How to sell real estate to hedge funds
How to sell properties to Hedge Funds
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what's going on everybody it's Brian
Tripp welcome to another episode of the
real estate investing live podcast I am
here in Birmingham Alabama so glad you
decided to join us today we have a very
special guest that is going to talk to
us today about hedge funds spent some
time with a very prominent hedge fund
group and I haven't had anyone on our
show talk about this before so I'm very
interested to speak with you Matt I'm
gonna bring you in the show Matt how's
it going today
good going very well I got mr. Matt bell
and you're in Charleston is that right
you're in Charleston South Carolina yes
sir so let's just kind of start I know
you've been doing real estate for a long
time tell everybody what just what is a
hedge fund and what your particular role
was with that particular head's fun sure
well you know that's it's a bit of a
broad answer there's a lot of different
hedge funds and a lot of different
niches that have hedge funds real estate
has become the latest and greatest hot
spot for hedge funds prior to I would
say probably 2012 give or take
institutional money aka Wall Street
money was not in real estate right they
couldn't figure out how to rate and when
I say rate I mean like a rating double a
triple a BB you know so they rate
securities and they couldn't figure out
a way to rate real estate up until about
you know 2010 11 12 somewhere in there
so what happened was like a like a
turning on a faucet or flipping a light
switch once they figured out that they
could rate real estate now all of a
sudden it was no longer Greek right it
made sense to them it fit and so a tidal
wave of capital has gone into the the
real estate world in that in the last
decade that that has changed it
immensely in that amount of time and
will continue to change it going forward
I mean what I'm
talking about immense amounts money I'm
talking about this is the kind of money
that could wash out the National
Association of Realtors for instance I
frankly think agency maybe if it's
around it may be totally different in a
decade
this is trillions of dollars and you
know it's exciting because there's an
opportunity there but it's also it's
also scary I think for a lot of people
because it's different it's it's new and
this is a different different set of
players if you will so maggie's give me
a ton of stuff right there and and I
want to want to try to break this down I
want to learn because there's a lot of
things you just got done talking about
that I don't even know about and I'm
sure that there's gonna be a lot of
people who are listening you're talking
about raiding securities you're talking
about wipe money that kind of kind of
money it's gonna wipe out the NA are the
national assistants Realtors so I wanna
get I want to talk about all that stuff
but first kind of clue in some of us who
may speak in real estate speak we may
know the real estate language but we
don't necessarily know the Wall Street
language let's kind of bridge that gap
for for me included for our audience
you're talking about rating securities
what is what it what is the security was
that what's the rating system what is
all that
yes I'm not a finance guru by any means
and I certainly haven't spent any time
on Wall Street personally I've just
worked closely with some guys that were
from that world and picked up on some of
the vernacular over the years working
with them so securities have different
ratings and that has to do with how much
they are valued at as well as insurance
and essentially when they figured out
hey this is a higher the rating a
triple-a for instance is the highest
rating you can have
that's the highest valuation that you'll
get it's the same it's what they view
it's basically a safety ratings that
makes sense
so they figured out that like so so in
our world in the in the investing world
if we're talking about a single-family
house for instance and a asset would be
something that's maybe new construction
recently renovated and newer Abbi asset
may be something that's maybe built in
the 90s that is I don't know 100k to
200k something like that so like your
safest assets from their perspective or
the 250 plus houses that are brand-new
right that's the most stable asset that
that they'll that they'll see all the
way down to you know $50,000 houses that
that are train wrecks that need a ton of
work that would be like a c-minus or
maybe even I don't even know if there's
a derating but something like that right
if you've way down the list so there's
this spectrum of ratings and so so when
you get to the huge huge money investors
like institutional level money state
pension money for instance the first
Jessel kind of flip flops right for all
of us little guys it's all about return
on investment right and then and we'll
take risks for that reward
so risk and reward are kind of in a
certain order and they can a flip flop
when you get to an institutional
investor the first goal for somebody who
has billions of dollars the first rule
is do not lose the money right that's
that's the first thing in in order of
importance behind that is and and yeah
let's try to make some money as well
right that's why they're willing to buy
an a asset right versus a C asset where
the cash flow may be much much better
right on that C asset but it's not
viewed as safe as a asset right so if
the market crashes or does something
crazy well now they have something that
they can resell from their perspective
much easier if that makes sense so it's
it's it's
really it's it's a it's almost an
inverse perspective to how I approached
and most of us approach investing yeah
so you start talking about ESET you
mention pension money which is what's
getting invested and the most important
thing is we don't want to lose the
actual investment itself and you know if
that means we're only making a one to
three percent returns so be it we don't
want to lose that initial investment and
then you know and then you went along
the rating scale which i think is is
very important obviously applicable to
to us and you know we see things like
you said more in terms of ROI you know
we want we want the best bang for our
buck that we can find
so let's tie that back into a hedge fund
what's going after some of these
properties what is you you mentioned in
the very beginning that you did you you
said that they didn't really know how to
rate real estate and I guess now they've
kind of figured that out a little bit
what what is kind of the the general
sense as far as that goes today yeah
they have there's there's you're
starting to see securitization of debt
in a big big way with single-family
residential it's been around in
multifamily for years and years right
everybody in the multifamily world
refers to assets as an a-class asset of
the assets right but it didn't
necessarily ever translate in the SFR
world so now that it does now that
they've kind of cracked the code on on
what it looks like yeah that there's
just tons and tons of money flooding in
from non-traditional places so let's
talk about that let's talk about like
like what do you what does that even
mean
money is flooding in from
non-traditional plate-like what does
that mean yeah so I mean there's
trillions of dollars and on the
exchanges in Wall Street right and they
none of those dollars or very few of
those dollars were ever invested in
anything other than say a REIT right
like a real estate investment trust
something that was specifically designed
for Wall Street to buy sell trade
um they couldn't figure out how to do it
in a so they figured out how to do it in
a vehicle that that made sense to them
just like a stock or a bond or anything
else right which is what a REIT is is
similar in that it it gives them a
vehicle much like a mutual fund or
anything else to sink money into real
estate but it's not really actually
buying a house its buying a percentage
of a pool of assets where they've got
some some diversification of debt some
of their what they would consider
exposure is mitigated over a pool of
assets so that leads me to the natural
question what's the difference between a
reeds which is a real estate investment
trust and a hedge fund what's the
difference well so they're both pools of
capital they both have their own
investors they have their own capital
they have their own assets a REIT is
something that is federally regulated so
a government there's government
oversight when it comes to a real estate
investment trust it's been registered
with the Securities and Exchange
Commission and and it is it is watched
and there are reporting requirements
management requirements return
requirements for the investors as well
that none of which is the case with a
traditional fund a traditional fund does
not necessarily have mandates with any
of those pieces it's much more of a hey
can you sell it type thing right it's
not regulated it's just hey can you make
this attractive enough for an investor
to invest with you
it may rate you know eight for instance
I think all but I don't want to miss P
here but I believe that all but one
percent every year of a real estate
investment trust has to go back to the
investors I think that's that's right
and that's on the net side I want to
double check that but anyway the point
of the difference is is once federally
regulated regulated and has mandates and
the other is not it's basically just
you're building your business however
you want to build it and can you make it
attractive or not for an investor
so and that's the hedge fund piece is
isn't is a hedge fund is it pop it's not
publicly traded really has to be some of
them are so some of them have an IPO
initial public offering and then they go
public and then they're publicly trade
most of them and the guys that I work
for were private capital there which
means what is that what a private equity
fund is so the group that you work for
was not I guess technically a hedge fund
it was more of a private equity fund is
that yeah it's it's it's essentially I
mean I I use those interchangeably
gotcha they're there you know a hedge
fund basically comes from hedging risk
right and so private equity is where
most hedge funds start and then the
different the ways that they invest
hedge against risk and bring in whatever
that return is so in in our case
everything in the initial capital raises
private equity I say our case the fund
that I worked for is case everything
initially is as raised as private equity
and then and I'm gonna have to do I'm
gonna do the math with you here in a
second just a kind of come full circle
and make it make sense but basically
they do arrays and they take out
leverage which mitigates now you're
starting to use other people's money or
bank money which helps with your
exposure and then they will deploy that
capital as well and then they'll use
even more Bank capital so so they had a
one and a half debt ratio what that
means is and again I'll just give you
broad numbers so they raise seventy
million dollars okay they buy 50 million
dollars worth of properties right have
assets then they renovate those
properties for the remaining 20 so
they've deploying 70 million dollars
okay then they send the the BPO person
right the appraisers around and the
appraisers come back and say the houses
that you bought we renovated are now
worth 100 million dollars so we're gonna
give you 70% LTV so they get 70 million
more dollars right they deployed that
seventy million and then do the whole
thing again so basically the long and
short of it is they're buying three
houses one of which is with private
equity and the other two are with debt
capital so that's where the
one-and-a-half debt ratio comes from
who's lending it's kind of a sidebar
who's lending that yeah there's there's
a lot of institutional lenders now again
now that everybody can make sense of it
and with ratings etc b2r was it was a
big one that was the oh gosh Blackstone
I think in the group that has invitation
homes they have a lending arm invitation
homes is the largest fund out there I
think they have something like I don't
even know how many 60,000 homes I think
something like that huge
they had a lending arm and they were
doing some lending to some other smaller
players so b2r is one core vest is
another and there's a handful yeah that
is interesting that you're talking about
that I mean that that's big big you
start getting the huge money big money
yeah that's not as at raunch
it's not that much you know yeah so
let's kind of let's bring this back kind
of full circle and let's tie this into
some of these areas that especially an
area where I live where you live you're
in Charleston South Carolina Columbia
South Carolina is right there you've got
places like Birmingham Huntsville
Montgomery Alabama Jackson Mississippi
you've got kind of Charlotte you got the
Kansas cities out there there's so many
markets that I hear and see a lot of
these funds that are going into just
because the numbers work the the cash
flowing numbers work talk about that and
just and I kind of want you to talk more
about um like broader than maybe just
the company that you happen to work for
you're just in a broad sense when you
start talking about these funds wherever
they are why are they going into places
like Charleston and Birmingham and
Louisville and Charlotte in Kansas City
wire
what makes those places so attractive
and not LA in Chicago in New York yes so
the primary markets the bang for the
buck isn't there in Charleston for
instance is a destination city it's very
expensive to live so if you were to buy
and try to hold your rent return is just
not very good although you're in maybe a
an a asset that there's a trade-off
right there's an inverse relationship
generally speaking between equity play
and cash on cash return so they love
those secondary and tertiary markets
because the cash on cash return is much
stronger where the median home prices
are maybe a little bit lower the sweet
spot for the group that I work for and
frankly the majority of them is probably
in that 70 to 150 range 70 to 150 K a
purchase price or all-in price for the
rent you hit a point of diminishing
returns right around 125 K per the rent
so so so let me let me just I don't want
to get too sidebar it off of that but I
do want to talk a little bit about the
evolution of every funds because they're
very very similar and since you wanted
me to kind of touch on something
globally they all start with cash
non-cash almost exclusive focus so they
they end up starting with C assets and
you know having a really high you know
12 14 18 percent return like the guys I
work for when they first started in 2012
are late 2011 they were getting really
really strong returns right well that's
your first series or your first fund
it's also called the proof of concept
series so they'll go out and they're
gonna prove that they can do this with
like 100 homes let's just say and a lot
of times it starts with friends and
family money and then once they have
whether they would consider a proof of
concept then they then they go out and
now I can sell it now they can pitch it
right and try to find real capital from
say the Wall Street area so the guys
that I did the first tranche of bones
this the proof of concept
100 Helms the second one was they went
to a twelve hundred and fifty homes
which was raised elsewhere and then the
third I think was a private fourth was
like three thousand anyway they graduate
up and up and up and up
in more and more capital and and there's
this you kind of have to graduate to
each level and what I mean by that a
state pension money is as big of money
and we're talking billions and billions
of billions of dollars they don't even
return your phone call until you have
the ability to move the needle for them
so you have to get to that right just
like securitizing debt like they don't
want to talk to you unless you have 300
million dollars to securitize like they
just you're not even on the radar so so
every like so when you see invitation
poems and American homes for rent and
and you know some of the other big
waypoint the Starwood Waypoint and
anyway there's a handful of the big dogs
right they all they buy now is at is
class-a assets they're buying $250,000
houses in every market that they're in
and they they don't care as much about
that return because they've graduated to
the type of investor that doesn't care
about the return as much either right
again going full circle back to the
beginning first thing is to make sure
you don't lose the money when you get to
that tier it just changes so and is this
Matt is this why you started talking
about that this is the kind of stuff
that can wipe out the National
Association of Realtors and this is the
kind of stuff that can really start
completely changing the real estate
landscape when you have that kind of
money
yeah buying these kind of properties in
I don't say they don't care about
returns but returns are so much less
important than just the quality of the
asset yeah absolutely and you know
obviously that was a little bit of
hyperbole you know washing out the na R
I do think it'll be very different
though and and I feel like if people
don't recognize that it's coming like
buckle up because it's here the money is
here now in this space and it will
change completely if you I mean Zillow
is already flipping homes right if you
don't think Zillow is gonna buy and sell
and transact of real estate online and
completely cut out real estate agents I
think I think it's naive I mean I think
that's wing to happen if it's not
already I think then you have all the AI
buyers right you got offer pad and red
door and roof stock and all kinds of
different I buyers that are entering
into the space - that's all because of
Wall Street money so I don't you know
and then you throw in the virtual stuff
that's going on man like I think that
then again this is just my gut kind of
two cents usually which is worth about a
penny but I think that people are gonna
be walking homes virtually in a decade
they're gonna put their VR on and
they're gonna walk around a house and
they're gonna buy sell online without
ever going into the house maybe doing a
drive-by or getting a feel for the
neighborhood - like I think only that is
just thing is just my two cents but I
think I think the high-end homes the
million-dollar home stuff like people
want their handheld right like they want
that's a personalized experience type
thing I don't think it I don't think
that gets washed out as easily but I do
think on the investor side of the world
rentals flips like we're gonna be
looking through homes like sitting in
our office on VR I fully believe that so
and it's because of these guys they're
playing with money that to your point
they don't care a ton about return right
and that's why it's forward and that's
why everybody's afraid because they can
out pay right they're gonna they're
gonna overpay for what you or I can pay
for it
but I feel like that's short-sighted
because there is a huge opportunity to
work live yeah so so that's what I want
to get at let I want to tie this into
the wholesaler that's out there the
rehabber that's out there let's let's
start talking about just average
ordinary wholesaler maybe doing a few
deals maybe doing 20 30 50 deals how
does this affect a wholesaler how do
these funds and all this money how's
this gonna affect a wholesaler you just
got done talking about we can work with
them yeah I think there are two
different ways we can see this we can
compete which I don't think we can
compete
No or we can choose to work with them
how can we work with them yeah I think
so and I mentioned earlier I was
terrified that some of these guys are
going to imn now some of these SFR guys
if we teach them how to source pop
market they will step on your neck
they're gonna take everything you got in
and do it themselves in the second they
understand it so what I would say is
sell them houses do what we do best find
deals off market as much as possible and
and sell them assets they're going to
buy it frankly they're gonna overpay for
it we already know that because it can
pay more than anybody else so if we can
be experts as individual investors at
sourcing deals which a lot of us are
good at that's the play for me I mean
it's either take it down and list it and
let them gobble it up after you've
listed it or take it down and assign it
to them whatever I think they'll buy it
if it's a if it's a decent house and
depending on where the fund is in the
lifecycle like we're talking about you
you know invitation they're not looking
for see assets anymore age four are
they're not looking for to see assets
and even worse you gotta know you're
talking to but that's the opportunity
yeah yeah for sure
so so Matt so you've spent some time a
significant amount of time working for
one of these really big funds I want you
to talk about how the wholesaler can
work for them work with them maybe
finding them off market deals I'm one of
the questions I get asked often is how
would someone find who is the actual
buyer who is the actual point person in
my local market how do I even find these
hedge funds how do I find the actual
person to talk to
sure yeah it's easier said than done in
most cases generally speaking most of
the analytics go on in-house wherever
they're based the fund but in most cases
I don't want to say all but in a lot of
cases the guys
work for for instance they were working
with an agent or a couple of agents in
the market that basically was doing all
of the writing of the offering in the
negotiation of the contracts etc so if
you can find them I don't necessarily
have a great I tell you how you can do
it frankly is get on the tax assessor's
tight and and figure out you know what
the name of the you know big buyers are
you can definitely find that and then if
you can utilize your MLS or if you have
an agent that is nearby that can plug in
they can figure out which ages working
with which buyers for sure so that's the
best way to go to straight line but
globally Brian I would say take it down
and list it they'll find you in that
case they'll find you right because they
will gobble it up if it's on the MLS
that's how most of them buy so I I want
to recap this because the Matt just
provided us some golden nuggets right
here this is huge
these were two huge points that Matt
just made I love this stuff the first
way he said to find these hedge funds is
first of all find out the name of the
fund find out who it was just by looking
at the tax records you can go in sort
properties by hew bought them where the
most cash transactions you can sort it
by that and find who is buying the most
and some of these bigger funds they're
gonna be at the top of that list and so
what we're gonna do now is we're gonna
find those properties go to the MLS and
see who the listing agent was or senior
the buyer's agent was and contact that
agent and that agency it up brokers it
just directly so that's one nugget
that's huge and then this I've been
saying this for years I just this is how
we discovered it's in like 2013 and 14
and 15 this is how we discovered all
these new funds that were coming about
we discovered them by just taken down a
property everyone swaps go and buy it
even if you're a wholesaler find the
private money go ahead and buy it and
relist it as is maybe clean it up a
little bit you don't go rehab it maybe
sweep it out and clean it up you know do
a you know clean it out if you feel like
you have to or you just turn right
around are listed as it
Matt just said this they will find you
guys it's unbelievable I remember the
first time this happened to me house
here in Birmingham where we went ahead
and took this thing down we listed on
the MLS and we were thinking we'd
probably get about you know you weren't
here in Birmingham so we got a little
bit lower price points and we're
thinking we probably get 50 55 for this
thing we got it we bought it for like 40
45 we got an offer we put it out there
really high we got an offer above asking
from a big hedge fund for like 74
thousand we end up making one of the
biggest wholesale spreads and this is
like 2014 that I had ever made and it's
all because we're gonna took it down and
just listed it if you can do this this
is how you're going to find these hedge
funds there you're not gonna find them
they're gonna find you and they're gonna
and once they proven you've proven that
you're good and easy to work with
they're gonna want to keep working with
you like Matt said work with them and
find them those off-market deals there's
a way to make money with any place in
the market cycle with any buyer and
seller you just have to figure out where
it fits you know those guys are they're
always gonna pay more than we will and
so trying to compete heads up with them
there's just that it's a losing
proposition but there's a heck of an
opportunity to to sell sell them
properties and make a lot of money no
doubt about it no doubt Matt I can't
thank you enough for giving us some
really great perspective on just funds
in general hedge funds private equity
funds and Reed's and it's just really
interesting to learn this stuff and
bring it back home you know so maybe the
wholesaler who's listening to this maybe
even the rehabber people who are
listening this there in the trenches
every day how this can actually apply to
them in their City and Matt before we go
though I want to give you an opportunity
to talk about some stuff I know you
you've kind of moved on from the hedge
fund world a little bit talk about what
you're up to today and how you could
potentially provide value to our
audience yeah so you know to hearken
back to the rich dad poor dad days which
is how I started this entire you know
journey you talk about the four
quadrants and quadrant four is kind of
when your money is making money I have
an operating business we do well I
we have consulted outside of that
business consultant for the hedge fund
for years as the director of renovation
and now I'm consulting for a large
lender institutional lender based out of
California it's a fix and flip lender
primarily we should have a rental
portfolio product out here in the next
couple months but anyway they've hired
me to build a national sales division
for them and the company is name is
lending home and yeah so I started with
them a couple a couple of months ago and
I'm you know working towards the lending
side of the world I feel like it's the
next iteration is becoming fluent in
private capital so you know starting to
starting to cut my teeth if you will
there and learn a new vernacular and yes
so we've got a lot of opportunity to
help people on the funding side and you
know I just generally like to help
people anyway so whether it's connecting
people or talking about scaling
businesses or renovation or whatever
love to be a resource that's awesome
Matt how can people learn more and how
can they reach out to you I do you have
a you have a contacts and contact
information
sure yeah well I mean certainly welcome
to to my email it's matt bell at lending
home calm and and always welcome to
field questions whether you're on your
first deal or your 100 you know we have
products for everybody and and you're
welcome to reach out to me directly on
my on my phone I'm fine with that too
I'm always available at 7:06 two six
seven three two ninety three guys we're
gonna link all that up in the show notes
so don't feel like you got to break your
neck to try to write down a phone number
it's gonna be right there in the show
notes for you you're gonna link all that
I'll put it put Matt's phone number
you're very brave Matt for giving your
phone number out and his email address
so you guys can go check that out if you
have any lending me or any if you need
capital you just said he does fix and
flip loans and they've got rental
products that are coming out very very
soon so Matt
thank you so much really do appreciate
you for coming on the show and giving us
some great perspective on hedge funds
yeah thank you Brian appreciate it enjoy
it
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