Latest / Real Investor Radio Podcast / Ep. 100 - Part Two | Fred Lewis on Regulation, Affordability, and the Future of Real Estate
Transcript
- Craig (00:12) So a couple more topics that I thought would be interesting to cover, Jack and Fred, would be the regulatory outlook more from a sort of a local state legislative standpoint. Jack, you sent me a story a couple of weeks ago on some topa changes and eviction changes in DC, which You know, some could argue that if implemented, that could be a catalyst for what we might see across, you know, other places in the U.S. ⁓ So we could speak about that. And then second, ⁓ more and more, Jack, ⁓ we get these stories from the NHRC. Those guys are great about ⁓ regulations that we're seeing that will limit ⁓ LLCs or institutional buyers on the number of houses that they can have in any given. Fred, I don't think we've ever gotten your take on either of those. It would be interesting to see if you think that those targets will still be on the backs of the bigger buyers ⁓ in the coming years. Is that something that's going to go away? ⁓ Are these legislators going to give up on regulating ⁓ larger investors or is this something that's here to stay? Fred Lewis (01:30) Well, been, yeah, there's been several dynamics happening at one time. One is in the post COVID world, we've seen a lot of the folks who work in local governments work at home or work in a hybrid remote environment where we've seen a slowdown in the processing of almost anything that's a municipal issue, whether it's permits, whether it's application for something you need to get your project done. That's been a complaint nationwide from most of our investors. Some markets not that affected, some markets highly affected. If you're a DC ⁓ renovator, someone doing a substantive job, holy the ability to get through that job vis-a-vis the municipal approvals is really a problem. And you're borrowing private funds for a much longer period of time than you expected. And some of the folks who've run out of money back to the liquidity issue, the number one issue, has been purely driven by some municipal delays. That's just a dynamic. The other dynamic, when you talk about TOPA in DC, there's also been a trend over the last number of years for city governments to pile on and continue to pile on against real estate investors and developers, because historically developers have been really, they've leaned in on markets. The perception is they make a lot of money. The perception is those are the guys we can create ⁓ more obstruction or more fees or more whatever. And there's been a... kind of a bias against the investment community, I think. And when you get into Topa and things like that in local markets, a lot of those things have been created in the last several years, five years, eight years. And a lot of that stuff is onerous. What's that? Yeah, expanded. Yeah, they've expanded. Yeah, COVID itself just was a license to expand any protection of Jack BeVier (03:37) expanded. Yeah. Yeah. Expanded these, ⁓ COVID expanded Topa. Yeah. Fred Lewis (03:52) any kind that then would that would in theory sunset right after COVID is over. They didn't sunset. That's the problem. A lot of these expansions, if they sunset, they didn't sunset. Maybe they deescalated or adjusted somewhat. But TOPA for example is such a problem for DC investors. It's amazing. City Council gave within the TOPA law, it gave the tenant not just certain rights, but the right to sell. They're going to move out, but the right to sell their occupancy, their TOPA rights on every single contract to a third party investor. So there's a whole new industry of investors buying the TOPA rights of that person who was moving out anyway, so that they can hold up that, literally hold up the development project. Jack BeVier (04:47) like a profession of shakedown artists. Fred Lewis (04:50) Yeah, it's a shake down among shakedowns. ⁓ Mayor Bowser got, you know, she got pummeled by the investment community saying, take a look at the shakedown that's happening. She's like, I agree. It's crazy. She proposed fundamental ⁓ reform to the TOPA rules and the people who run the city council just obliterated her. So now she got through a partial piece of what she proposed and really it got watered down. The investment community is pissed. So are we going to see modest improvement in TOPA? Probably just because what went through is an exception for inventory built within the last 15 years. She wanted 25. She wanted certain notice periods. She wanted the inability to sell your rights. A lot of that stuff got watered down. And I think that you extract that out. Jack BeVier (05:53) You have Fred. Let me enter, let me over real quick. So, ⁓ I Craig was alluding to in the intro to this, I had sent him an article about those bills that were talking about how, Hey, finally we've got some, some reform to that. We're going to like rain it in. It was like, my God, finally common sense is going to, is going to rule. then Craig, the update to that was like, this was like last week, it got all that got gutted. Like, yeah, yeah. That was, I gave me the update last week. I was like, you're kidding me. I was like, I thought that we had turned a corner. Fred Lewis (06:10) Great, right? Craig (06:17) I had no idea you didn't send me the update Jack BeVier (06:23) It's like, no, it got gutted. Craig (06:25) Wow. Fred Lewis (06:25) Well, because the certain advocacy groups who got in the hooks into certain people in the city council, I'll go unnamed here, the city council just said, screw you, Bowser, we don't care about the investment community. And so they, in the back room, kind of horse traded on a couple of things. And what got passed was ⁓ just a version of what really was needed. Craig (06:30) Yes. Fred Lewis (06:55) And I, so back to an earlier point in the conversation about like DC investing or DC lending, we had the opportunity years ago to really lean in on DC lending, but we wanted to moderate. We didn't want to go all in. We just wanted to do, and we still had, we still couldn't see, have the visibility of what really occurred, which was a real downturn in development, DC real estate values. and projects for all these reasons. I can't tell you how many investors because of TOPA by itself completely lost their investment or just that in the combination of the inability to get permits approved and time tables and managing a timetable. So fortunately for us, getting the discipline of not over leveraging our lending operation in DC because we're local to DC. uh, or to Baltimore and any one market, I think is a smart move. But I, but I think to your question of what does that mean nationwide? I think all of, I think, unfortunately we're in a time we're in a political environment where we may see modest gains in what is ludicrous city council policy throughout the country in various against investors, but I'm not sure it's going to be substantive enough or material enough. that we won't be talking about this for the next five years of how crazy it is to get through a project. Everyone complains that it takes longer. It's more difficult to get through their project in some form. And I think that that's going to continue, which is hard for most investors to plan for in an investment thesis, which then only aggravates their liquidity. So having enough cash to get through a deal. It depends if it's a fix and flip, it's a small renovation, not that impacted. The bigger the job, the bigger the deal is, the more impacted that could be. So it's just a more professional environment today. Jack BeVier (09:08) Yeah. mean, you, Craig (09:10) Thanks Jack BeVier (09:10) if you know the rules, you can price for it, right? It's, when the goalpost gets moved mid game that becomes the problem that, and, and if the stakes are high and you go bigger on this big project, because you're like, Hey, yeah, I've been doing single family flips, but you know what? I want to move up to this multifamily redevelopment, or I want to do this condo conversion, or I want to, you know, subdivide the lot into six and build five more houses. And those necessarily take longer times to do that. That's where you get caught with your pants down because the government moves the goalposts on you in the middle of that longer timeframe. And there's higher probability just because it's a longer timeframe that the goalposts get moved on. Yeah. That's the existential threat. Right. So it's tough, but everyone wants to like, as soon as they've done a flip, do a bigger flip. As soon as they've done bigger, a bigger flip added an addition, as soon as they've added an addition, do a tear down, as soon as they've done a tear down, build new houses, as soon as they've built a house subdivide and you, you know, people, people want to do that. Right. Like that's everyone talks about that. It's like, let's, I figured out this, it's not only human nature to want to do something that's a little bit harder. We're guilty of it also, but also you make more money that way. And so there's a self interest in doing it and taking a little bit more risk. But each time you do that incrementally, you're exposing yourself to not only more market risk, but more regulatory risk. And the regulatory risk is one that can really, you know, put you down. ⁓ even if you didn't do anything wrong. So there's a real, those war stories are real. Craig (10:39) I'm just thinking of the guy that's just doing the, you know, I'm going to I'm going to tackle a historic rehab. You know, geez, I mean, can you the brain damage there alone in D.C. has to be insane to get through that. ⁓ Speak, though, Jack, to all of our friends out there who doing B2R. ⁓ They're you know, they've got large portfolios. They're focused on maybe one market or several. And they've got a few hundred houses in a single market. Is that target? Jack BeVier (10:45) Mm-hmm. Craig (11:10) going to continue to be on their back from local city councils and state houses on the amount of rentals that they can own? Or is that something that's going to go away? Jack BeVier (11:21) You're talking about just from like the perspective of like the anti institution, anti institutional ownership of real estate perspective. Craig (11:23) We've seen, we've, Yeah, but like we've talked several times on the podcast Jack where it's not just, you know, they're not just going after BlackRock or, you know, the guys that own thousands of houses. Some of these ⁓ municipalities are saying, hey, we don't want you to own more than 10 or 50. And that's not an institutional guy. That's a mom and pop guy that's like saving for retirement. Jack BeVier (11:50) Yeah. ⁓ I mean, I think that those threats are real on a regional basis. Obviously the bluer you are, the more of a threat that that is. ⁓ and the bigger you are, the more of threat that is. I also think that it's a function of the affordability. It's, a, it's a, it's a, it's a potential release valve relief valve for the affordability issue. And as long as we continue to have the affordability, you know, affordability at like, you know, historic lows. Fred Lewis (12:12) Thank Jack BeVier (12:18) we're going to continue to see politicians try to relieve some pressure that way and say that they're doing something, right? Cause they really don't care as much about the outcome. I'll be cynical statement. They don't care as much about the actual outcome as they do that. They can say that they tried that they did something they took away from somebody who's taking from you, right? Yeah. ⁓ so yeah, I think that as long as affordability is, is, ⁓ there is pressure from the affordability perspective, you're going to continue to see that. Craig (12:32) Yeah. We... Yeah, we're still up to the big guy. Jack BeVier (12:46) I also don't see any relief to the affordability issue in any time soon. So I think it's something that they're constantly going to be taking swings at the market from that vector. ⁓ So yeah, think that's just going to be the way the world is, the industry. Fred Lewis (13:08) Yeah, I think my view is assume the regulatory environment and the difficulties dealing with government processes the same, if not even a little tougher. think we saw a real adjustment in the last two years where it was to some extent, it was COVID and then it felt like it should be temporary and then it wasn't temporary. All these things expanded and then we all woke up and said, holy crap, it's really hard to deal with. government getting anything done. I think that the smart move is just to Jack BeVier (13:41) Isn't that isn't that the shutdown is not the is not the argument over the shutdown right now, pretty much sorry to throw that in there. like, it's this is a, this is a, this is an argument over expanded, ⁓ expanded budgetary, ⁓ you know, spending that was supposed to be COVID temporary, which is now we're like, we've shut the government down over getting back to pre COVID spending levels or not. Craig (13:49) Stay shut down. Fred Lewis (14:02) Right. Jack BeVier (14:09) And I think the Republicans are not doing a great job of framing it that way, but. Fred Lewis (14:11) It's a fascinating argument, actually, which I know we're not going to dig into here, but it's you give government the opportunity to expand spending and they never cut it back. Any time in American history, you give politicians who like to print money and like to tell their voters, how much money I printed for you that I can give to you. That never tends to go the other way. And I think that we're seeing a fight over that now, but I think that from a real estate investment perspective, it's smart to assume that it's not going to improve. Your fundamental question, Craig, was do you see reforms in TOPA? Do you see reforms in kind of the regulatory environment? I just think it's smart to assume no. Just assume and adjust and price in all the headaches that come with that. We have priced in, we have a large Section 8 portfolio in Baltimore. We have priced in all the that comes with managing that real estate. And we're not assuming it's gonna improve. Jack BeVier (15:18) Yeah. man. The, and, in the house bill, right. This past time that the house bill included a 40 % reduction to the housing choice voucher program budget. And then the Senate version didn't in the 11th and a half hour, but we were very close to like a significant market disruption. Now we thought that that would be highly impactful to the real estate market. We thought we'd be fine because we never were like, you know, cause we've been prof, you know, And that was bullet dodged that, we have no delusions that we think that that was going to be the last time that they take a swing at us, you know, or the swing at that. Craig (16:12) Not only were they trying to price in less of a budget jack, I thought they were also proposing limits to the time of which you could hold a voucher. So wasn't like a womb to tomb thing. was like you get this benefit for a few years and then you're back to being a market rate tenant if you're still going to be a tenant. So that was a bullet dodge I would think as well. Jack BeVier (16:38) Yeah, I mean, yeah, we could argue for a whole other episode as to like how that would play out. You could think it could play out a lot of different ways. There's an argument that it would be fine. You know, I could, I could also steal man that one and be like, it'll be fine. Like, Craig (16:50) Yeah, I mean, there's Fred Lewis (16:51) It does suggest, to create back to your question about being a casual investor, being the guy with the W-2 who just makes some investments. There's so much more to price in. There's a level of sophistication that you have to model in because if you miss a fundamental aspect of the economics, you could basically buy yourself out of business. Or you can make a fundamental chain mistake. So can you be a W2 guy that buys something and transact your right? Of course. Of course you can. You know, you can make an investment ⁓ if you think about it as an operation with your with your time where you're not working. So you execute well. You can buy and hold something, have access to capital nationwide. Like you can take the you can take the things that are real positives, access to capital, access to resources, access to data, access to outsource certain parts of managing that for you. You can lean on those positives, but then you have to recognize the pitfalls that you have to buy well, ⁓ and you have to not expect. the government to be your friend. Craig (18:13) Yeah, you're always on the clock Fred, always on the clock. Fred Lewis (18:17) Yeah. Craig (18:18) So ⁓ one last thing that I wanted to focus on, especially with you, Jack and Fred, since you've been such a part of the growth of the tech stack that we use here at Dominion. Let's speak to that, Jack. What's exciting for that mid-tier guy right now to gain some competitive advantage with the tech that you're seeing ⁓ that's just as a part of everyday operating tech these days, right? Like not only just emerging AI tech, but just like stuff that's like off the shelf now that guys can be using that you're excited. Jack BeVier (19:00) Yeah. So, I, I think that the way that AI is going to be deployed is a bit more nuanced than what, you know, what, what the media would like, you know, would, ⁓ would have you believe, ⁓ we have a, for real investor round table, the mastermind that Fred runs, ⁓ we have a monthly call. We've, we've started a monthly call. That's the only topic is, is AI. It's, hey, how are you know, what are you building? How are you incorporating into your business? What have you learned lately? And so everybody who's interested in that topic shows up and compares notes and it's find it super helpful. And I was on the one this last Friday and the, there's a, you know, there's a bifurcation in terms of based off of what your business model is and what your current tech stack looks like as to how people are deploying it, how much energy they're spending on it. I mean, if you were you know, because, know, you could use it at the front end, right? You could use, you know, in terms of like generating leads or fielding those leads, but there's some skepticism as to like, you know, someone you're trying to create a personal relationship with and buy their, buy their house that needs a bunch of work. Do they want to like speak to an AI or as soon as, cause you can still kind of tell, right? Like some people will tell you like, no, it's gotten really good. I know I've heard it too. Like I've heard the latest from 11 labs and all that stuff. But like, is it gonna create an emotional, elicit an emotional reaction from somebody? I think it's an appointment setter, right? Like, so maybe, you know, maybe it's an appointment setter, maybe it's a follow-up campaign, but it's not replacing salespeople. It's certainly not replacing talented salespeople. ⁓ And then like, you know, is it gonna help me pull comps faster, gather some information maybe to make it so that I, like, all the data is prepped? Craig (20:37) could lead you. Jack BeVier (20:53) faster and in a format that I like. Sure. Um, is that changed the game? No, you know, I don't think so. Is it going to help with construction on a renovation project of a house built in the forties? That's a tough, that's a, that's, don't know. I don't really see it there yet. You know, like, can it send some follow-up emails to whatever, you know, maybe can it help me sort my home Depot bill? Yeah. Yeah. It help me, help me process invoices faster. Sure. ⁓ But like the use cases are like little like, you know, they're little if And the thing is, know, if you're flipping five houses a year, is it worth the squeeze to build a custom tool for yourself? Probably not, you know, like I don't really see it, know, like probably probably not if you're doing enough scale of something Well, then yes, you know if you're you're spending ten million dollars a year at Home Depot, then yes It makes absolutely makes sense to build Craig (21:26) incremental. Jack BeVier (21:47) a GPT that'll or, you know, not a GPT, but ⁓ build ⁓ an agent that'll read, read and categorize and help your bookkeeper and even book that those quick, you know, those, those quick book entries automatically. Like I think that that makes total sense, but a lot of it has to do with, you do enough of this task? Right? Like what works really well is like making it do very discreet things. It gets better than human at a very, with a very narrow focus. Then the question is, do you do enough of one little thing to for it to be worth it, squeezed to learn this technology and implemented into your operation. And I think that ends up being that that really kind of separates the wheat from the chaff in terms of like how much you should be leaning into it or not. ⁓ and there some cool products that are out there that, you know, that, ⁓ like we, interviewed a river X AI, ⁓ and I think that they've got a really interesting use case in terms of like mining, you know, bringing leads back around to set an appointment for a human. I think that makes total sense. Craig (22:47) clearly working, but he was spending, I think, about $2,000 a month just on that app, essentially. So not insignificant, but definitely generating great results. Jack BeVier (22:54) Mm-hmm. Yeah. So that he could do an extra 30 deals a year, right? Like you have to be doing some scale though, to, for this to be worth the squeeze. Um, but I think that, you know, to just finish that thought, but the company, but the use cases where you do a lot of some white collar work, those are those you need to do it there, or you're gonna get left behind or those, those are going to become a, a differentiating cost. cost center where you're spending a lot more than your competitors are doing that thing. So for us, we've been spending most of our energy on the mortgage side of the business versus versus the real estate side. Craig (23:39) think, Jack, that the thing that gets me a little excited for the mid-tier guy is exactly that. I've got all these repetitive tasks. ⁓ They're mundane, largely, but highly necessary. How can I have some agentic AI do that for me? And if you start to think about those three legs of the stool, how's going to make me a better marketer to go out and find better leads? not necessarily being the guy that sits across the table with the home seller, but the person who makes the phone ring or the app that makes the phone ring. Second, can you imagine where a guy who spends ⁓ an inordinate amount of time trying to find a great financing for his deals and really setting up ⁓ a flow for a relationship that's just easy button, right? Can you imagine where Jack BeVier (24:38) Yeah, I think more is just gonna be an easy button. ⁓ Craig (24:39) where technology will help that. Dominion is building a lot of AI right now just for that purpose. Can you imagine that the user experience, the guy who's wearing all the hats in the business, now he's got the easy button for his capital, and the user experience and customer service level is just so pristine because a lot of it is being taken care of by some sort of agentic flow. I find that to be really exciting. And then finally, ⁓ We go to a lot of trade shows, Jack, where we see some pretty slick software that allows people to manage their rehab processes ⁓ a lot better than the guy who's riding around his truck all day to each address. And so that I find exciting that I do think there's going to be good tech off the shelf coming down the pike that allows for relatively low cost ⁓ a better process on all three of those lengths of the store. Fred Lewis (25:39) You know, Craig, it's interesting, it depends on what chair is sitting in. think if you are, for a lot of folks, the AI is really just through tools, for tools that are going to make your business more efficient, make your life operate better, make you're able to, you go to a conference, you're able to implement something that just makes it easier. Any function of that is really a helpful thing. I think that's the majority of people. The second aspect, depending on where you're sitting is, It makes the cost of a customer acquisition or the cost of your product lower, cheaper, because it brings the cost of production down some, and it makes you more competitive. And I think that that's a whole nother really aspect of how business owners are now looking at AI is, is yeah, want, I want things to be easier for my employees. I want to be able to do things more efficiently, but the cost of the cost of producing the product needs to be better. And then there's, there's. There's the existential part of it, which is if I don't incorporate certain technologies, I may not be able to compete. I may not exist in the future. And so we look at all three. I think that, you know, some of our conversations are what does Dominion need to look like in the future? What kind of service provider? Because we're, as a lender, we're selling money like other lenders. So what is that customer, the easy button part that you just alluded to? What do we need to look like as a company so that we produce, we provide that level of customer experience, that ease and comfort that the technology will allow us to do. So not only do we get to do it effectively and efficiently, but that we will be a leader and we'll survive as a leader. And I think in the future, five years from now or whatever that may be, there'll be many companies that just, that they won't exist. I mean, the history of capitalism, that were the top 10 companies, if you look 20 years down the road, a lot of them don't even exist 20 years later. And I think that that's a fundamental, that fear of not succeeding is a fundamental truth for us that we want to make sure that we can ⁓ integrate the technology and the tools so that not only are we more efficient, not only can we bring customer back of customer acquisition down, but that we fundamentally have a better mousetrap and that we can provide customers what they really seek so that they want to choose us. Craig (28:18) Fred, I've personally walked through many houses with you in questionable parts of Baltimore. And one of the things that I've always loved is that, you you were a guy that walked through houses. You were, that is what you did best. And I've met so many investors over the years that think they can run the business behind a computer. I don't see any technology coming down the pike that's going to fundamentally change the fact that no man, you've still got to go out there and rub shoulders with the guy who's selling the house for pennies on the dollar. You still have to get out there and evaluate deals by and walk through a lot of dogs before you get to the to the diamond. ⁓ And so there's the romantic part of me that wants to believe that like that that part of the industry is not changing anytime soon. And I think that that's a very good thing. high and large. You have to get out there and rub shoulders and see product. Fred Lewis (29:16) It's also the belief that your customers drive your success. So I know that sounds like a statement, but if you don't walk the house and you don't know, you don't have an opinion as to what the size of hallways and the size of bedrooms and how something should be laid out, then you don't have an opinion on your customer because your customer makes an emotional decision to buy something, to rent something, to buy something. to borrow something, to do something. These are all emotional, customer-driven decisions. And as business people, part of our job is to buy into that and to buy into, is my customer thinking? What would make them happy? What would make them satisfied? What would make them successful? And if we can make that a guiding principle, I think any business making that a guiding principle then gets off their ass to go figure that out, which means you got to walk the house. You got to see what your contractor is doing. You got to see the sides of the hallways and the bedrooms and the kitchen and the living space, because that's how they're going to live in the house. You know, it just astonishes me when I see a real estate investor fail. And in some cases, not all, but in some cases, it's a poorly designed house. And then I hear, well, my contractor did that. I didn't do that. Craig (30:48) It's poorly designed or poorly executed, right? Fred Lewis (30:51) Yeah, some variation thereof. And I think it's a fun. It's simple, but it's really fundamental. That a lot of failure occurs because you didn't understand what you what you're building for your customer or you didn't provide something your customer wants or you made it about yourself and not about the customer. You know, as a lender. We have a lot, know, we, we try to do everything right. It's, it's, it's hard. You know, we make mistakes too, but we try to be self reflective on how we operate the mistakes we make. And we try to root them out and we try to root out bad process where we're not customer centric because it's not about us. It's about providing the right delivery, the right product and process. The customer emotionally says, I like that. I like that product. I like. I like those people. I like that house. I like that living room. It's simple, but it's fundamental. Craig (31:56) I can't tell you how many times Jack and I have said on the podcast that ⁓ from a from a let's just talk from a flipping standpoint. Those houses that are in decent neighborhoods that where there has been a great rehab done to them ⁓ and that are priced properly are probably still selling in most markets right now. Jack, would you agree with that? It's the guys that go in and sort of do that, you know, lipstick on a pig. Jack BeVier (32:21) Yeah. Craig (32:26) maybe bought a house that they shouldn't have in an area that is not really the best homeowner area. Those are the guys that are getting crushed right now in the market. Like they're taking price drop after price drop. And Fred, I learned it from you in 2004, five, six, that like better product, better vision for the product. You don't go into a house thinking like, ah, I kind of bought it at this crappy price. And so I'm just going to do, I'm not going to do my my great rehab, just going to fix it up a little bit. Those are always the ones that come back and bite you in the ass. And I think your philosophy is like, no, we're not going to buy that house unless I can go in and do the dominion properties renovation, the style of renovation that we're known for doing. And that is something that think is always, you know, that that philosophy has in all of your businesses has always benefited you. Fred Lewis (33:04) Right. I mean, I would like to say that, hey, it's a smart business move to produce the better product. It secures the whatever margin you're to make. Maybe your margin is not as great as you thought it would be, but you make your margin or you make your own or you produce your product. And then it's a, it's a smart business move to do it. But I also think that there's a pride in what you do and what you produce, whether it's the house, whether it's the loan. whatever it is in the real estate side is the pride in your product. I'm a product driven guy and I think that's carried forward well for me, but I think it's also the combination of produce a good product, have customers who want your product, that differentiate you from the herd and then you have the right to succeed. Otherwise, these are all just transactions. You can't build a business unless you have product in product and a product that stands out. Craig (34:16) So guys, I think that getting back to your point of just the customer experience, it's like, you know, it comes down to knowing your customer, knowing the house that they want to buy and then really giving them the best experience when they walk through the door, whether they're someone buying the house or renting the house. And I think that's where you've always separated yourself from the herd. ⁓ So a couple of last seconds left, guys. Let's let's let's create some some. Fred Lewis (34:26) you Craig (34:48) 15 second clips for producer Kyle to throw out on the Instagram for us here. Jack, what are you excited about over the next 12 months from not only for Dominion properties, but for also Dominion lending? And you can take them one by one if you'd like. What's exciting for Jack BeVier (35:08) On the dominion property side of things, I'm looking forward to a little bit more softness in the market. I think that there's, we're about to see, ⁓ good practices and poor practices differentiated, which in good markets, you can't tell the difference. So, you know, I hate to be the guy who's like rooting for the downturn, but I'm always a little bit rooting for the downturn because I think that that's, know, when you actually get to differentiate yourself. So I'm looking forward to that on the real estate side of things. Craig (35:24) Yeah. Jack BeVier (35:38) On the lending side of things, I'm looking forward to, we've been like, you know, leaning very forward into this, ⁓ this AI technology wave because it's the first time in my career, at least that I've ever had the same starting line as everybody else with respect to a technology. And I've just never experienced it before. And so I'm frankly just having a ton of fun learning it and excited that I think that we've actually been able to create some things that are literally literally industry mortgage industry. say that literally capital capital I mortgage industry leading in terms of technology. And so putting that putting that out onto the street is something is just a you know, is a I think it's going to be fun, whatever we learn from it. So there's there's a mind to Craig (36:28) Fred, ⁓ as a grizzled veteran in this space, what excites you from Dominion properties side and Dominion lending side? Fred Lewis (36:40) Well, know, my view of real estate in the last couple of years has been what excites me is not to buy anything and to, it did not make mistakes, but no, really is to focus on operating the real estate better, incrementally better all the time, because we own a bunch of houses for anyone who has a portfolio. Sometimes, Improving operations and managing operations on what you have and making sure your houses are ready to go to battle. I look at your houses going into battle for the next 20 years. You know, is it prepared to go to battle? Can you operate, you know, your soldiers that go into battle? Well, and that's what real estate, that's one of us in real estate is. So making sure you maximize your portfolio, you get rid of the real ones and keep the good ones and. you know, have the right turnover teams and the right, you know, construction folks and so on. All of that, you know, in support staff and counting is critical. So we were always focused on that. And then the market takes care of itself. In the last couple of years, it's been a hard time to buy. We stole situations. We have teams to do it. We buy situationally. I do think that as liquidity starts to, ⁓ created an environment where some people crap out and there's some holes, I can see us buying more opportunistically. And I think for those that can find those holes, there's going to be some opportunities on a forward basis that may not have been there in the last couple of years. So in general, I think that's good for the real estate side. On the lending side, I think there's a fundamental shift in how money's being distributed in the economy. It used to just be banks. mean, I know we say what we say in calls like this, but man, pre-COVID five years ago, you would have to go to your local bank to go get a loan and kiss the ring and wait 90 days to get your loan. And maybe you get the loan committee in a month or two. And there's a certain psyche that was banking in local markets in various product classes. And today, Today, is, with the confluence of technology and AI and other technologies, but also just the way banking is done more virtually, the next generation doesn't look at a bank the way they look at the non-bank. They look at it as a fluid, it's just money, just boring money. And matter of fact, whereas a charter, it's almost like the taxicab analogy. If you wanted to take, If you wanted to get a fricking ride, you'd have to go get a taxi and the taxi cab had a medallion. And that medallion was like, man, I can, I can, I can be late. I can do, I can be rude to you. I can do whatever I want because I had a fricking medallion. And now there's Uber and Uber went like that. They're like, screw you guys. Medallions are worth zero. And banking is similar. The charter is the medallion analogy and the charter used to be gold and it's still important, but it's not gold anymore. We don't need a charter to lend investor money quickly with great customer experience and give them an approval in 24 hours instead of a month for a bank. So I could fill a whole segment on this, but I'll just say that I think I'll extrapolate this out. I think we're seeing a fundamental shift in real time. of how money is being deployed and distributed through an entire economy over the next five years. And I think that AI technology is only going to speed up that process. Those tools will speed up the transformation of the financial services world. so if we look at it as the pie as a private lender, a non-bank private lender, is going to continue to increase. Craig (40:38) only for investors. Fred Lewis (41:00) Five years ago, there was no DSCR market. Now there's a DSCR market. The pie for non-bank lending is exponentially growing. And so we see ourselves as a financial services company that today is in DSCR lending and bridge lending. Craig (41:21) So is that to say that the disruption that the taxi industry saw with Uber, it's still happening in lending. We're in the sort of the, I wouldn't say the infancy stages of it, but like we're still in the opening innings of what the total disruption is going to look Fred Lewis (41:38) Yes, it was, it was abrupt with Uber because it was a fundamental change in technology. It's, it's less abrupt, but it's pervasive and it's clear. And I, and I think that, for those lenders, yeah. Hey, if you're a local lender in your, in your local market and you get in your truck and you drive over to someone's project and you shake hands and buy them lunch and you can get a little higher than, you know, market, ⁓ national rates, great. That's still going to happen. That's still going to be a good business. Those guys want higher leverage or want to give higher leverage because you're in a local market, all good. So I think that that still is a business. But then you skip really to the national lender who's able to provide national pricing, national service, bigger facilities and so on. I think there's an opportunity to be more of a financial services company. Whether we're in two products or three products, doesn't really matter, but handle it in those terms, give customers that level of experience. And I think that's really exciting. I think that that's what, you know, that's what I, in my mind, you know, gets me really excited about Dominion Financial because we're not looking at the company as just, hey, let me just make you a quick loan in your market and get as much as we can. We try to look at it as how do we make you happy as a customer and be a leader in the non-bank financial services private lending business, which is only growing. Craig (43:16) Yeah, we should ⁓ we should schedule an episode just to talk about that. You ⁓ you you and I discussed it briefly over lunch a couple of times recently, and I was fascinated by your take on how the industry will continue to grow. I wonder, though, Fred, if you and we don't we can get into it later, but I wonder if you. Do you do you see the products that could be coming down the pike that that that would. enhance the product offerings that we already have to create like a financial services company or or is it something that's still ethereal in your mind like like. Fred Lewis (43:56) Well, I think, I think there's still a phenomenal amount of room for improvement within our industry in general on bridge and DSCR. And I'm sure there'll be some things around the edges per se, but, uh, you know, providing that service level. think technology is going to enhance that dramatically, you know, in the next 12 to 24 months. So I just think we all have our work cut out for ourselves to to really build a first class operation. And I think there'll be a number of first class operations in the country, a number of them, not hundreds of them. I think there'll be ⁓ a few of them. And I think that that's really where our core focus is. But I think it's also great for the customer. Craig (44:43) Do you think there'll be a consolidation in the industry at some point, of the, you know, lenders, mergers and acquisitions of other lender, lender to lender? Fred Lewis (44:55) Yeah, yes, and it depends. think if the number of borrowers stays roughly the same, then it would be reasonable to believe the number of lenders that have just popped up everywhere nationwide, in times that were really, really strong, that are still surviving because they're coming off of good markets. There's reason to believe there'll be consolidation. I don't think Much of that consolidation is going to be one company buying another. certainly, I'm sure that will happen to some extent. I think it's just that they'll be pushed out. I think there'll be a mid-tier market, mid-tier private lending community that won't be competitive. They won't have the platform that a company like ours has per se. And it'll be hard to compete. So back to what I said earlier, one of the things that technology is kind of ⁓ quickened. is the pace to which you need to improve your operation, provide the product to be a company that does survive. And the fear, our healthy fear is we want to make sure we're one of them. Jack BeVier (46:08) I'll just add a little bit to that point. think that the, what back in 2020, 2021, there was a real bifurcation in the private lending space, the bridge lending space based off of cost of capital, because if you could do a securitization, you could get several hundred, you you could get money at four or 500 basis points cheaper than main street could. so Kiavi, you know, came into existence for example, right? Based off of that, there were the first ones to do a securitization. did a number of them early and fast, and they bought the market through low rates. They also invested heavily in the cert and the technology side to create a, for, for simple projects of ⁓ a smooth, ⁓ experience for the borrower to their credit. They've they're doing 500 million a month based off of that combination. They're not profitable. They're not growing, you know, from a balance sheet perspective, but they've they've done a lot of business. Craig (46:51) process. Jack BeVier (47:06) And, um, but that eroded that competitive advantage of that cost of capital eroded, um, in the 2023, 2024 timeframe, because interest rates increased so much and all of sudden doing a securitization wasn't such a great place to go raise money. And the main street lenders borrowing money from their friends and family and uncles at 10 % became competitive again. Well, now we're in a declining interest rate, short-term interest rate environment, right? The Fed is dropping rates. The two years coming down. And as a result, I think we're going to start to see that bifurcation from a cost of capital perspective again. And, ⁓ that's going to enable the, I think the larger lenders who have access to the securitization market to once again, compete based off of price and for those better fix and flip investors for the best, for the best fix and flip investors. We're going to see that emerge again as a competitive advantage. The add to that, a, the, you know, so I think that that's going to be crucial. You need to be big enough to be able to offer the lower rates to your people. There will still be borrowers who are like, yes, but all I care about is the service level and the, and the Delta and the interest rate isn't enough for me to switch. completely subscribed to that. I agree to that. I agree to that perspective. I agree to that philosophy. But I think that through AI, we're going to be able to offer as compelling and frankly, more compelling of a service level to those exact same people and hack away at that service argument that the main street lender, that the purely main street local guy with 3 million bucks in the street has to offer. And then if you overlay on top of that, we are no longer in a declining interest rate environment where real estate values go up every year. Risk management as a concept. is for the first time in the past 15 years, going to emerge as a differentiator, which it never has before. No one is our you know, no, none of the big lenders have phenomenal risk management as one of their, you know, pillars. But and so they're all scrambling to build it right now. ⁓ And so I think that I think that if you've got that those are really kind like the three pillars like expertise, differentiation and capital markets. service level from through, you know, using AI as a way to provide the best service level at a small scale or sorry, at a large scale and best in class risk management to keep the bad borrowers out of the system. That for us is the combo, you know, all three equally important. ⁓ We think that's what the recipe for success is in this space over the course of the next 10 years. Craig (49:51) Well, I knew this was going to be a fascinating episode. think we could probably cut it up into multiple episodes now that we're going on two hours. Fred, always illuminating Sarah. It's such. Fred Lewis (50:01) Yeah, for sure. It was fun, as always. Craig (50:05) 100 episodes, Jack, 100 episodes, we made it. We can go into syndication now. Like old episodes of MASH, we could just play these things forever and take our royalties off of them, Jack. So get excited about that. yeah, final thoughts, Jack. Take us home. Jack BeVier (50:12) Yeah Yeah, exactly. Yeah. Now, looking forward to the next 100. No, no, it's been a, it's been a blast to do this, to do this podcast with you, Craig. I thank you for, for agreeing to do it. And I think it's been a great partnership. ⁓ and of course, you know, Fred, thank you so much for, joining us on the hundredth year. It's been a real pleasure. Always enjoy the conversation and let's get you on here more. Craig (50:42) man, I was just about to the same. Unfortunately, I can't go knock on his door because he's not here in the building with us much. Fred, the more we can have you on the show, the better, say. Fred Lewis (50:53) Well, I'm happy to join, you know, whenever you guys have a slot in the future, maybe before the next, before the 200 episode would be great. Uh, I, I would just say my parting, my parting thoughts are, you know, I think about really being disciplined and prepared, both really important terms for being successful. You got to prepare for success and you have to have the discipline to do it, but you also have to be prepared for. Jack BeVier (51:02) you ⁓ Fred Lewis (51:22) some chaos and conflict and ⁓ for when things don't work out. And if you can do both at the same time, if you can think about if everyone in the listening or in their business can think of those things at the same time, you know, we label them as different things, but risk management being, you know, being an aspect of ⁓ private lending is being prepared, also being on both sides of that equation all the time. is really important to position yourself to succeed. Craig (51:56) Folks, we can't thank you all enough for listening. Please tell a friend. Let your investor friends know about the podcast. The more the merrier. We love your comments, love your questions. You can always reach out to me at craig at thedominiongroup.com. ⁓ Glad to answer any questions or ⁓ bring topics to us that maybe we're not covering that you'd like to hear more about. We've got great guests coming down the pike. We've got some surprises too, Jack, from a studio standpoint. even open up the Pandora's box on that yet, but we're excited about that. And we're just excited to do the next 100. So thanks for being a listener. We hope you enjoyed these episodes. We'll talk to you soon. This is Craig Fuhr, Real Investor Radio. We'll see you on the next one.