Latest / Real Investor Radio Podcast / Ep 87 | Single-Family Rentals, Institutional Capital, Financing Challenges, with Sean Tierney

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Ep 87 | Single-Family Rentals, Institutional Capital, Financing Challenges, with Sean Tierney · Real Investor Radio Podcast

• Craig Fuhr (00:12) Hey, welcome back to real investor radio. I'm Craig Fuhr joined again by Jack BeVier. Jack, good to see you. We have much to talk about today. We have an awesome guest to introduce can't wait to introduce Sean to everyone. But Jack, I did a little bit of a dive on on the five year bond, I you know, getting a lot of calls from customers wondering about the timing is now the time to refi Should I wait? What am I doing? Jack BeVier (00:18) Good morning, sir. Great to see you. Craig Fuhr (00:39) So I went out and I checked sort of like five of the top, you know, I don't even know if they're bond buyers as much as they are forecasters. so financial forecast center, world government bonds, trading economics, econ forecasting, Oxford economics. And I took a look at what they're talking about and what their projections are over the next 12 months for what we might see in the five year bond market since that's We can look at the 10 from a consumer standpoint, from an investor standpoint, I think it's always important to look at the five year as all DSCR loans are sort of indexed off the five. And what I'm seeing here, Jack, is these five companies are basically saying, hey, it's going to be a little bit of a sideways slog over the next 12 months. Financial Forecast Center is probably the most bullish. They're saying that we could see 2.66 % yields by the end of the year. Yeah, and most of them are coming in between 3.9 and 4.2. So weighted average of all of them is 3.69%, which is actually great for investors. Yeah, we're at like three. Yep, yep. So. Jack BeVier (01:47) It was like, we're right at four this morning or on the dot. So 30 basis points down from DSC for DSCR rates. That would be great. I mean, if DSCR rates come with it, which they should, but, we didn't see it, them come with it when we had the volatility like three weeks ago, because the market was freaked out. So like they didn't just cause the index went down, they took all that room as extra spread. So we actually didn't get any pass through on a DSCR rate point of view. But if we got to like a stabilized three, seven, that would be cool. Craig Fuhr (02:10) Yeah. Check break. break that down a little bit. So traditionally, if we see the five-year treasury yields go down, DSCR rates go down almost always with that downward new five-year. And so in the last several weeks, we saw the five-year go down to like 3.6, and everybody's excited, phones ringing off the hook. But what we saw was our biggest note buyers were like, you know what, we're just gonna increase our index a little bit more revenue, little, exact, increase the spread, catch a little more revenue. We don't really know where it's heading over the next couple of days, weeks. And so that's what we saw this time. You've been doing this a long time. Have you ever seen them do that before? Sean Tierney (02:47) Mm-hmm. Jack BeVier (03:02) Yeah. And it happens. so when, when they're not being greedy as much as they are being defensive, because if bond, spreads, like if the credit spread of the non QM securitizations that they go do, right. they're to buy these DSCR loans, go do a securitization, put those loans generally into a non QM non-qualified mortgage. So this is basically anything other than Freddie and Fannie gets called non QM. And so they're going to go do a non QM securitization of a whole bunch of mortgages. They're going to put DSCR loans in there. They're going to also put bank statement loans in there. Um, and, uh, you know, all the other non QM products are going to go into this big securitization and the, and then they're going to go issue bonds themselves. And so the insurance companies and pension funds that are buying those bonds, if they, uh, are requiring a higher spread, higher yield on the paper that they're buying, then it means that the cost of capital for these loan buyers has gone up also. So the in times of volatility, no one knows where like spreads are going to land, right? Like is the world permanently riskier or not is an unknown question at those moments. Like we had two weeks ago, that was one of those points in time where like no one knew what was going to happen next week. And so At those points in time, you don't see people following the base index in terms of pricing. see them kind of being defensive and waiting to see where everything falls out. Now, when everything calms down and securitizations are being issued and sold, and there are market reference points, because deals are happening and so we can use those last deals as a comp. Then you see, then you see those credit spreads stabilize. And as a result, you see. loan buyers move their pricing with the underlying index. but those periods of volatility, kind of all bets are off until things stabilize. and so anyway, yeah, that's what we saw. Like since it was just a boop boop, like, know, big drop, big, big back increase. Well, they were correct, right? Big drop. And then a week later, it was back above where it was before. Right? So if they had followed, right, if they had paid more for those loans in that week, during that week, they had gotten themselves screwed. So. It was the right, it was intelligent, right? It was the right move. Monday morning quarterback in this thing, but that's what they were worried about. And then that's exactly what happened. So, you know, things are starting to stabilize a little bit more. some deals are getting priced again. And so I think we'll, know, if we saw like you were, you know, if these, these projections are correct, that like, get another 30 basis points on DSCR rates before the end of the year as 130 basis points, that would be pretty, that would be pretty great. Craig Fuhr (05:44) be tight. Well, we've got an awesome guest today. Like to introduce Sean Tierney. Sean is the vice president of in Terra. The in Terra is the first full serviced AI powered platform built specifically for real estate investors buying and operating single family homes. Before in Terra, Sean started out at Morgan Stanley working his way up through institutional sales and later in securitization products. So sure he has a lot to talk about on our last topic. He built relationships with hedge hedge funds and pension funds. He then worked to build Sylvan Road capital and Haven Brook homes, which is where I think you met him, Jack, and he raised over $450 million single handedly. single handedly, Jack just out there dog and ponying doing you know, raising 450 million for the single family rental strategy and most recently. Sean Tierney (06:30) Mm-hmm. Craig Fuhr (06:36) He helped launch Freddie Mac's pilot program for SFR portfolios and and he also worked with Corvest. He is now the vice president of NTERA, which I assume we'll be talking a lot about today. Sean, honestly, man, we always we get some amazing guests on the show. And I'm just always so fascinated that they would take the time with us. And I'm sure that speaks to how much you respect Jack. Hopefully by the end of show, you'll say the same about me, but you know, the jury's still out. I don't sail for a living. So I got no stories there. But anyway, welcome to the show. And thank you so much for taking the time out of your busy day. Sean Tierney (07:11) No, I appreciate it. It's an honor to be here with you guys. You guys have built quite a following. your list goes to show of, speakers goes to show the presence that you guys have in this space, you know, from economists to operators to all sorts of folks, you know, that I know and respect in this industry and other industries. So congrats to you guys. Craig Fuhr (07:32) We're just the little engine that could on the internet, man. Just keep plugging away at it and building a following. It's great. mean, honestly, it's been a joy indeed. So Jack, before the show, you were mentioning that you met Sean in Atlanta when you and Fred were buying a whole bunch of houses there. And so why don't you start us off with a story and then we'll jump in. Sean Tierney (07:35) Right? Jack BeVier (07:56) Yeah. Yeah. Yeah. So that's, that's how Sean and I met. were buying, we were the guy down at the courthouse steps, uh, you know, buying houses, getting them fixed up. went down to Atlanta back in 2011 and started buying houses, which was just like great timing just before the institutions got there and the cat, you know, got out of the bag. Um, and then, uh, wall street showed up, but in, you by 2012 wall street showed up. And, uh, so we were buying houses, fixing them up and we didn't, we we were just running out of cash. So we had to sell houses to recycle it. So we were selling turnkey rentals. So we would buy like 30 houses a month, fix them up, get them rented, and then start selling them to, you know, hedge funds and insurance companies and private equity groups and a Sylvan road, which later became Haven brook. Right, Sean? Have that got it. Sean Tierney (08:44) that became our operating company. And then we sold off Havenbrook to, well, long story short, but now it's a part of Predium, actually, at the end of the day. ⁓ Jack BeVier (08:54) Right. Yeah. Part of the big roll up along the way. if the big fish, you know, small fish gets eaten by a bigger fish, gets eaten by a bigger fish, you know, but Sean Tierney (09:01) Yep. And Sullivan Road is still actively out there. Jack BeVier (09:05) So yeah, that's where we met. was, I had houses to sell and Sean was there had, you know, he had money to buy houses. And so we, we'd sold a bunch of houses, you know, or we did a bunch of business together at a good time and just always kept in touch since then. and then you were at, you were at core vest. Can we talk about that? that pilot, cause that was really cool. And it kind of, it kind of lost steam, but at the time no one was really like, Sean Tierney (09:26) Yes. Jack BeVier (09:30) You know, there was no podcast format to talk about it, but that'd have been, that was like a really cool moment. Um, can you talk to us about that? Sean Tierney (09:36) Yeah, so I was actually with another company at the time when I was doing that called A10 Capital, which was here locally. But they were, that pilot program was based off of the kind of the tail end of Fannie Mae trying to do some interesting things. But they ended up getting their hands slapped by doing, when they started doing some public financing for invitation homes, using kind of that public money to go finance a large institution, which was fine. But the pilot program itself was really geared towards Jack BeVier (09:41) That's right. Yes. Sean Tierney (10:06) owner operators that had about $5 million in value of properties. And they were trying to build a national program that was going to help build out the, where the private credit groups couldn't do, or the private lenders couldn't do, right? know, Freddie Mac doesn't really have the same kind of constraints as far as geography. If you have 150 homes in rural Alabama, great, they can absorb that as a portfolio. There was lot of interesting characteristics where they wanted to go put out to it. And they got a few loans done. think we ended up doing about 100 loans fulfilling the five billion that they wanted to go deploy. There was just some issues at the end, some politics that went way above my head in pay grade, but it was still a really phenomenal program at its heart. Jack BeVier (10:55) What was the, cause at the time, what year is this? Yes. Right. So this is like B2, this is like B2R finance first key and core vest slugging it out on the rental, on the long-term rental side, but only the yield maintenance option. Sean Tierney (10:58) This was like 2016 to 17, I believe. Mm-hmm. Mm-hmm. You got it. And some new entrants like Lima and LendingOne were kind of just getting into that longer term financing, right? These were, and the loans themselves were very simplistic when it came to it, right? It was five, seven, 10 year type debt. I.O. was almost like a new kind of crazy feature that they were offering to certain groups. Alan True, I believe with True Homes was the first one to get the loan done across the board. It was, you know, and we all, there was about four of us that had licenses for this program, you know, going out there and, because you need a license to operate for Freddie Mac and, you know, and it was, it was a great program. They got cut too short and I think it would have provided a lot of growth and still to this day, I think that there could be phenomenal benefit from a agency like, you know, I mean, you see it in the multifamily space all the time, right. And, you know, the securitization as you were talking about earlier becomes so much easier too. You put things into K deals or Fannie K deals or the dust deals, And, know, CNBS type structures and it just starts building that wheel in that you can start financing better and more efficient. Jack BeVier (12:19) Yes, just to contextualize why I'm such a nerd about this and like I'm dwelling on it is like, so at the time, like there was, there was a very burgeoning kind of like SFR long-term financing market, but rates weren't very good. Like they were still like above bank rates by like a hundred, 150 basis points. like the group, you know, but, so the funds, like the small private equity groups, not even small private, like all the private equity money that wanted to be in single family real estate. Sean Tierney (12:31) Correct. Jack BeVier (12:44) would go to the local banks and the local banks would be like, who's going to sign personally? And the fund VP is like, dude, I'm like 2 % of the fund. Like I'm not signing personally for I own 2 % of this thing. and so like, they'd be like, guys, I got $100 million of capital to deploy into single family real estate, we need to like state we need affordable housing and to stabilize this real estate market. And no one will frickin lend to me. And so Freddie Mac, you know, so everyone was banging on the door, like, hey, Freddie Mac, you got this multifamily program that like Sean Tierney (12:48) Yes. Jack BeVier (13:12) is the market for financing multifamily properties. This is the same thing. Just take one address and put in, you know, 37 addresses and it's the same damn product. Like you can't get your heads around this one guys. Like this is like so freaking mission. You know, it was making everyone so frustrated. So, and so yeah, they finally were like, all right, let's try it out. And, you know, use that, that like Freddie Mac Sean Tierney (13:22) and It was very mission driven. Jack BeVier (13:39) path of like giving licenses to certain originators who were trained on the guidelines. And basically it was going to be like the single family version of Freddie Mac multifamily. And everyone was jacked. Everyone was like, this makes two more attempts. They didn't like it. Yeah. Sean Tierney (13:50) Yes. Everyone was really excited about it. I think some of the private lenders were a little, some of our competitors, you know, it was because it was going to almost take, you know, all of a sudden, as you were indicating, right, those rates were 75, you know, 75 basis points cheaper when they are trying to do it. And they were a little bit concerned on how it was going to eat up their own book, you know, because they were, you know, they weren't going to get some of the servicing aspects of it. And they may have lost out on some of the origination fees. But overall they were very supportive of the deal because at the end of the day it was going to be flow for some of their other products right some of the bridge into a Freddy deal or You know something along those lines Jack BeVier (14:27) Yeah. And then so they start to this paper on the street. And was it at the beginning or at the end that they did the invitation homes deal? Sean Tierney (14:35) Well, so Fannie Mae did Invitation Homes, and that's where they got their hand slapped. But then Freddie Mac ended up doing a... They ended up financing part of the... The name escapes me too, but it was another large institution that's now, it was like an Alta Source group. It was actually part of the Havenbrook name that got rolled up and they ended up doing some public financing with it that probably shouldn't have gotten done at the time. that was kind of the end of that program. I was gonna say, I don't think that that was the nail in the coffin, but I do think that that was one of the things that was Jack BeVier (15:08) Yes, we... No good. Sean Tierney (15:17) was frowned upon. was also some you know there was also some pushback from the NAR and the National Association of Relators. They were against you know agency you know agency funding you know because the theory was or the you know the working theory was that you know because these private equity groups didn't need licensed agents to buy real estate they were going to be taking out some of their commission which If you actually looked at the data and looked at how these groups were actually purchasing, they were always using ⁓ some sort of an agent at the time. Jack BeVier (15:50) Right. Yeah, but the, the fear, the fear of wall street coming in and buying up main street is not, not a new thing. It's pervades, but it's not a new thing. Yeah. Sean Tierney (15:56) Yes. Correct. No, it is not. is not. so it was, it got, you know, unfortunately it was taken out. think it was first key. No, not first key. I front yard. Front yard. Front yard homes. Yeah, that was the transaction. Jack BeVier (16:06) So yeah, Gotcha. Yeah. So the, so the, you know, the institutions started, try to dip their toe into the water on getting, know, in, in getting into this space, they, Sean Tierney (16:15) Yes. getting into that agency financing as well because the securitization market really hadn't formed for them either. And so there had been a few securitizations back then, but it really had not, that wheel had not started yet for them either. And so this was sort of their ability to use some good financing for them to grow their engine. Jack BeVier (16:35) Yeah. So the, like their involvement or that, that, that that the institutions, that the private equity groups ended up getting that financing ended up kind of like killing it politically. And then, so then we went back to zero, but, then ironically at the same time, the non-QM market, the DSCR market, that kind of left the vacuum, right? That like, Verus I think was one of the early entrants. Maybe there were some others too, but Verus is the one that at least was on my radar at the time. Sean Tierney (16:42) Mm-hmm. Correct. Mm-hmm. Right, it did, yes. Jack BeVier (17:02) like put together the DSCR loan and started to get that, tried to make that a securitized product. And that ended up being like that, you know, that's what came out of it, right? Like we, so we, we don't have today, we don't have a Freddie Mac single family option. Sean Tierney (17:15) Nope, there is no agency like deals, right? mean, even you've started to see some of the, you see the non QM deals, but right, like the core rest of the world, their securitizations have slowed down. You know, and now you do have the right, that long-term. Jack BeVier (17:26) Yeah. Corvettes on core, doing a similar kind of product. some insure some direct to insurance company stuff for the bigger private equity groups. But since the private, but over the course of past five years, four years, since the institutional aggregation pace has slowed down, you know, there hasn't been like that push for that side of the market. Like there was before now it's become, it's kind of gone back to the mom and pop people buying a couple of houses at a time. Sean Tierney (17:49) Right, it's 100%. Jack BeVier (17:55) And so the DSCR product has ended up being like kind of the overwhelming volume on the, the, the single family origination side, at the moment, right at the moment. But that's kind of like the point, what the, what I, the reason I wanted to like dig in here is that like, this has been like an evolution over time. And depending on the market conditions at the time, the financing has the financing markets have like, tried to adapt. and fill the need of what the equity, but you know, what the predominant equity was being deployed at the time at the moment, it's kind of back to mom and pop acquisitions, but that could and probably will at some point shift, you know, could shift at some point in the future and the debt markets will adapt again. And we could see a reemergence of core vest and on core and, and the insurance product. Sean Tierney (18:40) Well, and I think you have though, right? I mean, I think that to your point, is 100 % driven by the mom and Paul retail investors right now. You're seeing some really interesting things coming from, you know, the dominants of the world, the, you know, the key obvious of the world. All of these guys, always kind of in the back of my mind, I always think, all these lenders should be slowing down with where rates are, but you continuously see headlines of, you know, such and such lender. 5 billion in origination, or this lender doing a billion dollars in origination last year, right? And they are becoming, whether it's through bridge financing or term structures, I think most of that, if you were to look at the data, would actually push towards the bridge, the short-term financing. But the ability for them to still continue and push out new product really goes to show that fortitude that they have, and to be creative. coming from my prior... a life away time ago, they're not pushing credit risk to make deals get done. I think we saw in 2006, 2007, 2008, didn't matter how that loan got done. It got done. Now on these bulk portfolio loans or even on the one-off, the credit underwriting is still pretty sufficient to cover these and defaults are low. We talked to the lenders quite a bit. they're seeing delinquencies start to tick up, but nothing concerning in that 2 to 3%. Maybe it's a little higher off books. Jack BeVier (20:07) Yeah. that's what I'm really interested in in the next phase here, like, because, because the DSCR loans specifically just picking up, picking that product had become a part of rated securitizations. The rating agencies now have a lot to say. Like they're a big driver of what ends up on the street. because if the rating agency frowns upon that feature, no one wants it. No one wants it in there. Right. and so as we see delinquencies, Sean Tierney (20:10) Mm-hmm. Mm-hmm. Right. Jack BeVier (20:35) I think, you know, continue to increase the, they started to increase. think they're going to continue to increase. ⁓ I, I'm just, I, you know, we, have the real estate side of things in Baltimore. so like, I'm, look at the courthouse foreclosure auctions every week and I've got, you know, VA who puts together this spreadsheet. And one of the fields is who the defendant is. So it's, know, so-and-so trustee versus, you know, Joan Smith deceased, right. Is like your typical for the past five years, it's been a lot of like cleanup. Sean Tierney (20:39) Yeah. Mm-hmm. Jack BeVier (21:03) of post COVID foreclosures that just didn't happen. A lot of folks who just passed away or just kind of normal foreclosure activity. But then over the course of the past four months, I've seen a noticeable increase in LLC defendants. And then I go on land records and see who the plaintiff was. it's one of the 10 usual suspects of private lending. Sean Tierney (21:21) Mm-hmm. Mm-hmm. Jack BeVier (21:32) You know, those foreclosures have started to come through and those folks are about to figure out what severity given default is right. Like we had a whole bunch of assumptions in an Excel spreadsheet as to like, what was going to go happen if, was going to happen if this thing went sideways. And now we're about to find out, you know, like how much you lose on a foreclosure in the west side of Baltimore. ⁓ so Sean Tierney (21:49) That's right. Mm-hmm. Jack BeVier (21:54) And then that feedback loop is then going to go back up to the rating agents, know, the remittance reports on the securitizations that are being read by the rating agencies. And then that's going to flow back down into guidelines. So I think we're at the beginning, you know, we're in like inning two of that feedback loop right now. So it'll be an interesting, interesting. Sean Tierney (22:00) Correct. The investors, Yeah. And you brought it up earlier too, right? Like the investors also demand different, you know, whether it's higher or lower LTVs or, you know, they require some of those credit features into those bond structures as well, right? Where, you know, to absorb the credit risk that they're going to have, not just a premium, right? And saying, oh, you know, I'm not going to pay this for the bonds. I need to pay, you know, a lower price or whatever to make sure that credit risk, but there better be some structures in those DSCR loans. that protect me, whether it's a first loss prevention piece or how does a waterfall structure look like. So I think that those two and then the rating agency steps in and puts a check to it as well to make sure that those sorts of features will play out the way they're anticipated. But those are all empirical. now it's all great. As you said, it's all great on a spreadsheet that says, I'm only going to have. 2 % loss and it's only going to my unpaid balance of, know, whatever it is. And it could be more. Jack BeVier (23:11) We're about to find out. It's gonna be fun. It's gonna be fun. Craig Fuhr (23:13) So getting back to the whole Fannie, you know, getting into that was strictly the product that you were talking about with Corvest would be like, I've got an investor, he's got 100 houses, we want to roll that up into a Fannie agency. So what would so let's just play it out. Like if they were to get back in the space, because I feel like DSCR pricing is pretty competitive, you know. Sean Tierney (23:26) Or Freddie, yeah, is it Freddie? Yep. Jack BeVier (23:27) Ready. Craig Fuhr (23:39) these days for a 30 year fixed over like walking into your local bank. So, but my but the question is though, how much better would the pricing be over what we're offering now? Jack BeVier (23:43) Portfolio is hard though, starting to wrap. Portfolio is hard right now. Can't really. Sean Tierney (23:52) So I think it's short. I think it's two components, right? It's not only is it's pricing, but it's efficiency and what they can underwrite. There is no, again, right? So let's say pricing is 50 bips tighter. Let's just make it up as the number, right? But it's also what the type of product that they can underwrite, i.e. they don't care if it's 100 homes in Baltimore that are all worth $25,000. Right? Whereas some of the private credit, the Corvests or the lending ones of the world, may have some regulation around how much they can absorb. Also, population, right? If you were into smaller population places, Freddie can say, look, we don't care if that population is below 100,000 people. We'll go finance it. So I think it's twofold, not just pricing, but it's the type of product that you can get into. portfolio loan that makes it so valuable. And eventually it becomes part of the efficiency of getting that loan, which is where I think Freddie struggled at first. They took all of their multi-family underwriting and just sort of plopped it over into the single-family rental space, which is, we all know is not the way that things work. right now, right, if you look at your average owner operator of a mom, Craig Fuhr (24:49) Interesting. Sean Tierney (25:12) or Jackson is 100,000 times, right? And ask them, hey, let me see your three year PNL statement. ⁓ That just doesn't exist, right? Or, you know, let me see your receipts for all your capex expenses for the last, you know, 18 months. If you do get something, it's gonna be a shoe box and it's gonna be disorganized. That methodology did not fit into the Freddie Mac kind of way of thinking of how to do a loan. Craig Fuhr (25:19) Yeah. Sean Tierney (25:40) There needed to just be some operational changes. And I'm not saying either group was right. It just needed to meet in the middle a little bit more. And it would need to meet in the middle a little bit more. Jack BeVier (25:50) Craig to put some numbers to what you're asking. like Freddie Mac fixed rate 1.25 or 1.35 DSCR 70 % loan to value 10 years with nine and a half years of yield maintenance. like very restrictive yield maintenance. let's, know, to be fair, very restrictive prepayment penalties is, was high fives. like it's a hunt now that's got Yield maintenance there is a, is a portion of that, like, you know, versus the five, four, three, two, one prepay, which is like what we break the most of there's a difference there. There is a little bit of a pricing bump because of that feature, but a hundred basis points of rate, basically, Delta between the multifamily financing market and the single family financing market. And that is, you know, that that's that Delta existed 10 years ago, but it was the banks. who were 100 basis points higher than the Freddie Mac multifamily rates, right, but they were doing single family, the banks have kind of been supplanted, right, the rate the rates are on par now with bank, the DSCR rates are on par now with bank. But, but there's still a delta. But the point is between multifamily and single family on the same, you know, the same equivalent assets. And so we know which ironically, you know, that should on an investment basis lead to like a Sean Tierney (26:48) Mm-hmm. Jack BeVier (27:10) difference in pricing between single family and multifamily. We haven't seen a whole lot of great multifamily deals or you know, there's not a whole lot of multifamily deals happening right now. So no one has been paying attention that much to the multifamily rates recently. But by the by you can still get high fives financing right now on multifamily projects. It's just super hard to find a deal that actually has 1.35 you know, ex debts or debt service coverage ratio on because Freddie Mamley Freddie Mac actually Sean Tierney (27:14) Mm-hmm. Jack BeVier (27:40) underwrites debt service coverage to they don't do P. That's not a P. I. That's a gay real 1.3 5 X. So it's just really hard to find a seven and a quarter cap right now on the multifamily side. Craig Fuhr (27:52) Isn't there a loan limit with them though? Like if you're like mom and pop going out and trying to get a Fannie or Freddie loan for an investment? Isn't there like a it's like nine or 10 and it and it Sean Tierney (28:02) I think it was nine, wasn't it? Yeah, it was nine or 10 on each. It was on the Social Security number for my recollection. I haven't looked in a bunch of years, Craig, but it used to be it was limited to Social Security number and you could get maybe nine and each one became harder, progressively harder to get because you had cash reserves and, you know, net income requirements that each loan you had would deteriorate that all of a sudden because you weren't allowed to use your net worth requirement. You weren't allowed to use a house that you already had invested with Franny or Freddie as a net worth requirement. So unless you were worth 10 million bucks, it would start to decrease every single time. Craig Fuhr (28:45) not to not to mention it also counted against your credit. And so you could be this guy like with 10 highly performing houses making all your payments on time, and you're rocking a 680 credit score because all of these things go against your go against your credit. And so I always thought that that was like the limiting factor where, you know, whereas like the private lender distribution network for DSCR, you know, there's no limit. And there's no, it doesn't report to the credit agencies either. So Sean Tierney (28:56) Mm-hmm. Mm-hmm. Craig Fuhr (29:13) It just felt like DSCR just feels like a better mousetrap for me right now than going out to the agencies for investor products. Jack BeVier (29:21) portfolio is still a hole though. And I think like the market's not like DSCR portfolios are kind of tough to get done. have to break, you have to break up the 80 unit portfolio into a bunch of 10 property portfolios and sell it to like six different guys in order to get those deals done, which we can do and are doing, but it's a hassle, right? or like your alternative is that you go to core vest, you go to encore, you go to, you know, Craig Fuhr (29:33) Yeah. Jack BeVier (29:44) direct to an insurance agent, insurance company. If you have like several hundred houses, you could probably go, you probably get a direct deal done through like a bricadier or somebody. but, but that, that portfolio refi is a missing, is a missing middle right now, but there's not enough. I don't think there's enough of those deals happening, ⁓ that aren't already in core vest and core vest is just like extending you, for Sean Tierney (30:02) Go. Jack BeVier (30:06) like the market to like really solve that problem for there to be enough demand for that product that the debt market like gives a shit frankly. So that's just kind of like, the missing middle right now is, those, um, well it's, it's the, the, the, um, 10 to 50 unit or 10 to 30 unit multifamily and the 20 to 200 portfolio single family is kind of the hard part right now to get done. Sean Tierney (30:35) Yeah, and it is, right? mean, we have not seen, we actively trade portfolios for our clients out there, and it's quiet, right, on the portfolio trading side. And it's because the rates are so preventative and that where buyers and sellers are looking to exit, and there's obviously a pricing component to it where execution, if you're looking at a portfolio of 40 homes to say, all right, I wanna get rid of these. What's my best execution? Well, it's more than likely it's just selling it to retail, right? And versus trying to go ahead and sell that 40 homes to another investor because it just, it won't work from a lending standpoint and it may not even work from a cap rate standpoint. So it becomes very challenging. Craig Fuhr (31:21) Yeah, I was going to ask you like the sort of the low velocity. What's the what's the defining factor there? I would just thought it was just rates at this point that just can't make the map work. Sean Tierney (31:29) Yeah, no, think that highest it's highest invest. You know, in 2021 when demand was so strong from everybody, you know, I think that everybody was willing to pay a premium or you would be able to take out, you know, 100 home portfolio very efficiently. Now, it's just investors are willing to get creative on their finance. Let's say if they had a term loan coming up in 2025. Right? They would have, you know, they would just get a bridge loan to pay that off. and then say, all right, I'll use over the next 18 months, I'm going to go sell my 40 home portfolio versus trying to pay off in one fall swoop. Right. And so I think that we've seen a few of those transactions going down. We have seen the, the investor loans extend, right. they want to keep it on their books. And we're also seeing in the limited inventory that we do see trade, Investors are willing to pay in that 6.5 to 7 % for term financing, in a long-term portfolio loan. so they're able to make it work, which is always on the spreadsheet, it works great until two vacancies come up. Craig Fuhr (32:35) On the spreadsheet, it works great. Sean Tierney (32:41) you then get cash lockboxed and you're cash trapped and all of a sudden you're selling your portfolio for a deep discount. Craig Fuhr (32:41) Right? I'm 100 % going to take cash lockboxed and start using that. So thank you. I've never heard anybody say the cash lockbox. I love that. Sean Tierney (32:57) Mm-hmm. I believe it's in some loan. If you read loan docs occasionally, it used to be a term in there. But yeah, and I think the fun part is, so when you have to go set up that lockbox, let's say if you're an owner operator and they say, you need to go, in original loans, right? Like this was back in the day, they would go to get Wells Fargo to set that up for you. It was like $20,000. Craig Fuhr (33:07) Really? Sean Tierney (33:25) So it was not for them to operate that cash lockbox for you. was expensive. So not only are you now paying for that lockbox to operate facility, you're now not getting your cash and it's going, and the bank gets, the lender gets to distribute everything. So that's a bad place to be. Craig Fuhr (33:44) So man, let's let's step back and you've obviously had an amazing career. Love to know like how you started out and you know, you can go quickly through, you know, ending with Corvus and then and and then the idea for an Tara and joining joining up with them. So yeah, I would give us a story man like tell the listeners like not not every guy that comes on the show is born with a silver spoon in their mouth. Most of the guys like, you know, work their way up from the bottom and Sean Tierney (33:58) Yeah. ⁓ well, I'm using is probably a little bit of a. Craig Fuhr (34:11) you know, are where they are after a lot of hard work. So, yeah. Sean Tierney (34:16) I fall into that category, right? So I was very lucky and fortunate to go into Morgan Stanley on a January day. And I didn't happen to trip when they were looking for somebody on their short and medium term financing desk. And I had a series seven and they said, great, can you start next week? This was in San Francisco in about 2003. ⁓ I had a double major only because Craig Fuhr (34:35) What did you study in college? Sean Tierney (34:39) I went to school for so long, it just seemed to make sense. You you hang around the hoop a lot and they keep giving you credits. And so it was a major in business economics and business. And so I graduated from a small program in Moraga, California called St. Mary's that actually makes it to the, no, let's see, they make it to the, they make it into the NCAA basketball tournament. That's kind of their claim to fame. Craig Fuhr (34:46) Right. Right. Right. So you walk into Morgan Stanley with your seven year bachelor's degree. And somehow, close enough, somehow they they're like, this is our guy. Like, you know, you're not exactly like, ⁓ you know, walking out of walking out of Stanford, you know, like, yeah. Sean Tierney (35:09) Yep, was six, but that's okay. You're right. Correct. And so that was it. And I was placed on a desk and it was awesome. I really have to say I was with great mentors. The culture there was phenomenal at the time. But I was doing a lot of what was called, it was money market funds. And I was covering these large household names, Dreyfus, Fidelity, Pimco, Whamco, all these, because I was on the West Coast and you're covering these names. And I was a 21, 22 year old analyst. doing billion-dollar trades every day. And you're like, oh, it must be really cool. But then I saw these guys next to me having a really big time. And they were jumping on planes and having big parties and doing all this stuff. I wanted to figure out what was going on on that desk. And that was the Securitize Product Group, which was responsible for everything that had an acronym. so in 2005, or no, 2006, I switched over to the desk. Unfortunately, I was there covering all the large institutions both on buying the loans and securitizing them and then selling the loans on the West Coast. we covered all the large mortgage institutions that are no longer with us and a lot of the large funds that ended up blowing up. And pretty much we're at the epicenter for a lot of what happened in the great financial crisis, which... yeah. Craig Fuhr (36:40) Were you still working at Morgan Stanley during that time? Sean Tierney (36:43) I was, yeah, because I was young and cheap. right. I didn't really, you know, I, and I kept my head down every time HR would call. And so, uh, you know, they would look around the room and, know, they'd see an older guy and, know, somebody who cost them a little bit. that's who would usually get, unfortunately, who was laid off. And it was hard, man, for being a, you know, 27 year old thing. You're not really mentally equipped to handle that stress of the stories you're hearing of what's going on financially. Craig Fuhr (37:10) Yeah. Sean Tierney (37:12) people coming to you and blaming you and you're just like, I don't know, man. Like, you know, and yet Dr. Burry calling you and being like, why are my bonds marked at par, but you won't buy them at par. He was payments for the great short. so, you know. Jack BeVier (37:24) Mm Yeah. So you you the guy? Are you the guy he's calling on that desk? Sean Tierney (37:28) may or may not. But he was, yeah, he was, he would call because he was buying a lot of the corporate credit bonds that was traded next to me. And then I was covering once I moved over to the securitized product group, we would, you know, he wasn't my coverage, but he was covered by another guy out of our desk, but I would have to help him get his trades and you know, his short trades on and it was fun. Craig Fuhr (37:29) That's wild. Holy shit. Sean Tierney (37:51) Right? Like, but, and then in 2007 and eight, things started to change. You know, nothing but positive things to say about Morgan Stanley. left in 2012 because there was a gentleman who sat next to me who was the U.S. housing, and I'll go quickly here, but he was the U.S. economist, and he was a guy by the name of Oliver Chang. And he started writing some really interesting papers that are still out there on the institutionalization of single-family rentals. And this was in about Jack BeVier (38:19) He was like the first Wall Street guy who like, and everyone was like, looked at him like he was crazy. Yeah. Sean Tierney (38:25) 100%. And so we would go and you know, because I was a sales guy and we would do these like dog and pony shows and bring out, you know, your analyst and he would bring this up in these meetings. And you know, with large institutions, I'd be like, no, we'll never put money into this. We don't believe it. It's too, you know, the risk is not there. It's never been done before. But then you'd get the guy who, as you're walking out of the meeting would go, Hey, if you do this, I'll give you a million bucks out of my PA. And so, you know, Oliver and I started Craig Fuhr (38:51) Hahaha Sean Tierney (38:55) doing this enough times and we're like, I think we just raised 20 million bucks, you know, as a shadow book. And so in 2012, I actually left to go to another institution that went bankrupt, unfortunately called MF Global. was in longer story there, but they went bankrupt. I saw Oliver Chang on CNBC one day and said, hey, we should connect again. And he said, yeah, let's go do this. And him and four other people, started a group called Sullivan Road Club Capital. We went and raised, using kind of the relationships that I had built over the years, raised that 453 million. I always bring up the three million because that was the friends and family. And I have to say raising 450 million was easy compared to trying and going hitting up my friends and family for $3 million. So anybody who goes out there and says raising money is easy is from friends and family either has, know. Craig Fuhr (39:44) You're hitting you're hitting the guy up for 50 grand. That's like a friend and he's like, that's the last 50 grand I have Sean don't mess it up right. Sean Tierney (39:50) Totally. ⁓ Don't mess it up and you would get those calls. ⁓ Craig Fuhr (39:53) Dude, I'm so intrigued by this because like, here you are fresh out of college, probably weren't dreaming that like you were going to walk into, you know, an investment banking job. I don't know if it was that was that the plan or is it just happened that way? There you go. So you were going to go wrestle kangaroos, but instead, you walk into Morgan Stanley and you learn sort of like, very quickly how to talk the talk and walk the walk with very large scale numbers. Sean Tierney (40:06) No, I wanted to live in Australia and hang out. Craig Fuhr (40:21) which I just find like, think guys like Jack, just sees the numbers. Like Jack just sees it in his head. Like he just computes like it's that. But like, I don't think everyone understands like you get on the phone and you're talking to guys about billion, million, hundreds of millions of dollars and you're 23 years old. Like it's insane to think that. And the question is like, how did all of that quickly condition you for when you went out and Sean Tierney (40:42) percent. Craig Fuhr (40:48) raised the 450 million like, did you worry was that did that feel daunting to you? Or was it like, I got this like, you we know Sean Tierney (40:51) Two-fold, yeah. And you know what it actually prepared you for is that you learned that quickly that CIOs are people too, right? And, you know, I had the ability to talk to some of the top groups, know, Bill Gross at PIMCO or, you know, some of these large groups that you would read about in the, you know, the New York Times, the Wall Street Journal, you know, it'd pick up the phone and yell at you on an average Tuesday and call you all sorts of names. But at the end of the day, you'd go and grab a beer with them, right? And so you learned that these were just people and not to be intimidated by them, I think was the key thing that I learned and that it was okay to go and ask. They may hate your trade idea, but at the end of the day, they may even yell at you, but it's okay. And so I think it was a little bit of tougher skin just going out there and learning and then having that ability. I think that's where some of the challenges, I think that Invitation Homes in Dallas did a great job when they were first starting. Craig Fuhr (41:36) Made a pic. Sean Tierney (41:49) being able to connect John Gray at the time and saying, hey, look, this is how we can speak your language. So Blackstone can go give us a billion dollars. I think that that was, and to this day, I think that's challenging to go bring the SFR industry into the Norwegian Pension Fund or the Saudi, that language still is not there. it takes, it's an interesting kind of group that can go in and talk both sides of the fence and say, I understand why you shouldn't have ceiling fans in your homes because they break, but also I understand why your convexity of your mortgage bonds is underperforming and this may be a better delta to your there. So it takes a little bit of that skill. Craig Fuhr (42:34) Yeah, you're you're you are definitely walking into those meetings with all the receipts like there. It's not it's not fluff. Jack, you've you've had to do many of those sort of dog and ponies looking looking for capital. Like, what's it like? How has how has the last 20 years of Dominion, you know, condition you to walk into a meeting like that? Sean Tierney (42:39) Mm-hmm. Jack BeVier (42:54) We had a difficult time communicating raising capital in the single family space to large scale equity because deploying capital into houses is hard. Deploying houses, $150,000, $200,000 at a time is a shit ton of work. There's a lot of operations that goes into that. Craig Fuhr (43:16) Yeah. Jack BeVier (43:20) And I think that you have seen that idea play out in terms of like which real estate institutional capital, which single family real estate institutional capital has gone into and where it's gone in and gotten its butt kicked and then retreated and gone back out. you know, because we were Baltimore, cause that was our backyard. The idea of deploying institutional capital in Baltimore is like a really, really, really challenging idea. We've seen literally half a dozen groups. come in, think that they're going to crush it because the gross yields look great. And then just get their asses handed to them and tuck tail with a loss on their way, on the way back out of the market. so, you know, deploying that capital is, easier said than done, especially at the slopes, the small scale of a couple hundred grand at a time. but you know, then the sunbelt you, you know, where, where the, where the operations are a little bit easier and the variability. of the product is less. know, there, I mean, obviously institutional capital has deployed a tremendous amount of money into the class. It can be done. It has been done. Right. So like that, that issue is settled. But, but anyway, we always came, we always came from a place of like talking about Baltimore. And so we just don't think it's a fit. Like we just think that, Hey, you know, like if, you want to deploy, if you want to deploy a 10 million bucks, Yeah, we can have a conversation. If you want to deploy a hundred, I don't know, man. That's going to take a while. Like I'm not going to, I don't think I can get that on the street in 24 months. Um, not in Baltimore anyway. Uh, so I don't know that, that ends up leading to like interesting dynamics in like in different, you know, different markets. Um, and as a result, you know, opera different opportunities for smaller investors to fill the voids, like right underneath the, um, the institutional players, because we're going to have a hard time competing with their cost of capital. Sean Tierney (44:40) Mm-hmm. Jack BeVier (45:07) Right. When, when invitation homes raises equity, it raises equity from retail investors with retail investor return on equity thresholds. And then it goes straight to the bond market and raises directly raises money directly from the bond market. So it's getting the cheapest equity and the cheapest debt. And I'm supposed to outbid that guy on a house. Unlikely like our operations can be better. Right. And we talked a lot of shit for a lot of years about how these knuckleheads from Wall Street, we're going to screw up operations. And in Baltimore, that's true. But in Atlanta and in Florida and in Phoenix, my operations aren't better enough to make up for the difference in cost of capital. And so we just see those markets to Wall Street because they're going to outbid us on those houses. Or maybe we can like catch some table scraps. Sean Tierney (45:50) Mm-hmm. Jack BeVier (46:00) But going heads up with them at the courthouse steps, I'm gonna lose. And we have lost. We've lost for the past 10 years. We've lost in those markets. Mom and pop investors have lost in those markets. Craig Fuhr (46:11) It's interesting. Hey. Sean Tierney (46:12) Yeah. And I think something also that's interesting too, you talked about, and I remember one time at an RIR meeting, you guys were talking about is being prepared going into the institutional investors, right? And how, you're raising that capital, have all, you you guys were referencing it, Jack, at the time when you're going and getting a loan, but it was have all of your ducks in a row, be ready to answer all the questions. And I think that that is a key component when you're going and trying to raise capital. Craig Fuhr (46:36) yeah. Sean Tierney (46:39) Um, it's have all your ducks in row, have everything spelt out because you need to have, again, with the languages, barriers, not barriers, but just different languages. You need to have those kinds of, you know, things ready for them to understand the digest. And then also on the capital raising, be prepared for a slow haul, right? It's, know, you're not going to walk into a huge money market or, you know, a large institution and day one and say, Hey, I need 150 million bucks. let's go. I mean, you better be prepared for an 18 month due diligence period and then, you know, some contract negotiation all the way through. Jack BeVier (47:17) Yeah. And then you hope the market opportunities still there by the time, you know, like that's like one of the, you everyone's like, why don't we just go direct to the insurance company? Like, I mean, if you start today, you may get done 18 months from now. And like, are you sure you'll still have deals 18 months from now? The market moves pretty quick, you know, like that opportunity door is going to be closed. know, good chance that opportunity door is closed by the time you get there. Sean Tierney (47:20) Correct. Right? Like that. Mm-hmm. Craig Fuhr (47:40) I had a, I've told the story on the podcast before, but I had an experience to sit through one of those type meetings with a small private equity firm that was looking to get into mobile home park space. ⁓ These guys were literally doing high fives halfway through the meeting, like thinking, like saying, you know, the mobile home park space is literally what self storage was 20 years ago. It's just, you know, there's, and so Sean Tierney (47:52) Mm-hmm. Craig Fuhr (48:08) The meeting went great, but what I found was, yeah, there's a lingo in those types of meetings when you're sitting with like Wall Street guys or guys that have been on Wall Street that like was completely over my head. Thankfully, not for the guy who I was there as a partner with, he worked in investment banking and raised about $400 million for a kind of a mid-tier mobile home park provider. the most striking thing about it was it was probably 10 hours. we had the most the sharpest presentation that we could possibly put together in the timeframe that we had, like literally brought all the numbers, all the receipts, but the amount of questions and pointed questions. I mean, like, this wasn't like, you know, give us your thoughts on it was, you know, tell us exactly what this and, you know, I think the deal actually went up getting done. But you're absolutely right. So like, you know, this guy was like, we can raise a billion dollars. We'll start in April. It was December. And he was like, you know, well, We'll figure it out as we go. But it was a long, tough slog for my buddy who actually went up working with them and not easy meetings to get through. So that's why I find it so intriguing that you've sat through so many of those, Sean. So Jack, what do you say we end this episode here? Sean, we have you for like maybe another half hour or so. You cool with that? We'll end this meeting with Sean Tierney. Sean Tierney (49:20) Mm-hmm. Yeah. Craig Fuhr (49:23) I'm sorry, this episode was Sean tyranny and we'll come back for a second episode where we get into and Tara and all the cool stuff that you're doing there if that's cool with you. Sean Tierney (49:32) It sounds awesome. I appreciate it, guys. Craig Fuhr (49:33) Well, thanks for listening, everyone, to this episode of Real Investor Radio. We'll stop it right here and join us for the next one with Sean Tierney and Jack Levear.