Lending against distressed properties not to distressed borrowers, with Todd Pigott
"Distressed property can always be repaired, not so distressed people. And so we focus on distressed properties. And that platform has worked very, very well for us: I've done a billion dollars of this, and I will tell you, I have never ever lent on a property that I was not able to fix."
The modern mortgage model is designed to work at scale, so when a deal pops up that's a little outside the norm it can often be more efficient to say no quickly than to spend time thinking it over. But that means that a lot of great deals never see the light of day within the big lenders. But it has to be that way... doesn't it? You couldn't possibly employ a team of property experts to select hidden gems in good neighbourhoods and then ensure they're well restored while still protecting your margin... could you?
I love a lending model that leverages community knowledge and that's what ZINC does - providing financing to contractors who are looking to improve neighbourhoods by buying good but distressed properties and fixing them up. Margins are good. Collateral grows in value. Borrowers have skin in the game and every reason to make it work for your mutual benefit. In this episode, I speak to Todd Pigott about their win-win-win-win approach to private lending for property developers.
ZINC Financial's homepage is at https://zincfinancial.com/ (or at https://zincinvesting.com/ for investors)
But you can also find the ZINC companies on LinkedIn: the lending side at https://www.linkedin.com/company/zinc-financial-inc-/ and the capital side at https://www.linkedin.com/company/zinc-income-fund/
Todd is there, too, at https://www.linkedin.com/in/todd-pigott-893aa861/
My action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24
If you have any feedback or questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
Keep well, Brendan
The full written transcript, with timestamps, is below:
Todd Pigott 0:00
Distressed property, maybe it's dated on the inside with bad cabinets, can always be repaired, not distressed people. And so we focus on distressed properties, not distressed people. And that platform has worked very, very well for us.
Brendan Le Grange 0:15
Harry Potter may have had his Philosopher's Stone, but today I have my philosopher's wool.
Now, if you know me, you know I love a good treasure hunting story. Drachen my first pulpy adventure thriller is available now for free on Kindle, for example, and for a very reasonable price in all other formats. But yes, the philosopher's wool. You have to believe I was excited when I saw that. It turns out though, it's useless on mundane to make LEDs to make sand cream to make anti dandruff shampoos.
It also turns out that I was barking up the wrong tree when I went looking for meaning in the history or the chemical properties of the elements think Welcome to How to Lend Money to Strangers with Brendan le Grange.
Todd Pigott, principal and managing member at the Zinc Group of Companies. Welcome to the show.
Todd Pigott 1:15
Thank you for having me. It's an honour to be here with you, as well as your listeners. Thank you.
Brendan Le Grange 1:19
I'm looking forward to it. Because Todd, you've been in the property game for a long time now. But with a very interesting pivot in your career where you went from getting your hands dirty and actually building houses. And now you're on the side funding houses. But let's start at that first step when you were the one fixing up houses.
Todd Pigott 1:36
Absolutely. Well, I grew up in Southern California and then came up to Fresno, California, which is where I reside. Now that's right in the centre, California, got my degree in construction and finance at Fresno State.
At that time, I was very, very poor broke on welfare at about $17 to my name. And what I did during that time, and playing water polo and swimming is I needed a job. So I started cleaning buildings in a very young age. I took that company and I built it for myself up to about 500 employees.
And I sold that company in 2006 to a private equity firm in New York, I did not enjoy that line of work wasn't something I was passionate about. I was extremely passionate about construction and real estate and finance. That's what I went to school for. That's always been my dream job. So I immediately went into the rehab business.
I had bought a few multifamily small cap 4-plexes duplexes that were in terrible condition. I rehabilitated those up, and then I rent rolled them up, and then I sold them and made a small profit. I loved it, I bought single family residential properties. I went into those properties, mostly with cosmetic infrastructure issues.
And we would rehabilitate those, and then would resell them approximately 90 days. To date I have fixed and flipped over $100 million of real estate throughout the California region, we're one of the largest fix and flip operators in the state.
We focus on properties that are good bones, good neighbourhoods with good elevation. So you can't fix the elevation of the house, which is the frontal view, and you can't fix the location. But everything on the inside can be fixed. And so that's where I started.
From there. I went into lending. Today we've done about a billion dollars of lending. We lend money in 35 states to entrepreneurs, business owners that buy distressed properties with the intent of rehabilitating them and then selling them for profit. It's a fantastic business model.
But it gets even better. I then went about two years ago, and we formed our own mortgage fund. It's a debt fund. It has a sub REIT feature. It's registered with the Securities and Exchange Commission, and our investors put money into that fund and invest alongside me, I have my own money invested in it. I have my family's money invested in it, the ZINC Income Fund. It's a fully secured fund, every deed of trust on every property is fully secured by that fun, we use that money and then we lend it out to entrepreneurs in 35 states doing the same thing that I grew up doing rebuilding communities one house at a time.
It's a great and fascinating experience. I love what I do and I'm very passionate about it produces returns of about 8% to our investors,
Brendan Le Grange 4:12
The insights you must have gained from this front row seat you've had of the relationship between the people that are doing the rehab, the people that are doing the building, and the people traditionally that are lending.
What was it that you learned during the work yourself about looking for finance?
Todd Pigott 4:28
Back when I started rehabbing my own properties 20 years ago, buying distressed properties, rehabilitate them and then reselling them to earn a profit. I found out one thing very quickly. banks, credit unions and mainstream financial institutions are not in this space. Because banks, financial institutions, credit unions, for that matter, mostly get their money from the FDIC - 91% government backed Fannie, Freddie VHA etc.
As a result of where they get their capital. They're basically prohibited from lending on distressed properties. And they don't want to because the short duration as well. So there's two primary factors that prevent banks from getting in here. Therefore, I uncovered a niche, a very specific niche in lending. And that's when I formed zinc financial, to loan money to other operators that are in the same situation that I was.
What's fascinating about this is my borrowers actually are credit worthy, they're not subprime. They're not nonprime, our average FICO of our portfolio is a 711. And all of them have cash. So we have good borrowers with good liquidity with good jobs, paying above market rates for our loan, because they need the speed, the ease and the reliability of us to be able to fund.
And so that's why that niche of lending that I've been able to focus in on has been so profitable, and so lucrative and so safe for our investors.
Brendan Le Grange 5:49
Obviously, in terms of timing, you started think when the financial crisis, the subprime mortgage crisis was still hot ashes. And when you use words like distressed, I guess people start to think subprime, but it's not about the risk of the borrowers the risk of the borrower's fantastic. This is about a bank saying, I don't know how to look at a rehab project or rehab company and make a judgement at scale cheaply, so I'm just not going to bother.
Todd Pigott 6:14
It's fascinating to me, we do not loan money to distressed borrowers, we loan money on distressed assets.
I've done a billion dollars of this, and I will tell you, I have never ever lent on a property that I was not able to fix. Everybody listening to your programme today is probably bought a house or sold a house. And when you bought or when you sold, here comes the conditions upon close of escrow, you have to fix that self enclosing pool gate, you have to make sure the smoke alarms there. And by the way, your co2 detector is not working. And there's a little bit of leakage at the hose spigot outside the front door, and it didn't clear the pest report...
Properties can be fixed. It's about a contractor and materials usually available at your local Home Depot, I have always been able to fix distressed properties. I cannot fix distressed people. And back in the 90s in the early 2000s. I did learn that lesson. And that's why I stopped.
So I don't loan money to distress people, we loan money on distressed assets. And it's fascinating because the government views it almost opposite. They loan money to more credit challenged people than I do at a higher LTV, and their default rate is much higher. We actually have credit worthy borrowers high FICO with 10% to 20% down on a property that actually performed better.
Brendan Le Grange 7:33
What does that look like if I'm a contractor looking to raise some funds can not some bolt,
Todd Pigott 7:39
I talked about this as my Win Win Win Win story.
You know, you have a borrower, a contractor, a real estate agent, or just a full time real estate investor that finds a distressed property. This property is in probate, the previous people there have left our planet and they were there for 30 years the house is in distress, the appliances don't work. The carpet is shag from the 1970s. There's not a fence around the pool. So that's the property.
So how it looks is this investor finds that property, they are going to buy it, fix it, put $50,000 in it and resell it. This is a good borrower with good credit with good experience and he's got $50,000 $60,000 $70,000 of his own money, but he doesn't have the $300,000 or $400,000 to buy the whole thing cash. ZINC will loan that borrower up to 80% 85% of the acquisition cost not to exceed 65% to 70% of the ARV, or after repaired value.
And then here's the neat part of this whole thing.
My investors who provide me capital are invested in zinc Income Fund, they get a solid return on their money as close to guaranteed as you can get. We have a first position lien on that house. My investors are earning 8% passively, with some excellent tax benefits instilled by the federal government. Their blended pre tax rate is about nine and a half percent.
And then the final winner in this whole thing is the neighbourhood or the community. Boy, I'll tell you when we drive up to a house, the lawn is 18 inches tall. There's a parked car in the front grass. The Christmas lights are still up in the middle of June. It's the dumpiest house in the neighbourhood. I'll tell you what, neighbours bring us cookies pies and they're so grateful that the squatters that were in there or the bad renters that were in there are out and this gentleman is going to fix this house up.
Number one, the borrower or investor gets to make a sizable profit by buying this property fixing it and delivering it to a first time homeowner number two, I'm a lender. I'm a licenced lender. I'm not a broker. I make a few dollars on the loan fee as well as yield on my personal money that's invested in the Fund.
Number three, the fund investors earn handsomely you get returns are between eight and 9% for loaning to a good creditworthy borrower to fix up this house, and finally, the neighbourhood wins by improving their neighbourhood with a buyer that's a first time homebuyer that has To enter that neighbourhood and bought a newly nice rehabbed house, with new appliances, new counters, new lighting, and a beautiful front yard that's manicured, it looks good. There's no losers in my scenario, and that's that's how a typical transaction unfolds
Brendan Le Grange 10:14
I think it's a really nice twist. And essentially, you've created a bank, without all the fluff in the middle.
Todd Pigott 10:20
I am a bank. We are a licenced lender. We have the same licencing as Wells Fargo and major banks, we have the same licencing. The only difference is we get our capital from the ZINC income fund private investors, where a bank would get theirs from the FDIC.
That enables us more flexibility to loan and distressed assets.
The ZINC Income Fund has done phenomenally well. We invest in promissory notes on the properties. So we don't actually have the maintenance, repair and hold time of actual real estate assets, yet, we still are in the real estate business. So number one, we're going to create passive income wealth without having to actually own it.
Number two, it's a debt fund, we get our income every single month, in some asset funds, you have to hold that asset for five years or seven years or three years, you have to reposition it and do a lot of other things with that money in the hopes in the hopes that someday you realise the value and can sell it and make a few bucks. Ours is instantaneous. If an investor contributes money to zinc income fund this month, next month, they get a check.
Thirdly, the ZINC Income Fund has excellent tax advantages. You only taxed 80% of the income. Number two, if you live out of state your tax in the state that you reside, if it's more favourable than California. And then thirdly, Ira is not subject to youbut taxes or a tax return. So it's just great for them. And it's a great vehicle.
And you're right, I'm a bank. But I created this, this mechanism, which enables my investors to win and and myself to win. And I'm invested alongside of them. And it's just been, it's just been quite an exciting event. And after a billion dollars with virtually no losses. I think our track record speaks for itself.
Brendan Le Grange 11:58
I see from your website, you're still very much there helping property developers with tips and such, you're not all just about the loans, you still do have that passion for the actual industry.
So talk to me about what you're seeing in terms of trends in the market, what are you watching?
Todd Pigott 12:12
I get my data metrics that I study and evaluate from two sources. I do not get them from news, social media or the web. I get my data raw directly from the source National Association of Realtors. And I also get it from the GSA General Services Administration.
I look at a couple of things. Number one at the at the real estate level nationally as well as California, believe it or not, as of today, the days on market for a home entry level below the median cost of housing is around 15. We're still not back at normal normal is 60 to 90 days. Simply put, we have a shortage of entry level housing candidates across the nation. We also have a shortage of multifamily across the nation.
Number two, housing is selling at or above right now the list price. Why? Because we have a shortage of housing availability right now. And again, it's pretty systematically wide across the country.
When I look at the GSA, it's about 160 page document has all the metrics of servicing loan portfolios across the nation. What I start to hone in on is what I call stress points, calls that are coming into the servicing centres that are stressed calls. The GSA plots these and tracks these and then they sell this information to people like myself. stress points coming into call centres are things like pickup payment forbearance, foreclosure avoidance distress.
Listen to this, the amount of calls coming into mortgage centres across the nation for stress points or distressed borrowers is that four tenths of 1%. It is at a 50 year record low. That tells me that we do not have stress in portfolios across the country.
Housing mortgages today are performing at the highest level in 50 years. Why? Over the last eight to 10 years, all mortgages that have been written have been full dock mortgages, full dock full income full verification. Back in the last housing price that crashed that was not the case, we had pickup payment, negative amortisation and a variety of other loan products where people didn't even qualify si sa stated income stated asset you could have been a pizza delivery driver and stated your income and gotten a half million dollar house that is impossible to do today.
We have a second part of this equity is at an all time high back in, oh 607 and eight and even the two recessions prior to that strategic defaults made up the most of the defaults not economic. They could afford it. They just didn't want to because there was no equity in their house today we have record equity. So for the most part mortgages are performing.
We have another issue here. We just left the lowest cost point of mortgages in almost 60 years, two and a half, two and a quarter percent.
What this is causing is almost a shadow effect. People are not moving Previously, if people had a three bedroom, two bath house, they needed a four bedroom because they had another kid they move. People won't do that today, they're staying in that house. Why? Because they have a two and a half percent mortgage, and their next mortgage is gonna be near 6%. So those homes are not coming on the mortgage, we don't have upward mobility. Well, here's what you'll see on news channels, housing is down 45%. It's down 45% but from what? From the euphoria of 18 months ago, that was not normal. We are actually at normal supply, normal sales. Today's charts and graphs are still not even below the average median line over the last 50 years.
So my projection is because of the shortage in housing, the demand for entry level housing, and zinc only loans below the median cost of housing. That's our focus point, because that's the most desirable and that's the most necessary.
And here's the trick, housing by itself right now is still a very solid investment. However, could there be a disruption in our field? Absolutely.
And I tell my investors, there absolutely could be a disruption. And if there was ever a time for that disruption, it would be now what do you mean, Todd, you just told me housing is safe and is safe. It's very, very stable. There's a shortage of entry level housing, mortgages are performing. There's not a wave of foreclosures coming defaults or an all time low. Housing is only 15 days on the market. All of these attributes provide me with a solid foundation to make these loans.
But today, I tell you, there is a very solid chance of disruption. It's a disruption outside the housing sector that could very quickly affect the housing sector. We live in a world and we live in an economy and we live in a society right now where the slight blip of something outside of housing could have a cause and effect on housing that could cause it to go into negative territory, war, political unrest, political issues, worldwide issues, energy issues, there's a variety of issues that are facing us today. That could contribute. But unless you're under a rock that could happen with any industry that you're in, and that's kind of where I feel today.
So I'm very bullish on this. We only lend to investors and I only put my money in my investors money into established neighbourhoods, there needs to be a curb, and gutter, a Starbucks nearby a church and a McDonald's. These are well established neighbourhoods, we do not do rural acreage, condos, forest desert, we don't do any of that.
We loan on curbs and gutters. They have a street sidewalk, they'd been there for 15 or 20 years. There's a Starbucks nearby. They're very, very sound entry level homes. Here's even another important fact, my borrower bought that house at the lowest price point in that neighbourhood. Believe it or not, they're actually going to set the comps for the neighbourhood. So they bought it at the lowest price, they put down 20%. They rehabilitated that home and now they're going to set the highest comp in that neighbourhood that puts me in an extremely safe spot because my average LTV in my portfolio for myself and my investors is 61% They bought the house for 200 When all the comps in the neighbourhood are 300. And when he's done fixing it, it's going to sell at 350 the highest price point that neighbour because it's a newly remodelled own, and yet I'm into that thing only 260.
So it's safe for us, which is why we have nominal, if any losses very, very few,
Brendan Le Grange 18:16
You are lending against an asset that's going up. You know, if we talk about auto loans, you know, the minute the car drives off the lot, it's lost, whatever it is, 50% of its value,
Todd Pigott 18:26
My collateral only goes up, it only gets better, you bought it at the worst point in the neighbourhood, there's only one thing that can happen. It only goes up because you're only fixing the property.
When you loan on a new house, you know, the guy bought the house for 200. I'm loaning him 180 And now it's gonna be worth 300 Look at it this way, FHA is gonna give them a 97% loan on that highest value. I loaned 80% at the lowest value, which one's safer, FHA or myself, I'm safer. Again, people view distressed housing, and sometimes they've got it wrong.
They view distressed housing as risky. No, no, no, no, no, no, I'm at the lowest price point in the neighbourhood. And that house is only going to be worth more when it gets done.
You know, what's risky is FHA coming in and loaning 97 and a half percent, to a first time homebuyer with only three and a half percent down that's gonna buy that at the highest price point of that neighbourhood, that's a loan I don't want to be into
Brendan Le Grange 19:20
it such a key component of having other model is having that ability to leverage the knowledge and the the enterprise of these contractors for the benefit of the people putting the funding in.
Todd Pigott 19:31
It really, really helps that I'm a licenced contractor, and that I fixed and flipped, you know, hundreds and hundreds and hundreds of properties because we know what to look for and we know what not to look for. So just very experienced in this field.
My whole team is very experienced, and it just really helps to know what to get into and what not to get into.
Don't get into a property that's a complete teardown and a gang infested neighbourhood. We will never lend on that. We lend on good neighbourhoods with good properties with good bones that are simply not Financing, because they're not up to conventional standards.
Brendan Le Grange 20:02
We've spoken about underwriting from an asset point of view. But are there also underwriting steps you take when you look at the contract, or you look at the loan side of that.
Todd Pigott 20:13
So we're very, very tight and strict here.
First of all, we do a full evaluation on the collateral, we also evaluate the repair budget to make sure it's consistent with the repairs. And then we provide that to the appraiser. Look, this guy is going to put in $50,000, and he's going to put in a new roof and new appliances, and the appraiser gets that so that he can adequately appraise that value.
But it doesn't stop there. We're very, very borrower centric. We are not a hard money lender, we're a private money lender. What's the difference? Well, a hard money lender loans money based on the value of the collateral, we actually pull a full try merge credit report, we actually do background checks, we actually do a tracing of their funds, we actually get their bank statements, we actually validate and confirm their prior experience by pulling deeds and trust from the county recorder.
So we do a full evaluation of the borrower including credit, liquidity, banking, background, check, criminal activity, etc, etc, etc. If there is any blemish in this, we don't loan money to them, even if they have a property that's worth a billion dollars, and they got it for 100 grand, if their credit is poor, and they have some baggage, unfortunately, they will not get a loan from us.
We are very, very picky on credit. We're very, very picky on background check, we're very, very picky on liquidity, meaning they need to have some money in their bank account. And we trace those funds to make sure they're actually their own funds.
Learning from early 2000 and late 90s, we just chose that a path that we did not want to be in was a path of working with bad people, our rates and our fees are less than hard money, we make a lot less than hard money, we make a lot less than other lenders, but we're very choosy on who we work with both from a borrower as well as a collateral perspective. And so if there is baggage in their background, it's it's unfortunately, probably not going to get a loan here.
We declined about 80% of our submissions, only about 20% actually get through the door to the top.
Brendan Le Grange 22:07
And I think that speaks to, you're taking money from investors and lending it straight out. There's none of the room that a big bank would have for the message or the vision to get diverted into all sorts of other things. It's a very clear line of what you're getting the money for and what you're doing with it.
Todd Pigott 22:23
There's another twist to this that I guess I'll share in the fund the mortgage fund, you know, I have my money invested in that fund. I also within that fund, and this is exceptionally rare, I have a $500,000 Cash guarantee for my investors. I'm first loss that's already been posted. Brendan, I'm going to tell you that my organisation is gonna be very, very careful on who it lends money to, because my money's in there, as well as $500,000 Cash guaranteeing my investors, I'm a first loss.
So guess what, we're very, very, very pragmatic on what collateral we loan to, as well as borrowers because I don't want to lose my money for my investors, which is the case that it would be in our offering circular. And our private placement memorandum is built,
Brendan Le Grange 23:10
Todd, if anybody listening would like to get involved with it as a product on the investment side, or if people listening would just like to learn more about what you're doing and your philosophies, where can they go online to find you and to do that sort of research.
Todd Pigott 23:23
Our fund. This is for investors who want to passively earn eight to 9% passively on their money that's fully secured with monthly cash distributions. And they can learn more about that at www.zincinvesting.com
They can also reach out to us at 559-326-2509. And they can ask for David Sheets, our director of investor relations, or even myself, again, that's 559-326-2509.
If you're a borrower or real estate investor that's out there buying properties with the intent on fixing and flipping and trying to earn a self a fair profit. And you're the kind of guy that's improving neighbourhoods one house at a time, and you need some extra cash. I'm here to lend it to you. That website is www.zincfinancial.com.
Brendan Le Grange 24:13
Before I let you go, I just was doing some last minute research and I saw there's a lovely little story behind the name. So tell me, where does this name thing come from? That you you're branding all your businesses with?
Todd Pigott 24:24
Yes, that's interesting. You found that I don't know how you found I don't know where that's out there on the web.
So when I built I sold the facilities maintenance company I you know that 500 person company has sold that and I started zinc I needed a name right? And so I couldn't think of a name. My three children. I'm married with three children right here in Fresno, California. My three children's name are Zachary And Nicholas and Cameron.
And so I took the first letter of each of their names which is Zachary Nicholas and Cameron or ZNC and I've had to make a word out of it. So I needed to vowel.
Well 'o' is a vowel, but that would be ZONC, 'a' is a vowel but that'd be zinc, the only vowel that sit was the eye for zinc. And so that's how I came up with the company name.
Brendan Le Grange 25:06
It's been a pleasure chatting to you, we're just sort of experiencing your passion for this. But in particular, I love hearing stories of lending that are channelled through, you know, the way we teach lending in school of how it should be taking money from people who've got excess capital, paying them a solid return, and giving that money to someone who's going to build something with it.
Todd Pigott 25:24
It was so nice meeting you and I really considered a pleasure to be on the show with you. Great job. Thank you and to all your listeners. Thank you for having me today.
Brendan Le Grange 25:33
And thank you all for listening.
Please do look for and follow the show on your favourite podcast platform and share the updates widely on LinkedIn where lending nerds are found in our largest concentration. Plus, send me a connection request while you're there.
This show is written and recorded by myself Brendan le Grange in Brighton, England and edited by Fina Charleson of FC Productions.
Show music is by Iam_wake, and you can find show notes and written transcripts at www.HowtoLendMoneytoStrangers.show and I'll see you again next Thursday.