Financing the property industry, with Paul Watts
In any property transaction, you need a willing buyer and a willing seller. What you don’t need, but almost always have, is a disinterested lender.
That third wheel can be problematic, so Paul Watts is trying to get rid of it via owner financing for home builders.
As Paul mentioned, Lenuity’s home page is at https://lenuity.co.uk/ but you can also find him on LinkedIn
You can learn more about Barclays Eagle Labs and the Black Founder Accelerator here: https://labs.uk.barclays/
You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), 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, 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.
Oh, and if you’re in need of more banking podcasts, you can find related content at https://blog.feedspot.com/banking_podcasts/
Regards,
Brendan
The full written transcript, with timestamps, is below:
Paul Watts 0:00
We're talking about the financial waste of holding costs; we're talking about the difference between completions that take three months, four months and five months coming down to two weeks. We're talking about giving builders certainty, financial stability and providing an exceptional experience for the customer.
So I can't help but be excited about what we can contribute to 2023 to helping to drive forward the UK economy!
Brendan Le Grange 0:25
in the forests of southern Nigeria there grows a shrub, or maybe you'd call it a small tree: massularia acuminata. The way it is described online, it sounds unremarkable. Greyish green bark and white trim pink flowers.
Luckily, it doesn't rely on its looks to get by. The stem of the shrub, when cut into thin 10 centimetre pieces, is Nigeria's foremost chewing stick. If, like me, you don't know what that is, a chewing stick is a sort of a natural toothbrush-toothpaste combination, often sold by streetside hawkers. And that's exactly how today's guest earned his entrepreneurial stripes, selling chewing sticks on the streets of Lagos while his father was there for work.
Welcome to How to Lend Money to Strangers with Brendan le Grange.
Paul Watts, one time Lagos chewing stick vendor and current founder of Lenuity, the mortgage lender in a box for house builders, welcome to the show.
Now Paul, I usually ask my guests to describe their career background for one of two reasons. One, it gives us a chance to warm up, just you and me having a little chat before we get into the real meat of the discussion. And two, it can show how both insiders and outsiders can come to a point where they are reshaping an industry. But in your case, I'm asking you because your background is just so interesting.
And we do have a lot to cover today, so I'm not going to let you spend the whole interview on it but I think we probably could. So tell me, you're a FinTech founder now, but how did you get here?
Paul Watts 2:08
It's been a lifelong journey of discovery to get here. You mentioned about chewing stick, well, often you hear people talking about how they had a newspaper round, you know, as a teenager or something like that, maybe a lemonade stand. Well, as a six years old, I found myself in Lagos. I was brought there by my father who had a contract with an oil company and was staying with a local family. And I sold chewing stick by the roadside, car to car, in Lagos, it was on consignment.
And for me at the time, it was just what kids do. Or if you're in Lagos, it's what kids do. But now, looking back on it, it was a profound experience.
I've spent a lot of time in New York, I've been a street vendor in New York as well, being what they consider to be the hustling capital of the world. For me, it's a sense of pride that I went to Nigeria as someone who had no relationship to the country and learn to hustle on the streets of Lagos!
Brendan Le Grange 3:09
Your career from there took you in many different directions. What were you doing as an adult as you started your career?
Paul Watts 3:16
The funny thing is, I didn't start as an adult.
So you know, at 13, I got into the music business. And I was trying to employ sixth formers, because I felt that as they were older than me, that there would be more respected, in terms of doing business. I then did tour management, I worked with people like Public Enemy, Ice-T, Rhyme Syndicate, A Tribe Called Quest, Queen Latifah, and so I did tour management until I moved on, and got into IT.
And it was an incredible journey for me with that. I have worked for Apple in Toronto, I worked for Northern Telecom, which took me all around the world, doing infrastructure and internal security escalations for the whole of Asia Pacific, right? So escalations from Hong Kong and Singapore and that sort of global exposure. I then went on to work for Universal Studios based in in California which has a direct bearing on where I am today, because really got introduced to creative financing, buying my first property.
And with that dabbling in property and that experience in California while working with Universal Studios, that got me interested in film. I came back to England and started a post production company... but I didn't like my customers, which is terrible you know, if you don't like your customers, if you think they have no talent.
So I did what any self-respecting entrepreneur would do, I fired them!
So I fired all my customers and my business survived thanks to the income from property I bought as a contractor. And this made me think. And I think the big thing that stuck out is, I was used to staying in five star hotels paid for by Universal Studios and I came back to my place and I'm like, you know, this is three star, and I'm used to five star.
So I started doing renovation work, and, you know, like, bring me up to the standards that I was used to. And that started me on a property journey that brought me back to California and into financing again.
Brendan Le Grange 5:28
You're talking about renovating, and there is a big section of the economy of people whose jobs are not just to buy a house and rent it out, but to buy some land and develop it or to buy a place and develop it. What is the state of the market for independent home builders today?
Paul Watts 5:43
Right now, we've been experiencing what many people consider unprecedented turmoil. It's not unprecedented, because we went through it in 2007 but it's been a really frustrating experience for many people across all industries nonetheless with the cost of living crisis, the energy crisis, etc. And so if you're outside of that industry, you may not have noticed how house builders, public limited companies, have lost around half of their value, you know, half of their share price.
That's painful!
And that directly relates to mortgages and the future cost of mortgages, not even today's costs, but the future cost of mortgages. And so investors investing in PLCs that are in the house building, traders are saying 'well, look, if you look forward, mortgage prices are going up, the Bank of England is raising interest rates, the customers are going to have trouble buying or not going to be able to buy'. And the uncertainty in that market has meant the investors have just pulled their money out from these housebuilders, which, you know, we're talking about shares, all you have to do is click and my money's money's out. And that's that's a painful experience for them.
But everybody suffers. Construction, house building is really important to the economy. Financial services are really important to it to the economy in the UK, the city drives the UK. So I believe this is everybody's problem. We're really in a circular economy, there isn't one that isn't. Goods not being bought, homes not being built, people sitting on expensive assets, paying interest for them, and not being able to get out - that's just driving the economy into the ground when we want to be rising up.
Brendan Le Grange 7:28
Yeah. So Paul, this is not really my area of expertise, so feel free to educate me. But I'd always, naively I guess, assumed that mortgages would be the sort of last bastion for the big banks, that their low cost of capital would make it almost FinTech proof - because when we are borrowing a mortgage, it's for so much money, we're going to take the cheapest price no matter how unpleasant and how difficult the process is. But earlier, you're talking about your time in California and learning about some of these other creative ways of financing buildings and building projects.
Paul Watts 8:02
It's really useful, really important to have a clearer picture on what the market is. And the first thing is that the idea that mortgages are a bank thing is a recent thing, because if you go back to Victorian times, even before, you had lots of properties that were actually changed hands with the money going directly to the owner. And you can see that on old property deeds, where you see payments recorded on the deed itself to the owner. More recently, it was dominated by building societies. And then they were legislative changes that made it more attractive for banks to get involved with that you saw building societies like Abby National becoming banks.
Banks, doing mortgages is actually relatively recent.
Brendan Le Grange 8:45
A few months ago, I spoke to Alex Breshears, the author of Lend2Live, about private lending in the US. And that's kind of where individuals are helping developers to fund smaller projects, or, you know, make up the difference to fully fund a project. But to me, at least my understanding of that from our chat, was it's more about flipping one house or you know, renovating the inside of a house and then selling it for a profit. So maybe a few 1000 pounds, or a few 10s of 1000s of pounds, but quite small amounts of money, not a complete build or complete multi house build.
So what is owner finance, and what are we thinking about when we think of that as an option for funding?
Paul Watts 9:25
Owner financing is a massive area and it also goes by multiple names like vendor financing and seller financing. And what you covered there, was one small area of owner financing. And why I say it's one small area for example, first charge mortgages - or in the US as they are called liens, so these are first lien on a property - last year, 2021, 93,000 loans were done like that, worth $27 billion. And you're talking over 100 billion in new originations of home mortgages right over the last five years. So we're talking about a significant amount of amount of money.
What specifically, my area of that is really assets that are owned by somebody, by a company and then providing the finance to their customer. And this is done without the use of cash, it's done because they own the asset and have little or no debt on the asset.
It's a payment plan that they didn't have to fund because there was no debt for them to pay off, and the money was going to the owner.
And we just make that really simple by doing the contracts, the loan servicing and management of those processes so that someone can implement best practice and do it painlessly. There are many types of asset where it's the owner and a potential buyer see the value that a third party doesn't, or that there isn't high demand for the asset, which means that the asset represents poor security.
One of my pet hates with this subject is that people always think it's about bad credit. And it's not about bad credit. Bad credit is a small section of this market, and one that I just don't dabble in. So right now, we're in a situation where a lot of house builders have switched their focus to overseas investment. And they're looking at Chinese buyers. Now, if you think the buying process of three to four months to complete, a sell is painful, you try getting Chinese investors come in, because they got currency control problems.
And so, you know, when you're talking about that, it just further complicates and lengthens out the Completion process. So you know, five months, six months growing, and in this time, what's most needed is certainty. Everybody wants certainty. And in a time of chaos, you want certainty.
And so if you're targeting Chinese investors, their problem is getting money into the country. So should we offer them a 12 month mortgage? We can complete a 12 month mortgage, with a 10% deposit and giving them a 2% interest rate. Now the reality of that is you're charging the full price by providing a product like that, it may cost you the equivalent of, well, under 5%. If you took a unit that was maybe half a million, you'd be doing a 10% discount/15% discount in these times, which is devaluing the other units in the building and making enemies for you out of all your previous buyers.
Even if you end up with the property back, you've had that deposit and you're selling on the property again. So for the house builder, it's a win win win all the way. For the overseas investor, it's a win win all the way.
Brendan Le Grange 12:43
I have been sitting there thinking in my head, you know, how's the developer going to afford this. But of course, as you said, it's not financing in the sense you think of a bank handing over cash, it's more about a payment plan. So they've already paid to develop a house or to develop some site into multiple houses, that's the cash outlay.
And now it's a case of instead of saying 'buy my house for £500,000', it's by my house, and pay me a given amount per month, like you would the mortgage lender, but you're paying it to me, the person who owns the asset, the person who built the house - is that kind of the right way of thinking through it?
Paul Watts 13:19
The theory is correct, but it's not how I would apply it.
So I think that you have to address the financial circumstances of the individual providing the finance first of all. In a scenario where you're talking about a small developer whose built a house providing finance/ mortgage for a customer, that tends not really to work because they don't have the financial stability to do that kind of thing. So we're kind of split into two niches.
One where is when you talk about the development opportunity. So whether you're talking about the piece of land, or a commercial building that's been sold to a developer, a developer would normally raise bridging finance for six to 24 months to do this acquisition. It takes around six to seven months for that to go through for them to make that acquisition.
And this is a painful process. It's a broken process.
If you think about it, when a developer goes to acquire a site, they have to do due diligence on the site, they have to make plans about what they're going to build what they're going to do with it, they have to cost this out of the cost of materials and then they have to plan when work is going to start and who's going to do that work. Well if you do your costing in month one, right, then it's taking you some time to do, you've put in the offer, that offers eventually been accepted and you complete in six or seven months down the line, your costing is totally unrealistic. It's conjured out the air because so many things have changed since then. And availability of labour has changed since then. So when you finally complete you're not going to be able to start work.
And so we have a massive financial waste element here, right. And this is why we see 80% of SME developers went out of business before Corona, right. And we just do not have the figures of how many have gone out of business since then.
The alternative that I'm talking about here is when the owner of the land says, 'well, I want certainty, I don't want to wait six, seven months for this sale to complete, I want certainty'. And by offering a payment plan to the developer, they can gain the benefit of providing bridging. They don't have to put up any cash, they'll complete the sale in 14 days, and make around 30% more money with inherently low risk. Because if the developer defaults, they end up with the property back, and they've received that deposit.
So that's where I'm talking in terms of the SME side of things. But where you were talking about with an end user purchasing a property, I think that's really where enterprise customers with a large housebuilders win. And we service that market, much like car manufacturers providing financing for their customers, where traditionally, they were waiting on a third party to finance their customers, a model that didn't work.
Sending somebody away once they've said 'yes, I want to buy' is a model that doesn't work very well.
If you ask somebody who sells sofas, they're like, if we didn't provide finance, we wouldn't have a business. If you ask Boeing, regarding selling you a jumbo jet, they're like, if we didn't provide finance, we wouldn't have a business. If you're an investor, and you look at somebody's business, that person's business is reliant upon a third party to finance their customers who thinks they're irrelevant? Would you really want to put money into that business? I mean, just the idea that you're reliant upon somebody who considers you are irrelevant.
And that's what's happened a few months ago, we saw, we've seen a steady erosion of investors pulling their money out of house house builders on the stock exchange, because they're saying, well, actually, you know, what your customers are financed by, you know, building societies and banks and other lenders who consider you are irrelevant. They do not take your business, you know, into consideration at any point in the equation, you're not even their customer. The car manufacturers that finance their customers make about 30% of their revenue from finance, you know.
Sceptical people look at car manufacturers and saying, are you in the car business? Are you in the finance business? You look at General Motors, who for three years in a row, the only profitable division was finance, you look at General Electric, who most profitable division, the division that made more money than all the others put together was GMAC, the mortgage lender, you tend to get this idea that that mortgages are a burden. They're not a burden, it's a high profit centre. This is additional revenue that brings stability to a house builder, it brings additional income to a house builder.
And if you consider something like that, you know, how do you how do they compete with a bank or with a building society? Well, think about this: can any lender compete with Mercedes in a Mercedes dealership, or BMW in a beat BMW dealership? Who knows their customer better? Does a bank know or a mortgage issuer know a borrower better than a car manufacturer who spent years designing and building a car for a specific ideal customer, or a house builder that had to do their research before they started building, when they were purchasing the land? They're like, 'okay, this is who we're going to target, they know their customer better, they have much lower risks.
Brendan Le Grange 18:51
As a borrower, it's hanging on the decisions of this third party lender as well, who doesn't care about your house, you know, they're just looking at that mortgage aspect. So if it can be in that one place, that's also better for the borrower to be able to go and say, Well, this is what I want, I want this living arrangement or this commercial property. And I don't then need to explain this to a bank manager. And hopefully, I'll get the mortgage or I'll get the loan.
It will always be a stressful process, but it should ease it a bit.
Paul Watts 19:18
There's no reason for it to be a stressful process!
The why of it being a stressful process is because people are stuck in the industry have accepted these problems as the way it is for a house builder, who's our customer who's providing lending to their customer, they can present an amazing offer we can complete in 14 days, right? They can have the keys in 14 days. Just like if you walked into a car dealership, you know, this is the price of the car. So this is the price of the house. This is the finance offer we're offering. This is what the deposit is. This is what the interest rate is this is what the monthly payment is.
All of that the process is so streamlined that you could do the application two in the morning, three in the morning, go through the application, upload your information, book your appointment with your solicitor to complete. So at that first appointment, you're going to be bringing your documentation for verification, any complications and issues, you will get that notification come through that this is the additional information that we require. But it will make it a painless process. And it gives you certainty. And we're doing that from residential and commercial.
Brendan Le Grange 20:28
Is it the same for the big players and the small? What's the best way to engage with you? And what does it sort of look like to start that ball rolling?
Paul Watts 20:36
Well, one of one of the key things why I said about the smaller developers, because the way they currently work is they're not financially stable. And you need to be a financially stable business to get in into lending. So I tend to suggest a guideline of 'you need to be selling 500 units per annum or more'. If you are financially stable, and you're doing less great doing more than those units, you may still be financially unstable as a company. If you're stable, then you can get into providing lending for your customers providing that personalised mortgage offer for your ideal customer. You can dabble in it with sort of smaller offerings to fill out the process, you know, like short term lending, commercial sales and stuff like that. But really to be able to implement, you know, the sort of service that Mercedes or BMW deliver, you need to be of a fair size.
Brendan Le Grange 21:31
You talked about sort of turning it around in 14 days and taking care of a lot of the pain in the back end, it's probably worth us spending just a moment here to revisit some of that ground. When linearity is involved. What are you doing for the developer? How dirty are they getting their hands on the financial space?
Paul Watts 21:49
It depends on the angle you're coming from, right? So we call it mortgage lender in a box, right, but if you're in the FinTech space, you will call it mortgage lender as a service!
And so when you're new to the strength is in designing lending products, whether it's for an individual unit, or it's for a development and offers that they can vary by their own financial position, we want to get these units gone before the end of the month, most fintechs in the mortgage space, what they're doing is AML KYC, process your documents faster. That's not what we do. That's not our core functionality.
Our core functionality is product design. And we handle the origination that's all the compliance so that the house builder does not have to worry about becoming an authorised lender. And that's key to make it profitable, but painless.
Brendan Le Grange 22:43
Talk to me a bit about some of the accelerators, some of the good press that linearity has been getting.
Paul Watts 22:48
Well, one of the things we've just been talking about is how issuing mortgages was done by banks. And some people get the idea that, you know, like, we're sort of the bank's enemy, right? But no, we're very complementary. And I've been very fortunate to receive a lot of love for Barclays. I know it sounds funny that you know, receiving love from a bank, but Barclays have been a strong supporter for Lenuity.
For some time I did the Barclays Black Founder Accelerator, Lenuity was part of the Barclays Rise Home of FinTech, which is about building the future of financial services, the level of support from Barclays has been tremendous - there some intricate aspects of of things where that relationship has been incredibly useful. The insights that come from working with senior people within the bank, with strong strong support.
So if you Google Lenuity, the first thing that used to come up was Barclays Bank, they used to come up before Lenuity came up!
And prior to that, I did the Founders Institute accelerator, the Silicon Valley accelerator by the Founders Institute which is a bit like the equivalent of doing an SAS boot camp for, for a start up. It's very, very intensive and very competitive. 500 applicants and 13 graduates graduating from that was was really good. It gave me really strong connections in Silicon Valley. I still enjoy support from them. I've been really lucky and I'm very grateful for for the help that had from from the founders Institute. But if I was gonna say anybody is my number one fan, it would have to be Barclays.
Brendan Le Grange 24:36
What is Lenuity looking to do over the next year, where are you putting your energies?
Paul Watts 24:40
Honestly, I am so excited about 2023. It's just an amazing opportunity for us to contribute.
When you look at the market uncertainty going on. A lot of people are scared about what the future is bringing in terms of energy crisis and inflation and I I want to focus on his bringing a message of hope.
I was at the CBI conference. And there we had reached the Senate speaking, we've had Sakia stammer speaking. And they were delivering the same message that tech startups tech scale ups with with a future, we needed to embrace technology to take us out of the recession. And people may remember that while we were in the depths of Corona lockdown and shut down, the first thing the government did was say, look, we need construction back working, because it's that important to the economy. Financial services, people could work from home, but construction, they needed to be out there building to get us back going.
So where does Lenuity fit in? Well, financial services and construction are the two most important things to get the UK out of a recession. Construction is building wealth for the economy. It's providing homes. For people, these are really important things, it's providing jobs, this is an incredibly important thing to drive us out in a recession. And what we're doing is enabling them to thrive in the current environment, to sell like they've never been able to sell before. Not even in boom times.
When you if you take a look back at what happened to the car industry, when they started financing financing their customers, it was just a massive boom for them that they could create better offers, their business became more profitable, that they had a reduction in costs. Now, when you get into house building and construction, this is magnified for bigger reductions in costs, an area of waste that they never even talk about that, you know, they talk about waste on the building site, we're talking about the financial waste of holding costs, we're talking about the difference between completions that take three months, four months and five months coming down to two weeks.
We're talking about giving them builders certainty, financial stability, and providing an exceptional experience for the customer. So I can't help but be excited about what we can contribute. And the fact is car manufacturers finance 80% of their b2c customers. Imagine if house builders were financing 80% of their b2c customers with a product that cost the customer less and makes the builder more money.
Brendan Le Grange 27:23
Now, if anybody else has also excited now for 2023 and excited about owner financing and linearity, where can they go to learn more about you follow your journey and stay in touch
Paul Watts 27:34
Lenuity is the blending of 'lending' and 'equity'. So come to our website lenuity.co.uk
And that begins your journey, there's some videos on YouTube, you can reach out to me personally on LinkedIn, you know, those are, those are the best places to start.
If you're you know, serious about construction, serious about driving for the economy, we didn't even get to touch on what we can do in terms of affordable housing, right where the shared ownership scheme like we can just deliver products that are way beyond what's what's what's possible, which is why I've been getting involved in in in, for example, the SME homebuilders or partly all party parliamentary group and stuff like that. So I'm getting involved in or been involved in a lot of the industry stuff at the very highest levels.
You know, it's just so important to move these things forward that it needs to be led from the front lead from from from the top. Please, if this is important to you, reach out lenuity.co.uk
Brendan Le Grange 28:39
Perfect, and I'll put those links in the show notes as well. Paul, thank you so much. This has been both a pleasure and very inspiring for me. So thank you for making the time today.
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.