In this episode, we talk to Ari Shpanya, co-founder and CEO at LoanBase, the leading online platform for commercial real estate lending. He discusses the story behind the company and how they are making it easier for investors to find the financing they need. He also offers valuable insights on the current market, specifically on the lending environment, and breaks down best practices to become a better borrower.
[00:01 - 07:04] Loans Made Easier
- Ari talks about his humble beginnings in real estate
- Introducing Loanbase and the solution they offer in the space
- Clients can now search for loans in a very simple and seamless way
- Finding the best lenders by proprietary algorithms and partnering with banks
- Leaning into product-led growth
- Focusing on making a good quality product
- Expanding their customer base through referrals
[07:05 - 17:11] Navigating the Current Market
- The impact of higher interest rates on lending
- Why we should expect more defaults and foreclosures
- This will also open up opportunities in distressed real estate
- It’s important to be conservative and don’t optimize for profit
- Make sure no deals will go bad
- Ari lists things to consider when underwriting conservatively
- Being a better borrower gives access to better loans
- Track record matters
- Establish credibility and experience
[17:12 - 18:13] Closing Segment
- Reach out to Ari!
- Links Below
- Final Words
Tweetable Quotes
“If your product is good, then product-led growth is the best thing because then it becomes viral or at least one happy borrower can tell their colleague… And that's the best type of marketing I think in our industry and in general.” - Ari Shpanya
“The better borrower you are, the better track record you have, the better access you have to rates, the better access you have to capital, the better access you have to investors and inventory and so on.” - Ari Shpanya
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Want to read the full show notes of the episode? Check it out below:
[00:00:00] Ari Shpanya: I just couldn't wrap my head around the fact that I had to research for three or four months to find the best lender. So you have to pick up the phone, you have to call one broker to another broker. You need to call too many banks, local banks, regional banks, credit unions, and so on, and try to compare everything and decide what's the best for you. And I just wished I had something that I can just go and put all the filters I want to and get the kind of a simple order or arrangement of which banks I should work with.
[00:00:42] Sam Wilson: Ari Shpanya is the co-founder and CEO of LoanBase. Ari, welcome to the show.
[00:00:47] Ari Shpanya: Thank you for having me, Sam.
[00:00:49] Sam Wilson: The pleasure is mine. There are three questions I ask every guest who comes in the show: in 90 seconds or less, can you tell me where did you start? Where are you now? And how did you get there?
[00:00:57] Ari Shpanya: Okay. I started by buying a single-family home. I lived there while I was attending actually a program at Stanford. And then I remodeled it by myself. And from there, there was one more and one more. And that's how you get to multifamily, I guess. But it's always about humble beginnings and I think I'm still, kind of, at the beginning of it.
[00:01:19] Sam Wilson: Interesting. What do you do now at LoanBase?
[00:01:23] Ari Shpanya: Oh, on a high level, LoanBase is a KAYAK or Expedia for commercial real estate loans and investment properties. We help investors and borrowers to find the best loan for their needs by searching in a very easy and seamless way. Just like you shop for flights on SkyScanner or KAYAK or Expedia.
[00:01:44] Sam Wilson: That is really interesting. I guess, tell me, how did you know or what hole did you see in the market where you said, man, this is something I need to create? And then I guess, we'll start there. Let's ask that question first. So I'm not asking you too many all at once.
[00:01:58] Ari Shpanya: Yeah, I remember a couple of years ago, that was a few months after COVID hit, I needed to refinance a couple of properties in San Francisco, multifamily, it was a 10 million loan for both of them. And I just couldn't wrap my head around the fact that I had to research for three or four months to find the best lender. So you have to pick up the phone, you have to call one broker to another broker. You need to call too many banks, local banks, regional banks, credit unions, and so on, and put all these little notes and, you know, comments, and then try to compare everything and decide what's the best for you. And I just wished I had something that I can just go and put all the filters I want to and get the kind of a simple order or arrangement of which banks I should work with. And the same was for the process of underwriting and, and during underwriting, and during that process with the bank, it was like, it was like pulling a teeth, right? That was really two, three months. And you feel like you are being asked for so many documents and everything goes by email. So it was really horrendous. So, yeah, I remember actually finding out by the broker that the broker is actually making another yield spread on my deal. So, not only did you pay a broker fee, you're actually paying someone a fee to give you a deal that is better for them rather than better for you. And I was really upset. So I remember calling the broker and telling them, listen, this is not okay. This is not for here's what I going to do. I'm going to start a new company and putting you out of business. So yeah, a joke aside, that's kind of what happened and you know, it was a result of a real pain of four months process that should be less than a week.
[00:03:39] Sam Wilson: Right, man. Yeah, I, I love stories that start that way 'cause it's like, you know what, you just, you saw problem. You said, I, I can solve this in a more efficient manner. How do you stay in front? So you, you guys aggregate, you know, like you said, you're the KAYAK for loans, so, I mean, you know, I, I can understand it from the airlines perspective where it's like, Hey, you know what, here's our flights that are available and they can probably integrate their data or they do integrate their data some way such that it can be displayed on KAYAK. But how do you guys stay in front of what each lender is offering, the terms they're looking for, the money they have to lend? I mean, that's got to be constantly, especially right now, moving target. How do you guys stay in front of that?
[00:04:18] Ari Shpanya: Correct. So there are three ways that we do that. First is we have banks that are partners, so we get their rate cards and rate sheets and essentially we scan them and we do what's called auto parsing. So we scan the rate cards and that is being imported to our database. We also talk with the banks to verify that. So that's part of data integrity. And some banks, some lenders, we, we also have a direct integration, so that's another way to get the data. When the rates are changing, we also have some proprietary algorithms that essentially are looking into the fed rate, the treasury, and calculating based on the rate fluctuation. So if the fed rate is increasing today, obviously the banks will follow. There is a difference between regional banks and national banks and debt funds. So some banks are more less receptive or less sensitive to any kind of change in a, in the fed rates, 'cause they were lending off their balance sheet, but most shops and so on, they will be in line with that change. So, we add that spread or that change to their rates. And that's what we present to the consumer at the end of the day or to the borrower.
[00:05:37] Sam Wilson: Tell me about building your company. I mean, okay, so you got this great idea. You figured out how to integrate the rates from the lenders. And now you said, all right, the next thing I need is clients. I mean, you need somebody to come to you and work with LoanBase. What was that process? 'Cause we talk a lot of it on the show of scaling your business, scaling, you know, real estate. What was the process for you for scaling LoanBase?
[00:05:59] Ari Shpanya: Yeah, it's a good question. Initially, we're relatively a new business. We've been around for the last 18 months, out of that probably 12 months in beta. So it's really important to have to nail down your product to give a good experience to your first customers. So we’re still in this kind of stage, we're still working mostly based on referrals. We get friends, clients that refer other clients. Obviously, we do get some new clients by paid search or by anything of like, content or articles out there, or, but at the end of the day, I really think that if your product is good, then product-led growth is the best thing because then it becomes viral or at least one happy borrower can tell their colleague. I'm sure that you have a lot of people you work with, so if you are happy with a certain product or a certain technique, then you're definitely going to share it with others. And that's the best type of marketing I think in our industry and in general.
[00:07:02] Sam Wilson: Got it. No, I think that's really, really cool. Tell me your general feeling. I mean, this is you're involved in the financial markets. How should borrowers be protecting themselves? What steps should they be taking right now? I guess just give me a kind of holistic view, if you will, on where we are and then what people should be doing.
[00:07:22] Ari Shpanya: Yeah, it's interesting that you ask, Sam. I've just seen today one of the latest surveys and very thorough research reports. And it seems like there is a consensus among the US consumers that this is one of the worst times to, to buy a home, or at least that's, you know, as opposed to, to last year, We can really see that decline. And obviously, with combination of increasing interest rates, it's really something that might be alarming. So we are potentially heading to recession. Obviously, the fed is going to try to make sure that we are not going to hit there, but in terms of interest rates, we are seeing in our industry, right? We are seeing the interest rate going up. We see that across the entire markets, including secondary markets. So right now, if you are a real estate entrepreneur, and you are getting a hard money loan for it can be a rehab, construction, bridge, entitlement, land title, and you name it, you used to get it for seven and a half, maybe six, maybe even four and a half. If you had a good relationship with your local bank. Now it's close to ten and ten and a half. So it's really not sustainable. Debt service coverage ratio is just completely being destroyed if I may say. And that will create, in my opinion, more defaults because if you are in a project already, you know, that's fine, but it will be very hard to get that takeout loan.
[00:08:53] Ari Shpanya: And if you are starting a new project, then all the lenders are essentially underwriting to new guidelines. And new guidelines mean that there are no more takeout loans at four and a half. I'm putting aside the relationship discount and so on, but most debt shops are underwriting to, you know, an interest rate of six and a quarter. So that means you really need to have a very profitable project. I think we're going to see a lot of foreclosures. I think we're going to see a lot of projects going to default. That's going to create more opportunities. Cap rates, we see that that is being pressured. So this is the end of the cycle, just like 2008, so, there, there are, you know, winners and losers. So, I think it's a good time to, to have your war chest and be ready for you know, for gobbling up some, some inventory that will be distressed. And if you are an investor, you do want to be very cognizant and conservative, definitely not over-leverage. Always go on a, like, I would say 65 to 70% LTC, like leverage, not over-leverage yourself, better to have more equity in the deal. This is not the time to optimize for your profit. This is the time to optimize for your reputation and your deal to survive.
[00:10:09] Sam Wilson: That is really interesting, you know, what you say there. I think that that's sound advice. It is not time to optimize for profit. That's absolutely great. Tell me about this: you think the foreclosures will be on the rise because if people are mid-project and like you said, they need to take out a loan or they need to, you know, they need to recapitalize, they are not going to be able to refinance at the rates that maybe they underwrote to. Is that what you're saying?
[00:10:31] Ari Shpanya: Yeah, exactly. I mean, look, the inflation when, when the inflation is going up, right? So you have a certain pressure there, you have an interest rate that's going up. At the end of the day, that creates some pressure on a cap rate. So we, we see cap rates that are going up as a result, we see on a, on a higher interest rate, we see a debt service ratio that is really hard to reach. So we see that, you know, usually banks will need 1.25 at least, but a project that used to be 1.35 is all of a sudden below one, which means it cannot serve its debt. So in that case, it does create that pressure, and some entrepreneurs, they may you know, they, they may end up in, in default or they may need to, bring more collateral and so on. You know, I remember something that happened to me as a real estate investor in the past and present. During COVID, I had to bring more liquidity to the deal 'cause at the end of the day, with this space, you really want to make sure that you have no single bad apple. You always need to have an impeccable track record because your record is everything. And you need to make sure that no deal goes bad. That's why you, you want to go low leverage, that's when you CR you want to have the interest reserves, but I definitely think that there's going to be a lot of opportunities with these assets that are just not, yeah, a lot of single-family homes that going to drop in value. A lot of other asset class that's going to come down in value and when they cannot serve the debt, then that might create an opportunity for other buyers or, you know, so that's kind of where we are.
[00:12:20] Sam Wilson: The term conservative underwriting is something that is thrown around all the time in our industry. Like, well, we always underwrite, you know, super conservatively, which to me, it's like, You know, when you ask somebody, how are you doing? They're like, oh, I'm great. It really doesn't mean much. It's like, okay. Yeah, sure. You write it conservatively. When I say, conservative underwriting, what should people be doing if they are projecting a cap rate and exit? Like, how can they do that conservatively? Like what, what should people be plugging into their, into their charts in order to say, hey, you know what, I think we've, we've really been hyper-conservative in our underwriting when, when establishing our cap rate and exit.
[00:12:59] Ari Shpanya: Yeah. That's a good question from what I see with our lenders or, you know, we have visibility to thousands of lenders, so I can tell you that conservative underwriting starts with conservative rent projections, for instance. So let's say in multifamily, let's say we're in wherever in LA or we're in San Francisco where, you know, we, we are looking into market brands that we have to take to account and let's say assume 80% of the current market rate, right? So we want to be conservative on the market rate. We want to be conservative about the vacancy. So we want to be conservative about the cost, the other costs, like the cost to manage a property. That's one aspect. Then you want to be conservative about the cap rate, so let's say if you're in, I don't know, let's say if you're in LA then it will be, used to be four and a half cap, and now you're going to underwrite to five and a half, for instance. So that's another thing. And then a third layer would be the debt service coverage ratio. So it's actually, you can increase that. So rather than a 1.2, you can go to 1.3. And the last thing I would say is, is take into account the interest rate that could be in a year from now, and that's not necessarily a lower rate. So you have to be, you know, hoping for the best and planning for the worst, essentially. So that's, how I look into proformas of other lenders, and I just see that everyone is definitely doing that and everyone is also reducing their LTV or LTC, so lower loan to value. Used to be 80%. It dropped to 70%. LTC used to be loan to cost, 90% now we see it at 80% max. And I see now what's called interest reserve. So 12 months of the interest reserve holdback, okay? So that's money that you bring front to the deal, especially on the construction deals or rehab deals. So all of these are essential steps that lenders are taking in order to make sure that you bring the project to the finish line 'cause no one wants to get stuck. With a construction project, right?
[00:15:21] Sam Wilson: No, certainly not, certainly not. What is a practical piece of advice that you would give to somebody that's looking to, let's say they come to your platform, but what's one thing that they should be doing as a borrower that would set themselves apart and make getting approval on their loans easier?
[00:15:38] Ari Shpanya: Well, the thing about real estate investing is it's kind of has the compounding effect, right? So the better borrower you are, the better track record you have, the better access you have to rates, the better access you have to capital, the better access you have to investors and, and inventory, and so on. I would really say it's important for borrowers to focus on their having, like, their experience with five properties, five assets completed. So that's something that every real estate investor, every real estate borrower should have under their belt. And once you have this experience, again, it relates to what we talked in the past. It's okay that you didn't turn a huge profit. You know, it's really important to establish your credibility and your experience. And even if you made a, you know, a 15% IRR, 25% IRR, it doesn't matter. Even if your LPs made more money than you, that's totally fine. As long as you have these four or five projects in terms of experience on your belt and then you’re golden because that's what you need. You need that four or five buildings in terms of experience, assets, you want to have above a certain credit score, which is not an issue. And you want to have a certain net liquidity, which is also something that, you know, you want to set aside something and never be over-leveraged. So these are the three golden rules or the rules of thumb that I would say for getting a loan today or getting financed. And I would say that's a key here.
[00:17:11] Sam Wilson: Fantastic. All right. Thank you for taking the time to come on the show today. It really gives us your view on where we are in the market cycle, what's going on in the market, and then really telling us, you know, how to be prepared as a borrower when we come to, you know, come and talk to the lenders and also, just, you know, telling us about LoanBase and why you started it, the problem you saw in the marketplace, and then how you creatively solved it. I think that's really, really cool. Certainly appreciate it. If our listeners want to get in touch with you or learn more about you, what is the best way to do that?
[00:17:38] Ari Shpanya: LoanBase.com
[00:17:40] Sam Wilson: LoanBased.com. Fantastic. We'll make sure we put that there in the show notes. Ari, thank you again for coming on today. I certainly appreciate it.
[00:17:47] Ari Shpanya: Thank you, Sam. It's been a pleasure.
