Some of us originate from somewhere away from real estate investing. A person who has been through the same journey is Steve Driscoll of ECONO HOMES, LLC who talks about his experiences and all things private lending. He shares his background on how he went from auto finance to real estate investing, walking us through cars and houses. Steve gives some great insights on how he runs things, from buying and liquidating credit card paper to financing. Touching as well on subjects like LTV and RMLO, he brings information that shows the inner ropes of private lending.
I’m proud and honored to have Steve Driscoll with us. I met Steve down in Cancun on the Mitch Stephen Real Estate Mastermind. If there’s anything you want to know about that trip, Steve could tell you all the dirt on me and everything. Steve, thanks for coming on. It’s good to see you.
Thanks for asking me to come on board.
There’s no formal structure to this interview. I wanted Steve to come on. We got along good down in Cancun. I’ve seen him in Texas since then at another Mitch Stephen event and I wanted to continue the roll. You were on very quickly on the episode I did regarding the Cancun mastermind, but I want to delve a little deeper into your past and what you do. Correct me if I’m wrong but you are a New York gangster. You’re in the mob.
I was out in the San Antonio and Houston. I didn’t spend much time in Houston. It’s a nice part of the world there but it’s a lot different than what New York is and a lot different than the Northeast. You don’t appreciate the country until you start traveling around it. I had a great time. I met some good people.
You did it right. You went down there in October, which is a good time to go to Texas; May through September. Besides that former criminal activity that you never did, I know you have a background in finance. Give us your background in how you went and got into auto finance I believe now you’re doing in real estate. Walk us through how you went from cars to houses.
If you're an entrepreneur, you better roll with the punches.
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The cars started way back. I took a hobby and decided to make a living out of it. I love automobiles. Who doesn’t love cars? Who doesn’t like cars? I was a kid and I was selling cars out of my driveway. As time went on, I opened up car dealerships and it was around 1985. In 1985, when our friends from Korea started bringing cars to the US under the name Hyundai, we also got another beautiful automobile here called the Pyeonghwa. Detroit started to feel the pinch because they were taking sales away. They started dropping their interest rates and as they dropped the interest rates down, they were buying anybody’s loans that they could fog a mirror speaking.
We went from doing a great business to being almost shut down overnight. What do you do? You had to reinvent. If you’re an entrepreneur or a true person, you better roll with the punches. You’ve got to change with the market and you’ve got to make yourself reinvent it. We went ahead. I did a little research and I said, “It’s the same thing in the real estate market if you’re doing financing. Look at the biggest side of the market. The biggest side of the market is the people that can’t get financed and it’s over 80%.” At the time back in the ‘80s New York metro area, over 80% of the people who were shopping to buy a car didn’t qualify. I said, “I want to go service that into the market.” I made some alliances with some finance companies and that these guys were absolute crooks. They were the gangsters. I said, “If these guys can do this, I can do this legitimately.”
I went and I became a licensed finance company. In New York State, that’s not an easy thing to do. Nothing’s easy to do in New York, but I did it for a long time. You use your own money for a while and after a while, you run out of money. You are bringing in private investors. There are banks and finance companies that are unique, that are just boutique lenders for that end of the market. After a while, we were collecting $500,000 a month just in interest. We were doing well. I had lines of credit with asset-based lenders. I had one line for $65 million and a backup line for $15 million. That’s $80 million and thank God we never used the backup line. We came close at one time using the whole line, but we did well for a long period of time. This podcast is about private lending and if I go back and I think, “You’ve got to be able to put a price on an asset. You’ve got to be able to look and see document wise no matter what the asset is.” I used to loan money. I had loaned money on some of the craziest stuff. I’ve come out with that book. You’ve got a copy of it right there, Real Estate Rock Stars. I contributed to the first chapter inside the book. I didn’t write the whole book.
I was asked to come on board with it and I talk all about my business model and I talk about how to protect investors, what you should do, what the steps are in general. I’m a pretty conservative borrower. I don’t like borrowing money, but if you can’t do business now, sooner or later you’re going to run out of cash. This is a quick story. I’d buy almost any damn thing if I could liquidate it. I learned from these two old timers from New York City. They were both old retired attorneys and they’d buy anything. They could make chicken soup out of a chicken crap. They called me up one day and I was buying a credit card paper and all kinds of notes and stuff from them and just liquidating it out in big volumes through my company. They called me up one day and say, “Where are you?” I said, “I’m in Long Island.” These guys said, “Move to Arizona. Get in your car. You’ve got to go to Connecticut for us. You’re in this deal.” I said, “What’s the deal?” He says, “We’re buying a submarine.” This was the craziest deal I ever did. He said, “You’re in.” I said, “What are you talking about?” He said, “You should just get in the car. Call me when you’re on the way.”
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I had a couple of loose ends that I need to take care of and I hop in the car. I’m driving up the New England Thruway and I’m heading up to Connecticut. I get them back on the phone and he says, “These guys will liquidate us. We’ll loan this guy money against this submarine.” I go, “Yes.” He goes, “He’s not going to make the first payment on it.” I was like, “How do you know that?” He was like, “I’m telling you, he’s not going to make the first payment.” I go, “What’s the deal?” “Instead of us just buying it, we’ll get a loan of money against that. You’re in for $150,000. We’ve got the rest of it handled.” What does that mean? We already got this thing sold. I didn’t say anything after that. He said, “Go up there. Pull up to the place. See if it’s in the water. That’s great. It means it floats. If it starts up and it runs, that’s even better. If it moves, that’s even better. It’s a celebration.”
I wind up and I was up over there. There is this big black turd in the ground. It was a World War II whiskey sub. The guy had bought it up in Nova Scotia and it was decommissioned. Then he drove it down to Connecticut and he wanted to borrow some money against it. I show up there and the guy said, “Are you here to inspect it?” I go, “I guess so.” “Come on our board.” I said, “I’ll stay right here.” He started it up and the big wheels turned. All was well. I left and I was on the way back and I called him. I said, “Is this thing all right? It’s in the water.” He said, “It’s great.” About five six weeks later I called because I haven’t gotten the check, “What’s going on with this thing?” “It’s all being worked out.” It was about eight weeks. He said, “The guy defaulted so we foreclosed. We’re dicing it up. We’ll ship it to San Diego.” I said, “What does that mean?” “We’re cutting it up,” because you can’t put the thing on one trailer.
They’re cutting it up in pieces and they’re selling it to a salvage company in California. They already had money from the guy. These guys were incredible. These guys are real hustlers. That was a lesson I learned early about knowing what a liquidation value was worth. If you’re going to buy an asset and you’re going to loan somebody money against something, you want to know what the quick liquidation value is if the crap hits the fan. That’s important. Without knowing the value, you’re gambling. I don’t mean to take over your shoulder.
I have no problem doing it. It’s a great story. You went to Connecticut to look at a submarine. I can see a mobile home or maybe a hot rod car but a submarine.
We made six figures on that one. I was happy on that. They sold it to us. They salvaged it supposedly. It was in pieces on trucks by the time I called the guy. About six, eight weeks into it, they had already cut the thing up and they were transporting it. They had a piece left in Connecticut.
I’d like to continue down this tangent a little bit because you mentioned that you were buying and liquidating credit card paper. Run us through how that worked.
Without knowing the value of what you’re buying is gambling.
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Back in the day, I don’t know how it is nowadays because I don’t do that, but you could buy volumes, lots of defaulted credit card paper. This fellow was taking over companies that were going out of business. Let’s say a guy at a jewelry store and he had four or five different jewelry stores. When I say credit card paper, it was more like loan paper, this particular transaction. They originated millions of dollars and it was all just paper. Meaning, it wasn’t cash. I promised the pays. I don’t think the guys cost of goods was even 5% of what was writing the stuff for but it was crazy. It was marked that way up. When he was liquidating these buildings, he got everything. He was going to make it play and he says, “I’m going to buy everything. I’m going to buy all the assets. We’ve got the buildings, the furniture,” he got everything in it which included the account paper. When he put a liquidation value on this and that, I want to put it all on the paper.
Some of the transactions were big. He also bought in a different transaction, he wants them taken over. It was a collection agency and he got a lot of accounts that they held in-house that they had purchased and he wants them shoveled out over to me. There was a lot of HSBC. I believe it was HSBC Bank many years ago. We started running this through our systems and most of the stuff was fraud and the people never existed. When they send you a credit card and all you’ve got to do is sign, they wouldn’t go by people’s addresses. Generally speaking, what the income is for the area. They’ll give anybody a $1,000 line. That’s where all this crap was, most of the stuff was a collective. We wasted a lot of time on that. I bought judgments in the past. You can make money with judgments if you know what you are doing. When anything you’re going to look at is going to be tied to a piece of real estate, you’re in the driver’s seat if you know what you are doing.
You mentioned your business model in the book, Real Estate Rockstars. You do a little bit of landlording, some lease optioning and seller financing, but what does your business look like now?
What I do now is I bring in private lenders, buy houses and finance them for the long haul. I like passive mailbox money. I’m not in getting big checks right away. I want to retire one day. I’m getting old. I love mailbox money. One thing I found when I was in the auto finance business was good times and bad times, no matter what. You might not be selling anything or you might not be financing anything, but money still comes in the door. That’s what I love. When you’re in a business, when you can manufacture a business like this, when you’re in a business where the money makes the money, now you’re in a business. In the home finance business or owner finance business, you’re limiting your income to how many units you can go out there and sell and finance. The long-term, since what you’re doing is facilitating financing, you’re selling money. You’re not selling a piece of real estate. I’m selling money. When you sell money and I’m writing 30 contracts on it, that’s forever money. I bring investors in for five and ten years and I just do interest only with them.
I was at a REIA meeting. He’s all happy about this renovation that he did on this house, this rehab. Many people watch this stuff on TV and they think they’re going to make so much money. He’s talking about this and when he gets all finished, with all the money that he invested in this property, he takes out a calculator and goes, “What’s the net number before taxes?” It was less than 3.5%. This guy killed himself that put this thing together. I didn’t crack what it was with the guy or anything like that, he was a lot bigger than me anyway. I said, “The thing to do is just sit back and watch it.” I don’t know when this is going to hit the airwaves, but the stock market dropped 650 points. This is no ordinary mom and dad stock market. This is not the Wall Street that your dad invested in. The individual people or even if your company’s investing, we’re not big enough to be in the know as to what’s happening. They say this insider information is all illegal. It’s all over Wall Street and that’s how these guys are making their plays. We’re not big enough to being inside that club as they say to know how that’s going to work. Where does that leave us? If you’re investing on Wall Street, you’re gambling. It’s the biggest casino in the world.
Private Lending: If you’re investing on Wall Street, you’re gambling. It’s the biggest casino in the world.
You have absolutely no way of knowing what this stock is or whatever you invest in is going to be worth anything. After the meeting, I was giving away my book. A bunch of them came over and said, “What’s your strategy? How do you figure this and that? Why is what you do so much better than what happens on Wall Street? I’ve been investing in Wall Street for years.” I said, “How much money do you make?” They go, “Enough for a part-time job.” I said, “The big difference is the hedge.” “What’s a hedge?” I go, “If you buy a piece of stock, you buy one stock for $100 on Wall Street, you’re paying 100% of the value for that stock.” It costs you $100. A week from now for some reason, the stock loses 10% of its market value. Now it’s down to $90 a share. If you decide you want to get out, there are fees for getting out of it but let’s just say it’s $90 now. What do you do? Does the street tell you to reinvest it to just sit back and wait? Maybe it will go up. How many times are you going to sit there and stare at the business news and hopefully there is more good news that will help you maybe push this back up? I can’t do that and I can’t be responsible like that for an investor. I can’t tell somebody that that’s legitimate investing.
My dad was a banker all his life. He invested some money in Wall Street and he never made a lot of money on it. I was raised saying, “Don’t gamble. There are no sure things in life.” Let’s change the numbers. Instead of $100, it’s $100,000. It’s a $100,000 house and you’re going to give me $60,000 on a first mortgage. That’s $0.60 on the dollar. That $40,000 is the hedge. It’s the spread. In order for your value to start dropping, in order for that mortgage, that value that you have, that note to take a big hit, that number from $100,000 has got to drop way down. That’s your hedge. That’s what banks look at. This as a bank model. If you don’t think so, ask yourself one question. Why are there banks on every corner throughout the United States? Why is it that you can put money into their bank and they’re only giving you a point two or three quarters of a point, 1% or maybe a point and a half. They turn around and put it out for five or six. They’re making money on your money arbitrage. That’s what they call it....