Today’s guest is Bill Bymel
Bill is the CEO of First Lien Capital LP, a privately owned distressed mortgage investment platform he founded in 2021 which owns over 700 residential mortgages and REO in over 30 states with a total investment of $65 million in equity dollars. Join Sam and Bill in today’s episode.
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[00:00:00] Intro
[00:01:11] Bill’s background and experience in real estate investing
[00:08:16] Bill’s approach to working with distressed borrowers
[00:10:18] The revolutionizing the industry
[00:11:33] Challenges in the market
[00:15:34] The future of the market
[00:21:04] The challenges of raising capital
[00:22:10] The discipline to say no to easy capital
[00:22:45] Closing
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Connect with Bill:
LI: https://www.linkedin.com/in/billbymel/
IG: https://www.instagram.com/billbysea/
FB: https://www.facebook.com/billbymel
TW: https://twitter.com/billbymel
TT: https://www.tiktok.com/@billbymel
Book: Win-Win Revolution – https://a.co/d/cMDA4ov
Connect with Sam:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Facebook: https://www.facebook.com/HowtoscaleCRE/
LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/
Email me → sam@brickeninvestmentgroup.com
SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson
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Spotify: https://open.spotify.com/show/4m0NWYzSvznEIjRBFtCgEL?si=e10d8e039b99475f
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Want to read the full show notes of the episode? Check it out below:
Bill Bymel ([00:00:00]) – You’ve got somewhere in the range of 250 billion still to 375 billion of defaulted mortgages. Still a very small number in comparison to the market. And so it has been tough, but that’s all changing. And a one every 1% move is another 120 billion with a B of new defaults that are coming to market. So we’re we’re starting to see that trend go in the other direction. And it’s like I’ve just got my popcorn ready.
Sam Wilson ([00:00:32]) – Welcome to the how to scale commercial real estate show. Whether you are an active or passive investor, we’ll teach you how to scale your real estate investing business into something big.
Bill Bymel ([00:00:45]) – Bill by Mel.
Sam Wilson ([00:00:46]) – Is the CEO of First Lien Capital L.P. It’s a privately owned distressed mortgage investment platform he founded in 2021. They currently own over 700 residential mortgages valued at over $65 Billion in Assets under Management. Bill, welcome to the show.
Bill Bymel ([00:01:02]) – Great to be with you, Sam.
Sam Wilson ([00:01:03]) – Absolutely. The pleasure is mine. Bill There are three questions I ask every guest who comes on the show in 90s or less.
Sam Wilson ([00:01:08]) – Can you tell me where did you start? Where are you now and how did you get there?
Bill Bymel ([00:01:11]) – Wow. 90s or less is the hard part. I started as a residential fix and flip investor in the early 2000 in South Florida. I’ve been a broker in Florida for years. I live in California now. I built that up, got into commercial real estate, buying and selling brokering as well. And then when the GFC hit, I got a random call from a asset manager in Southern California that said I can buy mortgages for pennies on the dollar. That was my lightbulb moment. That was three months before the fall of Lehman. In the summer of 2008. And from there I built I went on to say, I’m going to do this for a living. And for 15 years I’ve learned how to buy and sell mortgages, work them out, and really kind of created a new paradigm for how to work with distressed borrowers in the residential real estate market. And I’ve done this to the tune of several hundreds of millions of dollars at other institutions.
Bill Bymel ([00:02:08]) – The number two guide at a New York private equity firm. And then a couple of years ago, I was the baby bird leaving the nest and started first lien capital with the goal to build it to a half $1 billion company.
Sam Wilson ([00:02:20]) – Wow, that’s really, really cool. I love that. So just to just to clarify, you went out and worked for another firm where you kind of cut your teeth learning this business. It sounds like that is a is an effective strategy to really get into what you’re doing. Would you recommend the path you took or is there a better, better way to get it done?
Bill Bymel ([00:02:38]) – You know, it’s very interesting because the secondary mortgage market, which is where we play, that’s how we access our product buying and selling, right? That’s where big pools of mortgages are traded, as well as small individual loans. This is a good old boys network. Right. And since the 2008 recession, there’s been a lot more access to it. There’s almost like a tertiary market beyond the secondary market.
Bill Bymel ([00:03:04]) – Smaller investors trading due to the Internet, due to the availability of communications. That said, the main secondary market remains a good old boys network. So yes, if you can, I always a big believer in finding someone with the knowledge you seek and have them be your mentor. So I met a guy named Pete Sligo back in 2010. At the time, I was buying small deals and and and build, trying to build up. And he had just raised his first 50 million bucks. And he was a mortgage note. He was a mortgage investor with experience at UBS and all the big New York houses. I was like, This is a guy I can learn from and he could learn from me because I knew real estate and we teamed up for ten years. I was his number two. I did all of his Florida stuff and it was through that mentorship that I gained access to the people that you need to know how to and how to work this very nuanced business. You know, it’s really taking a Wall Street private equity, institutional world and bringing a main Street approach to it.
Bill Bymel ([00:04:14]) – You know, it’s kind of combining those two things in what we do. So I highly recommend finding someone.
Sam Wilson ([00:04:21]) – Absolutely. No, that’s that’s great. I love I love the way that you’ve done that. It is a good old boys network, I feel like and maybe it’s just because I run a podcast with 800 and something episodes, but I feel like it is at this point it’s become more mainstream, like more people understand it. I mean, I don’t think before and of course I was probably too young. I went through the oh eight crisis. I owned a business then but didn’t understand kind of conceptually how all this was traded and kind of the like you said, the turkey is exactly right. Right. But I feel like more people have an understanding of what a mortgage is now, how they’re bought and sold. Right. The we’ve had just obviously up until now, we’re recording this June 13th, 2023. But we’ve just had a booming economy for a decade or more. Has that has the distressed mortgage market, has the pool of available loans shrunk over the last.
Bill Bymel ([00:05:11]) – Oh, absolutely. Absolutely. It has been very difficult to be a distressed mortgage buyer the last couple of years when there’s been no distress. Right. Right.
Sam Wilson ([00:05:21]) – So what did you do?
Bill Bymel ([00:05:23]) – You know, I saw it. So the way I made my mark the first two years of this. So there were some unique opportunities in play with Covid when Covid shut down courts in this country. A lot of the guys my competition in the business really freaked out because if you already owned an existing pool of mortgages that were nearing foreclosure. And all of a sudden the courts closed that down. You know, now there’s they’re they had no timeline to exit these things they thought they were a year away from. So I got a lot of deals in the last few years buying my competitors tales, stuff from old funds, you know, buying up other people’s problems, you know, And I have the experience and the knowledge and the comfort to to to really analyze all of those on a one by one basis. So we really hit it out of the park that way.
Bill Bymel ([00:06:14]) – So part of this business is kind of shifting about shifting with where the opportunity is. Prior to Covid, you know, there was it was scraps. You know, we didn’t didn’t grow too big. So, you know, there just wasn’t enough volume in the in the industry. But keep in mind how big this the residential real estate industry is, $12 trillion of mortgages in America. If there’s and we were at our lowest obviously our lowest default rates on record somewhere between 2 and 3%. Right now. So that means that you’ve got somewhere in the range of 250 billion still to 375 billion of defaulted mortgages. Still a very small number in comparison to the market. And so it has been tough, but that’s all changing. And a one every 1% move is another 120 billion with a B of new defaults that are coming to market. So we’re we’re starting to see that trend go in the other direction. And it’s like I’ve just got my popcorn ready.
Sam Wilson ([00:07:21]) – Right? Which I know what you mean when you say that because we I think we, we understand the pain that brings to families, to the people affected by it.
Sam Wilson ([00:07:30]) – So I don’t I don’t hear you in any way being like, oh, hey, I wish more people would have the stress on their mortgages. We don’t. But at the same time, you play a very vital role in just how this economy functions and, you know, helping, help helping keep things liquid and things moving. So get it both ways. You’re getting your popcorn now because it’s like, well, this is kind of what we’re poised for. Unfortunately, we’re you’re poised with a downturn and that’s what that’s where you make your money. So, I mean, that’s that’s part of it. But I want to find out. So so you said that, you know, the the last decade has been tough to be in the distressed mortgage business. But yet you guys, what was your competitive advantage and how did you underwrite that? I know I’m not supposed to ask more questions at once, but you got all your friends who were like dumping off their their kind of tailings of what they had going, All right, this is no good.
Sam Wilson ([00:08:16]) – That’s no good. And you said, wait, there’s opportunity here. So what was your competitive advantage there?
Bill Bymel ([00:08:20]) – Very good question. So I wrote a book about this. Obviously, I’m not, obviously. But you know, I mentioned it to you earlier called Win Win Revolution. You know, that I and it’s really details the paradigm by which we operate. We put this paradigm into place over a decade ago, and in many ways it revolutionized our industry. I have competitors of mine that tell people, read, you know, that take my book and give it to their new asset managers, because the whole idea is to meet the borrower at their level. You know, I got it. Nobody wanted to. I don’t didn’t get into this business to become a debt collector. That’s not of interest to me. I like real estate. I know how to value real estate. And I know that if a that it’s a very safe investment because you’re buying a note as long as it’s based upon a true value of the real estate, you can’t lose money.
Bill Bymel ([00:09:12]) – So it’s from my perspective, it was the best risk adjusted return investment. Now, if I buy these mortgages at a discount, I can now share some of that savings with my borrowers. You know, we turn around and in in, you know, instead of calling this borrower up and asking them for a payment, we ask them. They’re flabbergasted because they get a call from us saying, how do you see this resolving? What would you like to see happen? The first, if there’s an opportunity to modify someone, you know, in the old days, we were giving huge principal reductions because people were underwater and that was phantom money to us too, because we were buying the mortgages at a discount. We were able, like you said, we provide a very vital role because as private equity, we have so many more tools in the toolbox. We take the first 30 to 40% of every pool we buy and and perform. Those people give them modifications If someone has the ability to pay and and the intention of keeping their home, we will do whatever we can to make that happen.
Bill Bymel ([00:10:18]) – And for that middle 50% where maybe they just priced out, their situation has changed, whatever it might be. We want people to exit with dignity. So we’ll give people a waiver of their deficiency balances, will help set them up in a new rental property rather than spend money on an attorney to foreclose. I’d rather pass that so that savings back to our borrowers. So that’s really how we revolutionized the industry. And that means. We do this through the help of our local real estate broker network and our mortgage brokers and people on the ground who are knocking on doors and letting people know, Hey, we’re not Bank of America, you should talk to these guys. And that gives us the competitive advantage that others in the industry can’t do. It’s just not it’s such a big industry. You can’t most can’t get that granular, right.
Sam Wilson ([00:11:07]) – Most can’t get that granular. The I think the one the one key that gives you the margin in these deals to offer that flexibility is buying at a discount.
Bill Bymel ([00:11:19]) – Correct.
Sam Wilson ([00:11:19]) – Like you have to buy and I’m telling you things you already know. But you know, when you’re buying at a discount, as you mentioned, for the last decade has been tough. I mean, because people are bidding a lot of these pools up. Am I? And if I’m incorrect.
Bill Bymel ([00:11:33]) – Yeah, yeah. No, no, no, no. So the last four years have been tough. I mean, you know, we had a good run up until about, I would say 16 is when the market, you know, right around the time Goldman did a deal with the with the federal government where a big settlement over the last foreclosure crisis, they made a huge commitment of dollars to buying buying mortgages and part of their settlement with the federal government allowed them to buy defaulted mortgages and modify them and get a credit against their settlement. So they’ve been the biggest player in the market the last 4 or 5 years. And then there’s another woman who’s bringing money in from Asia that’s been overpaying for stuff.
Bill Bymel ([00:12:16]) – And there was a number of investors that were highly leveraged with very cheap capital up until a year ago that were also forcing the price of NPLs up. That said, they were always still creating at a discount, but you’d see stuff trading at, you know, in the 80s or 90s, not enough of a discount that we could really make our our our mold. So we ended up focusing on on harder to work areas like New York, New Jersey, Florida where there judicial foreclosure states a lot of the large institutional investors stay away from the judicial foreclosure states or will bid those down or just not bid them at all. And that’s where we’ve been able to find opportunity and still find discounts over the last few years that.
Sam Wilson ([00:13:03]) – Yeah, that makes that makes that makes a lot of sense. How do you underwrite that many deals at scale if if you do it at scale? Or is it an individual loan by loan analysis?
Bill Bymel ([00:13:14]) – And if so, no. Yeah, it’s a good question. We have we’ve developed the model for over ten years.
Bill Bymel ([00:13:18]) – It’s a very it’s a very it’s a sophisticated yet simple discount model. So think of it like this. It’s done on a loan by loan basis with every but and we get the data that the servicer gives us on any pool and we’re able to look up it into our model. And what you’re in essence looking for is what am I going to get if I have to take this to a worst case scenario, I have to take this property to foreclosure. How long is it going to take? What’s going to be my cost to carry the money? What’s the cost to the rehab? Potential rehab, legal expenses, the cost of insurance, property taxes? All of that gets discounted off along with a timeline. And what you’re projected yield is over that two year period, let’s say, you know, 20, 15% per year. And that’s how the model determines what price I should what discount I should be offering on any individual low. And believe it or not, even with that, this model like if you get an old loan that’s you know, that’s late stage foreclosure, my model might say I can pay 105% of UPB for something like that because if it’s been in foreclosure for two years, then you’ve already got another 10 or 15% in debt that’s built up above your principal balance.
Bill Bymel ([00:14:36]) – So, you know, it does work both ways, but most of the time, you know, we’re bidding in the 60s or 70s of, of of of value.
Sam Wilson ([00:14:45]) – Do you you you mentioned popcorn earlier. Are you expecting that? Bid percentage to come down in the near future? Yes.
Bill Bymel ([00:14:54]) – 100%. So what’s happened is, is I’ve been able to consistently find deals in a mid-teens yield while the rest of the market is bidding large pools to high single digits yields. And what’s happened now as a as in the last year is the adjustment in rates has happened. Everyone’s expectations is now shifted into double digits, the regular market. And so we’re now looking at deals that are in the 20s, minimum minimum 20% yield and as and it could get better, especially if we did dip our toe into commercial stuff in commercial, we should be modeling in the 30s. I mean, there’s a bloodbath on the horizon there.
Sam Wilson ([00:15:34]) – Well, certainly, certainly in the office sector, there’s a bloodbath. That’s right. That’s right.
Sam Wilson ([00:15:40]) – So, yeah, that’s very interesting. What what is the I guess there’s two questions I have attached to this. What is your disposition strategy once you get the loan performing?
Bill Bymel ([00:15:50]) – Oh, yeah, good question. We do have that’s why the secondary mortgage market connections are so important. So we’re able to pool a report forming pools minimum about $10 Million. Sometimes you get a buyer at five, but the institutional guys will securitize re performers in with new mortgages as they’re building these as these aggregators come back to the market once the rates seem to level off, should you know, then you’ll see a lot more of these securitizations come back or institutional buyers are just will just buy it to clip a coupon. So we’re able reformers now will traditionally not sell for par but you know they’ll sell in the 90s of their principal balance. So if I’m buying in the 60s, I’m taking in six months of payments and I’m selling in the 90s. You do the math. It’s actually one of the the best return across the board in our portfolios have been deals that we’ve modified and resold and it’s the win win strategy.
Bill Bymel ([00:16:56]) – So it’s like I just love it, you know?
Sam Wilson ([00:16:58]) – Absolutely. Absolutely. So you I guess that’s the last question attached to that is the seasoning period, six months, 12.
Bill Bymel ([00:17:06]) – Six months seasoning just to resell a loan and have it three months is it’s of payments, considers it a repay forming loan. But most buyers in the market want at least a six month seasoning.
Sam Wilson ([00:17:19]) – Oh, I would think so. I would think so. So you repackage these and you sell these off to aggregators, then? That’s right. $10 million at a time. Can you take that on your fund? Is their debt for acquiring debt?
Bill Bymel ([00:17:34]) – Absolutely. Absolutely. So it’s very interesting to see how that market has changed. Yeah. Um, those of you who have watched the news recently know the name back West Bank PAC, West Bank owned two lender finance companies where they had their own internal lender finance, and then they had another Capital Solutions out of DC that they had acquired a couple of years ago, five, ten years ago.
Bill Bymel ([00:18:02]) – They were one of the larger players in the debt on debt space. So just as an FYI, now they’re out of it now. Thank God I didn’t take the line of credit they were offering me last year because it was attractive last year at a four and a half, five and a half rate. But that same but those are their floating rates, right? I would have been sitting on a on a 10% loan. So now the debt, the debt on debt still exists. Credit Suisse is obviously most famous for it. It’s interesting to the names that are that were bubbled around as being problematic recently are the guys who are deducted. Right um but those guys and there’s a there’s a number of them still out there Western alliance was another one that did you know that does lender finance there’s you absolutely can do it we do we could do it. We try not to leverage ourselves. We try to stay all equity but we have that option. And where we’re at right now is that the leverage on leverage options that are out there.
Bill Bymel ([00:19:03]) – It used to be if I want private equity, I’d have to pay minimum 10% or so and I could get the banks for five, six. Now the banks are not there. So for plus 450 or 500, so it’s close to 10% money at the banks as well. So you’re you’re almost better off doing now the private guys are trying to push into low single, low doubles, but they’ll still take 10% probably if you have a relationship. So you’re actually better off leveraging through private equity right now.
Sam Wilson ([00:19:31]) – Right. And does that come in as debt or do they come in as equity?
Bill Bymel ([00:19:35]) – All of my equity has come. All my private equity money is coming as equity so far I’ve got I do have it’s funny, my main private equity partner is a big, you know, billion dollar institutional group out of New York. And they pursued me as debt for a year. And we and I just that wasn’t the kind of relationship I wanted to have. So I prefer to have all equity, have us all, just have, you know, you know, you know, all of our we’re all vested in it together.
Sam Wilson ([00:20:08]) – Pursue and that and shoot man I love the idea of limited to no debt because it just leaves it leaves the toolbox. You leave every tool in the toolbox to really do what you want without constraints. That’s great and do what’s best for the best for the fun, best for the investors, best on the return profile. It just leaves you much more nimble. Absolutely. Love that. Let’s talk here. The last 60s or so that we’ve got here on the show before we get into how to how to contact you and get in touch with you, let’s talk about raising capital. I mean, it’s it’s something you’ve got a lot of experience in. What’s it been like raising capital for the nonperforming loan space?
Bill Bymel ([00:20:48]) – You know, I’m an asset. I’m an asset manager by trade in a deal guy. So learning to raise capital was going back to school six years ago at my previous firm was the where I had to first do it. It was one of our main capital partners was starting to pull back.
Bill Bymel ([00:21:04]) – And so I had to learn how to go out and brand ourselves, packaged, talk to investors. And it has been very educational and and wonderful and yet not easy. You know, the persistence is the key, especially with large dollars. I’ve got a guy that a gentleman, for instance, right now, multi multimillionaire, I have been pursuing for five years. And he’s about to write his first million dollar check this week. And it’s persistence. It is, you know, being, you know, the strategy, you know, perfecting our pitch for our strategy has been fine. You know, I think everybody who gets real estate with a little bit of nuance or a little bit of sophistication likes the uniqueness of our strategy and sees the soundness of it. But, you know, raising capital is a whole different it’s a whole different career. And, you know, I may look back on this and say, you know, it was worth it because of the money. And I may just say, you know, I like doing deals and I’m going back to just doing deals.
Bill Bymel ([00:22:10]) – We’ll see. Right.
Sam Wilson ([00:22:10]) – Right. But I think the one interesting thing in all of that, despite the challenges raising capital, the temptation to have your billion dollar fund or $1 billion PE firm that says, hey, we want to come in as debt, I mean, that’s low hanging fruit for the guy out there raising capital. And yet you had the patience and. In the discipline to say no. Yeah, not the way we’re doing business. So I think that’s really, really cool. An awesome, awesome part of your story there to point out. Bill, if our listeners want to get in touch with you, learn more about you and or get a copy of your book Win Win Revolution, what is the best way to do that?
Bill Bymel ([00:22:45]) – My personal website is bill by bill bml.com.
Sam Wilson ([00:22:53]) – Fantastic build by Malcolm and make sure we put that there in the show notes. Bill, thank you again for your time today. Certainly appreciate it.
Bill Bymel ([00:23:00]) – Great to be with Sam.
Sam Wilson ([00:23:01]) – Hey, thanks for listening to the How to Scale Commercial Real Estate podcast.
Sam Wilson ([00:23:05]) – If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories. So appreciate you listening. Thanks so much and hope to catch you on the next episode.
