Loan options for investors who rehab and flip houses are pretty straightforward. Private lenders, banks and crowdfunding sites can all be good options, depending on the borrower’s credit and funding needs.
But what if there were a funding source that also had a fix-and-flip division in addition to being one of the nation’s top five largest private lenders? There is.
Fred Lewis and Jack BeVier of The Dominion Group love to talk plumbing and design almost as much as they like to lend money. Their success and unique skill sets make them Think Realty Magazine’s Master Investors for September/October 2016.
“We’re investment experts in a single-family real estate space, so we kind of view ourselves as real estate experts lending money to investors who seek to be experts themselves. It’s investors to investors,” says Lewis, Dominion’s founder and managing partner.
Rehabbing and selling homes and private lending are two legs of Dominion’s tripod. The third leg is property management. The firm owns 560 rentals in the Baltimore area, and its management company manages more than 700 houses.
“We have a very experienced management arm that’s focused on kind of an owner mentality first,” Lewis says. “The fact that we have the three arms of the business really makes us very well rounded as a company. It really adds to our knowledge base when we’re working with a borrower who’s struggling with management issues or struggling with real estate issues. And on the real estate side, our lending company provides us insights. It’s a very synergistic group of entities; our tripod approach has really been the right way to go.”
The company initially focused on its backyard: Baltimore and the surrounding counties in Maryland and Washington, D.C. In 2011, the company started lending on the East Coast and is now a national lender.
Entrepreneurship Showed Early
Pennsylvania native Lewis showed his entrepreneurial chops as a young man by starting a T-shirt company while only a freshman at George Washington University. He steadily built the business through his college years and eventually got into licensed apparel. The money from the T-shirt business helped pay for his schooling.
“We got licenses from whatever was the popular culture at the time, and at one point, we were the largest grossing T-shirt company in the country. We did about $40 million in T-shirt sales in 1998,” Lewis says.
Itching to do “something different,” Lewis sold his interest in his T-shirt business in 2000 and started Dominion Financial Services in 2001 and Dominion Properties soon afterward.
Ivy Leaguer BeVier, on the other hand, took the more traditional route and studied real estate at the University of Pennsylvania. He interned at Dominion while attending Penn. After working in commercial real estate for a couple of years after college, he talked to Lewis about rejoining Dominion to handle acquisitions, coming back aboard in 20007.
“I went the more traditional school path and didn’t start my own business, but when I interned at Dominion, I really liked that environment and liked kind of the rope that Fred gave me even as an intern,” says BeVier, now a partner at Dominion. “I was actually really involved in moving the business forward and making decisions, and so I really kind of fell in love with that environment and enjoyed it a lot more than a big-business hierarchical structure.”
A Product-Driven Approach
Starting a private lending company after running a successful T-shirt business might not seem like a natural next move, but it made perfect sense to Lewis, who calls himself a “product-driven guy.”
Whether the product is T-shirts or rehabbed houses, Lewis enjoys the challenge of creating something that customers will choose over the competition. “What I really enjoy about real estate is it speaks to our creativity as to how we like to renovate houses, making sure we pick the right paint colors and the right design and the right layout,” he says.
The explosion of fix-and-flip television shows has created a class of real estate investors “starving for learning those skills,” Lewis says. “They want to know how to do that. It’s something that Jack and I have kind of a deep understanding at this point, so we enjoy it.”
BeVier is more of a “deal junkie,” as he likes buying houses and helping other investors buy property as well, “because you can’t buy every single house. It’s a way to be involved in other real estate transactions and work toward other real estate investors’ success, and I enjoy the personality type of the borrowers that we work with and the business model that they’re doing, so what’s not to like?” he says.
Combining Successful Traits to Help Investors
Dominion has about 30 houses that it’s buying, renovating and then selling, and this “translates very well in conversations to other investors” who are looking to do the same thing, Lewis says.
Both he and BeVier have expertise in different aspects of Dominion’s business, allowing the duo to become more than the sum of their parts.
BeVier’s primary responsibility at Dominion is underwriting real estate for its property division to purchase. He spends his mornings purchasing houses and then dons his underwriting hat in the afternoon, underwriting loans for the lending side of the business.
His experience in evaluating single-family real estate provides a unique perspective when he underwrites loans. “I’m able to kind of bring some skills to the table in speaking with our borrowers that I’m really speaking their language, and I really enjoy that because that’s a core part of our business. When I see one of our borrowers getting a great deal on a house, we get really excited about that,” says BeVier. “We like talking to these guys. We enjoy speaking to flippers because we are flippers.”
Lewis’ forte is real estate construction and his knowledge of the real estate business in general, which he says helps investors who are “trying to buy a property with the goal of holding it for rental and then building a rental portfolio.”
He says Dominion “knows every single nuance of turning an old scratch-and-dent property or beat-up property into a quality rental.” The knowledge is hard won, as Lewis says he has personally been involved with a “couple of thousand” renovations since 2001. “I’ve made every mistake I can make, probably six times, and we’re learned from all of that,” he says.
This level of experience allows him to field questions and put out fires in all areas of the business, from the lending side to the fix-and-flip division.
School of Hard Knocks
Even Master Investors get knocked sideways sometimes; the real estate downturn of the late 2000s made sure that BeVier and Lewis weren’t exceptions to the rule.
Lewis says that “nothing really went wrong” from the company’s founding until 2007. Up markets have a way of doing that, he says. Then the real estate downturn hit, and despite their best efforts, the calm seas suddenly became very choppy.
“As much as we tried to put in place to protect us from the downside, we learned from the down market what happens when you do make errors in judgment and what happens when you extend to the wrong people,” Lewis says. “I would say the down market taught us a hell of a lot, and the stabilizing of the market really taught us a whole lot, too.”
Since his arrival at Dominion coincided with the start of the downturn, BeVier experienced an “extremely steep learning curve. I never thought I’d see a lot of the stuff that happened to us directly during that period of time, but we were able to make it through that, which provided the environment for a lot of opportunities for the growth of that lending business,” he says.
As bad and as nerve-wracking as it was watching competitors go out of business, Dominion’s leaders learned valuable lessons from the down times. For one, they realized they needed to be much more selective about recipients to whom they loaned money. The difficult times taught them the most enduring lessons. “We learned a ton from that environment, and that really shaped our approach to underwriting,” BeVier says.
The downturn made such a profound impression on Lewis and BeVier that they changed their lending style. “One of the main ways that our style of lending has changed over the years is through the focus on the borrower,” Lewis says. “One of the main lessons that we learned as a result of 2007 and 2008 was that ‘skin in the game’ matters and the financial strength of the borrower matters as much as the quality of the deal.”
Private Lending is Not for the Faint of Heart
Pressed for advice for those considering entering the private lending space, Lewis and BeVier have two words of advice: Don’t bother. Private lending may seem like a simple business from the outside, yet Lewis says it’s anything but.
“It is more akin to brain surgery than it is to general practice. There’s so much nuance in understanding how to underwrite the borrower’s exit strategy, the real estate itself, the age of the real estate, how it really sits and does it really fit into what the strategy is for the borrower,” he says.
The private lending space has changed in the past 18 to 24 months, according to BeVier, as larger regional and national private lenders enter the space. He says that the new players offer “a bit more professional platforms and certainly lower costs of capital” than previous lenders. Hedge funds are starting to enter the market as well.
Any additional new entrants to the market will “have a hard time as a new lender in this environment competing with those entities, including us, from a cost capital point of view,” BeVier says. “It’s not your 15 percent interest in five points business anymore, which is what a lot of people get excited about. I think if you do that, you’re really doing a sub-private investor lending, and you might find yourself more likely in a workout scenario than in getting repaid.”
Having a uniquely multifaceted private lending business has served Lewis and BeVier well, especially during the downturn, and allowed them to take it nationwide after many of their competitors had exited the business.
“At the end of the day, what makes us different and makes us leaders in business—and we really enjoy being leaders—is that we don’t have any interest in not providing value,” Lewis says. “It’s all about providing value to our clients, and I think that’s how we approach everything.”
0 Comments