09 Apr April 9, 2020 – Automation Finance Paul Birkett, IBHS Tanya Giammanco and Fighting for Space Amy Teitel
I thought investing in real estate would be a passive income
generator. Once you get past 3 or 4, it becomes much less passive!
Paul Birkett, Founder and CEO of Automation Holdings LLC, has 25 years experience building data-driven businesses in global markets. Prior to launching Automation Finance, he repeatedly built multi-billion dollar businesses for PepsiCo and Procter & Gamble in the US, Europe and Asia. The purchase of a non-performing mortgage as “an experiment” became the cornerstone of a new career. Within 2 years, Paul liquidated a significant rental portfolio, left corporate life and launched Automation Finance to help investors automate their future finances. As CEO, Paul oversees Automation Finance’s management of $200 Million of distressed mortgages. Since launching Automation Finance in 2014, the company has purchased and liquidated 1,500 mortgage loans with a par value of $100mm.
Tanya Brown-Giammanco – MD of Research at Insurance Institute for Business & Home Safety and Author at Roofing Magazine
Dr. Tanya Brown-Giammanco is a Managing Director of Research at IBHS research center. Her research focus is on hailstone formation, hail impact testing, wind-flow characterization and testing, instrumentation, and field measurement and damage assessment studies. Prior to joining IBHS full-time, Dr. Brown-Giammanco was an engineering consultant for IBHS and LNSS & Associates. Tanya was also a National Science Foundation Integrative Graduate Education Training Fellow while completing her Ph.D. in Wind Science and Engineering at Texas Tech University. She is currently appointed as a Faculty Associate at Texas Tech University to continue serving with the Texas Tech University Hurricane Research Team.
Amy Teitel – Author of Breaking the Chains of Gravity and Fighting for Space
Amy Shira Teitel is a spaceflight historian, author, blogger, speaker, YouTuber, TV personality, and podcaster. Amy has had a lifelong passion for spaceflight, her interests, however, go well beyond space. She also loves early aviation, early technological evolutions, and she’s endlessly fascinated with mid-century America. She began with her blog, Vintage Space, and soon parlayed that into a career as a science writer with a solid focus on spaceflight history. Vintage Space spawned a YouTube channel of the same name and ultimately led to her first book, Breaking the Chains of Gravity. She has won an achievement award from NASA, has published with the BBC and Time magazine, and appears frequently as an aviation expert on TV and documentaries. Her new book Fighting for Space: Two Pilots and Their Historic Battle for Female Spaceflight became available in February 2020.
Starting a business, you don’t need to be creative because it’s not a creative endeavor. I was a corporate guy up until 40 years of age, just a desk jockey working away doing what I’m sure a lot of people do. Started off in a cube and ended up in an office. But at the end of the day, I was working hard to deliver on the goals of the company, which is not the most exciting thing in the world perhaps, but the remuneration was pretty good. So, I was looking outside the company for other investment opportunities and started buying. I grew up in Ireland, and came here to the US in 2010. At that time, you’ll probably remember, we were really in the teeth of the last recession, and single-family homes were selling for what certainly seemed very cheap prices, in European context. $80,000 or so would buy you a three-bedroom two-bathroom house that would rent out for maybe $1,500 or $1,600. The same house, back in Ireland or in the UK, where I lived for a long time, would rent for about half of that. So, the yields looked very attractive.
By 2012, I had about 30 houses rented along the lines of what I thought investing in real estate would be like, which is a passive income generator. Of course, as many of people who run rental property would know, once you get past three or four, it becomes much less passive. So, I was spending my weekends working with property managers and letting agents, approving repairs, and moving in and move out. It was almost a full-time job. Every Friday night after work, I would leave and fly to either Southern Florida or Phoenix, which were the two markets I was focused on. I looked for homes to buy and get them rehabbed and rented out. So, I was basically working seven days a week for those few years, but it worked pretty well. I was generating about $150,000 net a year, so I was kind of thinking that maybe this would be my retirement plan, and I was around 40 years of age at that time. But ultimately, that’s not what happened. Instead, I moved into a much more interesting and much more exciting business.
Banks are in the business of making loans. If I look over the past 30 years, 99% of mortgages perform as originated. So, the bank is used to people making payments every month, and the bank uses those payments to pay their shareholders. But 1% of mortgages go bad, and in the Great Recession, that 1% went up to nearly 9%. Imagine, if you were working in the bank’s non-performing loan department, you’re used to seeing one box of loans coming in every day or so. But in 2008 to 2010, there were 10 to 14 boxes coming in, particularly to the banks who were making more risky mortgages.
The banks can either try and work out those non-performing loans, or sell them. Typically, what they do is they sell them, because banks don’t want to be in the business of foreclosing on people’s homes and making people homeless. That’s really their only solution. The reason being, if they cut you a break as a non-performing borrower, you’ll tell all your friends at the church or at the gym or wherever it is you’re hanging out, and everyone else will become a non-performing borrower because the rumor will get around pretty quickly that ABC bank cuts deals to borrowers who don’t pay. Wouldn’t it be great if everyone could not pay? So, the bank will sell their loans for funds like ours.
The way I got into the business was through a complete mistake or experiment. I was buying a lot of short sales back in 2010 or 2011. Short sales are where the homeowner sells the home and the bank accepts less than is owed on the mortgage in full and final settlement. So, I was buying the short sale and the bank came to me one day and said, “Hey, we cannot actually complete that short sale because we sold the loan.” I asked, “Well, who did you sell it to? Did you sell it to some other bank?” They said, “No, we sold it to some local investor.” That piqued my interest. Because outside of the United States, I think in just about every market, it’s not legal for a non-bank to own a mortgage. Whereas in the United States, that’s a fairly common occurrence that banks are not the only owners of mortgages. So, I started researching, and I found that there was a big difference between owning a mortgage and owning a house. If you own the house, you’ve got to find the tenants, you’ve got to make the repairs, you’ve got to pay the taxes, you’ve got to pay the insurance, you’ve got to assume all of the risk that you would assume if you were a rental landlord. I’ve learned over the preceding four or five years that that was an awful lot of work and was taking all my weekends and evenings, and that was with just 30 houses. If you’re a mortgage holder, you don’t have any of those responsibilities. Your job is just to collect payments from borrowers. Now, the wrinkle here is that the borrowers are not paying. So, the question for me was, could I figure out this business, and could I figure out a way to get the borrowers who were not paying on these loans that were being sold to pay? That began the journey of buying non-performing loans instead of houses renting to them.
What we’re ultimately trying to do is to actually keep the people in the house and find a way to help them. I’ve learned the hard way that renting more than 30 houses requires an awful lot of efforts and an awful lot of work, and so 30 houses were basically the most I could do on my own. I started buying mortgages. Now, we’ve a team of 26 people, and we had almost 1000 mortgages when there were just 6 of us. So, it’s a much more scalable business than rental properties. What we do is we buy these loans. The first question that everyone asks is because they think you’re crazy, so they say, “Well, hold on, you’re buying a loan where the borrower isn’t paying. What are you going to do?” The answer to that is, “Well, we’re going to address the cause of the non-payment.” That usually falls into really one of the two things. Either the borrower has abandoned the home and moved to another state and gone away and the home is vacant. We usually try and stay away from those homes.
The other reason for non-paying is that the borrower has had a life event, let’s say they lost their job or their wife lost their job, or something has occurred that meant they couldn’t make their payments. Typically, the first thing they stopped paying is the mortgage, because we all know what happens if you stop making your auto payment or your cell phone payment or your cable payments; you end up with no car or no cell phone or no TV. But you can stop paying your mortgage and really nothing happens for the first 60 days; maybe even 90 days, you will get some messages [Unclear]. But after three or four months, then the bank starts to take it more seriously and they may even start to foreclose, and that’s where we step in. Typically, they’ll sell a loan to us and we’ll go to the borrower. For example, we’ll speak to Mr. Smith and he will say, “Yes, I lost my job. I got six months or nine months behind. So now I own the bank, let’s say $10,000. My problem is I don’t have $10,000 because I’ve been employed.” What we can do is something that the banks cannot do. We will just say, “Okay, let’s just wipe away all the payments that you missed, and you can start making payments again.” That’s how the borrower gets to stay in the home and we get a stream of payments. The person that’s funding that at the end of the day is the bank, because the bank is selling the loan at a discount. So, if it’s $100,000 home, the bank is probably selling that loan for something around $60,000 to $70,000. There’s about a 30% or 35% discount. So, if you look at this, it’s as if you’re buying a house which is a $100,000 house for $65,000, let’s say.
My initial reaction when I heard from a well-known bank that they’re selling the loan; I thought this lady I was speaking to on the phone is making a mistake; she doesn’t mean what she’s saying. But after a few weeks, I figured out and I actually ended up speaking to the owner of the company that had bought the loan, and he was a local investor who used to work as a branch employee and had just figured this business out on its own. I thought, if this guy can figure it out, I can figure it out. For a conference maybe two or three weeks later, I was in Las Vegas. I went out and met with people who were in this business. It was at the time, and indeed still is, kind of a cottage industry. There’s a lot of mom and pop operators who used to work in banks or used to work in mortgage companies or used to work in law practices, who fed up with a small amount of money and started buying a few loans. So, I went to the conference, met with a bunch of people, and sat through all the seminars. At the end of it, I scooped my jaw up off the floor, because I just couldn’t believe that you can compete with the world’s biggest banks. Only in America can someone like me who comes not from the mortgage industry, wasn’t educated in the United States, didn’t do anything here, come here and start a business with just $150,000 I started the business with, which is the price of one home when you’re buying homes. That was enough to cover some of the operating costs, my first licensing, and buying the first few loans.
The first loans worked out spectacularly well, just beyond anyone’s wildest dreams, which was actually a bad thing. Because I thought, finally, the universe recognizes my brilliance. Despite my complete lack of expertise, education or experience in this business, I am so gifted that I figured it out just with my Midas touch that everything I touch turns to gold. But unfortunately, which is blind law and the loans that I had picked were just lucky. In fact, I hadn’t even picked them, the seller had picked them. I didn’t even know how to pick the loans. Unfortunately, or fortunately, that gave me two things. The first thing that gave me was great confidence, which is always big mistake. The second thing it gave me was a bit of a track record. So, I was able to go and talk to investors. To cut a long story short, four months later, I had raised $20 million and bought 1100 more mortgages, which was I think a disaster in one way. Talk about a baptism of fire, but I had way more paper than I could ever manage. I thought 30 homes was difficult to manage, try managing 1100 mortgages.
The first shock came when the paper arrived. I was actually running the business out of my apartments, not even an office, and 70 boxes of those banker boxes, about two feet by one foot, arrived from FedEx with this giant pile of paper. I took it out and started going through it. About two days later, my cell phone starts to ring, because on the purchase and sale agreement with the bank that I was buying this paper from, I had given them my cell phone because I didn’t really have a proper office, I was sitting at my kitchen table. The phone started ringing and ringing and ringing, because now 1100 borrowers had my phone number, and I was just totally unprepared for all of that. So, I like to think that I’m a systematic thinker, but what I didn’t realize was, the day the company get signed, the day you own those loans; you are a 100% percent responsible for them. So that’s when the avalanche of letters and phone calls started.
Then I had to try and build out a team really quickly, which also was a challenge because remember, I didn’t truly have a big background in this space. I had worked at 11 loans at this time and I had done a great job, but what I didn’t realize was that these were the easiest loans in the world to work as the borrowers were very keen to pay. In fact, in some cases, they have been waiting to pay, but the previous owner; the bank wouldn’t accept the payments, so it could not have been easier. But now, I have all sorts of borrowers; some going into bankruptcy, which was a new thing for me, some who felt they had been lent the money and property by the original bank and wants to sue. It really was an avalanche of disasters.
I was hiring people who just knew a bit more than me but that wasn’t a very high bar, in that anyone who ever worked in the mortgage industry really knew more than me. So, it began a two-year baptism of fire before I learned every single thing the hard way. We set up a small office actually in Ohio and I moved out there for a few months, and we just worked through the paper as best we could. I do remember we did only three social things throughout the five months in Ohio. We worked seven days a week, 8am until 10 o’clock at night, just going through the papers, not realizing that I need to 20 or 30 people, not 3 or 4 people. So, like everything, you learn the hard way, and hopefully you never repeat your mistakes of the past. I learned a lot about riding my bike up and down Main Street, Canton in Ohio, which was really the only place that we ever went. We didn’t even need cars; we just went to work and went home. We actually rented a house for three of us and made a couple of tents and worked through all of that paper.
The good thing was, once you built the system, the systems work for up to 100 loans. That was really the ground zero of learning how we were going to build our technology systems. So, through every hardship, there are lessons, and the lesson that we learnt was, if you look at 1 mortgage or 100,000 mortgages, the paperwork is all more or less the same, so a loan from me to you looks the same in every state. Whereas, if you’re trying to buy real estate single homes, every system is different; every yard is different, the taxes are different in every state, everything is different. The mortgage industry is just so much more scalable.
The silver lining to the first year or two of torturous pain, getting started back in 2013 and 2014 was, we were able to create all of the systems and processes manually, that we then spent the following five years automating and streamlining. Now, buying 1,000 mortgages really doesn’t really get anyone’s feathers too ruffled. But way back then, obviously, it was an enormous challenge. Today, we’re bidding at the moment on 3,300 mortgages, and I’m sitting here in an office full of people and its basically clients. People are just clicking away because we’ve built us all of the things that we learned the hard way; we’ve now automated it and streamlined, so it makes the business a lot more scalable. Looking into the future, we’re talking today on the day where the market is down 12% and this corona scare is sweeping the country, and that will lead directly into a lot of people being laid off or furloughed for the next several months, or several weeks at least. That may mean that a lot of people are going to miss mortgage payments, and people like us will end up being able to help them.
Now, all our funds have come from institutional investors. This is a capital intensive, there’s no sense that you’re buying assets and then each asset might be $40,000 or $50,000 a piece, so you’re constantly raising institutional capital. In 2014, the Obama administration came out with the JOBS Act, which is often referred to as crowdfunding. We are one of the first crowdfunds for mortgage. We went through the SEC approval process. After two years of paper filling, we now have a fund which allows us to raise money directly from the public and pay them a target 8% return; but you can’t guarantee 8% because who knows what’s going to happen tomorrow. We’ve made about 17% a year, so we’re on our fourth funds now. Basically, what that will translate into is, half goes to the business and half goes to the investor.
Just go to “automationfinance.com”, you can sign up online, and read the prospectus. It’s a very lengthy document but it really details everything. On the minimum, you don’t need to be a sophisticated investor, anyone with $250 to invest can get started. Although, most people invest quite a bit more than that. We also get a lot of people investing with their self-directed IRA. We pay dividends monthly, and people can reinvest the dividends if they wish. We also offer best efforts liquidity, which means if people want to redeem, we will do that if we have the funds to do so. So, some investors will wish to cash as early, then what we’ll do is if the company has the cash to do so, we will facilitate that transaction. Again, we can’t guarantee it. In fact, we’ve only had one so far, and it took about three days. Most people when they put in money, they leave it, but you never know; events come along and people need to get their cash back. So, if we have the cash on hand, we will repurchase the units from the investor.