The 14 Year Real Estate Party Is Over

Added: 2026-05-27

[00:00:00]We had like a 14-year run.

[00:00:03]Prices just went up. So, if you were a person involved in the real estate business, the land went up. If you built a house, you could sell it almost for whatever the [ __ ] price you could get for it just sold, right? Um and if you're developing units, whether it's commercial, residential, multi-res, doesn't matter.

[00:00:23]Um it was easy to assign a value because you just looked at this straight-up gradient and said, "Yeah, we're going to be on the next leg up." Where it's where we're going to be and that's where the value comes from.

[00:00:35]And so, that means that for those 14 years, we had a [ __ ] ton of people who were right.

[00:00:42]They were just right. I mean, yeah, it was easy. Yeah, it build it, sell it, everything worked out, finance it, lend on it, all good, all good, all good until the moment in time that came in March of 2022.

[00:00:56]And apparently for the land guys, it was a little earlier. My friend friend of the show Jeremiah Shama says, "Oh, we knew something was wrong in '21."

[00:01:05]Something something was off in '21. We didn't have to wait till '22. We knew in early '21 something was going on.

[00:01:11]If you're building developments.

[00:01:14]But for the for the big guys, that's that's for the for the real giants of the industry. So, you could you were caught. Like, you'd just be caught, but the key I think to to what you do and and stop me if I'm wrong in construction lending is you insist that first of all, that a [ __ ] ton be done before you give your first penny, right?

[00:01:36]>> Correct. So, you have to have everything free and clear, foundations and there, permits, you name it.

[00:01:45]Everything's you won't give a nickel until it's and it has to be free and clear. You're not lending on land. Correct. And when that reaches that particular stage, you're ready to introduce some funding.

[00:01:57]Is that a reasonable summary? Yeah, and and beyond that one extra piece is that we are lending to the end user and we are lending for them to build their home. To live in? To live in. And so in many cases the the deal I love the most is the family who sold their home, moved in with their in-laws, and are now building their home because that adds extra incentive to get the finished product done as soon as possible to get the hell out of my in-laws house. And so those are the ones where we love because we know everyone is all dialed in to say let's get this build done. So that's I think another wrinkle to it is that if you're lending to the end user, that's likely going to be their principal residence. You know, it's it's foundationally different than lending to someone who's going to build inventory homes or build on spec with the hopes that they have to sell and quite frankly it's not the home they're going to live in so quite they're going to have to sell unless of course they're going to build rental and that you know, that's another cash flow uh scenario that could work uh but the majority the great majority of the construction we do is for end user for principal residence and that again is a key a key difference. So everything Derek is saying is the way I was taught it should work.

[00:03:11]But this this comes back to Derek's other point that when you go outside that box because you want more lending because the the key thing to talk about is let's say that you're making as a company all the and this is not right but let's again to simplify that the company who's doing this administration, finding these investors, doing the lending, doing the underwriting, doing the distributions, doing the funding on the that spread between what the uh investor's getting as a payment and what the borrower is paying as interest the spread is for the company. The spread is is what is the profit and the operating uh income for the company.

[00:03:52]So, what you have to ask yourself cuz you got you need a certain amount of you just need a certain amount base number of people to to run these operations.

[00:04:00]So, you don't And again, stop me if I'm wrong. You don't need enormously more people.

[00:04:08]And that's all that you you guys are not buying you're not selling t-shirts. I mean, you you you don't have any inventory, okay?

[00:04:15]Um and you don't have a factory. So, you don't need enormously more people to do 300 million of this stuff as to do 100 million, right? Is that a reasonable assessment? I it with efficiency and with clarity, you can you can do a lot of work. Uh it's that it's the less clear you are and the more questions that there are, then then you cannot scale. And so, scaling for me comes with efficiency. So, I agree with you. You can do more with the same amount of people in the same processes uh so long as you're very efficient with your with your lending practices. So, there's a definite incentive to expand business. There's an incentive for growth because that's that [snorts] spread that again, say for the sake of argument 2% is what you make all your money. So, you're going to make a lot more money off three 2% of $300 million than 3% of a of a $100 million. So, that's I think and you made the point, that is where the clarity is lost. That is where the discipline can go out the window because if I have to go down I can't go down the pricing curve because like I can't make enough money to satisfy any investor.

[00:05:23]So, I have to go down you know, we're describing it as a credit curve, but the credit curve people outside the industry misunderstand. It's not about your FICO score.

[00:05:31]Credit curve is not about your FICO score. Credit curve is about your covenants. It's about hey, have I studied their income? Do I understand, you know, who they are? Do I do I understand, just like you just said, are they moving into this house? Is it the house they live in? Or is it some kind of speculative flip that they're trying to do? Um that's all when we say credit curve, that's what we mean, okay?

[00:05:53]So, there is a temptation to grow your business to go down that curve before you let more, well, maybe we don't need to know what his income is. Maybe we don't need to know what her income is.

[00:06:04]Um maybe we just, you know, we got they seem to have a big enough down payment, we're going to be okay.

[00:06:09]Um is that some of the big fatal flaws that people run into? Yeah, and I you know, I think that ultimately during the path of growth, uh we saw many new entrants to the world. And so, you know, whether it be mortgage brokers, whether it be lenders, so many new people have joined. And you know, you can't necessarily join and be a bank. It's a little harder to become a bank. Uh but you can join and become a private lender. And uh and so, ultimately we saw a massive increase in the number of private lenders and what they're doing.

[00:06:41]And ultimately, um not necessarily uh with the same kind of discipline or experience that that the folks with, including myself, at Westboro and and other There's lots of good mix that are that exist in Canada and Ontario. Uh and their disciplined approach to the way they manage their business, the experience that they have. And so, when you've got all these new entrants, all of a sudden, um they're willing to take a bit of a chance. I mean, I can even tell you a story of when we had a broker, you know, in the in say 2021, 2022, things are booming. And he's saying, you know, Derek, can you do a deal in May? It's closing in September. And uh you know, don't even worry about the value. By the time they close, it'll be worth 10% MORE THAN >> [laughter] >> BUT WE'RE UNDERWRITING it today. And I'm like, that you know what? When that when that conversation happened, it's almost like that movie, uh The Big Short, when the guy goes down to Florida and he goes looks around and goes, "There's a problem."

[00:07:33]Like, that's a bubble. There's a bubble.

[00:07:34]>> [laughter] >> That was my bubble day. And I'm like, I I can't believe we're HAVING THIS CONVERSATION. [laughter] LET'S PROJECT the value forward in time, okay? And so and so when you but when you have mortgage brokers like award-winning mortgage brokers because they're relatively new in the industry and they caught just at the right time that things were booming talking to you like that you're thinking to yourself you know what um no we're going to we're not going to be part of that and in time uh listen I hope I hope things continue to go well for a long time but you just know that the market moves in cycles and where it goes up uh to the degree that it did it will either regulate or come back down and you have to be ready for that and I think that ultimately Ron when when people just continued on the wave they thought they'll get one more year they'll do one more condo they'll have one more great whatever and you know you don't always know when the music's going to stop but when it stops um you're accountable for all the decisions you made and they're not the decisions you made the day the music stopped the decisions you made the 24 months 36 months prior to the music stopping.

[00:08:39]You know like I I cheerfully uh maybe not cheerfully but I put up my hand and say I was a guy who was right but actually years before I was right like I I I'm talking about I think this is overvalued I think this is overvalued I think this is overvalued for years and at a certain point you have to accept that that is just as wrong and it's absolutely when you're like five six seven years wrong that is as bad as as saying no it's going to keep going up forever that's almost as bad not quite not quite but You called the condos you were the like as far as everyone in my life you were the first one to call the condo thing and I said I you called it even before I saw it and I kind of said to you you know Ron even a broken clock's right twice a day.

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