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“In the beginning, we were just a couple of investors.”

That’s Dave Van Horn, CEO of PPR Note Co, a holding company operating within the mortgage advisory and fund management industry, that manages residential mortgage investment funds collateralized by real estate assets from across the United States.

Started in 2007 by four partners (now three) who saw an opportunity in distressed debt, PPR Note Co was initially run as ‘an investment club’ as Dave likes to say. Over the past five years, however, the partners have “gotten serious about the business”. The result? They’ve more than tripled the company’s top line and heading into 2020 are well on their way to over $65M in revenue.

Their path to growth, of course, hasn’t been a straight line. And, as with many entrepreneurs who start off with a great idea, Dave and his partners have had their share of lessons along the way.

The Opportunity and the Idea

Their story started with an opportunity – and an idea, as Dave shared with me in a recent conversation.

“Back in 2006, 2007 you could see the writing on the wall.”

“Back in 2006, 2007 you could see the writing on the wall. I’d been in real estate since 1987, John (Sweeney – his one partner) was a mortgage originator, my other partner Bob was also a fundraiser and investor. We knew that there was going to be a lot of distressed debt with the collapse of the housing market.” Dave smiles. Where some see trouble, others see opportunity.

“To amplify my investing, a few years prior I had started an investor group called RING (Real Estate Investors Networking Group). What began with just 12 people in the early 2000’s had since grown to meetings in 6 cities in 5 states with over 8,000 members. My job at the group was to interview potential speakers. Then a man from Wall Street came down to Philadelphia to talk about something I never really heard of – note investing, more specifically delinquent 2nd mortgage note investing.”

Dave as intrigued and booked him for a presentation. “After he spoke to the group, like most people who hear a new exciting idea, I did nothing,” Dave chuckles, before adding, “But fortunately, my future partner John did.”

John had invested with the gentlemen in order to learn more about the business and make a passive return, Then, he reached out to his future partners saying, ‘Hey, let’s buy some of these distressed notes ourselves, turn them around, get them re-performing and we’ll cash flow from the modified payment plans.”

As a landlord who had become tired of dealing with tenants himself, Dave loved the idea of a cash-flowing tenantless Real Estate investment, one where you didn’t have to worry about maintenance or the property itself. But there was one problem: Second mortgage notes or “Junior liens” as they’re often referred to, hadn’t been around all that long so there was never much of a history of default with an upmarket.

“No one else was teaching the junior lien space that we could learn from,” he shares, “So we decided to work from our own capital to test the concept and teach ourselves. And then we quickly learned, no one else knew what a delinquent junior lien even was!  So we had to become teachers as well.”

“Initially we used our own money to get going, and of course we ran out.  So we had to think of a new plan to start to scale.”

The Education and the Path

They started in an old ReMax office that had closed, taking advantage of the downturn in real estate. “As a Realtor, I had gone from selling 75 or 80 properties a year to about 7. So the rent at a defunct Real Estate brokerage was cheap,” Dave says. “Initially we used our own money to get going, and of course we ran out.  So we had to think of a new plan to start to scale.”

With no debt or capital partners, Dave and his team had to get creative. Working on their marketing and outreach early on, he said, “I knew enough about raising capital and had a large network, so I took on the fundraising role. John being the analytical mortgage lender eventually turning towards the acquisitions department.”  Bob Paulus, the third partner, with a knack for negotiation, found his niche spearheading the “work out” or “loan modification” part of the equation.

“As they handled the operations side of the business, I started teaching people what this industry actually was. We’d hold seminars, tour local Real Estate groups, and slowly but surely we started raising capital to acquire some mortgages. But then we had to also think about the exit.”

“We were banging our heads against the wall, and we had to ask ourselves, ‘what would make people comfortable with investing in a new type of an investment they had never seen or heard of before?’

The Dilemma and the Irresistible Offer

PPR could buy the notes and modify them, but when it came time to sell and recapitalize…there wasn’t much of market for re-performing 2nd mortgages. So they had to create one.

Through his teaching, in person and writing a blog for investor websites like BiggerPockets, people started to come around and understand the business. To alleviate fears about buying an asset that was previously upside down, especially one that they couldn’t see or touch like hard property, Dave shares another creative strategy.

“We were banging our heads against the wall, and we had to ask ourselves, ‘what would make people comfortable with investing in a new type of an investment they had never seen or heard of before?’ And that’s when we came up with the idea of ‘Let’s create a warranty.’ Our guarantee? People couldn’t lose their initial investment. It became our ‘irresistible offer’.”

The partners didn’t know what that would actually look like however. “No one was doing it,” Dave laughs.  “Our warranty was and is the return of the principal investment minus payments received. What’s funny is, when you really look at it, that’s similar to an interest free loan to the fund in the event of a buy back. So, if someone exercises the warranty, in the end it didn’t cost us much, but it was a distinguishing marketing feature that made people feel comfortable about buying our notes and eventually even investing in our company.” And with that the business started taking off.

The Lessons

Understand your Market and Don’t be Afraid to shift the Model

Things were going pretty well for a while but as the market started to rebound, distressed product started to dwindle. Dave explains.

“Lending swung the other way after the crash in ’08. There were less and less 2nd mortgages being written for borrowers and in turn, less distressed ones that we could buy. There just wasn’t enough product out there for us to buy and see any real growth. So we had to turn to 1st mortgages – which there’s basically an endless supply of.”

With thinner margins and more tools and people necessary to build their growing first lien shop, how could they expect the same if not more of a profit?

While more abundant and more secure than a 2nd mortgage, 1st mortgages also come at a higher purchase price, so there are thinner margins. They’re also more property and location specific since you’re not just dealing with the paper, but often times the hard, underlying asset itself.

About five years ago, PPR gradually shifted from the junior lien space, with a lower barrier of entry, into the first mortgage space, changing from just asset management and servicing, to fund management and surveillance. “We eventually outsourced the servicing of notes to remain more compliant, and, because that allows you to manage a lot more assets with fewer people while deploying more capital.”

So now PPR could deploy more money and buy more product, but with thinner margins and more tools and people necessary to build their growing first lien shop, how could they expect the same if not more of a profit? “Easy. We lowered our cost of capital. Well maybe not so easy,” he chuckles again.

The lower cost of capital had to come with another creative idea: liquidity. “As fund managers we started out raising capital at really high rates, like 18%. So high that people were almost scared! A high rate spelled volatility in many people’s eyes. But then as time went on and we built our base of fund investors, we managed to lower the rates down with each new offering. Now offering 4 different options. Two longer term funds with a preferred return of 10% for 3 years, 8% for 1 year. And now two liquidity offerings at 4% and 60 days or 6% and 90 days.”

Know the Organization’s Capability and Create the right Infrastructure to support Growth

Dave pauses, reflecting on their progress and the detours.

“We’ve done a lot of bootstrapping over the years, figuring out what we were good at along the way, but we’ve definitely missed a few things.  We didn’t make enough of an investment in accounting and IT in the beginning for instance and now we’re running hard to make up for that. I knew enough about Marketing that I could take on that role initially, but then I became the weakest link. I held on too long to my strengths instead of properly delegating before letting go. I’m working hard not to do that in the CEO role,” he adds.

“…It’s the Human Capital that’s just as important, if not more important, then having Financial Capital.”

Dave’s biggest lesson learned, he freely admits, is the importance of the right people in the right seats. And understanding how the org chart needs to change and evolve as the company grows.  “Putting in place more accountability, clearly defining scorecards with Key Performance Indicators (KPI’s) and responsibilities for each role has been our biggest challenge, and a big ‘aha’ for the partners.”

But Dave knows that implementing the right organizational structure and accountability is critical if they want to reach their BHAG of $1 Billion under assets.

“There’s lots more capital in the market right now, we’re poised for the next downturn (where we’ll see even more product with a lower price point), and others are interested in leveraging the core capability that we’ve developed. The internet has also transformed the landscape. But it’s the Human Capital that’s just as important, if not more important, then having Financial Capital.  And that’s what we’re focused on right now. Having the right people to manage the throughput of the business model. Buying it, turning it around and then going and getting some more.”

PPR Note Co Team

PPR Note Co Team

Ensure that your Stakeholders are on the same page

Dave and his team have also worked hard to get and keep the team on the same page as they’ve grown.

“We’ve worked on our Vision clarity (They’ve leveraged the work of Ari Weinzwig of Zingerman’s fame and his Vision framework) and have stayed on top of our plan with Quarterly Meetings and Weekly Tacticals.”

The leadership team has also focused on creating a culture rooted in shared Core Values with a clear Core Purpose to “Share, build, and preserve wealth”.  Not just by helping the homeowner, but also by leaving everyone in the communities in which they work in a better place.

“You can’t get where you want to go, without help.”

“The CEO is the steward of the Culture,” Dave states simply. “Without it, the secret sauce goes away.  It’s got to be relationship-based.  With the employees, with customers and with vendors.  You have to have people that care. And that’s what we’re striving to do as we move on to our next phase of growth.”

Never be afraid to ask for Help

Dave’s biggest learning? If you don’t have the experience and expertise, you can’t get where you want to go, without help.

“Having CEO Think Tank® and the Scaling Up Coaching support, reaching out to thought-leaders like Lewis Schiff, Randy Nelson and Tony Robbins, having access to and meeting with other businesses who are outside our industry. That’s been invaluable. That’s what keeps us creative.”

“I’d urge any growing entrepreneur who wants to succeed to branch out and look for learning and growth opportunities, for yourself and your team.”

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