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Education wise I have a master's degree in economics; I completed Harvard's strategic marketing management program and I am a Ph.D. candidate at the Chicago School. I'm about two thirds of the way through or somewhere between a third of the way through my dissertation on organizational leadership. Hopefully by the end of this year early next year I'll be I'll be a doctor; Dr. Steve Kaufman. That's a little bit about my education. I'm a lifelong learner in fact when people ask my number one hobby I always tell them that it is learning and education. And regarding how I ended up as the founder of Zeus, I'm also a CPA. I'm not practicing but I am licensed and in my early days I went to school at night finishing my accounting degree and I worked in public accounting during the day. And this was when Bill Clinton was president. Dating myself just a little bit I'm not that old. Bill Clinton was the first president to recognize that in the United States GDP is sourced 18 to 22 percent from real estate. Said another way; somewhere between 18 and 22 cents of every dollar made in this country is made in the real estate industry. He realized that if there was one segment that he could easily influence it was the real estate industry by making financing a lot more available. He started pressuring Fannie Mae and Freddie Mac to lower their downpayment requirements from the 20 percent down to the 10 percent down to the 5 percent down to zero.
Much of what you think is the mortgage crisis of 2008 really started in the late 90s and that economic experience that we had was so positive was really a part of that. During that time I happened to be a student at night and working in the day in public accounting. The firm where I worked ended up getting mortgage companies and mortgage banks as clients. At the same time I was a real estate investor. I owned three rental properties last time I was 21 years old and I've never inherited anything other than a little bit of medical debt and funeral expenses, so I don't come from money. I grew up incredibly poor. In fact a lot of people who know my true story know that I grew up in a trailer park and for about 80 percent of my life until I was in high school, I did not have electricity. I did not have a telephone. My mother made my clothes and she gave us IOUs for our birthdays and most holidays.
I have four older siblings none of them graduated high school so I figured I would do what they all did which is I dropped out of high school in the ninth grade. I went to work like them because that's what you did where I grew up in a trailer park. Everyone went to work and then sometime around the age 17 I realized that I had to do something different than everyone else around me or I'd end up just like everyone else around me.
I became addicted to drugs. I drug myself to work, I drug myself to school, I drug myself to the bank to save money. I drug myself to volunteering. I started dragging myself to all these places that I know that everyone else in my neighborhood in my trailer park wouldn't do so that I could have a life that they wouldn't have. And I've been doing it ever since. Circa 2000-2001 I was working in public accounting and I decide that maybe I should consult in the mortgage industry or lending industry. During that entire process working for a few clients I decided to start my own firm and I called it Zeus because Zeus is the god of all the gods in Greek mythology and we could simply be the god of all gods in the lending space. That's where it started about 15 years ago and we've had an amazing ride. Lots of great people making a lot of difference for people.
JOBS Act Miracle
The Jobs Act helped in a major way. We were doing hard money lending prior to the JOBS Act and prior to that if you said the word ‘hard money’ even though it was a great tool that a lot of investors loved and used, the JOBS Act did something really miraculous. It's like the war on drugs or making the estate tax the death tax or what global warming is to climate change or in the 80s they had a variable rate mortgages and now they're called ARMs, adjustable rate mortgages. All of these name changes have a dramatic impact on us as consumers as a whole. The JOBS Act took crowdfunding which was basically sourcing investments for real estate from different individuals and opening up the opportunity to do transactions that a traditional bank wouldn't do. Well that's called hard money in the real estate industry and it's been a product for 30 years or more. The change of name transformed our ability to market mainstream a product that we were kind of keeping in the shadows. We launched a few years ago, ZeusCrowdfunding.com which last year was ranked the seventh best site in the country and the number one new site in the country for investors in crowdfunding real estate. A big part of that is because of our commitment to transparency. What it really did was it allowed us to move hard money with a slight name change into the center stage and market it in a way that people were willing to accept it.
Funding of Loans
The changes were significant; small shifts but they've had a major impact in. Prior to the JOBS Act when we funded a loan we funded it with our own capital and then we sought out individual investors that we knew, friends and family and acquaintances that may want to invest in that loan, one at a time to only accredited investors. Very slow tedious process. Then literally overnight we were able, thanks to the JOBS Act, to put that transaction on a Web site ZeusCrowdfunding.com, under our view investment section and then investors all over the globe including Singapore are able to see the deal and invest in it after we've already funded it. It made our job to solicit for funds so much easier. Ironically what used to be our number one problem, which is getting investor capital, now we do not even think about it. It is so overrun that we've raised our minimums we can't handle the amount of people who want to invest with us and that's not a plug. We really cannot.
Discovering Crowdfunding
I didn't even know that the JOBS Act had been passed. I didn't even know about real estate crowdfunding until a friend of mine who was an avid and real estate investor asked me to vet a site where he was going to invest in some transactions online. This is by far without a doubt one of the top 10 sites in the country and when we looked at the deal closely together he asked for my underwriting expertise. We like to say that our firm is good at two things. Number one by far is risk assessment thru underwriting and number two is marketing as in giving our customers borrowers and investors what they really want. Those are the two things we're good at. Well he knew that because of my accounting background and some of the things I've done in my career that I would have a good eye for this and so we looked at the deal. We thought well this is a terrible deal but more importantly I thought how are they able to ask you for money they don't even know you. Prior to that you had to be going to the accreditation process and everything else and so we'd explored their site and we read about the JOBS Act.
I had never learned about it before. I'd never heard it in mainstream media and this was probably four years ago five years ago and I really thought that this is going to be a place to be. With peer to peer business growing dramatically across the globe when you think about Uber or you think about Airbnb, Uber is not going to shut down all car services or taxis but it is taking them and making a meaningful dip. Airbnb is not going to shut down Marriot but it's taking a meaningful dip of their business. I feel the same way about crowdfunding for real estate that we're not going to shut down the banks but we are going to make a meaningful difference a meaningful dip in their market share. The way I tied them together is I saw what another crowdfunding site was doing. I was already doing that but doing it the hard way and I realized that we could create our own platform make it a little bit better and offer the same product but just make a little bit better.
We were in a place that we needed a web presence so we created the Web site and that was just simply from reading the JOBS Act and reading what was permissible. Anybody listening to your podcast or your interviews can read the JOBS Act. It's written in reasonably straightforward terms. We read that and we knew that we needed a Web site that had enough disclaimers that let investors know that they are at a risk of losing their investment if they do a non-guaranteed investment.
Guaranteed Investment
I'd be remiss if I didn't say that we are one of the only sites in the country to offer guaranteed investments through our 15 year corporate guarantee. We very rarely actually make non-guaranteed investments. Almost all of our investments are guaranteed which means if something happens to the asset we still pay the investor. We foreclose, repurpose it and the investor is never negatively impacted at all. We were highly discouraged, we were even mocked once in an interview that we were doing that by another by another platform. But it's worked, it's our model.
We've funded almost $3 billion in mortgages. Our investors’ only complaint is that we're we aren't fast enough or not have we don't have enough deal flow.
We’ve been guaranteeing loans for more than 15 years. Since prior to the existence of the company. When I was making loans prior to the existence of Zeus, I was making loans and if I had to bring in an investor to help me recycle my cash to do it so I could do more loans I would tell them Look my new company will guarantee this.
To describe how we do that, I use this example. If you're going for heart surgery you always ask for a second opinion because you want to know if someone else has a different view of what's happening. But when you get on an airplane you never even ask for the resume or the experience of the pilot and the co-pilot. The reason why is because on the heart surgery if something goes wrong you stay there but he gets up and goes back home to his family that night and nothing impacted him other than he's regretful But the pilot you don't have to ask for their resumes because if the plane goes down you all go down. In our business model we're partners with our investor to the point that we're confident in what we're doing. We want to give them the reassurance that we're pilots with you on this. We're not heart surgeons, you're not taking all the risk and we're just getting a slice and dice where we think is appropriate. We're in it together.
Think of it another way. If you're really confident in your underwriting, why wouldn’t you guarantee it? Then a third element is I'm already putting my own money in the deal upfront anyway. No investor ever sees a deal on our platform ever that we haven't first lent our money unless it's listed as non-guaranteed. I'm so confident in the transaction I've already given my own cash. I've already underwritten it with my team. My underwriter who works here, on of my first two employees from 15 years ago who both still work here, if she says if we're going to do the transaction based on our matrix and our underwriting criteria and we fund it why would we not guarantee it to an investor.
Underwriting a Guarantee
We have a less than 1 percent default rate on our portfolio. We've never had a down year in our portfolio. It's not a matter of if, it's when you take back an asset. If you're in this space that's not the issue. We even do a little bit of thriving through recessionary periods. We like this business during corrections and economic downturns because the industry itself is macro economically countercyclical on a full scale. This industry does better. It does better when banks retract and the economy contracts. People need alternative financing. You could say we were potentially losing business, losing deals because property values were dropping. On the other hand you could say we were gaining market share because of the amount of business we were doing.
I will tell you in 2008 the entire year when we took back five transactions and of those five transactions two of them three of them we sold within probably three to four months and we were made whole or made a profit. Two of them we had to hold for another year and a half. When that happened we gave the investor the option to pay them off and keep the asset, or to keep paying them as we were paying them before. We ended up when we sold the assets about a year and a half give or take later we made a somewhere in the low 20 IRR in our money net of what we had to pay to the investor. We came out very ahead on the transaction and we were happy to have maintained the investors.
The question is do you have the staying power to do that based on your portfolio and so a small lender who guarantees they're guaranteeing that because they probably can't get the money anywhere else. But our company has no debt. We service and manage all of our own assets and we're perfectly positioned to repurpose based on the foundation of the company. One other thing that we do is invest in assets and so while we're not a home investors franchise, we don't actively buy residential property, but we do do a few commercial projects a year that we redevelop that are more what I call Mom and Pop commercial real estate which is $10 million or less. We understand what it's like to take back the property and to repurpose it. We prefer to only be in the lending business when we do a loan to lend on it. But we understand if a property has to be taken back what to do with it. That’s how we underwrite our guarantee.