One night in May 2016, Zak Karzi and his brother Ace were hanging out in Ace’s backyard in Simi Valley, California, about 40 miles from downtown Los Angeles. Zak had just turned 31; Ace is a year older.
Experienced entrepreneurs, the Karzis were already successful. But they’d grown frustrated with their latest venture, a private money lending firm called Karzi Equities. The brothers simply couldn’t figure out how to increase their loan volume, and they were beginning to consider abandoning the business altogether.
Since 2005, when they moved to California from their native Chicago, Zak and Ace had launched several small companies in various sectors of the real estate industry. They’d had a solid run in traditional mortgages, then stepped away in 2008 as the market tanked. But by early 2014, conditions had improved. Cradling a relatively small nest egg—the profits from their earlier business efforts—the Karzis decided to reenter the fray, this time with a focus on hard money lending.
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Traditional Lenders Were Not Interested in Helping Karzi Equities Grow
In 2014, relying on a handful of brokers to connect them with clients in need of cash for fix-and-flip investments, Karzi Equities lent about $2.5 million for bridge loans. The following year, they nearly doubled that figure to almost $5 million, turning a healthy profit in the process.
But the Karzis had bigger ambitions. Growing up lower-middle class in Chicago, they’d earned pocket money working as golf caddies for some of the city’s most powerful financiers, executives, and developers, and they were determined to hit those same heights themselves. They dreamed of building a “monster” success.
But at the time, all they were hitting was a ceiling. With the capital they had available—their nest egg plus some small-scale infusions from a friends-and-family fund—the Karzis couldn’t afford to increase their loan volume. And there were no obvious alternative sources of funding. As any reasonably experienced hard money lender knows, traditional lenders—especially banks—are averse to lend to other lenders.
2016: From $5 Million to $12 Million in Loans
That night in Ace’s backyard, Zak told his brother that he’d heard of several new companies that might be able to help them. These companies were run like tech startups and could provide capital via crowdfunding and other unconventional means.
Before going to bed, Ace researched a few of them online and reached out to each of them. He got a reply almost immediately—first thing the next morning—from PeerStreet.
That responsiveness impressed the Karzis. Here was a company that seemed to do business at the same pace they did. They decided to give the startup a shot.
In 2016, the Karzis began funding loans through the PeerStreet marketplace, which allowed them to recapitalize and issue new loans through their growing network of brokers. They were able to tap into PeerStreet’s diverse sources of investment capital, without the pain of growing their own fund.
They appreciated the fact that the PeerStreet marketplace connects them to tens of thousands of individual investors, as well as well-known institutions, banks, and capital funds, that would be virtually impossible to attract on their own. In that first year, the duo grew their business from $5 million to $12 million in loans thanks to the new partnership.
Taking Advantage of the PeerStreet Business Model
As the Karzis’ lending capacity expanded, so did their marketing efforts. They had learned early to be selective about the brokers they dealt with—avoiding, for example, those who tried to change the terms of a loan at the signing table.
But with a limited pool of capital, they also hadn’t needed more than a few dependable contacts to bring them borrowers. Now, using a combination of email, phone, snail-mail outreach, and good old-fashioned networking, Zak and Ace grew the referral structure that fed their business, eventually reaching 35 brokers spread over 15 California counties.
In important ways, the Karzi brothers remained conservative, largely attached to their original business model—originating loans on their own, then selling them to PeerStreet out of their portfolio.
As they came to realize, their approach—while much better than it had been in 2014—still wasn’t taking full advantage of the capital and flexible working structure available from PeerStreet.
In addition to acquiring funded loans for investment through the PeerStreet marketplace, PeerStreet also funds loans into origination—routing funds from investors through professional lending partners to borrowers.
That was a potentially huge resource the Karzi brothers wasn’t tapping into.
“We didn’t want to take the chance of having someone else fund our loans,” Zak explained. “It was about being able to provide the speed and due diligence that our customers required. We didn’t want to ruin relationships by putting our fate in someone else’s hands.”
2017: $50 Million in Loans Originated—with Room to Grow
Little by little, they embraced PeerStreet’s loan-to-origination model and began using it to fund many of their loans.
They also learned the ins and outs of the PeerStreet’s technology platform, working with analysts and underwriters through advanced software to more closely align their lending practices with PeerStreet’s parameters and get deals done incredibly quickly. The result? In 2017, Karzai Equities issued close to $50 million worth of loans.
And there was still room for growth.
At the beginning of 2018, Zak and Ace set a goal of $5 million in loan volume per month—$60 million for the year. Initially, Zak worried they had set a target they wouldn’t be able to hit.
It quickly became apparent, however, that he and Ace had actually underestimated their capacity. They hit $60 million by July; by the end of September, they were up to $85 million and on course for $110 million to $115 million by year-end. As they refined and scaled-up the strategies they’d begun to implement in 2017, the Karzi brothers also ventured into new territory.
For most of its existence, Karzi Equities had issued loans to two basic kinds of customers: people looking to fix-and-flip and people looking to buy-to-rent. The loans were short-term—12 months at a maximum.
“When you are working with your own money, you have limitations. It’s a lot harder to move quickly and re-use capital in short time periods,” Zak said. But with PeerStreet behind them, the Karzis are adding new options to their portfolio, including commercial loans, construction loans, and loans for manufactured homes. They also began offering 36-month loans and five-year buy-to-rent loans.
2018 and 2019: $100 Million+ and Still Growing
Banks still won’t fund the Karzi brothers’ business. But that hardly matters now. PeerStreet has stepped into this void, helping private money lenders grow their business without taking out a small business loan or getting a line of credit. And PeerStreet continues to expand into more and different loan types, from SFR to commercial and multifamily properties.
“When you have a big institution [like PeerStreet] behind you, they give you the comfort to step into those new spaces,” Zak said. “And it makes it a lot easier to step in with your own money.”
In October, Karzi Equities opened shop in Illinois, and Zak and Ace have begun to think of their business differently.
“We’re really not just a hard money lender, but an ‘Alt-A lender’,” Zak told us. “As an Alt-A lender, we offer a lot more than your typical hard money product.”
The Karzis run a lean operation—just the two of them plus three other full-time employees. The additional technology and services that PeerStreet provides help keep efficiency high and costs low. On-demand reporting across their portfolio and free, automated loan document creation tools enable Karzi to work faster, stay organized, and communicate better internally.
The quality of their underwriting process and the performance of their loans over time strengthened the relationship between their organization and PeerStreet, which helped as they began increasing their volume.
In 2019, they plan to expand into ground-up construction—like the developers they used to caddy for.
But they won’t be shuttering their lending business any time soon. “Our next focus is going to be how to capture higher dollar [loan] amounts,” Zak said.
“We’re not looking at trying to write loans for fifty, sixty, or eighty-thousand anymore. It’s the same amount of effort and energy on those loans as for a million-dollar or 2-million dollar deal. The end goal is to be able to lend $250 million a year.”
“With PeerStreet and the current setup we have, those numbers are very doable.”
Lend More With These Best Practices
We asked Zak for specific advice he had for anyone looking to expand their hard money lending business. Here’s what he said:
1) Write Your Own Paper
Zak attributes 60% of Karzi Equities’ success to their being willing and able to fund their own loans. It has made them fast and reliable, and they win the trust of their clients as a result. It also gave them a solid base on which to build when they found a way to expand. Private money lenders who don’t back loans with their own capital find themselves at a comparative disadvantage.
2) Leverage Your Track Record
One of the keys to Karzi’s success is its ability to find new brokers and borrowers. For that, the most important asset you have is your reputation and track record. Make your brokers trust you, and they will tell others. Give borrowers a great experience, and they will tell others. By keeping the quality of your loans high, you’ll deal with fewer late payments and defaults—enabling you to focus more on growth and less on servicing.
3) Get Some of that Paper Off Your Books
Karzi Equities never had any luck getting help from traditional banks or capital institutions. But by partnering with PeerStreet, they were able to make their money go further. In selling off a portion of their loans, they freed up cash, which they could then use to write more loans to high-quality borrowers. To follow their model, find a way to get some of your loans off your books.
4) Work Your Network
When Karzi’s lending capacity began to grow, they needed to find more borrowers, many of whom now come through referrals—a source they initially neglected.
“Back in 2005, we didn’t capitalize on referrals,” Zak said. “There is no competition amongst brokers. For example, we had one individual at Keller Williams who was referred to us by another broker in the same office. We ended up getting three deals in a month and a half from that one Keller Williams office. It’s all about performing and showing these brokers that you can get the deal done. You deliver on what you promise, and they will put your name out there.”
5) Take Full Advantage of PeerStreet’s Business Model
If Karzi Equities had stuck with their original model of partnership with PeerStreet, simply selling off a portion of their existing loans, they’d never have been able to contemplate reaching $250 million in annual loan volume. Having PeerStreet fund loans to origination and then expanding into new areas—construction loans, commercial loans, etc.—initially caused the Karzi brothers anxiety; those things didn’t fit with their first operating model. But diversifying has proven central to growing their business.
Still, in spite of how far he and his brother have come, Zak emphasized the continued importance of having their own money at stake.
“Number one is how much of your own capital is in the game,” he says. “If we didn’t have the ability to write our own paper in the beginning, our volumes would be much lower.”
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