Construction Risk Mitigation

John Harcar (00:01.318)
Hey guys, welcome back to the show. You know, I’m here with Marcus Carter and what we’re going to talk about is construction risk mitigation, right? Hey guys, here at Investor Fuel, we bring up all these things to really help investors, service providers and all real estate entrepreneurs, 2 to 5X their business, Giving them tools to be able to help them grow a business they want to grow and live a life they want to live. You know, with that being said, Marcus, welcome to the show.

Marcus Carter (00:29.218)
Yeah, thanks, John. Happy to be here. Appreciate the invite. Yeah.

John Harcar (00:30.758)
Yeah, awesome. I’m definitely interested to learn more about that construction risk mitigation. It’s like a tongue twister for me. You try to say it fast enough, And I want to learn more. Before we get into all that, why don’t you tell our audience a little bit more about who is Marcus, how you got into real estate or lending, and listen a little bit more about you.

Marcus Carter (00:39.392)
It is. It is.

Marcus Carter (00:50.158)
Yeah.

Yeah, so quick macro view of who I am. So I graduated here from USD in San Diego and got a finance degree. And actually, I landed in lending in 94. I really didn’t know what I wanted to do, but I got kind of this entree into residential lending and quickly gravitated to the private money space and opened a small little boutique private money lender in San Diego, a lending company in San Diego back in 99. And so kind of dating myself a little bit.

John Harcar (01:21.636)
You

Marcus Carter (01:22.614)
Yeah, did a lot of construction lending, John. Did a lot of construction lending, a lot of ground-up construction, a lot of rehab financing. And it was all funded privately. We had a group of investors that would put money into trustees, and we would fund these transactions. And then through that, I was utilizing. So when you fund a construction loan, you obviously can’t disperse all the money to the contractor up front or the owner.

John Harcar (01:26.138)
Mm-hmm. Okay.

John Harcar (01:34.617)
Okay.

John Harcar (01:50.732)
Right,

Marcus Carter (01:51.576)
You got to hold it back and you have to use a mechanism to actually hold that back. you want to do it properly. You want to disperse that money properly. You want to make sure the work’s been completed. You want to make sure that lien releases are issued. And then you want to make sure everybody that’s owed money on that project as it goes along the way through that draw process gets paid properly. So I was using a company back then, La Mesa Lumber had a fun control business and that’s what they did. But fast forward to 07.

John Harcar (02:11.148)
Right.

Marcus Carter (02:21.399)
they decided to shut down their business, their fund control business. And so I’m pretty entrepreneurial and I like businesses and I thought, gosh, this is a huge need. And there’s not a lot of places that do fund control and construction risk mitigation specifically for lenders. And so we took that business over. We started La Mesa Fund Control and escrow back then, this is 2007. And we’ve been grown it ever since. We’re probably…

John Harcar (02:24.504)
okay.

John Harcar (02:38.564)
Right?

John Harcar (02:44.77)
Interesting.

Marcus Carter (02:50.157)
the third largest nationwide provider of construction risk mitigation in the country. And we do, we focus on really three main pillars of our business are pre-construction reviews. We review a construction project upfront. We handle the disbursements, so we manage the construction project through fund control. And then we do the inspections all the way through that process. So we started that business back in 07 and we’ve been growing it ever since.

John Harcar (03:14.542)
Okay.

Marcus Carter (03:19.437)
It’s been a super fun ride. work with all different types of lenders, banks and finance companies and lot of private money lenders and investors and municipalities. It covers a lot of territory.

John Harcar (03:31.896)
Right.

Awesome. Well, and for some of our folks that are listening that maybe aren’t as familiar with some of the terms, the real estate terms, I mean, kind of give me a little bit more of a general idea. What is that construction risk mitigation and why is it important?

Marcus Carter (03:49.57)
Yeah, yeah. Well, from a lending standpoint, construction lending is probably the riskiest type of lending that you can do. Because it’s not just, it’s after you fund that loan, what happens. And you’ve got a project that’s moving. You’ve got people coming and going. You got contractors there. You got workers there. You got sticks going up in the air. You got all sorts of moving parts when it comes to your collateral. So from a lending standpoint, you really have to have the back.

end of your business buttoned up. And you’ve got to be able to manage that disbursement process and make sure that that project, your collateral is actually getting built. mean, last thing in the world you want is your collateral not to get built or to get half built or to have problems along the way. So that’s really the genesis behind fund control. That’s really where it was created. It was probably started 50 years ago. There were a few companies out there that were doing it.

John Harcar (04:21.445)
sure.

John Harcar (04:38.575)
Got it.

John Harcar (04:46.671)
Mm-hmm.

Marcus Carter (04:48.599)
And it was really a lender product that allowed lenders to kind of manage that disbursement and that draw process through construction.

John Harcar (04:56.015)
Okay. So you were doing this before you started this company. Is there any special type of things you had to get or any type of licensing to be able to do all this type of stuff for it?

Marcus Carter (05:03.01)
Yeah.

Great question. Yeah. we are a licensed and bonded independent escrow company in California, which, and we actually hold two licenses. We hold a traditional escrow license and also a joint control license. And that allows us to disperse funds, hold money and then disperse money in phases for construction projects. yeah. So it’s a DFPI license. We have to have audited financials every year. It’s a pain in the rear end, but we got to do it. yeah. So.

John Harcar (05:24.463)
Awesome.

John Harcar (05:32.045)
Yep. How have, and I am sure, you know, once you say California, we both thought about it. How have these whole fire situation things? How have all this? Cause I know it changed a big landscape of insurance, right? How has that or has it has any, have any effect on you and your business?

Marcus Carter (05:44.033)
Yeah.

Marcus Carter (05:49.72)
Well, we work with a lot of lenders and a lot of homeowners who have had fire damage and have their homes burned down. So right now, we have probably already onboarded maybe 10 or 15 projects up in the LA area that are going to be rebuilt. So right now, some of them are just going through the kind of cleaning up the lots, the mitigation of that lot and cleaning it out, making sure that the soils are clean at that point.

It’s really what the city’s requiring. So they’re working with engineering firms that are ultimately having to go through and actually clean the dirt and clean the lot up before they go back in for permits and actually rebuild that project. So yeah, we’re doing a lot of that right now. So it’s kind of in the infancy stage just because the fire has just, they just happened. So yeah. Yeah.

John Harcar (06:20.239)
Mm-hmm.

John Harcar (06:27.429)
Got it.

John Harcar (06:32.238)
Okay.

John Harcar (06:37.465)
They just have, yeah, they’re still sifting through a lot of stuff. Are there any specific type of properties that you guys specialize in that you focus in? mean, do you all commercial? Do you do all residential, everything?

Marcus Carter (06:49.421)
Yeah, John, across the board, it covers all different types of projects, any type of construction project. But probably 75 % of our business is residential. So the vast majority of the projects that we do are residential. And they can be as small as a little $20,000 or $30,000 renovation projects, flip projects up to $350 million ground up construction project in Idaho. And they’re building a 200 unit apartment complex.

John Harcar (07:08.09)
Mm-hmm.

John Harcar (07:15.801)
Sure.

Marcus Carter (07:18.797)
So we see it all. We see it all.

John Harcar (07:20.719)
There’s a lot of those 200 unit apartment complexes going up out here. We see them all the time out here. Interesting. Now, do you lend on specific projects? are there like a boundary? Like what you would lend on versus what you wouldn’t lend on, or you would work with what you wouldn’t?

Marcus Carter (07:23.723)
There are. Yeah.

Marcus Carter (07:41.006)
Yeah, so we’re not a lender. We’re strictly a service provider for lenders. So for instance, Axos Bank might hire us because they’re going to fund a $4 million ground up construction project of somebody’s dream home in Rancho Santa Fe. And so they’re going to hire us to actually manage that disbursement process. And then

John Harcar (07:44.791)
Okay, alright. Got it.

John Harcar (08:00.27)
Okay.

Marcus Carter (08:07.179)
do the site inspections, and make sure the work’s getting performed, and then disperse those funds all the way through that construction project. So when I say we work with a lot of different lenders, that’s really what we do. We are. We’re a service provider specifically for lenders providing risk mitigation services for that lender. But that’s not to say that that’s all that we do, because we have a lot of investors that work with us too. So we have investors that want to raise money.

John Harcar (08:16.931)
That’s what you mean. You are that middle guy between the lender and the contractors. Yeah.

John Harcar (08:27.704)
Awesome.

John Harcar (08:33.829)
Mm-hmm.

Marcus Carter (08:36.749)
or they’re raising money for a development project. And let’s say they’ve got three or four investors that want to put money into a development project. We can actually hold the money for them. We’ll hold the money and then track that money, give the investors complete visibility on where the money is going. And as they need money for the architecture and the engineer and all the entitlement work that goes into that development over the course of a year, we can hold those dollars so the investors see exactly where it’s going. We actually do a decent amount of that.

John Harcar (08:48.236)
Okay.

John Harcar (08:58.383)
Got it.

Marcus Carter (09:07.381)
So it’s interesting who needs our services.

John Harcar (09:11.945)
And that’s what I was going to talk about next. Who is your avatar? Who is the people you work with? Are you direct to investor? What are you doing?

Marcus Carter (09:19.319)
Both, yeah, we have a lot of private money investors that utilize our services. some builders, builders will hire us just to manage that disbursement process for them. Predominantly, it’s lenders. mean, predominantly our avatar is probably a lender. mean, our ideal avatar is a national lender who’s got a massive footprint that wants to fund construction loans all over the country. So that’s.

John Harcar (09:47.454)
huh.

Marcus Carter (09:47.95)
That’s an ideal client. But we deal with small onesy, twosy operations and credit unions and finance companies and so you name it. So, yeah.

John Harcar (09:56.334)
Mm-hmm got it. kind of challenges in the mark are out there in the market right now you think pertaining to what you do?

Marcus Carter (10:02.989)
Oh. Well, you know, from a construction standpoint, John, I would say it’s cost. You know, it’s inflation. I mean, we’ve pretty much leveled off with the price of materials, although who knows what’s going to happen now. There could be some increase in materials, but it’s the wage inflation that’s really been the hardest for a lot of these projects. So it’s the guy on site who’s a drywaller who used to make 250 bucks a day and now he wants 400 bucks a day.

And so it’s all of that over the course of the last three to four years that’s really caused pretty massive inflation when it comes to construction. it’s not transitory. It’s here to stay. Yeah, not going anywhere. Construction’s probably not going down. But there’s a lot.

John Harcar (10:29.529)
Yep.

John Harcar (10:39.609)
Mm-hmm.

John Harcar (10:45.577)
It is not, It’s not going anywhere. It’s be here for a minute, man.

John Harcar (10:54.189)
I was going to ask what kind of trends are you seeing? Like, where do you see things going? mean, you’ve obviously been in it through a lot, right? Through a lot of the different years, you’ve seen the ups and downs. I mean, since your inception into the business, what were you using the evolution of it was and where it’s going?

Marcus Carter (11:01.506)
Yeah.

Marcus Carter (11:04.855)
Definitely.

Yeah.

Marcus Carter (11:12.173)
Well, I think it’s largely tied to demand. And I think that we’re a supply constraint from a residential standpoint. So I think that we’re going to see continued demand for construction and for housing. And whether that be in the multifamily space or the single family space or the attached space, I think there’s just going to be continued demand for housing. And I don’t think that’s going anywhere. think

John Harcar (11:26.981)
Mm-hmm.

Marcus Carter (11:39.47)
You know, my crystal ball broke a long time ago, but, but, but, but, but I, know, in, in the length of time I’ve been doing this and kind of the writing on the wall, what’s happening with inventories. And I think where interest rates are going, I think they’re probably going to shift down over the course of the next 12 months, 18 months. So I, you know, I just think there’s going to be continued demand, John. I really do. I think if you’re in that space and you can, and you can, you know, deal with construction and you can manage that process, I think it’s a good place to be.

John Harcar (11:42.053)
You

John Harcar (12:01.561)
Yeah.

Marcus Carter (12:09.399)
So, yeah.

John Harcar (12:10.585)
What are the pros and cons of using you guys versus not?

Marcus Carter (12:13.953)
Yeah, so I would say if you don’t have a team or a staff of dispersing funds or managing that draw process, don’t do it yourself. Don’t do it yourself, because there’s a lot to it. There really is. And we educate people all the time. We walk them through it. But there’s a lot of moving parts when it comes to managing a draw process. We get lenders all the time who hire us, and they’ll say, we just want you guys to disperse the funds. We don’t want to do inspections.

And I’m like, well, that’s your visibility to what’s happening on the ground. mean, we can collect all the lien waivers, all the invoices. We can make sure that the budget’s balanced. But man, if nobody’s going out to that site to make sure that if you’re at 50 % of the money’s dispersed, you want to make sure that that 50 % of that work’s been completed. Yeah. So we counsel lenders all the time, like, hey, here’s best practices. Here’s how you should do it.

John Harcar (12:43.237)
Hmm.

John Harcar (12:46.724)
Yeah.

John Harcar (13:02.287)
The work is done.

John Harcar (13:10.437)
Mm-hmm.

Marcus Carter (13:11.605)
Most of them choose to use us, some of them don’t. I see a lot of bad practices, so put it that way. Yeah, even with large institutional lenders, a lot of times they don’t follow best practices when it comes to dispersing funds.

John Harcar (13:16.025)
Damn.

John Harcar (13:26.339)
What are you seeing out there as far as the bad practices?

Marcus Carter (13:30.093)
Just light on the documentation. So not collecting lien waivers, not collecting invoices, allowing a GC or an owner to submit his own photos of the site. mean, emailing photos in saying, I’m done. Here’s my photos. Can you just reimburse me? And lenders do it. So I mean, you’re just opening yourself up for problems. I have an old saying, all contractors are good until they’re bad.

John Harcar (13:43.801)
Hmm.

John Harcar (13:54.543)
for out here.

Marcus Carter (13:58.9)
So, so. And I love contractors. I love contractors. Don’t get me wrong. But I mean, you know, they’re people. They get themselves into messes just like anybody else. so, you know, trust but verify is what I say.

John Harcar (13:59.142)
If you’ve worked with contractors in that for you I understand that for sure.

John Harcar (14:10.915)
Yeah, yeah.

John Harcar (14:15.301)
for sure. does your team look like? Is it yourself? Do you have a team that you work with? What does that look like?

Marcus Carter (14:19.085)
We have about 17 people that work for us. We have a great crew here locally in our office and then we have six or seven remote people that work for us that are kind of industry specialists that have lots of experience in this risk mitigation, inspections and draw request space. It’s a very niche business and so it’s super important you have people that know what they’re doing, that understand construction, that understand

John Harcar (14:38.169)
Mm-hmm.

Marcus Carter (14:46.709)
documentation that we have to collect on the back end to really be to really follow best practices. So it’s a pretty skilled team, good people. We’re blessed with that, super blessed with great people that we get to work with.

John Harcar (14:51.63)
Sure.

John Harcar (14:59.333)
and how many lenders do you currently work with?

Marcus Carter (15:01.613)
Gosh. Active lenders is probably 120, something like that, 125. mean, it’s probably more than that, but there’s a lot of lenders that maybe do two construction loans a year or four construction loans a year. But consistently, maybe 100, 125. So yeah.

John Harcar (15:14.789)
Sure.

John Harcar (15:20.001)
Okay, okay. How many deals are you doing a year? How many, you know?

Marcus Carter (15:24.365)
So we have about 2,400 projects right now under management. it’s probably, yeah, it’s probably $8.5 billion worth of construction loans. So it’s a lot, it’s a lot. We’re 500 inspections a month and 500 or 600 draws a month. So we process a lot of money, we move a lot of paper. Yeah, it’s an operation.

John Harcar (15:28.122)
Wow.

John Harcar (15:41.951)
huh.

John Harcar (15:45.411)
Sounds like it. Are you growing and gravitating towards working directly with more investors or you mean it’s just the lender business enough for you guys?

Marcus Carter (15:54.862)
We are. We are. We are. actually think there’s a lot of room for growth. There’s a lot of room for increased market share. We do this on a national basis. We’re probably active in maybe 28 states, 29 states right now. We have great coverage from an inspection standpoint. But we think there’s more room for growth. Yeah, definitely. We’re pushing it.

John Harcar (16:10.03)
Okay.

John Harcar (16:18.181)
How are you guys addressing that growth? mean, are you looking, I mean, are you marketing a certain avenues? Are you, mean, how are you trying to build that part of your business?

Marcus Carter (16:24.459)
Yeah. Great question. So it’s so relationship based, John. It really is. mean, is. It’s because we’re, know, lenders are hiring us. We’re managing. You think about it. You know, if you’re a lender and you’re going to fund a $2 million or $3 million construction loan and you’re going to send the money to us and we’re going to disperse it for you, they got to trust us. you know, they’ve got to. So our reputation is huge.

John Harcar (16:30.71)
100%.

John Harcar (16:46.468)
sure.

Marcus Carter (16:51.277)
and it’s a lot of shaking hands and meeting with clients and talking to them about our services. So most of our business is really referral type based, but we’re at a lot of conferences. We go to a lot of lending conferences. We’re probably doing 10 or 12 of them this year. I’ll be out at CMA next week out in Palm Desert. then we go to Miami for an MPLA conference. I think we’re going to be back in Vegas in the middle of…

John Harcar (17:03.621)
Okay.

John Harcar (17:10.572)
Okay.

Marcus Carter (17:21.547)
middle of March. yeah, we’re, I’m traveling quite a bit. yeah.

John Harcar (17:25.455)
Damn, sounds like it. That’s awesome. It sounds like getting a lot of good exposure. If someone was to approach yourself or a business like yours, right, looking to hire your services, I mean, what are some important questions for them to ask? Like what are things so they make a smart decision that they should know?

Marcus Carter (17:28.973)
Yeah.

Marcus Carter (17:42.414)
Yeah, I think from an investor standpoint, from a guy who’s maybe flipping properties and trying to scale his business or buying apartment complexes and repositioning them, and you’re dealing with individual investors, one of the things that we can do is really provide transparency to your investors that you might be bringing into these deals. And because we’re going to track every penny that goes into that project, and investors want to see that.

John Harcar (18:09.016)
Marcus Carter (18:11.105)
So I think from a transparency standpoint, that’s really what we can do from an investor standpoint and provide great visibility to not only what’s happening on the site through inspections and showing what the progress is on the actual construction project, but we’re also going to track the money. So they see exactly how their dollars are getting invested into that real estate project. Whether it’s ground up or.

John Harcar (18:16.825)
Okay.

John Harcar (18:35.607)
And that’s so important.

Marcus Carter (18:39.398)
or reposition or a flip or whatever it is. So it’s visibility.

John Harcar (18:43.759)
Yeah, no, and that’s so important too is just know where every dollar goes because anybody who’s flipped a house knows every dollar counts. What makes you stand out or what makes you different from anybody else out there that might do this?

Marcus Carter (18:51.415)
Yeah, absolutely. Yeah.

Marcus Carter (18:58.455)
Yeah. So there’s not a lot of us. So I will say that. service. We pick up our phone. We answer our phones. We talk to people. We disperse money really quickly. We will not slow you down. So a lot of our staff has a construction background. We understand that we have to move at the speed and pace of construction. So when contractors need to get paid, when subs need to get paid, we’re moving money. We’ll process a draw request within three days.

That’s with an inspection. So subcontract or GC submits us or the owner submits us a draw request. We’re out there same day or next business day doing an inspection, tracking the budget, processing all the paperwork, and then dispersing funds. So we’re making sure that guys get paid so that those subs are coming back to that project and they know they’re going to get paid consistently. So yeah.

John Harcar (19:41.805)
Awesome.

John Harcar (19:48.974)
Awesome. Awesome. And that, you know, that we’ve talked about, that’s a big thing, right? To make sure that we know that, you know, the job’s getting done, they’re getting paid, the money’s tracked, and that for me, you know, if it was my flip, that’d be a huge weight off my shoulders to know that that’s being taken care of. So that’s…

Marcus Carter (19:56.247)
Yep.

Marcus Carter (20:05.005)
Yeah, definitely, definitely. And it takes some of the burden off of owners and GCs too because they’re not having to write the checks. They’re not having to manage that accounting piece of it. We’ll do it for them. We’ll take it off their shoulders.

John Harcar (20:20.249)
Sure. Well, it’s being able to focus on your lane, right? Not having those outside distractions, you know? And that’s where it goes back to not what you know, but who you know. Get the right person to be able to do it. So Marcus, if folks out here, maybe some of the lenders that might be on, maybe some flippers that are looking for a service like this, how would they reach out to you? What’s the best way to get in touch with you?

Marcus Carter (20:28.813)
So true. So true. So true.

Marcus Carter (20:42.219)
Yeah, shoot us an email. mean, my cell phone’s always on. You can ping me. You got questions. You need a referral to a good lender. I mean, we have a great database of good, solid lenders that are reputable. Happy to make a referral to somebody like that looking for financing or looking for whatever they’re looking for. So happy to make those connections. Or just answer questions. So cell phone, email, call us any way you want.

John Harcar (20:53.241)
Awesome.

John Harcar (21:08.587)
Awesome. Anything else you want to share real fast before we go?

Marcus Carter (21:11.437)
Gosh, keep going, do things right. I think there’s all sorts of opportunity out there right now. If you do it right and you focus on what you’re good at, there’s a lot of opportunity right now. So we’re super bullish on where we’re going in this market. So excited about it. Yep.

John Harcar (21:28.962)
Awesome. That’s awesome. Words for the wise, folks. Marcus, thank you for sharing all that. mean, a lot of that is stuff that maybe a lot of our folks didn’t know but need to know, especially if you’re in the flipping, know, managing your contractors and all that money. We know that’s very important. So, guys, I hope everybody enjoyed today’s show and you’ll see you on the next episode. Cheers. Thank you, Marcus.

Marcus Carter (21:44.685)
It’s over.

Marcus Carter (21:49.39)
Thanks everyone, appreciate it. Bye bye.