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Ashley:
This is Real Estate Rookie, episode 228.
Tony:
I know so many rookies today would consider capital maybe as one of their biggest obstacles to getting started, but you got to start thinking outside the box. It’s like BPCON just happened. Hopefully, you’re at BPCON, shaking hands, meeting people, because I guarantee, out of the almost 3,000 people that went to BPCON, a certain percentage of those folks are lending money on a private basis and they have a good time doing it because it’s the most passive return they’re ever going to get in real estate investing. You just got to find the way to connect with those people.
Ashley:
My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson.
Tony:
And welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your investing journey. We like to start the episodes off by shouting out folks in the Rookie audience who have left us honest rating and reviews on Apple Podcasts.
And this week’s review comes from Rags321, and Rags says, “Great podcast!” with an exclamation mark. “This is a great podcast for learning about real estate through so many different aspects.” So Rags kept it short and sweet but still left us five stars. So if you haven’t yet, please leave us a rating and review on whatever podcast platform it is you’re listening to. The reviews go a long way to helping us find new listeners. And the more listeners we find, the more folks we can help and that is our goal here at the Real Estate Rookie Podcast. Isn’t that right, Ashley?
Ashley:
And you know what I was just thinking of? So this is recorded after BPCON and we talk about the benefits of BPCON throughout this episode, but we’re headed there in a couple of days. And all I thought about while you were reading that review is, man, I need to get myself some muscle and force people into leaving us five star reviews while we’re there. Do it now.
Tony:
We’ll just walk around with a big QR code that links to the podcast.
Ashley:
Yeah. Oh, Darryl and Sarah just pushing people out of the way, “Did you leave a five star review? You can’t enter the conference.”
Tony:
That is such a good idea. So for BPCON next year as part of the registration process, there should be a toggle that says, “Have you left a review? Yes or no?” And if they say yes, then they can buy a ticket. And if they say no, then I don’t know, they’re not able to buy a ticket or it’s double the price or something crazy like that.
Ashley:
And obviously, this word, trademarking this idea right here. So it’ll only be used for our podcast on the market, not steal our idea.
Tony:
You guys are on your own.
Ashley:
But if you guys haven’t already, check out BiggerPockets’ newest podcast on the market with some of our good friends. It actually is a super great podcast.
Tony:
Such a great podcast.
Ashley:
Still number two to us of course, but definitely really interesting. And they don’t have boring banter. It’s actually interesting conversation going on there. So make sure you guys check them out if you haven’t already. So Tony, what’s new with you?
Tony:
Yeah, we are shaking, we’re moving. One of the things that I would love to do, maybe we can do this in front of our future Rookie Replies, is give you guys all an update on our Big Bear Hotel. So I would love to share the story behind that, but we just officially shut that deal down last week, so another buyer swooped in and took it away from us. So it’ll be a lot of, I think, good lessons for folks to hear as far as what we learned, what we do differently next time.
So licking my wounds from that defeat. But nonetheless, we’re still moving forward. We got a bunch of properties we’re setting up right now. I think probably we’re in the process of about to take live. I think what will be my favorite property in our portfolio is this really cool Mars themed property in Joshua Tree. And it’s got the same aesthetic as our usual tiny houses, but it’s actually a two-bedroom property. And it’s like, I’m just super excited for it. So we’re having a good time setting that one up and just all full steam ahead, the usual stuff.
Ashley:
Yeah, I think that would be a great Rookie Reply is talking about that deal because even me, I’ve had to back out of a campground deal and it was just sickening, and I felt awful losing that deal. And then somebody else swooped in and got it. But I think that it’s way better to not force a deal and that wasted time, the money, that was an opportunity cost of losing a little bit of time and a little bit of money compared to the large amount of money and time you could have wasted if you went through that deal and it not being a great deal too.
So social media, the impact it has on people’s lives, I could care less about somebody showing me their fancy things they have that. I have no interest in keeping up with the Joneses, that doesn’t bother me. But somebody talking about, “I never back out of a deal, I always close.” That’s like, “Oh, I had to leave a deal.” That makes me cringe at myself. But also, you never know what people are saying online, but I think it’s perfectly acceptable and should be made more of the norm that it is okay to go out of a deal if it’s not going to work anymore, instead of trying to force it.
And yeah, it does suck to be that person where the seller is like, “Geez, I had a buyer and they’re not buying it anymore. What the heck?” And they can trash talk you or whatever you want or something like that, I don’t even know. But I guess they’re happy they have another deal, but-
Tony:
I got another buyer.
Ashley:
Yeah. So it’s hard to swallow that when it does happen. But lessons learned are huge, I think, from that.
Tony:
Totally. Well, what’s new with you, Ash? What do you got going on?
Ashley:
So I actually have a lake house that I’m hoping to close on, I think, Friday. But I’d leave on my flight for BPCON Friday, and so I’m trying to get a really early morning closing scheduled here before I take off. So, hopefully closing on that. If not, it won’t be until a week and a half later because I’m pretty much gone all of next week to get it done. So that’s the new thing. And it’s going to be a short-term rental, just on a little lake near us here about 45 minutes from me now.
Tony:
Are there beavers there too?
Ashley:
No, at least I haven’t seen, but there is actually a dam. So the lake, it’s cool. There’s a dam there and they actually drain it. So I think it’s coming up October 2nd or October 3rd. They actually drain the lake. So it’s like a manmade lake. There used to be a town there and they actually picked up … It’s always flooded, so they actually picked up houses and moved it and then they dug it out and they turned it into a dam.
So every year they drain the lake and then they fill it back up in the spring and then everybody boats on it and stuff like that. But I’ve never been to it when it’s drained, and so I can’t wait to go and see it like basically this big crater. And there’s still some water that stays in the bottom of it because they don’t get all of it out, but you can walk around some parts of it and stuff like that.
So it’ll be interesting to see. But a really nice area, nice community, a small town that the lake is in. And I think there’s a lot of potential. There’s not a ton of rentals that are listed there. What are listed don’t have a ton of vacancy, but what I’ve learned is that there’s a lot of, people don’t even have to advertise because they have the same families that come every single year that rent it out and things like that. So I think this actually might be a good opportunity to … There’s a Facebook group for this lake and I think just even posting in the Facebook group as to, “Here’s this new short-term rental.”
Tony:
Oh yeah, I’m glad you mentioned that, Ash, because I feel like that’s … A lot of people when they want to break into real estate investing, they always want to go to the big hotspots. But even for Airbnbs, you can find success in smaller, secondary, tertiary markets because every pocket of every single state has these little spots where people go to spend a night or two to enjoy whatever that little location has to offer.
So even if me on the other side of the country, I’ve never heard of this spot, but everyone in that area knows and goes there. Then there’s an opportunity for you to have a successful short-term rental there too.
Ashley:
And I think part of the large opportunity, and I’ve learned this from my arbitrage, my units, the short-term rental arbitrage where I’m renting out an apartment in an apartment complex, a lot of our guests that stay are actually visiting people that live in the apartment complex. But they live in smaller apartments, one or two bedrooms and it’s family visiting and they maybe have five people or whatever and they can’t fit into their apartments. So they rent this unit when they’re visiting. So like Thanksgiving, Christmas, always book through there people visiting family that live in the apartment complex.
I think since we’ve had it, this would be our third or fourth Christmas and it’s been the same woman that has rented it every Christmas to visit her family that lives in the apartment complex. So the same with this lake house, is getting people that have a lake house already but want to have people come and visit, offering people in the community a discount code or whatever if they have friends or family that want to stay at their house if they can’t accommodate them into their own lake house too.
Tony:
I love that. Great lessons learned, great lessons learned. Well, we got a slew of good questions today as well. Our first question is all about how to fight back when an appraisal comes in short. Ash and I both dealt with that issue and no folks have dealt with that issue. What happens, and this is the second question which I think might be my most favorite, is like what happens if one tenant punches another tenant? How do you handle that as a landlord? And Ash and I kind of share our thoughts on that. And then the third question is about how to remain competitive when you’re going up against cash buyers because I think a lot of folks are feeling that pressure, especially in today’s environment.
So question number one today comes from a listener by the name of Lauren Murphy Niakhu and Lauren’s question is about appraisals. So Lauren says, “My husband and I are refinancing our primary residence, which was just built in 2019. We received the appraisal today and it’s almost $100,000 less than the first appraisal completed in February of 2020. Given the down payment we have in the house, even with the low ball appraisal, we still have over 20% equity.
I don’t want to be reactionary or emotional, but I’m kind of pissed. I haven’t heard from the lender yet, but I’m hoping it doesn’t affect our refi. Obviously, if it does affect the refi, I’ll try to argue against it. One of the three comps to choose was a 30-year-old house with updates. But even if the refi moves forward, is this appraisal something that would affect the future sale of our house when we’re ready to move on?”
So I love a good appraisal question, Ashley, so I’ll let you lead in first. What are your thoughts? Do you think this has an impact on her refi and her ability to sell them in the future?
Ashley:
Yeah, I think I’ll answer the latter question first is, is it going to affect the future sale of their house when they’re ready to move? First of all, this appraisal is not public knowledge, so this will be held in … You don’t have to disclose that appraisal number to anyone. When you are ready to sell your house, if the person is getting a loan when they purchase your property, they will have their own appraisal on the property.
Unfortunately, there is no consistency that the appraisal will turn out the same or turn out different. An appraisal has been considered to be more of an art than a science where it can vastly depend on who the appraiser is that is appraising the property. So yes, it could affect the future sale of your house.
So if you go and list this property and somebody puts in an offer to purchase it and they’re going to be using conventional financing and where the bank would like to have an appraisal on the property and easy math, let’s use a hundred thousand dollars for the purchase price, the bank is going to loan you up to 80% of that value, $80,000. But when it is appraised, it only appraises for $90,000. So now the bank is not going to loan them that $80,000 and that means they’re going to have to come up with more money, a larger down payment because the bank is only going to give them 80% of the appraised value, not what they’re purchasing the property for.
So to kind of go into your other question as to how to dispute this, Tyler Madden, an investor friend of ours actually did this on a recent property he just purchased where he actually was doing a refinance. He held the property for a year, rehabbed it, went through the refinance and he asked his bank to dispute it. He wrote a letter stating that he would like a second opinion on the appraisal. He had to pay to have another appraiser come in and appraise the property. But he also submitted supporting documents.
So if you can show some kind of proof as to maybe you actually have the cost of construction, your original contract with the contractor, if you know of other comps in the area that weren’t included in your property or if you can find out more information about the houses that were used for comps and maybe there was inaccurate information, bring all of this forward.
And with anything, when you are confronting someone that they had made a mistake, don’t throw it in their face and be like, “This is wrong, this is wrong. You did this, you should have done this, blah-blah-blah,” just show them here. I’d like to provide more information and kind of do it in a kindly manner. But you can definitely dispute or request to have an appraisal disputed, but it will depend on the bank. The bank can deny your request and in that time, that’s when you most likely would go to another bank to ask them to finance the loan and to get another appraisal done.
Tony:
Yeah. Ashley, so many good things you mentioned there. I’m just going to add a little bit. So she asked about, will this affect the refi? And Lauren, you said that you’re at about an 80% LTV based on that, the appraisal that just came in. So I don’t know how high of an LTV your bank is willing to go on that refi, but I feel like a lot of times it’s going to max out around that 80%. So you might not have anything left to refi if you only have 20% equity left in the house.
So it definitely could impact the refi. If they’re able to go up to like 85 or 90%, then you’ve got some room there. But obviously that $100,000 difference will impact how much money you’re able to pull out of the house. I think your point, Ashley, about trying to challenge the appraisal are a really good idea. We’ve done that, I think, two or three times successfully now. We actually just got another appraisal that came back on a house that we’re selling that came back super low. So we’re actively challenging that, literally, have a call after we finish recording today to work through that issue.
And things we’ve done is we pointed out some of the inconsistencies in the appraisal that came back. I think your point of them using a house is 30 years old versus a house that’s four years old. Those are two totally different types of construction. And typically, appraisers aren’t going to take a three-decade-old house with a three-year-old house. Those are two different types of houses that you’re looking at.
If you can find better comps within the same search radius, so let’s say they went out a quarter mile, if you can find recent comps that are better comps, I would use those as proof to say, “Hey, here’s something that I think was missed from this report.” And like you said, Tyler, I think given the scope of work for what he did, we’ve done that as well for some of our rehab. So all these things I think help play into the fact of whether or not you’ll be successful in challenging that appraisal.
And then I think, you talked about this as well, that art versus science. Anything that’s dependent upon a person’s opinion, there’s always going to be some sort of fuzziness around how they get to that number because you can send two, three, four appraisers to the exact same property, there’s a good chance they’re all going to come back with a very different opinion of value. And just a slight tangential story, but somewhat related. I know a builder. He builds in Southern California and when he builds his houses, they’re all the same exact property, same exact floor plans, same exact house, but he’s building them in different spots around the city.
So he’ll go. He’ll submit plans for four properties at a time. So he’s submitting four sets of the same exact plans to the county for them to check the plans. Those get submitted to four different plan checkers, same exact property, same exact plans. But guess what happens when he gets his comments back? Not one set of comments are the same thing. Every single plan checker is pointing out something different even though it’s the same exact build, and it makes no sense.
So he’s submitting revisions on plan A that he’s not submitting on plan B, and revisions on plan C that aren’t on plan D. So my point is, whoever goes out there, they’re going to see something that someone else might miss. So if you can point out some of those inconsistencies and things that they might have missed, I think it helps you.
Ashley:
Yeah, that’s definitely a great point. And some appraisals that I’ve done too is I’ll meet the appraiser when they go to the property and I’ll offer them information. So some people have said that they’ve tried to offer appraisers information, they don’t want it. They do their own thing and that’s fine, let them. Don’t push information onto them. But I’ve had appraisers like, “Oh wow, thank you.”
So there was one property, I owned a house down the street and I had had it appraised fairly recent. So I gave that appraisal a copy of that appraisal to the new appraiser that was coming in for this other property also with a list of what updates we had done to the property, how much it cost, things like that. I’ve also had appraisers ask me, “Oh, so what did you put in for new?” And I just tell him. He’s like, “A ballpark, what do you think it cost or whatever?” And just ask my opinion, and no proof. I don’t want to see no receipt or anything. They just ask and I just spew out on a number or whatever it was. And so yeah, it does widely vary depending on the appraiser.
I’m working on getting a hard money loan right now to purchase a property and it’s kind of a hard money lender, not really. They do hard money loans, but I’m actually doing a long-term loan with them. And so we’re having an appraisal on the property and when the appraisal was done, they told me that I could not have a copy of the appraisal yet. And I was like, “Okay, that’s really weird, I am entitled to that.”
But what they said was they were actually having a third-party fact checker go through the appraisal and make sure all of the information was correct. And once that verification was done, then they would send me a copy of the appraisal to look over. And I guess there was some kind of confusion and things that were missing and they had to have the appraiser revise the appraisal because of that, but ended up good. It was $13,000 over what I’m paying, so instant equity right there. So yeah, it just vary.
Tony:
And that happens, appraisers are people and sometimes they get things wrong. Our last successful challenge, they had the square footage off by, I think it was like, I don’t like a 20% difference in the square footage. They had us 20% smaller than what the property actually was. And obviously that has an impact on the value. So go through that appraisal with the fine tooth comb and if you can find some inconsistencies, point that out.
And then lastly, like Ashley said, if you can’t get that challenge successfully and your lender isn’t able to help advocate on your behalf, then maybe find another lender to do this refi with and maybe they’ll have a better chance of getting you the right appraisal.
Ashley:
If you haven’t done an appraisal yet, get a copy of someone’s appraisal. So anybody that has done a loan probably has a copy of their appraisal. So ask your friends and family if they don’t mind giving you one and just go through it and look because it does show almost the formula or kind of the guide of how they do put the appraisal number onto your property.
So you’ll see three to four comparable properties listed there and it’ll go as to what’s the bedroom count. And if your house has three bedrooms and the comparable has four bedrooms, they’ll subtract some off of your house because it’s not as comparable because it’s one less bedroom. And so you can go through and see the things that they actually look at when they’re adding or subtracting value from your property.
So take a look at that and you can probably Google appraisals too and look at them, but if you can find a friend or family member that has gone through an appraisal and get a copy of their report, it is very interesting to look through.
Okay, let’s move on to question number two. This question is from CJ Caneel. Does anyone have any information regarding a landlord’s responsibility for damages caused by a tenant renting a condo to another person on the premises? Specifically, if the HOA documents say a unit owner is liable for damages caused by the tenant, does that extend to intentional acts by the tenant that harm another person?
So for this question, are we assuming these are in the unit or are these in common areas even? I would think that in the unit, it would definitely be the owner responsible because a condo, you actually own your unit. But if this tenant were to go and do harm to someone else in the common area or do harm to the property in the common area, then yes it would be the owner’s responsibility of that unit. What are your thoughts on that?
Tony:
Yeah, that’s tricky because if I’m reading or understanding CJ’s question correctly, it sounds like one tenant hurt another tenant in some way, shape or form. He says, if one tenant causes damage to another person on the premises. So it sounds like maybe there’s some kind of altercation between two tenants. Is the landlord somehow responsible if tenant A beats up tenant B or something like that? And honestly, I do not know and it’s make … Are you not reading it the same way?
Ashley:
No, no. Now, I am. I see it. So if your tenant does damage to the property as the owner of the unit, I think the documents say that you are liable for that. So he does understand that. But what he’s asking is does it extend to intentional acts by the tenant that harm another person? So maybe let’s say that your tenant goes and punches another tenant in the face, are you liable for that?
The first thing I think of though is I feel like that’s not really an HOA issue. I feel like that’s a civil case.
Tony:
Or a criminal case.
Ashley:
Yeah, a criminal case. So I could see if there was maybe damage to the property where the HOA would come back after you, in which case you in turn would sue the tenant for the damages. So yeah, that stinks that you have to go and try and get your money back from the tenant. But as far as an intentional act to harm another person causing physical harm or emotional harm, I would think that would be a civil case against the tenant as the landlord.
So for example, if someone in my property that’s a tenant went and punched the neighbor, the neighbor would go after the tenant, would call the cops on the tenant, not on me. I could see the HOA moving for you to remove that tenant from the property. I could definitely see that in which if the tenant is doing this, it might be a good idea to get the tenant out.
Tony:
Yeah. And CJ, we don’t know what state you’re in or what city you’re investing in, so definitely consult with a local attorney if this is something that you’re concerned about. But yeah, I think I’d agree with Ashley where in most cases, if there’s some sort of physical altercation between one tenant and another, those two tenants would be held responsible, not necessarily use as a landlord now.
If someone is walking in the common areas and they trip over a step and hurt themselves, that’s a different scenario. But just one guy or girl walking up to another and called in some issues, I don’t think that would fall into your lap. But definitely consult with some legal professionals because Ash and I are, either one of us are attorneys or pretend to play one on podcasts.
Ashley:
The only way I can think of is if that person decides to sue you because you rented to that person, because people will sue for anything nowadays.
Tony:
That’s true. If this person had a history or something of violence and you didn’t catch that and maybe they were a threat to the community, who knows?
Ashley:
Yeah. So I think, Tony, is the best advice is consult an attorney. Better to be proactive than reactive. But I would think that it would be very hard for an HOA to monitor. That’s like saying that you’re responsible for another person’s actions. Why would anyone ever want to rent out their property if you are liable for their actions on another person? That’s a huge responsibility there.
Tony:
That’s a huge responsibility, huge responsibility. But it does make me wonder now though, like for Airbnb properties, I wonder if let’s say that my guest gets into a fight with the neighbor next door, I wonder if I could be held liable as the Airbnb owner for maybe something that the guest did like that, so something for me to think about. I got to make some phone calls after this to see what kind of liability we have.
Ashley:
Tony, along those lines, so I’m trying out new software for short-term rental. And one of them has the option where if you want to send almost a lease agreement or rental agreement to the person renting, that is probably something you could put in there. Obviously, there’s still ways people can sue you, even if you have them sign a waiver or something, but put in there that you’re not responsible for their actions or whatever, something like that. And they’re responsible for themselves and what they decide to do. But the second part of that is do you do that?
Tony:
It’s so funny. So we just had our short-term rental summit a few weeks ago and one of the speakers or two of the speakers were Sarah and Annette from the Thanks For Visiting podcast. Great podcast, you guys should definitely check them out. But they’re super dialed in with all their systems and they send rental agreements before every guest checks in. And they have it as part of their house rules on Airbnb and Vrbo, that if the guest doesn’t sign the rental agreement 24 hours before checking in, they can cancel their reservation without any kind of penalty.
So essentially someone will pay for the reservation, not fill out the rental agreement, they don’t get their money back. So we’ve been having some discussions and turned it around like, does it make sense to add a rental agreement as well? So we don’t do it yet, but after talking to a Sarah and Annette a couple weeks ago, it’s something that’s on our roadmap to add in for sure.
Ashley:
Yeah, super interesting because I really hadn’t thought about that. But then I did see their talk at the summit, it was really great information and then when it came up again with checking out the software. So yeah, I was just interested in that.
But I think that if this is something that you are worried about is being responsible for your tenant’s actions that especially short-term rental or even in your long-term leases, putting in some kind of clause that protects you. And the best place to get the proper wording for a clause like that is from an attorney. And it also probably varies based on what state you live in too, because some states, it’s a lot easier to sue people for frivolous things than it is in others.
Tony:
Awesome. All right, well, let’s keep rolling. We got one more amazing question to dive into and our third question today comes from Anthony Emerson. And Anthony says, “As a first time buyer, what are some ways to beat out a cash buyer?” This is a great question, Anthony. I think one that’s popped up multiple times both in the podcast and the Real Estate Rookie Facebook group. Here’s what I’ll say.
So a seller is motivated by one of three things. Its convenience, its speed and its price. A cash buyer, typically they’re going to beat you out by speed because if you’re a cash buyer, you don’t have to jump through all the hoops that a typical mortgage-backed buyer has to go through. There’s no appraisal process. You don’t have to if you’re paying cash. You can skip on a lot of inspections and you can close tomorrow if you really wanted to.
But when you’re buying with a traditional loan, you’ve got to go through the appraisal process. You’ve got to get your title work done. There are so many things that a traditional lender will want to see, which adds to that escrow period. So if a buyer is looking for speed, someone with cash will typically win.
The other thing that cash gives you, and I guess this is the fourth reason, is certainty. A lot of times, people can get pre-approved for a loan, but when they go out to actually close, some things pop up that prevent them from getting to the finish line. But if someone has cold hard cash in the bank, there’s a certain level of certainty that comes along with someone that has cash in the bank. So with cash, you get speed and you get certainty.
On the other side, ways that you can be competitive are with the actual price and with convenience. I met an investor one time that got a crazy good deal on a property because they offered to help the seller move. Seller had been in the house for her whole adult life, had accumulated a bunch of stuff and the thought of her having to leave was just overwhelming for her. But the seller just offered to hire a moving truck, and because they offered to help that person move, they added a certain level of convenience that allowed them to get that deal.
So if you can find what the pain point is for that seller and find a way to soften the blow or make that pain point a little bit easier, you’re giving them a level of convenience that might make them choose you over another offer.
And then the last thing you can do is the actual price. Some sellers are just motivated by what is the highest dollar amount that I’m going to give. You have to remember, on the seller’s side, they’re just going to get a check when you close. It doesn’t matter if it’s cash or if it’s with the loan, right? They just get a check at closing.
And even though the cash might come faster, even if that buyer has a loan that they’re getting on the property, the seller is still going to get a big fat check at the closing table. So if you can give them a bigger, fatter check, some people are motivated by that. So, speed and certainty, maybe you lose out to on the cash side but you can beat them out with offering a higher price and giving them a certain level of convenience.
Ashley:
Tony, that was great, great information. And to tell you, whenever you go off and giving this great information, all I do is imagine this turning into a nice Instagram reel on your Instagram account.
Oh, I only have a couple things to add to that, but I think those three things apply to any kind of property you’re going after. Every seller has one of those three things, or maybe a couple of those things that motivates them. So the advice I would give is to go for off-market deals. So you’re going to have less competition because it’s not listed on the MLS.
So, off-market deals you can find by driving for dollars, sending out mailers, calling people, word of mouth, telling anyone and everyone what you’re trying to buy. And maybe somebody’s cousin will come and say, “Hey, you know what? My cousin is selling this, and blah-blah. I thought of you because you were talking about it.”
I wouldn’t rely on that as your only lead source. I’m waiting for people to bring deals to you, but also wholesalers too. So the thing with wholesalers though would be is that a lot of times they will only accept cash purchases, but that’s not always the case. So that’s something to talk to a wholesaler up front is if you are financing the property if they would accept terms when purchasing a property.
What you can do is if you do find an off-market deal, and I think this is a big misconception sometimes, is that because you’re buying the property off market, the seller is going to expect you to close fast and to bring cash. And that is not true. That’s not the case. You can give them an offer of any type of financing that you have available to you. And it doesn’t mean you if you are getting a conventional loan, that you have to buy a property on the MLS.
So I think that’s a great route to go is to actually do some deal sourcing yourself, find a deal, and then make an offer on it where it’s just you offering and nobody else. So that there is that, they don’t have tons of people submitting offers by 10:00 PM on Sunday evening for whatever.
Another thing too I like about off market deals is that you’re talking direct to seller. So it’s a lot easier to find out what their motivation is. Where when you’re on the MLS, it’s you talking to your agent, talking to their agent, talking to the seller, and it’s like playing telephone. Even now I’m in New York state, you have to use attorneys to close and I’m doing an off-market deal on a lake house. And it’s like me to my attorney, to their attorney, to them.
And finally, we just called them and it’s like, “Whoa, whoa, no that’s not what’s happening. I don’t know why our attorney said this and your attorney said that,” like no. And we were able to, within 24 hours, get the deal back on the table and the ball rolling and moving. So I think there is an advantage sometimes to having a middle man when you’re working on a deal, but other times, it’s even better just to go directly to the seller and be able to talk to them and figure out what they want and what their motivation is.
And then you can negotiate from there, sit down with them, give them your offer. And if they’re like, “No, we don’t want to do it,” you can talk to them and say, “Okay, well what would be some things that would maybe make this deal happen for you?” Maybe it will work out, maybe it won’t, but don’t go into the deal just because you want the deal and don’t agree to their terms just to make it happen, because there will be other deals out there.
So definitely, try finding your own deals by going off market. There’s a lot of ways to do that, just even driving around looking at properties. One thing you will have to be careful of is that when you are looking for off-market deals, you will have to make sure that the bank will finance the property if you are using a loan. So if you’re using your FHA loan, you have to go through and do a kind of an FHA inspection. So this is separate from the inspector you hire. This is completely separate from that where they want to see the property as up to code.
I remember when my cousin purchased a property with an FHA loan, she had to install handrails going up the one stairs because it didn’t have it and stuff, before they would actually finance the property. So, do be careful of that that you’re looking at properties that would pass an FHA inspection or that the property would actually finance. Because if the property is too dilapidated, a bank may say, “You know what? We’re not going to touch that.”
And banks also have lending limits. I found that very common. A lot of banks won’t even give you a mortgage if it’s less than $50,000 too on the property. So watch out for those kind of things when you are going for those off-market deals. The best way to find out what property won’t work is to go directly to the lender that you’re using and ask what are properties that you stay away from or you won’t lend on. If it’s inhabitable, there’s no running water yet or anything like that, the bank probably will say, “Yeah, we don’t finance those type of properties. You have to get it livable, at least for us to finance.”
Tony:
Yeah, so many good things, Ashley. As I just want to piggyback on what you said about playing telephone, where it goes from you to your agent to their agent to them. The same exact thing happened to me on a deal we’re negotiating on this past summer where I wanted to present some updated terms to the seller. And the agent, he was a dual agent, so he was representing both the buyer and the seller in this situation. I was the buyer, the other person was the seller. And I said, “Hey, just pitch this to them and let’s see what they say.” And the broker was just so hesitant. He’s like, “I think I might make the deal fall apart and the seller is really antsy and I don’t want you to lose this deal,” so whatever.
I hang up from him, I just called the seller. And I say, “Hey, here’s what I’m thinking. What are your thoughts?” Without hesitation, they’re like, “Yes, let’s do it.” So it’s like sometimes if you can skip that middleman, it does help I think bring a more creative deal together. And it also helps build that relationship, I think, if you can talk to that person directly.
The other thing too is that it doesn’t necessarily have to be your cash. So Anthony, if you have friends or family or even hard money that you can go out and get, that will give you an opportunity to be a cash buyer in a way. Because cash just means like can you buy it without getting a traditional loan? So if you can go out and raise $500,000 from friends and family or go out and get hard money, now you’re able to close within the same timeframe that a cash buyer will.
And if you think about, I looked it up while we were talking, the S&P 500 is down 22% year-to-date. So the people that have had their money majority in the stock market are down 22% this year. So do you think that there might be an appetite for someone to say, “Hey, I’d rather give you a private money note at 10%, 12%, whatever it is, as opposed to leaving the stock market right now that’s taking a nose dive”? So there’s probably an appetite in today’s environment to say maybe private money lending is a better way for me to get a return on my investment because the S&P 500 has taken a nose dive.
So I think get creative, Anthony, doesn’t necessarily have to be your cash and see if there’s some other ways where you can get some cash but not be yours.
Ashley:
I’m going to give some unsolicited advice on the stock market right now. I am going to say if you do have money in the stock market even though it is down 22%, I would say-
Tony:
Don’t pull it out.
Ashley:
… leaving your money in there and let it ride it out, because if you look at the history of the S&P 500, it will go back up. And if you are losing money right now, you will lose money if you pull it out.
So a lot of people don’t follow that advice, they panic. So just to Tony’s point is those people that do pull their money out, great opportunity for you to make the money. And there are going to be, and probably already are tons of people that are pulling out of the stock market and kind of panicking. Just like in 2008, a lot of people did that. And if they would’ve left their money in, they would have a lot more than what they do have now because they did pull their money out.
So yeah, I think that’s a great point is you can offer a better return right now than a savings account, money market account, things like that, and even just someone putting their money into the stock market.
Tony:
And there’s probably a lot of people just sitting on cash too. It’s like a lot of people had equity. A lot of people sold homes over the last year. A lot of people refinanced over the last year. A lot of people pulled HELOC. So they just have this cash that they’re sitting on that they would like to put to work. They don’t want to put in the stock market because of how things are going. So if you can present them with a safer alternative investment strategy that gives them a better return, you can be a lifesaver.
I know so many rookies today would consider capital maybe is one of their biggest obstacles to getting started, but you got to start thinking outside the box. It’s like BPCON just happened. Hopefully, you’re at BPCON, shaking hands, meeting people, because I guarantee out of the almost 3,000 people that went to BPCON, a certain percentage of those folks are lending money on a private basis. And they have a good time doing it because it’s the most passive return they’re ever going to get in real estate investing. You just got to find a way to connect with those people.
Ashley:
Yeah, I think to add on to that too, if you do have money to invest, actually right now is a great time to put into the stock market because you’re getting stocks on sale. But once we get a lot of people will do that. But also if you are planning on retiring in the next couple of years, the stock market may not-
Tony:
Rebound.
Ashley:
… rebound in time when you are ready to retire. So this is also a great person to go after. Somebody who’s retiring in the next several years maybe doesn’t want to put any more money into the stock market and they want to put it into a nice safe investment with you. So what did we learn? We want to go after old people that are on the verge of retirement.
Tony:
We got to start doing presentations at the senior home, the geriatric centers. It’s where the best private money lenders are.
Ashley:
And you know what? It seems like, not even old people. If you’re retiring, hopefully you’re not that old because you guys are rockstar real estate investors and you were going to retire at the age of 30, 40 you a lot sooner than …
Tony:
So that’s the hot tip for today’s episode. You got to go to the senior citizen, local senior citizen, like community center in your city and do your presentation there to find your private money.
Ashley:
Okay, let’s really break this down and let’s go through the sold homes. Let’s look up people who have sold their homes. So look for the Dorothys, maybe the Carols, all of the old fashioned names that have sold their homes for cash for way more than they bought it for 30 years ago. They’re sitting on their lump sum of cash. Search what nursing home they’re at or long-term care facility and then that’s where you’re volunteering.
Tony:
There you go. That’s million dollar plan right there. You’re welcome to everybody.
Ashley:
Okay, so Tony, we’ve been our last episode, our first one doing these longer extended episodes, we had a little bonus content kind of talking about market interest rates. So did you have something that you wanted to touch on today that we could boring banter about?
Tony:
So BPCON just wrapped. And I know we’ve talked about this in the past before, but I think it’s always good to put networking front and center because I really do believe that that’s one of the most important things that a new investor can do to kickstart their investing journey. So I’m just going to share what someone can do if you are hesitant to network or maybe you feel like networking isn’t quite your cup of tea.
So first thing I’ll say is that you don’t have to be an extrovert to enjoy networking. I think I’m naturally an introverted person because I know I re-energize by being by myself. I need alone time to have my energy levels come back up. Whereas if you’re an extrovert, you need that people connection, that energy of other people being with you to feel re-energized. So I’m by nature an introvert.
But I still find joy in networking, and here’s typically what I’ll do. So even before I was Tony J. Robinson from the BiggerPockets Real Estate Rookie Podcast, and I was just going to meetups as Tony Robinson with the nobody-listens-to-my-podcast podcast, I would go into a room and I would find a group of people. And all I would say is like, “Hey, do you mind if I join you guys?”
And a hundred times out of a hundred times, they’re going to say yes. I’ve never been told, “No, you can’t join us.” And once you join into that group, it’s a simple question, ” So, hey, what brings you here today?” Or, “Hey, where are you at on your real estate investing journey?” And then people kind of go off and start telling you their story. And that’s how you build connections with people. And it’s not necessarily about meeting as many people as you can in the room, it’s more so about like, can I build a genuine connection with any of these people? And you never know where these little conversations or where these little connections might lead you.
I’ve shared in the podcast before that the only reason that we started investing in Airbnbs was because Alex Sabio … His name is Alex Sabio. He’s another investor here in southern California. He started buying Airbnbs and he and I met at a meetup. And after he bought his first one, he said, “I think you guys should buy one too.” Three weeks later, we close on our first cabin. So you never know where those connections will lead you.”So hey, can I join you guys? And where are you out in your investing journey?” Those two sentences will take you so far when it comes to networking.
Ashley:
The point you made about establishing a genuine connection was right on. I do think that sometimes people get over-concerned with, “Oh, I got to build my list of connections. I collect as many business cards as I can and enter them into some kind of data collection software so I can track the people that I’ve made a touch point with.”
But having, instead of meeting 20 people that night, talking to three people where you actually were interested in what they’re saying and the same back to you and you built a connection with them, that may be on your way to a friendship instead of just that business connection, that networking. That will be so much more valuable to you than looking at a list of 20 people that you met that night but can barely remember or put a face to a name as to who these people actually were.
You may make a note on the back of their business card, what they do or something like that, or one thing you learned about them. But the genuine connections are really what are going to help you. And also you can provide so much value to those people too.
And because you have that genuine connection, they’re actually going to want to help you and the same, and you’re going to want to help them because you truly care about them and you become friends or whatever that relationship has turned into. So I think right there was a huge takeaway. And sometimes when we talk about things on this podcast that are business-wise, I think of it too as even just in life in general.
As I’ve gotten younger but yet wiser, I’ve somehow learned that in life, I would rather have that core group of friends that are super genuine and best friends than have 50 friends that you don’t have that genuineness from because you’re just like trying to keep your friendship going with 50 people instead of those four or five people where you build that genuine connection. So I think that works in all aspects of life, I guess.
Tony:
So true.
Ashley:
Well, you guys, thank you so much for listening to this week’s Rookie Reply. My name is Ashley, and you can find me at WealthfromRentals, and he’s Tony at tonyjrobinson on Instagram. And please, if you are loving the new Rookie Replies, leave us a five-star review on your favorite podcast platform. We’ll see you guys back on Wednesday with a guest.
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How lenders can break through a siloed mortgage ecosystem
HousingWire recently spoke with Kevin Koon-Koon, chief technology officer at Grid 151, about streamlining and simplifying how mortgage lenders interact with the rest of the ecosystem.
HousingWire: What are some common challenges lenders face when it comes to interacting with the rest of the mortgage ecosystem?
Kevin Koon-Koon: Many mortgage lenders have invested heavily into technology, people and process improvement to modernize the homebuying journey.
However, if there is not an equal investment from the other stakeholders in the transaction (i.e., appraisal, title, et al.), there is not a high return on that investment, because the ecosystem itself is only as strong as its weakest link. The lender might be the most modern and progressive thing going, but without tight coordination across the “assembly line” from front to back, the impact on the customer will be limited as the lender will effectively be stuck in a perpetual hurry up and wait.
Gridbase is democratizing the power that comes with that tight coordination to all parties because the integrations across lender LOS, real estate transaction management system and title production systems is available off the shelf.
Additionally, Gridbase will also enable connectivity between those same entities and the next level down of vendors and partners that support them. The tighter the coordination, the greater the efficiency, which translates into a better experience for all parties – most notably the customer.
HW: In today’s uncertain market, how important is it for lenders to be able to offer borrowers an expedited timeline?
KK: An expedited timeline is something the industry as a whole should aspire to achieve, and it can be a differentiator for those mortgage lenders that can consistently offer it to their customers. The connectivity and resultant efficiency that Gridbase can enable across transaction stakeholders will help to make that possible.
But what is probably more important to the consumer experience than truncating the timeline is providing better transparency and certainty through the process, regardless of the timeline.
In other words, not every homebuyer needs or even wants to close on day two, but it would be a significantly better experience if the homebuyer was given helpful and reliable information very early on about what timeline is feasible (for better or worse) so they can be educated and plan accordingly.
Given the relatively low frequency and high value of real estate transactions for most consumers, the industry needs to do a better job connecting the dots and providing helpful and digestible information at every turn along the journey.
HW: How is Gridbase helping mortgage lenders?
KK: The siloed, disconnected and often legacy systems of record of our industry do not easily communicate with each other. Mortgage lenders bear the burden of building solutions to solve this complexity but are often stuck managing to the technological limitations of their partners.
As a result, there are seemingly infinite workflow permutations depending on the partner and what system of record they utilize. Even when integrations are available, mortgage lenders’ technology teams are forced to learn, support and maintain multiple APIs. By centralizing all those integrations through a single point of entry, Gridbase is streamlining and simplifying how mortgage lenders interact with the rest of the ecosystem and facilitating end-to-end workflows.
HW: Does Gridbase benefit other product and service providers downstream from the lender as well?
KK: Gridbase is a multi-tenant platform that adds value across the entire supply chain. For example, providers of instant title product, settlement agents, RON platform vendors and the village of other providers it takes to close a loan never have to leave their system either – order management, communication and delivery are all facilitated by Gridbase. Plugging into Gridbase opens up access to an entire universe of connections where the value is delivered bi-directionally to benefit all.
To learn more about Gridbase, visit grid151.com.
The post How lenders can break through a siloed mortgage ecosystem appeared first on HousingWire.
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How to Beat Cash Buyers, Tenant Brawls, and Appraisal Tips
A cash offer almost always gets a seller’s attention. Whether someone comes in low or high, the prospect of a smooth closing without any loan contingencies is often more than enough to get a deal done. But what if you don’t have stacks of cash lying around? Maybe you’re trying to get your first rental property or house hack with a conventional, FHA, or VA loan. How do you set yourself apart from the hotshot who roles in and offers all cash without any appraisal necessary? Worry not because Ashley and Tony have done it dozens of times before.
Welcome back to this week’s Rookie Reply, where we take questions directly from Instagram, Facebook, the BiggerPockets Forums, and our Rookie Request Line. This week, we talk about how to beat cash offers, what to do when tenants in the same property start disputing, and appraisal tips to get your home valued higher. We also touch on how to network, make better connections, and build genuine relationships with other investors in your area!
If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).
Ashley:
This is Real Estate Rookie, episode 228.
Tony:
I know so many rookies today would consider capital maybe as one of their biggest obstacles to getting started, but you got to start thinking outside the box. It’s like BPCON just happened. Hopefully, you’re at BPCON, shaking hands, meeting people, because I guarantee, out of the almost 3,000 people that went to BPCON, a certain percentage of those folks are lending money on a private basis and they have a good time doing it because it’s the most passive return they’re ever going to get in real estate investing. You just got to find the way to connect with those people.
Ashley:
My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson.
Tony:
And welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your investing journey. We like to start the episodes off by shouting out folks in the Rookie audience who have left us honest rating and reviews on Apple Podcasts.
And this week’s review comes from Rags321, and Rags says, “Great podcast!” with an exclamation mark. “This is a great podcast for learning about real estate through so many different aspects.” So Rags kept it short and sweet but still left us five stars. So if you haven’t yet, please leave us a rating and review on whatever podcast platform it is you’re listening to. The reviews go a long way to helping us find new listeners. And the more listeners we find, the more folks we can help and that is our goal here at the Real Estate Rookie Podcast. Isn’t that right, Ashley?
Ashley:
And you know what I was just thinking of? So this is recorded after BPCON and we talk about the benefits of BPCON throughout this episode, but we’re headed there in a couple of days. And all I thought about while you were reading that review is, man, I need to get myself some muscle and force people into leaving us five star reviews while we’re there. Do it now.
Tony:
We’ll just walk around with a big QR code that links to the podcast.
Ashley:
Yeah. Oh, Darryl and Sarah just pushing people out of the way, “Did you leave a five star review? You can’t enter the conference.”
Tony:
That is such a good idea. So for BPCON next year as part of the registration process, there should be a toggle that says, “Have you left a review? Yes or no?” And if they say yes, then they can buy a ticket. And if they say no, then I don’t know, they’re not able to buy a ticket or it’s double the price or something crazy like that.
Ashley:
And obviously, this word, trademarking this idea right here. So it’ll only be used for our podcast on the market, not steal our idea.
Tony:
You guys are on your own.
Ashley:
But if you guys haven’t already, check out BiggerPockets’ newest podcast on the market with some of our good friends. It actually is a super great podcast.
Tony:
Such a great podcast.
Ashley:
Still number two to us of course, but definitely really interesting. And they don’t have boring banter. It’s actually interesting conversation going on there. So make sure you guys check them out if you haven’t already. So Tony, what’s new with you?
Tony:
Yeah, we are shaking, we’re moving. One of the things that I would love to do, maybe we can do this in front of our future Rookie Replies, is give you guys all an update on our Big Bear Hotel. So I would love to share the story behind that, but we just officially shut that deal down last week, so another buyer swooped in and took it away from us. So it’ll be a lot of, I think, good lessons for folks to hear as far as what we learned, what we do differently next time.
So licking my wounds from that defeat. But nonetheless, we’re still moving forward. We got a bunch of properties we’re setting up right now. I think probably we’re in the process of about to take live. I think what will be my favorite property in our portfolio is this really cool Mars themed property in Joshua Tree. And it’s got the same aesthetic as our usual tiny houses, but it’s actually a two-bedroom property. And it’s like, I’m just super excited for it. So we’re having a good time setting that one up and just all full steam ahead, the usual stuff.
Ashley:
Yeah, I think that would be a great Rookie Reply is talking about that deal because even me, I’ve had to back out of a campground deal and it was just sickening, and I felt awful losing that deal. And then somebody else swooped in and got it. But I think that it’s way better to not force a deal and that wasted time, the money, that was an opportunity cost of losing a little bit of time and a little bit of money compared to the large amount of money and time you could have wasted if you went through that deal and it not being a great deal too.
So social media, the impact it has on people’s lives, I could care less about somebody showing me their fancy things they have that. I have no interest in keeping up with the Joneses, that doesn’t bother me. But somebody talking about, “I never back out of a deal, I always close.” That’s like, “Oh, I had to leave a deal.” That makes me cringe at myself. But also, you never know what people are saying online, but I think it’s perfectly acceptable and should be made more of the norm that it is okay to go out of a deal if it’s not going to work anymore, instead of trying to force it.
And yeah, it does suck to be that person where the seller is like, “Geez, I had a buyer and they’re not buying it anymore. What the heck?” And they can trash talk you or whatever you want or something like that, I don’t even know. But I guess they’re happy they have another deal, but-
Tony:
I got another buyer.
Ashley:
Yeah. So it’s hard to swallow that when it does happen. But lessons learned are huge, I think, from that.
Tony:
Totally. Well, what’s new with you, Ash? What do you got going on?
Ashley:
So I actually have a lake house that I’m hoping to close on, I think, Friday. But I’d leave on my flight for BPCON Friday, and so I’m trying to get a really early morning closing scheduled here before I take off. So, hopefully closing on that. If not, it won’t be until a week and a half later because I’m pretty much gone all of next week to get it done. So that’s the new thing. And it’s going to be a short-term rental, just on a little lake near us here about 45 minutes from me now.
Tony:
Are there beavers there too?
Ashley:
No, at least I haven’t seen, but there is actually a dam. So the lake, it’s cool. There’s a dam there and they actually drain it. So I think it’s coming up October 2nd or October 3rd. They actually drain the lake. So it’s like a manmade lake. There used to be a town there and they actually picked up … It’s always flooded, so they actually picked up houses and moved it and then they dug it out and they turned it into a dam.
So every year they drain the lake and then they fill it back up in the spring and then everybody boats on it and stuff like that. But I’ve never been to it when it’s drained, and so I can’t wait to go and see it like basically this big crater. And there’s still some water that stays in the bottom of it because they don’t get all of it out, but you can walk around some parts of it and stuff like that.
So it’ll be interesting to see. But a really nice area, nice community, a small town that the lake is in. And I think there’s a lot of potential. There’s not a ton of rentals that are listed there. What are listed don’t have a ton of vacancy, but what I’ve learned is that there’s a lot of, people don’t even have to advertise because they have the same families that come every single year that rent it out and things like that. So I think this actually might be a good opportunity to … There’s a Facebook group for this lake and I think just even posting in the Facebook group as to, “Here’s this new short-term rental.”
Tony:
Oh yeah, I’m glad you mentioned that, Ash, because I feel like that’s … A lot of people when they want to break into real estate investing, they always want to go to the big hotspots. But even for Airbnbs, you can find success in smaller, secondary, tertiary markets because every pocket of every single state has these little spots where people go to spend a night or two to enjoy whatever that little location has to offer.
So even if me on the other side of the country, I’ve never heard of this spot, but everyone in that area knows and goes there. Then there’s an opportunity for you to have a successful short-term rental there too.
Ashley:
And I think part of the large opportunity, and I’ve learned this from my arbitrage, my units, the short-term rental arbitrage where I’m renting out an apartment in an apartment complex, a lot of our guests that stay are actually visiting people that live in the apartment complex. But they live in smaller apartments, one or two bedrooms and it’s family visiting and they maybe have five people or whatever and they can’t fit into their apartments. So they rent this unit when they’re visiting. So like Thanksgiving, Christmas, always book through there people visiting family that live in the apartment complex.
I think since we’ve had it, this would be our third or fourth Christmas and it’s been the same woman that has rented it every Christmas to visit her family that lives in the apartment complex. So the same with this lake house, is getting people that have a lake house already but want to have people come and visit, offering people in the community a discount code or whatever if they have friends or family that want to stay at their house if they can’t accommodate them into their own lake house too.
Tony:
I love that. Great lessons learned, great lessons learned. Well, we got a slew of good questions today as well. Our first question is all about how to fight back when an appraisal comes in short. Ash and I both dealt with that issue and no folks have dealt with that issue. What happens, and this is the second question which I think might be my most favorite, is like what happens if one tenant punches another tenant? How do you handle that as a landlord? And Ash and I kind of share our thoughts on that. And then the third question is about how to remain competitive when you’re going up against cash buyers because I think a lot of folks are feeling that pressure, especially in today’s environment.
So question number one today comes from a listener by the name of Lauren Murphy Niakhu and Lauren’s question is about appraisals. So Lauren says, “My husband and I are refinancing our primary residence, which was just built in 2019. We received the appraisal today and it’s almost $100,000 less than the first appraisal completed in February of 2020. Given the down payment we have in the house, even with the low ball appraisal, we still have over 20% equity.
I don’t want to be reactionary or emotional, but I’m kind of pissed. I haven’t heard from the lender yet, but I’m hoping it doesn’t affect our refi. Obviously, if it does affect the refi, I’ll try to argue against it. One of the three comps to choose was a 30-year-old house with updates. But even if the refi moves forward, is this appraisal something that would affect the future sale of our house when we’re ready to move on?”
So I love a good appraisal question, Ashley, so I’ll let you lead in first. What are your thoughts? Do you think this has an impact on her refi and her ability to sell them in the future?
Ashley:
Yeah, I think I’ll answer the latter question first is, is it going to affect the future sale of their house when they’re ready to move? First of all, this appraisal is not public knowledge, so this will be held in … You don’t have to disclose that appraisal number to anyone. When you are ready to sell your house, if the person is getting a loan when they purchase your property, they will have their own appraisal on the property.
Unfortunately, there is no consistency that the appraisal will turn out the same or turn out different. An appraisal has been considered to be more of an art than a science where it can vastly depend on who the appraiser is that is appraising the property. So yes, it could affect the future sale of your house.
So if you go and list this property and somebody puts in an offer to purchase it and they’re going to be using conventional financing and where the bank would like to have an appraisal on the property and easy math, let’s use a hundred thousand dollars for the purchase price, the bank is going to loan you up to 80% of that value, $80,000. But when it is appraised, it only appraises for $90,000. So now the bank is not going to loan them that $80,000 and that means they’re going to have to come up with more money, a larger down payment because the bank is only going to give them 80% of the appraised value, not what they’re purchasing the property for.
So to kind of go into your other question as to how to dispute this, Tyler Madden, an investor friend of ours actually did this on a recent property he just purchased where he actually was doing a refinance. He held the property for a year, rehabbed it, went through the refinance and he asked his bank to dispute it. He wrote a letter stating that he would like a second opinion on the appraisal. He had to pay to have another appraiser come in and appraise the property. But he also submitted supporting documents.
So if you can show some kind of proof as to maybe you actually have the cost of construction, your original contract with the contractor, if you know of other comps in the area that weren’t included in your property or if you can find out more information about the houses that were used for comps and maybe there was inaccurate information, bring all of this forward.
And with anything, when you are confronting someone that they had made a mistake, don’t throw it in their face and be like, “This is wrong, this is wrong. You did this, you should have done this, blah-blah-blah,” just show them here. I’d like to provide more information and kind of do it in a kindly manner. But you can definitely dispute or request to have an appraisal disputed, but it will depend on the bank. The bank can deny your request and in that time, that’s when you most likely would go to another bank to ask them to finance the loan and to get another appraisal done.
Tony:
Yeah. Ashley, so many good things you mentioned there. I’m just going to add a little bit. So she asked about, will this affect the refi? And Lauren, you said that you’re at about an 80% LTV based on that, the appraisal that just came in. So I don’t know how high of an LTV your bank is willing to go on that refi, but I feel like a lot of times it’s going to max out around that 80%. So you might not have anything left to refi if you only have 20% equity left in the house.
So it definitely could impact the refi. If they’re able to go up to like 85 or 90%, then you’ve got some room there. But obviously that $100,000 difference will impact how much money you’re able to pull out of the house. I think your point, Ashley, about trying to challenge the appraisal are a really good idea. We’ve done that, I think, two or three times successfully now. We actually just got another appraisal that came back on a house that we’re selling that came back super low. So we’re actively challenging that, literally, have a call after we finish recording today to work through that issue.
And things we’ve done is we pointed out some of the inconsistencies in the appraisal that came back. I think your point of them using a house is 30 years old versus a house that’s four years old. Those are two totally different types of construction. And typically, appraisers aren’t going to take a three-decade-old house with a three-year-old house. Those are two different types of houses that you’re looking at.
If you can find better comps within the same search radius, so let’s say they went out a quarter mile, if you can find recent comps that are better comps, I would use those as proof to say, “Hey, here’s something that I think was missed from this report.” And like you said, Tyler, I think given the scope of work for what he did, we’ve done that as well for some of our rehab. So all these things I think help play into the fact of whether or not you’ll be successful in challenging that appraisal.
And then I think, you talked about this as well, that art versus science. Anything that’s dependent upon a person’s opinion, there’s always going to be some sort of fuzziness around how they get to that number because you can send two, three, four appraisers to the exact same property, there’s a good chance they’re all going to come back with a very different opinion of value. And just a slight tangential story, but somewhat related. I know a builder. He builds in Southern California and when he builds his houses, they’re all the same exact property, same exact floor plans, same exact house, but he’s building them in different spots around the city.
So he’ll go. He’ll submit plans for four properties at a time. So he’s submitting four sets of the same exact plans to the county for them to check the plans. Those get submitted to four different plan checkers, same exact property, same exact plans. But guess what happens when he gets his comments back? Not one set of comments are the same thing. Every single plan checker is pointing out something different even though it’s the same exact build, and it makes no sense.
So he’s submitting revisions on plan A that he’s not submitting on plan B, and revisions on plan C that aren’t on plan D. So my point is, whoever goes out there, they’re going to see something that someone else might miss. So if you can point out some of those inconsistencies and things that they might have missed, I think it helps you.
Ashley:
Yeah, that’s definitely a great point. And some appraisals that I’ve done too is I’ll meet the appraiser when they go to the property and I’ll offer them information. So some people have said that they’ve tried to offer appraisers information, they don’t want it. They do their own thing and that’s fine, let them. Don’t push information onto them. But I’ve had appraisers like, “Oh wow, thank you.”
So there was one property, I owned a house down the street and I had had it appraised fairly recent. So I gave that appraisal a copy of that appraisal to the new appraiser that was coming in for this other property also with a list of what updates we had done to the property, how much it cost, things like that. I’ve also had appraisers ask me, “Oh, so what did you put in for new?” And I just tell him. He’s like, “A ballpark, what do you think it cost or whatever?” And just ask my opinion, and no proof. I don’t want to see no receipt or anything. They just ask and I just spew out on a number or whatever it was. And so yeah, it does widely vary depending on the appraiser.
I’m working on getting a hard money loan right now to purchase a property and it’s kind of a hard money lender, not really. They do hard money loans, but I’m actually doing a long-term loan with them. And so we’re having an appraisal on the property and when the appraisal was done, they told me that I could not have a copy of the appraisal yet. And I was like, “Okay, that’s really weird, I am entitled to that.”
But what they said was they were actually having a third-party fact checker go through the appraisal and make sure all of the information was correct. And once that verification was done, then they would send me a copy of the appraisal to look over. And I guess there was some kind of confusion and things that were missing and they had to have the appraiser revise the appraisal because of that, but ended up good. It was $13,000 over what I’m paying, so instant equity right there. So yeah, it just vary.
Tony:
And that happens, appraisers are people and sometimes they get things wrong. Our last successful challenge, they had the square footage off by, I think it was like, I don’t like a 20% difference in the square footage. They had us 20% smaller than what the property actually was. And obviously that has an impact on the value. So go through that appraisal with the fine tooth comb and if you can find some inconsistencies, point that out.
And then lastly, like Ashley said, if you can’t get that challenge successfully and your lender isn’t able to help advocate on your behalf, then maybe find another lender to do this refi with and maybe they’ll have a better chance of getting you the right appraisal.
Ashley:
If you haven’t done an appraisal yet, get a copy of someone’s appraisal. So anybody that has done a loan probably has a copy of their appraisal. So ask your friends and family if they don’t mind giving you one and just go through it and look because it does show almost the formula or kind of the guide of how they do put the appraisal number onto your property.
So you’ll see three to four comparable properties listed there and it’ll go as to what’s the bedroom count. And if your house has three bedrooms and the comparable has four bedrooms, they’ll subtract some off of your house because it’s not as comparable because it’s one less bedroom. And so you can go through and see the things that they actually look at when they’re adding or subtracting value from your property.
So take a look at that and you can probably Google appraisals too and look at them, but if you can find a friend or family member that has gone through an appraisal and get a copy of their report, it is very interesting to look through.
Okay, let’s move on to question number two. This question is from CJ Caneel. Does anyone have any information regarding a landlord’s responsibility for damages caused by a tenant renting a condo to another person on the premises? Specifically, if the HOA documents say a unit owner is liable for damages caused by the tenant, does that extend to intentional acts by the tenant that harm another person?
So for this question, are we assuming these are in the unit or are these in common areas even? I would think that in the unit, it would definitely be the owner responsible because a condo, you actually own your unit. But if this tenant were to go and do harm to someone else in the common area or do harm to the property in the common area, then yes it would be the owner’s responsibility of that unit. What are your thoughts on that?
Tony:
Yeah, that’s tricky because if I’m reading or understanding CJ’s question correctly, it sounds like one tenant hurt another tenant in some way, shape or form. He says, if one tenant causes damage to another person on the premises. So it sounds like maybe there’s some kind of altercation between two tenants. Is the landlord somehow responsible if tenant A beats up tenant B or something like that? And honestly, I do not know and it’s make … Are you not reading it the same way?
Ashley:
No, no. Now, I am. I see it. So if your tenant does damage to the property as the owner of the unit, I think the documents say that you are liable for that. So he does understand that. But what he’s asking is does it extend to intentional acts by the tenant that harm another person? So maybe let’s say that your tenant goes and punches another tenant in the face, are you liable for that?
The first thing I think of though is I feel like that’s not really an HOA issue. I feel like that’s a civil case.
Tony:
Or a criminal case.
Ashley:
Yeah, a criminal case. So I could see if there was maybe damage to the property where the HOA would come back after you, in which case you in turn would sue the tenant for the damages. So yeah, that stinks that you have to go and try and get your money back from the tenant. But as far as an intentional act to harm another person causing physical harm or emotional harm, I would think that would be a civil case against the tenant as the landlord.
So for example, if someone in my property that’s a tenant went and punched the neighbor, the neighbor would go after the tenant, would call the cops on the tenant, not on me. I could see the HOA moving for you to remove that tenant from the property. I could definitely see that in which if the tenant is doing this, it might be a good idea to get the tenant out.
Tony:
Yeah. And CJ, we don’t know what state you’re in or what city you’re investing in, so definitely consult with a local attorney if this is something that you’re concerned about. But yeah, I think I’d agree with Ashley where in most cases, if there’s some sort of physical altercation between one tenant and another, those two tenants would be held responsible, not necessarily use as a landlord now.
If someone is walking in the common areas and they trip over a step and hurt themselves, that’s a different scenario. But just one guy or girl walking up to another and called in some issues, I don’t think that would fall into your lap. But definitely consult with some legal professionals because Ash and I are, either one of us are attorneys or pretend to play one on podcasts.
Ashley:
The only way I can think of is if that person decides to sue you because you rented to that person, because people will sue for anything nowadays.
Tony:
That’s true. If this person had a history or something of violence and you didn’t catch that and maybe they were a threat to the community, who knows?
Ashley:
Yeah. So I think, Tony, is the best advice is consult an attorney. Better to be proactive than reactive. But I would think that it would be very hard for an HOA to monitor. That’s like saying that you’re responsible for another person’s actions. Why would anyone ever want to rent out their property if you are liable for their actions on another person? That’s a huge responsibility there.
Tony:
That’s a huge responsibility, huge responsibility. But it does make me wonder now though, like for Airbnb properties, I wonder if let’s say that my guest gets into a fight with the neighbor next door, I wonder if I could be held liable as the Airbnb owner for maybe something that the guest did like that, so something for me to think about. I got to make some phone calls after this to see what kind of liability we have.
Ashley:
Tony, along those lines, so I’m trying out new software for short-term rental. And one of them has the option where if you want to send almost a lease agreement or rental agreement to the person renting, that is probably something you could put in there. Obviously, there’s still ways people can sue you, even if you have them sign a waiver or something, but put in there that you’re not responsible for their actions or whatever, something like that. And they’re responsible for themselves and what they decide to do. But the second part of that is do you do that?
Tony:
It’s so funny. So we just had our short-term rental summit a few weeks ago and one of the speakers or two of the speakers were Sarah and Annette from the Thanks For Visiting podcast. Great podcast, you guys should definitely check them out. But they’re super dialed in with all their systems and they send rental agreements before every guest checks in. And they have it as part of their house rules on Airbnb and Vrbo, that if the guest doesn’t sign the rental agreement 24 hours before checking in, they can cancel their reservation without any kind of penalty.
So essentially someone will pay for the reservation, not fill out the rental agreement, they don’t get their money back. So we’ve been having some discussions and turned it around like, does it make sense to add a rental agreement as well? So we don’t do it yet, but after talking to a Sarah and Annette a couple weeks ago, it’s something that’s on our roadmap to add in for sure.
Ashley:
Yeah, super interesting because I really hadn’t thought about that. But then I did see their talk at the summit, it was really great information and then when it came up again with checking out the software. So yeah, I was just interested in that.
But I think that if this is something that you are worried about is being responsible for your tenant’s actions that especially short-term rental or even in your long-term leases, putting in some kind of clause that protects you. And the best place to get the proper wording for a clause like that is from an attorney. And it also probably varies based on what state you live in too, because some states, it’s a lot easier to sue people for frivolous things than it is in others.
Tony:
Awesome. All right, well, let’s keep rolling. We got one more amazing question to dive into and our third question today comes from Anthony Emerson. And Anthony says, “As a first time buyer, what are some ways to beat out a cash buyer?” This is a great question, Anthony. I think one that’s popped up multiple times both in the podcast and the Real Estate Rookie Facebook group. Here’s what I’ll say.
So a seller is motivated by one of three things. Its convenience, its speed and its price. A cash buyer, typically they’re going to beat you out by speed because if you’re a cash buyer, you don’t have to jump through all the hoops that a typical mortgage-backed buyer has to go through. There’s no appraisal process. You don’t have to if you’re paying cash. You can skip on a lot of inspections and you can close tomorrow if you really wanted to.
But when you’re buying with a traditional loan, you’ve got to go through the appraisal process. You’ve got to get your title work done. There are so many things that a traditional lender will want to see, which adds to that escrow period. So if a buyer is looking for speed, someone with cash will typically win.
The other thing that cash gives you, and I guess this is the fourth reason, is certainty. A lot of times, people can get pre-approved for a loan, but when they go out to actually close, some things pop up that prevent them from getting to the finish line. But if someone has cold hard cash in the bank, there’s a certain level of certainty that comes along with someone that has cash in the bank. So with cash, you get speed and you get certainty.
On the other side, ways that you can be competitive are with the actual price and with convenience. I met an investor one time that got a crazy good deal on a property because they offered to help the seller move. Seller had been in the house for her whole adult life, had accumulated a bunch of stuff and the thought of her having to leave was just overwhelming for her. But the seller just offered to hire a moving truck, and because they offered to help that person move, they added a certain level of convenience that allowed them to get that deal.
So if you can find what the pain point is for that seller and find a way to soften the blow or make that pain point a little bit easier, you’re giving them a level of convenience that might make them choose you over another offer.
And then the last thing you can do is the actual price. Some sellers are just motivated by what is the highest dollar amount that I’m going to give. You have to remember, on the seller’s side, they’re just going to get a check when you close. It doesn’t matter if it’s cash or if it’s with the loan, right? They just get a check at closing.
And even though the cash might come faster, even if that buyer has a loan that they’re getting on the property, the seller is still going to get a big fat check at the closing table. So if you can give them a bigger, fatter check, some people are motivated by that. So, speed and certainty, maybe you lose out to on the cash side but you can beat them out with offering a higher price and giving them a certain level of convenience.
Ashley:
Tony, that was great, great information. And to tell you, whenever you go off and giving this great information, all I do is imagine this turning into a nice Instagram reel on your Instagram account.
Oh, I only have a couple things to add to that, but I think those three things apply to any kind of property you’re going after. Every seller has one of those three things, or maybe a couple of those things that motivates them. So the advice I would give is to go for off-market deals. So you’re going to have less competition because it’s not listed on the MLS.
So, off-market deals you can find by driving for dollars, sending out mailers, calling people, word of mouth, telling anyone and everyone what you’re trying to buy. And maybe somebody’s cousin will come and say, “Hey, you know what? My cousin is selling this, and blah-blah. I thought of you because you were talking about it.”
I wouldn’t rely on that as your only lead source. I’m waiting for people to bring deals to you, but also wholesalers too. So the thing with wholesalers though would be is that a lot of times they will only accept cash purchases, but that’s not always the case. So that’s something to talk to a wholesaler up front is if you are financing the property if they would accept terms when purchasing a property.
What you can do is if you do find an off-market deal, and I think this is a big misconception sometimes, is that because you’re buying the property off market, the seller is going to expect you to close fast and to bring cash. And that is not true. That’s not the case. You can give them an offer of any type of financing that you have available to you. And it doesn’t mean you if you are getting a conventional loan, that you have to buy a property on the MLS.
So I think that’s a great route to go is to actually do some deal sourcing yourself, find a deal, and then make an offer on it where it’s just you offering and nobody else. So that there is that, they don’t have tons of people submitting offers by 10:00 PM on Sunday evening for whatever.
Another thing too I like about off market deals is that you’re talking direct to seller. So it’s a lot easier to find out what their motivation is. Where when you’re on the MLS, it’s you talking to your agent, talking to their agent, talking to the seller, and it’s like playing telephone. Even now I’m in New York state, you have to use attorneys to close and I’m doing an off-market deal on a lake house. And it’s like me to my attorney, to their attorney, to them.
And finally, we just called them and it’s like, “Whoa, whoa, no that’s not what’s happening. I don’t know why our attorney said this and your attorney said that,” like no. And we were able to, within 24 hours, get the deal back on the table and the ball rolling and moving. So I think there is an advantage sometimes to having a middle man when you’re working on a deal, but other times, it’s even better just to go directly to the seller and be able to talk to them and figure out what they want and what their motivation is.
And then you can negotiate from there, sit down with them, give them your offer. And if they’re like, “No, we don’t want to do it,” you can talk to them and say, “Okay, well what would be some things that would maybe make this deal happen for you?” Maybe it will work out, maybe it won’t, but don’t go into the deal just because you want the deal and don’t agree to their terms just to make it happen, because there will be other deals out there.
So definitely, try finding your own deals by going off market. There’s a lot of ways to do that, just even driving around looking at properties. One thing you will have to be careful of is that when you are looking for off-market deals, you will have to make sure that the bank will finance the property if you are using a loan. So if you’re using your FHA loan, you have to go through and do a kind of an FHA inspection. So this is separate from the inspector you hire. This is completely separate from that where they want to see the property as up to code.
I remember when my cousin purchased a property with an FHA loan, she had to install handrails going up the one stairs because it didn’t have it and stuff, before they would actually finance the property. So, do be careful of that that you’re looking at properties that would pass an FHA inspection or that the property would actually finance. Because if the property is too dilapidated, a bank may say, “You know what? We’re not going to touch that.”
And banks also have lending limits. I found that very common. A lot of banks won’t even give you a mortgage if it’s less than $50,000 too on the property. So watch out for those kind of things when you are going for those off-market deals. The best way to find out what property won’t work is to go directly to the lender that you’re using and ask what are properties that you stay away from or you won’t lend on. If it’s inhabitable, there’s no running water yet or anything like that, the bank probably will say, “Yeah, we don’t finance those type of properties. You have to get it livable, at least for us to finance.”
Tony:
Yeah, so many good things, Ashley. As I just want to piggyback on what you said about playing telephone, where it goes from you to your agent to their agent to them. The same exact thing happened to me on a deal we’re negotiating on this past summer where I wanted to present some updated terms to the seller. And the agent, he was a dual agent, so he was representing both the buyer and the seller in this situation. I was the buyer, the other person was the seller. And I said, “Hey, just pitch this to them and let’s see what they say.” And the broker was just so hesitant. He’s like, “I think I might make the deal fall apart and the seller is really antsy and I don’t want you to lose this deal,” so whatever.
I hang up from him, I just called the seller. And I say, “Hey, here’s what I’m thinking. What are your thoughts?” Without hesitation, they’re like, “Yes, let’s do it.” So it’s like sometimes if you can skip that middleman, it does help I think bring a more creative deal together. And it also helps build that relationship, I think, if you can talk to that person directly.
The other thing too is that it doesn’t necessarily have to be your cash. So Anthony, if you have friends or family or even hard money that you can go out and get, that will give you an opportunity to be a cash buyer in a way. Because cash just means like can you buy it without getting a traditional loan? So if you can go out and raise $500,000 from friends and family or go out and get hard money, now you’re able to close within the same timeframe that a cash buyer will.
And if you think about, I looked it up while we were talking, the S&P 500 is down 22% year-to-date. So the people that have had their money majority in the stock market are down 22% this year. So do you think that there might be an appetite for someone to say, “Hey, I’d rather give you a private money note at 10%, 12%, whatever it is, as opposed to leaving the stock market right now that’s taking a nose dive”? So there’s probably an appetite in today’s environment to say maybe private money lending is a better way for me to get a return on my investment because the S&P 500 has taken a nose dive.
So I think get creative, Anthony, doesn’t necessarily have to be your cash and see if there’s some other ways where you can get some cash but not be yours.
Ashley:
I’m going to give some unsolicited advice on the stock market right now. I am going to say if you do have money in the stock market even though it is down 22%, I would say-
Tony:
Don’t pull it out.
Ashley:
… leaving your money in there and let it ride it out, because if you look at the history of the S&P 500, it will go back up. And if you are losing money right now, you will lose money if you pull it out.
So a lot of people don’t follow that advice, they panic. So just to Tony’s point is those people that do pull their money out, great opportunity for you to make the money. And there are going to be, and probably already are tons of people that are pulling out of the stock market and kind of panicking. Just like in 2008, a lot of people did that. And if they would’ve left their money in, they would have a lot more than what they do have now because they did pull their money out.
So yeah, I think that’s a great point is you can offer a better return right now than a savings account, money market account, things like that, and even just someone putting their money into the stock market.
Tony:
And there’s probably a lot of people just sitting on cash too. It’s like a lot of people had equity. A lot of people sold homes over the last year. A lot of people refinanced over the last year. A lot of people pulled HELOC. So they just have this cash that they’re sitting on that they would like to put to work. They don’t want to put in the stock market because of how things are going. So if you can present them with a safer alternative investment strategy that gives them a better return, you can be a lifesaver.
I know so many rookies today would consider capital maybe is one of their biggest obstacles to getting started, but you got to start thinking outside the box. It’s like BPCON just happened. Hopefully, you’re at BPCON, shaking hands, meeting people, because I guarantee out of the almost 3,000 people that went to BPCON, a certain percentage of those folks are lending money on a private basis. And they have a good time doing it because it’s the most passive return they’re ever going to get in real estate investing. You just got to find a way to connect with those people.
Ashley:
Yeah, I think to add on to that too, if you do have money to invest, actually right now is a great time to put into the stock market because you’re getting stocks on sale. But once we get a lot of people will do that. But also if you are planning on retiring in the next couple of years, the stock market may not-
Tony:
Rebound.
Ashley:
… rebound in time when you are ready to retire. So this is also a great person to go after. Somebody who’s retiring in the next several years maybe doesn’t want to put any more money into the stock market and they want to put it into a nice safe investment with you. So what did we learn? We want to go after old people that are on the verge of retirement.
Tony:
We got to start doing presentations at the senior home, the geriatric centers. It’s where the best private money lenders are.
Ashley:
And you know what? It seems like, not even old people. If you’re retiring, hopefully you’re not that old because you guys are rockstar real estate investors and you were going to retire at the age of 30, 40 you a lot sooner than …
Tony:
So that’s the hot tip for today’s episode. You got to go to the senior citizen, local senior citizen, like community center in your city and do your presentation there to find your private money.
Ashley:
Okay, let’s really break this down and let’s go through the sold homes. Let’s look up people who have sold their homes. So look for the Dorothys, maybe the Carols, all of the old fashioned names that have sold their homes for cash for way more than they bought it for 30 years ago. They’re sitting on their lump sum of cash. Search what nursing home they’re at or long-term care facility and then that’s where you’re volunteering.
Tony:
There you go. That’s million dollar plan right there. You’re welcome to everybody.
Ashley:
Okay, so Tony, we’ve been our last episode, our first one doing these longer extended episodes, we had a little bonus content kind of talking about market interest rates. So did you have something that you wanted to touch on today that we could boring banter about?
Tony:
So BPCON just wrapped. And I know we’ve talked about this in the past before, but I think it’s always good to put networking front and center because I really do believe that that’s one of the most important things that a new investor can do to kickstart their investing journey. So I’m just going to share what someone can do if you are hesitant to network or maybe you feel like networking isn’t quite your cup of tea.
So first thing I’ll say is that you don’t have to be an extrovert to enjoy networking. I think I’m naturally an introverted person because I know I re-energize by being by myself. I need alone time to have my energy levels come back up. Whereas if you’re an extrovert, you need that people connection, that energy of other people being with you to feel re-energized. So I’m by nature an introvert.
But I still find joy in networking, and here’s typically what I’ll do. So even before I was Tony J. Robinson from the BiggerPockets Real Estate Rookie Podcast, and I was just going to meetups as Tony Robinson with the nobody-listens-to-my-podcast podcast, I would go into a room and I would find a group of people. And all I would say is like, “Hey, do you mind if I join you guys?”
And a hundred times out of a hundred times, they’re going to say yes. I’ve never been told, “No, you can’t join us.” And once you join into that group, it’s a simple question, ” So, hey, what brings you here today?” Or, “Hey, where are you at on your real estate investing journey?” And then people kind of go off and start telling you their story. And that’s how you build connections with people. And it’s not necessarily about meeting as many people as you can in the room, it’s more so about like, can I build a genuine connection with any of these people? And you never know where these little conversations or where these little connections might lead you.
I’ve shared in the podcast before that the only reason that we started investing in Airbnbs was because Alex Sabio … His name is Alex Sabio. He’s another investor here in southern California. He started buying Airbnbs and he and I met at a meetup. And after he bought his first one, he said, “I think you guys should buy one too.” Three weeks later, we close on our first cabin. So you never know where those connections will lead you.”So hey, can I join you guys? And where are you out in your investing journey?” Those two sentences will take you so far when it comes to networking.
Ashley:
The point you made about establishing a genuine connection was right on. I do think that sometimes people get over-concerned with, “Oh, I got to build my list of connections. I collect as many business cards as I can and enter them into some kind of data collection software so I can track the people that I’ve made a touch point with.”
But having, instead of meeting 20 people that night, talking to three people where you actually were interested in what they’re saying and the same back to you and you built a connection with them, that may be on your way to a friendship instead of just that business connection, that networking. That will be so much more valuable to you than looking at a list of 20 people that you met that night but can barely remember or put a face to a name as to who these people actually were.
You may make a note on the back of their business card, what they do or something like that, or one thing you learned about them. But the genuine connections are really what are going to help you. And also you can provide so much value to those people too.
And because you have that genuine connection, they’re actually going to want to help you and the same, and you’re going to want to help them because you truly care about them and you become friends or whatever that relationship has turned into. So I think right there was a huge takeaway. And sometimes when we talk about things on this podcast that are business-wise, I think of it too as even just in life in general.
As I’ve gotten younger but yet wiser, I’ve somehow learned that in life, I would rather have that core group of friends that are super genuine and best friends than have 50 friends that you don’t have that genuineness from because you’re just like trying to keep your friendship going with 50 people instead of those four or five people where you build that genuine connection. So I think that works in all aspects of life, I guess.
Tony:
So true.
Ashley:
Well, you guys, thank you so much for listening to this week’s Rookie Reply. My name is Ashley, and you can find me at WealthfromRentals, and he’s Tony at tonyjrobinson on Instagram. And please, if you are loving the new Rookie Replies, leave us a five-star review on your favorite podcast platform. We’ll see you guys back on Wednesday with a guest.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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Opinion: Applying lessons learned to adapt to a competitive market
2022 and 2023 will not mirror the conditions of 2008 and beyond. But they won’t resemble 2020 either. Below are a few lessons title agents can take from previous down cycles that could help them adapt to current market conditions.
It’s been a while since the settlement services industry faced such a competitive market. Of course, this was all but inevitable after the amazing numbers brought to market in 2021. Fannie Mae recently told us it expects $2.6 trillion in origination volume for 2022. In most years, that’s still a fair amount of opportunity. But in combination with uncertainty about interest rates and the overall economy, the fact is that there will be industry contraction into 2023. The fact that we will be in a primarily purchase market for the first time in years means that title business owners will need to have a specific mindset and a carefully crafted strategy. The good news remains that, for those who can adapt, there will be business to be had. For some, there may even be growth.
I’ll begin by saying I don’t know anyone who believes 2022 or 2023 will look like 2008 or that era. Far from it. Very different factors —underwriting, dramatic overextension of leverage and lack of capitalization— brought that collapse about. Right now, we’re not facing a collapse. We’re facing a significant correction coming with a pivot in the market cycle. But the period following the ‘Great Meltdown’ may well be the last time our industry faced any kind of stark change to the market, at least one requiring substantial adaptation.
I have some very vivid memories from 2008 as the market changed. That collapse was historic, and the contraction so severe that I remember checking, daily, a news source specifically designed to track lenders who had closed or gone insolvent. I used that information to anticipate which of my own closing files would be cancelling, or which ones not to fund. In those days, lenders sometimes funded via certified check. I watched in disbelief as stories unfolded about lenders’ funding checks that were returned as “NSF,” leaving them unable to fund closings. Even worse, some of those agents had already made the disbursement, only to discover the lenders’ checks were not good.
We adapted and survived in 2008 and the following years. We also learned some lessons that could come in handy this time around. It cannot be overstated: 2008 made what we’re about to experience seem like a hiccup. But it never hurts to be prepared. Opportunity can strike in any market. With that in mind, here are a few tactics that I and my partners learned as we adapted to the market meltdown of the late 2000s.
Have a long-term capitalization plan…always
It seems rudimentary enough, but more than a few title businesses have never taken the time or effort to ensure proper capitalization, including a scalable plan to build and maintain reserves. It’s not surprising because title agents are almost forced to act on a day-to-day— or even hour-to-hour— basis. Files can be pulled or canceled mid-transaction. We act on new orders immediately, and they could come from any angle. And, as is the case in any part of the mortgage process, things can change significantly at the drop of a hat.
We in the title industry are used to unexpected expenses and surprises, no matter what market cycle is dominant. In those periods when we are flush with cash, many invest in new technology, upgrade elements of their operations, staff up or even reward their most productive employees. While savvy agents may have plans to save, an unexpected market hiccup can change even the best-laid plans. Really, who’s got enough left over to save?
In reality, we all do. It takes a long-term strategy and a plan to faithfully reserve capital, even a little at a time, no matter what the P&L shows. If orders are coming in, then there’s a way to set aside a bit of capital for a rainy day.
Sometimes, the best time for capital raises is when the market is at its best. Our industry looks to flash capital raises far too often once the storm clouds have already gathered. This minimizes their chances of reaching their goals, as potential investors are besieged by requests. It’s also not advisable to haphazardly seek investors or outside capital on the basis of short-term goals or initiatives like upgrades to your title production system. But, there’s nothing wrong with working such objectives, including capital raises, into a long-term plan. As long as you plan the trajectory of that investment and know how it will eventually be paid for.
Thoroughly evaluate the long-term impact of cost-cutting
It doesn’t take a genius to understand that, when revenue declines, costs need to be pared back as well. This is especially true if costs went up to accommodate the volume of a previous market cycle. However, as is the case with capitalization, this process should be executed with the long-term plan in mind. Far too often, the knee-jerk reaction to bad news in the marketplace is to eliminate the positions created or expanded by the need to service greater volume. However, when the market turns again, those same positions are brought back. This hire-fire cycle has been proven to be the more expensive route in the long run.
To be clear, layoffs, department eliminations or the cutting of product offerings may well be unavoidable at certain times. For example, title agents determine staffing needs based on order volume, which is never predictable and may result in staffing changes. Additionally, a title order doesn’t always lead to a closing. When a title business owner receives an unexpected amount of orders, they may quickly increase staff to accommodate those orders. But, they could fail to see all of the anticipated revenue due to a rate hike or other market change that leads to the cancellation of some or many of their orders.
If anything, slow periods may be a great time to reassess the company’s workflow and consider process improvements. Are there greater efficiencies to be found? Would automation or tapping into centralized resources avoid the costly hire and fire cycles? When there’s time to make the assessment, use it. One can always make the investment later when revenue improves.
Through all of these seasons, consider the ramifications when cost-cutting can be planned. Not just the savings over the next quarter or six months, but the potential damage to the business in the long term. Just as successful title business owners make their investment and purchase decisions carefully in the best of markets, they also consider the long-term or collateral impact of cost cuts in the face of poor markets.
Diversify your offerings…within reason
During and after 2008, it was not uncommon for title agencies that had specialized primarily in refinance transactions to suddenly add specialties like default/REO, reverse mortgages or 1031 exchanges to their offerings. For more than a few agencies, this strategy helped them find enough revenue to make it through the cycle. For some, however, the new offerings amounted to little more than a new bullet point on a marketing flyer. Although the firm advertised expertise, the reality often proved otherwise. When clients discovered that those firms weren’t really up to the task, potential revenue wasn’t the only thing lost. The brand damage, in many cases, was enough to drive those firms out of business altogether. And the damage done to the firm’s traditional services, and clients, due to the sudden shift of focus only chipped away further at revenue. The short-term revenue gain lead to massive losses in the long run.
In the coming months and years, lenders will likely roll out new initiatives, products and target market segments to bolster their revenue. These offerings may include reverse mortgages, HELOCs, non-QM offerings and more. Although some of these adjustments will have no impact on the title industry, forward-thinking and creative title businesses may well expand their offerings or capabilities to serve these new niches. It will be important that, unlike in 2008, these new offerings be backed by expertise and ability. Businesses may need to hire experts or hire good consultants. Failure to do so could result in a business that never makes it to the next high-volume period.
Finally, while caution and hesitancy will likely rule the day for the next few months or quarters, that doesn’t mean that a title business shouldn’t consider carefully measured risks here and there. For the well-capitalized firm, now may be just the time to implement new technology and endure the implementation while volume is slower so that it will be ready to capture more business as volume rises. Some of the savviest business owners in this space will tell you that down markets are the time to acquire competitors or other key assets. Amazing talent will be looking for new opportunities as businesses cut employees— including executives and high producers. If the plan allows, now is the best time to bring innovators and proven leaders into your team to help find ways to manage this phase and prepare for the next.
Lenders and title businesses alike have all generally been moving to prepare for the purchase cycle and revenue decline we’re experiencing now. Some are benefiting from the long-term planning and contingencies they put in place years ago. But it’s never too late to bring strategic thinking into the mix. And for those able to execute their plans, these economic and market conditions could be a springboard to greater success.
Aaron Davis is the CEO of AMD Enterprises, a conglomerate of title, technology and eClosing ventures which includes Florida Agency Network, Premier Data Services and Network Transaction Solutions. He is also a frequent speaker at title and mortgage industry conferences and seminars and often serves as a contributing author or expert source to numerous trade publications on issues pertinent to title and mortgage executives. You can reach him at aaron@amd-1.com.
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American Housing Act charts bipartisan path forward for housing affordability
Earlier this year, congressional Democrats considered making major investments to promote housing affordability as part of their Build Back Better bill. But the way this legislation was considered — through the inherently partisan “reconciliation” process — ensured it would garner no Republican support. Ultimately, the housing provisions ended up on the legislative cutting-room floor.
The problem
The nation’s housing affordability crisis continues to roll on. Housing remains unaffordable for far too many families, due in large part to a shortage of affordable rental units and entry-level homeownership options. In addition to affordability challenges, wages and incomes in recent years have not kept pace with the rising housing costs.
As a result, millions of households pay unsustainably high rents, often more than half of their monthly incomes. Millions of others can’t afford to buy their first home. Meanwhile, nearly 600,000 individuals are experiencing homelessness on any given day.
At the Bipartisan Policy Center’s Terwilliger Center for Housing Policy, we believe that a comprehensive, effective and durable response to the crisis can only come through bipartisan cooperation. That’s why our government advocacy partner, BPC Action, has developed a legislative proposal — the American Housing Act of 2023 — that builds on the best ideas from congressional Democrats and Republicans. The plan seeks to improve housing affordability using a three-pronged approach:
At the grassroots level, Democrats and Republicans overwhelmingly believe the federal government should address the crisis. A new poll that Morning Consult conducted for the Bipartisan Policy Center claimed some 88% of Democrats and 75% of Republicans said it was important that the federal government respond to high housing costs that are contributing to inflation. And, 89% of Democrats and 77% of Republicans said it was important that the federal government address homelessness.
The housing affordability crisis does not discriminate by geography or party affiliation. It’s affecting big cities, rural areas and suburbs alike, disrupting the lives of Republicans, Democrats, and Independents. Some 54% of those polled said they had experienced increases in their rent, mortgage or utility payments over the past 12 months, and 52% of renters said they’ve had trouble paying their rent in the past six months.
Not surprisingly, those making less than $50,000 per year were likelier than middle and higher-income respondents to report problems in paying rent and utilities over the past 12 months. One in six renters is not caught up on their rent payments. 17% of renters are not confident that they can make their next payment on time.
Those troubling figures help to explain why we feel so strongly about the need for federal action. We believe that the three-part American Housing Act gives lawmakers a comprehensive, and politically feasible, way forward.
What’s in the plan?
The first part of the plan proposes to increase the much-needed housing supply. In recent years, the nation has underbuilt housing by millions of homes, failing to keep pace with new household formations and rising demand. We would substantially strengthen the federal Low-Income Housing Tax Credit, our nation’s most successful affordable rental housing production program, and create a new tax credit that would incentivize private investment to build and rehabilitate homes for sale in distressed communities. These homes, designed for lower- and moderate-income families, would serve as an entry point for homeownership while supporting neighborhood revitalization.
The second part proposes a preservation of our existing affordable housing stock. Preserving an affordable home is generally more cost-effective than building a new one, and it prevents displacing a household. We would ensure that new homes that are financed through the Low-Income Housing Tax Credit stay affordable permanently, rather than carry rent restrictions that expire after 30 years.
The third and final part proposes a series of “demand-side” initiatives that would help families afford and access housing and reduce homelessness. Federal rental assistance enables millions of low-income families to secure stable housing. However, because of limited funding, fewer than one in four eligible households receives assistance. One of our proposals, based on legislation from Senate Democrat Chris Van Hollen of Maryland and Senate Republican Todd Young of Indiana, would fund 500,000 new housing vouchers to help families with young children move to high-opportunity neighborhoods.
Nearly every idea put forward in the American Housing Act has some measure of bipartisan support. If enacted in its entirety, the legislation would greatly improve the lives of millions of Americans.
Regardless of the upcoming congressional election results, the new 118th Congress that convenes in January should take on the housing affordability crisis with the urgency it deserves.
Dennis C. Shea is executive director of the Bipartisan Policy Center’s J. Ronald Terwilliger Center for Housing Policy.
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Local markets: Phoenix, Huntsville and Boston
Local markets is a HousingWire magazine feature spotlighting housing trends across the country.
Phoenix, Arizona
Phoenix has arguably been one of the hottest housing markets in the country over the past two years, but as mortgage rates have climbed, demand has cooled and inventory has risen dramatically. At some points during the summer, the active listing count for the Phoenix-Mesa-Scottsdale metro area topped 10,000, according to data from St. Louis Fed.
“Inventory is rising, and days on market is also a bit longer, but we still have a significant turnover of existing product,” Bob Nathan, a local Engels & Völkers agent, said. “It is not a crazy hot market anymore, it is now just a very strong market, but there are less concessions being given up by the buyer. So it is a little bit more back toward normal.”
However, as mortgage rates continue to rise, home-buying demand cools further and concerns about a possible recession become more prevalent. Accordingly, Phoenix is feeling the pain. The city ranked No. 8 in a Redfin analysis of metro areas most likely to feel a big impact as these gloomy economic scenarios materialize.
Lafayette, California
Just 25 miles east of San Francisco, Lafayette, California, is known for its high quality of life, top-rated schools, low crime rate and some of the highest home prices in the country. In June, the median sales price for a home in Lafayette came in at $2.065 million, according to Redfin.
Despite the steep home prices, home-buying competition was intense in Lafayette until mortgage rates began to rise.
“We have gone from so many offers on homes and not a lot of inventory to a slightly sleepier environment as people pause and figure out lending and what they can now afford with the decline in the stock market and rising interest rates,” said local agent Dana Green, team leader of the Compass-based Dana Green Team.
For sellers, Green said this change means having to alter pricing strategies and being a bit more modest with list prices. However, she noted that this shift did not come as a surprise.
“We all saw it coming based off of the number that came out Q1 this year,” she said. “We were at such an unbelievable high, and it obviously can’t stay that way forever. It is hard to know what a normal market looks like anymore. We went from a normal but strong market to the COVID market and now this sudden shift, so we are still trying to figure out what our new normal is.”
Vancouver, British Columbia, Canada
With easy access to the Pacific Ocean, great skiing and a milder climate than other parts of the country, it is a wonder everyone doesn’t live in Vancouver, British Columbia. During the height of the pandemic, when many people looked to get out of cramped cities, the housing market in Vancouver got a boost from homebuyers from other parts of the country who decided to take advantage of remote work opportunities and relocate.
But over the past few months, local eXp Realty agent Sarah Kwan has noticed a shift in the market. “There are definitely a lot more price reductions,” she said. “I first noticed the drop in March because I had a townhome listing and the week prior there was another unit that was virtually the same and it had twice as much foot traffic as we had.”
According to Kwan, prices have dropped an average of 2% month over month, but in some markets, she has seen prices drop 10% month over month. Despite these drops, she said that if a property shows well and is priced strategically, it will still generate plenty of interest and possibly even a multiple-offer situation.
“In markets where we have seen large price drops in the past 30 days, it is very important that you are looking at sold inventory on a weekly basis and maintaining communication with your clients so you can make changes if you need to.”
Kwan said she doesn’t confirm the final list price until right before the home is listed. Looking ahead, Kwan expects the market to continue to slow down. “It was expected regardless of interest rates. It was kind of bound to happen. There is only so long it can keep going up,” she said.
Huntsville, Alabama
Huntsville, Alabama, is perhaps best known as the birthplace of the Saturn V rocket that would one day send Neil Armstrong and Buzz Aldrin to the moon. However, it wasn’t always a bustling metropolis for the military technologies and aerospace industries. The city’s initial growth is attributed to the cotton industry and trade associated with railroad industries.
“We have always been known for great white-collar jobs, but we just didn’t have anything to fill the gap,” said John Brooks, a local agent with Coldwell Banker of the Valley. The opening of an Amazon distribution center and the addition of a second Toyota plant, among other things, have changed the situation.
The abundance of job opportunities combined with Huntsville’s strong public school system and growing arts and culture scene have made the city a place many wish to call home.
“We are usually ranked as one of the best places to live, and with this latest huge migration, a lot of people decided to move here, which gave us a bustling real estate market,” Brooks said.
Like elsewhere in the country, high levels of housing demand resulted in rapidly rising home prices and low inventory, but as interest rates have risen and fewer people are looking to make cross-country moves, Brooks said things have slowed down.
“I think Huntsville will still see some relocations probably into next year, and I think that is going to help our local market stay balanced,” he said. “We have definitely started getting more inventory, which is a healthy thing because it is not sustainable for everyone to continue to go up $40,000 over list price on every single home.”
Boston, Massachusetts
Founded in 1630, Boston is one of the oldest cities in the U.S. In its centuries of existence, the city and its housing market have seen a lot. As one might expect, despite its high home prices, the metro’s housing market is pretty hearty. In July, Redfin named the city as one of the metro areas with the lowest chance of a housing downturn if the U.S. entered a recession.
“We are seeing pockets of high activity, but prices are super stable,” said Ricardo Rodriguez, a Boston-based Coldwell Banker agent. Rodriguez attributes at least some of Boston’s resilience to the metro’s limited inventory and constant stream of demand, thanks to the various industries that call the city home.
But while other markets across the country are dealing with shifting conditions and changing trends, Rodriguez said he has noticed a new home-buying trend in Boston.
“Our buyers are younger than they used to be,” he said. “I think during the pandemic, a lot of people passed along financial resources to their children earlier than they would have because I am seeing more young people engage in the home-buying process than I have in my 20 years in the industry.”
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Expensive regions see the biggest dip in home sales
Higher mortgage rates continued to impact home sales over the last month, with existing home sales declining in September for the eighth consecutive month, according to a report from the National Association of Realtors (NAR).
“The housing sector continues to undergo an adjustment due to the continuous rise in interest rates, which eclipsed 6% for 30-year fixed mortgages in September and are now approaching 7%,” NAR Chief Economist Lawrence Yun said in a statement. “Expensive regions of the country are especially feeling the pinch and seeing larger declines in sales.”
Per the report, existing single-family home, townhome, condominium and co-op sales fell by 1.5% from August to September, with three out of four major U.S. regions experiencing month over month contractions.
The seasonally adjusted sales rate for existing home sales also declined in all regions on a year over year basis. According to the NAR, home sales declined by 23.8% on a year over year basis, dropping to 4.71 million from 6.18 million in September 2021.
This is the 13th consecutive month in which year over year home sales have declined nationwide.
Sales of existing homes are now at the lowest level since 2014, excluding the decline that occurred during the pandemic, and home sales are expected to continue to decline over the next few months.
“Existing home sales are being impacted by higher mortgage rates,” housing analyst Bill McBride of Calculated Risk said in a post Thursday. “Rates have increased sharply in October, and that will impact closed sales in November and December – so I expect further declines in sales later this year.”
According to Freddie Mac, the average rate in September for a 30-year, conventional, fixed-rate mortgage was 6.11%, up from 5.22% the month prior. In contrast, the average rate in 2021 was 2.96%.
While higher mortgage rates have had a clear impact on existing home sales, it’s likely that rising home prices over the last 127 months (10.5 years, roughly) have also played a role.
As of September, the median home price was $384,800 for existing homes of all types, according to the NAR. That’s an 8.4% increase year over year compared to September 2021, when the median home price was $355,100. The year over year median price change peaked at 25.2% in May 2021.
The trend of month over month median home price growth has reversed course over the last few months, however. Per the report, September marked the third month in a row in which the median sales price retracted. The NAR cites regular seasonal price trends as the cause of the decline in median home price.
Housing inventory also decreased last month, but just slightly, dropping from 1.25 million available units in September from 1.28 million the month prior. Per the NAR, this drop in inventory was likely due, at least in part, to the seasonal inventory decline that typically occurs during December and January.
The months of supply remained unchanged from August to September at 3.2 months.
According to the NAR, the region that experienced the most significant decline in existing home sales was the South, with home sales declining by 1.9% from August to September, and by 23.8% from this time last year.
Existing home sales also declined in the Midwest, dropping by 1.7% from the month prior, and by 19.7% from September 2021. Home sales dropped in the Northeast as well, declining by 1.6% from August to September, and by 18.7% compared to September 2021.
The West was the only region that did not experience a decline in existing home sales month over month. Home sales in the West were identical from August to September, but were down 31.3% from the year prior.
But while home sales and inventory have declined across much of the nation, the trend of homes selling above list price has continued, according to Yun.
“Despite weaker sales, multiple offers are still occurring with more than a quarter of homes selling above list price due to limited inventory,” Yun said. “The current lack of supply underscores the vast contrast with the previous major market downturn from 2008 to 2010, when inventory levels were four times higher than they are today.”
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Where home seller profit margins are shrinking
Profit margins on median-priced single-family and condo sales across the U.S. decreased to 54.6% in the third quarter, according to a new report from real estate data company ATTOM.
This is the first decline in home prices in almost three years, down from 57.6% in the second quarter, with median national home values dropping 3% quarterly to approximately $340,000, the report said.
Despite this drop, investment returns for home sellers is still up from 48.8% in the third quarter of 2021, and still at near-record levels for the century (20 points higher than two years ago). The median home price is also still at a near all-time high, more than double where it was 10 years ago, according to the report.
On the other hand, investment-return decline during this year’s summertime home-selling season marked the largest quarterly downturn since 2011, with the third-quarter reversal also marking the first since 2010 that seller returns went down from the second to third quarter.
This coincides with a decrease in gross profits during that time, with the typical single-family home and condo sale dropping 6% to $120,100, representing the largest quarterly decrease since early 2017.
The report attributes these declines to “growing headwinds that threaten to end or significantly cool down the nation’s decade-long housing market boom”, including a doubling in average mortgage rates, a slumping stock market, a 40-year high in consumer price inflation and double in foreclosure activity by lenders.
The easy way to make property listings stand out
According to a report from the National Association of Realtors, homebuyers consider floor plans the top most desired feature on a home listing, after standard listing photos and property data.
Presented by: CubiCasa
ATTOM says these factors are raising homeownership costs for buyers, which it says “cuts into resources available for down payments on purchases” and impacts overall household budgets. This has resulted in a growing supply of homes for sale, and in turn pushed home prices down (though not in every market).
Metro results for home sellers
While typically profit margins, or the percent change between median purchase and resale prices, decreased from the second quarter to the third quarter of 2022 in 68% of metropolitan statistical areas (127 of 186), returns were still up annually in 148 of these markets (78%)
The report states that the biggest quarterly decreases in typical profit margins came in the metro areas of:
ATTOM also found that just 59 of 186 (32%) of markets that did see increased profit margins in the third quarter, with the largest quarterly increases including:
The report also found that metro areas with a population of at least one million saw the largest quarterly profit-margin declines in San Francisco, Seattle, San Jose, Raleigh and Birmingham. Larger markets experiencing profit increases include Milwaukee, Miami, Cincinnati, Nashville and Grand Rapids.
Cash sales and institutional investors
All-cash purchases continue to represent a large slice of single-family home and condo sales, accounting for 35.7% of all sales in the third quarter of 2022. This is slightly down from 36% last quarter, but is still above the 33.9% of sales in Q3 of 2021.
Markets with the largest share of all-cash purchases include Columbus, GA (76.8%), Augusta, GA (76.6%), Gainsville, GA (68.3%), Myrtle Beach, SC (67.3%) and Atlanta, GA (61.9%). Cash-sales represented the smallest share of all transactions in Lincoln, NE (14.9%), Valleja, CA (17.6%), San Jose, CA (18.8%), Kennewick, WA (19.4%) and Spokane, WA (20.2%).
These high levels of all-cash offers also coincides with a rise in institutional investment purchases, accounting for 6.7% of all single-family home purchases in the third quarter. While this is up from 6.4% last quarter, it is also down from 8.4% at this time last year.
FHA-financed purchases
Another interesting trend occurring in the third quarter is the increase in Federal Housing Administration (FHA) loans, which now comprise 7.9% of all home purchases in the third quarter (one in every 13). This is up from 6.7% in the second quarter of 2022, representing the first quarterly gain in the past year.
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Ally Financial takes a big hit on Better.com investment
Online bank Ally Financial recorded a $136 million impairment related to its investment in struggling digital mortgage lender Better.com, bank executives said Wednesday during the company’s third-quarter earnings call.
The bank disclosed to shareholders and analysts that the $136 million impairment was a “nonmarketable equity investment” related to its mortgage business.
“Following the impairment, our investment has a remaining carrying value of $19 million, so this has been effectively derisked,” CEO Jeff Brown said on the call.
Better.com, founded by Vishal Garg in 2014, grew tremendously during the pandemic, capitalizing on a historic refinancing wave and homeowners’ growing comfort in an all-digital mortgage experience. Better grew from roughly 2,000 employees and $4.9 billion in volume in 2019 to 10,000 employees and $58 billion in origination volume in 2021.
But the company – which has raised $905 million across several funding rounds and got a $750 million loan from SoftBank in 2021 – has run into major trouble. It took a major public relations hit when Forbes reported on Garg’s aggressive management style and past controversies, as well as the infamous mass layoff on Zoom.
Better is also facing a lawsuit from Sarah Pierce, its former CFO, that claims she was pushed out after complaining that the company’s “black box” financial were misleading investors. The Securities and Exchange Commission took notice.
But above all else, Better’s biggest problem appears to be about fundamentals. The company continues to lose tons of money – it lost $221 million in the first quarter – and it’s struggled to gain traction in a purchase market that is also slowing.
The company’s plan to go public via a special purpose acquisition with Aurora Acquisition Corp., initially slated for the fourth quarter of 2021, is unlikely to happen given market conditions.
In recent weeks, Garg has sought out the press to tout its new direction, which includes a “Zillow-like website for mortgage applicants to find homes they can afford,” according to Insider. Better is also building a home-action tool that the company believes will allow preapproved mortgage holders to bid on homes and purchase them without broker fees.
Ally, one of the country’s largest vehicle lenders, invested in Better in 2019, though it wasn’t clear at the time how large its investment was.
In the first half of 2022, Better originated $8.7 billion, slipping to the 34th largest mortgage lender in America. Its origination volume dropped 67% from last year, according to Inside Mortgage Finance. Among the top 50 lenders, only Freedom Mortgage had a bigger decline in origination volume, at 75%.
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Homebuyers increasingly seek ARMs as mortgage rates soar
Mortgage rates have more than doubled from the beginning of the year and homebuyers facing affordability challenges are increasingly turning to adjustable-rate mortgages (ARMs) to reduce their monthly payments.
The latest weekly survey data from Freddie Mac shows the 30-year fixed-rate mortgage rose two basis points from last week to 6.94%, slowing its upward trajectory this week. A year ago at this time, rates averaged 3.09%.
“The 30-year fixed-rate mortgage continues to remain just shy of 7% and is adversely impacting the housing market in the form of declining demand,” Sam Khater, Freddie Mac’s chief economist, said in a statement.
The Freddie Mac’s index compiles purchase mortgage rates reported by lenders during the past three days. It’s focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20% down and have excellent credit.
Other indexes show higher rates.
On HousingWire’s Mortgage Rates Center, Black Knight’s Optimal Blue OBMMI pricing engine, which also includes some refinancing products, measured the 30-year conforming rate at 7.026% on Wednesday, up from 6.939% the previous week. Meanwhile, the 30-year fixed-rate jumbo (greater than $647,200) went from 6.549% to 6.746% in the same period.
Mortgage rates were 7.22% for conforming and 6.15% for jumbos at Mortgage News Daily on Wednesday, a spread of 107 bps.
ARMs pick up steam
Borrower demand slumped with mortgage demand hitting a 25-year low last week amid the ongoing economic uncertainty and affordability challenges. In return, homebuyers looking for rate relief turned to various ARM products to reduce their monthly mortgage payment.
“Mortgage rates keep trending higher because inflation stubbornly refuses to abate,” said Holden Lewis, home and mortgage expert at NerdWallet. “That’s why one in eight loan applications are for adjustable-rate mortgages.”
The overall ARM loan share rose to 12.8% of all applications last week, marking a 14-year high, according to the Mortgage Bankers Association (MBA). Rates for 5/1 ARMs ticked up to 5.65% last week from the prior week’s 5.56%.
“ARM loans continue to remain a viable option for borrowers who are still trying to find ways to reduce their monthly payments,” said Joel Kan, MBA’s vice president and deputy chief economist.
Historically, it’s still roughly “a third of the peak seen in the early 2000s,” said Bob Broeksmit, President and CEO of the MBA.
Buyers, builders and sellers take a step back as inflation persists
Surging mortgage rates reflect the Federal Reserve’s tightening monetary policy to tame inflation. The annual U.S. inflation rate was little changed last month, rising 8.2% year over year and up 0.4% compared to August’s 0.1%, according to the Bureau of Labor Statistics last week.
The Fed increased its benchmark rate five times this year, which included three consecutive 0.75% hikes.
Treasury yields show higher rates in the short term, signaling a recession on the horizon. The 2-year note, closely tied to the Fed’s interest rate moves, increased 27 bps to 4.55% on Wednesday from the prior week. The 10-year note went to 4.14% from 3.91% in the same period.
At its most recent Federal Open Markets Committee meeting, officials largely agreed that it was better to aggressively raise interest rates now to avoid economic pain down the road. Markets widely expect a similar-size rise to be approved at the next meeting in early November.
On the heels of heightened mortgage rates and persistent inflation, buyers, builders and sellers have taken a step back to consider their best course of action. Home purchase sentiment hit its lowest level since 2011 and home builder sentiment fell for the 10th consecutive month in September as construction activity slowed. Sellers are responding to the shift in the market and pulling back on listing activity, resulting in a 9.8% decrease in new listings compared to last year and even further below 2019 levels, according to Realtor.com.
“Though price growth has cooled and prices have begun to come down, high and still climbing mortgage rates mean many of today’s buyers face larger home payments than they would have when home prices were at their peak,” said Hannah Jones, economic data analyst at Realtor.com.
The post Homebuyers increasingly seek ARMs as mortgage rates soar appeared first on HousingWire.
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