Some agents will thrive while others barely survive in a post-NAR lawsuit world as real estate agent commissions are threatened once again. But it isn’t only agents getting hit hard this week. Banks have been “rocked” by real estate losses, primarily commercial real estate, as loans come due, but investors aren’t able to pay. One bank saw its share price slide by more than fifty percent this month as earnings reports showed a major loss from lending this quarter.
Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, and today we’re going to be digging into three of the most pressing and important headlines facing the real estate investing industry. And to do that, I have my friends, Kathy Fecke, James Dannard and Henry Washington joining us. Kathy, how are you today?
Kathy:
Doing great. We survived the atmospheric river, so all good.
Dave:
What is an atmospheric river?
Kathy:
Apparently when the clouds open up and just dump a lot of water.
Dave:
Rain? Is that just a fancy term for rain?
Kathy:
Yeah, life-threatening rain in California.
Dave:
Okay. Well, this is maybe why on this episode we’re going to be digging into headlines so that we don’t just see things like atmospheric river and read too much into it when all it is is rain. We’ll be doing the same thing, hopefully, for the real estate market to help you not overreact to any potential headlines that you’re seeing. James, how you’ve been?
James:
I’m good. I took off in the atmospheric river last night. It was a bumpy ride out.
Dave:
It’s almost like it’s a normal weather phenomenon. All right, Henry, it’s good to have you on as well. Hopefully down in Arkansas you don’t have to make up fancy words for just normal weather.
Henry:
Yeah, today I am here despite the atmospheric brightness that we are experiencing. I believe some call it sunshine, but down here in Arkansas we like to get pretty fancy.
Dave:
We got a real meteorology team over here. Thank you for joining us. All right, well, we do have a great show for you all today. We’re going to be covering, like I said, a couple of major headlines facing real estate industry, like what’s going on with the big NAR Sitzer/Burnett lawsuit. Updates on credit markets and what’s happening with banks and are they lending to real estate investors. And we’ll be talking about fresh data about the labor market that we’re seeing here in 2024. Let’s just jump right into our first headline, which is Keller Williams reaches a $70 million settlement.
If you remember, there’s been this ongoing lawsuit against NAR and a lot of the largest real estate brokerages in the country alleging that they colluded to keep their commission structure in place against the best interest of home sellers. We did get a jury verdict back in the fall that found NAR and some of their co-defendants liable. Now we’re seeing Keller Williams, one of the largest brokerages in the country with over 180,000 real estate agents reaching a settlement to address these antitrust claims. Now, it seems like this story just keeps evolving. James, as an agent, what do you make of the updates in this story? How are you thinking about Keller Williams behavior here and what it means for the next few steps that might unfold from this lawsuit?
James:
I feel like we’re going through an evolution of broker fees. I think that happens in every business, every service and what we’re seeing now is the traditional way and the assumption of doing business might be getting changed, where it’s like, “You’re a broker, you just get paid this and you move on.” The fact that they settled does, I think, make a pretty important impression on what’s going on right now and it could open it up for other lawsuits. They did admit to no wrongdoing and they were just trying to get this thing gone. It looks like they settled for the 70 million, they’re trying to move on and now they’ve agreed to change their business practices. I don’t think it’s going to impact us in the next 12 to 24 months, but over the next four to five years we’re going to see this evolution of broker fees, which I don’t have a problem with whatsoever, because if you really look at the history of brokers, back in the ’90s, they didn’t have the internet.
They had books and advertising and brokers would meet together and they would have to go over the inventory and then bring it out to the market. It was a lot of work, and we still get paid the same percentage today with a lot higher numbers. We’re getting paid well and I feel like this is going to be the evolution of the niche broker, and if you’re a niche broker with a high level of service or a specialty, you’re going to get paid well. And if you’re just pushing paper and putting signs in the yard, you might get paid a lot less and it could be going to that Redfin style model. I think people need to brace for it and don’t be delusional about it. I don’t think it’s going to have that much impact over the next 12 to 24 months.
Dave:
Well, I’m curious because, just as a reminder, as of right now we have this jury verdict that held NAR liable, but we haven’t heard from the judge exactly what this means. Kathy, do you think this move by Keller Williams is trying to head off a really big injunction from the judge so that they don’t change everything and they’re saying like, “Okay, okay, we’ll change a little bit.” And that way it won’t disrupt their entire business model?
Kathy:
Yeah, I don’t want to speak for them. I do know that NAR and HomeServices have refused to settle. They are taking a different bet. They think that they’re, I guess, going to get a better deal if they keep fighting. Again, I’m trying to read minds here. I have no idea what’s going on in those boardrooms, but I can tell you from personal experience that we had to settle a case once where we had absolutely nothing to do with it. We weren’t involved, we were just named and our attorney said, “This is just a business decision. You have to look at it just like a business. You could spend a whole bunch more money trying to fight or you just put up your hands and say, ‘We didn’t do anything wrong but go away.’” It could be that’s what they did or they just thought it could be worse if we wait. I don’t know. When you go to a jury, you have a jury who may not know very much about real estate deciding your fate. Again, it was just a business decision.
Dave:
Henry, have you noticed any changes in the way the agents you work with are operating? What are you seeing?
Henry:
No, no changes in the way they’re operating so far. I agree with James. I don’t know that we’ll see any major changes in the next one to two years, but I do think that the industry is going to change and I don’t believe it’s a bad thing. It’s like any other industry. You typically get paid based on performance and level of service and customer service. I think those agents and brokerages who are going to provide exceptional customer service and who are going to go above and beyond in their business practices are going to not just survive but thrive in a market where you’ve got to provide those things in order to make money now. You didn’t have to provide that before, right? You were going to get your percentage as long as you were the named broker, agent on that deal. You have to think about home buyers, especially first-time home buyers. They’re called first-time home buyers.
They have no idea what a good level of service is from a real estate agent, right? They’re just trusting that this person knows what they’re doing and they just have to take what’s given to them. It’s not till they’ve been through maybe their first deal and then they get a better agent on their second home purchase and then they realize, “Oh my goodness, our first agent just really didn’t do much compared to the level of service that we’re getting now.” I think that it’s just going to mean that, like I said, the better agents who provide a good quality of service and operate a better business will do well.
Kathy:
Yeah, my concern is that people won’t get a buyer’s agent and they’ll either try to do the negotiation on their own or they’ll use the listing agent. My message to all you out there who maybe have not bought your first property, be really careful about going to the listing agent and using them to double represent you. That was our very first deal. I didn’t really know back then, this was a long time ago before I knew anything about real estate, and I didn’t know the difference between a buyer’s agent and a listing agent. I just went with a listing agent. In retrospect, they weren’t serving me. They were hired by the seller. They did not negotiate on my behalf because that would be… How do you do that when you’re representing both? It’s like getting an attorney to represent two parties, speaking of the NAR situation.
That’s my concern is don’t be lazy, don’t just use the listing agent because they are not necessarily working in your favor unless you’re an expert. Now I do that just so they get more commission and I get the deal, but hopefully this means that people will get a buyer’s agent and get one who really truly will represent them and understand what that means. What do you even need a buyer’s agent for? Hopefully to help you negotiate. To make sure that you’ve got all the proper inspections. Hopefully someone who knows the area, knows the history. Really, it comes down to that. What does a buyer’s agent do besides have really beautiful marketing and maybe great hair and a great car?
Henry:
Yes, I agree with you, but I think this is moving in a way that every other business operates. Hiring a real estate agent has always baffled me. People don’t do any research. They just pick the family friend or the person at their church or the lady who’s on your kid’s soccer team, other soccer team member, mom, right? That’s the level of research that they put into it. It’s always baffled me that that’s how it was done before. Going forward, it’s just going to be you have to do the same amount of research that you would do for anything else. If you’re going to hire a plumber, you’re not just going to hire some Joe Schmoe off the street. You’re going to go ask people who you trust who are in the industry or ask people who have had plumbing work done recently. Who did you use? What was your experience like? Can I have their phone number? And then you might ask a series of qualifying questions when you get them on the phone. You just have to do this normal now.
Dave:
Yeah, that’s so true. This whole situation reminds me, I guess, it was probably 10 or 15 years ago when Uber came around and certain taxi drivers and drivers got with the times and figured it out, and then there were some that just stuck their head in the sand and were fighting against it and were suing and they were just fighting upstream. To me, it just feels like that’s what NAR is doing. KW, a lot of these other brokerages are settling and, I think, are trying to adapt to the times and maybe ready to move on a little bit. Then there are others who are just really digging in hard when, at least to me, it feels like the winds have changed, are already… What am I saying? Winds have changed. Is that a saying?
Henry:
Atmospheric river has changed path, it’s now flowing upstream.
Dave:
The atmospheric river has changed and now things are changing (beep). This has gone off the rails. Should we do that again?
James:
Yeah, I think it worked. I fully understood what you were trying to say, Dave. The money is stopping flowing for these brokers that don’t offer additional services.
Dave:
Yeah, I think people have to accept that things are changing and there’s still a way to make money, as Henry just pointed out. It’s just you need to adapt to the new time, which is true in every single business.
James:
Every investor does use numerous brokers, right? Depending on whether you’re trying to get the deal or not. I’m a broker, sometimes there’s brokers bringing me deals and they’re off-market and I’m being buyer in this scenario, not my service fee. I don’t really see this changing too much for investors. If anything, it might actually steer more deals their way because they might just go straight calling the listing broker. To Kathy’s point, when you’re going direct to that listing broker, you do want dual representation if you can get it. Then you are protected. They have a fiduciary duty to watch over you. But investors are a lot more savvy than your normal homeowner because they’re doing a lot more transactions. For not having representation, they don’t care half the time because they’re buying it a certain way and that’s what they know to buy, and they’re doing their own feasibility inspections anyways.
I think it actually might push more deals towards investors. The one thing I can see this affecting though is off-market transactions because a lot of times when you’re negotiating direct to seller is you’re looking at, “Hey, this is a cash convenience sale.” You have all this cost when you sell, which is anywhere between 5 and 6%. Many times those sellers will give you that credit to get that discount that you need, right? And it’s that inch game where you’re just trying to get that net number to them where they’re happy and we can [inaudible 00:13:05] it. Now, that’s going down by half. It actually makes a much bigger negotiation for wholesalers and brokers on direct to seller, but I think on-market it’s going to push more deals investors away, but off-market it actually could add a bigger gap and less off-market deals could be getting done.
Dave:
All right. Well, thank you. I appreciate that insight, James. We’ll all just have to wait and see how this goes over the next couple of months, but I think those are some wise things to keep an eye out for. All right, now we’ve covered our first headline and we will be right back with two of the most important headlines impacting the real estate industry after this quick break.
Welcome back to On the Market. Let’s move on to our second headline, which is that, “Banks are being rocked again as real estate losses mount.” This article talks about a specific bank, New York Community Bancorp, where shares plunged a whopping 38% after posting a $252 million loss in just the last quarter. This was higher losses that they were expecting and they were already expecting pretty big losses on commercial real estate. This is a little bit concerning, but at the same time I feel like we keep hearing about this pending apocalypse with commercial lending, but so far it’s been contained to a few banks. Kathy, do you think this is a sign of more trouble to come in the future?
Kathy:
I think it’s a sign of bad business practice, honestly, and lack of diversification. I think in the case of this New York Bank, the bulk of their portfolio was in office. COVID obviously accelerated the work from home environment, but it’s been a trend for a while. With business stay diversified. Make sure you’ve got plenty of reserves on hand and don’t over leverage, and all the things that people should know about. To me it’s like, “I wouldn’t have done that if I were the owner of the bank.”
Dave:
James, with your commercial deals, are you noticing any big change recently in commercial practices? Because I know they’ve changed over the last few years, but in the last three months has anything altered?
James:
It’s funny, I read these headlines and some of it, I believe, is just hype and it’s for a specific type of asset and product in the market and they make it seem doom and gloom with these local commercial banks. But we’ve had the easiest time getting access to capital from commercial banks on townhome sites, apartment deals. It has not been a struggle to get financing. We actually just got a development loan where we perform about 20%. That we were going to leave 20% of the total project in. The banks appraised it. They ended up giving us a 90/10. They gave us 90% leverage with an interest reserve in there for 12 months. And because their loan-to-value position was good and they liked us as a borrower, I think if you have that long-term relationship, don’t always shop your banks guys. Staying with the same bank and getting that consistency with them, they’ll lever you more.
Even all this doom and gloom news that the banks aren’t really lending, they don’t really want to. If they like you, they’re being a little bit more aggressive. I think build those relationships, you can still get debt, especially on residential. Apartments, townhomes, development, single family, you can get that. Office? Yeah, it’s not the most desirable, but even right now we’re about ready to list an office building, small office. We didn’t think it was going to get much traction. We talked to five banks and they all pre-approved it for a purchase. If you have the right product in the right area, banks will still lend you. It’s not as bad as what I’m seeing in the articles. But I will say some of these guys have made some bad moves and lost some serious money, because I was even reading that article, it’s like, “Some small ripples.” I’m like, “33 billion is a small ripple?”
Dave:
It’s another atmospheric ripple.
James:
Yeah.
Dave:
Henry, I know you work a lot with local banks. I’m curious, how would you advise investors who maybe don’t have the track record that you have or James has with local banks? How do you establish those relationships to create that credit worthiness in the eyes of these banks?
Henry:
Yeah, that’s a great question. Well, first I want to piggyback off James and say I completely agree. I’m seeing the exact same thing. I’ve got two deals that I’m closing on at the end of this week, both with local banks, both with creative aspects to them. One, I’m doing an owner carryback for part of the down payment portion. A lot of banks, if they’re being tight, they’re not allowing you to do some of those things, right? But this bank is totally fine with that. Another bank we’re closing on a deal where we’ve got seller credits involved. One of these banks is only my third deal I’ve done with them and the other bank it’s the very first deal I’ve done with them. I think what you’re seeing is these banks who are smarter, who may have some of these office assets are trying to diversify and want people who are doing really good deals to bring those deals to them so that they’ve got some different asset types in their portfolio that have a good amount of equity in them.
To answer your question, Dave, you’ve got to speak to these banks in the what’s in it for them, right? And the what’s in it for them with these small banks when you’re brand new is you want to bring them a deal that’s got equity in it because that’s a lower risk investment for them. They want low risk loans in their portfolio. They have to loan to stay in business and if they’ve got a loan to stay in business, they would much rather take on low risk loans in a residential space because then if they end up with those assets, they’re not really stressing about it. They can sell those assets and recoup their money. They’re not losing their shirt like they are in some commercial spaces or in some office commercial spaces. You’ve got to have a good deal. That’s first and foremost.
If you’re buying off-market, you can go and get a deal and then bring a good deal to them. If you’re buying on-market, you’ve got to get a pre-approval first and a bank can give you a pre-approval, but make sure when you’re going to ask for that pre-approval, you’re talking to them about your strategy. What is it you’re going to look for? “I’m going to look for single and small multifamily that I can get at a 30, 40, 50% discount. I want to bring those assets to you and have you finance those deals.” The second thing that you want to mention to the bank is that you are looking for a long-term relationship. Banks need deposits and they need to loan.
Share with them your plan. “I’m looking to buy these types of assets in these markets with this type of equity in it, and I will bring my business bank accounts here to you and we can have a relationship where I keep my deposits here, you continue to help me grow my business and I’m helping you grow yours.” Right? You’ve got to speak to them in the what’s in it for them. You can’t just go and say, “Hey, give me some money. I’m trying to do some deals.” They need to know what you’re trying to do and what’s in it for them.
Kathy:
100%. Banks are in the business of lending. They’re desperate to lend right now, but it’s the basics. You got to have a good deal. They got to have security. Land development, that’s all riskier, so that’s going to be more expensive or more difficult to get. That always has been… Well, not always. They’re going to look at the risk level and in residential, there’s not a whole lot of risk there right now. Just bring them a good deal, especially if you’re putting money down.
Dave:
This is such a good conversation because I think as Henry just brought up and Kathy reiterated that. If you understand how banks make money, you can very easily work with them. This is so important with any business, any contractor that you work with, any lender, any agent. If you understand what they’re looking for, then you can adjust your own strategy, your own requests, your own proposals to them accordingly. And as Henry and Kathy just stated, there’s this term in finance where people say that banks are either like, “Risk on.” Quote, unquote. Or risk off. That is basically just a shorthand for how much risk financial institutions are taking. Right now most financial institutions are quote, unquote, “Risk off.” Which means that they’re not going to be lending on the type of projects Kathy just said, development or land deals as readily, but they have to make money.
If you can bring them low risk deals, they’re going to be thrilled by it. Thank you both for bringing that up. I think that’s a really important point and really helpful tactical advice here for everyone listening that if you are worried about being able to finance your next project, think about the relative risk, just take a minute and sit, and put yourself in the bank’s position and ask yourself like, “If I were the bank, would I lend on this deal?” And if the answer’s no, maybe bring them a different deal and go find something else. We’ve now hit our first two headlines on Keller Williams settling the antitrust lawsuit and headwinds in the banking sector due to commercial real estate weakness. Stick with us because after this we’re going to be talking about the, spoiler alert, robust labor market.
Welcome back to the show. All right, with that, let’s move on to our third headline, which is about the labor market. We just can’t stop talking about this labor market because it continues to surprise. The headline is that the January jobs report showed US job growth surging. The labor market added 353,000 jobs in January 2024, which is the highest mark in over a year. We’re seeing strength across a lot of industries. High paying sectors like professional and business services accelerated and piled on 74,000 jobs. Healthcare added 70,000, and we’re seeing wages growing faster than traditional historic rates above and beyond the pace of inflation. Spending power, after years of getting pretty hammered is starting to recover slowly. Henry, what do you make of this labor report and what it means for you as an investor?
Henry:
You know what? This is reflecting what I’m seeing here in my local market as well. I think I read that we added like 10,000 jobs last year and we have about the same amount of people moving to the area. It just shows the strength in the jobs market and some strength in the economy. I believe that that’s going to be beneficial for the real estate market. These people need places to live. A lot of these companies are not doing remote work or are lighter on remote work now. That means people have to move to these new places where the jobs are being added. They’ve got to have a place to live. They’re going to be buying homes. They’re going to be building homes. They’re going to be renting homes. We’ve also seen a 9% rise in appreciation here in home prices. I think it all plays in hand in hand. If there are jobs, people are going to need homes, and if they’ve got money to pay for them… It just speaks to a healthy real estate market.
Dave:
Kathy, how do you look at this labor market situation, in particular how it relates to the Fed and interest rates? Do you think this will change their calculus after signaling they may be open to a pivot and cutting rates in 2024?
Kathy:
Yeah, there’s no pivot in sight right now. This was a big miss by economists. They just cannot get a grasp on the job market and why it just keeps expanding and why it just keeps being bigger than expected. I have my theory on that, and the theory is that second stimulus package was probably not needed. It was a ton of money created and put out in the economy and it’s still out there circulating. When you look at a deficit like we have today, we better have job growth. We better have something for all that money printing. That’s, again, my humble opinion on it. Lots of money circulating. It’s creating lots of jobs. How are we going to pay off that debt? Don’t know. Nobody knows how you’re going to pay off the debt, but at least we’ve got job growth.
Dave:
What do you think, James? Are you seeing confidence from buyers right now? Because it felt like for a couple of years, buyers were pulling back a little bit, not necessarily because of affordability, that was obviously a big part of it, but people also want to feel secure with their income before they make a huge purchase. Do you think the continued resilience of the labor market is going to increase in demand for homes?
James:
I think that always is going to be correlated. The one thing about this jobs reports is it’s so up and down every month. It’s like, “Oh, finally cooling.” Then it’s red-hot. Then it goes cooling. I swear two months ago it was saying it was way down. It was going in the right direction. I do feel like buyers are confident, but more, I do feel buyers came to life the last two weeks for sure. I think it has to do more with them just knowing that the Fed is saying, “Hey, look, we’re going to start going in the opposite direction at some point.” They think there’s no free fall. It’s funny because when I do talk to people about the job report, even real estate professionals are like, “Hey, the jobs report came out hot this month.” And they’re like, “Oh, what’s that mean?”
Dave:
Yeah.
James:
They’re focused on the now, right? Most consumers like, “What I experience now?” And at the interest rate, and they’re not looking at all the factors. But I didn’t think this was great news because if it’s this hot and it keeps going, even if it’s pulsated, they need stability. And I don’t think they’re going to start moving rates until there’s stability in the jobs market, the economy in general and not this surging. As investor, as we’re trying to perform out deals, that’s what we’re looking for, consistency and stability. Every time this goes up and down, it makes me a little bit more nervous because it could go the opposite way real fast and cause some market shifts.
Dave:
Yeah, that’s a great point. And just to remind everyone why we as real estate investors should be thinking about the labor market. Few reasons. One, first and foremost, labor market very correlated with overall economic growth. That’s really important. The second thing that I think has become more important over the last few years is thinking about the role of the Federal Reserve. We talk about the Fed a lot, but just as a reminder, they have two different jobs. The first job is to maximize employment. They care a lot about the employment rate, labor force participation, and the many different ways that you can measure and evaluate the strength of the labor market. On the other hand, their second job is to control inflation. Obviously they’ve been really focused on that element of their job the last couple of years because inflation got out of control.
But if you think about this job, you see a paradox here, because maximizing employment can lead to an overstimulation of the economy, which leads to inflation. But if you work too hard to combat inflation, that will slow down the economy and negatively impact the labor market and people’s ways of earning a living. The Fed is constantly on a seesaw. They are just going back and forth and trying to find the right balance between maximizing employment without overshooting and having a lot of inflation. That’s why these labor market reports are so closely watched by people like us and economists because they are trying to read the tea leaves and think about how the Fed is going to react to these labor market reports.
When you see strong labor market reports like the one that we’re seeing here, that, to me, at least signals, “Hey, maybe even though the Fed has said that they do intend to lower rates in the future, it might take a little bit longer because they don’t need to focus so much on preserving the labor market. That’s doing great, and they can keep focusing on the inflation piece, which is still above their target of 2%.” We’re still above 3%. That’s why we’re talking about this and why it’s so important, even though it might feel a little bit abstract from real estate investing.
Kathy:
Yeah. Also, how it affects us is people keep hoping that mortgage rates will go down and mortgage rates don’t go down when the economy’s booming. It doesn’t work that way. I think we can at least expect rates will be where they are, and I’m speaking mortgage rates, probably for a while because my guess is the Fed will keep the Fed fund rate where it is until they see things slow down a bit. But I can tell you in the markets that we invest in like Dallas, Texas in general, Texas was the number one market where that job growth happened, and Florida was pretty close behind. From an investor perspective, I’m going where all those jobs are going and that’s where we’re investing.
James:
This is why we’re in the mess we are now, right? The economy was way too hot. The money was way too cheap and then cut rates. Hopefully, and as much as I hate to say this, they keep rates where they need to be until we get this fixed because if they start cutting rates, things could explode again. And we’re going to be exactly… It’s great in the short term, right? We all make a bunch of money. We’re selling things for a lot. We’re renting things for a lot, but there needs to be some stability for us to move forward over the next five years.
Dave:
Absolutely. Well, thank you all so much for your insights on these latest stories. If you have any ideas of stories you would like to hear us talk about on future episodes of On the Market or these correspondents show, please let us know. You can put that in the comments below on YouTube, or you can always find me on BiggerPockets or Kathy, James or Henry on BiggerPockets as well. And share with us your thoughts or stories that are of particular interest to you. James, Kathy, Henry, thank you for joining us. Thank you all so much for listening and we’ll see you for the next episode of On The Market. On The Market was created by me, Dave Meyer, and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.
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NAR adds home improvement contractor’s app to Realtor benefits
The National Association of Realtors (NAR) announced on Wednesday the addition of a home repair estimate app to its package of NAR Realtor Benefits for members.
Curbio, a provider of pre-sale home improvement services that requires payment at closing, will provide its “Build Your Own Estimate” mobile app to NAR members, which offers free repair estimates for home inspections upon the upload of a PDF document. Members will also “receive a free digital floor plan with every Curbio project,” according to the announcement.
“This collaboration reflects our dedication to equipping NAR members with innovative solutions that cater to the evolving needs of their clients, ensuring a smooth experience for sellers and buyers alike,” said Rhonny Barragan, NAR vice president of strategic alliances in an announcement of the deal.
Second Century Ventures, NAR’s strategic investment division, included Curbio in its “REACH” startup growth program in 2019. Later that year, Curbio won the “pitch battle” segment at NAR’s second annual Innovation, Opportunity & Investment (iOi) summit that took place in Seattle.
“Today’s sellers want to work with real estate agents who offer added value, including the ability to get their home market-ready and spruced up without having to pay upfront,” said Olivia Mariani, CMO at Curbio. “We are thrilled to provide NAR members and their clients with access to our reliable pre-listing home improvements with pay-at-closing terms.”
Founded in 2017, Curbio is based in Potomac, Md. The company also lists Comcast Ventures, Revolution and Camber Creek as investors.
NAR members can navigate to a dedicated page on Curbio’s website to claim their new benefits, and the mobile app is available on both Apple‘s iOS and Google‘s Android operating systems. The company operates within a 40-mile radius of more than 60 major U.S. markets, according to the page.
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Paceline Equity Partners backs Constellation Software’s Optimal Blue
An affiliate of Paceline Equity Partners LLC, a private equity manager based in Texas, completed a debt investment in a subsidiary of Constellation Software Inc.
The investment stems from a merger agreement between Intercontinental Exchange (ICE) and Black Knight, which included the divestiture of Optimal Blue. ICE and Black Knight agreed to sell Optimal Blue to secure regulatory clearance of ICE’s proposed acquisition of Black Knight, a $13.1 billion megadeal announced in May 2022.
The $700 million proposed transaction included a payment by Constellation of $200 million in cash, with the remainder financed by a $500 million promissory note issued by Constellation to Black Knight.
To secure regulatory clearance for the merger and the sale of Optimal Blue, the promissory note was required to be sold and Paceline acquired it.
Optimal Blue — a provider of secondary market solutions and actionable data services — facilitates more than $1.1 trillion in mortgage locking and trading transactions per year. The company’s solutions are used by more than 3,500 mortgage lenders, accounting for 35% of all mortgage locks completed nationwide every year, according to its website.
Optimal Blue plans to solidify its position as an end-to-end solution — from pricing a loan to hedging, trading and selling it — according to a previous HousingWire interview with interim CEO Scott Smith.
“I think integration is key. I don’t think there’s a one-stop shop for your tech,” Smith said. “Open platforms of integration are critical. Optimal Blue integrates with all the loan origination systems (LOSs). I think we have about 70 partners that use our application programming interfaces (APIs) as well.”
“We are excited to support Optimal Blue in the continued growth of its market-leading platform under the ownership of Constellation,” said Sam Loughlin, CEO of Paceline. “We believe our past experience investing in the mortgage industry previously enabled us to move quickly and provide certainty of closing.”
The Paceline team focuses on private equity, corporate debt and real asset investment opportunities across the country. The firm says it has more than $1 billion of commitments currently under management.
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Build-to-rent is attracting powerhouse investors. Here’s what’s next for the sector
Earlier this month, real estate investment management firm Pretium Partners raised $1 billion to acquire build-to-rent homes, bringing its total investment in the sector to $2.5 billion.
The investment was needed to chip away at a pronounced national housing shortage caused by “decades of under-building and under-investment,” according to Josh Pristaw, Pretium’s head of real estate.
Pretium’s new fund came on the heels of private equity giant Blackstone’s decision in January to acquire Tricon Residential in a deal valued at around $3.5 billion. Tricon owns more than 37,000 homes and is building about 2,500 more.
Blackstone had already invested heavily in the single-family rental space when it bought Home Partners of America in a deal that valued the company at $6 billion in 2021. The deal came on the front end of market hype about the build-to-rent space, which cooled somewhat in 2023 as higher interest rates prompted a pullback by builders.
But 2024’s deals show investor interest has persisted.
Cushman & Wakefield, which manages more than 8,000 build-to-rent units, believes “institutionalization is imminent” for the sector as powerhouses like Blackstone get more involved and as the tandem of tight for-sale inventories and high home prices keep rental demand high, according to a pair of reports the company published in December.
The reports note that Millennials are reaching the typical age of homebuying at a time when a prospective homebuyer who can pay a 20% down payment and can pay the equivalent of the going market rent towards a monthly mortgage payment would not even qualify for the median home in the U.S.
Many of those would-be homebuyers want to “graduate” from apartments to homes, but unable to buy them, they are turning to home rentals.
A small but growing sector
Cushman & Wakefield notes build-to-rent homes have become “increasingly attractive to the investment community,” with sales of build-to-rent communities reaching $3 billion in 2022.
Sales were half that in 2023, but the commercial real estate brokerage notes that $1.5 billion in sales is still 40% above 2019 levels. In the multifamily space, by contrast sales are down 65% from where they were in 2019.
Those sales include “major buyers” like Inland, Blackstone, Starwood and American Realty Advisors, the company pointed out in its report.
CBRE, too, expects build-to-rent sales to grow but notes that the sector is still dwarfed by the multifamily sector. In 2022, build-to-rent transactions totaled about $2.1 billion (lower than Cushman & Wakefield’s estimate), while multifamily transactions totaled about $279 billion, according to CBRE.
Similarly, construction has slowed but remains elevated. The number of units under construction peaked in the fourth quarter of 2022 at above 53,000 and fell to about 36,500 in the fourth quarter of 2023, according to Cushman & Wakefield.
Even at the reduced pace of construction, that still means about 20% of all build-to-rent inventory is under construction today. The sector equates to just 1% of existing multifamily inventory.
Cushman & Wakefield further states that it would take a year and a half to fully absorb all build-to-rent construction, versus almost four years to absorb all multifamily construction, leading the company to conclude that the build-to-rent sector “may quickly become under-supplied as construction starts dwindle.”
The multifamily sector experienced a construction boom after rents soared, and rent growth has since normalized.
Hotspots
The growth of the build-to-rent sector has been heavily concentrated in a few states, according to a report published in January by the National Rental Home Council and Yardi Matrix.
In the 31 states included in Yardi Matrix’s data, only seven added 1,000 or more build-to-rent units last year.
Even within those states, there were high concentrations of construction:
That leaves many locales largely untouched by the sector to date.
As long as a shortage of for-home sales exists, Cushman & Wakefield, NRHC and others see a bright future for the nascent build-to-rent industry.
“Build-to-rent housing is quickly emerging as an essential, and highly desirable, sector of America’s housing market,” NRHC CEO David Howard said in a statement. “With the U.S. housing market facing inventory and supply shortages of near historic proportions, leasing a newly built single-family home in a dedicated community with a range of neighborhood and in-home amenities is an option that appeals to an increasing number of families.”
Cushman & Wakefield’s Head of Multifamily Insights Sam Tenenbaum agrees.
“With the sector in relative infancy, the opportunity to buy and build [build-to-rent] communities remains wide open,” he wrote in the company’s report. “The demographic tailwinds remain robust, and while the capital markets remain challenged in the rising interest rate environment, the sector is poised to grow further. It has already attracted some of the biggest funds in U.S. real estate, and the growth trajectory appears bright.”
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CoStar continues to post solid growth in the fourth quarter
CoStar Group’s annual revenue increased by 12% during the fourth quarter of 2023, marking its 51st straight quarter of double-digit revenue growth. The company reported revenue of $640 million and net income of $96 million for the quarter.
Meanwhile, the company reported revenue of $2.46 billion for the year ending Dec. 31, 2023, up 13% from $2.18 billion for the full year 2022. Net income was $375 million, compared to the $369 million of the previous year.
“Once again CoStar Group delivered exceptional results in our commercial information and marketplace businesses for the full year 2023, while at the same time devoting major time and resources towards launching the new Homes.com,” Andy Florance, founder and CEO of CoStar Group, said in a statement.
Florance also highlighted the growth of Homes.com, which reached 95 million monthly average unique visitors in Q4 2023, a 600% increase year over year, according to data from Google Analytics.
According to Florance, Homes.com is now the second most-highly frequented residential portal behind Zillow, and well beyond Realtor.com‘s 66 million monthly average unique visitors.
Florance also touched on the first marketing and branding campaign by Homes.com, delivered in the form of four commercials during the Super Bowl LVIII broadcast on Feb. 11, which generated 123 million impressions.
In the week following the game, Homes.com generated 560 million impressions across Prime Video, broadcast TV, syndicated TV, cable TV, morning shows, late-night shows, video platforms and Google searches. Throughout 2024, ads for Homes.com will be spotted at the Olympics, the Oscars, the Emmys and many other events. Florance aims for 80 billion impressions by the end of the year, with the goal of reaching 90% of U.S. households.
On Feb. 12, CoStar also started selling membership subscriptions to listing agents for Homes.com, a quarter earlier than what had been anticipated.
“Our goal is to catapult our growth forward and quickly capitalize on the momentum and exposure generated from our marketing campaign,” Florance said during the company’s earnings call on Tuesday.
Florance touted the productivity of his 1,000-plus agent sales team. CoStar is also building a sales force that is dedicated only to selling Homes.com subscriptions. In that context, Florance recruited a vice president, sales managers and 100 sellers to date. The founder intends to have 300 account representatives by the end of the year.
“2024 marks the turning point in the investment cycle for our residential business as we launched our first Homes.com membership product,” Scott Wheeler, CoStar Group’s chief financial officer, said in a statement.
For the full year of 2024, the company expects revenue in the range of $2.75 billion to $2.77 billion, representing year-over-year growth of approximately 12% to 13%.
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Fairway makes new reverse mortgage investments, rejoins NRMLA
Fairway Independent Mortgage Corporation announced on Tuesday a series of reverse mortgage maneuvers designed to increase the company’s investment in the space.
The first initiative is the decision to rejoin the National Reverse Mortgage Lenders Association (NRMLA), which the company left at the end of 2021 under previous reverse division leadership.
“Fairway is renewing its membership with NRMLA, a move that symbolizes its dedication to staying at the forefront of reverse mortgage best practices and regulatory standards,” the announcement said. “This partnership underscores Fairway’s commitment to the highest levels of professionalism and ethics in serving senior homeowners.”
The division’s leadership team will now also include Dan Ventura, who has served at Fairway since 2007 and last year was appointed as VP of reverse mortgage operations. Ventura’s new position is as president of reverse lending, where he succeeds former reverse lending president Tane Cabe.
“Ventura, a seasoned veteran in the mortgage industry and within Fairway, is tasked with steering the reverse division towards unprecedented growth and operational excellence,” the company said of Ventura’s appointment. “His expanded role is pivotal to Fairway’s strategic direction and success in the reverse mortgage space.”
Expanding H4P focus
The company is also taking a strategic look at expanding its business in the Home Equity Conversion Mortgage (HECM) for Purchase (H4P) area, a severely under-utilized variation of the traditional Federal Housing Administration (FHA)-sponsored HECM that allows borrowers to purchase a new home using a reverse mortgage.
“This initiative reflects Fairway’s commitment to leveraging its award-winning service and extensive experience in the purchase market to meet the unique needs of retirees looking to buy homes, setting a new benchmark for excellence and innovation in the reverse mortgage sector,” Fairway said of the move.
Recent policy changes by FHA may make H4P business more attractive for lenders, including the addition of a seller credit announced in October at the same time a reverse mortgage industry conference was taking place. Event attendees cheered upon hearing news of the credit.
To ‘lead by example’
“These strategic investments reflect our deep commitment to the future of our reverse mortgage business,” said Steve Jacobsen, CEO of Fairway. “We are not just participating in the market; we are leading it by example through innovation, leadership, and a firm dedication to our customers.”
Ultimately, Fairway hopes to impact the standards of the reverse mortgage industry with these moves, the company said.
“Through rejoining NRMLA, embracing Dan Ventura’s leadership, and targeting the HECM for Purchase market, Fairway is setting a new course for success and customer satisfaction in the reverse mortgage space,” the company said.
RMD reached out to NRMLA for comment on Fairway rejoining the association, but did not hear back prior to the publication of this story.
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Pending legislation would end home inspection waivers in Massachusetts
A housing market marked by relatively high interest rates and tight inventory — and punctuated by the practice of home inspection waivers to sweeten offers — are taking a bite out of business for home inspectors, who play a key role in the sales process by ensuring that buyers are not being sold a lemon of a house.
Legislation that is pending in Massachusetts, if enacted, would change at least one part of this equation for home inspectors in that state — and potentially in other states, if lawmakers elsewhere in the country also decide move in that direction. The pending Massachusetts legislation recognizes the key role that inspections play in the home purchase process and would ensure that buyers have the right to an inspection.
The working bill, S2474, is now pending in the state Senate’s Ways and Means Committee, according to Robin Frechette, chief of staff for Massachusetts State Rep. Brian Ashe, who co-sponsored the House version of the legislation. The bill essentially negates as a negotiating tool the waiving of the home inspection contingency, which makes an offer for a home contingent on the results of an inspection.
“Both the Senate and House bills [in Massachusetts, now combined as S2472] also require an offer to purchase a residential home to include a disclosure that a buyer has 10 days to have a home inspection done; and makes a seller violating the bill’s provisions liable for certain related damages as well as a civil penalty of the greater of 4% of the home sale or $10,000,” according a research report on the Massachusetts legislation prepared by the state of Connecticut Office of Legislative Research. “The [Massachusetts] bill makes certain exceptions to its provisions, such as for sales to family members.”
The Massachusetts legislation would grant buyers the right to a home inspection, but it does not mandate that one be completed.
“The legislation generally prohibits a residential home seller from (1) conditioning the sale on the potential buyer waiving or limiting an inspection; or (2) accepting an offer if they have been informed in advance that the prospective buyer intends to waive their right to an inspection,” the Connecticut research report states.
The purpose of the Connecticut legislative research analysis, prepared this past September, was to identify any bills proposed in Connecticut that are similar to the pending law in Massachusetts that would ensure the buyer’s right to an inspection. The research report found one such bill, which did not make it out of committee.
“It does not appear that any states [currently] require a home inspection as a condition of a residential home sale,” the Connecticut report stated.
Nick Gromicko is the founder of the International Association of Certified Home Inspectors, or InterNACHI, which has some 25,000 members in the U.S. and Canada. It also operates a home inspector training program that is accredited by the U.S. Department of Education.
Gromicko said the practice of dropping the home inspection contingency in order to “juice the offer” for a home “works well to get the house, but then that’s a potential grenade that can blow up [if major problems with a home exist].”
“And it blew up so much that states like Massachusetts … are seeking to pass right-to-inspect laws, which is going to make it hard to get that inspection contingency out of the contract,” he said.
Industry overview
Mark Goodman is a senior home inspector and territory manager for BPG Inspections, which is owned by title insurer Fidelity National Financial Inc. He is also the 2024 president of the American Society of Home Inspectors (ASHI), which has some 5,000 members and is one of two national home inspector organizations deemed “trustworthy” by the National Association of Realtors (NAR) — with the other being InterNACHI.
“A member of the American Society of Home Inspectors (ASHI) or the International Association of Certified Home Inspectors (InterNACHI) are trustworthy individuals to perform the [home] inspection,” a NAR report states. “They’ll generally charge about $300 to $500,” with the figure varying on the region of the country and the size of the home.
Goodman offered some insights into the the home inspection business and individual inspectors via the following datapoints.
• Inspectors rely heavily on real estate agents for job referrals, although they cultivate other referral sources as well, including real estate attorneys, past customers, and online reviews and marketing.
• Most inspectors come from the building trades, but there are many exceptions to that rule. “We have a member who is a former NASA engineer, and we’ve got CPAs, and there’s a member that formerly ran a scuba diving resort,” Goodman said. “…There’s a big percentage of full-time inspectors, but there are a lot of inspectors that are like Realtors and they’re part-time home inspectors.”
• A total of 36 states currently regulate home inspectors and/or their firms in some way. “And then you have non-licensed states, like Missouri, for example, where I am, where it’s really important to use an ASHI-certified inspector [or an InterNACHI-certified inspector] because we set a standard of practice,” Goodman added.
Gromicko estimates that there are some 27,000 home inspectors in the U.S., adding that it’s a second career for many.
“If you’ve been in the trades, that’s considered hard work — welding, plumbing or whatever —and then when they become an inspector, it’s almost like being semi-retired because it’s so much easier physically,” he explained.
Most home inspection firms are small mom-and-pop operations, according to Goodman and Gromicko. But there are some larger operators as well, such as BPG Inspections, U.S. Inspect, the WIN Home Inspection franchise and private equity-backed LaunchPad Home Group.
“Inspectors really look at every system in the house, but there’s some specialized ancillary areas [where additional training is needed],” Goodman said. “There’s mold, there’s infrared, termites, radon, and there’s lots of chimney inspections — so there’s a bunch of ancillary services that involve additional fees [for the client].
“… The home inspector is one of the few unbiased advocates for the consumer that’s solely looking after the consumer, and that home inspection is really important in protecting somebody’s investment.”
Liability and protections
Geoffrey Binney, managing partner at Gauntt, Koen, Binney & Kidd LLP in The Woodlands, Texas, is a former FBI agent turned attorney who has been defending home inspectors for the past 15 years.
The most prevalent types of lawsuits lodged against home inspectors, he said, involve claims over foundation, roof or plumbing issues that were missed, as well as claims involving termites or mold — even though the latter two are not part of a standard home inspection.
“If it’s just a home inspection, they’re not responsible for mold or termites,” Binney said. “I can’t tell you the number of times I’ve taken depositions of plaintiffs and asked, ‘What did you think he [the inspector] was going to do?’
“And the response is something like, ‘I thought he was going to tell me everything that was wrong with the house.’”
Binney stressed that home inspectors are generalists who know enough about a range of areas to get licensed or certified, “but they’re not experts in all of those, unless they happen to have experience from a prior job.”
“They’re only supposed to look and report on things that are present and visible,” he added. “If it isn’t there that day, then they can’t report on it.
“If it’s under the carpet, behind a wall, or if it’s in a crawlspace that you can’t get to; if it’s covered by laundry … I mean, some of these houses that are for sale are just cluttered and that significantly hinders the inspection. … Oftentimes, the homebuyer should be angry with the seller for not disclosing something, like if there’s evidence of a roof leak that was painted over, but they might sue the home inspector and say, ‘You should have caught this on the site.’”
Instead, Binney said, the buyer should blame the seller “who painted over the problem.” He added that he has handled cases where “my guy just screwed up,” with the inspector missing an issue that was clearly present and visible.
In these cases, he said, inspectors will often “fall on their sword” and admit their error because they’re good, honest people. “And I’ll tell the insurance carrier, ‘You’ve got to pay this one.’” Binney said.
In addition to purchasing professional liability insurance, another protection that inspectors need to employ is smart contract language. Binney explained that a “limitation-of-liability clause” in a contract is enforceable in most jurisdictions nationwide. He recommends setting the limit for exposure to the amount of the inspection fee — adding that it’s not fair for an inspector to charge $500 for an inspection “and then be liable for $250,000 in damages.”
“That just doesn’t make economic sense, so we’re going to agree that if you sue me, the most you can get is the amount of the inspection fee,” Binney said. “… One of the biggest problems I’ve had is convincing [inspectors] to do written agreements,” because many mom-and-pop inspectors still do business with a handshake.
Conflict of interest
Gromicko stressed that the threats of lawsuits and reputational damage also serve as checks against another concern that exists in the market with respect to home inspections — that is, the perceived conflict of interest between real estate agents seeking to close a sale and the home inspectors they refer to their clients.
“Some worry that when a real estate agent provides a referral for an inspector that he or she will be a patty-cake inspector who’s going to just make the house look glowingly beautiful,” Gromicko said. “… But the real estate agent [and home inspector] don’t want lawsuits, and they don’t want bad word of mouth, because they have to work in the community.”
In fact, Gromicko said, some prospective buyers may actually want the inspector to find problems with a home — not to kill the deal but to use the inspection report as a “negotiating tool.” He added that inspectors must learn to deal with the politics and pressures of the job, and they should become good communicators in both spoken and written word.
“A lot of new inspectors go in, and they do the first two or three inspections, and they’re like, ‘Eff this!’” Gromicko added. “‘I’m not going to be in this position of pressure, where I have the seller on one side and the agent and buyer on the other, with the kids running around sticking their fingers in things, and I have to get on this roof, and I have to generate a report, and they want it today.’”
Excelling as a home inspector requires a skill set that is rare — and for a relatively modest income that typically short of six digits, even for the most successful of inspectors.
“A guy who fixes plumbing is not normally a guy who can stand on a podium and talk, and then there’s the challenge of needing to distill it all into writing,” Gromicko explained. “The ones that survive [and prosper] normally have that unique blend of skill sets.”
Consumer protection
In addition to the unique skill set required to excel as a home inspector, there’s the equally daunting challenge of surviving as an inspection business in the current climate of tight inventory and higher rates that are working to suppress home sales. That’s in addition to the ongoing trend of waiving the inspection to sweeten an offer.
“The last couple of years, because of the condition of the housing market … home Inspections are down, on average, in a lot of areas in the country, but not every place, because there are some really booming markets,” Goodman said. “And so, many are having a rough time because of the costs of running a business, and there’s only so much in your overhead that you can really cut out, so you have to either raise your prices or do more inspections.
“If that doesn’t work out, then maybe it could cause a little bit of a shift to move more of the small proprietorships toward multi-inspector firms [industry consolidation]. That’s just the nature of the beast — the cyclic nature of the home-inspection profession.”
Goodman agrees that the legislation now pending in Massachusetts, which calls for mandating the right to an inspection for nearly all sales, would arguably help to bolster the home inspection industry in that state. He also stressed, however, that the legislation creates an important safeguard for consumers.
“The New England ASHI chapter is pushing the bill in Massachusetts that mandates [a right to] an inspection,” he said. “If that bill is successful, I think you’ll see a wave of similar legislation across the country.
“That legislation is not so much about the home inspector and the home inspection, but rather it’s more of a consumer protection.”
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Home price gains slow as mortgage rates rise: Altos
Are last year’s surprising home price gains evaporating? As interest rates climb again, some of the price signals are softening. Inventory is climbing vs. last year, and home prices have stayed flat for three weeks now. The price reductions data has turned less bullish for future sales also.
Mortgage rates are back over 7%. We can see the impact on homebuyer demand across several of our stats. And as demand slows, inventory grows. Inventory is up over last year and is about to turn the corner and start climbing for the spring selling season, probably within a couple weeks.
It’s not super bearish in the data. Even as money is more expensive and there are more sellers than a year ago, we can also see slight home sales growth over 2023. Dramatically few home sales was the story of 2023. We continue to see some growth off those very low levels.
The housing market data has been changing very rapidly this year. The economy has continued to be strong, so mortgage rates have defied expectations and remained very high.
New listings rise
New listings continue to show us that more sellers are interested in this market this year. With just under 50,000 new listings unsold coming to the market this week, that’s now 16% more than the same week a year ago. Each week, the percentage gains over a year ago keep improving.
For the housing market bears out there, any rising inventory is a red flag for the market to crash. There are some markets where inventory is no longer at the crisis shortage levels of the pandemic. Is it too much inventory? Is new supply growing out of balance with demand? It’s worth keeping an eye on.
Sellers easing back in the market
As a result of sellers easing back in, and lower demand from expensive money, there are now 494,000 single family homes on the market across the US. That’s basically flat from last week — just a fraction of a percent fewer homes on the market now than last week. The key is there is now 13% more active inventory than last year at this time.
Each week we have more sellers and each week that inventory spread over last year keeps growing. Inventory fell nationally this week but is up compared to a year ago. Last year, inventory fell by 1.5% in the mid-February week. This year it just inched lower. So the spread grew. This is the same trend we’ve been talking about for several months.
Regionally the Gulf States are where inventory is rising the most quickly — Southwest Florida, over to New Orleans and into Texas. Inventory is back at 2019 levels in many of these markets. Our Altos Market Action Index gauge has some of them in Buyer’s Opportunity for the first time in many years with inventory sufficiently high relative to demand.
On the other hand California in fact most of the West and much of the Northeast still has less inventory than last year, but pretty much the whole country is rising. Again, since no market has a lot of homes for sale, I interpret more supply as a mostly positive trend for the year.
New pendings grow
As inventory grows and new sellers grow, it was an encouraging week for new contracts too. This week saw 60,000 new contracts started for single family home purchases. That’s 9% more than the same week a year ago. If we can sustain 9% more sales over 2023, that will be excellent growth, but I’m no longer so sanguine that this is going to be easy. Last week was 3% sales growth over the previous year. This week is 9% growth. That rate will probably dip back down next week. The key here is that more sellers should mean more sales this year. The question is how many more sales.
The bearish scenario that we watch for is if inventory rises but sales do not. And we can see that when mortgage rates spike, sales take a hit very quickly. The economy has been very strong, stronger than expected, so interest rates have stayed higher for longer. Higher mortgage rates have resulted in fewer new contracts than I expected, say 6 weeks ago. Though this week was an encouraging return to growth with 9% home sales gains over 2023, this is something to keep our eyes on. If inventory rises but we do not see the corresponding growth in sales that would have us revising lower all the forecasts for 2024.
Price reductions increase
We can really see how sensitive home buyers are to higher mortgage rates when we look at the price reductions data. As of mid-February, 30% of the homes on the market have taken a price cut. This is in the normal range for this time of year.
But price reductions didn’t decline this week, which they often do in mid-February. That’s because mortgage rates have jumped over 7% again. When rates jump, a few offers don’t get made and a few more sellers cut their prices.
In strong housing market years, this part of February has declining price reductions each week. If you’re getting fresh inventory and you’re getting offers quickly, then each week fewer sellers have price cuts.
But this week we’re flat because mortgage rates are back over 7%.
Price reductions are a leading indicator for future sales prices. A home is on the market now, it doesn’t get any offers, does a price cut, gets an offer in March, closes in April. So this data lets us see several months into the future.
And what it’s telling us is that consumers are taking their time, bidding less aggressively or not at all as mortgage rates are higher. Now that’ll change quickly if we get lucky and rates fall.
Median Price unchanged
Median price for single-family homes on the market is unchanged this week at $425,000. It’s not uncommon for home prices to cluster around the big round numbers and we’ve been at this level for three weeks now. I expect the median price for homes to tick up in the next couple weeks.
It’s worth noting that while we finished December with pretty strong price gains over the year prior, those gains seem to be compressing now. In the active market data here, home prices are just 1-2% higher than last year at this time. Mortgage rates have been climbing since the new year, so maybe that shouldn’t be surprising. Worth watching. Will home price gains evaporate if mortgage rates stay in the 7s?
It can be hard to communicate all this with buyers and sellers. There are folks on the sidelines waiting for rates to drop so they can swoop in for sudden bargains. But they may not realize how much competition is waiting right along with them. And meanwhile mortgage rates are actually rising. If you need to help buyers and sellers see the actual data, you should join us at Altos.
Mike Simonsen is the president and founder of Altos Research.
Download the free Altos eBook: “How to Use Market Data to Build Your Real Estate Business”
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Is time the enemy of equity for chronically distressed homeowners?
Chronically distressed properties lost more than $7,000 in total home equity on average while cycling in and out of foreclosure, according to an Auction.com analysis of more than 80,000 properties scheduled for foreclosure auction multiple times in the last three years.
The chronically distressed properties cycled in and out of foreclosure for an average of 475 days, resulting in a lost equity rate of more than $5,000 a year and nearly $450 a month. They were scheduled for foreclosure auction nearly four times (3.8) on average and represented 38% of all 210,000 properties scheduled for foreclosure auction in the last three years. The remaining 130,000 properties were scheduled for foreclosure auction only once.
Rapid home price appreciation can sometimes help slow the rate of lost equity as it did in 2021, when distressed homeowners lost an average of $377 a month. Accelerating home price appreciation can even sometimes help reverse the trend completely as it did in 2023, when distressed homeowners gained an average of $255 a month in equity. Conversely, slowing home price appreciation can help accelerate the rate of lost equity as it did in 2022, when distressed homeowners lost an average of $1,453 a month.
But increasing home prices, on their own, are often not enough to increase home equity for distressed homeowners. That’s because the unpaid loan balance continues to grow for delinquent mortgages due to unpaid interest, property taxes and insurance. While the average value of the 80,000 properties analyzed increased 3% between the first and last scheduled foreclosure auction date, the average unpaid loan balance increased by 6 percent.
When the mortgage balance is increasing at a faster pace than home prices, more time in foreclosure only digs a deeper home equity hole for distressed homeowners. And when home price appreciation slows or goes negative, as it did for a few months in 2022, the home equity hole is dug faster.
Trading equity for rent
Still, even the $1,500 a month in lost home equity experienced in 2022 may represent a beneficial tradeoff for many distressed homeowners facing a shorter-term disruption, allowing them to exchange that lost equity for some extra time to stay in the home until they can start making mortgage payments again.
“One of the examples I was researching for this month got a $58,000 partial claim granted,” said Houston-based real estate investor Francois Delille, referring to the partial claim program for mortgages insured by the Federal Housing Administration (FHA). The program allows delinquent borrowers to package up to 30 percent of the unpaid principal balance of their original loan into a non-interest bearing second loan that only needs to be paid off when the home securing the loan is sold or refinanced, or the first position mortgage is paid off sometime down the road.
“Assuming he put 3.5% down, he was able to get close to a 30% partial claim mortgage,” Delille continued. “Usually, rent is about 1 percent so effectively he paid at most for 3.5 months of rent equivalent and then got 30 months free rent equivalent.”
Effective foreclosure prevention
Partial claims — and the extra “free rent” time they give to distressed homeowners — have proven to be key part of an effective foreclosure prevention strategy that mortgage servicers and government agencies employed in the wake of the economic shock caused by the COVID-19 pandemic.
Most homeowners who missed mortgage payments because of that shock have returned to making mortgage payments on time thanks to a combination of widespread forbearance programs that gave homeowners time to get back on their feet, along with innovative loss mitigation tools like the partial claim, which protect homeowners from the burden of having to catch up with missed payments when they do get back on their feet.
Of more than 8.7 million mortgages that entered COVID-19 forbearance, about 7.5 million (86 percent) are now back to performing or have been paid off, according to data from ICE as of November 2023. Only 93,000 (1%) of the forbearance exits have ended in a distressed disposition — in most cases a completed foreclosure auction.
Chronically distressed
Another 553,000 (6%) of the forbearance exits are still delinquent (455,000) or in foreclosure (98,000) after exiting forbearance, according to the ICE data. That number grew by 66,000 (14%) between November 2022 and November 2023, and is up by 331,000 (149%) since July 2021, when the pandemic-triggered nationwide foreclosure moratorium on government-backed mortgages expired.
For that smaller but growing subset of chronically distressed homeowners who may not be able to avoid foreclosure in the long run, staying in the home longer could be counterproductive, potentially eroding equity that could help them with more affordable replacement housing costs when they do eventually walk away from the home.
Providing a graceful exit
As a local community developer who has been buying distressed real estate in the Houston market for the last decade, Delille is passionate about providing distressed homeowners — whom he describes as “good people in a bad situation” — with a graceful exit that protects their equity while providing a path to replacement housing.
“As a company we always work with the occupants. … We always offer lease-back to people, and we have a few that have been tenants for several years,” he said. “I have a guy who has been leasing from us for six years. It’s a win-win.”
Protecting homeowner equity
In addition to losing equity on paper, the actual home equity for properties cycling in and out of foreclosure may not be as high as the on-paper home equity given that many of these properties have deferred maintenance and are not in fully repaired condition.
The average on-paper equity for the 80,000 properties analyzed — based on the estimated after-repair value (ARV) of the property — was $141,188. But for a subset of about 20,000 properties that did eventually sell to a third-party buyer at foreclosure auction, the average actual equity — based on the winning bid in a competitive and transparent marketplace — was a negative $5,348. In other words, the chronically distressed properties were underwater by about $5,000 on average, based on an actual market-clearing value for the homes.
For chronically distressed homeowners with actual home equity — not just on-paper home equity — the last chance to protect that equity is at foreclosure auction. When a property is sold to a third-party buyer like Delille at foreclosure auction, any surplus above the total debt owed is distributed back to the distressed homeowner after junior liens have been paid.
Although the aforementioned 20,000 properties sold at foreclosure auction had an average negative equity of more than $5,000, slightly more than half (51%) of those third-party foreclosure auction sales generated some potential surplus for the distressed homeowner. And among those 51%, the average potential surplus was close to $54,000.
A review of properties purchased by Delille at foreclosure auction via the Auction.com platform over the past three years reveals that 58% of those sales have generated a potential surplus.
“On this property we bid $30,000 over the credit bid, the bank’s bid,” said Delille, recalling a foreclosure auction purchase he made in January 2023. “That means there’s surplus funds that, within about three weeks, he’s getting. So, he got a nice-sized check after the auction that allows him to fall on his feet.
“He had been struggling for many years and he just could not afford that home anymore,” Delille continued. “So, I think that surplus fund check allows him to find something that he can afford, has some reserve, land on his feet. In the end he was quite happy with the result. We didn’t have to file an eviction; we were able to work out an agreement with him. He needed a month to move. We helped him move. And he was very relieved with the process.”
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9 House-Flipping Tips for the Risk-Averse From Two Experienced Flippers
Pittsburgh-based investor and house flipper John Walker of Turnkey Investment Properties and his business partner, Jim Auten, usually have around 10 flips on the go at any time. When rates were low, and business was booming, that number doubled. However, high rates and low inventory have seen many of their fellow flippers exit the market.
“It’s a case of the last man standing right now,” Walker says.
According to recent Bank of America research, it’s a scenario played out across the country, with sellers staying put for fear of sacrificing a low mortgage interest rate. About 80% of outstanding U.S. mortgages are at interest rates below 5%.
“It’s a needle-in-a-haystack scenario, with the margins thinner than ever,” says Walker. “You’re buying high and attempting to push the comps as far as they will go to eke out a profit. The good news is that generally, if you do a good flip, you’ll find a buyer because there’s so little on the market. Still, you have to be meticulous on the buy and construction sides to make a profit.”
North New Jersey-based flipper Shaheer Williams of Urban Luxury Development is a 30-year real estate veteran. He routinely has several flips going on. And he says the market is currently tighter than he has ever known.
“Right now, my advantage over many newer flippers is my reputation,” says Williams. “The other metrics, such as construction costs and the buy price, don’t allow much room for negotiation, so I’m getting deals because of my track record and personal network.”
Looking to flip houses but concerned about risk? Here are some tips from Walker and Williams for minimizing risk and keeping deals flowing in a tight real estate market.
1. Use Private Money With a Deed-In-Lieu of Foreclosure
Building a long-term relationship with private lenders who get paid once the deal closes rather than demanding monthly payments takes away the stress of coming out of pocket in the midst of a flip. Using a deed-in-lieu of foreclosure—which guarantees the property reverts to the lender should the deal fail to close—in the lending agreement also puts the investor’s mind at ease while ensuring that none of the flipper’s personal money is tied up in the project.
Says Walker: “We don’t mind paying 10% to 12% for private money, knowing there are no headaches or additional hurdles to jump. We are 100% funded for the purchase and rehab. We always deliver, even if we have to take a hit on our profit, which happened when rates went up.”
2. Always Close
“Realtors know I will always close, which is why they bring me their deals first,” says Williams. “In this business, your reputation counts for everything. You make your money on the buy side, so when a good deal comes along, a Realtor needs to know there won’t be any hiccups and their buyer will deliver.”
3. Fine-Tune Renovations to Save Money
Flippers should go through every inch of a home looking for ways to save money. Here are a few tried-and-tested tips to minimize the expenses of your renovation:
4. Reliable Contractors Are Key
Most flippers agree that good contractors are worth their weight in gold-plated fixtures. The cheapest contractor is not always the best if it means they will drag out a project. A fast flip saves money, as it gets a property listed quickly, eliminating holding costs.
“Broke contractors always charge less to get a job,” says Walker.
“Don’t be fooled by their sticker price.” Williams concurs. “I used to manage my own crews to save money, but it was a constant headache and cost me valuable time in the long run when I could have been finding other deals. Now I use a few reliable GCs I know will complete the job on time.”
5. Renovate Based on ARV
Extra bedrooms add value, but pricey chandeliers don’t. Similarly, a high-end luxury appliance isn’t going to move the needle on your ARV. Choose appliances and fixtures that match your sales price. Sometimes an antique or vintage store can unearth low-priced treasures that pop in the right setting.
6. Virtually Stage
Moving furniture in and out of a house leaves scuff marks, and staging can be expensive, especially when a home sits on the market for a while. Virtually staging a home costs a fraction of the price, especially when using overseas stagers on freelance sites such as Fiverr.
7. Stay on Top of Design Trends, and Keep Your Buyer in Mind
No one wants a home that looks dated. Equally, a home resembling a futuristic nightclub might limit your buyer pool. Always renovate with your target buyer in mind. Understanding the demographics of your neighborhood and the people attracted to your home’s price point is critical to achieving a quick sale.
8. Interest Rates Should Determine Your Renovation Budget and Sales Price
Higher interest rates have thrown a spanner into the works of homebuying affordability. Coupled with higher home prices and wages that have failed to keep up, potential buyers are getting squeezed out of the market.
In June 2023, the cost of a typical home reached a record of $410,200, up more than 14% on the previous year, according to the National Association of Realtors, marking an increase of over 40% from October 2019, before the pandemic. However, that number dropped to $387,600 in November.
Even with projected interest rate cuts in 2024, increases in construction costs mean that if you want to snag a buyer for your flip, you will have to scale back your finishes and buy less expensive homes than when rates were lower.
9. Future-Proof Your Home
Ensuring your home is equipped for the future is relatively cheap but will give you an advantage over other homes on the market, allowing you to push the sales price.
Future-proofing add-ons include:
Final Thoughts
Low inventory means that house flipping is still viable, but meticulous attention to detail is needed in every aspect of the process. Buying right in the first place is more important than ever.
Often, this means getting back to old-school granular techniques like driving for dollars, knocking on doors, and local networking because personal interaction is liable to carry more weight with a seller than AI-generated content on a mass-mailing campaign. Online marketplaces (Facebook and Craigslist), social media, and property auctions are also still proving effective.
During renovation, itemize every proposed upgrade. Investigate ways to save costs.
Finally, all-cash buyers jump to the front of the line when selling. Consider negotiating a discount to minimize your holding costs to ensure a fast sale.
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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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Keller Williams Settles for $70M in NAR Lawsuit, Banks “Rocked” by RE Losses
Just when you thought the NAR lawsuit coverage was over, Keller Williams agrees to settle for $70M, bringing a big blow to real estate agent commissions. How will this impact buyers and sellers, and are we entering a new age of home buying where only a fraction of the real estate agents exist? We’re getting into this headline and others affecting the housing market in BIG ways in this episode of On the Market.
Some agents will thrive while others barely survive in a post-NAR lawsuit world as real estate agent commissions are threatened once again. But it isn’t only agents getting hit hard this week. Banks have been “rocked” by real estate losses, primarily commercial real estate, as loans come due, but investors aren’t able to pay. One bank saw its share price slide by more than fifty percent this month as earnings reports showed a major loss from lending this quarter.
Finally, it wouldn’t be a headlines show if we didn’t touch on the jobs report. This month, we’re getting a mixed bag of good for the economy but bad for rates type of numbers. Jobs are growing, and the economy is still chugging along, but will this push rate cuts back as the Fed fails to find weakness in our economy? We’re giving you our thoughts on this episode!
Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, and today we’re going to be digging into three of the most pressing and important headlines facing the real estate investing industry. And to do that, I have my friends, Kathy Fecke, James Dannard and Henry Washington joining us. Kathy, how are you today?
Kathy:
Doing great. We survived the atmospheric river, so all good.
Dave:
What is an atmospheric river?
Kathy:
Apparently when the clouds open up and just dump a lot of water.
Dave:
Rain? Is that just a fancy term for rain?
Kathy:
Yeah, life-threatening rain in California.
Dave:
Okay. Well, this is maybe why on this episode we’re going to be digging into headlines so that we don’t just see things like atmospheric river and read too much into it when all it is is rain. We’ll be doing the same thing, hopefully, for the real estate market to help you not overreact to any potential headlines that you’re seeing. James, how you’ve been?
James:
I’m good. I took off in the atmospheric river last night. It was a bumpy ride out.
Dave:
It’s almost like it’s a normal weather phenomenon. All right, Henry, it’s good to have you on as well. Hopefully down in Arkansas you don’t have to make up fancy words for just normal weather.
Henry:
Yeah, today I am here despite the atmospheric brightness that we are experiencing. I believe some call it sunshine, but down here in Arkansas we like to get pretty fancy.
Dave:
We got a real meteorology team over here. Thank you for joining us. All right, well, we do have a great show for you all today. We’re going to be covering, like I said, a couple of major headlines facing real estate industry, like what’s going on with the big NAR Sitzer/Burnett lawsuit. Updates on credit markets and what’s happening with banks and are they lending to real estate investors. And we’ll be talking about fresh data about the labor market that we’re seeing here in 2024. Let’s just jump right into our first headline, which is Keller Williams reaches a $70 million settlement.
If you remember, there’s been this ongoing lawsuit against NAR and a lot of the largest real estate brokerages in the country alleging that they colluded to keep their commission structure in place against the best interest of home sellers. We did get a jury verdict back in the fall that found NAR and some of their co-defendants liable. Now we’re seeing Keller Williams, one of the largest brokerages in the country with over 180,000 real estate agents reaching a settlement to address these antitrust claims. Now, it seems like this story just keeps evolving. James, as an agent, what do you make of the updates in this story? How are you thinking about Keller Williams behavior here and what it means for the next few steps that might unfold from this lawsuit?
James:
I feel like we’re going through an evolution of broker fees. I think that happens in every business, every service and what we’re seeing now is the traditional way and the assumption of doing business might be getting changed, where it’s like, “You’re a broker, you just get paid this and you move on.” The fact that they settled does, I think, make a pretty important impression on what’s going on right now and it could open it up for other lawsuits. They did admit to no wrongdoing and they were just trying to get this thing gone. It looks like they settled for the 70 million, they’re trying to move on and now they’ve agreed to change their business practices. I don’t think it’s going to impact us in the next 12 to 24 months, but over the next four to five years we’re going to see this evolution of broker fees, which I don’t have a problem with whatsoever, because if you really look at the history of brokers, back in the ’90s, they didn’t have the internet.
They had books and advertising and brokers would meet together and they would have to go over the inventory and then bring it out to the market. It was a lot of work, and we still get paid the same percentage today with a lot higher numbers. We’re getting paid well and I feel like this is going to be the evolution of the niche broker, and if you’re a niche broker with a high level of service or a specialty, you’re going to get paid well. And if you’re just pushing paper and putting signs in the yard, you might get paid a lot less and it could be going to that Redfin style model. I think people need to brace for it and don’t be delusional about it. I don’t think it’s going to have that much impact over the next 12 to 24 months.
Dave:
Well, I’m curious because, just as a reminder, as of right now we have this jury verdict that held NAR liable, but we haven’t heard from the judge exactly what this means. Kathy, do you think this move by Keller Williams is trying to head off a really big injunction from the judge so that they don’t change everything and they’re saying like, “Okay, okay, we’ll change a little bit.” And that way it won’t disrupt their entire business model?
Kathy:
Yeah, I don’t want to speak for them. I do know that NAR and HomeServices have refused to settle. They are taking a different bet. They think that they’re, I guess, going to get a better deal if they keep fighting. Again, I’m trying to read minds here. I have no idea what’s going on in those boardrooms, but I can tell you from personal experience that we had to settle a case once where we had absolutely nothing to do with it. We weren’t involved, we were just named and our attorney said, “This is just a business decision. You have to look at it just like a business. You could spend a whole bunch more money trying to fight or you just put up your hands and say, ‘We didn’t do anything wrong but go away.’” It could be that’s what they did or they just thought it could be worse if we wait. I don’t know. When you go to a jury, you have a jury who may not know very much about real estate deciding your fate. Again, it was just a business decision.
Dave:
Henry, have you noticed any changes in the way the agents you work with are operating? What are you seeing?
Henry:
No, no changes in the way they’re operating so far. I agree with James. I don’t know that we’ll see any major changes in the next one to two years, but I do think that the industry is going to change and I don’t believe it’s a bad thing. It’s like any other industry. You typically get paid based on performance and level of service and customer service. I think those agents and brokerages who are going to provide exceptional customer service and who are going to go above and beyond in their business practices are going to not just survive but thrive in a market where you’ve got to provide those things in order to make money now. You didn’t have to provide that before, right? You were going to get your percentage as long as you were the named broker, agent on that deal. You have to think about home buyers, especially first-time home buyers. They’re called first-time home buyers.
They have no idea what a good level of service is from a real estate agent, right? They’re just trusting that this person knows what they’re doing and they just have to take what’s given to them. It’s not till they’ve been through maybe their first deal and then they get a better agent on their second home purchase and then they realize, “Oh my goodness, our first agent just really didn’t do much compared to the level of service that we’re getting now.” I think that it’s just going to mean that, like I said, the better agents who provide a good quality of service and operate a better business will do well.
Kathy:
Yeah, my concern is that people won’t get a buyer’s agent and they’ll either try to do the negotiation on their own or they’ll use the listing agent. My message to all you out there who maybe have not bought your first property, be really careful about going to the listing agent and using them to double represent you. That was our very first deal. I didn’t really know back then, this was a long time ago before I knew anything about real estate, and I didn’t know the difference between a buyer’s agent and a listing agent. I just went with a listing agent. In retrospect, they weren’t serving me. They were hired by the seller. They did not negotiate on my behalf because that would be… How do you do that when you’re representing both? It’s like getting an attorney to represent two parties, speaking of the NAR situation.
That’s my concern is don’t be lazy, don’t just use the listing agent because they are not necessarily working in your favor unless you’re an expert. Now I do that just so they get more commission and I get the deal, but hopefully this means that people will get a buyer’s agent and get one who really truly will represent them and understand what that means. What do you even need a buyer’s agent for? Hopefully to help you negotiate. To make sure that you’ve got all the proper inspections. Hopefully someone who knows the area, knows the history. Really, it comes down to that. What does a buyer’s agent do besides have really beautiful marketing and maybe great hair and a great car?
Henry:
Yes, I agree with you, but I think this is moving in a way that every other business operates. Hiring a real estate agent has always baffled me. People don’t do any research. They just pick the family friend or the person at their church or the lady who’s on your kid’s soccer team, other soccer team member, mom, right? That’s the level of research that they put into it. It’s always baffled me that that’s how it was done before. Going forward, it’s just going to be you have to do the same amount of research that you would do for anything else. If you’re going to hire a plumber, you’re not just going to hire some Joe Schmoe off the street. You’re going to go ask people who you trust who are in the industry or ask people who have had plumbing work done recently. Who did you use? What was your experience like? Can I have their phone number? And then you might ask a series of qualifying questions when you get them on the phone. You just have to do this normal now.
Dave:
Yeah, that’s so true. This whole situation reminds me, I guess, it was probably 10 or 15 years ago when Uber came around and certain taxi drivers and drivers got with the times and figured it out, and then there were some that just stuck their head in the sand and were fighting against it and were suing and they were just fighting upstream. To me, it just feels like that’s what NAR is doing. KW, a lot of these other brokerages are settling and, I think, are trying to adapt to the times and maybe ready to move on a little bit. Then there are others who are just really digging in hard when, at least to me, it feels like the winds have changed, are already… What am I saying? Winds have changed. Is that a saying?
Henry:
Atmospheric river has changed path, it’s now flowing upstream.
Dave:
The atmospheric river has changed and now things are changing (beep). This has gone off the rails. Should we do that again?
James:
Yeah, I think it worked. I fully understood what you were trying to say, Dave. The money is stopping flowing for these brokers that don’t offer additional services.
Dave:
Yeah, I think people have to accept that things are changing and there’s still a way to make money, as Henry just pointed out. It’s just you need to adapt to the new time, which is true in every single business.
James:
Every investor does use numerous brokers, right? Depending on whether you’re trying to get the deal or not. I’m a broker, sometimes there’s brokers bringing me deals and they’re off-market and I’m being buyer in this scenario, not my service fee. I don’t really see this changing too much for investors. If anything, it might actually steer more deals their way because they might just go straight calling the listing broker. To Kathy’s point, when you’re going direct to that listing broker, you do want dual representation if you can get it. Then you are protected. They have a fiduciary duty to watch over you. But investors are a lot more savvy than your normal homeowner because they’re doing a lot more transactions. For not having representation, they don’t care half the time because they’re buying it a certain way and that’s what they know to buy, and they’re doing their own feasibility inspections anyways.
I think it actually might push more deals towards investors. The one thing I can see this affecting though is off-market transactions because a lot of times when you’re negotiating direct to seller is you’re looking at, “Hey, this is a cash convenience sale.” You have all this cost when you sell, which is anywhere between 5 and 6%. Many times those sellers will give you that credit to get that discount that you need, right? And it’s that inch game where you’re just trying to get that net number to them where they’re happy and we can [inaudible 00:13:05] it. Now, that’s going down by half. It actually makes a much bigger negotiation for wholesalers and brokers on direct to seller, but I think on-market it’s going to push more deals investors away, but off-market it actually could add a bigger gap and less off-market deals could be getting done.
Dave:
All right. Well, thank you. I appreciate that insight, James. We’ll all just have to wait and see how this goes over the next couple of months, but I think those are some wise things to keep an eye out for. All right, now we’ve covered our first headline and we will be right back with two of the most important headlines impacting the real estate industry after this quick break.
Welcome back to On the Market. Let’s move on to our second headline, which is that, “Banks are being rocked again as real estate losses mount.” This article talks about a specific bank, New York Community Bancorp, where shares plunged a whopping 38% after posting a $252 million loss in just the last quarter. This was higher losses that they were expecting and they were already expecting pretty big losses on commercial real estate. This is a little bit concerning, but at the same time I feel like we keep hearing about this pending apocalypse with commercial lending, but so far it’s been contained to a few banks. Kathy, do you think this is a sign of more trouble to come in the future?
Kathy:
I think it’s a sign of bad business practice, honestly, and lack of diversification. I think in the case of this New York Bank, the bulk of their portfolio was in office. COVID obviously accelerated the work from home environment, but it’s been a trend for a while. With business stay diversified. Make sure you’ve got plenty of reserves on hand and don’t over leverage, and all the things that people should know about. To me it’s like, “I wouldn’t have done that if I were the owner of the bank.”
Dave:
James, with your commercial deals, are you noticing any big change recently in commercial practices? Because I know they’ve changed over the last few years, but in the last three months has anything altered?
James:
It’s funny, I read these headlines and some of it, I believe, is just hype and it’s for a specific type of asset and product in the market and they make it seem doom and gloom with these local commercial banks. But we’ve had the easiest time getting access to capital from commercial banks on townhome sites, apartment deals. It has not been a struggle to get financing. We actually just got a development loan where we perform about 20%. That we were going to leave 20% of the total project in. The banks appraised it. They ended up giving us a 90/10. They gave us 90% leverage with an interest reserve in there for 12 months. And because their loan-to-value position was good and they liked us as a borrower, I think if you have that long-term relationship, don’t always shop your banks guys. Staying with the same bank and getting that consistency with them, they’ll lever you more.
Even all this doom and gloom news that the banks aren’t really lending, they don’t really want to. If they like you, they’re being a little bit more aggressive. I think build those relationships, you can still get debt, especially on residential. Apartments, townhomes, development, single family, you can get that. Office? Yeah, it’s not the most desirable, but even right now we’re about ready to list an office building, small office. We didn’t think it was going to get much traction. We talked to five banks and they all pre-approved it for a purchase. If you have the right product in the right area, banks will still lend you. It’s not as bad as what I’m seeing in the articles. But I will say some of these guys have made some bad moves and lost some serious money, because I was even reading that article, it’s like, “Some small ripples.” I’m like, “33 billion is a small ripple?”
Dave:
It’s another atmospheric ripple.
James:
Yeah.
Dave:
Henry, I know you work a lot with local banks. I’m curious, how would you advise investors who maybe don’t have the track record that you have or James has with local banks? How do you establish those relationships to create that credit worthiness in the eyes of these banks?
Henry:
Yeah, that’s a great question. Well, first I want to piggyback off James and say I completely agree. I’m seeing the exact same thing. I’ve got two deals that I’m closing on at the end of this week, both with local banks, both with creative aspects to them. One, I’m doing an owner carryback for part of the down payment portion. A lot of banks, if they’re being tight, they’re not allowing you to do some of those things, right? But this bank is totally fine with that. Another bank we’re closing on a deal where we’ve got seller credits involved. One of these banks is only my third deal I’ve done with them and the other bank it’s the very first deal I’ve done with them. I think what you’re seeing is these banks who are smarter, who may have some of these office assets are trying to diversify and want people who are doing really good deals to bring those deals to them so that they’ve got some different asset types in their portfolio that have a good amount of equity in them.
To answer your question, Dave, you’ve got to speak to these banks in the what’s in it for them, right? And the what’s in it for them with these small banks when you’re brand new is you want to bring them a deal that’s got equity in it because that’s a lower risk investment for them. They want low risk loans in their portfolio. They have to loan to stay in business and if they’ve got a loan to stay in business, they would much rather take on low risk loans in a residential space because then if they end up with those assets, they’re not really stressing about it. They can sell those assets and recoup their money. They’re not losing their shirt like they are in some commercial spaces or in some office commercial spaces. You’ve got to have a good deal. That’s first and foremost.
If you’re buying off-market, you can go and get a deal and then bring a good deal to them. If you’re buying on-market, you’ve got to get a pre-approval first and a bank can give you a pre-approval, but make sure when you’re going to ask for that pre-approval, you’re talking to them about your strategy. What is it you’re going to look for? “I’m going to look for single and small multifamily that I can get at a 30, 40, 50% discount. I want to bring those assets to you and have you finance those deals.” The second thing that you want to mention to the bank is that you are looking for a long-term relationship. Banks need deposits and they need to loan.
Share with them your plan. “I’m looking to buy these types of assets in these markets with this type of equity in it, and I will bring my business bank accounts here to you and we can have a relationship where I keep my deposits here, you continue to help me grow my business and I’m helping you grow yours.” Right? You’ve got to speak to them in the what’s in it for them. You can’t just go and say, “Hey, give me some money. I’m trying to do some deals.” They need to know what you’re trying to do and what’s in it for them.
Kathy:
100%. Banks are in the business of lending. They’re desperate to lend right now, but it’s the basics. You got to have a good deal. They got to have security. Land development, that’s all riskier, so that’s going to be more expensive or more difficult to get. That always has been… Well, not always. They’re going to look at the risk level and in residential, there’s not a whole lot of risk there right now. Just bring them a good deal, especially if you’re putting money down.
Dave:
This is such a good conversation because I think as Henry just brought up and Kathy reiterated that. If you understand how banks make money, you can very easily work with them. This is so important with any business, any contractor that you work with, any lender, any agent. If you understand what they’re looking for, then you can adjust your own strategy, your own requests, your own proposals to them accordingly. And as Henry and Kathy just stated, there’s this term in finance where people say that banks are either like, “Risk on.” Quote, unquote. Or risk off. That is basically just a shorthand for how much risk financial institutions are taking. Right now most financial institutions are quote, unquote, “Risk off.” Which means that they’re not going to be lending on the type of projects Kathy just said, development or land deals as readily, but they have to make money.
If you can bring them low risk deals, they’re going to be thrilled by it. Thank you both for bringing that up. I think that’s a really important point and really helpful tactical advice here for everyone listening that if you are worried about being able to finance your next project, think about the relative risk, just take a minute and sit, and put yourself in the bank’s position and ask yourself like, “If I were the bank, would I lend on this deal?” And if the answer’s no, maybe bring them a different deal and go find something else. We’ve now hit our first two headlines on Keller Williams settling the antitrust lawsuit and headwinds in the banking sector due to commercial real estate weakness. Stick with us because after this we’re going to be talking about the, spoiler alert, robust labor market.
Welcome back to the show. All right, with that, let’s move on to our third headline, which is about the labor market. We just can’t stop talking about this labor market because it continues to surprise. The headline is that the January jobs report showed US job growth surging. The labor market added 353,000 jobs in January 2024, which is the highest mark in over a year. We’re seeing strength across a lot of industries. High paying sectors like professional and business services accelerated and piled on 74,000 jobs. Healthcare added 70,000, and we’re seeing wages growing faster than traditional historic rates above and beyond the pace of inflation. Spending power, after years of getting pretty hammered is starting to recover slowly. Henry, what do you make of this labor report and what it means for you as an investor?
Henry:
You know what? This is reflecting what I’m seeing here in my local market as well. I think I read that we added like 10,000 jobs last year and we have about the same amount of people moving to the area. It just shows the strength in the jobs market and some strength in the economy. I believe that that’s going to be beneficial for the real estate market. These people need places to live. A lot of these companies are not doing remote work or are lighter on remote work now. That means people have to move to these new places where the jobs are being added. They’ve got to have a place to live. They’re going to be buying homes. They’re going to be building homes. They’re going to be renting homes. We’ve also seen a 9% rise in appreciation here in home prices. I think it all plays in hand in hand. If there are jobs, people are going to need homes, and if they’ve got money to pay for them… It just speaks to a healthy real estate market.
Dave:
Kathy, how do you look at this labor market situation, in particular how it relates to the Fed and interest rates? Do you think this will change their calculus after signaling they may be open to a pivot and cutting rates in 2024?
Kathy:
Yeah, there’s no pivot in sight right now. This was a big miss by economists. They just cannot get a grasp on the job market and why it just keeps expanding and why it just keeps being bigger than expected. I have my theory on that, and the theory is that second stimulus package was probably not needed. It was a ton of money created and put out in the economy and it’s still out there circulating. When you look at a deficit like we have today, we better have job growth. We better have something for all that money printing. That’s, again, my humble opinion on it. Lots of money circulating. It’s creating lots of jobs. How are we going to pay off that debt? Don’t know. Nobody knows how you’re going to pay off the debt, but at least we’ve got job growth.
Dave:
What do you think, James? Are you seeing confidence from buyers right now? Because it felt like for a couple of years, buyers were pulling back a little bit, not necessarily because of affordability, that was obviously a big part of it, but people also want to feel secure with their income before they make a huge purchase. Do you think the continued resilience of the labor market is going to increase in demand for homes?
James:
I think that always is going to be correlated. The one thing about this jobs reports is it’s so up and down every month. It’s like, “Oh, finally cooling.” Then it’s red-hot. Then it goes cooling. I swear two months ago it was saying it was way down. It was going in the right direction. I do feel like buyers are confident, but more, I do feel buyers came to life the last two weeks for sure. I think it has to do more with them just knowing that the Fed is saying, “Hey, look, we’re going to start going in the opposite direction at some point.” They think there’s no free fall. It’s funny because when I do talk to people about the job report, even real estate professionals are like, “Hey, the jobs report came out hot this month.” And they’re like, “Oh, what’s that mean?”
Dave:
Yeah.
James:
They’re focused on the now, right? Most consumers like, “What I experience now?” And at the interest rate, and they’re not looking at all the factors. But I didn’t think this was great news because if it’s this hot and it keeps going, even if it’s pulsated, they need stability. And I don’t think they’re going to start moving rates until there’s stability in the jobs market, the economy in general and not this surging. As investor, as we’re trying to perform out deals, that’s what we’re looking for, consistency and stability. Every time this goes up and down, it makes me a little bit more nervous because it could go the opposite way real fast and cause some market shifts.
Dave:
Yeah, that’s a great point. And just to remind everyone why we as real estate investors should be thinking about the labor market. Few reasons. One, first and foremost, labor market very correlated with overall economic growth. That’s really important. The second thing that I think has become more important over the last few years is thinking about the role of the Federal Reserve. We talk about the Fed a lot, but just as a reminder, they have two different jobs. The first job is to maximize employment. They care a lot about the employment rate, labor force participation, and the many different ways that you can measure and evaluate the strength of the labor market. On the other hand, their second job is to control inflation. Obviously they’ve been really focused on that element of their job the last couple of years because inflation got out of control.
But if you think about this job, you see a paradox here, because maximizing employment can lead to an overstimulation of the economy, which leads to inflation. But if you work too hard to combat inflation, that will slow down the economy and negatively impact the labor market and people’s ways of earning a living. The Fed is constantly on a seesaw. They are just going back and forth and trying to find the right balance between maximizing employment without overshooting and having a lot of inflation. That’s why these labor market reports are so closely watched by people like us and economists because they are trying to read the tea leaves and think about how the Fed is going to react to these labor market reports.
When you see strong labor market reports like the one that we’re seeing here, that, to me, at least signals, “Hey, maybe even though the Fed has said that they do intend to lower rates in the future, it might take a little bit longer because they don’t need to focus so much on preserving the labor market. That’s doing great, and they can keep focusing on the inflation piece, which is still above their target of 2%.” We’re still above 3%. That’s why we’re talking about this and why it’s so important, even though it might feel a little bit abstract from real estate investing.
Kathy:
Yeah. Also, how it affects us is people keep hoping that mortgage rates will go down and mortgage rates don’t go down when the economy’s booming. It doesn’t work that way. I think we can at least expect rates will be where they are, and I’m speaking mortgage rates, probably for a while because my guess is the Fed will keep the Fed fund rate where it is until they see things slow down a bit. But I can tell you in the markets that we invest in like Dallas, Texas in general, Texas was the number one market where that job growth happened, and Florida was pretty close behind. From an investor perspective, I’m going where all those jobs are going and that’s where we’re investing.
James:
This is why we’re in the mess we are now, right? The economy was way too hot. The money was way too cheap and then cut rates. Hopefully, and as much as I hate to say this, they keep rates where they need to be until we get this fixed because if they start cutting rates, things could explode again. And we’re going to be exactly… It’s great in the short term, right? We all make a bunch of money. We’re selling things for a lot. We’re renting things for a lot, but there needs to be some stability for us to move forward over the next five years.
Dave:
Absolutely. Well, thank you all so much for your insights on these latest stories. If you have any ideas of stories you would like to hear us talk about on future episodes of On the Market or these correspondents show, please let us know. You can put that in the comments below on YouTube, or you can always find me on BiggerPockets or Kathy, James or Henry on BiggerPockets as well. And share with us your thoughts or stories that are of particular interest to you. James, Kathy, Henry, thank you for joining us. Thank you all so much for listening and we’ll see you for the next episode of On The Market. On The Market was created by me, Dave Meyer, and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.
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