Ashley:
This is Real Estate Rookie episode 302.
Tony:
There’s a few different types of lenders here. I love small local credit unions because they tend to have a little bit more flexibility than your larger national banks. And the credit union that I used, they allowed me to fund 100% of both the purchase price and the rehab. I think that it’s very much doable to find that person. You just got to spend the time to build those relationships and identify the right folks.
Ashley:
My name is Ashley Kehr and I’m here with my co-host, Tony Robinson.
Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And we are back today with another Rookie Reply episode, we’re going to answer some questions from the Rookie audience and we’ve got four really cool questions today. First, we talk about private money lending and we actually talk about lending in general, but then how private money lending plays a role in that and how you can fund 100% of your deals using other people’s capital. We talk a little bit about estimating rehab costs, which is one of the hardest things for a new real estate investor to do, and we give you some pretty simple tools and tactics for exploring how to estimate those costs.
Ashley:
Then we will go through red flags when hiring a property manager. So Daniel asked a couple questions of things that incurred while he was looking into hiring a property manager and we go through if these are red flags or green flags and if he should continue dating this property manager. Then the last thing we do is going over your lease agreements and stating what you should and shouldn’t include as the landlord, that is your responsibility to fix or repair during the length of the lease.
So, one thing that came up in the question as to how little or small of things are you going to fix for your tenant in their rental property. So if you are thinking of doing long-term rentals or you currently are right now, maybe you’ve had this situation where something comes up and you’re undecided, is this actually my responsibility or is this the tenant’s responsibility? So we kind of discuss your options there and one way to troubleshoot that.
Tony:
Now I want to give a shout out, because today’s episode, I’m going to read a review. It’s a little different of a review today. Usually I’m sitting here and I get to read all these five star glowing reviews of who we are and why people love us so much. But today, for the first time in a very long time, we got less than five stars in a review. Someone left us a two star review. So instead of hiding from this and digging our head in the sand, we’re going to read it.
Ashley:
Okay. First of all, let me just clarify. This review is not about Tony and that’s why he is okay with reading this review because he literally has nothing to do with it.
Tony:
That’s true because this person does say, “I’m only one episode in,” so I didn’t come on until episode like 38 or 39, so I had nothing to do with this, but they say, “I’m only one episode in and all I can hear them say is the word like over and over. I stopped counting at 45 likes. I can’t focus when that’s all I hear. Keep up the great work otherwise.”
But the last part, “Keep up the great work otherwise,” I feel like there’s something to build on there. So for all of our Rookies that are listening, help us out, we got to rebound from this two star review. If you can, leave us an honest rating and review on whatever platform you’re listening to, five stars help, two stars hurt a little bit. So maybe if you have a two star, keep it to yourself, but if you’ve got a five star, you can share it with the world.
Ashley:
And our producer even asked, is that review about you, Ashley, or your old co-host or the guest? And honestly, it probably was me, still is me. Now I’m going to be super conscious. I’m going to have to get a sticky note and stick it on my computer and put “like” and X it out so I make sure I’m not saying it a lot.
Tony:
I feel like I’ve never picked up on filler words like that. I don’t think I’ve heard you say over and over and over again. Who knows? Maybe it was just an episode one thing.
Ashley:
I have some kind of software implemented where it cuts it out.
Tony:
It just cuts it out. Yeah.
Ashley:
I’m pretty sure there is software like that now that cuts out filler words. So…
Tony:
Yeah, I’m sure. Just some boring banter really quickly, Ash. Do you watch Ted Lasso?
Ashley:
I started watching it when it first came out, but I never got super into it.
Tony:
Oh, man. So Sarah and I always have at least one TV show that we watch, and right now it was Ted Lasso and we’ve watched the third season just ended and we’ve watched all three seasons, but this was the end of the series, so it was the series finale. And I just really enjoyed that show. It was supposed to be a comedy kind of slapstick type thing, but as the seasons progressed, they explored some pretty deep topics in that show. So anyway, if you guys haven’t watched Ted Lasso, highly encourage everyone to watch it and you can now go back to Apple TV and watch all three seasons, binge watch them all.
Ashley:
And you know who else loves that show?
Tony:
Who?
Ashley:
Is Tyler Madden.
Tony:
Does he? I’m not surprised at that.
Ashley:
Yeah, yeah, so our good friend Tyler, who Tony and I are actually flying out tonight to see, that Tony RSVPed to, what? Yesterday did you text-
Tony:
Last night, yeah.
Ashley:
So we are headed to Denver tonight. We did a charity auction at the BiggerPockets Conference last year where someone could win a day with us and that day is tomorrow. So we are meeting up in Denver. We are also doing two podcast episodes live with guests. So that will be super exciting. We always love doing the in person. It actually was the, it aired two episodes before this, 300 and 301. So you guys can check out those two episodes and you’ll be able to see us all in person. We’re renting out a cool little studio, so if you guys want to watch on YouTube and see all the fun instead of just listening to it, you can check out the Real Estate Rookie YouTube.
Today’s first question is from Preston Garcia. Does anyone know how to get a private lender to cover all 100% of purchase price and rehab? It seems like all of them only cover 75% of the purchase and 100% of the rehab. I don’t have enough cash to cover the other 25%. I planned on refinancing afterwards to pay them back. So Tony, you’ve talked about this a couple times on the podcast as this is how you actually purchased your first couple long-term rentals and maybe talk about that experience and then now how to get the same thing.
Tony:
Yeah, so Preston, first, just for all of our listeners, there’s a few different types of lenders here. So you have private money lenders, which are typically just individuals who have capital that maybe is in their savings account or maybe is in some kind of a SDRIA or some kind of 401k where they’re taking loans out. So typically your “private money lenders” are individuals who have access to capital. After your private money lenders, there are hard money lenders who are legitimate businesses where their whole way of operating and making profits as a business is lending money to real estate investors for short-term debt situations. And then you have more institutional type lenders like credit unions and banks and things of that nature. So you’re going to get a different level of, I think, flexibility when it comes to down payment percentages with each type of lender.
Now I’ve used pretty much all of those I think in at least one deal or another. My first couple of long-term rentals were done through credit unions. And I love small, local credit unions because they tend to have a little bit more flexibility than your larger national banks. And the credit union that I used, they allowed me to fund 100% of both the purchase price and the rehab as long as I met certain criteria that they wanted me to meet in terms of, what am I buying it at and what will it appraise for after my rehab is done?
We’ve also used private money on a ton of deals. So pretty much every flip that I’ve done, I’ve used private money on those deals and our private money lenders typically fund 100% of the purchase and the rehab. I actually literally just sent a wire today repaying one of my private money lenders. So Preston, I think that it’s very much doable to find that person, you just got to spend the time to build those relationships and identify the right folks.
Ashley:
Yeah. So I guess the distinction was with the first properties, you went through the bank and then now you’re using private money because it is a lot harder to find a bank that is going to give you that type of loan that you were able to get on those first properties. So that is where going to private money lenders makes a lot of sense right now in today’s market. There may still be some credit union or other bank out there that does have that option available, but I haven’t found it yet as of right now. Tony, have you?
Tony:
Not recently. Honestly, I haven’t really looked as much, but I feel like we had a guest on recently where he said he found some credit union in Utah. Do you remember that? That was one of the guests we just recently interviewed and he said he got a really sick deal from one of those credit unions out there. But I would agree with you, Ashley, that most banks, I think, have kind of tightened things up a little bit. Especially after COVID, you just saw a lot of that stuff that they were doing before COVID go away.
But I think the private money opportunities are probably bigger now than they were a few years ago because for the folks that just had, say they had six figures maybe just sitting in a savings account, think about how much money those people have lost to inflation if they just left that money in the bank for the last couple of years. So there’s a really strong incentive for folks that are sitting on cash to try and put that money to work. And if you can give them a double-digit return backed by real estate, there’s a good chance they might want to work with you as opposed to just leaving their money sitting in their savings account.
Ashley:
Yeah, that’s a really good point, Tony, and that’s also one way to educate someone on why they would want to be a private lender too, is give them that reasoning, that advantage, that this is actually an opportunity for them to not lose their money to inflation.
Tony:
Can we talk a little bit too, Ash, about how to find these private money lenders? Because I know when I first started, that was always, where are all these people at? Where are all these private money lenders at? And the first thing that I’ll say is that when I first got started investing, I definitely had a limiting mindset around money and I had this scarcity mindset, I guess, is a better phrase around money where I thought that there just wasn’t a lot of money around to be shared in that way. But as I’ve matured as a real estate investor, I’ve come to realize that the opposite is true is that there’s an abundance of capital everywhere and it’s on you as the investor to put yourself in situations where you are meeting people who might have that capital.
And some of the best ways that I’ve found to meet people, going to your local meetups, hosting your own meetup, I think is one of the best things to do. We’ve seen a lot of benefits in our business and students in my coaching program that have their own meetups that are finding private money lenders, so hosting your own meetup I think is one of the best things you can do, even if you don’t have any kind of following whatsoever, just posting on the BiggerPockets forum and posting on meetup.com and Eventbrite and all these other places, but going to local meetups or hosting your own is a great way to do it.
Going to local conferences. You’ll notice it as you start to attend a lot of the bigger conferences that you see the same people at a lot of these events. So as you start to make your rounds from one event to the next, you start to build relationships with the folks because you’re seeing them over and over again. And if at these events you’re introducing yourself as, “Hey, my name’s Tony and I help people get double-digit returns backed by real estate,” that’s a great way to start building a name for yourself in terms of finding private money lenders. So, going to meetups, hosting local meetups, going to conferences.
Networking online I think is a really great benefit as well. So we’ve got the BiggerPockets forums, we’ve got the BiggerPockets Facebook groups, and you’ll see in the forums for all of our Rookies that are listening, that if you go through, you’ll see some folks whose names pop up over and over and over again in the forums and they’re doing that obviously because they want to help and they want to give value to other people, but they’re also doing that because they’re building a name for themselves in that platform.
I remember it was, I think Ben Leibovich was his name, and Ben’s a big time syndicator and before I even knew who he was, I just always saw him posting on the forums in BiggerPockets and I was like, “Man, this guy is just the nicest guy ever, just always giving his time to people in the forums.” But on the backend of that, he was able to introduce a lot of people to his syndication business and that’s how he finds, I’m sure I would think, quite a few people to invest in his business. So Rookies, for all of you that are listening, there are so many ways to start building a name for yourself and building relationships with potential private money lenders. You just have to take the action and put yourself out there.
Ashley:
I think the last thing I would add to that that ties in is proof of concept. So having experience and showing that you’ve had a couple successful deals. And one way to do that is to share online. And somebody looks at you, you post that you’re successful, oh, you have a lot of followers, you have these nice before and after pictures, you have a picture of a check, you must be successful. So one thing that that’s not the way that someone should decide to lend their money to you is based on your social media presence, but that does really help gain some traction for you if you are sharing what you’re doing and you’re open about it on social media or in the BiggerPockets forums. In the forums there’s also the deal diaries where you can go through and kind of answer some questions on a deal you just did and share it almost as a case study.
Tony:
I just want to share two other resources, Ashley, for our Rookies. So first, BiggerPockets has a book by Matt Faircloth, Raising Private Capital, definitely go check out wherever you want to consume your books and pick up a copy of that. And then one of my good friends in real estate investing, her name is Amy Mahjoory, so if you look her up on Instagram, it’s Amy, A-M-Y, Mahjoory, M-A-H-J-O-O-R-Y. So that’s M-A-H-J-O-O-R-Y. And Amy runs a company called Raising Private Capital and she does just a phenomenal job of specifically teaching real estate investors how to raise private capital.
So if you go through her Instagram, she’s got so many little golden nuggets on techniques that she’s used to raise private capital in her business. And then Amy was also on a few episodes of the Real Estate podcast last year, so if you guys just look up Amy Mahjoory BiggerPockets, I’m sure you’ll find all her episodes as well, but she is a wealth of knowledge and I really highly encourage you guys to go check her out as well.
Ashley:
Okay, let’s go on to our next question from Dimitri. “When trying to figure out rehab costs for off-market deals, is it customary to have multiple contractors come through while you are still new and trying to pick someone to work with? I would imagine that for an off-market property, the seller might not appreciate that. Maybe I’m thinking about it the wrong way, but how do you figure out the rehab cost when making offers and you are new and don’t have a feel for what it could cost?”
Number one question a Rookie could have. And I think a really great one that could be addressed over and over again and there’s multiple ways to approach this. The first thing in here is how to educate yourself so that you do have that feel for what a rehab would cost. Also, how to handle and manage contractors when you don’t even own the property but you’re asking them to come and do walkthroughs. Then the third thing is how will the seller react having all of these contractors come through?
So maybe let’s start with the first thing on just educating yourself on rehab and construction costs, and also just the process of it. And one of the things you can do is, at the BiggerPockets bookstore, you can look at J. Scott’s book called Estimating Rehab Cost, and right here it’s going to give you almost every line item that you could have for a scope of work. This book is not going to tell you, “Okay, you can get flooring installed for $3.50 cents per square foot,” because as this varies from market to market as to what the actual cost is also as to the quality of the contractor, the cost will differ to. So you’re not going to find the cost in this book, but you’re at least going to know what you should be getting estimates on. So that is one great way to get started.
Then to actually find the cost of material and labor for material, you are going to go on Lowe’s, Home Depot, or wherever your hardware store is and you are going to look up every item that you would need. And if you don’t know those items, okay, you look at pictures of the bathroom, you see the bathroom needs to be remodeled, and you want to put in a tile floor, you are going to YouTube or Google, “What do I need to tile a floor? What materials?” You’re going to take those materials and pull them up from Lowe’s or Home Depot, even if it is not the exact toilet, the exact grout, it’s still going to give you an idea of what your material cost would be and you’re going to build that out.
And then for the labor costs, that’s where you’re going in and getting estimates. So start making phone calls and finding out if contractors have a set price per square foot or how much does it cost to have a toilet installed? What’s your price per square foot for painting? Considering there’s no cathedral ceilings or anything like that, what is your cost for laying flooring? What is your cost for cabinet install? Things like that and just try to get as rough of an estimate as you can over the phone for what these things are going to cost you. The next thing, if you are going to be doing walkthroughs through the property, is having the contractor come through is you can offer to pay them if you feel like you are going to be wasting their time, you can offer to pay them and if you get an estimate, ask for as detailed as possible.
One thing I learned from a contractor’s wife actually, she was in one of the Real Estate Rookie boot camps and she said, “My husband will just give you an estimate that’s just one price. He’s not going to break down line items because he is so busy and he has so much work already that it’s not worth the time for him to go through line by line.” So what she recommended people do is if they want a detailed estimate, they actually build out that scope of work themselves and then give it to the contractor and say, “Fill this in for me.” So building that scope of work and just practicing, practicing that. If you have a friends or family that are contractors or have experience with rehab, have them go through that scope of work. If you just Google scope of work, you can get a ton of templates and a ton of ideas.
The way I build out a scope of work is I go room by room. So I look at one room at a time, okay, the living room, what needs to be done here? Are we painting the walls? Are we doing new drywall? Do we need new windows? Are we putting down new flooring? Do we need new trim? What’s the heating source in that room? Do we need to do anything with that? The light fixture? And I take it one room at a time and for me that’s an easier pill to swallow than to be like, “Okay, where is all the flooring we need in the house?” So you can do it either way that works for you, from my brain, I need to go room by room when doing that scope of work.
Tony:
Yeah, so much good information there, Ashley, and I agree with you. When we’re putting our scopes of work together also, my brain just comprehends better going room by room, even though it might be easier on the execution side to go trade by trade because then you can say, “Hey, all the electrical, here’s this.” But anyway, you got to do what’s easier for you.
Ashley:
I think for the mechanics, that’s a good one, just general mechanics, that’s good to do by item, but breaking it down room by room for all the finishes I think is a lot easier. Yeah.
Tony:
We also have episode 165, we had James Dainard, he’s actually 165 and 166, I think it was back to back episodes, where James talked about, he gave a masterclass on a lot of things related to flipping homes and rehabbing, but he also talked about estimating rehab costs. So episode 165, if you guys are interested there. And I just want to talk about, because part of Dimitri’s question here was, how did he say it? I would imagine that for an off-market property, the seller might not appreciate having multiple contractors come through.
First thing I would say, Dimitri, is don’t assume that. If you’re buying this directly from the seller, then just let the seller know, “Hey, I’m going to have a few contractors come through. The purpose of this is for me to really make sure I understand the condition of your home and so I can give you the most fair offer possible, right?” You want to structure maybe these contractor visits in a way that also benefits them.
We bought a property off market, gosh, I guess two years ago now, and initially the seller was giving us a really hard time of having, I think we had two contractors go through that property and we had a septic inspection. There was a few people that had to go through the property and he was giving us a hard time initially, but when we phrased it as like, “Hey, this is what we need to do to be able to close on this property and pay you out,” they immediately kind of changed their tune.
So I think if you can structure it or phrase these contractor visits in a way that helps the seller understand that it’s beneficial for them as well, you’re able to get a little bit more buy-in that way. But yeah, I think everything else you said, Ashley, is spot on. I probably don’t have much to add to that.
Ashley:
Yeah, I would say that in my experience it’s actually been easier to get contractors through an off-market property than it has been an MLS property and on-market property. As to you’re contacting through agents, usually you have a middleman and trying to get back into the property and especially in how competitive the market has been, we’ve had spots of cooling off, but I still have seen that if you’re putting in offers, you’re still having to be competitive. And part of that offer is maybe you’re doing your inspection, but then after that you’re under contract, they don’t care, they don’t want you back in the property until you close on it. And I think for off market it’s a little more flexible because you’re talking directly to the seller, there’s not any middleman and you’re able to negotiate, and you can even put that into your contract too.
So when you’re making your offer, put in your offer that you are able to bring contractors through. So even if you’re doing an inspection, you’re not doing inspection, even after that due diligence is done, so say you know you need the new HVAC system replaced and that’s part of the deal and you’re getting it at a certain price because of that, you could still work into your contract saying that you will have access to the property two more times before closing to bring contractors through. So this could just be, so you’re bringing the contractor through, they’re getting their estimate, but then they’re also scheduling you for around the time you’re closing too, so that you’re able to look at all your bids, maybe you have three contractors walk through that day, you get to look through all your bids, you get to select one, and then you have them lined up ready to go right when you close on the property.
Tony:
Ashley, that’s a great point about including those things into your contract. I feel like a lot of Rookies don’t, I guess, understand how much flexibility or leeway or freedom, creativity you have in your contracts. So like I said, that first off-market deal that we did, we had a hard time convincing the seller to give us access to the property. So on our second direct-to-seller deal that we did, we actually put in the contract with that seller that we were able to put our own lockbox on the property. That way we didn’t have to ask the seller like, “Hey, can we get in? Can we do this?” We literally bought our own lockbox, got the keys from the seller, put it on the property, and then that allowed our team to go in and out as needed. So, you can put whatever makes sense for you and what you can get the seller to agree to in your purchase agreement.
Ashley:
Okay. Our next question is from Daniel. “Hello, my first post over here.” So this question must come from Facebook. If you guys have a question for us, you can leave it on the Real Estate Rookie Facebook page, you can send a DM to Tony or I on Instagram, or you can also go to biggerpockets.com/reply. So Daniel’s question is, “Does the property manager normally share copy of lease agreements? I’m moving for work and I plan to rent my house. I want to hire a property manager and this guy came to my property and he asked how much I pay for mortgage, and I told him. After that I have been thinking, why would he care how much I pay? Then I asked him to send me a copy of the lease agreement he made with tenants to verify monthly rent and security deposit and he refused. Does this sound like a red flag?” To me, yes. This is confusing almost to me.
Tony:
Yeah, this 100% sounds like a red flag to me, right? If you’re looking for a property manager, one of the things that they should very happily and readily have available for you to view, as a prospective client, is a copy of what their typical lease agreement looks like. That way you can look through it, you can see what’s in there, they shouldn’t be, I think, withholding that information. So if they’re, Daniel, not willing to give that to you, I would really, really question why.
Ashley:
Yeah, I agree. One thing you could also ask for is the management agreement. So when you are hiring a property manager, they should supply you with almost an operating agreement as your property manager, so management agreement it’s called, and this would state the terms of the arrangement of them overseeing and managing your property. So if you want to ask this property manager for a copy of that too and see what their response is there, because that they definitely have to give you. So, the only thing I can think of to go on the other side of things is that maybe because you haven’t hired them yet, it doesn’t appear, that he doesn’t want to give out the lease agreement that he or his company uses because he doesn’t want somebody to copy it or something like that. But if you did hire him and he did write up a lease agreement for your tenants, yes, you 100% should have access to that.
And where’s the money going to? You want to make sure you know where the security deposit is held. Check your state and local laws too, because on some states for the security deposit, you have to keep it in an escrow account that is interest bearing and your tenants are incurring interest on it and you should too, as the owner of the property, to cover admin costs is what they call it in New York state here. But yeah, I would say yes, this is a red flag unless it is just the property manager not wanting to send you a copy of their lease thinking that maybe you are just going to take that lease and use it yourself and not hire them.
And then as far as asking how much you pay for mortgage, that could just be out of curiosity as to like, “Well, maybe you should be charging $1,000 for rent instead of the $900 you want,” or something like that. So there could be some reasoning as to why they’re saying that so they can best advise you as to how much rent to charge.
Tony:
But you would hope that if the property manager did refuse to supply the lease agreement, that they would at least have a legitimate reason as to why they wouldn’t want to. So they just said no and with no explanation, Daniel, yeah, I feel like it’d give me a little pause about moving forward with that person.
Ashley:
We got time for one more question. So this one is from Jada Lee. “What is the smallest thing you should be fixing for your tenants? We are currently renting our home by the room while we occupy a small apartment separated from the property. One of our tenants texted us about her closet door being off the tracks. My husband and I are in disagreement about whether we should fix it ourself, creating a precedent where the tenants are going to come for us for the most inconsequential thing. FYI, we are currently out of state for a few days so it would take time for us to come back and do it for her? Or if we should just tell her it’s her responsibility since it was working properly when she started her lease. So we are here asking you guys with a little more experience. So the question is, what is the basic rule? What’s the smallest thing you should fix? What are your reasons for this rule? What are the pros and cons? By the way, this is our first property.”
Well Jada, first of all, congratulations on your first property. Yay.
Tony:
Yeah, that’s amazing. And so close on Christmas too, that’s amazing. Ashley, you’re the expert when it comes to long-term rental property management. So I’m going to say my little piece and then I’m going to shut up and let you take the reins here. I think my advice to Jada would be, whenever you’re entering into any kind of agreement really, but whenever you’re entering into an agreement, I don’t think it’s as important to say, “Hey, what should I do or what shouldn’t I do?” What’s more important is that there’s clarity at the onset about where those responsibilities fall. Whatever level of involvement you’re comfortable with is where you should draw that line. And if you personally feel that fixing closet doors that fall off the track is not what you want to do with your time, that’s totally fine as long as you set that expectation clearly upfront with your tenants.
So as we eventually venture back into the long-term rental space, the way that I would approach that is saying, “Here’s everything that I’m comfortable doing as the landlord.” And maybe that’s a dollar value, maybe it’s a time, effort value, whatever it is, but here’s everything I’m willing to do. And then when my tenants sign that lease, they will have clarity on if a light bulb goes out, they need to fix the light bulb. If the closet doors come off the track, they need to fix the closet doors. Everything outside of my list is what you need to handle. So, just my two cents, Ashley, and now I’ll let you take it from there.
Ashley:
Yeah, the hard part about that is you can never know exactly everything that’s going to happen or go wrong to kind of itemize that. So what we currently do is we will fix it the first time for you. We’ll fix it once and we will let you know that we’ve fixed it, it is in working order, we have a copy of the work order. We state in the notes of the work order that this repair has been made. We’ve let the resident know that if it does happen again, that is their responsibility to repair it.
So in this one apartment complex years ago, this was a very common thing that happened were the tracks coming off the closet doors and it was because there was no, almost like a track at the bottom, just a little metal clasp almost to keep the bottom of the door. So the doors were kind of just hanging there from the top. And so what we did do when they would fall off the tracks, we would install these clips that helped prevent them from falling off. So the first thing I would say is assess the situation as to if there is something that can be done to prevent this from happening again, as to, maybe that’s something you missed when you purchased the property and something that really isn’t a huge deal, but you could install this $5 clip, take 20 minutes to screw it into the floor to prevent the door from falling off again.
Or it is your right to say that it’s the tenant’s responsibility, but the problem that happens right there is now you’re kind of creating this animosity against each other as to the tenant’s going to be like, “Well, I pay rent, blah, blah, blah,” and now you’re off on a bad track together. So what we do is we do, in good faith is we will fix it once. If it is something like that where it borders the line of, is this the tenant’s responsibility or is this the landlord’s responsibility? So we will come in and take care of it.
We do have certain things that are in our lease agreement, like clogs. I think it’s after, I can’t remember if it’s 30 or 60 days, might even be 45 days in the lease agreements, if you have a clog in your drain between the time you move in and that 45 days, we will take care of it. After that amount of time, if there is a clog that happens, that is most likely from whatever you’re putting down the drain, your hair or whatever that may be, and that is your responsibility to take care of.
Another thing is pest control. So the same thing, within so many days. We just had an instance where someone had ants. So we had an exterminator come, took care of it, and let them know, “Per the lease agreement, if this happens again or the ants come back, it is, per the lease agreement, your responsibility to take care of,” because we had the situation taken care of and a lot of time pests are coming because of something on the property.
Tony:
Something inside the house. Right.
Ashley:
Yeah. So that’s kind of the way we handle it. And because there is no way, you can think of so many things and put that into your lease agreement, even just as an addendum, writing out, like Tony said, “Resident in charge of replacing light bulbs. Resident in charge of smoke detector batteries. Resident in charge of whatever your toilet paper holder,” things like that. If your toilet paper holder falls off, it’s probably because you ripped it off or pulled it off or something. So making a list of those things is a great idea, and then just continuously updating it as these little things happen. Like, “Oh, the closet door fell off the track. You know what? Let’s start adding this to our list that we send out with the lease agreement at each renewal that it is the tenant’s responsibility to fix that.”
But I think little things like that that you can be a good landlord and take care of those little things, and as far as setting the precedent that you’ll always run and take care of little things, there’s definitely that fine line that you have to walk on, and that’s where I think it’s important to say, “We’ll take care of it this one time, but going forward, just so you know, it’ll be your responsibility to take care of it.” And if you’re out of state for a couple days and you’re coming back, I would try and hire somebody off, what are those little handyman services? I tried to look at one the other day, but they don’t serve us Buffalo at all. Is that Thumbtack or-
Tony:
Yeah. Yeah, that’s one of them. Yeah, TaskRabbit’s another one where you can hire people for random little things. Yeah.
Ashley:
And we are out of time today for our Rookie Replies. Thank you guys so much for submitting them. As a reminder, you can go to biggerpockets.com/reply and submit your question for us. Tony, do you want to refresh our social media shout out today? We did a little one for Amy earlier, so I think we should use her today.
Tony:
Yeah, absolutely. Like we said, one of our earlier questions was about raising private capital and Amy Mahjoory is all about teaching people how to do that. So she’s got a lot of wonderful information on her Instagram, so if you head over to @AmyMahjoory. The last name is M-A-H-J-O-O-R-Y. Like I said, you guys will learn tons and tons from Amy on raising private capital for your deals.
Ashley:
Thank you guys so much for listening. If you haven’t already, make sure you get your tickets to BP Con in October 2023 so we can see you there. Go to biggerpockets.com and you’ll be able to get a ticket and we will see you there.
I’m Ashley, @WealthFromRentals, and he’s Tony, @TonyJRobinson, and we’ll be back on Wednesday with a guest.
:215-447-7209
: deals(at)frankbuysphilly.com
Land sales volume remains high, but slower than pandemic peak
Land sales volume continued to exceed the five-year average of $650 million in gross sales during the first six months of 2023, but gross sales are off from the record-setting pace of 2021 and 2022, according to Farmers National Company mid-year land values report, released Tuesday.
During the first half of 2023, land sales volume came in at roughly $445 million, compared to an average of $735 million in both 2021 and 2022. In addition, land value growth nationwide was negative in Q1 and Q2 2023 when compared to the same time period a year prior.
According to the report, this trend began to emerge during the fourth quarter of 2022 as interest rates increased and inflationary pressures began to weigh more heavily on the overall real estate market.
“These operators have enjoyed a period of high liquidity over the past five years but are now moving into a period of increasing debt service and borrowing. This will most likely result in less available cash reserve to deploy for capital expenditures and land purchases,” Paul Schadegg, the senior vice president of real estate operations for Farmers National Company, said in a statement. “While investors have not always been the successful buyer of properties offered for sale, they certainly are part of the equation, helping set a floor on land values and creating a competitive market. If farm operators step back from aggressive bidding for land, investors will most likely step in to take advantage of purchasing options.”
Despite the slowdown in transaction volume, farm operators remained the largest group of buyers through Farmers National Company, accounting for nearly 80% of the firm’s land sale transactions, according to the report.
“Landowners continue to look for opportunity in the agriculture land market, deciding if this is the best time to sell at historic values or retain ownership of what continues to be a very valuable asset,” Schadegg said.
Schadegg added that there continues to be a strong appetite for land properties from buyers considering farm expansion and investment opportunities in the agricultural economy. He believes that this, combined with strong commodity markets, will continue to drive demand for high-quality cropland, helping to maintain strong land values.
“We remain confident that the strong demand for quality agriculture land will continue through the year,” Schadegg said. “That opinion, coupled with the stable ag economy and a supply/demand scenario favoring the landowner, will maintain the current and long-term value of farmland across the U.S.”
Regionally, the Midwest continued to post positive land value growth. However, it dropped from a range of 18% to 32% in Q3 2022 to a range of 2% to 5% during the first half of 2023.
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Home Prices in These 5 Counties Grew the Most Since Last Year
Home prices across the U.S. had the highest quarter-to-quarter gain since 2015, as potential homebuyers are getting pushed out of an increasingly expensive market.
The median single-family home value rose 10.2% from the first to the second quarter of 2023 to $350,000, a report from real estate data firm ATTOM found. It’s the biggest quarterly increase in almost the past decade.
Median home prices in 565 of the 574 counties analyzed in the report (98%) were less affordable than in prior quarters, more than double the number of counties that were unaffordable two years ago before mortgage rates went up. This means only 2% of counties examined were more affordable than their historic averages.
Buyers Are Feeling the Pinch
It’s unclear if the increase in prices is temporary or signals another extended price surge, but “house hunters are feeling the pinch,” said Rob Barber, CEO of ATTOM.
“The U.S. housing market has done an about-face following a downturn that threatened to usher in an extended period of flat or falling prices,” he said. “With that has come another blow to how much house the average worker around the country can afford.”
Looking at data from publicly recorded sales deeds and average wage data from the U.S. Bureau of Labor Statistics, ATTOM found that affordability among homeowners worsened in the last quarter. The portion of income required to buy a home shot up to 33%, above common lending practices of a 28% debt-to-income ratio.
Still, wage growth has outpaced housing prices in 74% of the counties analyzed—a reversal of trends during the same quarter in 2022, when prices were growing faster than wages in 91% of counties.
Counties with the Highest Sales Growth
The report found that 91% of counties analyzed had seen an increase in housing prices. They rose at least 5% in two-thirds of markets, hitting a peak in nearly 40% of the counties examined.
Among the 47 counties with a population of at least 1 million, the biggest year-over-year increases in sales prices were in the South, with most counties located in Florida. A housing shortage and surge in population have caused prices to skyrocket in the Sunshine State.
The Bottom Line
While inflation and mortgage rates have steadied, there is still a bit of uncertainty around the U.S. economy. The Federal Reserve is also poised to raise interest rates in July, which could further increase housing prices. But if the stock market cools down and the economy falls into a recession, housing prices could drop.
The third quarter of 2023 will be key to knowing if the housing price boom is set to continue or will fade as it did during the same period last year. For now, though, real estate remains a seller’s market.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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Housing Market Tracker: Inventory shocks lower
The slow zombie crawl of housing inventory went lower last week as inventory was negative week to week. In addition, mortgage rates rose to a yearly high as labor data stayed firm and purchase apps had their first negative week after three straight weeks of positive growth.
Weekly housing inventory
We had a hat trick in housing last week: weekly active listings were negative week to week, new listings were negative week to week, and active listing + new listing data is negative year over year. This is truly a savagely unhealthy housing market as we have too many people chasing too few homes.
The weekly active listing data had a rare week-to-week decline. Part of this can be attributed to the July 4th holiday, but the trends this year versus last year have been so different that it’s not 100% based on a holiday week.
The housing inventory growth is so slow this year that the active listings data today in July isn’t even higher than our January levels, which is typically when we see the seasonal bottom for the year’s first half. As we can see in the chart below, it’s been so slow that year-over-year inventory is now negative versus 2022.
The other big story in housing has been that new listing data has been trending at the lowest levels recorded in history for 12 months. We have had four straight weeks of declines and we are about to run into the seasonal decline in this data line. As we can see below, there is a big difference between 2023 data for this week versus 2022 data.
The 10-year yield and mortgage rates
Mortgage rates started the week at 7.03% and ended at 7.14%. The 10-year yield is close to yearly highs as the U.S. bond market doesn’t see a job-loss recession happening soon. As you can see below, bond yields rose noticeably during jobs week.
In my 2023 forecast, I said: If the economy stays firm, the 10-year yield range should be between 3.21% and 4.25%, equating to mortgage rates between 5.75% and 7.25%. The labor market remains healthy as long as jobless claims trend below 323,000 on the four-week moving average. As we can see below, the 10-year yield has stayed in this channel 100% of the time in 2023, but mortgage rates are on the verge of breaking over 7.25%.
As the spreads between the 10-year yield and mortgage rates have worsened since the banking crisis, this has added more pressure on rates to be higher than I would have anticipated in 2023. The chart below shows the spreads rising after the SVB banking crisis started.
Purchase application data
Purchase application data was down 5% weekly, making the count for the year-to-date data 13 positive and 12 negative prints. If we start from Nov. 9, 2022, it’s been 20 positive prints versus 12 negative prints. Considering mortgage rates have been near 7% and above the last month, having three out of the last four weeks being positive shows that the collapsing market in 2022 did change after Nov. 9.
But remember: The bar is so low with purchase apps that we can trip over it. As long as we know that the data has just stabilized from a waterfall dive, we are all in the same boat with the data this year.
The week ahead: Inflation week!
Inflation week is here again, and we have two inflationary reports to work with. Between the critical CPI data and the PPI data, we should see the same story: the headline inflation data is falling noticeably, but the core inflation data is a bit more sticky. Still, the shelter aspect of inflation will kick in more here, with used car prices falling over the next few months. Below is the year-over-year core CPI data.
Considering where we are with the 10-year yield and mortgage rates, a lighter-than-expected CPI inflation print this week would be just what the housing market needs to bring mortgage rates lower.
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How to Get 100% Financing for ALL of Your Real Estate Deals
100% financing for ALL of your real estate deals? Without thousands of dollars saved up, many people assume there’s no way for them to invest in real estate. But that’s far from true. Today, you can fund your entire real estate deal—including purchase price, down payment, closing costs, and rehab costs—using other people’s money!
Welcome back to another Rookie Reply! If you don’t have the funds to invest in real estate, hear Ashley and Tony share their best strategies for getting deals done with creative financing. They also discuss rehab costs and provide a three-step plan for estimating them. Hiring a property manager is a daunting task for any rookie, but our hosts share the biggest red flags to watch out for when vetting a property management company. Finally, they discuss the touchy subject of rental repairs—who’s responsible and how to keep the peace with tenants!
Ashley:
This is Real Estate Rookie episode 302.
Tony:
There’s a few different types of lenders here. I love small local credit unions because they tend to have a little bit more flexibility than your larger national banks. And the credit union that I used, they allowed me to fund 100% of both the purchase price and the rehab. I think that it’s very much doable to find that person. You just got to spend the time to build those relationships and identify the right folks.
Ashley:
My name is Ashley Kehr and I’m here with my co-host, Tony Robinson.
Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And we are back today with another Rookie Reply episode, we’re going to answer some questions from the Rookie audience and we’ve got four really cool questions today. First, we talk about private money lending and we actually talk about lending in general, but then how private money lending plays a role in that and how you can fund 100% of your deals using other people’s capital. We talk a little bit about estimating rehab costs, which is one of the hardest things for a new real estate investor to do, and we give you some pretty simple tools and tactics for exploring how to estimate those costs.
Ashley:
Then we will go through red flags when hiring a property manager. So Daniel asked a couple questions of things that incurred while he was looking into hiring a property manager and we go through if these are red flags or green flags and if he should continue dating this property manager. Then the last thing we do is going over your lease agreements and stating what you should and shouldn’t include as the landlord, that is your responsibility to fix or repair during the length of the lease.
So, one thing that came up in the question as to how little or small of things are you going to fix for your tenant in their rental property. So if you are thinking of doing long-term rentals or you currently are right now, maybe you’ve had this situation where something comes up and you’re undecided, is this actually my responsibility or is this the tenant’s responsibility? So we kind of discuss your options there and one way to troubleshoot that.
Tony:
Now I want to give a shout out, because today’s episode, I’m going to read a review. It’s a little different of a review today. Usually I’m sitting here and I get to read all these five star glowing reviews of who we are and why people love us so much. But today, for the first time in a very long time, we got less than five stars in a review. Someone left us a two star review. So instead of hiding from this and digging our head in the sand, we’re going to read it.
Ashley:
Okay. First of all, let me just clarify. This review is not about Tony and that’s why he is okay with reading this review because he literally has nothing to do with it.
Tony:
That’s true because this person does say, “I’m only one episode in,” so I didn’t come on until episode like 38 or 39, so I had nothing to do with this, but they say, “I’m only one episode in and all I can hear them say is the word like over and over. I stopped counting at 45 likes. I can’t focus when that’s all I hear. Keep up the great work otherwise.”
But the last part, “Keep up the great work otherwise,” I feel like there’s something to build on there. So for all of our Rookies that are listening, help us out, we got to rebound from this two star review. If you can, leave us an honest rating and review on whatever platform you’re listening to, five stars help, two stars hurt a little bit. So maybe if you have a two star, keep it to yourself, but if you’ve got a five star, you can share it with the world.
Ashley:
And our producer even asked, is that review about you, Ashley, or your old co-host or the guest? And honestly, it probably was me, still is me. Now I’m going to be super conscious. I’m going to have to get a sticky note and stick it on my computer and put “like” and X it out so I make sure I’m not saying it a lot.
Tony:
I feel like I’ve never picked up on filler words like that. I don’t think I’ve heard you say over and over and over again. Who knows? Maybe it was just an episode one thing.
Ashley:
I have some kind of software implemented where it cuts it out.
Tony:
It just cuts it out. Yeah.
Ashley:
I’m pretty sure there is software like that now that cuts out filler words. So…
Tony:
Yeah, I’m sure. Just some boring banter really quickly, Ash. Do you watch Ted Lasso?
Ashley:
I started watching it when it first came out, but I never got super into it.
Tony:
Oh, man. So Sarah and I always have at least one TV show that we watch, and right now it was Ted Lasso and we’ve watched the third season just ended and we’ve watched all three seasons, but this was the end of the series, so it was the series finale. And I just really enjoyed that show. It was supposed to be a comedy kind of slapstick type thing, but as the seasons progressed, they explored some pretty deep topics in that show. So anyway, if you guys haven’t watched Ted Lasso, highly encourage everyone to watch it and you can now go back to Apple TV and watch all three seasons, binge watch them all.
Ashley:
And you know who else loves that show?
Tony:
Who?
Ashley:
Is Tyler Madden.
Tony:
Does he? I’m not surprised at that.
Ashley:
Yeah, yeah, so our good friend Tyler, who Tony and I are actually flying out tonight to see, that Tony RSVPed to, what? Yesterday did you text-
Tony:
Last night, yeah.
Ashley:
So we are headed to Denver tonight. We did a charity auction at the BiggerPockets Conference last year where someone could win a day with us and that day is tomorrow. So we are meeting up in Denver. We are also doing two podcast episodes live with guests. So that will be super exciting. We always love doing the in person. It actually was the, it aired two episodes before this, 300 and 301. So you guys can check out those two episodes and you’ll be able to see us all in person. We’re renting out a cool little studio, so if you guys want to watch on YouTube and see all the fun instead of just listening to it, you can check out the Real Estate Rookie YouTube.
Today’s first question is from Preston Garcia. Does anyone know how to get a private lender to cover all 100% of purchase price and rehab? It seems like all of them only cover 75% of the purchase and 100% of the rehab. I don’t have enough cash to cover the other 25%. I planned on refinancing afterwards to pay them back. So Tony, you’ve talked about this a couple times on the podcast as this is how you actually purchased your first couple long-term rentals and maybe talk about that experience and then now how to get the same thing.
Tony:
Yeah, so Preston, first, just for all of our listeners, there’s a few different types of lenders here. So you have private money lenders, which are typically just individuals who have capital that maybe is in their savings account or maybe is in some kind of a SDRIA or some kind of 401k where they’re taking loans out. So typically your “private money lenders” are individuals who have access to capital. After your private money lenders, there are hard money lenders who are legitimate businesses where their whole way of operating and making profits as a business is lending money to real estate investors for short-term debt situations. And then you have more institutional type lenders like credit unions and banks and things of that nature. So you’re going to get a different level of, I think, flexibility when it comes to down payment percentages with each type of lender.
Now I’ve used pretty much all of those I think in at least one deal or another. My first couple of long-term rentals were done through credit unions. And I love small, local credit unions because they tend to have a little bit more flexibility than your larger national banks. And the credit union that I used, they allowed me to fund 100% of both the purchase price and the rehab as long as I met certain criteria that they wanted me to meet in terms of, what am I buying it at and what will it appraise for after my rehab is done?
We’ve also used private money on a ton of deals. So pretty much every flip that I’ve done, I’ve used private money on those deals and our private money lenders typically fund 100% of the purchase and the rehab. I actually literally just sent a wire today repaying one of my private money lenders. So Preston, I think that it’s very much doable to find that person, you just got to spend the time to build those relationships and identify the right folks.
Ashley:
Yeah. So I guess the distinction was with the first properties, you went through the bank and then now you’re using private money because it is a lot harder to find a bank that is going to give you that type of loan that you were able to get on those first properties. So that is where going to private money lenders makes a lot of sense right now in today’s market. There may still be some credit union or other bank out there that does have that option available, but I haven’t found it yet as of right now. Tony, have you?
Tony:
Not recently. Honestly, I haven’t really looked as much, but I feel like we had a guest on recently where he said he found some credit union in Utah. Do you remember that? That was one of the guests we just recently interviewed and he said he got a really sick deal from one of those credit unions out there. But I would agree with you, Ashley, that most banks, I think, have kind of tightened things up a little bit. Especially after COVID, you just saw a lot of that stuff that they were doing before COVID go away.
But I think the private money opportunities are probably bigger now than they were a few years ago because for the folks that just had, say they had six figures maybe just sitting in a savings account, think about how much money those people have lost to inflation if they just left that money in the bank for the last couple of years. So there’s a really strong incentive for folks that are sitting on cash to try and put that money to work. And if you can give them a double-digit return backed by real estate, there’s a good chance they might want to work with you as opposed to just leaving their money sitting in their savings account.
Ashley:
Yeah, that’s a really good point, Tony, and that’s also one way to educate someone on why they would want to be a private lender too, is give them that reasoning, that advantage, that this is actually an opportunity for them to not lose their money to inflation.
Tony:
Can we talk a little bit too, Ash, about how to find these private money lenders? Because I know when I first started, that was always, where are all these people at? Where are all these private money lenders at? And the first thing that I’ll say is that when I first got started investing, I definitely had a limiting mindset around money and I had this scarcity mindset, I guess, is a better phrase around money where I thought that there just wasn’t a lot of money around to be shared in that way. But as I’ve matured as a real estate investor, I’ve come to realize that the opposite is true is that there’s an abundance of capital everywhere and it’s on you as the investor to put yourself in situations where you are meeting people who might have that capital.
And some of the best ways that I’ve found to meet people, going to your local meetups, hosting your own meetup, I think is one of the best things to do. We’ve seen a lot of benefits in our business and students in my coaching program that have their own meetups that are finding private money lenders, so hosting your own meetup I think is one of the best things you can do, even if you don’t have any kind of following whatsoever, just posting on the BiggerPockets forum and posting on meetup.com and Eventbrite and all these other places, but going to local meetups or hosting your own is a great way to do it.
Going to local conferences. You’ll notice it as you start to attend a lot of the bigger conferences that you see the same people at a lot of these events. So as you start to make your rounds from one event to the next, you start to build relationships with the folks because you’re seeing them over and over again. And if at these events you’re introducing yourself as, “Hey, my name’s Tony and I help people get double-digit returns backed by real estate,” that’s a great way to start building a name for yourself in terms of finding private money lenders. So, going to meetups, hosting local meetups, going to conferences.
Networking online I think is a really great benefit as well. So we’ve got the BiggerPockets forums, we’ve got the BiggerPockets Facebook groups, and you’ll see in the forums for all of our Rookies that are listening, that if you go through, you’ll see some folks whose names pop up over and over and over again in the forums and they’re doing that obviously because they want to help and they want to give value to other people, but they’re also doing that because they’re building a name for themselves in that platform.
I remember it was, I think Ben Leibovich was his name, and Ben’s a big time syndicator and before I even knew who he was, I just always saw him posting on the forums in BiggerPockets and I was like, “Man, this guy is just the nicest guy ever, just always giving his time to people in the forums.” But on the backend of that, he was able to introduce a lot of people to his syndication business and that’s how he finds, I’m sure I would think, quite a few people to invest in his business. So Rookies, for all of you that are listening, there are so many ways to start building a name for yourself and building relationships with potential private money lenders. You just have to take the action and put yourself out there.
Ashley:
I think the last thing I would add to that that ties in is proof of concept. So having experience and showing that you’ve had a couple successful deals. And one way to do that is to share online. And somebody looks at you, you post that you’re successful, oh, you have a lot of followers, you have these nice before and after pictures, you have a picture of a check, you must be successful. So one thing that that’s not the way that someone should decide to lend their money to you is based on your social media presence, but that does really help gain some traction for you if you are sharing what you’re doing and you’re open about it on social media or in the BiggerPockets forums. In the forums there’s also the deal diaries where you can go through and kind of answer some questions on a deal you just did and share it almost as a case study.
Tony:
I just want to share two other resources, Ashley, for our Rookies. So first, BiggerPockets has a book by Matt Faircloth, Raising Private Capital, definitely go check out wherever you want to consume your books and pick up a copy of that. And then one of my good friends in real estate investing, her name is Amy Mahjoory, so if you look her up on Instagram, it’s Amy, A-M-Y, Mahjoory, M-A-H-J-O-O-R-Y. So that’s M-A-H-J-O-O-R-Y. And Amy runs a company called Raising Private Capital and she does just a phenomenal job of specifically teaching real estate investors how to raise private capital.
So if you go through her Instagram, she’s got so many little golden nuggets on techniques that she’s used to raise private capital in her business. And then Amy was also on a few episodes of the Real Estate podcast last year, so if you guys just look up Amy Mahjoory BiggerPockets, I’m sure you’ll find all her episodes as well, but she is a wealth of knowledge and I really highly encourage you guys to go check her out as well.
Ashley:
Okay, let’s go on to our next question from Dimitri. “When trying to figure out rehab costs for off-market deals, is it customary to have multiple contractors come through while you are still new and trying to pick someone to work with? I would imagine that for an off-market property, the seller might not appreciate that. Maybe I’m thinking about it the wrong way, but how do you figure out the rehab cost when making offers and you are new and don’t have a feel for what it could cost?”
Number one question a Rookie could have. And I think a really great one that could be addressed over and over again and there’s multiple ways to approach this. The first thing in here is how to educate yourself so that you do have that feel for what a rehab would cost. Also, how to handle and manage contractors when you don’t even own the property but you’re asking them to come and do walkthroughs. Then the third thing is how will the seller react having all of these contractors come through?
So maybe let’s start with the first thing on just educating yourself on rehab and construction costs, and also just the process of it. And one of the things you can do is, at the BiggerPockets bookstore, you can look at J. Scott’s book called Estimating Rehab Cost, and right here it’s going to give you almost every line item that you could have for a scope of work. This book is not going to tell you, “Okay, you can get flooring installed for $3.50 cents per square foot,” because as this varies from market to market as to what the actual cost is also as to the quality of the contractor, the cost will differ to. So you’re not going to find the cost in this book, but you’re at least going to know what you should be getting estimates on. So that is one great way to get started.
Then to actually find the cost of material and labor for material, you are going to go on Lowe’s, Home Depot, or wherever your hardware store is and you are going to look up every item that you would need. And if you don’t know those items, okay, you look at pictures of the bathroom, you see the bathroom needs to be remodeled, and you want to put in a tile floor, you are going to YouTube or Google, “What do I need to tile a floor? What materials?” You’re going to take those materials and pull them up from Lowe’s or Home Depot, even if it is not the exact toilet, the exact grout, it’s still going to give you an idea of what your material cost would be and you’re going to build that out.
And then for the labor costs, that’s where you’re going in and getting estimates. So start making phone calls and finding out if contractors have a set price per square foot or how much does it cost to have a toilet installed? What’s your price per square foot for painting? Considering there’s no cathedral ceilings or anything like that, what is your cost for laying flooring? What is your cost for cabinet install? Things like that and just try to get as rough of an estimate as you can over the phone for what these things are going to cost you. The next thing, if you are going to be doing walkthroughs through the property, is having the contractor come through is you can offer to pay them if you feel like you are going to be wasting their time, you can offer to pay them and if you get an estimate, ask for as detailed as possible.
One thing I learned from a contractor’s wife actually, she was in one of the Real Estate Rookie boot camps and she said, “My husband will just give you an estimate that’s just one price. He’s not going to break down line items because he is so busy and he has so much work already that it’s not worth the time for him to go through line by line.” So what she recommended people do is if they want a detailed estimate, they actually build out that scope of work themselves and then give it to the contractor and say, “Fill this in for me.” So building that scope of work and just practicing, practicing that. If you have a friends or family that are contractors or have experience with rehab, have them go through that scope of work. If you just Google scope of work, you can get a ton of templates and a ton of ideas.
The way I build out a scope of work is I go room by room. So I look at one room at a time, okay, the living room, what needs to be done here? Are we painting the walls? Are we doing new drywall? Do we need new windows? Are we putting down new flooring? Do we need new trim? What’s the heating source in that room? Do we need to do anything with that? The light fixture? And I take it one room at a time and for me that’s an easier pill to swallow than to be like, “Okay, where is all the flooring we need in the house?” So you can do it either way that works for you, from my brain, I need to go room by room when doing that scope of work.
Tony:
Yeah, so much good information there, Ashley, and I agree with you. When we’re putting our scopes of work together also, my brain just comprehends better going room by room, even though it might be easier on the execution side to go trade by trade because then you can say, “Hey, all the electrical, here’s this.” But anyway, you got to do what’s easier for you.
Ashley:
I think for the mechanics, that’s a good one, just general mechanics, that’s good to do by item, but breaking it down room by room for all the finishes I think is a lot easier. Yeah.
Tony:
We also have episode 165, we had James Dainard, he’s actually 165 and 166, I think it was back to back episodes, where James talked about, he gave a masterclass on a lot of things related to flipping homes and rehabbing, but he also talked about estimating rehab costs. So episode 165, if you guys are interested there. And I just want to talk about, because part of Dimitri’s question here was, how did he say it? I would imagine that for an off-market property, the seller might not appreciate having multiple contractors come through.
First thing I would say, Dimitri, is don’t assume that. If you’re buying this directly from the seller, then just let the seller know, “Hey, I’m going to have a few contractors come through. The purpose of this is for me to really make sure I understand the condition of your home and so I can give you the most fair offer possible, right?” You want to structure maybe these contractor visits in a way that also benefits them.
We bought a property off market, gosh, I guess two years ago now, and initially the seller was giving us a really hard time of having, I think we had two contractors go through that property and we had a septic inspection. There was a few people that had to go through the property and he was giving us a hard time initially, but when we phrased it as like, “Hey, this is what we need to do to be able to close on this property and pay you out,” they immediately kind of changed their tune.
So I think if you can structure it or phrase these contractor visits in a way that helps the seller understand that it’s beneficial for them as well, you’re able to get a little bit more buy-in that way. But yeah, I think everything else you said, Ashley, is spot on. I probably don’t have much to add to that.
Ashley:
Yeah, I would say that in my experience it’s actually been easier to get contractors through an off-market property than it has been an MLS property and on-market property. As to you’re contacting through agents, usually you have a middleman and trying to get back into the property and especially in how competitive the market has been, we’ve had spots of cooling off, but I still have seen that if you’re putting in offers, you’re still having to be competitive. And part of that offer is maybe you’re doing your inspection, but then after that you’re under contract, they don’t care, they don’t want you back in the property until you close on it. And I think for off market it’s a little more flexible because you’re talking directly to the seller, there’s not any middleman and you’re able to negotiate, and you can even put that into your contract too.
So when you’re making your offer, put in your offer that you are able to bring contractors through. So even if you’re doing an inspection, you’re not doing inspection, even after that due diligence is done, so say you know you need the new HVAC system replaced and that’s part of the deal and you’re getting it at a certain price because of that, you could still work into your contract saying that you will have access to the property two more times before closing to bring contractors through. So this could just be, so you’re bringing the contractor through, they’re getting their estimate, but then they’re also scheduling you for around the time you’re closing too, so that you’re able to look at all your bids, maybe you have three contractors walk through that day, you get to look through all your bids, you get to select one, and then you have them lined up ready to go right when you close on the property.
Tony:
Ashley, that’s a great point about including those things into your contract. I feel like a lot of Rookies don’t, I guess, understand how much flexibility or leeway or freedom, creativity you have in your contracts. So like I said, that first off-market deal that we did, we had a hard time convincing the seller to give us access to the property. So on our second direct-to-seller deal that we did, we actually put in the contract with that seller that we were able to put our own lockbox on the property. That way we didn’t have to ask the seller like, “Hey, can we get in? Can we do this?” We literally bought our own lockbox, got the keys from the seller, put it on the property, and then that allowed our team to go in and out as needed. So, you can put whatever makes sense for you and what you can get the seller to agree to in your purchase agreement.
Ashley:
Okay. Our next question is from Daniel. “Hello, my first post over here.” So this question must come from Facebook. If you guys have a question for us, you can leave it on the Real Estate Rookie Facebook page, you can send a DM to Tony or I on Instagram, or you can also go to biggerpockets.com/reply. So Daniel’s question is, “Does the property manager normally share copy of lease agreements? I’m moving for work and I plan to rent my house. I want to hire a property manager and this guy came to my property and he asked how much I pay for mortgage, and I told him. After that I have been thinking, why would he care how much I pay? Then I asked him to send me a copy of the lease agreement he made with tenants to verify monthly rent and security deposit and he refused. Does this sound like a red flag?” To me, yes. This is confusing almost to me.
Tony:
Yeah, this 100% sounds like a red flag to me, right? If you’re looking for a property manager, one of the things that they should very happily and readily have available for you to view, as a prospective client, is a copy of what their typical lease agreement looks like. That way you can look through it, you can see what’s in there, they shouldn’t be, I think, withholding that information. So if they’re, Daniel, not willing to give that to you, I would really, really question why.
Ashley:
Yeah, I agree. One thing you could also ask for is the management agreement. So when you are hiring a property manager, they should supply you with almost an operating agreement as your property manager, so management agreement it’s called, and this would state the terms of the arrangement of them overseeing and managing your property. So if you want to ask this property manager for a copy of that too and see what their response is there, because that they definitely have to give you. So, the only thing I can think of to go on the other side of things is that maybe because you haven’t hired them yet, it doesn’t appear, that he doesn’t want to give out the lease agreement that he or his company uses because he doesn’t want somebody to copy it or something like that. But if you did hire him and he did write up a lease agreement for your tenants, yes, you 100% should have access to that.
And where’s the money going to? You want to make sure you know where the security deposit is held. Check your state and local laws too, because on some states for the security deposit, you have to keep it in an escrow account that is interest bearing and your tenants are incurring interest on it and you should too, as the owner of the property, to cover admin costs is what they call it in New York state here. But yeah, I would say yes, this is a red flag unless it is just the property manager not wanting to send you a copy of their lease thinking that maybe you are just going to take that lease and use it yourself and not hire them.
And then as far as asking how much you pay for mortgage, that could just be out of curiosity as to like, “Well, maybe you should be charging $1,000 for rent instead of the $900 you want,” or something like that. So there could be some reasoning as to why they’re saying that so they can best advise you as to how much rent to charge.
Tony:
But you would hope that if the property manager did refuse to supply the lease agreement, that they would at least have a legitimate reason as to why they wouldn’t want to. So they just said no and with no explanation, Daniel, yeah, I feel like it’d give me a little pause about moving forward with that person.
Ashley:
We got time for one more question. So this one is from Jada Lee. “What is the smallest thing you should be fixing for your tenants? We are currently renting our home by the room while we occupy a small apartment separated from the property. One of our tenants texted us about her closet door being off the tracks. My husband and I are in disagreement about whether we should fix it ourself, creating a precedent where the tenants are going to come for us for the most inconsequential thing. FYI, we are currently out of state for a few days so it would take time for us to come back and do it for her? Or if we should just tell her it’s her responsibility since it was working properly when she started her lease. So we are here asking you guys with a little more experience. So the question is, what is the basic rule? What’s the smallest thing you should fix? What are your reasons for this rule? What are the pros and cons? By the way, this is our first property.”
Well Jada, first of all, congratulations on your first property. Yay.
Tony:
Yeah, that’s amazing. And so close on Christmas too, that’s amazing. Ashley, you’re the expert when it comes to long-term rental property management. So I’m going to say my little piece and then I’m going to shut up and let you take the reins here. I think my advice to Jada would be, whenever you’re entering into any kind of agreement really, but whenever you’re entering into an agreement, I don’t think it’s as important to say, “Hey, what should I do or what shouldn’t I do?” What’s more important is that there’s clarity at the onset about where those responsibilities fall. Whatever level of involvement you’re comfortable with is where you should draw that line. And if you personally feel that fixing closet doors that fall off the track is not what you want to do with your time, that’s totally fine as long as you set that expectation clearly upfront with your tenants.
So as we eventually venture back into the long-term rental space, the way that I would approach that is saying, “Here’s everything that I’m comfortable doing as the landlord.” And maybe that’s a dollar value, maybe it’s a time, effort value, whatever it is, but here’s everything I’m willing to do. And then when my tenants sign that lease, they will have clarity on if a light bulb goes out, they need to fix the light bulb. If the closet doors come off the track, they need to fix the closet doors. Everything outside of my list is what you need to handle. So, just my two cents, Ashley, and now I’ll let you take it from there.
Ashley:
Yeah, the hard part about that is you can never know exactly everything that’s going to happen or go wrong to kind of itemize that. So what we currently do is we will fix it the first time for you. We’ll fix it once and we will let you know that we’ve fixed it, it is in working order, we have a copy of the work order. We state in the notes of the work order that this repair has been made. We’ve let the resident know that if it does happen again, that is their responsibility to repair it.
So in this one apartment complex years ago, this was a very common thing that happened were the tracks coming off the closet doors and it was because there was no, almost like a track at the bottom, just a little metal clasp almost to keep the bottom of the door. So the doors were kind of just hanging there from the top. And so what we did do when they would fall off the tracks, we would install these clips that helped prevent them from falling off. So the first thing I would say is assess the situation as to if there is something that can be done to prevent this from happening again, as to, maybe that’s something you missed when you purchased the property and something that really isn’t a huge deal, but you could install this $5 clip, take 20 minutes to screw it into the floor to prevent the door from falling off again.
Or it is your right to say that it’s the tenant’s responsibility, but the problem that happens right there is now you’re kind of creating this animosity against each other as to the tenant’s going to be like, “Well, I pay rent, blah, blah, blah,” and now you’re off on a bad track together. So what we do is we do, in good faith is we will fix it once. If it is something like that where it borders the line of, is this the tenant’s responsibility or is this the landlord’s responsibility? So we will come in and take care of it.
We do have certain things that are in our lease agreement, like clogs. I think it’s after, I can’t remember if it’s 30 or 60 days, might even be 45 days in the lease agreements, if you have a clog in your drain between the time you move in and that 45 days, we will take care of it. After that amount of time, if there is a clog that happens, that is most likely from whatever you’re putting down the drain, your hair or whatever that may be, and that is your responsibility to take care of.
Another thing is pest control. So the same thing, within so many days. We just had an instance where someone had ants. So we had an exterminator come, took care of it, and let them know, “Per the lease agreement, if this happens again or the ants come back, it is, per the lease agreement, your responsibility to take care of,” because we had the situation taken care of and a lot of time pests are coming because of something on the property.
Tony:
Something inside the house. Right.
Ashley:
Yeah. So that’s kind of the way we handle it. And because there is no way, you can think of so many things and put that into your lease agreement, even just as an addendum, writing out, like Tony said, “Resident in charge of replacing light bulbs. Resident in charge of smoke detector batteries. Resident in charge of whatever your toilet paper holder,” things like that. If your toilet paper holder falls off, it’s probably because you ripped it off or pulled it off or something. So making a list of those things is a great idea, and then just continuously updating it as these little things happen. Like, “Oh, the closet door fell off the track. You know what? Let’s start adding this to our list that we send out with the lease agreement at each renewal that it is the tenant’s responsibility to fix that.”
But I think little things like that that you can be a good landlord and take care of those little things, and as far as setting the precedent that you’ll always run and take care of little things, there’s definitely that fine line that you have to walk on, and that’s where I think it’s important to say, “We’ll take care of it this one time, but going forward, just so you know, it’ll be your responsibility to take care of it.” And if you’re out of state for a couple days and you’re coming back, I would try and hire somebody off, what are those little handyman services? I tried to look at one the other day, but they don’t serve us Buffalo at all. Is that Thumbtack or-
Tony:
Yeah. Yeah, that’s one of them. Yeah, TaskRabbit’s another one where you can hire people for random little things. Yeah.
Ashley:
And we are out of time today for our Rookie Replies. Thank you guys so much for submitting them. As a reminder, you can go to biggerpockets.com/reply and submit your question for us. Tony, do you want to refresh our social media shout out today? We did a little one for Amy earlier, so I think we should use her today.
Tony:
Yeah, absolutely. Like we said, one of our earlier questions was about raising private capital and Amy Mahjoory is all about teaching people how to do that. So she’s got a lot of wonderful information on her Instagram, so if you head over to @AmyMahjoory. The last name is M-A-H-J-O-O-R-Y. Like I said, you guys will learn tons and tons from Amy on raising private capital for your deals.
Ashley:
Thank you guys so much for listening. If you haven’t already, make sure you get your tickets to BP Con in October 2023 so we can see you there. Go to biggerpockets.com and you’ll be able to get a ticket and we will see you there.
I’m Ashley, @WealthFromRentals, and he’s Tony, @TonyJRobinson, and we’ll be back on Wednesday with a guest.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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Will labor data send mortgage rates to 8%?
The 10-year yield and mortgage rates have been rising close to the 2023 high as some labor data shows that the honey badger labor market is still growing. To make things even more complicated, the spreads between the 30-year mortgage rate and the 10-year yield keep getting wider. The question is: will the labor data push mortgage rates to 8%?
In my 2023 forecast, I wrote that if the economy stays firm, the 10-year yield range should be between 3.21% and 4.25%, equating to mortgage rates between 5.75% and 7.25%. As long as jobless claims trend below 323,000 on the four-week moving average, the labor market is holding steady, which means the economy remains healthy. As you can see in the chart below, the 10-year yield channel has stayed within my 2023 forecast range.
For the labor market to break, the four-week moving average on jobless claims needs to get above 323,000, but that number is only at 248,000. Jobless claims have been rising from the recent lows, but haven’t broken yet.
From the St. Louis Fed: Initial claims for unemployment insurance benefits increased by 12,000 in the week ended July 1, to 248,000. The four-week moving average fell, to 253,25.
Mortgage rates have stayed in line with my forecast this year, but the spreads have gotten worse. What factors could send mortgage rates toward 8%, which wasn’t part of my forecast? The first factor is the labor market, which is more important in 2023 than the inflation growth rate.
The labor market
Early in the COVID-19 recovery, I had three key talking points:
Here’s where those landed:
The third factor is also key to understanding the labor dynamics: we are almost back to where we should have been all along with the total employment level of jobs in the U.S. Currently, we are at 156,214,000, so we’re getting closer to where job growth should be cooling down to our population growth realities.
The job market should slow down as we get closer to that 157 million to 159 million level. Next is wage growth, which isn’t spiraling out of control as some people feared it would. The growth rate is still too hot for the Fed, so if they seem more hawkish, it’s because wage growth at 4.4% is too much for Americans. The Fed has to ensure you don’t make more money because of some desperate fear of 1970s-style inflation, which is unfounded.
Friday’s wage growth was hotter than anticipated but not spiraling higher out of control. Wage growth has been cooling off since January of 2022, all while the labor market was tight.
To get to 8% mortgage rates, my 10-year yield peak call for 2023 would have to be wrong, the economy would have to be stronger than any of us believe it to be, and the bond market would need to believe that too. So far, that has yet to happen. If you had to have first-world problems, this is the one you would want to have.
Let’s look at the job report.
From BLS: Total nonfarm payroll employment increased by 209,000 in June, and the unemployment rate changed little at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in government, health care, social assistance, and construction.
While the headline number was a miss for some people, it wasn’t a bad headline print, but the revisions were negative 110K, combined. As I mentioned above, we are getting closer to being done with the make-up demand in labor, which should mean the growth rate of jobs should be lower.
Below is the breakdown of where the jobs were created and lost. We did have an extensive report on the government jobs, which typically doesn’t have staying power, so the private labor data was weaker than the headline print.
Below is a breakdown of the education attainment and labor force above the age of 25. As usual, those who never finished high school tend to have the highest unemployment rate.
Less than a high school diploma: 6.0% (2 months ago, 5.4%)
Wage growth came in a bit hotter than expected, but wage growth is not spiraling out of control, not so much that we need to force a job loss recession. Also, we should not want to hope for the meager wage growth we saw in previous expansions either.
This is my case for why I don’t believe we should see 8% mortgage rates. I could be wrong for a short period — we could have a bond market sell-off due to the U.S. dollar getting much stronger for many reasons — but that hasn’t happened yet.
So far this year, the 10-year yield channel has held its course, and the big surprise of 2023 has been the spreads getting worse. I still believe that is the mortgage rate story for the year, as the 10-year yield hasn’t surprised me. But with that said, if the economy accelerates higher with faster growth and wage growth picks up with the labor data getting stronger, that is a viable pathway for 8% rates as the spreads might even worsen.
Let’s cross that bridge if that happens, but until then, we will continue to track the weekly housing data here.
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What does the fix-and-flip market look like right now?
The fix-and-flip market has seen a boom in recent years, with more than 407,000 homes flipped in 2022, a 14% increase from 2021 and a 58% increase from 2020, according to a recent report by real estate data firm ATTOM. ATTOM reports that one in 12 home sales last year — 8.4% — involved fix-and-flip investors.
But increasing costs and the banking crisis this year have meant a fall-off in return on investment for flippers, and for those still interested, it can be more difficult to finance a fix-and-flip or a bridge loan than in past years.
“There is a lot less liquidity for fix-and-flip and bridge loans in today’s market, especially after the banking crisis,” said Keith Lind, CEO of Acra Lending. “In general, after what we went through and what’s going on with home prices, construction costs and interest rates, there is less liquidity for bridge and fix-and-flip versus non-QM.”
As an example, Lind noted that Acra’s pipeline in non-QM products, which includes bank statement and DSCR loans, is up 93% from December. But its bridge loan and fix-and-flip loan pipeline is down 40% over that same time period.
“It’s hard to buy a home today, fix it up and make a profit when your borrowing cost and fixed expenses are so high. That’s what people are struggling with,” he said.
There’s also the problem of declining home values and appraisals coming back lower than the investor’s expectations. Again, it makes it harder to achieve that desired ROI for the flipper.
Add to that the fact that some bigger, regional banks have paused or exited the lending game altogether for these types of assets.
“We are seeing a pretty large influx of loans that would have normally gone to these regional banks but are now coming to us,” Lind said.
Despite the difficulties with bridge and fix-and-flip loans, Lind is optimistic about the opportunities for such as the market consolidates.
“Investors in today’s environment want yield on safe products. People are bullish on housing, so I think that’s a very good backdrop for investors to say, ‘OK, I’m very confident in housing versus commercial real estate,’” he said. “If you want high yield and you want it in scale, you have to come to lenders like Acra.”
Acra’s non-QM pipeline continues to grow, and Lind expects there to be more market share gains even for the bridge and fix-and-flip loan products.
“A lot of our competition is disappearing,” he said. “A lot of our competitors have gone out of business or are having funding issues or capital issues. We have a very clean balance sheet, and our pricing is competitive.”
Acra has funded $10 billion-plus of loans since it was founded in 2014. The company services its own loans and works at scale, with 300 employees originating about $230 million in loans in June.
“Our pipeline is growing,” Lind said. “Let’s say we’re at $235 million this month. That’s a run rate of almost $3 billion of assets over the next 12 months. Where else are you going to find that? There aren’t too many originators that have the scalability, expertise, and experience that Acra has.”
To learn more about working with Acra, visit https://acralending.com/.
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Nationwide Property and Appraisal Services acquires Integrity Appraisal Management
Nationwide Property and Appraisal Services LLC (NPAS), led by Sri Velamati and one of the largest appraisal management companies in the U.S., announced that it has acquired Integrity Appraisal Management (Integrity), a regional AMC based in Houston, TX.
The acquisition of Integrity will help NPAS strengthen its ability to expand market reach and enhance product and service offerings, the company said in a statement.
“Integrity Appraisal Management’s unparalleled platform in Texas and surrounding southern states is due to their talented team. We are excited to grow the combined organization and offer our combined customer base a national platform with a regional experience,” Velamati, Nationwide Property and Appraisal Services’ CEO, said in a statement. “This acquisition perfectly aligns with our long-term vision and strategy to grow with our customers and innovate in the industry. By combining our strengths, we are confident in our ability to create a stronger, more competitive organization and drive further success.”
Shawn Thompson, the president of Integrity, added, “We were approached by several AMCs who wanted to partner with us, only to add numbers to their bottom line. We knew they were different from the first time we met with the executive team at NPAS. They have experience and a reputation of partnering with AMCs who share their values.”
As part of the acquisition, Integrity Appraisal Management’s employees will become members of the Nationwide Property and Appraisal Services team.
Nationwide Property and Appraisal Services was acquired by Arcapita Group Holdings, a Bahraini investment firm in January 2022. Before that, NPAS was under the umbrella of Corridor Capital, a lower middle market private equity firm, since 2016.
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Job gains slow in June, but are probably still too hot to sway the Fed
The labor market is moderating gracefully, but conditions remain too hot for the Fed’s liking. Job gains were relatively solid yet again in June, with total nonfarm payroll employment reaching 209,000 jobs, compared to 339,000 in May, according to data released Friday by the Bureau of Labor Statistics.
This increase is slightly under the average monthly gain of 341,000 jobs over the past 12 months.
The unemployment rate changed little at 3.6%, compared to 3.7% in May, with the total number of unemployed persons falling to 6 million. The unemployment rate has remained between 3.4% and 3.7% since March 2022.
“The incoming economic data has been filled with conflicting signals,” said Mortgage Bankers Association SVP and Chief Economist Mike Fratantoni in a statement. “Manufacturing activity remains quite weak, while consumer spending has held up somewhat better, and new home construction and sales have picked up. Our forecast is for a slowdown in economic activity in the second half of 2023, with a recovery in early 2024. The June employment report reinforces that forecast.”
While job growth and wage growth are trending down, both are still well above the pace that would be consistent with the Federal Reserve’s inflation target, Fratantoni noted.
“We now expect that the FOMC will raise the federal funds target another 25 basis points at its July meeting.”
The lion’s share of the job growth in June came from gains in the government sector (+60,000 jobs), health care sector (up 41,000 jobs), the social assistance sector (up 24,000 jobs), and the construction sector (up 23,000 jobs).
Employment in the construction industry has increased by an average of 15,000 per month thus far this year, compared with an average of 22,000 per month in 2022. In June, employment in residential specialty trade contractors continued to trend up (+10,000).
Employment in the professional and business services sector and in the leisure and hospitality sector changed little in June.
“The construction industry is very interest-rate sensitive, so many expected job growth to crater. Yet, new-home construction has been supported by the lack of existing-home inventory,” said First American Deputy Chief Economist Odeta Kushi in a statement.
“In the June jobs report, residential building construction employment is up 0.8% year over year, while non-residential is up by 4.8%. Residential building employment is up 11% compared with pre-pandemic, while non-residential building is up 1.8%. Both were up on a month-over-month basis. The fastest monthly growth came from residential specialty trade contractors. This sub-sector comprises establishments whose primary activity is performing specific activities, such as pouring concrete, site preparation, plumbing, painting and electrical work.”
With existing homeowners disincentivized to sell and few homes on the market, consumers may decide to renovate their own home instead of trading up with a new-home purchase, increasing demand for construction workers, economists said.
The number of residential building construction jobs came down from the recent peak in January of this year, but not by much, noted Kushi.
“Residential construction is defying expectations and it’s because the housing market continues to face a housing shortage.”
June’s job report showed the lowest monthly job change since a decline in December 2020, according to Lisa Sturtevant, chief economist at Bright MLS.
“The Federal Reserve has raised interest rates 10 times and it is possible that we are finally seeing the intended slowdown in the economy… Today’s employment report does not provide a clear indication as to what the Federal Reserve will do at its next meeting but the expectation is still for a rate increase when the Federal Open Market Committee convenes again. The modest slowdown in the labor market could give the Fed renewed confidence in its ability to bring the economy in for a soft landing.”
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Consumers may be coming to terms with elevated rates and high home prices: Fannie Mae
Consumer confidence in housing may have plateaued, according to the latest home purchase sentiment index (HPSI) by Fannie Mae.
The HPSI — which tracks the housing market and consumer confidence to sell or buy a home — rose a mere 0.4 points to 66 as difficult supply and affordability conditions continue to weigh on the housing market, according to Fannie Mae. The full index is up 1.2 points year over year.
While most of the HPSI’s six components were little changed month over month, survey respondents did report that homebuying conditions improved slightly in June compared to May.
About 22% of respondents said it is a good time to buy a home in June, up from 19% in the previous month.
“Confidence in the housing market appears to have plateaued at a relatively low level, suggesting that many consumers may be coming to terms with elevated mortgage rates and high home prices,” said Doug Duncan, Fannie Mae senior vice president and chief economist.
The percentage of respondents who say home prices will go up in the next 12 months decreased to 36% in June from the previous month’s 39%. About 16% expect mortgage rates to go down in the next 12 months, declining from May’s 19%.
“A larger share of respondents think mortgage rates will stay the same over the next year, whereas mid-to-late last year, most thought rates would continue going up. This seems to signal that consumers are adapting to the idea that higher mortgage rates will likely stick around for the foreseeable future,” Duncan noted.
Even so, about 78% believe it’s a bad time to buy a home – continuing a trend of pessimism towards buying since mid 2021.
Fannie Mae expects ongoing affordability constraints and lack of housing supply are projected to slow down home sales in the second half of the year.
The new home sales market, which has been increasing steadily over the past three months, is a silver lining in the sluggish housing market.
Housing starts rose 21.7% in May from April and sales of new homes increased 12.2% during the same period.
The Mortgage Bankers Association expects the total existing home sales to decline to 4.3 million in 2023 from last year’s 5.1 million while new home sales to rise to 676,000 from the previous year’s 641,000.
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Mortgage rates reach their 2023 peak
Mortgage rates jumped this week as investors grapple with persistent positive economic data and a hawkish Fed.
The Freddie Mac’s Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the 30-year fixed rate averaged 6.81% as of July 6, up significantly from last week’s 6.71%. By contrast, the 30-year was at 5.30% a year ago at this time.
Other mortgage indexes also show rates rising.
The 30-year fixed rate for conventional loans was 7.08% at Mortgage News Daily on Thursday morning, up 17 basis points from the previous week. HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 6.92% on Wednesday, compared to 6.69% the previous week.
“Mortgage rates continued their upward trajectory again this week, rising to the highest rate this year so far,” said Sam Khater, Freddie Mac’s chief economist in a statement. “This upward trend is being driven by a resilient economy, persistent inflation and a more hawkish tone from the Federal Reserve.”
High rates combined with low inventory continue to price many potential homebuyers out of the market, added Khater.
Markets are still digesting the Federal Reserve’s most recent FOMC meeting, during which Federal Reserve Chair Jerome Powell hinted at additional rate hikes before the end of the year. The 10-year Treasury yield was north of 4.0% on Thursday, a threshold not seen since March of this year.
Economic resilience is taking investors aback. Consumer spending keeps growing, as do auto sales, which were expected to soften. Real estate markets also speak to resilient conditions, as buyers have accepted mortgage rates in the new normal of 6% – 7% range and kept a steady pace of sales over the past few months. In addition, builders are recognizing the demand and the opportunity it presents, and they are pushing construction activity higher – about one-third of homes on the market are new construction, more than double normal levels.
The U.S. jobs market remains strong with U.S. companies adding almost half a million jobs last month, as reported by Bloomberg. Capital markets are looking for further clues and a hint about the outlook for the second half of the year in the next payroll employment report.
“The challenge for housing markets is the unfolding dynamic between supply, demand, and borrowing costs,” said George Ratiu, chief economist of Keeping Current Matters in a statement. “The number of homes for sale has been growing, and properties are sitting longer on the market, giving buyers more options and time to decide. At the same time, homeowners have held back from listing, keeping the supply of existing homes in check and driving prices higher. There are also clear signs of seasonality in this year’s housing markets, a good development on the road back toward health. However, we have a way to go to regain balance.”
Lisa Sturtevant, Chief Economist of Bright MLS, said economic conditions will cool in the second half and mortgage rates will come down.
“However, there will be no return to the 3% rates we had during the pandemic,” she said. “Homebuyers have had to accept the ‘new normal’ of rates around 6.5% or even a little higher. With affordability at near-record lows and inventory still very limited, buyers will continue to find the market challenging in the second half of 2023. Home shoppers will have to compromise on the features they want in a home or the neighborhood they are looking in.”
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