If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).
Ashley:
This is Real Estate Rookie episode 278.
Tony:
You should also look at the numbers and use that to help you kind of make a determination because, say that we look over the next year, over the next 12 months, and say that you’re trying to get 1,000 bucks for your place right now, but because you tried to get a $1,000, your place sits vacant for the next two months. Right? Over the course of that year, you have two months that are empty, so you’re going to make $1,000 over 10 months, which is $10,000. Say that you dropped the price from 1,000 to 950, and you rent it out this month, now you have a full 12 months. You’re actually going to make more. You’ll make $11,400 at 950 if it’s rinsed out for the entire year.
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 I want to start today’s episode by shouting out someone by the username of RSGreen2. They left us a five-star review on Apple Podcast that says, “I tell everyone and anyone I can to listen to this podcast, especially when people ask me about where they can start. Tony and Ashley have great energy, and they keep things very tangible for listeners. Keep up the great work, Ashley, and keep laughing. Don’t let anyone tell you different. Life is too short.”
And, so, RSGreen, we appreciate you. And Ash, I got to say, I love your laugh as well. Don’t listen to the haters. Keep doing your thing. Keep living your life.
Ashley:
Well, thank you so much because it is physically impossible to stop laughing, so, here to stay. So, Tony, what’s new with you?
Tony:
We got this campground that we’re working on in West Virginia, so I’m super excited about that. And, honestly, by the time this episodes airs, I think we should hopefully have closed on it by now. But it was a deal that came to me actually on Instagram. One of my Instagram followers reached out to me. And most deals that get sent to me on Instagram are not all that good, but this one actually ended up checking out, so we’re super excited for it.
Right now, it’s got a single-family house plus a little … There’s a church on the grounds, and there’s a few RV pads, but we’re going to build out some really cool dome campsites there. So, we’re excited. It’ll be our first true commercial project and hopefully the first of many. So, just trying to do our due diligence right now and get the money lined up and take this thing down.
So, we had a failed attempt last year at our first commercial deal, so I’m hoping this one … hoping we actually make this one happen.
Ashley:
Yeah, I’m so excited for you. I got your newsletter that talked about the property the other day, and Daryl and I were reading through it. It looks so exciting and such a great opportunity.
Tony:
Yeah.
Ashley:
Okay, well, this week, we have, I think, five questions we actually go through today, five or six. And we talk about financing, getting bank financing, the differences between doing an adjustable-rate mortgage, a conventional mortgage, a second-home mortgage, lots of different things we talk about, and what are the pros and cons and what may be the best route for you, depending on your situation.
And then we go into estimating a rehab and some of the ways you can do that as a rookie investor.
Tony:
Yeah, we also talk about analyzing deals, and we talk about FSBOs and how to kind of negotiate with sellers, without your agent being present. And we also talk about renting your property out and how to not get screwed when you’re searching for tenants and make sure you’re getting the place filled. So, lots of good conversation for today.
Ashley:
We will also tell you what a FSBO is, for those of you that don’t know. So, listen for that, the [inaudible 00:03:33]-
Tony:
That don’t know.
Ashley:
Okay, so our first question today is from Ernesto, and this is in the Real Estate Rookie Facebook group. Guys, don’t forget, if you want to ask questions that we may answer on the show, you can go ahead and join the Real Estate Rookie Facebook group. Ask a question in there. Most likely, you are going to get a whole bunch of people, rookie investors and experienced investors, to answer your question before we get to it.
But to Ernesto’s question today is, “Is it possible to get a new mortgage in an LLC with 20 to 25% down? Also, what are the documents and requirements needed?”
And the answer to that is, yes, you can. That is actually typically what a commercial lender is looking for, is that 20 to 25% down. Sometimes, they may require 30% down or more. So, since this is going to be in an LLC, you are going to have to go to the commercial side of lending.
I have found one small, local bank that did allow you to get a loan on the residential side in an LLC but, most of the time, you’re going to have to go to a commercial lender, and you can do the 20 to 25% down. There are lots of different options for the commercial lending. For example, how long you’re going to amortize the loan. That will also affect your interest rate. If you’re going to do an ARM, an adjustable-rate mortgage, lots of different options on the commercial lending side.
I have not seen, on the commercial lending side, where they will let you put less than 20% down. I have seen on the residential side, where a small bank that’s going to hold the loan in-house will allow that, just because you’re buying below market value. But banks are really flexible, especially the small, local banks, where maybe that does happen where you can put less than 20% down.
Tony, have you ever seen that, where a commercial lender will put less than 20% down?
Tony:
No. Yeah, most of our debt, honestly, isn’t carried by our LLC. And the debt we do have in our LLC is from private money lenders. We’re usually going 0% down on those ones.
But I think my question to Ernesto would be, “What is your motivation, Ernesto, for getting the LLC and going after commercial debt?”
I think there’s a common misconception that you need an LLC to buy investment property or to get all the tax benefits to come along with being a real estate investor. And that’s not true. You can still claim all the deductions, even if the property’s in your personal name and even if the debt is in your personal name.
The LLC really comes if you’re worried about liability, right? Asset protection. And even still, there are ways to protect yourself from a liability perspective, without even creating the LLC.
So, I think that would be my first question, Ernesto. Because, a lot of times, you can get better debt if you’re able to get that debt in your own name.
Now, obviously, if you do go that route, a lot of times, banks are going to want to make sure you have the DTI to cover that. So, maybe if you’re going after commercial property, where they’re kind of looking at your … Gosh, why can’t I think of the name of the statement? Your personal financial statement, and they’re looking at the NOI of the property, that could be one reason.
But Ernesto, if you have the debt-to-income ratio, you have the credit scores to go out and get that debt by yourself, I might even say, it might be more beneficial to get something in your personal name.
Ashley:
And then, the second part of that question, was the documents required, and Tony touched on one of them, providing your personal financial statement, which lists your assets minus your liabilities.
So, if you own a primary residence, that would be your asset. If you have cash savings, that’d be an asset. Your liabilities would be the mortgage that’s on your primary residence, or if you have a car loan, things like that.
The next thing that you may need to supply, and these are especially if you’re going to be a personal guarantor on the loan. So, even though your LLC is getting the loan, the bank may require you, or ask of you, to be a personal guarantor, where you are signing, saying that if the LLC defaults on the loan, you are now personally liable to pay that loan. You do get a better interest rate if you do sign for that, and you may get better terms if you are a personal guarantor.
So, they may want two years of your personal tax return, if applicable, two years of your LLC tax return if it’s been open for two years, a profit and loss of the property you’re purchasing, also the rent roll of the property that you are purchasing. And then, they’ll probably run your credit too, as a personal guarantor.
They also will most likely require any partner that has more than … or has 20% or more ownership in the property too, to supply all of these things as well, such as their tax return, and to also be a personal guarantor.
I’ve never seen it, where, if somebody owns less than 20%, they require them to sign on the loan or to provide their information, but that could also possibly happen.
Okay, so let’s move on to our next question. This question is from Denise Biddinger, and this is also from the Real Estate Rookie Facebook group. “What’s the best way to structure a first-time partnership? Should we look for someone to split the cost of a mortgage, and each get a loan for the applicable half? Is that even an option? So, here’s some background on it. It’s a buy-and-hold. The property is listed at 265,000, the down payment only 20%, which is around 50,000, which, hopefully, would be funded by a partner. What other factors should I be considering? Thank you.”
So, this is something Tony and I talk about a lot. There is no right way to structure your first partnership. That is completely negotiable. You just want to make sure that it’s legal and that it’s all in writing.
So, I think Tony will be able to talk to this better on this one because, Tony, you do partner with people who bring the capital to deals and how you do your joint venture agreements.
For myself, personally, my first partnership, we did a 50-50 ownership. My partner brought the capital, but he also was the lien holder on the property. He held the mortgage, so the money we used to purchase the property, we were paying him back that money over a 15-year amortization, at 5.5% interest.
So, he was getting a monthly payment every month of principle and interest. He was also 50% owner of the property, so any equity by mortgage paid on, he was getting that advantage. He was also any appreciation into the property that was building equity. So, when we eventually sold, he got 50% of the profit. He also was getting 50% of the cash flow through the lifetime of that property that we had it.
So, Tony, do you want to go ahead and touch on the joint venture side of doing a partnership for your first deal?
Tony:
Yeah, so there’s a couple things you should look at, Denise. So, the first thing you said is, “Should we look for someone to split the cost of a mortgage, and then each get a loan for the applicable half?”
I’ve actually never seen that happen before, where you have two different partners, and each of them gets their own mortgage for their part of the property. Usually, if you’re going to do it that route, both of you would just be applying for the same mortgage.
But here’s the thing. I think, if you’re in a partnership, typically, you want the smallest amount of people on the mortgage as possible, because if one person can qualify for that loan by themselves, then it allows the next person in that partnership to get the subsequent loan. But if both of you are in that loan, now both of your DTIs are impacted. So, usually, you want the smallest number of people possible on the mortgages as you can.
But anyway, to kind of answer your question about how to structure it, there’s a few things to look at, Denise. You can look at mortgage. So, who’s going to carry the mortgage? The down payments of the capital, who’s going to bring that capital? And then, on the actual ownership of the property, you look at equity. How are we going to split ownership of this property? And then you look at profits. How will we split the actual profits of this property?
And you can tie in other things like, “Hey, is someone going to get a management fee for doing the day-to-day management of the property?” Or if someone does maintenance on the property, do you get an hourly fee for the maintenance piece? But I think those are the different levers you want to look at.
And it sounds like Denise, you’re looking for someone to bring the down payment, but it also seems like, if I’m reading this the right way, that you feel you have the ability to get approved for the loan. So, one easy way to do it would be to say, “Okay, look. I’m going to carry the mortgage. You’re going to bring the down payment capital.”
And you have to make sure that that money gets seasoned or that your lender’s okay with that person gifting that money to you. But say, you carry the mortgage. That person brings the down payment. And then you guys can say, “Hey, we’re going to split the profits down the middle 50/50. We’re going to split equity down the middle of 50/50.”
Or your partner could say, “Hey, since I brought the 50K, I want to make sure that whenever we sell the property, I get my 50K back first, and then we split whatever’s left over.”
So, there are a million different ways to kind of skin the cat here, Denise, but I think those are the things you want to look at, is your mortgage, your down payment, your equity, and your profits.
Ashley:
Okay, our next question is from Trevor Manning. He says, “Hi, Rookies. I’m going to start analyzing deals. I was wondering if there is a rough rule of thumb for estimating rehab costs, like an estimate per square foot, moderate, heavy rehab. It doesn’t have to be super accurate. I just want to get my hands dirty with practicing my analyzing. Have a great weekend.”
Okay, so this is such a hard thing, as a rookie starting out, is estimating the rehab. And even still, I struggle with it, as to there’s so many variables that come into play to get the perfect budget, the perfect estimate.
When I first started out doing full, heavy rehabs, I took on a partner who knew how to do construction, and that’s how I learned to do my estimates.
The first thing I would do is to look into the book Estimating Rehab Costs by J. Scott. It’s available on the BiggerPockets bookstore. And it’s not going to be able to tell you, “Okay, in your market, in your area, a painter is going to charge you $2.50 per square foot,” but it’s going to lay out everything. You should be getting quotes for, everything you should be estimating that you might be missing.
Another way to kind of look at it is, and this is very time-consuming, but once you do it one time, you can constantly reuse it for other properties, is build out your own kind of template, so you can at least get a very good idea of what the material cost will be.
So, you’re looking at a property. You’re looking at the listing online, or maybe you go to do an actual showing. Take tons of photos and videos of the property. Then, sit down and go, room by room.
Okay, so I always use the bathroom as an example. You’re looking at the bathroom. You want to rip the bathroom out and redo it. Okay. For the shower, maybe you know want to put in tile. You want to tile the whole shower. Okay, will they make a Schluter tile system. Okay? You can go and look at the price at Lowe’s, Home Depot, or whatever hardware store you use. Pull up the cost of that. You are going to link that to your spreadsheet.
Then, you are going to find a YouTube video that talks about what it takes to build out a tile shower. And you are going to say, “Okay, I need the grout. I need the tile. I need the thinset. I’ll need these other things. I’ll need the faucet. I’ll need the handle. I’ll need whatever else is in that video.” Make a list and build out that kind of worksheet, that template, and then go online to the hardware store and pull those things.
Okay, so a toilet, you’re going to need a wax seal to go with the toilet. You can google all this on YouTube. Put those things in there. Even if you don’t use that exact same toilet that you linked, it’s still going to give you a pretty good estimate of what your budget is going to need to be.
If you don’t know what toilet to pick, go ahead and pick one on the higher end, and if you end up getting one that’s cheaper, and it’s going to work just as well, then great. You just saved yourself 25, $30 right there. So, always overestimate. Go for the higher-priced item. You don’t want to blow your budget way out of the water by picking $10 per-square-foot tile if you’re just doing a rental property, where you could get away with $2 or $3 per-square-foot tile. It’s time-consuming, but I think that is a great way to kind of get an understanding of what materials cost.
And then, for as far as labor, call around and ask contractors, “What do you charge to install a toilet?” Ask other investors. James Dainard, we had him on. I’m sure Tony already has his episode numbers teed up, as to what episode that was. But he did this heavy, deep dive. And he has a template, where he knows that his painter charges X amount per square foot. So, when he’s estimating a rehab, he already knows, “Okay, this is a 2100 square-foot property. I’m going to times that by the $2.50 cents my painter, and that’s how much I should be charged for … That’s my estimate for the painting on the property.”
And the same for installing tile and all these different things, or even drywall. So, calling and kind of getting an idea. Of course, no contractor’s going to be able to tell you over the phone, “This is how much it would cost just for this,” but just an idea or a range can really help you kind of figure out.
And then, for kitchens too, call kitchen cabinet places that do the design and ask if they can give you a low-end model or low-end cabinetry, what the price point runs on that. If it’s 500 square-foot kitchen, things like that.
This is going to be time-consuming, but going around and visiting those different places, making the phone calls, looking things up online, it’s going to be worth it, if you really do want to have a more accurate estimate. And if that’s the one thing that’s holding you back from getting started, then it’s definitely worth the time doing this kind of research.
Tony:
Yeah, it’s a great breakdown, Ash. And, of course, I’ve got James’s episode teed up, so that was Episode 165 for Part One, and I think Part Two is 167, if I’m not mistaken, or 166, one of those ones.
So, Trevor, in addition to everything that Ashley said, I’ll just kind of share what my journey was when I was first starting out and what I did to try and estimate my rehab costs. And once I found my subject property, a property that I was looking at purchasing, I looked for other comps in that area that had recently sold, and I identified the comps that I liked, the ones that I was trying to emulate.
And I did two things, really. First, I went out, and I found another contractor and said, “Hey, here’s what I’m looking to turn this house into. Here’s what I’m looking to transform it into. Can you give me an example of projects you’ve recently done that looked like this?”
And this contractor said, “Yeah, here’s one or two properties that I did, that are similar to what you’re trying to do.”
And I said, “Okay, what was the cost for that property?”
And he told me, “Hey, it was, whatever, $70,000 to do that rehab.”
And then, that kind of gave me a ballpark, if I want to do a level of rehab, it’s going to cost me around 60 to $70,000 to do that.
And the other thing I did was I gave him photos of what the property looks like today, the current state of that property, and I showed him those comps that I was looking at, and said, “Hey, to get a property like this, to look like this, what do you think it would cost me?”
And he said, “Okay, it’s going to cost you around this much.”
So, now, I’ve got these concrete numbers of what he charged his previous clients to do these rehabs, and I’ve now got this ballpark of what he’s going to charge me to take this property that I’m looking at and turn it into something new. And with those, it gave me a pretty decent ballpark on what I would be spending to kind of get the level of rehab that I was looking for.
So, I think, Trevor, talking to other investors in your market and asking them what they’re spending on a price per-square-foot is super important. And then, also, just going to the folks that are going to be doing the work and getting their opinion.
It is incredibly difficult, Trevor, for me or Ashley to say, “Hey, use this price per-square-foot in your market,” because it’s what Ashley spends in Buffalo is going to be very different than what I spend in Southern California, and it’s going to be very different than what you spend in whatever city or state you’re in. So, you do have to kind of get localized information to make your best guess.
Ashley:
Yeah, the last thing I would add on to that too is, even when you’re just in Lowe’s, if you keep an eye out, they usually have signs saying like, “We will install your flooring. We’ll install your bathtub.” Find out what their pricing is on that. And a lot of times, they actually do provide free quotes too, where they will send someone out. But sometimes, they will say, “We have a special going on. Our rate is usually $5 per square foot to install flooring, the luxury vinyl plank, but for this week only, we’re doing it for X amount.”
But you can at least see how their pricing kind of varies, and you can use that, too as kind of a starting point as to what the prices are.
Tony:
Ash, I’m just curious, have you ever not used LVP in your properties? Have you ever done, I don’t know, tile, actual tile, in your properties or, I don’t know, what’s the old linoleum type, or do you always go LVP?
Ashley:
Recently, always LVP. I’ve done tile showers and tile in bathrooms. I don’t think ever tile in a kitchen before for a rental property, but I’ve definitely done the tile shower, the tile in the bathroom floor, and then luxury vinyl plank throughout. I, actually, in one unit right now, that I just did a big turnover, and when we ripped up the carpets from when I bought it, we were going to put the LVP down, but it actually had hardwood floors. And it was cheaper to refinish the hardwoods, than it was to rip the carpet out or to put LVP into that unit.
And then, the A-Frame, the short-term rental, we did do tile in that bathroom and the shower too, but that was the rest was all LVP in there. Yeah.
And then, in the apartment complexes that I asset-manage for, we do linoleum in the kitchen, in the bathroom, but we’re slowly changing that into LVP, as people move out and just keeping it consistent the whole way through.
Tony:
Yeah, same for us. We tile all of our bathrooms, the bathroom floors, the shower floor, the shower walls, we always tile those. We have patios in most of our backyards. We will tile the outside with some nice tile as well. And then, everything else is a really nice LVP also. I’m just curious because one of my friends, this is in primary residence, and instead of doing LVP, he just tiled the entire inside of his house. And it almost looked like LVP, but it was tile. And he told me that they were thinking about doing LVP, but it ended up being cheaper to do that tile. So, I was just curious if you ever tried anything like that before.
Ashley:
Yeah, actually, in this property that I’m in right now, I wish … There’s the whole stacking. You can kind of see it, the whole pallet of flooring right there, and it’s LVP, but I wish that I would’ve done tile in this one throughout.
My aunt and uncle did that. They actually ripped up all of their hardwoods in their house and put tile that looks like wood on it, just because of the durability. Their dogs were scratching up the hardwoods.
My house that I built, we did tile in the kitchen and the bathrooms and the laundry room, but the rest … in the mudroom, but then the rest is all the hardwoods. I hate it so much. The first couple years living in that house, I would cringe every time a toy dropped onto the floor or whatever. Now, there’s dings and scratches and everything throughout it, but it’s also LVP, I think, is a lot easier to keep clean too, but also a lot more durable than the hardwoods too. So, I just don’t care for hardwoods anymore.
Tony:
Yeah.
Ashley:
Okay. So, our next question is from Jordan Alexander, and it is, “Would you go with a conventional second home mortgage at 10% down, with long-term fixed, or start an in-house portfolio relationship with a lender at 15% down, 5% interest, and a 20-year amortization?”
Okay, so, my opinion on that is, what is your why, first of all? Are you going for cash flow? Are you going for appreciation? Are you going to build this huge portfolio, where you think that doing this one loan differently with the lender is going to give you years of great business with them?
I think run the numbers and what’s going to give you the better cash flow. If you can get both of those, look at five years down the road, where you’re getting the better return on those things.
Doing the in-house portfolio loan, if you work with that lender to do the portfolio loan, or you work with them to do the second home mortgage, you’re still going to be establishing a relationship by working with that loan officer, no matter what type of loan product you are doing.
So, in my opinion, I would recommend doing the 10% down and getting that 30-year fixed mortgage on that, with a lower interest rate. The 5% interest for the second one that you mentioned with the 20-year amortization and putting a little bit more down, maybe that is a lower interest rate right now. I’m not sure when this post was done or what it would be for the second home mortgage, but 5% interest doesn’t sound that bad for me now.
I’m doing … helping my business partner. He’s doing a loan right now on a primary residence. And when I was filling out some of his paperwork, it was 5.125% that he was getting, but it’s a 7/1 ARM, so it’s only fixed for seven years, and then he’ll go and refinance it, depending when … what rates are, or probably just pay it off.
But Tony, what do you think about that? And also, Tony, I have another question for you too, are you … And I heard this. This was a rumor that was swirling around, and I keep forgetting to ask you if it’s true, are banks getting more strict on lending the second home mortgage, that the 10% down is going away?
Tony:
Yeah, it’s a great call-out, Ash. What I was going to mention is, as I talked about Jordan’s question here, is that banks aren’t necessarily getting away from the second home mortgage, but they are becoming more expensive. So, they’re still 10% down, but a lot of banks are now adding additional points, on top of the 10% down payment, that almost makes it less desirable for people.
So, we haven’t closed on a 10% down second home loan in a while, and we’ve been going with 15% down investor loans because, when we add up the total cost of the debt, it’s actually been cheaper to go with a 15% down loan with no points, versus a 10% down with all the added points and fees.
So, I think I would answer Jordan’s question in a very similar way, Ashley, where it’s like, “Jordan, you got to look at the total cost of the debt and understand, between the second home mortgage and that portfolio loan, which one’s going to allow you to achieve better returns and better cash flow long-term?”
Like Ash said, I mean, 5%, if that’s today’s rates, that’s pretty good. So, I might be interested in doing that. You didn’t mention what the term was for that, so I don’t know if that’s a three-year term, a five-year term, but 5% does seem pretty solid. But yeah, I would definitely just run the numbers and try and figure out which one makes the most sense.
So, just before we close this one out, I just want to talk about what points are and how it adds to your closing costs. So, one point is essentially 1% of your mortgage amount. So, if I had $100 of mortgage, one point would be 1%, which is $1.
So, as you add these additional points, it really can start to add up, especially if you’re buying a house for 300,000, 400,000, 500,000, $800,000, one point can make a pretty big difference in what your down payment cost is.
So, you want to make sure that you understand, not just the down payment percentage, but also the additional points and fees that are being added onto that, because when you close on that property, it’s the down payment, plus all the closing costs, which includes those fees and points.
Ashley:
I’ve seen banks doing a lot of options for people, is that they’ll offer, if you pay points, you get an interest rate buydown. So, say, for example, your interest rate is 6%, if you pay one point, they’ll knock it down to 5.8% or something like that.
So, what you have to do in those scenarios, is you have to look at, “Okay, how much more money am I going to have to put down?” So, one point, say it’s a $300,000 property, that’s $3,000 added to your closing cost, but let’s look at over how much interest are you saving by having that interest rate knocked down a little bit and is it worth it?
Also, look at your monthly payment too. How much extra cash flow will you actually have and how long until you can get that $3,000 back, that you put up, up front? Or is it worth it taking higher interest rate and not having to put more money into the deal upfront too?
So, just a couple things to think about, as lenders are trying to get creative to attract people when those interest rates are higher by offering those point paydowns. So, just make sure you’re understanding if it really is a better option for you or not. And I’ve seen it up to three points, where you can pay 3%, to get your interest rate knocked down a little bit.
Tony:
Yeah, just really quick, Ash, before we go to the next one. I know we’ve talked about NACA before. And I recently had a guest on that used NACA as well. And NACA’s like a loan program, that helps people buy properties. And they’re really good at allowing you to buy down your interest rate as well. And when interest rates were super low, I know some people that were getting NACA loans below 1%, which is crazy to think about. That’s literally almost free money.
So, yeah, if you are able to buydown your rates, it can be beneficial in the right environment.
Ashley:
Okay, our next question is from Preston Wallace. “Listed my first rental about two weeks ago. I have had a few people reach out about applying, but never complete the process. I am using a property manager, as I have moved a little over an hour away. At what point do you all consider reducing the ask on the monthly rent? I did a fair amount of research in the area and even priced rent about $50 lower than a few comparables in the neighborhood that rents it out in January. I can afford to pay the mortgage without the rent, but at the same time, I don’t want to have it vacant for much longer.”
So, the first thing I would look at is to the property management company or your property manager. What are the things that they are doing to market your property? If you search your property, or you search, say, the properties in Buffalo. Apartments for rent, Buffalo, New York. Two-bedroom apartment in Buffalo, New York, or whatever the city is that your property is in.
Where do you see the listing? Is it in multiple places? Is it being blasted out to 10 different places? Is there a sign in the front of the yard? So, that’s the first piece I would look at, is the actual marketing of the unit.
And then, I would take your property manager’s advice. They’re the expert, supposed to be the expert, in that market, and get their opinion as to, “Okay, this is listed, what I thought was below $50 before comparables in the area. In your experience, what do you think is the difference between my unit and these other units?” So, maybe these other units have a washer and dryer, and yours doesn’t. And that’s actually becoming more of a big deal than it isn’t. And then, see if there’s an opportunity, for whatever you are missing, to add that into it.
So, maybe these other properties allow pets, and you don’t allow pets. Okay, maybe do reconsider and allow a pet and charge a pet fee upon move-in? Things like that.
So, that’s what I would kind of do some research, before you actually go in and decrease the rent any further than what you have.
Tony:
Yeah, I think the only other thing I’d ask that, Preston, is that you should also look at the numbers and use that to help you kind of make a determination because, say that we look over the next year, over the next 12 months, and say that you’re trying to get a 1,000 bucks for your place right now, but because you tried to get $1,000, your place sits vacant for the next two months. Right? Over the course of that year, you have two months that are empty. So, you’re going to make $1,000 over 10 months, which is $10,000. Say that you dropped the price from 1,000 to 950, and you rent it out this month, now you have a full 12 months, you’re actually going to make more. You’ll make $11,400 at 950 if it’s rented out for the entire year.
And, so, I didn’t even include the fact that you have to pay the mortgage yourself for those two months of the property sitting vacant. So, sometimes, you can make more money by reducing your rent. So, I think just take that into consideration as well, where sometimes real estate investors get so fixated on the monthly amount, they don’t realize the impact that it’s having on vacancy, which is the biggest expense for us, as real estate investors.
Ashley:
And the last thing to add onto that, that’s great advice, Tony, the one thing to be careful with that is don’t … You want to fill that unit. Don’t just take on the first person that applies for your unit and risk getting a bad tenant in. The one time it is good to wait and have that little bit longer vacancy is waiting for a good tenant, and not just settling because you want to get it rented super quick. And then, the people end up trashing the house, and you saw all the red flags, but you just wanted to get it rented. So, that would be my one cautionary tale.
Okay, our last question today on Rookie Reply is from Samuel Hall. “A FSBO, which is For Sale By Owner, has agreed to move forward with my offer. However, they want me to provide comps, comparables, to them. How would you handle this?”
Well, I think this is a great situation for you to control, Samuel. They want you to provide the comps, instead of them going out and finding their own comps. So, I think you can definitely use this to your advantage. So, go onto the MLS, Zillow, realtor.com or whatever, and I would look at comparable properties that have sold in that area, not what things are listed at, because just because they’re listed at something, does not mean they’re actually going to sell for that.
I would also go to propstream.com. They have a free seven-day trial, so just use it for the seven days, and you can cancel it or you can keep it if you love it. But you’ll also be able to pull comparables from there too, by putting in the address, and there’s a little button you push to look at comps in the area.
So, you’re going to compare bedroom count, bathroom count, but also square footage, and then finishes of the property. If you find a property that’s $400,000, but it fits every check box, but it has all these high-end finishes, where yours is still designed in the ’60s, that’s not going to be a good comparable, or you’re going to have to adjust your comparable by showing this house has an extra $100,000 of upgrades in it that this person’s house doesn’t have.
The place that I would be cautious about that is this person probably has this sentimental value to their property, so try not to bash their property by saying, “Oh, these comparables are way better than yours. That’s why I am looking at something different.”
So, even look at, see if you can find a property that is worse than theirs, or level as there’s, and it sold for actually what you are going to pay for it. But I think you do have an advantage by picking and choosing what comps you use, to make your offer look more favorable.
Tony:
Yeah, I think the only thing I’d add to that is, also include, Samuel, and I’m making an assumption here that there’s some work to be done, but I would also include what you predict your rehab budget to be. So, you can go to the seller and say, “Look, I’m buying this property from you for X, but I also need to invest another 10, 20, 50, $100,000 to make this property even livable for the next person. So, I’m taking on all of the work that you don’t want to do.”
And the last thing you can tell the seller is like, “Look, Mr. And Mrs. Seller, I’m going to buy the property completely as is. You literally don’t have to lift a finger. If you want to just leave all the trash here, leave the trash air. If you want to do … Don’t touch anything, I’ll take care of everything. But just know I also have to put a little bit of work into it myself.”
We’ve used that tactic a couple times with some off-market deals we’ve purchased, and it’s been helpful to say, “Look, we get that you have the sentimental value, but for us, it also is a business for us as well, and here’s what we’re going to have to spend to make this worthwhile.”
So, I found that to be helpful when you’re negotiating with folks also.
Ashley:
Yeah, that’s really good advice. So, the more information you can provide as to … that’s going to be to your benefit, the better.
Well, thank you, guys, so much for joining us for this week’s Rookie Reply. If you guys are watching this on YouTube, make sure you are subscribed to the channel, and you like this video for us, and leave a comment below, as to what question and answer you found the most valuable this week. And don’t forget to leave us a review if you are listening on your favorite podcast platform.
Thank you, guys so much. I’m Ashley @wealthfromrentals, and he is Tony @tonyjrobinson, and we’ll be back on Wednesday with a guest.
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EVERYTHING You Need to Get Your First Real Estate Deal Done in 2023
Ready to buy your first rental property in 2023? If you’re going to reach financial independence, retire early, and own your time, you better get started. But you can’t build a rental property portfolio without buying your first, second, or third deal. So, how do you go from real estate zero to rental property hero without having any experience? Take some notes from rental property investing expert David Greene, who built his financial freedom-producing portfolio in under ten years!
David walks step-by-step through everything you must do to buy your first rental property in 2023. From finding the deals, getting your financing and loans set up, analyzing a property, and repeating the system. If you listen fully through this episode, you’ll have everything you need to find and buy your first (or next) rental property. So what are you waiting for? Grab a notepad and a pen, and don’t get distracted by David’s beautiful bald head. Now is the time to start building your life of financial freedom!
Want to take your real estate investing to the NEXT LEVEL? Reach financial freedom faster and sign up for BiggerPockets Pro with code “RENTAL20” for a special discount!
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High mortgage rates incentive for homeowners to stay put: ICE
Elevated mortgage rates are continuing to give homeowners a reason to stay at their current homes, according to the 2023 Borrower Insights Survey conducted by ICE Mortgage Technology. But while the inventory-lacking market has caused issues for buyers, one bright spot is that about half of the current homeowners say they plan to sell their homes in the next two years, according to survey data.
Of those who plan to remain in their homes, about one-third (36%) specifically cite high interest rates as the reason for staying put.
The survey polled 2,010 individuals age 18 and older in the U.S. in January and February. Of the total surveyed, 1,005 owned their current residence and had taken out a mortgage loan within the last five years. The rest of the participants were currently renting.
Borrowers were asked about the factors and the elements of the experience that are most important to them during the loan process. Renters were asked about their perceptions of the home buying experience and their expectations about the requirements of homebuying. The survey was fielded using the Qualtrics Insight Platform and the panel was sourced from Lucid.
What are borrowers looking for?
Nearly two-thirds of recent borrowers (63%) say they plan to seek new financing in the form of home equity loans, reverse mortgages, refinancing, or investment property loans.
About 34% of current homeowners who have taken out a mortgage in the last five years plan on taking out a home equity loan in the next year and 29% say they have considered refinancing. About 24% have considered a reverse mortgage, and 31% have considered investment property loans – an indication that there is still some degree of confidence in rising home values.
Current homeowners who were recently involved in the mortgage process cited “more space” and” finding a good deal on a house” as the main reasons for buying a home, according to the survey.
But while recent borrowers cite more space and good deals as the reason for buying, fewer respondents say they are trying to transition from renting to buying – which may signal that this type of transition is difficult in the current environment.
That result is a departure from last year, when “not wanting to rent anymore” (38%) was cited more often than finding a good deal (36%) or needing more space (36%).
“The year-over-year change may indicate that it is more difficult in the current environment to transition from renting to home ownership,” the survey said.
Active home buying market coming?
Still, it seems likely that the home buying market will stay active or become more so in the relatively near future. Nearly half of current homeowners, as well as many younger homeowners, say they are planning to sell their home in the next two years.
About 46% of respondents plan to sell their home in two years or less, according to the survey results. The reasons cited most were to cash in on increased home equity/value (39%), to change scenery (38%), or to downsize or upsize (36%).
Of the renters who are motivated to buy, Generation Z leads the sentiment.
About 37% of Gen Z say they believe that owning a home is within their reach, compared to 27% overall. About 67% of Gen Z and Millennial renters say they are open to relocation as a path to homeownership, compared to just 448% of those Gen X and older.
Homeowner, renter concerns
Saving money is a top concern for homeowners and renters, according to the survey. About 67% of people surveyed reported that when financing a mortgage, saving money overall is their biggest concern, followed by low lender fees at 56%.
When choosing a lender, Baby Boomers want low interest rates. Younger generations are more focused on finding a variety of loan terms and product options, study results show.
In addition, the survey showed borrowers tend to have different kinds of outreach preferences based on their experiences.
Experienced borrowers – defined in the survey as those who have taken out five or more mortgages in their lifetime – say they favor digital offerings. Borrowers, especially those who are least experienced, say they rely on referrals from family, friends or realtors to choose lenders.
“In other words, relationships mattered to high-interest rate borrowers. These borrowers are therefore likely to consider more than one lending institution when going through the mortgage process,” the survey report states.
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New American Funding enters the joint ventures space
Multi-channel mortgage lender New American Funding (NAF) is entering the joint ventures arena, offering multiple JV models in a margin-compressed and highly regulated industry.
Under the JV model, partners will have access to NAF’s infrastructure and mortgage originating process. It will allow the company to mitigate the risk associated with being in the mortgage business and minimize the capital-intensive nature of the business, the company said.
NAF is looking for a 50/50 joint venture between the California-headquartered lender for virtually any size real estate brokerage, a larger agent team, a new home builder and a wholly-owned mortgage business.
“With the refinance boom gone, fierce competition for the purchase business is causing significant margin compression,” Al Miller, national director of strategic relationship at NAF, said in the announcement.
For a standalone model, NAF and the partner company will form a mortgage banking company that can support funding loans of at least $150 million annually. The two lenders will each own 50% stake in the JV.
In a consortium model, currently popular in the title business, NAF will create a standalone mortgage banking company that will sell shares equal to 50% of the company. With this model, shares are intended to be for individual companies that have the scale for loan funding a minimum of $50 million annually and aggregate fundings for the combined owners of $300 million annually.
NAF will consider a mortgage brokerage model if it is done based on using it for speed to market and as a strategy to evolve into the full mortgage banking model in the near future, the company said. The third model has a low barrier to entry, in which capitalization and licensing complexities are much less than the standalone model.
With various services plus capital in place, a joint venture ramps up faster than a traditional mortgage company. At a mortgage brokerage joint venture, loan officers generally get paid a lower base salary than counterparts at traditional lenders and may get a smaller commission because the LO is doing less work finding customers since there are greater real estate agent referrals.
While a mortgage brokerage JV model was popular during the pandemic years, a new federal regulatory regime could put the model at risk of expenses from the lack of regulatory enforcement information as well as lesser margins, as the industry’s volume is tied to housing cycle shifts.
The partial acquisition model would be used when a company that owns and operates an independent mortgage business is looking to reduce its current capital investment and risk by selling a 50% portion of that business to NAF. After the sale, the partner would enter a standalone JV.
This fourth model could also be used if the partner is already in a JV with a lender and that lender is willing to sell NAF their ownership.
Founded in 2003 by Rick Arvielo and his wife, Patty Arvielo, New American Funding offers a variety of conventional, government, adjustable-rate and non-qualified mortgages. The California lender originated $15.12 billion in volume in 2022, down about half from the previous year’s $30.44 billion, data from Modex showed.
Licensed in 50 states and Washington, D.C., the lender has 168 active branches nationwide with 1,615 sponsored MLOs, according to the NMLS.
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Finding Comps, Estimating Rehab Costs, and Filling Vacancies
A FSBO (For Sale By Owner) seller wants to move forward with your offer—that’s great news! But first, they have asked you to pull comps (comparable sales). Believe it or not, this is something you can use to your advantage. Of course, you’ll need to know where to find comps and how to estimate rehab costs so that you can defend your offer. Thankfully, Ashley and Tony are back with some of their best tips yet.
Welcome back to another Rookie Reply! Negotiating a FSBO sale can be a little intimidating, but our hosts are here to help you navigate the entire process. In this episode, we also discuss and compare real estate financing options, from conventional mortgages to portfolio loans. We even weigh the pros and cons of personal debt versus commercial debt. Struggling to find a tenant for your rental? You’ll want to hear what we have to say about lowering rent prices, as well as other steps you can take to fill your vacancy and improve your cash flow immediately!
If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).
Ashley:
This is Real Estate Rookie episode 278.
Tony:
You should also look at the numbers and use that to help you kind of make a determination because, say that we look over the next year, over the next 12 months, and say that you’re trying to get 1,000 bucks for your place right now, but because you tried to get a $1,000, your place sits vacant for the next two months. Right? Over the course of that year, you have two months that are empty, so you’re going to make $1,000 over 10 months, which is $10,000. Say that you dropped the price from 1,000 to 950, and you rent it out this month, now you have a full 12 months. You’re actually going to make more. You’ll make $11,400 at 950 if it’s rinsed out for the entire year.
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 I want to start today’s episode by shouting out someone by the username of RSGreen2. They left us a five-star review on Apple Podcast that says, “I tell everyone and anyone I can to listen to this podcast, especially when people ask me about where they can start. Tony and Ashley have great energy, and they keep things very tangible for listeners. Keep up the great work, Ashley, and keep laughing. Don’t let anyone tell you different. Life is too short.”
And, so, RSGreen, we appreciate you. And Ash, I got to say, I love your laugh as well. Don’t listen to the haters. Keep doing your thing. Keep living your life.
Ashley:
Well, thank you so much because it is physically impossible to stop laughing, so, here to stay. So, Tony, what’s new with you?
Tony:
We got this campground that we’re working on in West Virginia, so I’m super excited about that. And, honestly, by the time this episodes airs, I think we should hopefully have closed on it by now. But it was a deal that came to me actually on Instagram. One of my Instagram followers reached out to me. And most deals that get sent to me on Instagram are not all that good, but this one actually ended up checking out, so we’re super excited for it.
Right now, it’s got a single-family house plus a little … There’s a church on the grounds, and there’s a few RV pads, but we’re going to build out some really cool dome campsites there. So, we’re excited. It’ll be our first true commercial project and hopefully the first of many. So, just trying to do our due diligence right now and get the money lined up and take this thing down.
So, we had a failed attempt last year at our first commercial deal, so I’m hoping this one … hoping we actually make this one happen.
Ashley:
Yeah, I’m so excited for you. I got your newsletter that talked about the property the other day, and Daryl and I were reading through it. It looks so exciting and such a great opportunity.
Tony:
Yeah.
Ashley:
Okay, well, this week, we have, I think, five questions we actually go through today, five or six. And we talk about financing, getting bank financing, the differences between doing an adjustable-rate mortgage, a conventional mortgage, a second-home mortgage, lots of different things we talk about, and what are the pros and cons and what may be the best route for you, depending on your situation.
And then we go into estimating a rehab and some of the ways you can do that as a rookie investor.
Tony:
Yeah, we also talk about analyzing deals, and we talk about FSBOs and how to kind of negotiate with sellers, without your agent being present. And we also talk about renting your property out and how to not get screwed when you’re searching for tenants and make sure you’re getting the place filled. So, lots of good conversation for today.
Ashley:
We will also tell you what a FSBO is, for those of you that don’t know. So, listen for that, the [inaudible 00:03:33]-
Tony:
That don’t know.
Ashley:
Okay, so our first question today is from Ernesto, and this is in the Real Estate Rookie Facebook group. Guys, don’t forget, if you want to ask questions that we may answer on the show, you can go ahead and join the Real Estate Rookie Facebook group. Ask a question in there. Most likely, you are going to get a whole bunch of people, rookie investors and experienced investors, to answer your question before we get to it.
But to Ernesto’s question today is, “Is it possible to get a new mortgage in an LLC with 20 to 25% down? Also, what are the documents and requirements needed?”
And the answer to that is, yes, you can. That is actually typically what a commercial lender is looking for, is that 20 to 25% down. Sometimes, they may require 30% down or more. So, since this is going to be in an LLC, you are going to have to go to the commercial side of lending.
I have found one small, local bank that did allow you to get a loan on the residential side in an LLC but, most of the time, you’re going to have to go to a commercial lender, and you can do the 20 to 25% down. There are lots of different options for the commercial lending. For example, how long you’re going to amortize the loan. That will also affect your interest rate. If you’re going to do an ARM, an adjustable-rate mortgage, lots of different options on the commercial lending side.
I have not seen, on the commercial lending side, where they will let you put less than 20% down. I have seen on the residential side, where a small bank that’s going to hold the loan in-house will allow that, just because you’re buying below market value. But banks are really flexible, especially the small, local banks, where maybe that does happen where you can put less than 20% down.
Tony, have you ever seen that, where a commercial lender will put less than 20% down?
Tony:
No. Yeah, most of our debt, honestly, isn’t carried by our LLC. And the debt we do have in our LLC is from private money lenders. We’re usually going 0% down on those ones.
But I think my question to Ernesto would be, “What is your motivation, Ernesto, for getting the LLC and going after commercial debt?”
I think there’s a common misconception that you need an LLC to buy investment property or to get all the tax benefits to come along with being a real estate investor. And that’s not true. You can still claim all the deductions, even if the property’s in your personal name and even if the debt is in your personal name.
The LLC really comes if you’re worried about liability, right? Asset protection. And even still, there are ways to protect yourself from a liability perspective, without even creating the LLC.
So, I think that would be my first question, Ernesto. Because, a lot of times, you can get better debt if you’re able to get that debt in your own name.
Now, obviously, if you do go that route, a lot of times, banks are going to want to make sure you have the DTI to cover that. So, maybe if you’re going after commercial property, where they’re kind of looking at your … Gosh, why can’t I think of the name of the statement? Your personal financial statement, and they’re looking at the NOI of the property, that could be one reason.
But Ernesto, if you have the debt-to-income ratio, you have the credit scores to go out and get that debt by yourself, I might even say, it might be more beneficial to get something in your personal name.
Ashley:
And then, the second part of that question, was the documents required, and Tony touched on one of them, providing your personal financial statement, which lists your assets minus your liabilities.
So, if you own a primary residence, that would be your asset. If you have cash savings, that’d be an asset. Your liabilities would be the mortgage that’s on your primary residence, or if you have a car loan, things like that.
The next thing that you may need to supply, and these are especially if you’re going to be a personal guarantor on the loan. So, even though your LLC is getting the loan, the bank may require you, or ask of you, to be a personal guarantor, where you are signing, saying that if the LLC defaults on the loan, you are now personally liable to pay that loan. You do get a better interest rate if you do sign for that, and you may get better terms if you are a personal guarantor.
So, they may want two years of your personal tax return, if applicable, two years of your LLC tax return if it’s been open for two years, a profit and loss of the property you’re purchasing, also the rent roll of the property that you are purchasing. And then, they’ll probably run your credit too, as a personal guarantor.
They also will most likely require any partner that has more than … or has 20% or more ownership in the property too, to supply all of these things as well, such as their tax return, and to also be a personal guarantor.
I’ve never seen it, where, if somebody owns less than 20%, they require them to sign on the loan or to provide their information, but that could also possibly happen.
Okay, so let’s move on to our next question. This question is from Denise Biddinger, and this is also from the Real Estate Rookie Facebook group. “What’s the best way to structure a first-time partnership? Should we look for someone to split the cost of a mortgage, and each get a loan for the applicable half? Is that even an option? So, here’s some background on it. It’s a buy-and-hold. The property is listed at 265,000, the down payment only 20%, which is around 50,000, which, hopefully, would be funded by a partner. What other factors should I be considering? Thank you.”
So, this is something Tony and I talk about a lot. There is no right way to structure your first partnership. That is completely negotiable. You just want to make sure that it’s legal and that it’s all in writing.
So, I think Tony will be able to talk to this better on this one because, Tony, you do partner with people who bring the capital to deals and how you do your joint venture agreements.
For myself, personally, my first partnership, we did a 50-50 ownership. My partner brought the capital, but he also was the lien holder on the property. He held the mortgage, so the money we used to purchase the property, we were paying him back that money over a 15-year amortization, at 5.5% interest.
So, he was getting a monthly payment every month of principle and interest. He was also 50% owner of the property, so any equity by mortgage paid on, he was getting that advantage. He was also any appreciation into the property that was building equity. So, when we eventually sold, he got 50% of the profit. He also was getting 50% of the cash flow through the lifetime of that property that we had it.
So, Tony, do you want to go ahead and touch on the joint venture side of doing a partnership for your first deal?
Tony:
Yeah, so there’s a couple things you should look at, Denise. So, the first thing you said is, “Should we look for someone to split the cost of a mortgage, and then each get a loan for the applicable half?”
I’ve actually never seen that happen before, where you have two different partners, and each of them gets their own mortgage for their part of the property. Usually, if you’re going to do it that route, both of you would just be applying for the same mortgage.
But here’s the thing. I think, if you’re in a partnership, typically, you want the smallest amount of people on the mortgage as possible, because if one person can qualify for that loan by themselves, then it allows the next person in that partnership to get the subsequent loan. But if both of you are in that loan, now both of your DTIs are impacted. So, usually, you want the smallest number of people possible on the mortgages as you can.
But anyway, to kind of answer your question about how to structure it, there’s a few things to look at, Denise. You can look at mortgage. So, who’s going to carry the mortgage? The down payments of the capital, who’s going to bring that capital? And then, on the actual ownership of the property, you look at equity. How are we going to split ownership of this property? And then you look at profits. How will we split the actual profits of this property?
And you can tie in other things like, “Hey, is someone going to get a management fee for doing the day-to-day management of the property?” Or if someone does maintenance on the property, do you get an hourly fee for the maintenance piece? But I think those are the different levers you want to look at.
And it sounds like Denise, you’re looking for someone to bring the down payment, but it also seems like, if I’m reading this the right way, that you feel you have the ability to get approved for the loan. So, one easy way to do it would be to say, “Okay, look. I’m going to carry the mortgage. You’re going to bring the down payment capital.”
And you have to make sure that that money gets seasoned or that your lender’s okay with that person gifting that money to you. But say, you carry the mortgage. That person brings the down payment. And then you guys can say, “Hey, we’re going to split the profits down the middle 50/50. We’re going to split equity down the middle of 50/50.”
Or your partner could say, “Hey, since I brought the 50K, I want to make sure that whenever we sell the property, I get my 50K back first, and then we split whatever’s left over.”
So, there are a million different ways to kind of skin the cat here, Denise, but I think those are the things you want to look at, is your mortgage, your down payment, your equity, and your profits.
Ashley:
Okay, our next question is from Trevor Manning. He says, “Hi, Rookies. I’m going to start analyzing deals. I was wondering if there is a rough rule of thumb for estimating rehab costs, like an estimate per square foot, moderate, heavy rehab. It doesn’t have to be super accurate. I just want to get my hands dirty with practicing my analyzing. Have a great weekend.”
Okay, so this is such a hard thing, as a rookie starting out, is estimating the rehab. And even still, I struggle with it, as to there’s so many variables that come into play to get the perfect budget, the perfect estimate.
When I first started out doing full, heavy rehabs, I took on a partner who knew how to do construction, and that’s how I learned to do my estimates.
The first thing I would do is to look into the book Estimating Rehab Costs by J. Scott. It’s available on the BiggerPockets bookstore. And it’s not going to be able to tell you, “Okay, in your market, in your area, a painter is going to charge you $2.50 per square foot,” but it’s going to lay out everything. You should be getting quotes for, everything you should be estimating that you might be missing.
Another way to kind of look at it is, and this is very time-consuming, but once you do it one time, you can constantly reuse it for other properties, is build out your own kind of template, so you can at least get a very good idea of what the material cost will be.
So, you’re looking at a property. You’re looking at the listing online, or maybe you go to do an actual showing. Take tons of photos and videos of the property. Then, sit down and go, room by room.
Okay, so I always use the bathroom as an example. You’re looking at the bathroom. You want to rip the bathroom out and redo it. Okay. For the shower, maybe you know want to put in tile. You want to tile the whole shower. Okay, will they make a Schluter tile system. Okay? You can go and look at the price at Lowe’s, Home Depot, or whatever hardware store you use. Pull up the cost of that. You are going to link that to your spreadsheet.
Then, you are going to find a YouTube video that talks about what it takes to build out a tile shower. And you are going to say, “Okay, I need the grout. I need the tile. I need the thinset. I’ll need these other things. I’ll need the faucet. I’ll need the handle. I’ll need whatever else is in that video.” Make a list and build out that kind of worksheet, that template, and then go online to the hardware store and pull those things.
Okay, so a toilet, you’re going to need a wax seal to go with the toilet. You can google all this on YouTube. Put those things in there. Even if you don’t use that exact same toilet that you linked, it’s still going to give you a pretty good estimate of what your budget is going to need to be.
If you don’t know what toilet to pick, go ahead and pick one on the higher end, and if you end up getting one that’s cheaper, and it’s going to work just as well, then great. You just saved yourself 25, $30 right there. So, always overestimate. Go for the higher-priced item. You don’t want to blow your budget way out of the water by picking $10 per-square-foot tile if you’re just doing a rental property, where you could get away with $2 or $3 per-square-foot tile. It’s time-consuming, but I think that is a great way to kind of get an understanding of what materials cost.
And then, for as far as labor, call around and ask contractors, “What do you charge to install a toilet?” Ask other investors. James Dainard, we had him on. I’m sure Tony already has his episode numbers teed up, as to what episode that was. But he did this heavy, deep dive. And he has a template, where he knows that his painter charges X amount per square foot. So, when he’s estimating a rehab, he already knows, “Okay, this is a 2100 square-foot property. I’m going to times that by the $2.50 cents my painter, and that’s how much I should be charged for … That’s my estimate for the painting on the property.”
And the same for installing tile and all these different things, or even drywall. So, calling and kind of getting an idea. Of course, no contractor’s going to be able to tell you over the phone, “This is how much it would cost just for this,” but just an idea or a range can really help you kind of figure out.
And then, for kitchens too, call kitchen cabinet places that do the design and ask if they can give you a low-end model or low-end cabinetry, what the price point runs on that. If it’s 500 square-foot kitchen, things like that.
This is going to be time-consuming, but going around and visiting those different places, making the phone calls, looking things up online, it’s going to be worth it, if you really do want to have a more accurate estimate. And if that’s the one thing that’s holding you back from getting started, then it’s definitely worth the time doing this kind of research.
Tony:
Yeah, it’s a great breakdown, Ash. And, of course, I’ve got James’s episode teed up, so that was Episode 165 for Part One, and I think Part Two is 167, if I’m not mistaken, or 166, one of those ones.
So, Trevor, in addition to everything that Ashley said, I’ll just kind of share what my journey was when I was first starting out and what I did to try and estimate my rehab costs. And once I found my subject property, a property that I was looking at purchasing, I looked for other comps in that area that had recently sold, and I identified the comps that I liked, the ones that I was trying to emulate.
And I did two things, really. First, I went out, and I found another contractor and said, “Hey, here’s what I’m looking to turn this house into. Here’s what I’m looking to transform it into. Can you give me an example of projects you’ve recently done that looked like this?”
And this contractor said, “Yeah, here’s one or two properties that I did, that are similar to what you’re trying to do.”
And I said, “Okay, what was the cost for that property?”
And he told me, “Hey, it was, whatever, $70,000 to do that rehab.”
And then, that kind of gave me a ballpark, if I want to do a level of rehab, it’s going to cost me around 60 to $70,000 to do that.
And the other thing I did was I gave him photos of what the property looks like today, the current state of that property, and I showed him those comps that I was looking at, and said, “Hey, to get a property like this, to look like this, what do you think it would cost me?”
And he said, “Okay, it’s going to cost you around this much.”
So, now, I’ve got these concrete numbers of what he charged his previous clients to do these rehabs, and I’ve now got this ballpark of what he’s going to charge me to take this property that I’m looking at and turn it into something new. And with those, it gave me a pretty decent ballpark on what I would be spending to kind of get the level of rehab that I was looking for.
So, I think, Trevor, talking to other investors in your market and asking them what they’re spending on a price per-square-foot is super important. And then, also, just going to the folks that are going to be doing the work and getting their opinion.
It is incredibly difficult, Trevor, for me or Ashley to say, “Hey, use this price per-square-foot in your market,” because it’s what Ashley spends in Buffalo is going to be very different than what I spend in Southern California, and it’s going to be very different than what you spend in whatever city or state you’re in. So, you do have to kind of get localized information to make your best guess.
Ashley:
Yeah, the last thing I would add on to that too is, even when you’re just in Lowe’s, if you keep an eye out, they usually have signs saying like, “We will install your flooring. We’ll install your bathtub.” Find out what their pricing is on that. And a lot of times, they actually do provide free quotes too, where they will send someone out. But sometimes, they will say, “We have a special going on. Our rate is usually $5 per square foot to install flooring, the luxury vinyl plank, but for this week only, we’re doing it for X amount.”
But you can at least see how their pricing kind of varies, and you can use that, too as kind of a starting point as to what the prices are.
Tony:
Ash, I’m just curious, have you ever not used LVP in your properties? Have you ever done, I don’t know, tile, actual tile, in your properties or, I don’t know, what’s the old linoleum type, or do you always go LVP?
Ashley:
Recently, always LVP. I’ve done tile showers and tile in bathrooms. I don’t think ever tile in a kitchen before for a rental property, but I’ve definitely done the tile shower, the tile in the bathroom floor, and then luxury vinyl plank throughout. I, actually, in one unit right now, that I just did a big turnover, and when we ripped up the carpets from when I bought it, we were going to put the LVP down, but it actually had hardwood floors. And it was cheaper to refinish the hardwoods, than it was to rip the carpet out or to put LVP into that unit.
And then, the A-Frame, the short-term rental, we did do tile in that bathroom and the shower too, but that was the rest was all LVP in there. Yeah.
And then, in the apartment complexes that I asset-manage for, we do linoleum in the kitchen, in the bathroom, but we’re slowly changing that into LVP, as people move out and just keeping it consistent the whole way through.
Tony:
Yeah, same for us. We tile all of our bathrooms, the bathroom floors, the shower floor, the shower walls, we always tile those. We have patios in most of our backyards. We will tile the outside with some nice tile as well. And then, everything else is a really nice LVP also. I’m just curious because one of my friends, this is in primary residence, and instead of doing LVP, he just tiled the entire inside of his house. And it almost looked like LVP, but it was tile. And he told me that they were thinking about doing LVP, but it ended up being cheaper to do that tile. So, I was just curious if you ever tried anything like that before.
Ashley:
Yeah, actually, in this property that I’m in right now, I wish … There’s the whole stacking. You can kind of see it, the whole pallet of flooring right there, and it’s LVP, but I wish that I would’ve done tile in this one throughout.
My aunt and uncle did that. They actually ripped up all of their hardwoods in their house and put tile that looks like wood on it, just because of the durability. Their dogs were scratching up the hardwoods.
My house that I built, we did tile in the kitchen and the bathrooms and the laundry room, but the rest … in the mudroom, but then the rest is all the hardwoods. I hate it so much. The first couple years living in that house, I would cringe every time a toy dropped onto the floor or whatever. Now, there’s dings and scratches and everything throughout it, but it’s also LVP, I think, is a lot easier to keep clean too, but also a lot more durable than the hardwoods too. So, I just don’t care for hardwoods anymore.
Tony:
Yeah.
Ashley:
Okay. So, our next question is from Jordan Alexander, and it is, “Would you go with a conventional second home mortgage at 10% down, with long-term fixed, or start an in-house portfolio relationship with a lender at 15% down, 5% interest, and a 20-year amortization?”
Okay, so, my opinion on that is, what is your why, first of all? Are you going for cash flow? Are you going for appreciation? Are you going to build this huge portfolio, where you think that doing this one loan differently with the lender is going to give you years of great business with them?
I think run the numbers and what’s going to give you the better cash flow. If you can get both of those, look at five years down the road, where you’re getting the better return on those things.
Doing the in-house portfolio loan, if you work with that lender to do the portfolio loan, or you work with them to do the second home mortgage, you’re still going to be establishing a relationship by working with that loan officer, no matter what type of loan product you are doing.
So, in my opinion, I would recommend doing the 10% down and getting that 30-year fixed mortgage on that, with a lower interest rate. The 5% interest for the second one that you mentioned with the 20-year amortization and putting a little bit more down, maybe that is a lower interest rate right now. I’m not sure when this post was done or what it would be for the second home mortgage, but 5% interest doesn’t sound that bad for me now.
I’m doing … helping my business partner. He’s doing a loan right now on a primary residence. And when I was filling out some of his paperwork, it was 5.125% that he was getting, but it’s a 7/1 ARM, so it’s only fixed for seven years, and then he’ll go and refinance it, depending when … what rates are, or probably just pay it off.
But Tony, what do you think about that? And also, Tony, I have another question for you too, are you … And I heard this. This was a rumor that was swirling around, and I keep forgetting to ask you if it’s true, are banks getting more strict on lending the second home mortgage, that the 10% down is going away?
Tony:
Yeah, it’s a great call-out, Ash. What I was going to mention is, as I talked about Jordan’s question here, is that banks aren’t necessarily getting away from the second home mortgage, but they are becoming more expensive. So, they’re still 10% down, but a lot of banks are now adding additional points, on top of the 10% down payment, that almost makes it less desirable for people.
So, we haven’t closed on a 10% down second home loan in a while, and we’ve been going with 15% down investor loans because, when we add up the total cost of the debt, it’s actually been cheaper to go with a 15% down loan with no points, versus a 10% down with all the added points and fees.
So, I think I would answer Jordan’s question in a very similar way, Ashley, where it’s like, “Jordan, you got to look at the total cost of the debt and understand, between the second home mortgage and that portfolio loan, which one’s going to allow you to achieve better returns and better cash flow long-term?”
Like Ash said, I mean, 5%, if that’s today’s rates, that’s pretty good. So, I might be interested in doing that. You didn’t mention what the term was for that, so I don’t know if that’s a three-year term, a five-year term, but 5% does seem pretty solid. But yeah, I would definitely just run the numbers and try and figure out which one makes the most sense.
So, just before we close this one out, I just want to talk about what points are and how it adds to your closing costs. So, one point is essentially 1% of your mortgage amount. So, if I had $100 of mortgage, one point would be 1%, which is $1.
So, as you add these additional points, it really can start to add up, especially if you’re buying a house for 300,000, 400,000, 500,000, $800,000, one point can make a pretty big difference in what your down payment cost is.
So, you want to make sure that you understand, not just the down payment percentage, but also the additional points and fees that are being added onto that, because when you close on that property, it’s the down payment, plus all the closing costs, which includes those fees and points.
Ashley:
I’ve seen banks doing a lot of options for people, is that they’ll offer, if you pay points, you get an interest rate buydown. So, say, for example, your interest rate is 6%, if you pay one point, they’ll knock it down to 5.8% or something like that.
So, what you have to do in those scenarios, is you have to look at, “Okay, how much more money am I going to have to put down?” So, one point, say it’s a $300,000 property, that’s $3,000 added to your closing cost, but let’s look at over how much interest are you saving by having that interest rate knocked down a little bit and is it worth it?
Also, look at your monthly payment too. How much extra cash flow will you actually have and how long until you can get that $3,000 back, that you put up, up front? Or is it worth it taking higher interest rate and not having to put more money into the deal upfront too?
So, just a couple things to think about, as lenders are trying to get creative to attract people when those interest rates are higher by offering those point paydowns. So, just make sure you’re understanding if it really is a better option for you or not. And I’ve seen it up to three points, where you can pay 3%, to get your interest rate knocked down a little bit.
Tony:
Yeah, just really quick, Ash, before we go to the next one. I know we’ve talked about NACA before. And I recently had a guest on that used NACA as well. And NACA’s like a loan program, that helps people buy properties. And they’re really good at allowing you to buy down your interest rate as well. And when interest rates were super low, I know some people that were getting NACA loans below 1%, which is crazy to think about. That’s literally almost free money.
So, yeah, if you are able to buydown your rates, it can be beneficial in the right environment.
Ashley:
Okay, our next question is from Preston Wallace. “Listed my first rental about two weeks ago. I have had a few people reach out about applying, but never complete the process. I am using a property manager, as I have moved a little over an hour away. At what point do you all consider reducing the ask on the monthly rent? I did a fair amount of research in the area and even priced rent about $50 lower than a few comparables in the neighborhood that rents it out in January. I can afford to pay the mortgage without the rent, but at the same time, I don’t want to have it vacant for much longer.”
So, the first thing I would look at is to the property management company or your property manager. What are the things that they are doing to market your property? If you search your property, or you search, say, the properties in Buffalo. Apartments for rent, Buffalo, New York. Two-bedroom apartment in Buffalo, New York, or whatever the city is that your property is in.
Where do you see the listing? Is it in multiple places? Is it being blasted out to 10 different places? Is there a sign in the front of the yard? So, that’s the first piece I would look at, is the actual marketing of the unit.
And then, I would take your property manager’s advice. They’re the expert, supposed to be the expert, in that market, and get their opinion as to, “Okay, this is listed, what I thought was below $50 before comparables in the area. In your experience, what do you think is the difference between my unit and these other units?” So, maybe these other units have a washer and dryer, and yours doesn’t. And that’s actually becoming more of a big deal than it isn’t. And then, see if there’s an opportunity, for whatever you are missing, to add that into it.
So, maybe these other properties allow pets, and you don’t allow pets. Okay, maybe do reconsider and allow a pet and charge a pet fee upon move-in? Things like that.
So, that’s what I would kind of do some research, before you actually go in and decrease the rent any further than what you have.
Tony:
Yeah, I think the only other thing I’d ask that, Preston, is that you should also look at the numbers and use that to help you kind of make a determination because, say that we look over the next year, over the next 12 months, and say that you’re trying to get a 1,000 bucks for your place right now, but because you tried to get $1,000, your place sits vacant for the next two months. Right? Over the course of that year, you have two months that are empty. So, you’re going to make $1,000 over 10 months, which is $10,000. Say that you dropped the price from 1,000 to 950, and you rent it out this month, now you have a full 12 months, you’re actually going to make more. You’ll make $11,400 at 950 if it’s rented out for the entire year.
And, so, I didn’t even include the fact that you have to pay the mortgage yourself for those two months of the property sitting vacant. So, sometimes, you can make more money by reducing your rent. So, I think just take that into consideration as well, where sometimes real estate investors get so fixated on the monthly amount, they don’t realize the impact that it’s having on vacancy, which is the biggest expense for us, as real estate investors.
Ashley:
And the last thing to add onto that, that’s great advice, Tony, the one thing to be careful with that is don’t … You want to fill that unit. Don’t just take on the first person that applies for your unit and risk getting a bad tenant in. The one time it is good to wait and have that little bit longer vacancy is waiting for a good tenant, and not just settling because you want to get it rented super quick. And then, the people end up trashing the house, and you saw all the red flags, but you just wanted to get it rented. So, that would be my one cautionary tale.
Okay, our last question today on Rookie Reply is from Samuel Hall. “A FSBO, which is For Sale By Owner, has agreed to move forward with my offer. However, they want me to provide comps, comparables, to them. How would you handle this?”
Well, I think this is a great situation for you to control, Samuel. They want you to provide the comps, instead of them going out and finding their own comps. So, I think you can definitely use this to your advantage. So, go onto the MLS, Zillow, realtor.com or whatever, and I would look at comparable properties that have sold in that area, not what things are listed at, because just because they’re listed at something, does not mean they’re actually going to sell for that.
I would also go to propstream.com. They have a free seven-day trial, so just use it for the seven days, and you can cancel it or you can keep it if you love it. But you’ll also be able to pull comparables from there too, by putting in the address, and there’s a little button you push to look at comps in the area.
So, you’re going to compare bedroom count, bathroom count, but also square footage, and then finishes of the property. If you find a property that’s $400,000, but it fits every check box, but it has all these high-end finishes, where yours is still designed in the ’60s, that’s not going to be a good comparable, or you’re going to have to adjust your comparable by showing this house has an extra $100,000 of upgrades in it that this person’s house doesn’t have.
The place that I would be cautious about that is this person probably has this sentimental value to their property, so try not to bash their property by saying, “Oh, these comparables are way better than yours. That’s why I am looking at something different.”
So, even look at, see if you can find a property that is worse than theirs, or level as there’s, and it sold for actually what you are going to pay for it. But I think you do have an advantage by picking and choosing what comps you use, to make your offer look more favorable.
Tony:
Yeah, I think the only thing I’d add to that is, also include, Samuel, and I’m making an assumption here that there’s some work to be done, but I would also include what you predict your rehab budget to be. So, you can go to the seller and say, “Look, I’m buying this property from you for X, but I also need to invest another 10, 20, 50, $100,000 to make this property even livable for the next person. So, I’m taking on all of the work that you don’t want to do.”
And the last thing you can tell the seller is like, “Look, Mr. And Mrs. Seller, I’m going to buy the property completely as is. You literally don’t have to lift a finger. If you want to just leave all the trash here, leave the trash air. If you want to do … Don’t touch anything, I’ll take care of everything. But just know I also have to put a little bit of work into it myself.”
We’ve used that tactic a couple times with some off-market deals we’ve purchased, and it’s been helpful to say, “Look, we get that you have the sentimental value, but for us, it also is a business for us as well, and here’s what we’re going to have to spend to make this worthwhile.”
So, I found that to be helpful when you’re negotiating with folks also.
Ashley:
Yeah, that’s really good advice. So, the more information you can provide as to … that’s going to be to your benefit, the better.
Well, thank you, guys, so much for joining us for this week’s Rookie Reply. If you guys are watching this on YouTube, make sure you are subscribed to the channel, and you like this video for us, and leave a comment below, as to what question and answer you found the most valuable this week. And don’t forget to leave us a review if you are listening on your favorite podcast platform.
Thank you, guys so much. I’m Ashley @wealthfromrentals, and he is Tony @tonyjrobinson, and we’ll be back on Wednesday with a guest.
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HUD raises Housing Choice Voucher funding to $30 billion for 2023
The U.S. Department of Housing and Urban Development (HUD) this week announced that it is allotting $30.3 billion for the Housing Choice Voucher (HCV) Program for 2023. The increase marks a 10.5% increase to the program’s 2022 funding levels, according to an announcement from HUD.
“This historic, $2.9 billion increase over the prior year will help Public Housing Authorities (PHAs) address recent inflation in rents and enable more low-income families to use housing vouchers to afford a safe, decent place to call home,” HUD said.
Last week, HUD awarded $27 billion of the $30.3 billion total to PHAs in an effort to renew assistance for 2.3 million low-income households currently making use of the program. More than half of current users are made up by seniors and people with disabilities, while the rest are made up of working families with children according to the department.
79,000 of the current beneficiaries are also formerly-homeless military veterans, while additional funding has been allocated for tenant assistance in public or low-income housing that is nearing demolition or retirement from service ($337 million), and a 15% budget increase to cover PHA administrative expenses ($2.8 billion).
“We know there is a housing affordability crisis, and this funding will help people who are struggling to find a place they can afford to live, including people experiencing homelessness,” said HUD Secretary Marcia Fudge in a statement. “With the awarding of these funds for housing choice vouchers — which represents HUD’s single largest investment in affordable housing — public housing agencies throughout the country have flexible resources to offer more housing options so that no one is ever denied housing because they are unable to pay the monthly rent.”
Secretary Fudge announced the new funding levels on Thursday during an appearance in Toledo, Ohio at an event highlighting the use cases and potential assistance of the HCV program for qualifying beneficiaries.
In its notice of increased funding, HUD also said that it has made additional materials available for landlords by creating specialized engagement tools including informational sheets, guidebooks, information about landlord-focused events and FAQ documents.
It has also made HCV utilization tools available that include additional information such as projection tools, training videos and monthly summaries of the program.
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Profits up, production volume down for Wells Fargo, JP Morgan in Q1 23
Wells Fargo and JP Morgan Chase, the country’s top depository lenders, saw mortgage production volume further decline in the first three months of 2023, signaling another tough quarter for the mortgage industry.
Wells Fargo, the fourth-largest U.S. mortgage lender by volume, originated $6.6 billion in mortgages in the first quarter of 2023, which was down 55% quarter over quarter and 83% compared to $37.9 billion in Q1 2022. Refinance increased to 16% of the portfolio in Q1 2023 compared to 13% in Q4 2022 — but still lower than the 56% from Q1 2022.
The drop in production volume was widely anticipated, as Wells Fargo announced its plan to exit correspondent lending and shrink its retail mortgage business footprint earlier this year.
About $5.6 billion in origination came from the retail channel in the first quarter, down 32% from the previous quarter’s $8.2 billion. Production volume in the retail channel dropped 77% from $24.1 billion during the same period in 2022.
In January, Wells Fargo halted its acceptance of applications from the correspondent channel. In turn, production volume in the correspondent channel dropped to $1 billion in Q1 2023, down from $6.4 billion in Q4 2022 and $13.8 billion in Q1 2022.
“Our strategy includes broadening our existing investment from the Special Purpose credit program to include purchase loans, investing an additional 100 million dollars to advance racial equity and homeownership and deploying additional home mortgage consultants in local minority,” Mike Santomassimo, Wells Fargo chief financial officer, reiterated to analyst in its earnings call on Friday.
JP Morgan, the fifth-largest mortgage lender in the country, reported origination volume of $5.7 billion in Q1 2023, a 15% decline from the previous quarter’s $6.7 billion — and a 77% drop from $24.7 billion in Q4 2021.
JP Morgan Chase has also been reducing its footprint in the correspondent channel, which it uses to fund a high volume of jumbo mortgages. While origination in the correspondent channel was unchanged from Q4 2022 to the first quarter of 2023 at $2.1 billion, it was down 78% from the $9.6 billion in Q1 2022.
Bank’s home lending struggles
While JP Morgan Chase’s home lending net revenue rose 23% quarter over quarter to post $720 million in Q1 2023, it was down 38% from $1.17 billion in the same quarter in 2021.
“Home lending revenue was down 38% year on year. largely driven by lower net interest income from tighter loan spreads and lower production revenue,” Jeremy Barnum, CFO of JP Morgan Chase & Co., told analysts on Friday.
Wells Fargo reported $863 million in revenue from its home lending business in Q1 2023. That’s up 10% from $786 million in the fourth quarter, but down 42% from $1.49 billion in Q1 2022.
“Our home lending revenue declined 42% from a year ago, driven by lower mortgage originations including a significant decline from the correspondence channel and lower revenue from the resecuritization of loans purchased from securitization pools,” Charlie Scharf, CEO and president of Wells Fargo, told analysts.
The bank, which reduced headcount in the first quarter, expects staffing levels to continue to decline due to the strategic changes announced in January, Scharf added.
Wells Fargo’s mortgage banking noninterest income came in at $232 million in Q1 2023, a jump from $79 million in the previous quarter and a decline from $693 million in the same period of 2022.
With the drop in originations, Wells Fargo’s mortgage servicing rights (MSR) – carrying value (period-end) – decreased by 5%, falling to $8.82 billion in Q1 2023 from the previous quarter’s $9.3 billion. Compared with Q1 2022, MSR value rose by 5% from $8.5 billion. The net servicing income declined 11% quarter over quarter to $84 million and was down 28% year over year.
JP Morgan’s mortgage servicing rights also dropped to $7.7 billion in Q1 2023 from $8 billion in Q4 2022 — but were up from $7.3 billion in Q1 2022. The net mortgage servicing revenues rose to $148 million in Q1 2023, up from $47 million in Q4 2022 but down from $245 million in Q1 2022.
Overall bumper profits for both banks
Overall, Wells Fargo and JP Morgan reported bumper profits in the first quarter amid the failures of smaller banks.
The banks’ earnings were lifted by higher interest rates and reflected consumer perceptions that larger institutions are more stable after the recent collapse of Silicon Valley Bank and Signature Bank.
Wells Fargo’s profit rose 58% to $5 billion quarter over quarter and jumped 32% from a year ago.
Rising interest rates bolstered Wells Fargo’s earnings as loan portfolio grew — led by gains in personal lending and higher credit card balances.
JP Morgan saw profit rise 15% to $12.6 billion quarter over quarter. The country’s largest bank reported an increased profit of 52% compared to a year ago.
The bank saw a 2% increase in total deposits, climbing to $2.38 trillion in the first quarter. That’s a 7% decrease from $2.56 trillion from a year ago.
“We had a rough spell in March, but things are looking better now,” Barnum said.
“The banking situation is distinct from 2008 as it has involved far fewer financial players and fewer issues that need to be resolved. But financial conditions will likely tighten as lenders become more conservative, and we do not know if this will slow consumer spending,” Jamie Dimon, chairman and CEO, said in a statement.
“We are going to eventually have a recession, but that may be pushed off a bit,” he said.
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Touchless Lending by Tavant leverages AI to deliver a customer-centric mortgage experience
To address the challenges and inefficiencies in the traditional lending process, Tavant has developed the Touchless Lending platform, which leverages advanced technologies like artificial intelligence, machine learning, data analytics and cloud computing. Through Touchless Lending, the company aims to deliver a seamless and personalized borrowing experience while improving operational efficiency and compliance.
Touchless Lending is an AI-powered lending-as-a-service platform that delivers customer-centric mortgage experiences across all channels. Its machine-oriented, optimized workflows engage with borrower and property data to improve decision-making, making better decisions faster instead of relying on physical documentation and manual data entry. Touchless Lending automates the loan production process, which allows lenders to originate mortgages more quickly while reducing costs and repurchasing risks.
The Touchless Lending platform offers lenders a flexible, collaborative, and efficient solution throughout the loan process. It provides an integrated ecosystem with more than 120 data partners, giving lenders the flexibility to choose their business partners and streamline the loan manufacturing process.
Additionally, Touchless Lending provides custom configurations and automates loan manufacturing with document analysis, decision analysis, income analysis, credit analysis, collateral analysis, title and fraud analysis. There are also value-added capabilities around data, AI/ML, Salesforce, DevOps and cloud computing, which enable digital transformation and competitive differentiation for lenders.
The platform’s multi-OCR (optical character recognition) strategy allows for a conversion of document to data that is unmatched in the current marketplace. This comparison and validation of data across various trusted sources provide focused direction for an underwriter that will result in less time spent on each file. This gives lenders a return on investment for not just efficiency but effectiveness.
The flexibility, automation and collaboration provided by Touchless Lending are critical in a highly volatile and competitive market. Lenders using Touchless Lending can differentiate themselves by offering a more personalized and efficient experience to borrowers, while reducing origination costs and risk.
Users also appreciate its collaborative and mobile-native experience, including add-ons such as chat, co-browse and audio/video collaboration, which increase the seamlessness and transparency of the borrowing process. Tavant also enables lenders personalization options, such as the ability to configure the platform with their brand, customer persona and business model.
Ultimately, Touchless Lending offers a comprehensive and integrated solution that can address the challenges and opportunities in the lending space.
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Mortgage app volume climbs on heels of recent rate drop
Mortgage rates tumbled downward by nearly 1% last week on the heels of a lackluster jobs report, which helped to spur renewed interest in mortgage loans by potential homebuyers. The uptick in mortgage applications was a welcome change for the struggling housing market, which has been plagued by affordability issues that have kept many would-be buyers on the sidelines.
Overall, mortgage applications increased last week by 5.3% on a seasonally adjusted basis compared to one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. The survey, which has been conducted weekly since 1990, covers over 75% of all U.S. retail residential mortgage applications.
Purchase applications accounted for the majority of the uptick last week, with a seasonally adjusted increase of 8% compared to the week prior.
“Incoming data last week showed that the job market is beginning to slow, which led to the 30-year fixed rate decreasing to 6.30% – the lowest level in two months,” said Mike Fratantoni, MBA’s SVP and chief economist. “Prospective homebuyers this year have been quite sensitive to any drop in mortgage rates, and that played out last week with purchase applications increasing by 8%.”
There was increased demand for government loans in particular, with the Federal Housing Administration (FHA) share of total purchase applications increasing to 12.3% from 12% the week prior. The share of Department of Veterans Affairs (VA) purchase loans also saw an uptick, climbing to 12.8% from 11% week over week.
The U.S. Department of Agriculture’s (USDA) share of total applications saw a slight downturn, however, decreasing to 0.5% from 0.6% the week prior.
Refi app volume a “mixed bag”
On the other hand, refinancing application volume was a “mixed bag” last week, according to the MBA. While total refi app volume was relatively flat, conventional volume declined last week — and the VA refi volume increased.
In addition, the adjustable-rate mortgage (ARM) share of activity decreased to 6% of total applications.
“Refinance application volume was a mixed bag with total volume essentially flat, conventional volume down for the week, but VA refinance volume increasing,” Fratantoni said. “The level of refinance activity remains almost 60 percent below last year, as most homeowners are currently locked in at much lower rates,” Fratantoni said.
This trend has been an ongoing issue for the housing market, as homeowners are hesitant to sell their homes and give up their current 2-3% interest rates. In turn, housing inventory has dwindled month after month — furthering affordability issues and causing the spring buying season to miss its expected burst.
The MBA shows the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.3% from 6.4% last week. Rates on jumbo loan balances (greater than $726,200) decreased to 6.26% from 6.36% on a weekly basis.
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New data reveals changing borrower preferences
The current housing market is hard to describe, hard to predict and hard to navigate for borrowers, renters and lenders alike.
The latest numbers are mixed. New data released in late March 2023 shows that US home prices — as measured by the seasonally adjusted Case-Shiller Home Price Index — fell for the seventh straight month in January. They are now 3% off their peak on a seasonally adjusted basis. But they are still up 37% from three years ago. Federal Housing Finance Authority data showed home prices up 0.2% from December to January, and up 5.3% in the course of 2022.
For mortgage lenders, all this boils down to one set of questions: What will borrowers do in 2023? Will they stay in place, or take advantage of falling rates and prices to relocate? Or will they look at falling rates as an opportunity to refinance?
And, most important of all: What can you do for them — to meet their current needs and to create long-lasting relationships?
Through our 2023 Borrower Insights Survey, we sought to find answers to these questions and provide insights that our customers can use to both win more business and stay ahead of their competition.
At the heart of the data: What consumers want and need
The survey results allowed us to examine borrowers’ priorities and preferences. We found that today’s borrowers want:
Steps you can take to create lasting relationships
Now that you have this information, what should you do with it? Here are five key steps lenders should consider taking to be more successful both in current and future market conditions:
In the mortgage industry, we can always count on change. Five years ago, no one was anticipating a global pandemic, inflation or an interest rate surge. The home lending marketplace will be different again in five years’ time or sooner. By leveraging the right technology and maintaining a human touch throughout the borrower experience, you can ensure that, in an unpredictable future, a steady and growing stream of business finds its way to your door.
To access more valuable findings from the survey, download our free “What Borrowers Want” eBook available now.
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LendingPulse Q2 2023 survey: Mortgage pros share their biggest concerns, market outlook
With the mortgage industry still rightsizing, mortgage professionals are worried about regulation of the industry and inflation that thins already tiny margins. Industry players are largely pessimistic about the economic climate and expect interest rates to trend up in the near term future, according to the HousingWire Q2 2023 LenderPulse survey.
Roughly 30% of 155 respondents of the LenderPulse survey pointed to increased regulation, rising interest rates and inflation as the biggest challenge they face in the next three months, out of a total of 11 options that included lender stability, underwriting problems and competitiveness of product offerings.
About 19.4% of the surveyed mortgage professionals said loans falling through was the biggest challenge, ranking as the second most challenging factor. Lead generation ranked as the third biggest hurdle at 15.5% and staying motivated trailed at the fourth place at 14.2%.
Other challenges selected by mortgage professionals were relationships with real estate agents at 8.4%; competitiveness of rate sheet and underwriting problems at 5.8%; lender stability at 3.9%; competitiveness of product offerings at 1.9%. None of the surveyed mortgage professionals said staff cuts caused decreased ability to close loans and lack of training were the challenges they faced.
LenderPulse requests surveys from 24,000 mortgage professionals across the country on market trends and lender opportunities and challenges. Of the 155 completed surveys, 32.3% of the respondents were from the Southwest, 21.3% from the Midwest, 16.8% from the Northeast, and 14.8% of the respondents from the Northwest and Southeast. RealTrends LenderPulse is a forward-looking quarterly survey. The survey was conducted from February 27 to April 3.
Economic and Housing Market Outlook
Amid the Federal Reserve‘s efforts to tame inflation, 44.5% of surveyed mortgage professionals expressed pessimism about the economy in the next three months. Of the total, 36.1% were neutral and 19.4% were optimistic.
Mortgage professionals’ pessimism about the economy in the near term stemmed from expectations of interest rates trending higher.
About 47.1% of the respondents said rates will likely go up in the next three months, 30.1% of the survey participants said rates will remain flat while 22% said rates will trend down.
A total of 45% of participants said home sales in their markets will remain flat for the next three months; 30.3% said sales will go up more than 5%; and 25.2% expected sales to go down more than 5%
In the latest report from the National Association of Realtors (NAR), existing home sales rose 14.5% in February month over month for the first time after 12 months of decline.
Incentives in the Market
In a higher-rate environment, temporary rate buydowns funded by sellers, lenders or builders were widely offered as an incentive for buyers.
The majority of the 155 respondents – about 70% of the total – noted temporary rate buydowns funded by the seller, builder or lender are offered as incentives to buyers.
“Sellers are entertaining offers with rate buydowns and concessions to keep this market going but also to sell their property,” a loan originator in California said.
In a high-rate environment, lenders call the temporary rate buydown a win-win strategy for both sellers and buyers when used appropriately.
For example, a 2-1 buydown can be paid for by the homebuyer or the home seller can pay for it as a seller concession. That payment can be made in the form of mortgage points or a lump sum deposited in an escrow account with the lender and used to subsidize the borrower’s reduced monthly payments.
“As it pertains to buydowns and or seller funded buydowns, in my opinion and from my perspective I feel this product is really only viable and something that makes sense for a borrower if the buydown is seller or builder funded,” an operations manager based in California said. “It is essentially free money that would be credited back to the borrower should they pay the loan off within the buy down structure (1/0, 2/1, or 3/2/1).”
Seller credit for closing costs, price reductions waiving of fees, and adjustable-rate mortgages (ARMs) were also mentioned by mortgage professionals as incentives offered in the market.
“The 2/1 buydowns were working great, but now the market has tightened with a lack of supply of homes on the market, so a lot of the sellers quit offering this or accepting this,” a mortgage broker in Arizona said.
“Borrowers opt for ARMs more often than a fixed rate for a more competitive rate. Many are curious about buydowns but we are currently operating in what is still a seller’s market so not seeing many seller-funded buydowns,” a loan officer in Boston noted.
Pivot to a purchase mortgage market
In a purchase mortgage-focused market, getting referrals from real estate agents is key to landing business.
Keeping in contact with Realtors periodically, forming new relationships at open houses and setting up in-person meetings were how mortgage professionals strengthened relationships with realtors, according to the submitted written responses.
“Volunteering with our local Board of Realtors, on three (3) committees; Education, Banking & Finance and Membership Engagement. Looking to form relationships that I can turn into referrals down the road once they realize how organized I am, how smart I am and that I am a relationship lender in a local community bank!” a loan officer in Washington noted.
Sharing leads and sending out newsletters are ways loan officers try to get themselves to stand out in a highly competitive industry.
“Actively engaging with them, monthly lending newsletter, training opportunities [is how we strengthen relationships with Realtors],” an executive at a regional bank in Michigan said in a written response.
“Our goal is to strengthen our Realtor partners relative to their competitors. To do this, we’re holding skills and knowledge classes and meeting face to face to share best practices,” a loan officer located in Texas said.
If you have questions about LendingPulse email RealTrends Editorial Director Tracey Velt at tracey@hwmedia.com. Also, be sure to sign up for the new Data Digest newsletter, a weekly breakdown of news, tips and strategies for success.
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