The U.S. Department of Housing and Urban Development (HUD) announced several new relief provisions on Wednesday that are designed to assist Arkansa homeowners that were impacted by the tornadoes that swept through the region at the end of March.

Relief provisions are available immediately, including a 90-day moratorium on foreclosures for homeowners with mortgages insured by the Federal Housing Administration (FHA), as well as mortgages to Native American borrowers guaranteed under the Section 184 Indian Home Loan Guarantee program.

A 90-day extension period is also automatically granted to impacted borrowers of the FHA-insured Home Equity Conversion Mortgage (HECM) program, which is designed for people at or over the age of 62 who have accessed their equity while remaining in their homes.

“HUD is committed to assisting people in Arkansas rebuild after these devastating storms,” said HUD Secretary Marcia Fudge in a statement. “Today’s announcement builds on unprecedented aid from the Biden-Harris Administration to help our state and local partners get access to the resources they need to restore their communities.”

HUD advises impacted borrowers to contact their loan servicer immediately for assistance. Borrowers with conventional mortgages may also qualify for certain relief through their mortgage holder, according to HUD. Impacted residents can also find more information on the FHA’s disaster relief website.

President Biden issued a major disaster declaration on April 2 for Arkansas’ Cross, Lonoke and Pulaski counties, which also makes Federal Emergency Management Agency (FEMA) assistance available to impacted residents. This assistance can include grants for temporary housing and home repairs, low-cost loans to cover uninsured property losses, and other assistance for both individuals and businesses.

The relief and extension programs from HUD are effective as of the disaster declaration date.

The relief comes on the heels of last month’s announcement made by HUD regarding an overhaul of its disaster recovery program. The overhaul includes the establishment of two new offices: the Office of Disaster Management (ODM) in the Office of the Deputy Secretary and the Office of Disaster Recovery (ODR) within the Office of Community Planning and Development.

The agency also vowed to add dozens of additional staff to help expedite the establishment of the offices — and a $3.4 billion investment in Community Development Block Grant-Disaster Recovery (CDBG-DR) funds.

“These steps will streamline the agency’s disaster recovery and resilience work by increasing coordination, reducing bureaucracy, and increasing capacity to get recovery funding to communities more quickly by facilitating collaborative, transparent disaster recovery planning with communities earlier in the process,” HUD said in Wednesday’s relief announcement.



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The investment community is still trying to unpack what Intercontinental Exchange (ICE) has in mind with the potential acquisition of Black Knight. Mortgage analysts expect to see consolidation if the deal were to go through, but also forecast that strong players in the servicing and loan origination system side will emerge. This, in turn, would provide more options for lenders. 

“The core of what they (ICE) are acquiring with Black Knight is the MSP – the mortgage servicing platform. It is a key missing piece of ICE’s tech stack,” Ryan Tomasello, managing director of Keefe, Bruyette & Woods, said during a session at the Mortgage Bankers Association Technology Solutions Conference & Expo on Tuesday.

The servicing aspect of the loan is a heavily under-invested and under-monetized area of a loan lifecycle that is perhaps the most important factor in terms of servicing, Tomasello explained. 

In mid-2022, the ICE-Black Knight deal prompted concerns that it would raise costs for consumers and give ICE too much pricing power in the mortgage data market, which lenders rely on. The Community of Home Lenders Association (CHLA) claimed that Empower and ICE’s Encompass jointly control upward of 60% of the loan origination software system. 

In the latest development, the U.S. Federal Trade Commission sued ICE to block the deal last month. The FTC said in the lawsuit that the merger would push customers to use its mortgage services and products and claimed the deal would stifle innovation while limiting lenders’ choices for origination and mortgage servicing.

Prior to the FTC’s suit, Black Knight announced the sale of its Empower business to a subsidiary of Canada’s Constellation Software Inc., which was done in an effort to overcome antitrust concerns. ICE and Black Knight also amended their deal terms to reduce the valuation of Black Knight to $11.8 billion last month, about 11% lower than the valuation when the agreement was announced last year. 

Tech vendors and competitors in the space are waiting to see what the outcome of the deal would be and how the divestiture of Black Knight’s Empower could impact the creation of another loan origination system in the industry. 

Multi-faceted tech platforms and scaling will be key for players to compete with the tech giant, should the deal go through, Tomasello said.

At the same time, the potential merger of two big tech giants accelerated optionality that lenders and servicers were not thinking of before the announcement of the deal, Micah Jindal, managing director and senior partner at Boston Consulting Group, explained.

“It’s amazing if you look at five years ago versus now, how many new loan origination systems there are, how many new servicing platforms there are… I think there are a lot of interesting strong players who are trying to be in that second and third position if the deal does go through,” Jindal said. 

The production side of tech innovation

While tech innovation has benefited consumers’ mortgage experiences, more work needs to be done in the production side — particularly in driving down costs to produce a loan. 

“We’ve gone through a decade where a lot of tech has been incorporated into the mortgage process, but we haven’t necessarily seen the benefits when it comes to cost and cycle times  (…). We’ll say we have on the experience side of things, but it brings to light how much more that there is to technology,” Jindal said. 

In the fourth quarter of 2022, the cost of originating a loan hit a record $12,450, according to the MBA’s recent survey. The average loan production expense was $7,068 per loan from the third quarter of 2008 to the last quarter of 2022. 

Bose George, managing director at Keefe, Bruyette & Woods, noted efforts from lenders, such as Rocket Companies, that target the purchase market through different products. 

“What Rocket is doing through Rocket Money and the recently introduced credit card (…). All of those things could improve their ability to attract purchase customers at a lower cost than typical because the big cost to originate comes from the acquisition of customers (…). Some of these investments could pay off over time,” George said. 

Rocket Money, which allows clients to find subscriptions, manage bills and cancel recurring charges, and Rocket Companies’ credit card, which launched late last month, are geared toward courting potential homebuyers. 

But in an industry that is highly regulated, it will be the regulators that will play a key role in driving innovation.

“We’re seeing progress being made there with the Federal Housing Finance Agency (FHFA) soliciting feedback on technologies they should be focused on (…). Everyone needs to be all in on whatever areas that the industry is going to be driving innovation and bringing down costs,” Tomasello said. 



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Add Moon Mortgage to the list of fintechs offering crypto-backed mortgages.

Six months after raising $3.5 million in a seed round, the Miami-based cryptocurrency lending platform announced on Tuesday that it launched a product that allows investors in Bitcoin, Ethereum and USDC to use their assets to secure funding for real estate purchases. 

“The use case for crypto has to go beyond investment potential. It has to be about how an investor can use it for real-world gains,” Tristan Marino, who co-founded the company with Aaron Nevin in 2022 after their frustration with the lack of digital asset applications, said in a statement. 

Since 2021, other fintechs have launched crypto mortgage products, including Toronto-based Ledn and Miami-based Milo. Figure, led by former SoFi chief executive Mike Cagney, has placed big bets on crypto-backed mortgages and launched the company’s first crypto-based product earlier in 2022. 

Moon’s crypto mortgage product has a minimum loan amount of $1 million. The company said on its website that “for now, as a good rule of thumb, [investors should] plan to post 100% collateral. Future products may feature different collateral requirements.” 

Because Moon is not a bank, crypto assets are stored with Anchorage Digital, a crypto custodial firm that is also the first federally chartered crypto bank in the U.S. In light of the current bank crisis, Moon also clarifies on its website that crypto assets are not FDIC-insured products, meaning they may lose value.

Moon Mortgage does not liquidate the investors’ collateral when crypto loses value unless it drops to a pre-agreed value during the underwriting process. Clients maintain ownership of the crypto stored and total exposure to the markets, which allows them to capture appreciation of the asset.

The company said they can originate a loan in six steps, with a close time of as little as 14 days. The product is available for homebuyers in Florida, Texas and Colorado and will be open to investors in most states for investment properties. HousingWire sent an inquiry to Moon regarding the product’s mortgage rate but did not receive a response prior to publication of this article.

Moon also launched a product that allows investors to take out loans against their digital assets while still maintaining some control of these assets. Dubbed “Trade & Borrow,” the product is available with one-, three- and six-month terms but can be renewed. There are no prepayment penalties and origination fees, the company said.

“Against the backdrop of a very tough year for crypto investors, there is an obvious need to provide more options to help create material value — to ensure that investors can have as many options as possible, just as traditional retail investors have,” Nevin, co-founder and CEO of Moon Mortgage, said in a statement.

The global cryptocurrency market capitalization was at $1.2 trillion on Tuesday afternoon, down compared to $2.2 trillion the same day last year, according to the price-tracking website for cryptoassets CoinMarketCap.



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Rithm Capital, the parent company of mortgage lenders Newrez and Caliber Home Loans, is expanding its business to Europe. Former Bank of America executive Marty Migliara has been tapped to lead the operations in the region. 

Rithm, a New York-based asset manager, is opening an office in London to seek equity and debt investments across the real estate and consumer finance sectors, the company announced on Monday. 

“The ongoing dislocations in the markets should enable us to generate attractive risk-adjusted returns for LPs and shareholders,” Michael Nierenberg, president and CEO of Rithm Capital, said in a statement. 

The company’s move was expected. Executives said during a call with analysts in early February that Rithm had plans to expand to Europe in the second quarter of this year. 

During the call, Nierenberg said Rithm was looking for more “situations around distressed debt in Europe.”

According to the executive, the company will likely raise some capital around the European business to invest in the region. 

“More likely in private funds. But I think initially it could come out of the public company,” Nierenberg said.

Rithm has a $32 billion balance sheet. 

Recently hired by Rithm, Migliara was the former head of Europe, Middle East and Africa origination and lending in BofA’s global mortgages and securitized products team. Migliara is a veteran of asset-backed securities, consumer lending platforms, and residential and commercial real estate.

Regarding his decision to join Rithm, Migliara said “the timing could not be better, given the interest rate environment and the tightening of credit conditions in Europe.”

“We will have great opportunities to provide growth capital to strong origination platforms and opportunistic capital to facilitate the upcoming refinancing needs across the commercial real estate in the region,” Migliara said in a statement.

Rithm spent 2022 in “conservative mode,” in which executives played it cautious with capital deployment and reduced expenses amid surging interest rates in the U.S. The strategy paid off: Rithm delivered an $864.8 million profit in 2022 — higher than the $705.5 million the prior year.

In the mortgage business, the company had a combined pre-tax income of $23.9 million in the fourth quarter of 2022. Rithm spent part of 2022 integrating its mortgage companies — Newrez and Caliber — and cutting 56% of its workforce. Its performance last year relied on the servicing portfolio. 

In December, Rithm acquired a 50% share of Senlac Ridge Partners, later renamed GreenBarn Investment Group. The partnership will accelerate GreenBarn’s strategy of building a vertically integrated and diversified commercial real estate debt and equity business. 



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The mortgage industry still faces the same cyber security threats as it did over the last 10 years. In turn, efforts to strengthen infrastructure and security are becoming even more important, experts emphasized on Monday at the Mortgage Bankers Association (MBA) Technology Solutions Conference Expo in San Jose, California. 

Phishing — a form of social engineering where attackers deceive people into revealing sensitive information installing malware —  still remains one of the most common ways to get initial access to customer or vendor data, Ariel Manalo, chief information security officer and vice president of infrastructure at Evergreen Home Loans, said.

“I’d say most recently we’re seeing a lot more impersonation, specifically anecdotally, to our environment, where they’re text messaging different employees, impersonating senior executives with the good old gift card scam (…). Emails are flooding in too, and we’re seeing a lot of uptick on those,” Manalo said.

Last year in particular, a common trend was spreading ransomware through USB drives, Evan Bredahl, customer solutions engineer at Red Canary, said. 

“The threat actors (…) bought a large bulk amount of USB drives, and put the malware underneath (…). America has been heavily affected with these USB drives. How many times have you been to a vendor trade show and they give out USBs? We don’t really know what the supply chain is there,” Bredahl said. 

Dubbed ‘Raspberry Robin,’ Red Canary found that about 4% of its customers were affected through this activity in 2022, which the company initially discovered in May of last year.

In July, Microsoft observed hackers delivering a prolific public ransomware, called SocGholish. Both were among the top 10 threats affecting Red Canary customers last year.

“It’s definitely been in an uptick where they’re making money. It’s profitable for them. They’ve monetized it; they have basically a whole entire business model. You want to hire hackers? You want to hire distributed denial-of-service (DDoS) people? You want ransomware? It’s out there, go out there and buy it, right? So it’s available; they’re making money,” Manalo said. 

Amid the growing risk of security threats, government-sponsored enterprises (GSEs) such as Freddie Mac, are making security mandatory, Manalo noted.

“Especially on Freddie Mac’s regulation, it basically says if you’re not compliant, we can terminate your access to any or all of Freddie Mac’s stuff (…). That makes security mandatory,” Manalo said. 

In October, Freddie Mac issued Bulletin 2021-31, updating its Seller/Servicer and Third Party risk mitigation requirements. 

The bulletin includes language that makes Freddie Mac a third-party beneficiary to vendors and third-party service providers of Freddie sellers and servicers. It also includes notification requirements with direct reporting to Freddie for certain events, such as a security incidents.

As the mortgage industry becomes more technologically interconnected, companies are looking to spend more on IT security and infrastructure. 

About 53% of organizations will increase IT spending in 2023, and 65% of organizations plan to increase cyber security spending this year, according to CSO Magazine

“I’d say stay curious, stay diligent, persistent and what that means is curiosity. The bad guys are creative. There’s this thing where defenders have to be right every single time,” Manalo said. 



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Last week was relatively calm for the housing market after the fiasco of the banking crisis. Housing demand grew and inventory levels fell again while mortgage rates rose.

Here’s a quick rundown of the last week:

  • The 10-year yield battle continues as bond yields rose early in the week only to close below 3.50% on Friday. Mortgage rates rose to 6.57%
  • Active inventory fell by 3,141, and new listing data fell again and is still trending at all-time lows.
  • Purchase applications data rose for the fourth straight week, which continues the streak of 2023, having more positive weekly data than negative.

The 10-year yield and mortgage rates

Last week was interesting for the 10-year yield and mortgage rates. Even though the Gandalf line in the sand (3.37%-3.42%) held firm and the 10-year yield reversed higher, it didn’t reverse with much of a kick this time, closing Friday below 3.50%.

The chart below shows how the weekly 10-year yield ended with lower bond yields. This is important because we previously saw more aggressive moves higher with the 10-year yield, which pushed mortgage rates much higher very quickly. That didn’t happen last week, which means we are more anchored in a lower level for now. In fact, I wouldn’t be shocked if the 10-year yield tried to break below the Gandalf line again this week.

Mortgage rates started last week at 6.38%, got as high as 6.61%, and ended at 6.57%, which seems high versus the 10-year yield. The banking crisis has stressed the mortgage backed securities market, pushing rates higher than usual. In this article I talked about how to look at housing credit getting tighter during the next recession.

Last week had the potential for fireworks, but it was pretty tame, this week we have four labor market reports to deal with.  

Weekly housing inventory

Looking at the Altos Research data from last week, the big question is whether we are finally starting to see the seasonal spring increase in inventory. The answer is no, because active listings fell to a new low last week for 2023, so we have to wait and see if April will be the month. 

  • Weekly inventory change (March 24-March 31): Fell from 413,169 to 410,028
  • Same week last year (March 25-April 1st ): Rose from 251,522 to 252,820
  • The bottom for 2022 was 240,194

As you can see in the chart below, we are far from what a normal inventory channel looks like, and it’s been hard getting inventory back to pre-COVID-19 levels.

Last year, the weekly seasonal inventory bottom was set on March 4; we still need to confirm the weekly bottom in 2023. It looks similar to 2021 data, which bottomed on April 9. So April will be very telling on the weekly housing inventory with Altos Research.

The NAR data going back decades shows how difficult it’s been to get back to anything normal on the active listing side. For example, over the last few months, when monthly sales were trending at 2007 levels, total active listings peaked at over 4 million. Today, per the previous existing home sales report, we are at 980,000 total active listings. Inventory is incredibly tight.


New listing data fell last week and is still trending at all-time lows in 2023. This trend of lower new listing growth has been here for some time with no significant reversal in the data line. Unlike 2021-2022, which were trending similarly year over year, the last few weeks in 2023 have created a noticeable gap, as the chart below shows.


Here are some weekly numbers for you to see the difference in new listings:

  • 2021: 59,908
  • 2022: 56,774
  • 2023: 49,234

Compare those to previous years:

  • 2015: 79,706
  • 2016: 70,141
  • 2017: 87,639

As you can see from the data above, homeowners aren’t rushing to sell because, as I have always talked about, primary residence homeowners don’t act like leveraged stock traders, nor are they are afraid of life like the crazy housing crash YouTube people. That unwillingness to sell hampers inventory even further.

Purchase application data

One of the most improved housing market data lines since Nov. 9, 2022, is purchase application data. This explains why the most recent existing home sales report had one of the most significant month-to-month sales prints ever. We have had three consecutive rising pending home sales reports as well.

Purchase application data was up +2% week to week in the fourth straight week of gains. The index was down -35% year over year, which is a reminder that the year-over-year comps will get easier, especially in the second half of the year. 


The purchase application data reports have been wild when mortgage rates have gone up or down. Traditionally, we wouldn’t have this volatility in this data line but 2022 was a historic dive. When mortgage rates went from 5.99% to 7.10%, we had three negative prints, bringing this index to levels last seen in 1995. However, we have stabilized the data with four straight weeks of positive prints.

Remember, this data line looks out 30-90 days before it hits the sales data. Also, the seasonality of this data line is almost over. I typically put more weight on this data line from the second week of January to the first week of May, since traditionally total volumes always fall after May.

We have had some odd economic data in housing due to COVID-19 and the rate shocks that have facilitated some crazy moves. However, history has been steady with the seasonality of purchase apps before all this drama, and hopefully, we will get back to normal sooner than later.

The week ahead

Jobs, jobs and more jobs data! We have four jobs reports coming up this week: JOLTS data, ADP jobs report, weekly jobless claims, and jobs Friday as well. If we have any softening in the jobs data and wage growth, that will be better for mortgage rates.

Last week, I was on CNBC talking about how the Federal Reserve‘s focus on creating a job-loss recession isn’t the most effective way of dealing with inflation. They need to endure at this stage because we have seen the growth rate of inflation fall and wage growth cool down — all with a labor market still tight. The Fed trying to force a job-loss recession to make their job easier because they believe it’s the 1970s again isn’t an effective policy since we aren’t in a 1970s economy. 

Also, over the weekend, OPEC announced a production cut, sending oil prices higher Sunday evening and the 10-year yield higher by a few basis points. Already Monday morning, with a weaker manufacturing economic report print, the 10-year yield is once again testing the key level.

The Fed can limit the damage of the recent banking crisis and keep the economy expanding rather than force millions of people to the unemployment line. We will have a nice batch of labor data this week to see where we are today with the state of the U.S. economy.



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Profitability has been a sore spot for Robert Reffkin and his brokerage, Compass. In media interviews and on earnings calls, Reffkin is forced to defend Compass’s mounting losses and the underlying strength of its business – in 2022, Compass recorded a net loss of $601 million despite raking in revenue – up 6% to $6.02 billion. 

Reffkin doesn’t shy away from the fact that the brokerage has received billions in venture capital and debt. The funding has allowed the firm to grow exponentially, de-throning residential real estate’s two biggest brokerages—Anywhere Real Estate and Berkshire Hathaway Homeservices—in just over a decade. He’s grateful for it, but also knows the days of red ink must end.

“We grew faster than any other company, and that is why we were able to raise $2 billion to invest in our agents,” Reffkin told attendees at the Inman Connect conference in late January. “If we decided not to grow and instead said, ‘Hey, we are going to be profitable in year two,’ I could not have raised $2 billion. But this last year, the world flipped on a dime and moved from growth to profitability. And just like our agents have had to adapt with the market, I have had to adapt to this shift, and we are now focusing on profit.”

​​Reffkin has set the ambitious goal for Compass, the largest brokerage in America by sales volume, to be cash flow–positive by the end of June, even amid the biggest housing market slowdown in years. 

Proptech companies, many of which have relied heavily on venture capital funding, have struggled mightily over the last 12 months.

“As we all know, when the Federal Reserve began raising rates last year, the housing market cooled significantly,” Spencer Rascoff, the co-founder and chair of Pacaso and co-founder and former CEO of Zillow, told RealTrends. “This meant slowing growth or contraction at a lot of previously high-flying proptech companies. At the same time, venture capital investment slowed across all sectors. That meant that proptech got hit with the double whammy of a tougher underlying business climate and less access to capital.”

This double whammy resulted in large-scale layoffs and rough financial results.

As of March 2023, Offerpad had cut roughly 50% of its workforce from its peak in August 2022, while Opendoor announced in November 2022 that it had laid off 550 employees. Knock laid off 46% of its staff last March and  Ribbon cut its staff by 85% in late November. Meanwhile Flyhomes laid off roughly 200 workers in mid-July and the Austin-based firm Homeward, which achieved a valuation of over $800 million in May 2021, also made cuts, reducing its staff by 20% in early August. 

In addition, Opendoor and Offerpad, the two publicly traded proptech firms, lost $1.4 billion and $148.6 million, respectively, in 2022, and were stuck with hundreds of homes on its books.

“Many proptech startups have had to completely rethink their businesses, and many pivoted entirely,” Rascoff said. “With both housing transaction volume down considerably and access to capital becoming scarce, companies are now growing slower and focusing on profitability. This led to broad cost cutting measures across the board. Companies are getting lean to survive the next 18-24 months with the assumption they won’t be able to raise new capital on favorable terms.”

Product pivots as VC money disappears

At Flyhomes, CEO Tushar Garg said the housing market slowdown and shift from growth to profitability has resulted in his firm expanding its product offerings and investing resources into consumer education initiatives.

Affordability has become the number one problem. It used to be, ‘how can I compete with all-cash offers to win the home?’ And that still is a challenge in some markets, but the biggest challenge for most buyers has changed,” Garg said. “The play that we did in that direction to make more robust offerings for those clients was to get Loftium to join forces with us. But what we do at the moment, foremost is customer education. Giving them the information they need to decide if they should buy or sell right now or not and what services our products can provide to help them.”

Flyhomes also recently launched a “buy now-refi later” product.

“The biggest thing right now is that we don’t know when rates are going to go up or down and there is a lot of friction in people’s decision making on whether or not they should buy now,” Garg said.

The new offering enables homebuyers using the product to refinance the purchase of their home any number of years down the road, when mortgage rates reach a level they are satisfied with.

Divvy, a proptech firm that provides homebuyers with an all-cash offer and then allows them to rent the property until they are ready to buy, conducted its most recent funding round in October 2021, but executives have been keeping a close eye on the venture capital market.

“We raised in a preemptive round in 2021 from Tiger and the timing was ideal, and nearly everything has changed in the fundraising market since then,” Adena Hefets, Divvy’s CEO, wrote in an email. “Layer in the instability in the banking ecosystem right now, and it’s even more challenging. Proptech companies are really struggling in the current market, and not everyone will make it though. You’re still seeing strong companies announcing big rounds, but it’s infrequent and nothing like we saw in 2021-2022. Much like the real estate market, it feels like most people are sitting on the sidelines and taking a wait-and-see approach.”

Fundraising struggles and concerns were compounded in recent weeks by the failures of both Signature Bank and Silicon Valley Bank, the latter of which held funds for firms like Opendoor, OJO Labs, and Homeward.

“The situation at Silicon Valley Bank was an extremely unfortunate one. A lot of work will need to be done by companies who banked with SVB, and quickly, as they rebuild parts of their finance operations,” said John Berkowitz, the founder and CEO of OJO Labs.

According to an SEC filing, SVB held less than 1% of Opendoor’s total cash, cash equivalents and restricted cash. In addition, as of March 13, 2023, Opendoor said that approximately 98% of its total cash, cash equivalents and restricted cash is held at the nation’s four largest banks.

Although Divvy was not impacted by the two bank failures, Hefets noted that her firm was taking action to “diversify its cash across several banks.”

The three Ps of proptech: Profitability, profitability, profitability

With limited funding opportunities in the near future, proptech firms are having to keep close watch on their balance sheets. 

At Offerpad, the smaller of the two publicly traded iBuyers, operating expenses came in at $309.74 million in 2022 and liabilities totaled $703.19 million. As of December 31, 2022, the firm had $825.1 million in total assets, $97.24 million of which was in cash. Although the firm has undergone significant staffing cuts, more work must be done to ensure profitability over both the short and medium term.

Over at Opendoor, the situation is even more challenging. At the end of 2022, the firm’s operating expenses totaled $1.59 billion and it had $1.5 billion in liabilities on its balance sheet. Although it had $6.6 billion in assets, only $1.13 billion of it is cash or cash equivalents. 

However, Opendoor executives remain optimistic, banking on the firm’s partnership with Zillow, and it being close to selling off all the inventory it acquired at the height of the market. 

 “As for right now, we are highly focused on stabilizing our core business and ultimately returning to positive free cash flow,” Carrie Wheeler, Opendoor’s CEO, told investors on the firm’s fourth-quarter earnings call.

Industry experts say that proptech firms will be laser-focused on profitability for the near term.

 “This is a period of cutting and consolidation across the proptech landscape. Companies are doing anything they can to survive and make it to the other side,” Rascoff wrote. “The good news for those that do is that most of their competition will likely have been wiped out in the interim, so the survivors will have room to run when times are good again. Companies are cutting costs wherever they can with the assumption that they won’t be able to raise capital on favorable terms anytime soon. Priority 1 has gone from growth at all costs to profitability at all costs.”

Flyhomes’ Garg echoed the sentiment.

“We saw the market change last year and we became laser focused on being able to hit profitability,” Garg said. “We are focused on fundamentals of the business and the things that we can control in this environment.”

In Zach Aarons’ view, this shift to profitability may lead many of these firms to go the IPO route in the next few years.

“You are effectively seeing no IPOs, but any IPO you will see in the future, folks are saying that the companies will need to be profitable to execute successful IPOs,” Aarons, the co-founder and general partner at New York-based VC firm Metaprop, said. “In the prior boom, there were many companies doing IPOs either traditional ones or direct listings that were not even EBITDA profitable. When the IPO market finally thaws out, which most prognosticators are suggesting is Q1 of next year or late Q4 of this year, I think we can expect companies, that if they are not already EBITDA profitable, that they have plans that show a clear path to EBITDA profitability in 2024.”

While current conditions will force a contingent of proptech firms to go belly-up, VC players in the space see better days ahead.

“At my venture firm, 75 & Sunny Ventures, I’m still seeing new seed stage proptech companies pop up every day,” Rascoff wrote. “The rate of new company formation has probably gone down since the boom times, but real estate remains a massive market with a lot of room for disruption, so I think we’ll continue to see new, innovative companies get started in good times and bad.”

Aarons added: “We are still seeing new company formation. Unfortunately, in this sector over the past 18 months we have seen thousands of layoffs and some of them now want to start their own thing.”



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Don’t think you can find cash flow in a high-priced market like Florida? What about doing a fix and flip with today’s rising rates and high-priced renovations? Don’t know if your rental’s zoning could sprout numerous red flags on a sale? We’ve brought some On the Market listeners in live to go over the deals they’re doing in 2023, which concerns they’re coming up with, and how they’re building wealth while battling against the economic tidal wave hitting the housing market.

Michael Yi and Matt McMains, two of Henry Washington’s mentees, have been trying to hit home run deals in Florida. Michael was able to lock down an underpriced rental property that has almost unbelievable cash flow but with some zoning red flags that could catch him off guard in a sale. On the Panhandle, Matt is weeks away from closing on an out-of-state flip, but with rates jumping up and property holding time getting pricey, expert flipper James Dainard advises caution when getting into a deal like this.

One thing is for sure; there are still plenty of ways to profit with investment properties, EVEN in today’s wild housing market! So stick around, and hear exactly how you should be doing your deals as 2023 unfolds.

Want to talk about your real estate deal on the show? Email [email protected] with all the nitty gritty details! 

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined by Kathy, Jamil, James, and Henry today. Good to see you guys. First time we’re all back together since we are in Denver together.

Kathy:
Great to see you. I’m excited for today’s show. Do you hear two live deals?

Jamil:
Feel like I’m going to embody my Kevin O’Leary today.

Dave:
Do you have an impression of Kevin O’Leary for us, Jamil? If you’re listening to this, he just made a very ugly face.

Jamil:
Yeah, and I hissed.

Dave:
We’re going to do this. We’re going to do a new format today where we have a couple listeners joining us. They each are doing a deal right now, and we’re going to learn about what they’re going through really as we speak, as you’re listening to this. This should give you a really good insight into the types of deals that are on the market and how people just like you are adjusting to market conditions and are still making good deals work. What do you all think of our conversations with Matt and Michael today?

Jamil:
Incredible.

Kathy:
Oh, it was so fun.

James:
The fact these guys are out there getting after it is awesome and mean, and one of them fell into a home run. So I’m a little jealous.

Kathy:
And I just loved hearing everybody’s tips and solutions. I felt like I just got an advanced education in the last 45 minutes.

Henry:
Yes, folks, pens and papers, take some notes because you hear some great advice on how to pivot a deal and you give some great advice on how to negotiate and talk to sellers. There’s great stuff being able to listen to this, and I’m just a deal nerd, so hearing people’s deals and talking about them and hearing people’s suggestions for how to work those deals is like music to my ears, man. I love this stuff.

Dave:
All right, great. Well, with that, we’re going to get into it, but first we’re going to take a quick break.
Michael Ye, welcome to On the Market. Thanks for being here.

Michael:
Thanks for having me, Dave. I am so excited to be here.

Dave:
Well, great. Let’s get into it. Can you just start by introducing yourself to the audience and letting us know a little bit about your experience in real estate?

Michael:
Sure. My name is Michael Ye and I am a pastor that’s transitioning out of ministry and into the real estate space. I started in real estate about six or seven months ago. I drank the Kiyosaki Kool-Aid and started down that trek and I just started just drinking in BiggerPockets every single day. I think I’ve must have listened to at least like a hundred hours of BiggerPockets stuff. And I ran across this dude named Henry, Henry Washington and heard his story and he was offering some sort of mastermind class, and I was like, “I got to be a part of that.” And so I did, and that was about six or seven months ago, and now I’m on On the Market. This is amazing.

Dave:
That’s awesome. Well, we’re glad to have you here and would love to hear about the deal that you have to share with us.

Michael:
Sure, sure, sure. So the property is in St. Cloud, Florida, which is right outside of Orlando. We are in central Florida, and it’s not a triplex, but it has three units. It’s a single family unit that has three units. It’s got a main unit that’s a three bedroom, two bath, a studio, and also a mother-in-law suite, all in the back, all on the same property. I purchased it for 240 rehab, just to get it up to speed to be able to rent out. It’s only about 15K or so. ARV is 400. According to Rentometer, I should be getting somewhere in the $3300 a month range combined between the three units.

Kathy:
Score.

Dave:
Yeah. Yeah, I don’t know why you need advice on this. It just seems like you should just go buy this. But before we jump into this one, can you just tell us a little bit about the market?

Michael:
Yeah, Florida in general is just a really, really hot market right now, but central Florida in general, it’s kind of a dark horse, I feel like. The sexy area is Tampa obviously, but central Florida, everybody always thinks of Disney, but central Florida is actually, from what I understand, Florida’s market has consistently kind of experienced very extreme highs and extreme lows, and has fluctuated a lot. But out of the Florida markets, apparently from what the other real estate people tell me, central Florida has been the most stable out of all the markets in Florida. So I live here. Being that I’m a first time investor and such, I do my best. I want to see the property, I want to be able to put my hands on it, that kind of thing. So I started investing here first.

Dave:
That’s great. And before I turn it over to the rest of the panel, last question is, how’d you find this deal?

Michael:
So it was through a wholesaler, a wholesaler that I’ve had a relationship with, and I promised him some money if he brought me the deal first before he blasted it out on email. And lo and behold, one day he just calls me up, he’s like, “Mike, you need to come and get this right now.” And I did.

Kathy:
Money talks.

Michael:
Yes, ma’am.

James:
Well, I know what my first piece of advice is, it’s to sell me the property. The numbers on this look extremely strong. Hey, Michael, have you already closed on this property or …

Michael:
Yes, yes. I closed on it last week actually.

James:
And how did you structure the deal as far as closing? Did you set it up hard money, conforming financing? Did you get a rehab loan or how did you close the deal?

Michael:
So I got hard money because the wholesaler said that we needed to close in two weeks. So yeah, I went ahead and did the hard money and my contractor says that the rehab shouldn’t take more than three weeks or so, so we’re going to be coming out in conventional. I’ve already started the paperwork on doing the conventional loans for this property, so hopefully we’ll be up and running by April.

James:
Then are you going to short-term rental or mid-term rent it, or are you going to go with the long-term rental or are you going to go do a mixture between the two?

Michael:
We’re going with the long-term rental. In this business, relationships are everything. And it just so turns out that my contractor knew a guy who really needed to move into a space and the space was just perfect for him. And so he decided that he’s going to rent out all three units. And so I’m running my credit checks on him right now and stuff, but it seems like it’s a go.

James:
And then how much based on the lenders you’re talking to or which lenders are you trying, what’s the end goal? So when we’re buying, I know when I’m buying single family rentals, a lot of times I’m buying for high cash flow like this deal or with some kind of equity position with a development upside on it. But for me, I’m always wondering how much cash do I have to lock in the deal or do I go with a different type of lender to try to leverage back? Are you going to plan, are you planning it on leaving your initial with your hard money guy? I’m guessing you’re putting 20% down roughly?

Michael:
Yeah, something like that, yeah.

James:
Are you planning on leaving that in the deal or are you able to burn this property and get your capital back out?

Michael:
For right now, I’m planning on keeping it in there just for the time being, and then I’m hoping to maybe refinance out of it when the interest rates do inevitably drop at some point and to get some of my money back out that way. But honestly, the property itself, the area is just starting to show signs of the first phase of gentrification, unfortunately. And so gentrification, I have mixed feelings about it, but from a property owner standpoint, it’s great for me. So yeah, it’s really an equity buy more than anything.

Jamil:
Michael, nice to meet you. Congratulations on getting this deal as well, seven months out of the gate and you’ve taken action. Phenomenal. There’s a couple of questions that I have about the exit. And so you’ve mentioned that the property is zoned single family, but there’s three units on the property that can be rented out. Now, my experience is that conventional lenders are going to make sure that the zoning matches what the use case is for your property before they’re going to loan on it. And so immediately the red flag that I get is when the lender comes and they notice that you’ve got a threeplex on a single family, they’re not going to want a loan on the property. How have you mitigated that situation and what is your plan if you can’t get conventional financing?

Michael:
I’ll be perfectly honest with you, Jamil, I don’t know quite yet.

Dave:
Sell it to James. You already know. You have another exit strategy.

Michael:
There you go. Yeah, I’ll be honest with you, I haven’t thought that far ahead. I just closed on it last week and I’m just trying to get all of that taken care of. But from what I understand, my lender, my conventional lender, it seems like it’s not going to be a problem. I’ll be honest with you. I didn’t think about that, what you just proposed.

Kathy:
So that’s exactly what I was going to ask is are those units permitted? Do you know?

Michael:
Yes, yes, they are.

Kathy:
All those areas are permitted, but not as a triplex.

Michael:
Not as a triplex, yeah.

Kathy:
Okay. Because I know obviously Florida law is very different than California law, but a lot of people don’t realize they’ll create these extra units and rent them out, but they’re not covered. They’re not covered by insurance, and you can get in big trouble for that if you get caught.

Michael:
Yeah, yeah, I made sure that they were covered, so we’re good.

Henry:
I think the benefit is what you did well here is a lot of people look at a deal like this and they say, “Oh, I’m willing to pay triplex numbers because I’m going to rent it like a triplex.” But you analyze the deal like a single family, which is at its true form what it actually is, and you bought it based on those numbers. And so renting it as a triplex is icing on the cake, which is I think the proper way you look at something like this, and yeah, Jamil’s right, you could run into a conventional lender not wanting to finance it because it’s three units, but you could also run into a conventional lender that will finance it.
The first property I house hacked, I still own it. It’s on an FHA loan and it’s a house with a mother-in-law house behind it. And they did say something when we were buying it and we sent them some pictures and told him it’s a single family, but it’s got a mother-in-law suite behind it and then they financed it. So it know it’s going to depend on that lender, but he’s absolutely right. Something to definitely, definitely think about, and it just means if that lender doesn’t want to do it doesn’t mean that another one won’t.

Michael:
Absolutely.

Jamil:
Michael, another question. You mentioned the $15,000 rehab, but you said a timeline of three weeks. And so instinctively for me, I have a lot of experience with contractors and I have always learned that you double everything that they tell you something is going to cost, and you also double the timeline, not because they’re dishonest, but because they’re dishonest. And so when you take that into consideration, how long have you known this contractor and what’s the experience that you have with him? I think $15,000 sounds very low, in considering today’s inflated material costs. You can get nothing done these days for 5 or 10 or $15,000. And so I’m curious, what does the scope of work look like for $15,000? Because three weeks is actually in the world of renovations quite a long time, so I’m interested to understand what that scope of work is.

Michael:
Sure, sure. So the contractor, interestingly enough, the contractor is a pastor.

Jamil:
Oh, good. Okay. So that checks the dishonest box off, right?

Michael:
Definitely. So I arrived in Orlando maybe about four months ago or so from New Jersey, and one of the first things I did as a pastor was I wanted to meet all the other pastors in the area, and I met this guy and turns out that he was a contractor. I was like, “Hey, I’m just getting into real estate myself. You want to work together?”
“Oh yeah, sure.” So that’s kind of how we met and we talk every day. We have a level of trust with one another and all of that stuff, and we analyze deals together and we have that kind of a close relationship. In terms of the scope of work, what we were talking about, like I said, just to get it up to speed is we’re talking some paint. We’re talking changing out a couple of the baseboard stuff and some kitchen counters. That’s pretty much it.

Jamil:
Really minimal stuff.

Michael:
Really minimal stuff to just get it up to speed.

Henry:
What a deal.

Michael:
Yeah, it’s pretty excellent, I got to say, man. But there are other things that we would like to do. I guess one of my questions to you guys was I want to be able to rent it at the top of the market, but I would say that right now as it stands, the environment is probably like a C plus neighborhood. And so how much is too much renovation? You know what I mean?

Jamil:
Does the neighborhood have the potential to go to a B or a B plus? Because if you have comps that are a B plus, then you can anchor on that number and then you can elevate to that and change the entire scope.

Michael:
Yeah, it does have the potential, but I would say if I were to just guess, I would say we’re probably about five to 10 years out.

James:
I think that’s a great question question, because we buy a lot of property as well that we can condo off later down the road. In the short term, we want to keep as rental property. And for me, when I’m looking at a five to 10 year appreciation play, which there’s nothing wrong with that, I typically like to put in cheaper material that will last longer, or not cheaper material but more bulletproof, but like LVP, solid types of floors, more indestructible items, and I’ll spend the money there, but I won’t go for the full cosmetic because what’s happened, what we’ve been doing in Seattle is we kind of land bank those because as the density changes throughout the whole United States, like in Washington state they just passed a new law that there is no more single family zoning allowed. Everything is allowed to be condoed off, built and sold separately.
So my recommend, when I’m looking at those deals, I actually try to put in, make sure it can be a great cash flow because this thing cash flow is at 24% cash on cash return with leaving 20% in the deal. That’s a great return. You can ride that cash flow and I would suggest doing the bare minimums that will last. But then once you get to that next path of progress event, which is in five to 10 years, then go for the full rebuild because you might be able to actually condo all three units off, sell those separately, and then 1031 those a larger amount into a bigger property.
But when you do those condos, sometimes you have to do some substantial renovations to improve it, add new water lines, do types of sewers. So in my opinion, it’s always best to get it bulletproof rental style, wait for that path of progress, then vacate, and then go for the optimal pricing. Because if you do it now, the market could look different in 10 years and then you have to redo the whole thing all over again. And so if you think it’s that five to 10 year play, then just make it to where it can sustain itself and you’re not going to get bled out by fees and maintenance costs and then go for the big rip in five to 10 years.

Dave:
Michael, you said that you wanted to rent at top dollar, which is obviously everyone’s goal, but you are also renting all three units to one tenant. Do you think that’s helping your rent situation or did you lower your overall rent for the convenience factor?

Michael:
I lowered the rent just for the convenience factor. And also the guy who’s coming in is a strong renter, and I figured, rather than having to deal with managing three separate units we just had the one guy, and it turns out the guy is also a contractor, so he said that he’d be willing to do some menial stuff for me and stuff, so that was attractive as well. So I did lower the rent a little bit for him.

Dave:
Does he need three kitchens or what’s the plan for three units?

Kathy:
Yeah, that’s what I was going to ask.

Michael:
Actually, his college age children are just graduating out and they need a place to live for at least a few years. And so the idea is that everyone’s going to kind of live on the property together. So I figure we will be good for at least a few years.

Dave:
Well, definitely go with the cheaper stuff then if there’s college kids going to be living there.

Jamil:
Is the rent rate with the one tenant the 3,300 a month or is it below that?

Michael:
So we’re at 32.

Jamil:
Okay, so just a hundred dollars discount. Not bad at all.

Kathy:
How did you screen for him? How do you know he’s a good tenant?

Michael:
I put him through the RentRedi process, RentRedi, the software. Also, he came armed with an Experian report that was done a month ago or so, and I had him submit his bank statements plus his tax return from last year. And so I did all of that. And I’m still kind of looking through government stuff to see if there’s any bankruptcies or anything like that, but everything seems to be a go.

Henry:
I want on top of that call references. So if he has a past landlord, I’d get on the phone with them. I love asking past landlords, because they’ll give you a report. And then the last question I typically ask them, as I say, either if it’s a landlord, I asked them, would you rent to them again if you had the opportunity? And if it’s a employer, you should also call his employers if he’s not self-employed.

Jamil:
I would want to add to that, go to landlords back because the last landlord may lie just to get them out.

Dave:
Exactly.

Kathy:
Yeah.

James:
One thing, Michael, you mentioned was this guy’s willing to do some work on your property. I have done that numerous times. I’ve done it the right way and the wrong way. One is the verbal like, “Hey, I’ll help you work on this property later.” And that’s great, and that’s a great gesture. But the problem is a lot of times that doesn’t actually happen. And so this is an opportunity I always look for. How can I bundle up things to reduce my expenses, whether it’s construction, whether it’s rental maintenance. If I’m renting to a property manager or something that works in there, maybe I give them a lower rate because they’re looking over a building. But this is a great opportunity to slow down and go, “Hey, I’m willing to give you a discount of a hundred dollars a month. Market is 3300, you’re getting it for 3200, but I would like you to cover these maintenance items for the duration of the rent.
And because that could save you hundreds of dollars a month, which will substantially affect your cash flow. And you don’t have to make it huge, but just say, “Hey, if when any of these 10 items happened, you’re willing to come out there and do the labor for free and I’ll pay for the materials.” And I would say it’s better to lock that in up front because the overall return on that, if he’s there for three years, you’re going to put an extra 4, 5% back in your pocket with cash flow because you’re not going to get bled on the maintenance expenses. So just put it in writing and then because I have had it where I’m like, “Hey, you said you were going to do these things.” And they’re like, “Yeah, here’s your bill.” I’m like, “Well, now I’m overpaying.” And so that’s a great opportunity, especially as a first time landlord, to really lock in a person in your property that can make your life easier for the next two to three years.

Kathy:
Oh my gosh, I can’t agree more. Make sure it’s all in writing, legal. People have different ideas of what is cool. So I’ve done that where I ended up with purple walls. So anything they do, in my opinion, needs to be approved. You need to know what they’re doing.

James:
Purple walls aren’t a good way to maximize your rent.

Kathy:
It cost me several thousand dollars to repaint it because it’s hard to paint over purple.

Michael:
Oh, God.

Dave:
Well, Michael, thank you for bringing this deal. Is there anything, any last questions you have for the panel before you get out of here?

Michael:
It’s funny because I had a whole bunch of questions and now that we’re at the end, I don’t feel like I have any left.

Dave:
Well, that means we did our job, I guess.

Michael:
Yes, you did. Yes, you did. So happy to have been here. Thank you so much.

Dave:
Of course. And congratulations. Sounds like a great deal.

Jamil:
Absolutely.

Henry:
Congrats buddy.

Michael:
Thank you. Thank you.

Dave:
Matt McMains, welcome to On the Market. Thanks for being here.

Matt:
Hey, thanks for having me, Dave.

Dave:
Well, let’s start by telling us a little bit about your experience in real estate.

Matt:
My experience is somewhat minimal. I do have a primary house that I bought right at the beginning of COVID, which helped instill me into the real estate world. And then refied out of that and bought a rental property in Pensacola, Florida, and initially started off as an AirBNB and then come fall we had transitioned into a long-term rental.

Dave:
Okay, great. And that’s not where you live. In Florida?

Matt:
Correct. I grew up in Orange County, California, Southern California, and I went to college in Pensacola. So that’s where the familiarity comes with that area.

Dave:
All right, great. So tell us a little bit about the deal you’re looking at now.

Matt:
All right. So it was an on market deal I found in Pensacola just by scrubbing everything that’s been on market more than 90 days. And this one actually was only at 40 days when I found it, but I had noticed they had dropped the price three times. So to me I was like, “Oh, probably trying to get rid of it, so let’s just throw an offer in.” And as Henry says in his Mastermind, “Just put offers in and let them choose if they want it or not.” So that’s what I did. And this one actually stuck. It was listed at 161. I got it locked in at 140 currently.

Dave:
Awesome. Well, I want to hear more about that. Before we do, for those of us who don’t know anything about Pensacola, can you just tell us a little bit about the area?

Matt:
So Pensacola, there’s a few colleges there and there’s the Naval Air Station. So there’s a lot of movement and traffic into the panhandle of Florida, but it’s kind of near the Alabama side. The market analysis I did you just looking back over the years, it did good through the last recession. There wasn’t too much fluctuation there. So I took that as hey, they could probably be pretty stable moving forward through anything else that comes their way. And also the sale to list ratio was pretty good. So that’s where I just chose. I have the familiarity of just the area. They’re building the downtown so there’s a lot of good things coming, I believe.

Dave:
Great. And your plan is to flip it, right?

Matt:
Correct. My plan is to putting 20% down on properties isn’t really cutting it for me because I’m two properties in and I’m already pretty much dry. So I’m trying to do just zero or low money out of my pocket and try to flip this first one to ultimately start BRRRR-ing and putting renters in and refinancing out of it, but using other people’s money.

James:
Matt, so on your rehab budget you have on this property, A, I like the price point in this property, 140, that’s great for a first when you’re flipping remote, especially lower price point, it sounds like more of a cosmetic turn. And I think when you’re buying out of state, cosmetic turns are great because there’s less variables in there. My concern with this deal is it’s a little tight. I think the numbers look good for a lot of different ways, but on a flip, it can be a little tight, especially if you’re flipping remote, because if you can’t control the cost as much, if it creeps over a little bit be you could go into red fairly quickly on this deal.
In addition to if you’re stacking the leverage and you’re looking for 100% financing, that debt cost is going to be higher than a normal flipper at that point. A lot of times when we’re flipping, we’re leaving 20, 25% in the deal, which is going to usually get back to us in the six to nine month period at that point. Because when I was looking at the flip numbers, have you established your hard money rate yet on this deal? What’s your debt cost on this? Because that’s going to make a big impact on the margin.

Matt:
So as far as the hard money, the way I’m planning to structure this deal is it’s hard money for the purchase and the rehab. And then I have a private money lined up that I met at a real estate meetup here in Orange County that is willing to do the down payment and any overhead costs on that. But the hard money I should have locked up today, their quoting me it will be around 12% with 10% down. So currently waiting back to hear from there and then that’ll dictate where I’m at on a deal.

Jamil:
Matt, what do you, what’s your full-time W2?

Matt:
I’m a federal officer.

Jamil:
Oh, awesome man. So you’re pretty well versed in being able to understand if somebody is telling you the truth. How do you feel about your contractor? Do you feel good about the numbers that they’re giving you do, do you think that the scope of work is in line with what’s being presented?

Matt:
I’m pretty confident. I’m reviewing two right now. One, when I locked this property up my estimate was 60,000. I had two contractors come out, both I have a fairly relationship with them just through my last deal out there. One came in at 52 and the other one’s at 65. So I’m kind of juggling those. I feel like either one or I’m going to be just fine truthfully, but I haven’t made a decision on it.

Jamil:
Are you past your inspection period on the property?

Matt:
Yes, as of Saturday, so just a day ago. Yeah.

James:
So Matt, your debt caught, I want to come back because I’m trying to figure out the flip. Because flip’s always based on A, I think your approach to the best thing you can do to build capital is to wholesale and flip as you’re trying to build up to keep buying your rental properties. It’s a great engine, it’s a high tax engine, but it really does work. And for me, when we’re looking at flips, it’s all about cash on cash return. And my concern on this deal is I think this deal on paper could work really well for a couple different exit strategies including wholesaling.
But on a flip deal, if your construction’s already creeping over a little bit over on cost and your debt is going to be at 12%, what’s the sale cost out in Florida? Is it typically … In Washington we pay roughly about 10% when we’re selling something out the door. Excise tax, closing costs, real estate fees, what’s the cost out there? Because if we were in Washington, the margin would be almost under 10% or it would be under 10,000 as a profit, which is going to not have a lot of cushion in this deal. And then my other question is for that specific market, when you’re selling at that 250 range, is that something that buyers are expecting their closing cost to be paid for? Because that’s something that can also substantially affect this deal on the margin.

Matt:
Great questions, James. So I’ll be honest, I’m not sure what I was estimating around like 6,000 to 10 in closing costs, but I do need to probably do some due diligence there and make sure I know exactly what that is going into this.

James:
Yeah, because when you’re flipping, we got to pack all these costs in, your debt cost, your construction cost, your sale cost, and then look at what that net number is. So I would definitely dig into what the sale cost is. Cause I know each county varies. I know in Washington we have a sliding excise tax, depending on your price point, you can pay 1.2% and sale cost, or if you’re expensive, you pay up to 3% as an excise tax. And so it can make a big, big variance on the deal.

Kathy:
And you have property tax and insurance and all of these things really add up the longer you hold it. I’m curious if you do end up having to hold it because you can’t sell it for what you want, you don’t want to lose money. Have you qualified, are you able to refi into a longer term rate?

Matt:
Yes. I did already speak to a lender as a potential out the cash flow if I do need to rent it will be minimal, but it will cash flow. So I do have that as a backup exit strategy.

Jamil:
Will you be able to take out your private money lender with that refinance?

Matt:
Yes, it’ll be close, but I’ll be able to cover it.

Jamil:
Awesome.

James:
Matt, what kind of loan did you get set up? Because when I was looking at the rental numbers on that, typically you’re going to be able to get a loan for 70, 75% of value, which is going to give you a balance loan of about 160, 165 on this, and you’re all ins at 200 plus debt costs. And so is that something that you’ve looked at that you feel pretty comfortable leaving 30, 40 grand on that deal?

Matt:
It’s definitely not my … Yeah, I wouldn’t say I’m super comfortable with it, but kind of have some things to work through on that exit front.

Jamil:
Just as a one last ditch negotiation technique, Matt, and I know you’re past your inspection period, and it’s not necessarily the best form to try to negotiate anything deeper once you’re past your due diligence periods, but it happens. And so I’m curious if, because I think you do need about another 10 or $20,000 in cushion in this deal. And I feel that if you look at the motivation of your sellers, how much do you have risk right now for EMD?

Matt:
1300.

Jamil:
Okay, so it’s a substantial amount, but I don’t think enough for your sellers to say, “Hey, let’s take the money and run.” So Mike, I’m curious if you’ve comfortable with trying to go back, even though you’re a day past inspection period, to go back and say, “Hey, after looking at my numbers, I think I do need to ask for an additional credit.” I think if you got another $20,000 off the purchase price of this deal, you would be in fantastic shape. And I would recommend, even if they refuse, Matt, even if they refuse, taking the shot is always worth it because you still have the right to say, “Okay, they refused. I’m still going to move forward. I don’t want to risk my $1,300. I’m going to close and we’re going to move forward with the deal.” But you still have the right to try and to move forward. So I’m curious, is that something that you’d be comfortable doing? And if so, I can help you with what that best technique could be.

Matt:
Yeah, definitely comfortable. I don’t mind, I’ll certainly ask.

Henry:
He’s in law enforcement, of course he can ask.

Matt:
Yeah, confrontation is not my weakness. But yeah, definitely, and I would appreciate the help too. Absolutely.

Kathy:
Jamil, I’m curious, are there any creative options he might have bringing the seller in somehow on splitting any profit there might be if they do lower it to encourage them to do that?

Jamil:
Given his purchase price here, I would’ve opted for innovation where the seller would’ve retained title of the property and Matt would’ve brought the private money lender into the deal, had the renovation done and had no origination costs or no loan costs to get into the property. Then all he’s got is that renovation that’s there. And he agrees to a sale price at 140 with his sellers, but he’s going to save like $7,000 in just closing and origination fees. And so creatively for me, that would’ve been the most strategic move because then he just brings his private money lender to the table. He doesn’t have to put 20% down because he doesn’t have to take title, private money lender comes in with the $52,000 in renovation expenses, they’re in it now for 192, he sells for 250. There’s a profit.

James:
The only concern I would have is just knowing that sale cost and then who. On these first time home buyer markets really dig into the comparables. Most times, I know in Washington we can see whether closing costs was paid or not. That’s three and a half percent a lot of times right off the deal, and that’s 50% of the profit on something like this, but I think that’s a great way to structure that because the problem is the debt cost is going to destroy this deal. And then if it goes long, it can go red fairly quickly.

Henry:
Jamil, what are your thoughts being a master wholesaler? So what are your thoughts if in that negotiation you are asking the seller to come down, but you’re also asking the wholesaler to come off his fee a little bit to make up for, so there’s a middle ground there?

Jamil:
So this got bought from a wholesaler as well, or was he the one who went, I think he went directly to the agent, right?

Matt:
Sister and agent on market.

Jamil:
Yes. Okay. So I think that there could be a play to ask the agent to come down on because did they do dual representation, Matt? Listing agent represented you?

Matt:
I went through my own agent.

Jamil:
Okay. So I like doing dual representation because you now put the listing agent in a situation where they now have double the commission to play with. And when they really want to get something done, they’re willing to get play with 3% often because they want the deal to close. And so normally when I’m buying on market, I’ll always go directly to a listing agent, ask for dual representation, or I’ll just say, “Hey, look, I can come in unrepresented, let’s give the 3% back either to myself or to your sellers, depending on the price point that I’m coming in at and just to make the deal sweeter or make it make more financial sense for myself and the homeowner.” I think in this specific instance, you’ve got a buyer agent, which is good because their fiduciary duty is to you.
And so I think you’d really need to have a heart-to-heart with your buyer’s agent and say, “I am looking at these numbers and I’m starting to get a little concerned looking at my loan cost, looking at the market.” And even though the market is strong in Pensacola, I’m really bullish on Florida. We just had the economic data right now is not the best. The Fed is signaling more rate hikes. And so with that said, there could still be some depreciation in your asset that you haven’t accounted for. And if you take another 5 or 10% dip in your ARV on that property, it’s done. This is a reality, and I think even over the weekend and over through last week, we’ve seen so much turmoil, banks shutting down, bank runs happening. There’s just so many things that you can use as economic indicators that make you nervous for moving forward. And I think that if you brought these situations to the table, also hiring a licensed inspector, did you do that for your inspection period? Did you get an inspection report done?

Matt:
No, I had two licensed contractors come out and dig through the property.

Jamil:
Okay, perfect. Good enough. So I would also use those. And I think that it’s smarter for you to use the higher of the two numbers just because the higher one is probably more likely to be the right number than the lower number. When you look at the world of contracting, I’ve never had a deal come in less than what they said. It’s always more, and my sister’s my contractor, I trust her more than anyone in the world and it’s still always wrong. And so with that said, I think that you’ve got a really strong case to present to your buyer’s agent who will then have to make the case to the listing agent. So there’s going to be a little friction there because you’re going to play telephone game. And you can even give your agent the right to forward your email.
I would make a case, I would say, “Look, given this bid that I got, given the economic data that we’re looking at and seeing all the things that happened over the week last week, I am feeling less confident about this deal at this price. And I really think this sellers want to move this house. I really want to perform on this deal, but I’m feeling very nervous to perform at 140.”

Kathy:
I love what you’re saying, Jamil, because this house has been on the market and they want to get rid of it.

Jamil:
And they had three price reductions. And that’s a signal that these people are motivated.

Kathy:
They’re a great sign to go back and say you’re getting cold feet and just this past weekend is enough for them to understand, that there are bank failures and give it a go. What do you have to lose?

James:
And that’s one, I think important thing right now is the market has changed and the velocity of the market has changed. We were all writing everything with no inspections, quick inspections the last two years. You don’t need to do that anymore. And what’s really important is you’re prepping your deal, your inspection timeline can be extended. And if you have not locked your debt, your bids are not firm and you don’t have the full grasp of the cost, that’s okay. You want to ask for that extension on the feasibility at that point, get more time. The more time you have, the better you can prep your deal. The more time you have, the more prep you have, the less risk in a deal. And so never waive until you are all the way locked in on that to where you feel good about your financing, it’s set up.
Because also, if that secondary lender bails on you last minute, if that’s not locked in and has a full commitment on that, that’s where your earnest money can be at risk. And so use that feasibility to get your term set up correctly. And I do think, Matt, one question I have is what will this rent for? Because I think maybe flipping just the wrong kind of dispo on this and maybe bringing it to someone like Jamil that has buy and whole renters, I mean that’s a good price point in an area with some growth in it that people can afford. I’m looking at them if you have a loan for 160,000, which a lot of people will leave 40 grand at a rental property that’s a payment of 1250 a month. You might just be able to wholesale that off, which gets you to your goal of building capital and not taking on this risk, which is a little thin.

Matt:
Yeah, I like it. The median rent and the cost for that specific area are at 1475 monthly. So the rents are definitely strong over there.

Jamil:
I’m happy to connect you with some strong disposition people there as well. I think in tandem, Matt, if you, when’s your closing date?

Matt:
April 3rd.

Jamil:
Okay, so you’ve got a little time. So what I would do in this period is make a case for a strong renegotiation. In the meantime, try a wholesale exit strategy. Even if you make $5,000 on this, Matt, it’s $5,000. You risk 13 to make 5 grand. That’s a great return. You transact it, in and out, move on to the next. But I also think that you have an opportunity to add more upside if you are successful in that renegotiation. Say you say wholesale this for 145 and you get another $10 or $20,000 off the purchase price. Now all of a sudden you’re making what you were going to make in the flip on flipping the paper. And that to me, coming from a person whose business model is wholesale, I’ll tell you that makes me more excited than putting a hammer to a house any day.

Kathy:
I’m also wondering if you did decide to just have it be a buy and hold if there would be less to repair if you don’t have to really make it flip ready and more rental ready, could that construction price come down?

Matt:
That’s a good thought, definitely something that I would like to look into after talking to you guys.

Kathy:
It does sound like a great rental. Yeah, it’s a great market. Lots of dynamics. My biggest concern about that property as a buy and hold is that Pensacola got hit so hard by hurricanes that I imagine the insurance is just astronomical, but still, the numbers could still really work for a buy and hold investor at that price.

Matt:
Very good point on that.

Henry:
I wholeheartedly agree with Jamil. My same suggestion was going to be a, maybe see if Jamil has some buyers in that market because that is a great buy and hold price point. The other thing is, as you’re going through this renegotiation, I would pull up all the LLCs who own houses in the neighborhoods around there. Because typically those are investors who are using it as rentals. And then I would prioritize that list based on the LLC that owns the most. And then I would find who owns the LLC and I would call them and say, would you want this deal for XYZ price? Because clearly they like the neighborhood, they’ve got other rentals in the neighborhood and they may be willing to pay that price. And you could find your buyer that way as well. So I would do that today.

Matt:
Great suggestion, Henry. Thank you.

Jamil:
And if you’re not familiar with that process, Henry can probably walk you through it offline as well. I have some utility that I can help you with in skip tracing and you’re a federal law enforcement officer, you know how to find anything.

Dave:
All right, Matt. Well, thank you. Hopefully this advice has been helpful to you. We appreciate you bringing us the deal and sharing all this with us.

Jamil:
Thank you for your service too, Matt. I

Matt:
I appreciate it. Thank you guys. I feel like I got educated, so thanks for it.

Kathy:
Awesome.

Dave:
All right, well, thank you all for participating in the infomercial for Henry’s coaching business.

Kathy:
I love to see the difference he’s making. Just wonderful meetings.

Dave:
No, seriously, man, that was awesome. Both of them, both Matt and Michael were super interesting, knew what they were talking about, were open to feedback. It was great talking to them. So Henry, how’d you feel about your students joining the show?

Henry:
Man, I thought it was amazing, man. Helping people invest in real estate is obviously a passion of mine. That’s why I’m here on this show in general. But I get more excited when my students get deals and when I get deals, man, and obviously Michael hit a home run for his very first real estate deal with his three unit single family deal. And that’s obviously what everybody would love to do. And then I think some people are going to look at Matt’s deal and go, “Oh man, that’s a tough spot to be in.” But I’d urge everybody to look at this in a different light. What Matt’s done is he’s taken massive action. He’s learning trial by fire. And so many people are scared to do that. They’re scared to get out there, analyze deals and make offers.
Because they think the world is going to end if they get themselves into a bad deal and bad deals are no fun. Don’t let me put that out there. But at the end of the day, if Matt walks away from this deal, because he doesn’t like the risk he would take on, he loses $1,300, but he doesn’t really lose $1,300. He paid $1,300 for an incredible education, for more education than he could have ever got in somebody’s class. More education that he’s getting in the Mastermind. He got trial by fire, he had to go find a deal, analyze the deal, talk to an agent, put in the offer, do the inspections, go back and renegotiate to try to get the deal to where it makes sense now, and then look at multiple exit strategies to try to get out where it makes sense.
And then if it doesn’t, then he has to get out. Then he has to get out and lose 1300 bucks. Well, man, so many people wouldn’t do that. And because they wouldn’t do that, they’re not going to find themselves in a position to build wealth. But Matt is going to find himself in a position where he could make money on this deal, or if he doesn’t, he’s going to hit a home run on the next one because of the education that he bought himself with that $1,300, I think it’s incredible that he’s taken that action

James:
Contacts equal contracts.

Henry:
That’s right, absolutely.

Jamil:
I think he learned a lot of really important lessons as well. And like you just said, Henry, all of this is phenomenal, but how do I get Michael’s deal?

Henry:
Do you want me to give you the link to join my program?

Dave:
I was going to ask for it if we can get a discount.

James:
Yeah, Jamil, you’re the wholesaler. Will you get me Michael’s deal.

Jamil:
Right. I mean, I was trying to talk him out of it, but he already closed it, so I was like, oh.

Kathy:
He better not get used to those numbers because that could be a hard one to find again. But who knows?

Henry:
That’s a screaming deal, screaming deal.

Dave:
Good for him. Well, thank you all for being here. This was a lot of fun. We’d love to hear your feedback on this. This is the first time we’ve done one of these live shows with a bunch of people. You can find any of us on Instagram or you can post on the BiggerPockets forums where there is an On the Market forum specifically that we will check and check in with. So hope you all appreciate it. Thank you all for listening, and we’ll see you for the next episode of On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Puja Gendal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.



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Last week, the Federal Reserve both surprisingly and unsurprisingly raised rates. For weeks leading up to this meeting, investors had a glimmer of hope that the historical rate hikes would end and that we could finally look forward to a time of reasonable mortgage rates and sustainable home prices. But, even with high rates, the housing market has taken some surprisingly strong wins. We’ll get into today’s top real estate-related stories in this episode!

Welcome back to another correspondents show where our “housing market data without the hysteria” expert guests bring in some of the most hard-hitting headlines that could affect real estate investors. Dave starts by professing his deep respect for Jerome Powell’s decision to hike rates even higher and goes into why the Fed could be playing “mind games” with the American people. Next, Henry hits on how home price drops just hit a new threshold not seen in over a decade!

Back on the residential side, James breaks down the good news for February home sales, but soon after, Jamil and Kathy touch on commercial real estate stats that have banks, lenders, and investors starting to sweat. But, what could be bad news for some is great news for others, and if you’ve been looking to pick up steals and deals during a time when competition is low, now may be the PERFECT time to get in the market!

Dave:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined by James Dainard. James, what’s going on, man?

James:
Oh, just enjoying my time out in Seattle, Washington, this trip.

Dave:
Good. Good. Henry, how are you?

Henry:
What’s up guys? What’s up? Life’s good, man. Glad to be here. Thank you.

Dave:
Good to see you. Kathy. What’s new with you?

Kathy:
Well, I’m just enjoying that you all got to see Rich’s 480 bench press video of the ’90s.

Dave:
If you guys don’t know Kathy’s husband, Rich, he’s the man. And if you want to get a sense of what he’s like, go Google, Rich Fettke 480 pound bench press on YouTube and enjoy yourself. It’s an incredible video.

Kathy:
Oh, he might hate me for this, but it’s worth it.

Dave:
It’s incredible and he should be very proud of it. Anyway, Jamil. What’s up man? How are you?

Jamil:
I’m fantastic. Honestly, after watching that, I wasn’t sure if that was a ’90s SNL sketch or if it was really Rich Fettke bench pressing 480 pounds, but phenomenal, incredible. I’ve always been a Rich Fettke fan, and today I know why.

Kathy:
New levels.

Jamil:
New levels.

Dave:
It’s very impressive. We should check how many YouTube views he has on that video right now. And then right after this episode airs, see how many YouTube views he’s got because hopefully several thousand people should be watching this immediately after hearing this.

Jamil:
It’s one of those things that I think will end up going viral because it’ll get picked up and found from all the increased views from this. And he’ll be a viral sensation.

Kathy:
And mullets will come back so strong.

Dave:
The hair is very good.

James:
Well, fanny packs are back, so why not mullets?

Dave:
Yeah, the ’90s, late ’80s, ’90s, it’s all coming back.
All right, well we have a lot to talk about today. We’re doing a correspondent show, and if you’re unfamiliar with this format of show, Henry, James, Kathy, and Jamil have all brought a story about the real estate market that they’re following and we’re going to talk about it, but I have a story I feel like we need to talk about first, and that is today, we are recording this on the, what is it, the 22nd of March. We just found out that the Federal Reserve raised interest rates once again. And I kind of felt like this one was the first tossup we’ve had in a while. I actually thought they were going to pause hikes due to the banking crisis and to try and reduce some stress on the banks, but Jerome Powell just doesn’t give a. He just went for it. So curious what you guys think about this.

Kathy:
I wasn’t surprised. He’s still battling inflation and he’s made it really clear, he’s going to do that no matter what breaks. But I also, on the other side of it, it’s like it’s the Fed. They could bail out banks, they’ve done it before. They’ll do it again. They’re going to keep doing it, and that could create more inflation if they’re printing more money to do that. So it’s a quandary. But for real estate, real estate performs generally well in inflation, and then it brought rates down, mortgage rates.

Dave:
Yeah. Somehow today after they announced a hike, bond yields went down, for some reason. So mortgage rates might go down as well. So it’s very interesting. I guess what I was reading is that the logic here is that obviously, inflation is still too high, so they want to keep raising rates, but I was thinking because a lot of the banking crisis, not direct result of Fed policy, but it indirectly is pretty tied to what’s going on with interest rates, that they were going to just take a pause to reduce stress on the banks. But apparently, the Fed was concerned that if they did a pause, they would make the banking crisis seem worse and signal that there is a lot of stress on the banks when they don’t want people to think that. So it’s just all these crazy mind games and I’m going to just give up on predicting what’s going to happen at this point.

Jamil:
I think it’s interesting though that they did signal that rate hikes would likely pause after this. And so I think that looking at it, we’re in this weird world where bad news is good news, good news is bad news. And so the economy, it has suffered. And that’s what the Fed was trying to accomplish, was to slow things down, and that it’s done.
But I understand the logic that if they had stopped or if they had paused the rate hike now, they would’ve signaled that there was a further crisis in the banking sector. And it was also interesting that they were very clear in calming any fears with respect to what’s going on it with US banks and made a point to comment on the stability of the US banking system in general. And so I think that it is a mind game, Dave. I think that the mind game is being played rather effectively and we can almost guarantee that the next meeting will result in a pausing in rate hikes because they couldn’t do it too quickly. They had to give us some runway. And so I think at least we see some reprieve around the corner.

James:
I’m just going to say a quarter point, not half or three quarters because those three-quarter hikes were brutal. And so I don’t think this is going to do much to what’s going on in the current market conditions. And I could see that he continues to raise a little bit though because this labor market still isn’t breaking. I mean, I’ve had an accounting job up for a month and man, I can’t get anybody in the door. It’s just like, it’s tough to hire right now. And that’s half the reason, it’s not just the rates. They’re also trying to beat back that labor market and slow the economy down. And it has not slowed down in certain sectors. I mean people still can get paid and things are still moving pretty fluidly.

Jamil:
It could also be that there’s very few people that want to be James Dainard’s accountant, but-

Dave:
The numbers are too high.

Speaker X:
It sounds like a nightmare.

Jamil:
The numbers are too… Yeah.

Dave:
It’s much easier to be someone else’s accountant where the figures are a lot smaller.
I think it is worth noting though that I read something that the recent bank issues, some economists have equated to something like a 25 or 50 basis point hike, just by the tightening of credit will have a similar effect as another 25 basis point hike or so they estimate. And so that could give the Fed reason to pause, as Jamil said.
And there is something that released that’s called the Dot Plot, which is basically a forecast of where the Federal funds rate is going to go. And right now, the median is 5.1 and so that is similar to where expectations have been. So it’s not like people are thinking it’s going to go that much higher. So if that happens, there’s not too much different that’s going to happen in the mortgage market or anything like that. So hopefully, that’s where it is and I would like at least to just see it pause for a while and just see what’s going on. It’s not like they can’t raise again in the future if they need to. It just seems like the take your foot off the gas for a little while to see what’s happening.

James:
But is that a red flag? Is that a red flag though? If they do cool down, does that mean they’re just totally lying to us about the banking market and the small banking because they’re like, “Oh, we’re going to break this in half”? That’s actually what my concern is, if they really, really slow it down because they’ve been so aggressive the last 10 to year. Are they backing off?
Even though they’re saying it’s healthy over here, is it really just not that healthy and we could see something else? I don’t know. I think I’ve lost all trust in anything the Fed has told us because it’s changed so many times in the last 12 months that I’m like, if they tell me one thing, I’m like, “Oh, it’s other.”

Kathy:
It’s a different scenario though. It’s very different than 2008 when just bad loans were given and they never should have been. In this case, the banks actually do have assets. And it seems like this was more of banks buying other banks and big banks getting bigger. The big banks seem to be in good shape, for the most part.
It’s just kind of buying a distressed asset that has assets. They’re just not good right now, but if you wait it out, they’re going to be, they just have to mature, the bonds that the bank bought. So to me it’s not as big a crisis. This may not age well, guys, but in my opinion it’s not as big a crisis as people are saying. It’s that they made some bad decisions, they bought bonds that weren’t mature yet. If they sold them now, it would be bad. So if someone else has got the cash, is buying these banks, and they get to hold onto those assets till they mature. So it just means, but there will be effect, that there will be an effect on real estate. Anyway, that’s just my humble opinion.

Dave:
Well, if you want to hear more about it with last week, I had a conversation, if you haven’t listened to it yet with Mark Zandi from Moody’s Analytics. It was really interesting. He shared similar sentiment, Kathy, that the banks are… their balance sheets are actually in really strong position. The concern is people panicking. It’s not really even necessarily the banks, it’s psychology.

Kathy:
I mean if you really were worried about your money, you wouldn’t put it in a bank because it’s being lent out. If everybody tried to take their money out of a bank at the same time, it wouldn’t be there. That’s just a known thing. So do you know what-

Dave:
Yeah, you would bury it in your backyard like the rest of us.

Kathy:
Buy some real estate. Don’t stick it in a bank.

Dave:
At least buy a bond. Yeah.

Kathy:
Yeah.

Dave:
All right. Well, that was my story. I just wanted to vent about the Federal Reserve, as usual. So we’re going to take a quick break and then we’re going to come back with our correspondent show.
All right. Henry, you’ve got some updates for us about the housing market. What have you been following recently?

Henry:
Yes, sir. So I brought an article from CNN Business Release just yesterday saying that home prices have just broken a decade-long streak and that streak is that the median existing home price fell a whopping, drum roll, 0.2% from a year ago.
But why that’s significant is because it’s been a decade since it’s actually dropped. And obviously, this is a national number. When you look regionally, there are some markets down where the median home price was down 5.6. It says some down four and a half. And so as you look across the country as a whole, this is just saying the average.
But the sentiment in the article is that there is an expectation that home prices will drop some more, even though this percentage is a very small percentage. Now, does that mean it’s going to be a 5% drop or is it going to be closer to a 2% drop? We don’t know. Obviously, real estate is regional, which is why it’s important to make sure you understand the metrics in your individual market and the economy that’s driving your market. But yeah, what do you guys think about the first decline in average home price in a decade?

Jamil:
Not shocked.

Kathy:
not shocked.

Jamil:
We’ve been seeing it. Look, I’m in Phoenix, Arizona and I feel that we’ve taken the brunt of that decline. If you’re looking at statistics, we’re the one statistic that’s pulling. We’re probably the reason why we pulled it into a decline in all honesty, because of just how much we’ve dropped.
But looking at that, I am not shocked at it. I do however feel that it’s misleading because a 0.2% drop nationally spread off over all of those markets, it’s not really painting the picture of what’s going on. And if you look at the major metros, there’s more pain than 0.2% of a price decline in some pretty concentrated and important areas in the country. And so an interesting stat, but I’m not super buying it, just because it’s got so much data involved in it. This average doesn’t paint the right picture, in my opinion.

James:
And I think a lot of what we’ve seen too is the 0.02 decline seems a little low to me, but that’s also because I think a lot of us are feeling, or investors are feeling the pain because we bought… It wasn’t off the median home price. We were buying off peak price for a lot of times.
And what we saw in that first quarter of 2022, I know in the Seattle market, which is similar to where Jamil is, right, we had hyper acceleration in certain markets. They’re off median home price. These homes were jumping 10 to 20% in the first quarter, so they were up 20% over that median home price the first quarter and then it snapped back down. The stat is actually a good thing if we’ve increased money by 40% and it’s only brought us down 0.2%, that’s a good thing actually.
That shows that the market’s a lot healthier than even I would expect. But I think what that does indicate though is there could be a little bit more of a slide because that’s not the impact it should be. And so you just got to be cautious. And the other thing is it depends on what market you’re in because like Scottsdale, expensive. Bellevue, Washington, expensive. We are well outside the median home price. I know in Bellevue our median home price dropped 22% year over year. So really, it depends on where you are and then dig into those specific sections because 22% is a big hit. 0.2 is not. So just dig into the markets that you’re looking at.

Dave:
If you are listening to this and are confused by this statistic and saying prices have been falling. I just want to clarify what this stat is, because prices in a non-seasonally adjusted way, not year over year have been falling on a national basis since June. But what Henry’s talking about is year over year data, which is basically comparing February of 2023 to February of 2022. And that is generally considered the best way to look at real estate prices because real estate data is seasonal. And so by looking at the same months over several different years, you get to take out that seasonality and you can understand the real trends. And so this is the first time that in a year over year basis, on a national basis, prices have declined. But if you have seen prices decline from June in your market to now, that is also true. So both can be true. There’s just different ways of measuring the same thing.

Kathy:
If you look at it that way and go “Year over year?” I mean last year was just the beginning of the rate hikes and mortgage rates were pretty low. So the fact that it’s dropped so little given the backdrop, given that mortgage rates have doubled and payments have doubled, that’s phenomenal. And also when you look at the averages, that means that some areas were higher. That means some areas actually still grew during all of this craziness, payments doubling. And obviously those markets had to have something going on where people were coming from areas that could afford that higher payment or maybe lenders are sellers are paying points to buy the rate down so that people can still afford. It’s just phenomenal that a year ago when people were really certain that 2022 was going to be the year of the housing crash, to just a year later be down so slightly, it shows the strength of the housing market.

Henry:
Yeah, I agree. And to echo all your sentiment as well as Jamil is this doesn’t really paint the full picture. It does. The article goes on to talk about how it’s not reflective of the home sales that have happened over the past month. So we got the home sales data for February that’s come out and it’s showing a percentage increase, which I know James is going to talk about. So yes, we have had a decline, but at the same time, I think in lots of market, we’re starting to see pending sales go up, more offers coming in on properties, more buyers entering the market. And so I think it’s a great point to dig into that February data.

Dave:
Well, thank you for doing my job for me, Henry. I appreciate that.

Henry:
You’re very welcome.

Dave:
James. Take it away. That was a buttery transition.

James:
I know. That was smooth, man. Yeah, so I have an article. It’s from the NAR realtors and what it talks about is we have broken a 12-month slide on existing home sales for the last 12 months. It’s been sliding for the amount of sales that are going on. And in February, they jumped 14.5%, which is a huge jump, but that is still down 22% year over year.
Why I think this is a great stat and a great article is that the market’s becoming alive again because everyone got so shocked and they were waiting for this crash. And we were just talking about how the median home prices down .2. And I think to a lot of people’s expectations, the market didn’t do what they thought was going to happen. We thought they were going to go into a free for all and so everyone kind of stood off side the sidelines. And now as the seasonal turnaround has came back and the market, we’re going in that spring market where it gets hotter and hotter, we’re seeing a lot more bodies come through houses.
For us, we have a lot of listings. We’ve over 60 listings. The amount of people we’re getting two to three showings a week, now we’re averaging seven to eight showings a week. And so there’s way more bodies in the market. And I think what is happening is people were waiting for the crash. It didn’t quite happen. It has gone down and it’s made it a little bit more affordable with the pricing. We’re seeing some compression, but now they’re seeing homes sell and they’re getting FOMO. And they’re going, “Okay, I’m never going to get a house.” And so they’re back in the market.
And I think one thing that people should remember, and I had to remember too, is quarter four, since I’ve been doing this for 18 years, it’s always a dead quarter. I would never ever list one of my projects in December. But during the pandemic, the rates were so low, we would list in that time because it would still get absorbed up fairly quickly. And so that seasonal slowdown did happen. We had the fear of the market crashing, plus we had our seasonal slowdowns. I think those are back. Like quarter four will be slow, just like it should be. And now we’re seeing this kind of spring back and things are transacting, which is a great sign. I don’t know if this means the market’s going to go up in value, but it shows that we’re getting back to stability, and stability is key for all of us as investors.

Dave:
That’s an interesting take. And I’m curious what the rest of you think. Have you seen pretty consistent upticks in activity in the housing market since the beginning of the year? Because part of me was wondering when I saw this data, and it is pretty amazing that it jumped so much, is was it a result of January having relatively low mortgage rates? They dropped down to about 6%. They’ve come back up in February and March. So I was kind of wondering if this momentum that we saw in February is going to be continued. And since as James said, there’s sort of these lead indicators that we can look at, which is traffic at showings and seller behavior, open houses. Are the rest of you seeing that as well now into February and March as well?

Jamil:
From the wholesale side, I can tell you that our inventory is flying faster than it has in months. We can’t keep our wholesale properties on our website for longer than a day.
And so that shows me that investor sentiment is strong or returning. We had a lot of investor… We still had investor activity when things were looking a little grim, but they were taking advantage of pricing. At that time, investors were coming in and they were banking, they were expecting deeper, deeper discounts and they were getting them, but those discounts have seemed to bottom. And pricing has seemed to bottom.
So I think what’s happened is that, A, the investors realize that prices are going to start to… If they haven’t leveled off, they’re going to start to kind of uptick a little bit now, slightly. It’s just slightly because I feel like we’ve seen the worst of it.
So with that said, in the wholesale side, there’s a lot of activity. The investors are gobbling up everything that they can possibly get their hands on, expecting that there’s going to be fewer resale properties hitting the market because home buyer or home sellers, would be home sellers are locked into their houses and they’re becoming landlords instead of sellers. So that inventory crunch is creating demand and that demand is being absorbed rather quickly. So from my perspective and from the investment point of view, in the single family asset class, it’s bananas right now.

Kathy:
Yeah. Same for us. We are seeing, our webinars are full, our property tours are full, and this is from an investor perspective, we help investors buy investment property. It’s again, flying off the shelf, to use the words you used. Do one webinar and it’s all sold. So I do think that initial fear that the headlines that have been literally claiming a housing crash for 10 years, for a decade. In 2014, I was on so many TV shows with the background saying “Housing crash,” like no, no, no, no, you got to look at the demographics. And we, again, know that there’s such little inventory, less than a million again on the market and a growing population of people at household formation age. So it’s just simply the matter of not enough inventory and a slight shift in interest rates. Just a slight shift down brings in a few more a hundred thousand people. A half a percent down brings in millions more people who can qualify. And that’s what we’re seeing.

Dave:
Yeah. Just yesterday I did what I do, which is nerdy things, and I overlaid these two graphs, which was mortgage demand and sorry… It was purchase applications and bond yields. And basically, you can see that the second that mortgage rates are going up, the number of mortgage rates are just start to spike.
So people are clearly waiting on the sidelines for any fluctuations in mortgage rates and are jumping in. And that’s only as to Kathy’s point, been pretty slight fluctuations in mortgage rates. It’s gone down from, it was like 7.1 or something, down to mid to high sixes. So if we talked about the fed’s projections, they’re projecting to get the Fed fund’s rate down to 4.1 next year in 2024. If all this happens, that’s millions of people who will probably jump back into the housing market.

James:
And one stat that doesn’t ever get reported because you really can’t do it, is like what we’re doing with all of our listings is with these showings increasing in our pricing, we’re going, “How many showings are we getting in this?” And then we go half mile out for looking for same price product in the same. And right now in the last month, we’re having a four to one. We have four to five buyers for every house that’s for sale. And so regardless if it’s not transacting, there will be a buyer in that mix. And so that’s a healthy sign, is like because for a minute, it kind of got out of whack, but the inventory’s still not there and there’s way more buyers. And so if you have a property on market, it’s a good stat to track, how many showings you get in there, how many competitive properties are in there, go half to a mile out and really see. If you have way more buyers in the market, I would stick with your list price at that point. Even if you’re not getting the offers, there’s people looking and you can transact.

Dave:
All right. Well, another great story and really interesting. I think, we’ll have to update you all, but I think it’ll be really interesting to see if this momentum in sales volume continues because that is a relatively good sign for the real estate industry and it’s not just investors and stuff. Obviously, real estate agents, mortgage brokers, these type of people depend on real estate transactions. And so seeing more of those is obviously helpful to the entire industry. With that, I think we’re going to move on to the commercial side of things. Jamil, what do you got for us?

Jamil:
Well, I don’t tend to speak on a lot of activity in the commercial real estate market, because you guys know that I tend to trade in a single family asset class, but I am a wholesaler and I love finding opportunity. And I can tell you that right now, there is going to be an opportunity in commercial real estate. And typically, what I like to do is zig when everybody’s zagging, right?
And what I have brought to the table today is an article by globus.com where they are reporting seeing discounts that they haven’t seen in the commercial real estate sector. So this is, we’re talking small office and they have not seen these discounts in 14 years. So price declines and pricing that reaching levels not observed since 2009. So if you’re looking for an opportunity, this is one of those asset classes that I would say you would have to play the long game on.
I don’t think you’re going to come in and snag up some opportunities and find an immediate spike in values in a return, but it’s a kind of perfect storm that we’re seeing, especially in the office space sector. We have many companies that have implemented very flexible working arrangements so that people can work remotely. I know for instance, especially in New York, they’ve got so much of their workforce that has remained remote. Even here in Phoenix, Arizona for my company, many of our staff members are still working remotely and taking advantage of some of the pandemic type working arrangements that became very popular during the lockdowns.
So that’s one of the factors that have people have lower vacancies, or sorry, greater vacancies in the office space sector. The second thing is, of course, rate hikes have put a lot of downward pressure on pricing because people just can’t get loans, they can’t tee up funding for their projects or to refinance whatever project that they might be in right now.
And so this is putting a lot of downward pressure on pricing in the commercial sector as well. So I think that there’s going to be a tremendous opportunity for people that are holding powder. And what I mean by that is actually having ready and available cash. I don’t think that lending is going to be very robust for getting your hands on these types of product, on these types of projects, but if you can come in and have cash available to take advantage of some of the pain that’s being experienced right now in the commercial sector, you can get your hands on some pretty incredible deals. And so for me right now, I’m going to be looking at opportunities to pick up some holds in the commercial, especially in the office, small office space sector.

James:
Yeah, I think there’s a ton of opportunity in the commercial space coming our way. The debt’s getting harder to get, for sure. And as debt gets harder, it’s harder to buy. I know we’ve been looking for a building for ourselves to move into for the last six years and we couldn’t get it. And now we think this is the time. I think if you’re an owner operator, investor, it’s a really good opportunity coming your way. The only thing I would say on the commercial space, as I remember in 2008, I bought this building for 30 cents on the dollar from an appraisal. We paid a million bucks for it, and it was like this mortgage company that went out of business. Because every mortgage company went out of business.
We bought this building, we paid 90 bucks a foot for this build… It was just ridiculously cheap. And we’re like, “We are doing this.” And I would say, I think there are opportunities there, but you still got to find the tenants to make sure it’s leasing. Because we bought this building, we had it up for rent for two years and couldn’t get it filled, and we ended up having to move our whole office down there and it was like the first WE Space. We were making these little offices and renting them out.
And I think the key to this is there’s a huge opportunity and if you have a tenant attached, the financing will be there. And if not, you’re going to have to pay cash. And so it’s going to be like a double search. As you’re looking for buildings, you’re going to be looking for tenants too, and almost buying based on who the tenants that you are locked in because then it’s going to be easy to get the financing. But from everyone I know in the commercial space, they said the inventory is massively stacking up for him. Like our commercial broker locally that we work with, he’s like, “I got all sorts of stuff for you guys to look at in the next couple months.” And he’s had zero for the last five years. And so I think Jamil is right, there’s a huge opportunity, and it’s going to be a matter of whether you can execute on it or not.

Henry:
I wholeheartedly agree with you. There’s absolutely opportunity in this space. What we’re having trouble finding is banks willing to lend, because the cash flow’s just not there for them because the interest rates are so high.
And so all I think that that means is that we’re not there yet. I think the prices will continue to come down. And as the prices come down, then you are going to be able to make an eight and a quarter percent cash flow. And I mean, that’s the ideal investment spot, because if you’re cash flowing at eight and a quarter, if things start to cool down with rate hikes and we level out and start coming down at some point, then wow, the opportunity is massive. The wealth you’ll be able to build. If you can get in the game, I think what it’s just going to take is it’s going to take some extreme diligence in your search and extreme diligence in your underwriting.
And James made a great point about finding the opportunities that have tenants in place because what you’re doing is you’re making a bank’s job easier, right? They’re saying they want to invest in something that is lower risk, right? And so if you can bring an opportunity that you’re getting at a discount with a good tenant in place, you’re setting yourself up to build massive wealth in the future.

Jamil:
Henry, to speak, just to add to that, if you are… For instance, my company, KeyGlee, we are just in this funny spot where purchasing a commercial building could be on the horizon for us because our lease is coming up and we could be looking at making a move.
So with that in mind, I see this as an opportunity for us to go out there and have our… Because my company’s got over a hundred people, that we need 20,000 square feet in order to house our staff. So we would be an ideal tenant. And if I can find a building that is, I can buy cheap enough and put myself in as a tenant and pay market rent for that, I’ve now created value. I’ve now created wealth with myself as a tenant, and I can generate cash from something that I would just need to do as a business anyways. So I think that there’s a tremendous opportunity, to add on to what James and Henry said, especially if you are a business owner and you can provide your own tenancy as part of the package, you can hit a grand slam.

Henry:
And Layer on cost segregation on top of that.

Jamil:
Boom.

Kathy:
It’s like a house hack, but it’s an office hack.

Dave:
Yeah.

Jamil:
Yep.

Dave:
That’s interesting, Jamil, because otherwise I want nothing to do with office space, to be honest. I just feel like it is, especially in big commercial in large areas like New York, San Francisco, the vacancy rates are really going up and I would be pretty concerned about it, but if you have to spend the money and like you’re essentially house hacking, like Kathy said, I think that’s an interesting approach. But let me know how it goes.

Speaker X:
Yes. Thank you.

Dave:
[inaudible 00:33:41] into office investing.

Jamil:
So again, paying attention to the fact that right now, there’s just not a lot of lenders out there that are willing to loan on these types of assets, look for those opportunities, look for that, because that’s where the pain is going to be. And I think that there’s just, especially for some of those buildings that are going to need to refinance in the next 12 months to two years, tremendous, tremendous opportunities.

Dave:
All right. Well, Kathy, it sounds like you brought a story that’s sort of related to that, right? You’ve something with commercial lending as well?

Kathy:
Yeah, it’s a MarketWatch story called Bank Jitters, puts spotlight on commercial real estate, three charts to pinpoint the potential trouble. And then the quote says, “I don’t think it’s going to be a repeat of the ’90s, but it is going to be harder to get a loan.”
So it’s basically what I also learned at the best ever conference when I talked to a lot of lenders there. And basically what we’ve been talking about for a year in liquidity, my whole keynote speech at the Best Ever was focused on liquidity and what that means. And it’s basically available cash, whether it’s cash you have, whether it’s cash you can get from a bank, the cost of that cash. Can you get it from investors? Liquidity is needed generally when buying real estate. Most people don’t buy properties with all cash. If it’s cheap enough, maybe.
But when you get into the commercial real estate range of prices, it’s usually needing liquidity of some kind, whether you’re raising it from investors or again, getting it from a bank. And when that liquidity dries up and you can’t get it, well, obviously that’s going to have a huge impact on the number of sales and the pricing of those if you just can’t get your hands on the money.
And I went through that totally in 2008 when there were great projects, but banks had no money to lend. And that’s when I started syndicating. That’s when syndicators came out of the woodwork because you didn’t need a syndicator before 2008. You could just go to a bank and get the money. That’s where you got the liquidity.
So today, we know that the Fed is trying to pull money back out of the system. That’s why they are raising rates. They’re trying to remove some of the liquidity. There was so much of it that people were trading deals all day long, because if you can go to a bank and get the money and go buy the deal and it makes sense, you’re going to do that. When you can’t get the money, what are you going to do?
So the situation right now of course is we’re seeing banks being cautious, obviously because of these bank failures. And there’s a lot of talk about, “Ooh, is the whole financial system going to crash?” And you already heard me say, I’m not worried about that. I think it’s more of a consolidation of big banks buying small banks that just didn’t have enough liquidity. They didn’t think that went through, they didn’t think there’d be bank runs and so forth. They thought they were investing in something safe, treasuries, right?
So right now, kind of where we’re at with banks and us as investors trying to get that money from the banks, there always seems to be enough money for single family, because the Federal government backs that through Fanny and Freddie. They want people to be able to get home loans. So again, I’m not too worried about the one to four unit conventional loan sector. It’s the commercial loans and what’s happening there.
And in this article, I thought it was really interesting. They talked about the number of small banks that have been involved in doing transactions this past year versus big banks. And with the small banks, it’s 68% of all commercial real estate is with small banks. And the big banks, much, much less, like 20%. And this past year, the big banks only increased their exposure by 5%, where the small banks kind of went all in. That’s where commercial investors were getting their money this past year.
The reason why I’m not worried about the big banks is because they sell those off to commercial mortgage backed security, CMBS. It’s the bond holders who hold those, and it’s not the banks at risk, it’s the bond holders who bought the commercial real estate backed securities. It’s the small banks who don’t do that, and they’re holding onto what could be some trouble.
And so that’s another thing to pay attention to. How are the smaller banks going to handle some of the issues that come up when these loans come due and the borrowers are not going to be able to refinance into the higher rate and these smaller banks are going to have to take back these distressed situations?
So that’s really, to me, what this article is about is liquidity, who’s got it, who’s got the money, and who’s going to be lending it? It’s going to be tighter, stricter. There’s concern now with these bank failures that there’ll be more regulation, which may be a good thing. The Dodd Frank laws prevented banks that had over $50 billion… Well, I should say banks that had more than $50 billion had stricter regulations, and that changed in 2018 where it was if you had to have 250 billion.
So a lot of the small banks got to do more without the regulation that big banks have over the last, I don’t know, four or five years. So more regulation, less money circulating. It’s just going to be harder to get a loan, and that is going to affect commercial real estate. Even if you’ve got a great project and you just can’t get it financed or you’re trying to refinance. It’s a great project, but you just can’t get it refinanced. These are the things we’ll be paying attention to at Best Ever.
Again, I talked to some high level people, Marcus & Millichap, John Chang, he’s like, “It’s going to be a problem for some syndicators who aren’t going to be able to refinance,” but the bank’s okay, because there’s equity there. It’s really more the equity that gets lost and another. There’s plenty of money on the sidelines ready to scoop up the deal just for the amount that the bank has lent on it.
So I don’t really see it, commercial real estate crashing so much as some syndication projects crashing and the equity crashing, people not getting their money back on those deals, but I think banks are going to be fine and there’s plenty of money to swoop in and pick up the pieces.

Dave:
Well, that’s what I was going to ask you, Kathy, is do you think people like hedge funds or private equity or some non-bank lenders are going to get more into this space? Similar to what happened in post financial crisis in the single family space. A lot of these institutional investors got in there and they’re pretty active in commercial real estate now, but I’m curious if you think they’ll start stepping in an increased way.

Kathy:
Well, again, that’s what John Chang said of Marcus & Millichap, and I’m happy to bring him on as a guest, if you guys want to interview him. He said that he was talking to major, major Wall Street funds who have to place money this year, and they’ve got a lot of it. They’ve got billions and they have to place it.
So they’re maybe not looking for the deals that you and I are looking for. Maybe they don’t need the kind of returns that we need. They need to just place the money. It can’t just sit there. And so he wasn’t worried.
The concern really is the syndicators who raised money, that equity gets paid last. So if you refinance and all of a sudden the payments are much, much higher and the cash flow is so much lower, either those investors aren’t going to get any distributions, or if it sells, it may sell at a price where they don’t get any money back. And that’s going to happen in quite a few deals. But I don’t think it’s the banks in trouble because like I said, someone will just take over that note because it’s cheaper now. If it’s a $50 million property and 10 million was raised in equity, but there’s a $40 million loan on it, let’s say, now that property, some other institutionals coming in to buy for 40 million instead of 50 million, but the equity got wiped out.

James:
I think the riskiest ones on those for the banks are those value add loans they were doing though, because some of them, they were taking 15% down on some of those deals, the small bank. I mean, I know Henry loves local banks like I do, and we all love them because they’re doing the percentage of loans that Kathy’s talking about. What, 65% of these deals were going with local banks. They were really easy to work with. They looked at you as a business.
Because the other day, I was trying to figure out, I was trying to research and I wonder if Dave knows how to find this, is there a way for us to figure out how much of those loans generated the 67% of them are actually on variable debt? Because the fixed debt will remain okay, but this variable debt was, a lot of that was going on, and when you have a variable debt loan set up with a two-step construction component with an operator that, like Kathy said, there’s been some new operators in the market that may have underquoted things and they’re going to get a little sideways, that’s the risk for the banks, is not taking it back when it’s stabilized but midstream.
And there’s a lot of stuff in midstream right now that are not hitting the rent perform… I mean, I was talking a few down actually in Phoenix of all places, and they’re like, “Yeah, our rents dropped so much. We didn’t want to put the money into the project,” and so they’re in this middle stabilization period. That’s where the loans can get risky, right? Because when you’re halfway through, the value of the building almost goes down, right? You’re vacated. Things are under construction, so that properties worth less than it was when you bought it just in where it is.
And that’s what I’m trying to research right now is how many properties are these midstream properties and how many are on variable debt? Because that’s the ones where they could walk away and then a bank has to remodel these things. That’s what bankers aren’t good at doing.

Jamil:
Which they won’t do, and they’ll just take the haircut.

James:
I think that’s where the opportunity is, is in… And I do think we’re not going to see this 2008 homeowner problems. It’s an investor greed problem. We’re seeing headphones getting their teeth kicked in right now. I know one that’s losing a ton of money in Seattle right now, and they’re all midstream projects and they’re bailing out.

Dave:
It’s the James Dainard special.

Speaker X:
It’s half-built.

Kathy:
Rates are down, what, 51% year over year, and that’s mostly office, and they are just absolutely getting hammered. I think what I read is 60 billion in fixed loans are requiring refinance and 140 billion in floating debt is maturing over the next two years and it’s going to need to refinance. So if rates stay high, there’s definitely going to be opportunity for people who know how to find it. Just my point was, I think there’s just enough people thinking this way that they’re getting ready. There’s money on the sidelines, and there’s institutional investors who have to spend it. They can’t just sit on it. We’ll see.

Dave:
Yeah, it’ll be very interesting.

James:
Well, if someone figures out how to create the commercial and the multi-family, somehow get the construction costs under control, then it will really rip. Then I think that stuff’s getting all bought and converted.

Dave:
Yeah, there’s going to be, I think there’s has to be some sort of public-private partnership, government incentive to do that in some locations. I didn’t know where those will be, but some municipality will get smart enough to help developers or investors convert office space as reasonable cost.

Jamil:
Well, we know the labor market’s broken as soon as James finds an accountant. So when we have that figured out, we’ll know that we may have some reprieve in construction costs, at least on the labor side.

Speaker X:
We have our market indicator.

Jamil:
That’s it.

Dave:
All right. Well, thank you all so much for bringing these stories. We really appreciate them. This was a very fun show. Thank you all for listening. If you like this show, we do always appreciate a positive review on Apple or Spotify. James, Henry, Jamil, Kathy, appreciate you being here. We’ll see you all next time for On the Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Puja Gendal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.



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The demand for home-equity loans, particularly home-equity lines of credit (HELOCs) as well as shared-equity investment products, is now stronger than at any time since before the global financial crisis some 15 years ago.

Securitization channels for those home-equity products, however, are only now starting to catch up to the growing demand for them. Homeowners collectively nationwide now have more than $10 trillion in tappable equity (equity beyond a 20% cushion) tied up in their properties, according to the Black Knight Mortgage Monitor. Those securitization outlets for home-equity products are critical to ensuring liquidity for ongoing operations.

“Securitization of HELOCs had been a small part of the RMBS [residential mortgage-backed securities] market in the pre-financial crisis period, but issuance was still relatively commonplace until 2007,” states a fall 2022 DBSR Morningstar report focused on the securitization market for HELOCs. “After that time, HELOC production waned as defaults spiked and home values plummeted, and HELOC securitizations effectively stopped for nearly a decade. 

“Eventually, a number of small deals trickled their way into the market starting in 2019, More potential issuers have looked to add HELOC securitization funding [in recent months], especially given the dramatic rise in home values providing increased home-equity availability.”

HousingWire analysis of bond-rating report data and information provided by industry experts shows that between 2019 and March 28 of this year, there were at least 17 private-label securitization deals involving HELOCs and/or closed-end second-lien (CES) home-equity loans and separately shared-equity contracts. Those 17 deals were backed by home-equity collateral valued in total at $3.9 billion. 

Eight of those securitization deals have gone to market since 2022, including three so far in 2023. Those include a $279 million combination HELOC/CES deal issued through the conduit Towd Point HE Trust 2023-1; a $237 million HELOC-backed offering, FIGRE Trust 2023-HEI, sponsored by fintech Figure Lending; and a $153 million offering, ACHM Trust 2023-HE1, sponsored by Achieve Home Loans — which also originated the HELOCs serving as collateral for the transaction.

The Towd Point deal involved HELOCs as well as CES loans originated by nonbanks Rocket Mortgage and Spring EQ. The Towd Point offering, according to a Kroll Bond Rating Agency (KBRA) report, closed in early March, prior to the March 10 collapse of Silicon Valley Bank (SVB). In the FIGRE offering, per a bond-rating report released March 28 by DBSR Morningstar, Figure Lending was the originator of the HELOCs in the collateral pool, with Homebridge Financial Services, Movement Mortgage and Guaranteed Rate also contributing to the HELOC collateral pool.

Nick Smith, founder and CEO of Minneapolis-based private-equity firm Rice Park Capital Management, explained that the consumer is now worse off every day “as inflation outpaces their income growth.” He said if those consumers want to maintain the same lifestyle, they have few options now. 

“The only way to do that is to either draw down savings or extract part of their net worth from some other assets they hold [such as a home],” Smith added. “Savings rates have declined to all-time lows and credit-card utilization is increasing significantly.

“I think that trend is going to continue, and you’re going to see a lot of supply of home-equity lending in the market in the future because the consumers want it. And I think fixed-income investors are going to say, ‘OK, there’s volume there,’ and as long as it’s priced appropriately, they’re going to want to participate. 

“I think that’s going to be a pretty significant burgeoning market.”

The need for capital-market outlets, such as securitizations, for home-equity loans is particularly acute for nonbanks that are dependent on short-term revolving lines of credit, called warehouse lines, for cash flow. It’s also true for fintech firms that are focused on expanding their reach into the shared-equity investment market.

Nonbanks can’t originate it, or won’t originate it [HELOCs], if they don’t know they have securitization to dump it into, or if they … need a bank partner that has agreed to purchase the loans on a forward-flow basis,” said John Toohig, head of whole-loan trading at Raymond James in Memphis. “… Most nonbanks just have warehouse lines, and since they don’t have the confidence to turn around and immediately sell it [HELOC loans], many may be afraid to jump into the HELOC market.”

The most common HELOC Toohig is seeing, he said, is “a 10-year, IO [interest-only] 20-year amortization, with a lien secured in a second position.” Toohig added that the interest rate on a HELOC is normally variable, “usually prime, plus 1.5 to 2 points.”

The market tumult sparked by the recent downfall of SVB, the second largest bank failure in U.S. history, bled into the secondary market as well and disrupted private-label securitizations generally in mid-March, market experts said. In addition, overall demand for home-equity loans slowed in the final months of 2022 as 30-year fixed rate interest rates moved into the 7% range in late October and into November. 

“We’ve already seen slowdown in issuance across [securitization] sectors actually, so it’s not just not just mortgages,” said David Petrosinelli, a New York-based senior trader with InspereX, a tech-driven underwriter and distributor of securities that operates multiple trading desks around the country. “I just think we’re kind of likely to see maybe a little bit more of an extended period of time where we just don’t see a lot of deals.

“But ultimately, though, like everything else, there’s a season, and [those home-equity securitizations] will come back.”

Traditional home equity loans

Rob Barber, chief executive officer at real-estate data firm ATTOM, said the $60.1 billion in fourth-quarter 2022 HELOC origination volume was up 27.4% from the fourth quarter of 2021. Despite last year’s fourth-quarter origination dip, he said HELOCs still represented 20.7% of all fourth-quarter 2022 loans – nearly five times the 4.6% level for the first quarter of 2021, according to ATTOM. 

Interest rates, though still volatile, have since receded from the 7%-plus high mark for a 30-year fixed rate mortgage reached late last year. As of late March, they were at least half a percentage point lower, according to Freddie Mac’s most recent market survey. The borrower demand for home-equity products for the balance of this year is expected to continue to grow — barring any future market jolts, industry experts say.

Among the nonbanks that offer HELOCs and/or closed-end second-lien (CES) home-equity mortgage products are Rocket Mortgage, Guaranteed Rate, United Wholesale Mortgage, Homebridge, Movement Mortgage and loanDepot. In fact, Rocket Mortgage was a major originator of CES loans for the first second home-equity mortgage private-label securitization this year — the Towd deal that closed in early March and involved loans seasoned an average of three months, according to KBRA.

That deal involved a mix of HELOC and CES loans, with home-equity lender Spring EQ originating the HELOCs for the securitization transaction. Rocket originated 47% of the CES loans for the deal, with CES loans accounting for 69% of the total collateral pool by count. The $279.1 million offering was sponsored by FirstKey Mortgage — a securitization and asset-management firm.

Among the most active lenders in the home-equity loan space are Spring EQ and Figure — founded by entrepreneur Mike Cagney, also the founder of SoFi. Another active player in the HELOC space is Achieve Home Loans, a real estate finance company under the umbrella of consumer debt-settlement provider Freedom Financial Network Funding.

Those three lenders originated the bulk of the home-equity loans for 10 of the 13 HELOC/CES securitization offerings since 2019 — the first year since the global financial crisis that the home-equity private-label market began to re-emerge. The 13 deals — including a total of six since 2022 — involved aggregate HELOC and/or CES loan collateral of nearly $3 billion, HousingWire’s analysis shows.

Five of those securitization deals, with loans originated by Figure or Spring EQ, were sponsored by Saluda Grade, a New York-based real estate advisory and asset-management firm specializing in alternative lending products in the nonbank sector. Those private-label securitizations were offered through Saluda Grade’s conduit called GRADE.

It makes a lot of sense for homeowners that are no longer able to tap their home equity via first-lien cash-out refi [because of high rates] to now seek a second-lien home-equity instrument, either debt or equity, to be able to unlock their available home equity,” said Ryan Craft, CEO of Saluda Grade. “We anticipated and would hope that there would be [increased] securitizations in Q2 or by the summer.”

Shared equity contracts

Craft said Saluda Grade also recently secured a $300 million line of credit from Barclays Bank PLC that will be used to purchase and later securitize shared-equity contracts originated by a fintech partner called Unlock Technologies.

“Saluda is the borrower, and they face Barclays,” Craft explained. “It’s a traditional investment-banking aggregation-to-securitization line that has a little more term than the standard short-term aggregation line.

“The mission of all the parties is really to help grow Unlock’s origination volume and help Saluda aggregate that production toward more actively issued securitizations.”

Fintechs like Unlock Technologies and other companies similar to it (such as Unison and Point) are part of an emerging sector in the home-equity space that serves borrowers who may not want or qualify for a traditional home-equity product like a HELOC. Instead, they offer homeowners a product called a shared-equity contract (also referred to as a home-equity investment, or HEI, contract) in which homeowners are provided cash upfront in return for a share of the equity in their homes that is monetized when the home is refinanced or sold.

Two of the four shared-equity contract securitization deals since August 2021 were sponsored by Saluda Grade, with Unlock Technologies originating the HEI contracts that served as collateral in those deals. One of the other two shared-equity contract securitizations issued over the same period was sponsored by Unison and the other by Redwood Trust — through Point, in which Redwood is an investor.

In the final quarter of 2022, Redwood set up a $150 million borrowing facility to help finance HEI contracts, according to its filings with the U.S. Securities and Exchange Commission. The real estate investment trust, via its venture-investment affiliate, RWT Horizons, also has invested in two HEI originators: Point and Vesta Equity.

“There are a number of players in the space that have been investing in HEIs,” said Dash Robinson, president of Redwood Trust. “There’s definitely room for that group of investors to deepen and, as the market continues to grow and scale, deepening your investor base becomes easier as more investors see the opportunity to put meaningful amounts of capital to work accretively.”

Brian Hale, founder and CEO of California-based consultancy Mortgage Advisory Partners, agrees that home-equity lending is primed to grow in the year ahead, given the current climate of high interest rates — relative to the large swath of homeowners locked into very low rates on mortgages closed prior to last year’s rate run-up. Hale also cautions that even so, “it’s not a magic bullet.”

“It’s adding another lending program, but it isn’t going to replace mortgage lending in terms of revenue for mortgage companies,” he stressed. “But yes, if they can do it right and not put themselves in harm’s way, and can continue to be prudent as lenders, they can make some money at it.”



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