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2023 Real Estate Investing: Approach with Caution


This article is part of our 2022-23 Housing Market Forecast series. After the series wraps, join us on February 6 for the HW+ Virtual 2023 Forecast Event. Bringing together some of the top economists and researchers in housing, the event will provide an in-depth look at the top predictions for this year, along with a roundtable discussion on how these insights apply to your business. The event is exclusively for HW+ members, and you can go here to register.

For fix-and-flip investors, 2023 promises to be a very challenging year. Ideal market conditions for flippers include strong demand, limited supply and rapidly rising prices — conditions that existed in 2020 and 2021 and led to record numbers of flipped homes, record gross profits and rich profit margins.

The market shifted abruptly in mid-2022 as soaring mortgage rates pummeled affordability, removing many prospective homebuyers from the market. Flippers next year will continue to work through less-than-optimal market trends — weaker demand, a lack of supply and prices that have plateaued or begun to decline in many markets.

ATTOM’s recent Q3 Home Flipping Report noted that flip profit margins declined at the fastest rate in 13 years. Tack on higher costs for materials, labor and financing, and it’s clear that there’s little margin for error for investors pursuing a fix-and-flip strategy. It will be more critical than ever to not overpay when purchasing a home to flip, not overestimate the ultimate resale price and not underestimate repair costs.

Some flippers have shifted gears and begun to wholesale investment properties they find to rental property buyers. Others have changed tactics and decided to fix-and-hold properties as rental homes themselves until market conditions improve.

This might be a good approach for 2023, as a significant number of prospective homebuyers have opted to rent instead since they can’t afford to buy the home they want due to today’s higher mortgage rates. It stands to reason that if these buyers were interested in purchasing a home, they might prefer to rent a house rather than an apartment. So the single-family rental property market, which has already seen tremendous growth over the past decade, might get another short term boost from these displaced homebuyers.

Neither flippers nor rental property investors are likely to benefit from an abundance of distressed properties next year. Mortgage delinquencies are actually lower than they were prior to the COVID-19 pandemic, and foreclosure activity is running at about 60% of where it was in 2019. ATTOM’s forecast is for foreclosure actions to remain below pre-pandemic levels until at least mid-to-late 2023.

Even then, investors shouldn’t be waiting for a surge of bank-owned properties to come to market. About 93% of borrowers in foreclosure have positive equity, giving them the opportunity to execute a soft landing by selling their house before losing it to a foreclosure auction. Auction sales are booming as well, with between 65-70% of the properties brought to auction selling at the event — roughly twice the percentage sold at auction historically. 

The combination of fewer homes in foreclosure reaching the auction, and the overwhelming majority of properties at those auctions being purchased leaves relatively few for the lenders to repossess and bring to market as REO homes.

This trend appears to be supported by foreclosure data, which shows that foreclosure starts (the first legal notice received by a borrower in default) have returned to about 80% of pre-pandemic levels, while lender repossessions are still below 30% of where they were before the COVID-19 pandemic. 

Despite all of this, there are still some positives for real estate investors. Demographics will continue to be a tailwind for residential real estate — both home sales and rentals — as the largest cohort of young adults between the ages of 25-34 reaches the prime ages for household formation.

There will also be less competition for the available supply of homes for sale from prospective homebuyers, and probably from iBuyers who have had to scale back their operations after experiencing huge losses as home prices declined in the second half of 2022. 

The outlook for 2023 real estate investing? Opportunities will be there, but approach them with caution, and not without doing the most careful diligence possible.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Rick Sharga at rick.sharga@attomdata.com

To contact the editor responsible for this story:
Sarah Wheeler at sarah@hwmedia.com



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An inside look at the latest trends in housing regulation and policy, featuring the 2022 Vanguard Honoree, Armando Falcon


In this series of interviews, we focus on the people who are shaping the state of housing at the top — the policy and regulation experts. The FHFA and the GSEs are essential to painting the picture of today’s housing market and industry trends. To help shed some light in this area, several of the 2022 HousingWire Vanguard honorees shared their insights on what’s happening at the federal level that’s going to affect housing this year and into 2023.

Armando Falcon, CEO at Falcon Capitol Advisors

Falcon_Armando-Regulation
Armando Falcon, CEO at Falcon Capitol Advisors

HousingWire: Which trends in housing regulation are you and your team most focused on as we move into 2023?

Armando Falcon: Looking ahead to 2023, there are a couple of broad trends that we are focusing on. The first is the overall business transformation that’s taking place in the mortgage industry. This is the result of several forces: the Fed’s anti-inflation policy; the rapid deceleration in lending that’s resulted in a 40% drop in applications; the rising cost of mortgage production, which has now broken the $10,000 per loan threshold; and the continued drive towards digitization in mortgage lending.

These are top of mind for my team, our clients and the industry. The second broad trend is access to homeownership and affordability. Home prices have never been higher, pent-up demand stronger and housing inventory tighter. These conditions are challenging for even the average homebuyer, let alone low-income and minority buyers.

There is a growing sentiment in both the public and private sectors that more needs to be done to help consumers, particularly underserved buyers, prepare for homeownership and to close the affordability gap. We’re seeing new energy and new initiatives in this area at many mortgage and housing agencies.

Similarly, large lenders are expanding their ESG and social responsibility programs. The commitment is real, and we see it only getting stronger.

HW: As a 2022 Vanguard honoree, what has been your proudest accomplishment?

AF: Is it okay to say that I am proud of building a consulting firm made of some very talented people who are helping the mortgage industry adapt to a market in transition? That I’m proud of the role that they are playing in helping modernize mortgage production and the secondary market? Because I am.

Over the past 15 years, our group has grown to more than 50-plus associates, many of whom have held leadership positions at leading lenders, tech and data providers and mortgage agencies.

It’s hard to pick just one project because we’ve had several interesting engagements recently: for example, our work with Ginnie Mae on its Digital Collateral Program; or the asset sales program that we manage for HUD that has moved more than 50% of these vacant properties to nonprofit organizations for affordable housing; or the analytic work we provide to the industry participants to help them measure progress on their ESG investments.

These engagements are helping to make the mortgage industry more efficient and more resilient, two goals that I pursued as a regulator and continue to focus on as a consultant to the industry.

HW: What major changes in federal regulation and legislative policies should people be paying more attention to?

AF: As I mentioned, there is a lot of interest and momentum around the regulation of challenges of affordability and inclusion in homeownership. It’s a priority at FHFA, FHA, HUD and Ginnie Mae. These agencies are trying to come up with creative solutions to make housing more affordable and homeownership more achievable.

There’s almost a New Deal spirit at work. We’re also seeing new market-based initiatives coming from the private sector. One of the nation’s largest lenders, for example, has just announced that it is testing a new program that will provide zero-down payment mortgages with no closing costs to first-time homebuyers in Black and Hispanic neighborhoods in five major cities.

HW: How has your experience as the director of OFHEO (now FHFA) influenced your initiatives and leadership at Falcon Capital?

AF: The GSEs and Ginnie Mae have been evangelical in their support of digital lending. Today roughly 5% of all conforming mortgages are eNotes, and all of the agencies are on record encouraging lenders to originate more assets digitally. Ginnie Mae has been accepting eNotes on a pilot basis since the beginning of the year. In June, they expanded their Digital Collateral Program, and they are now in the process of accepting new applications from eIssuers, eCustodians, and subservicers. This was an important milestone in digitizing government lending, which was roughly a $757 billion market.

HW: Falcon Capital regularly works with government agencies in program management and regulation strategy. Is there one project or partnership that you are proud of in particular?

AF: Lenders see the value in giving their customers the same kind of convenient digital experience that they encounter in other aspects of their lives (e.g., banking, shopping, transportation). They’re also worried that if they don’t provide this experience, larger national retail lenders will. This is why I believe these initiatives will continue even in the smaller, more competitive environment that the industry is now facing.

Creating digital, rather than paper, assets provides greater capital market efficiencies and reduces costs and errors. Recent ROI studies have shown that eClosings and eNotes can save originators approximately $400 per loan. That’s a big number when you consider that the average originator lost $82 per loan in the second quarter, according to the Mortgage Bankers Association.

This interview was originally published in the October/November issue of HousingWire Magazine. To view the full issue, click here.



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Comparing this housing market recession to 2008


As we close out 2022, it’s time to reflect on a historic year for the housing market, which was even crazier than the COVID-19 year of 2020. There are similarities and significant differences between the housing recession we’ve seen this year versus 2008, and looking at specific factors in both timeframes gives us an idea of what to expect in 2023.

First, we must define what we mean by recession. Our general economy is not yet in a recession, but housing has been in one since the summer. For me, it’s straightforward: it’s when we see these four things happen in any sector of our economy:

1. Sales fall. Housing demand has fallen noticeably this year.
2. Production falls. Housing permits and starts are falling now, even with the backlog of homes in the system.
3. Jobs are being lost. The housing sector — especially real estate and mortgage — has seen significant layoffs, while the general economy will create more than 4 million jobs in 2022.
4. Incomes go down. With less transaction volume, general incomes in the housing sector are falling.

A few months ago, I was asked to go on CNBC and talk about why I call this a housing recession and why this year reminds me a lot of 2018, but much worse on the four items above.

It is crazy to think we are seeing these four things happen in the housing market considering that even in March of this year we were seeing bidding wars accelerate before mortgage rates rose. That is how fast things changed — a by-product of a sector where the prices of homes were getting out of control after 2020.

Then we had the biggest mortgage rate shock in recent history and yet even with that, we will have over 5 million total home sales this year. Sometimes this discussion gets off the rails because people tell me home prices are up in 2022 so housing can’t be in a recession.

That is precisely the wrong way to look at housing economics: higher home prices have nothing to do with housing being in a recession, as I showed above. Housing went into recession in 2006 and prices weren’t collapsing that year either.

Let’s look at the recessionary factors we see now versus 2008.

Home sales

The housing market of 2002-2005 had four years of sales growth facilitated by credit. As we can see below, the purchase application data had four years of growth, peaking in 2005 and then collapsing. In our current market, purchase application data recently fell below the 2008 level.

However, what isn’t identical is that we have not had a massive sales boom like we saw from 2002-2005. We only had one year of growth in the purchase application data from 2020-2021. The COVID-19 pause and rebound meant that the end of the year in 2020 was artificially high, so I can make the case that we had decent two years of growth, but that’s all. This is significantly different than the period from 2002-2005 when credit expansion was booming.

Existing home sales has seen a waterfall dive in demand, but this has happened in less than a year. During the housing bubble years, home sales peaked in 2005 and it took two years to get back to the sales levels we are trending at today. As we can see below, we had times in the previous expansion when rates rose and sales trends headed to under 5 million. Now, with one more report left in the year, we might break under 4 million.

Outside of COVID-19, we have yet to see pending home sales hit levels that low level this century. Part of the issue is that mortgage rates moved up so fast that many sellers quit this year as well.

Key thing to remember: A traditional seller is also usually a buyer . This common-sense reality has been lost in the discussion of housing market economics for a long time because people kept pushing the false narrative of supply spikes — which means people would sell their homes to be homeless. In fact, when traditional primary resident homeowners list their homes, they typically buy another home.

When mortgage rates spiked up as much as they did this year, it wasn’t financially appealing to some sellers to purchase their homes at rates of 6.25%-7.37%. This has led to many people not listing their homes to sell and facilitated a more considerable decline in home sales than we would traditionally see. This now goes into a subject matter that is a striking difference between 2022 versus 2008: Inventory and Credit.

Housing inventory

This aspect of the housing market is where we see the biggest divergence between 2008 and today. Total housing inventory today — using the NAR data — stands at 1.14 million. We have a good probability over the next two existing home sales reports to break under 1 million total active listings, which would mean that we will start 2023 with the secon-lowest level listings ever in history.

As I have explained, this started in the year 2000, when total active listings grew from 2 million to 2.5 million in 2005. Except we had many years of a credit sales boom on debt structures that weren’t sustainable. So, when housing peaked in 2005, we had a flood of inventory from home sellers who couldn’t buy a home, and that flood allowed the list to spike to over 4 million in 2007.

As you can see below, today — a few days away from 2023 —with existing home sales trending at 2007 sales levels, it is strikingly different.

The housing economy is built on housing construction, and the recession that started in June meant housing permits were going to fall, which they have. The issue is that when housingw as in a recession in 2007, we had a massive spike in supply. That isn’t the case now and housing permits have legs to keep going lower as long as mortgage rates stay high.

One saving grace is right now is that the builders still have a massive backlog of homes to build, especially two-unit rental units that amount to nearly 1 million added supply coming online next year. This is a big plus in fighting inflation.

Key thing to remember: The best way to fight inflation is more supply.  If you’re trying to fight inflation by destroying demand, it’s not the most effective measure and can ruin future production. Depending on how the next two years go, this will be a topic of conversation if housing permits fall over the next two years.

The good news for 2023 is that we still have supply coming, and we all should be rooting for housing completion data to improve next year. As you can see from the chart below of housing completion data, sales are falling, but completions have gone nowhere for some time now. This is because we didn’t have the credit sales boom from 2020-2022 that we saw from 2002-2005.

Housing credit

The most significant difference between the recession today and 2008 is housing credit. In 2008, the rise of foreclosures and bankruptcy were waving red flags before the job-loss recession even happened. Today, it’s the complete opposite story: the 2005 bankruptcy reform laws and the 2010 Qualified Mortgage laws laid the foundation for the best housing credit profiles recorded in U.S. history.

From 2005 to 2008, we saw a rise in foreclosures, all before the job-loss recession happened. That isn’t what residential housing credit risk is supposed to look like.

We now have real credit risk, as prices are falling from the peak in some areas; late-cycle lending risk is always traditional. People who buy homes late in an expansion and lose their jobs with no selling equity will likely lead to a foreclosure, most likely those with FHA loans. This means that the scale of defaults when the next job -oss recession happens will be small compared to 2008.

A foreclosure takes a lot of time, traditionally nine to 12 months. As we can see, once the recession started in 2008, the 90 days late + foreclosure data line took off. However, this all actually began in 2005 with the rise of new foreclosure and bankruptcy data heading toward the recession of 2008.

From Fannie Mae: The conventional single-family serious delinquency rate decreased by three basis points to 0.64% in November.

The housing reforms made housing credit boring again, and boring is sexy! Housing is the cost of the shelter to your capacity to own the debt. So, someone buys a home, their debt payment is fixed, and their wages rise every year, making their cost of shelter go down while their income grows. This has created one of the most impressive data lines for homeowners.

Mortgage debt service payments as a percent of disposable personal income have collapsed as people stayed in their homes longer and longer. With three refinancing waves since 2010, their housing debt cost versus their total wages fell. As you can see below, there is a massive difference at the end of 2022 versus 2008.

FICO score trends have been steady for 12 years. Now, we have seen people speculate that the recent rise in FICO scores for owners is credit score inflation, but the trends have stayed the same for a long time. It’s just the fact that, as a country, we originated a lot more loans during COVID-19 due to the massive wave of refinancing. People assume that was credit score inflation but in reality, the trend stayed the same.

As you can see in the chart below, the credit quality is much better now and we have no more exotic loan debt structures in the system post-2010.

On top of homeowners’ credit looking excellent, we have a lot of nested equity, and over 40% of homes in America don’t have a mortgage. So, on the credit and debt side of the equation, the housing market looks a lot different in this recession.

Housing debt adjusting to inflation isn’t even above the housing bubble peak. This is a by-product of having the weakest housing recovery in the previous expansion. I wrote about this before we got into the critical timeframe of 2020-2024, and we weren’t in a housing bubble in 2019 as so many people claimed. 

So is housing in a recession? Yes, it is. Is it like 2008? Not even close.

What I’ve showed here can explain why some data look the same, and some look very different. This time around we have taken a much more aggressive hit in existing home sales in a faster amount of time. We didn’t see similar inventory spikes as we did from 2005 to 2008, nor has the housing credit market crashed.

However, we are in the early stages of housing permits getting hit, and many housing jobs were lost in 2022 due to the decline in demand for homes. The question now is, what about 2023? 

Next week I will be providing my 2023 forecast, which will be written in a way I have never done before because the chaos in today’s housing market data is truly savagely unhealthy, while some of the core foundations of housing are very well intact. Happy New Year’s!



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Inside mortgage lenders’ strategies for 2023 


Executives at Plaza Home Mortgage expect things to get worse before they get better. 

During the first three quarters of 2022, the San Diego, California-headquartered mortgage lender’s originations declined by about 38% compared to the same period of 2021, ending at $5.5 billion, according to Inside Mortgage Finance. 

Like many competitors, Plaza is losing money operationally. In turn, it has reduced its workforce and sold mortgage servicing rights (MSRs) to add some extra revenue, top executives said. 

“Obviously we had a very negative impact on the business compared to the previous year, which would be expected given the rapid rise in interest rates in 2022,” said Kevin Parra, who co-founded the lender two decades ago with James Cutri.

“I’ve been in the business since 1985, and mortgage rates are still historically low. It’s just a matter of the homebuyer psyche and, of course, an affordability problem,” Parra added.

Parra expects the landscape to stay tough for a while. 

“Builders aren’t building because they are pessimistic about buyers being able to buy homes. Sellers aren’t selling because they got a great mortgage rate in 2020 and 2021 and there’s less reason to move. So, activity will remain subdued, and home prices will fall in certain markets, but not radically,” he said. 

What Parra described are a few of the reasons that 2023 will be a challenging year for mortgage lenders — and strategies will have to pivot to accommodate for the rough landscape. Over the last few weeks, HousingWire interviewed analysts and executives to learn their expectations for 2023 and find out how they plan to run their businesses successfully in spite of challenges.  

The refi party is over 

David Battany, executive vice president of capital markets at Guild Mortgage, defines 2022 as the year in which the U.S. exited the “largest government stimulus for the mortgage market in history.” 

That’s because the Federal Reserve, as part of its inflation-busting strategy, has decided to hike rates and cease new purchases of agency mortgage-backed securities, or MBS, dialing back from a program launched in 2020. 

As a result, the mortgage industry “exited the largest refi boom in U.S history,” according to Battany. 

To illustrate, mortgage originations reached $4.4 trillion in 2021, with a 62% share of refinancing. This year, the volume is expected to decline to $2.2 trillion, with the percentage of refis at 33%, per the Mortgage Bankers Association (MBA).

When the refi party ended, the consequences were seen all over the country. Mortgage lenders imposed several rounds of layoffs, cutting thousands of underwriters, processors and loan officers. The cuts at Better.com and loanDepot are some of the most dramatic examples. 

Companies exited production channels to focus on their most profitable avenues. For example, Finance of America shut down its forward mortgage business to focus on reverse mortgages and other products. 

Mergers and acquisitions hit the market, with the latest case being Ohio-based Union Home Mortgage, which struck a deal to acquire Michigan-based Amerifirst Home Mortgage. And, for those companies not rescued by acquisitions, such as First Guaranty Mortgage Corp. and Sprout Mortgage, executives decided to abruptly close doors. 

For those who survived 2022, there’s a crossroads to face at the start of 2023, Battany said. 

“We will find out, in the next few months, if the Fed strategy is working or not to get inflation under control,” he said. 

“You can say the markets are betting there’s an 80% chance the Fed strategy will work and we will have a recession. But what if the 20% that doesn’t work happens? I think there’s a lot of hope that the strategy will work, but it’s not certain. And that uncertainty will result in volatility,” Battany added.  

Questions on the efficiency of the monetary policy were raised because, among the causes of inflation, there are factors that the Fed does not control, such as the war between Russia and Ukraine and supply chain issues. If the monetary policy works, mortgage rates can start a downward trend, bringing relief to the mortgage market in the second half of 2023. If not, the market may become a scary place. 

Are we reaching the bottom?

Amid uncertainties, economists and analysts have already started to make their estimates for 2023. 

The MBA expects mortgage originations will decline 14% year over year to $1.9 trillion in 2023 – with tighter monetary policy and more restrictive financial conditions causing a recession in the first half of the year. According to the trade group, mortgage rates will be 5.2% in December 2023.

Analysts at Keefe, Bruyette and Woods (KBW) believe that volumes will decline 23%, with home prices down by 12.5%. 

“Overcapacity was the case this year, and it’s going into year-end. So, it seems like that won’t get resolved anytime soon,” said Bose George, mortgage sector analyst at KBW.

“At the same time, we’ve seen meaningful competition continue among the larger players, which is set up for a pretty challenging first half of the year,” George added.   

KBW’s baseline scenario doesn’t forecast that the Fed will cut rates next year, and anticipates that mortgage rates will be between “5.75% to 6% something,” according to George. 

“The MBA is assuming mortgage rates are down to the low fives in the next year. Their volume expectations are a little more positive than ours because that leads to an improvement in the back half of next year. But we’re not building that in at the moment,” he added.

For analysts at the credit analysis agency Fitch, the first quarter of 2023 may be the bottom line for the industry, despite volatility and uncertainty. 

In terms of volume, “2023 is setting up to be at least lower than 2022 in the first half, but we will need to see what happens in the second half,” Shampa Bhattacharya, director for U.S. non-bank financial institutions, said during a webinar. 

“We are going into the seasonally lower winter months, so we should expect lower volumes to continue at least for the next two quarters,” Bhattacharya said.

Bhattacharya added that for mortgage lenders, the main challenge in 2023 is to execute their strategies successfully. But what are these strategies?  

Getting a larger slice of a smaller pie 

The strategy for United Wholesale Mortgage (UWM), the largest mortgage lender in the country, to win in the purchase market is crystal clear. In June, the company announced an initiative dubbed ‘Game On,’ in which UWM slashed prices across all loans by 50 to 100 basis points, wreaking havoc on competitors with already compressed margins.

The company, which has about $800 million in cash as of the third quarter, intends to keep pushing its rivals in 2023. 

“We don’t have any intention right now to stop Game On, which has been a big win for our company,” said UWM’s chief strategy officer, Alex Elezaj. “I don’t think we need to get more aggressive on it because we are very comfortable with where we are.” 

UWM says Game On pricing is not the reason competitors exit the market, but their lack of commitment to the brokers’ community is. On the list are rivals such as loanDepot, Mountain West Financial, AmeriSave, Point Mortgage Corporation, Stearns Wholesale (owned by Guaranteed Rate) and Finance of America’s forward wholesale business. American Neighborhood Mortgage Acceptance Company LLC was also a victim. 

However, the company’s executives say cutting prices led to attracting more loan officers to the wholesale channel and gaining market share when the market is down. 

“Retail loan officers continue to convert over to wholesale, and this [Game On] was an extra incentive,” Elezaj said. 

For Elezaj, 2023 will be challenging, but UWM’s executives will focus more on what they can control. 

“I think we’ll be hovering around 6% to 8% for a little while. I don’t see any major items that would cause mortgage rates to drop in 2023,” he said. “Nobody has the crystal ball to know, but we are making sure that as the next refi opportunity comes, our wholesale brokers have the tools to execute for their borrowers.” 

The growth strategy at the retail lender Guild Mortgage is quite different. With Guild, the company has an appetite for acquisitions. 

“Whenever you see cycles like this, the value of two companies merging to become more efficient, there’s a lot of benefit to doing that,” Battany said.

He added, “As a company, we are very much committed to the mortgage market. We want to continue to grow and we look at acquisitions with companies of similar values and cultures that are high-quality retail lenders with a high customer service focus.” 

The San Diego, California-headquartered retail mortgage lender reported a total in-house origination of $4.4 billion in the third quarter of 2022, compared to $5.7 billion in the previous quarter. 

In December, Guild announced it has acquired the Wisconsin-based lender Inlanta Mortgage – which said earlier that it would be winding down operations in 2023 – to increase its purchase loans portfolio and market penetration in the Midwest. The financial terms of the acquisition were not disclosed.   

Creating opportunities in an unforgiving market

Providence, Rhode Island-based Citizens Bank, the 25th largest mortgage lender in the country, originated $18 billion in the first three quarters of the year — a 44% decline compared to the same period in 2021.  

“The first half of 2022 was very robust and the second half was challenging. We believe next year is going to be the flip prototype,” Sonu Mittal, head of mortgages, said. “We expect the market to normalize in the second half of 2023.” 

According to Mittal, despite the changes in the landscape for 2022 and 2023, the company will stick to its strategy based on taking care of customers, building relationships and right-sizing the business. A challenge is that the execution is among three different channels, as Citizens is one of a few banks that operate in retail, wholesale and correspondent. 

Mittal said that the bank continues to believe in all three channels: retail is here to serve customers; the correspondent is continuing to build healthy MSRs; and wholesale, which we know has had some intense competition, is almost 20% of the market.  

With the wholesale space in particular, rival Plaza has prepared its operations for the storm in 2023. 

Over the last few months, the mortgage lender took the opportunity to recruit former account executives from companies exiting the market, such as Stearns and loanDepot. It’s also planning to change its compensation structure, adopting a salary plus commission model rather than a draw against commission. 

According to Parra, the new model is safer from a regulatory standpoint and rewards the best producers. 

With these changes, Parra hopes for a slow return to profitability in 2023, likely in the first quarter. 

“We are using the opportunity of attrition in the industry to grow market share. If the pie is a little bigger or smaller, it doesn’t matter. What matters is how much of the pie we can get,” he said. 

As a final message, Parra said, “There’s always amazing opportunities in markets like this, which are very unforgiving markets.”



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The 2023 Housing Market: A Look Ahead


This article is part of our 2022-23 Housing Market Forecast series. After the series wraps, join us on February 6 for the HW+ Virtual 2023 Forecast Event. Bringing together some of the top economists and researchers in housing, the event will provide an in-depth look at the top predictions for this year, along with a roundtable discussion on how these insights apply to your business. The event is exclusively for HW+ members, and you can go here to register.

Home Prices will fall, but don’t expect 2010

Median home prices have declined for four straight months. November and December will likely continue that trend of downward momentum. Heading into 2023, it seems well within reason, given current trends, that a peak-to-trough decline in home prices of 10% is possible. 

This sounds dramatic, but when considering where that would put home prices, it means that if we were to see that decline fully realized by April of next year, prices would only be down about 5 percent year-over-year.  While this would be a hit to homeowner equity, only 1 to 2 percent more of homeowners would move into negative equity.

There will be two key differences between 2023 and 2010. First, mortgage lending standards have remained high after the last bubble. People can afford to pay their mortgages. Second, because homeowners are well qualified, they can ride out this correction. There won’t be forced home sales like we saw in the crisis. 

As a result of the fallout from the great recession, mortgage quality has been far more regulated and viewed with suspicion.  Economic conditions have also remained strong despite interest rates, and employment still hasn’t shown any signs of weakening. 

Affordable mortgage payments and employment continuing to remain at low levels mean that homeowners will have a choice to sell, while people are generally hesitant to sell assets that are declining in price. Short sales are unlikely to reemerge unless there is a serious deterioration in borrowers’ ability to pay their mortgages. 

The last time we saw prices decline, the combination of declining prices and bad mortgages forced inventory onto the market. This time, declining prices are likely tempering the pace of inventory going onto the market rather than accelerating.  

Supply will finally have a chance to return to normal

Since the beginning of 2020, inventory levels have been historically low. The first half of this year stood out when months-supply-of-inventory hit bottom at 1.6 months nationally. As many were quick to point out at the time, the number of new listings coming onto the market had not fallen. The low levels of inventory seen in the data and experienced by homebuyers were a result of demand and rapid sales.

More recently, we’ve seen the opposite effect, with the pace of inventory entering the market slowing, but inventory is continuing to accumulate as the pace of sales declines rapidly. 

Next year we are going to see inventory continue to accumulate as months-supply-of-inventory returns to levels in line with a balanced market (5-6 months) or possibly even buyers-market (6+months). Days on market will likely continue to stretch out and peak next spring along with supply.  

There is still a supply of new homes bound for the market as a result of the substantial number of spec homes, which builders began before housing demand dropped. For those looking to buy in 2023, the market is going to feel a lot more normal than it did in 2021 or 2022.

The second half of 2023 is when we’re likely to see a rebound

The “known unknowns” right now are inflation and employment. When will inflation abate and what will the impact be on employment? Right now, there seems to be positive evidence that inflation is on track to start falling in as we head into 2023. 

Employment hasn’t shown any sign of budging, but there’s a fairly strong possibility that unemployment will have to increase as the economy slows down, a result of higher interest rates. The “soft landing” in which unemployment stays below 5 percent while inflation corrects is now looking increasingly likely but a great deal of uncertainty remains. 

Presuming inflation is now on track to move toward target levels, and the Federal Reserve won’t have to adopt more aggressive policies, the first half of next year will likely bear the brunt of higher interest rates on the overall economy and higher mortgage rates on the housing market. 

We’re likely to see year-over-year declines in home prices in the first half of the year, low unit sales and low building inventory. The latter half of the year will likely be the first opportunity for mortgage rates to trend down, and rates will almost certainly begin to be down on a year-over-year basis. 

The pace of sales will likely remain slow compared to the surge following the pandemic, but sales should have the opportunity to begin trending up from the lows seen earlier in the year. If rates do in fact trend down, potential buyers will likely be met with more inventory and more time to shop than they have seen since the beginning of the pandemic. 

While next year will certainly be full of challenges, particularly for real estate, we do think there is some cause for hesitant optimism in the back half of 2023. 

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Ruben Gonzalez at ruben.gonzalez@kw.com

To contact the editor responsible for this story:
Sarah Wheeler at sarah@hwmedia.com



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How to Build a Real Estate Portfolio from Scratch in 2023


Want to become a real estate millionaire? You’re in the right place. No matter how much money you’re starting with, how much experience you have, or how many Seeing Greene episodes you’ve watched, it’s ALWAYS possible to build wealth through real estate. But that’s easy for someone like David Greene and Rob Abasolo to say, right? They’ve already made it big, with millions of dollars in cash-flowing income properties. But they didn’t start like this.

David and Rob have come together to ask themselves, “what would we do if it all came crashing down?” If both of them lost their entire real estate portfolios in one fell swoop, how would they build it back up? Today, we put these two real estate legends in the hot seat and give them the biggest nightmare scenario so they can show you exactly how to build a real estate portfolio from scratch, no matter where you’re starting.

David and Rob will also be given certain dollar amounts to use in rebuilding their portfolio. So, if you’ve only got a thousand bucks on you, David and Rob will show you exactly how to use it best to catapult your wealth forward so you can become a real estate millionaire. If 2023 is going to be YOUR year to get started, get going, and get one step closer to financial freedom, we’d suggest following David and Rob’s plan!

David:
This is the BiggerPockets Podcast, show 706.

Rob:
In my opinion, real estate should… It’s fun making money, but real estate should never be fun because you should never be making that money and using it. You should be reinvesting it. And that’s not fun, that’s actually discipline. It’s like, “Yes, I like making the money, but it really hurt.” I’m like, “Oh, I felt like I could just use that $5,000 I made this month on this tiny house.” That would be really fun, but I have to force myself to say, “Well, sorry, Rob. Got to put it into the next property or into reinvesting in that property.” And it’s fun.

David:
What’s going on, everyone? This is David Greene with my co-host, Rob Abasolo who you just saw trying to match me with the 706, which is harder to do than you would think. And one of the reasons I’m the host of the show because nobody could get the hand gestures right. That’s right. You’re here at the best, the biggest, the baddest real estate podcast in the world for a pretty cool show. It’s going to be Rob and I solo today talking about what we would do if we lost everything and had to start over with no money and no houses in 2023.
Today’s show is very fun, very insightful, and very thought provoking, if you will, and hopefully very inspirational for you. Rob, how are you today?

Rob:
Good. As you were saying all that, it made me think of a show idea. You know how you do the Seeing Greene? What if I did my own version of it called the Robert Abasolo solo show? The solo-solo BiggerPockets show. Solo two.

David:
So you’re trying to get rid of me is what you’re saying?

Rob:
No, no, I’m just saying you do Seeing Greene. I think it’s time for the solo-solo show, the solo two.

David:
Abasolo show?

Rob:
The Abasolo solo show. But maybe you can still be a part of it. I just really like the name.

David:
Yeah, I just want to hear you talking solo that I don’t have to hear you and we’re going to be good. Right?

Rob:
Okay. Let me do this.

David:
Make sure I don’t like…

Rob:
The solo, solo, solo show where I have to talk like this the entire time.

David:
That would be really good. It would only be like a four-minute show because your voice couldn’t handle anything longer than that. That’s good.

Rob:
Not really, no.

David:
All right. Before we get into today’s show, a quick dip. What if I had to do a whole show in the Batman voice? That’d be something else. You’d really think about your words a lot more if it took that much effort to say all of them.

Rob:
Welcome. Welcome to the BiggerPockets show 710.

David:
And had to wear a mask the whole time as if you didn’t know who it was. Quick tip for today, what are your challenges? Write them down and think through solutions for them. You’ll quickly see avenues that you didn’t think about. I want everybody here to actually stress test their own life. What would I do if I lost my job? What would I do if I lost my spouse? What would I do if I lost my money? What would I do if the investments went bad? What would I do if we didn’t have food I could go get at the grocery store? This stuff is scary and cause some anxiety, but that’s okay because coming up with solutions will help build your confidence and help you be prepared for situations that we don’t know could be coming.
We’ve been lucky and blessed in this country to have a long run of a very, very healthy economy, but nothing’s guaranteed. If we learned anything from COVID, it was that. So take some time to stress test your life, your portfolio, and your goals and make sure that you feel good about them if everything doesn’t go perfectly. With that, let’s get into the show.

Rob:
All right. Welcome back to part two of the demise of Rob and Dave. Episode one. That’s right. Hey, you’re doing the mirror thing on the… Okay. I like it. You’re pulling a Rob. I like that. So in the last episode, just to recap everybody and level set and get everyone on the same page… Don’t make my hands…

David:
Kind of fun.

Rob:
Don’t take away my thunder here. So to quickly recap. Last episode, we talked about how our portfolios could basically crumble into oblivion. We talked about the ability to triage, which is a very fancy word of saying, could we sell off part of our portfolio if needed, or how liquid are we in our portfolio if we really needed to exit that? And then also how to actually assemble the architecture of our portfolio and how to strike a good balance between things like cash flow, debt, scalability. Dang it. I already messed up your-

David:
Ease of ownership?

Rob:
Ease of ownership. And then is there anything else?

David:
And liquidity.

Rob:
And liquidity. See, I knew that. I just wanted to throw you a softball. So today, we’re going to be picking up that conversation and talking about part two. What if we lost it all? What if we went down to zero? How could we actually rebuild our entire portfolio? We’re going to set some ground rules here. We still have our mind. We have our current knowledge. We’re still ourselves, but if we lost everything and it was just stripped away from our empires, how could we get back? How could we go from zero to Rob built and David Greene hero? So I’m excited, Dave.

David:
Yeah. This is one of my favorite things to do. I’ve often asked myself the question… You know that show Naked and Afraid? You’re dropped off in the middle of a jungle or something. You have no idea what you’re going to do. I’ve asked myself, what would I do if I had all the knowledge I have now, but none of my resources and you just dropped me into the middle of some city that I’ve never been before. I’m homeless, I don’t have any friends there. Would I be able to build wealth or would I just become addicted to drugs? So these exercises are kind of fun. And so now we’re going to do it with our portfolios.

Rob:
Yeah, man. So let’s get into just the first aspect of this and we’ll build to it. But I wanted to just start today’s show with just asking what are the biggest challenges that you’re facing right now, both emotionally, but specifically from a real estate standpoint, and is there any pitfalls that you’re currently encountering that that might lead to something like this?

David:
Well, this could easily turn into a therapy session for me if we’re not careful, so you’ll have to cut me off. But as far as the pitfalls that I’m going through, we have the market changing incredibly quickly. So pretty much almost all of the sources of income that I have come from some form of real estate. So my real estate sales team not selling nearly as many houses because the market has turned around. Rates are super high. A lot of buyers are wanting to wait to buy and a lot of the investors can’t make deals work because with the rates being high.
Even if you could get in contract, you can’t make a cash flow. Then you got the mortgage company, that’s the same thing. You can only qualify to buy a house off the debt to income ratio. So as rates are going up, it becomes harder to get people to be approved to buy the level of house that they have to get a seller to sell it. So income is going to be down there too. Well, all my employees are now making less money, and as you can imagine, people are not super happy about working harder and making less money.
So a lot of the character flaws that are present and all of us tend to not get exposed until times get hard. That’s one of the quotes that Warren Buffett has. When the tide goes out, you see who’s been swimming naked. So you’ve got all the personnel issues that you’re dealing with as the tide has gone down, the market is not doing good. Then I’ve talked about the 1031 that I was kind of forced into in a very quick timeframe. So I bought almost 20 properties. Maybe there was 20.
At the end of the day, almost all short-term or mid-term rentals across the country, massive problems with the rehabs employees that I had to let go of that quit that were managing these things that weren’t. I had to switch my CPA in the middle of all of this and my bookkeeper. So I’m every single week having to meet with bookkeepers to try to figure out what properties are profitable and what are not. Getting my taxes ready for the next year, and creating equities to hold all these properties in. Those mortgage payments still have to be made over and over and over. Then you throw in neighbors that are complaining about the construction that’s going on or that don’t want a short-term rental next to them. So they keep on calling the city to complain about nothing, which just means we have to now deal with more and more headaches.
And there’s more than that that’s going on as well. There’s a lot of things that are tough in life right now. So this is the perfect time for us to get into the fact that making money, especially making money in real estate is not always fun. In fact, it’s not often fun. It’s not glamorous all the time. You will hear the glamorous side of it when you’ve got a slick marketer trying to convince you to follow them on social media.
They want your attention. They want your subscribes. They want your follows. They’re going to tell you about the part of real estate that’s great. And then people get into it assuming that’s always the way that it works. And then when it doesn’t work that way, they think there’s something wrong with them or they think they weren’t meant for this and they get discouraged. But that is not the case. Even the people that are the best in the world are constantly sloughing through problem after problem to get to that cherry at the top of the sundae.

Rob:
Yeah. I mean, like you said, in my opinion, real estate should… It’s fun making money, but real estate should never be fun because you should never be making that money and using it. You should be reinvesting it. And that’s not fun. That’s actually discipline. It’s like, “Yes, I like making the money, but it really hurt.” I’m like, “Oh, I felt I could just use that $5,000 I made this month on this tiny house.” That would be really fun. But I have to force myself to say, “Well, sorry Rob. Got to put it into the next property or into reinvesting in that property.” And it’s not fun. It isn’t. But in 65 or when I’m 65, I should be having fun on my jet ski and realize my life dream of owning a jet ski on the beach, David.

David:
That’s exactly right. We talk about money being energy or really a store of energy. Energy that you’ve already accumulated from work that you did or previous investments that you made. The more of that energy that you can keep in your portfolio, the faster it will grow. The more of it that you pull out to fund your lifestyle, the slower that wealth will build. Now in your world, Rob, tell me about some of the pitfalls that you’re having with your real estate business.

Rob:
Yes, okay. A lot. I would say right now, this is being solved for thankfully, but a big pitfall that I’ve had is just not having cohesive bookkeeping in accounting. Now we had Matt Bontrager from TrueBooks on. He is my accountant and they are now doing my bookkeeper. That is solved. They’re doing really great. But actually last year for 2022, I had three… Oh, sorry, for 2021, I had three separate CPAs filing all of my taxes. I actually had four technically because I had all these different business partnerships and all of the partners were the ones that handled the taxes.
So my main tax accounting firm needed the taxes from everybody and they needed the tax. Oh, it was a big mess. But I have now fired all of them and Matt is now my sole CPA at TrueBooks. Now, they’re doing all my bookkeeping. So that’s going to solve a lot of the questions that I have day to day on what’s the true profitability? Because the way some bookkeepers track your accounting is just different than others. So that’s a big one. Another one is, this is probably the biggest problem that I face in my entire portfolio and it’s that I don’t have enough people on my team.
I’ve been very, very, very conservative and very slow to hire and that’s probably a good and a bad thing. But it’s been a bad thing for me because it really does slow down how quickly I acquire things. I’ve got a lot of plans to acquire properties and I see properties come across my desk all the time, but I honestly turned them down almost automatically whenever I think about the logistics involved with actually setting them up, just because I’m so busy with all the other miniature empires that I’m working with.
So on the real estate side, we’re a very slim team. On the content side, I’m a very, very, very scrappy team. It’s me and my editor. All the content that you’ve ever seen me post is just two people. It’s me and my editor for the most part. I write my own captions. I make my own Instagram reels. I do all my own posting. I respond to all my DMs. And some people at home might say, “Hey, how is this relevant to real estate?”
Well, my YouTube content, all my content fuel a lot of my real estate because that is my funnel for working with investors that approach me to invest half a million dollars. They find me off of YouTube. So that is a big fuel source for the acquisition part. But then I run into, “Okay. Well who’s my team?” I’m just now finally realizing that the thing that I’ve really needed to come to grips with is I need to force myself to make less money in the way of hiring more people.
Because hiring people are going to… It’s going to cost me a lot of money to hire them, but by that costing me money, it will actually make me a lot more money because I can scale up much, much, much faster. And so the big problem with my empire right now is that if I have a sick day, everything shuts down. If I were to die, it all crumbles. And this is actually a big stress point for me because if I were to not be around, not to get too morbid here, but we should probably talk about it a little bit. My wife doesn’t really know the inner workings of my portfolio and there aren’t that many people to run it.
My wife does not want to run my real estate portfolio where things to go that way. And so I’m having to now really focus and restructure my company to place more, I don’t know, more generals if you will, to run it for me so that if I’m sick I can actually take a sick day. Because right now if I’m sick, I don’t take a sick day. It’s even so bad now that when my wife is sick and I have to take care of the kids, for example, because she watches them on Tuesdays and Thursdays. That’s really tough for me in the business because then there’s no one to answer all the… It’s just a whole thing.
So I’m staffing up. I’m actually hiring a five-person content team. I’m going to have two full-time editors. My full-time editor now I’m promoting him to content director. I’m hiring a social media manager and a content writer. I’m doing that. And then I’m going to have acquisitions people on the real estate side. I’m launching a fund where I’m basically going to have seven to 10 people running the empire for me. It’s a whole thing. I feel like I just rambled here for five minutes, but it is a very real pitfall that I’m facing right now is just scaling and being able to hire and having the confidence to do so.

David:
Okay. So if this is your plan, tell me about some of the ways that this could go wrong and could all crumble around you.

Rob:
Well, I think for me, the reason I’ve been so nervous about hiring is I’m always… I have this very prideful and stubborn thought that I cannot hire someone to do a job that that will be better than me. Right? Because I’ve really good at the things that I do. And so it’s hard for me to hire someone even though I know that there are millions of people out there that are way smarter and more capable of doing the job than I am.
So I think my big fear of something going wrong is hiring someone that will not be able to pick up the slack and carry the torch forward and then that will effectively just cause structural issues within the business, if that makes sense.

David:
Okay. So what about the properties that are going to be buying for you? What are some areas where you think your acquisition team could make some mistakes or the operation side could let things slip to the point that you lose money?

Rob:
Okay. So I will say that for 2023 I am going to be more aggressively purchasing properties. I know a lot of people right now want to take the conservative route on that and that’s totally fine and commendable for those people. I see things a little differently right now. I think that we’re about to see some really huge discounts. I was very busy this year and I did buy properties, but not as much as I wanted to. And now it works out because now I’m seeing all these discounted properties and I’m going to go in and snap them.
So I think probably the pitfalls of this are going to be that I need my team and the acquisitions team that are running this for me. I need them to be really good at comping conservatively. I’m actually comping out all of my properties in an incredibly conservative manner that leaves a lot of room for error basically. I didn’t used to do that. I’ve always been very aggressive with my analysis. Most of the time I’ve been actually relatively correct, but now we’re sort of switching it over. So I’m just more right now weary of trusting the acquisitions team to be as conservative as I want them to because I think we’re actually in a time where we have to be the most conservative we’ve been in probably the last 10 years is my guess.

David:
Yeah, that makes sense. I mean, I wasn’t as upset with people that were riding aggressive offers the last six to seven years as others were because it was pretty clear to see that prices and rents were going to continue to rise. I think that you probably lost out on more gain than you protected yourself from loss if you were riding very aggressive offers when there was this much inflation happening. If you go back five or six years ago, someone would write an offer that a conservative guru could call a fool who made $200,000 and 80 grand a year on that property because they wrote aggressively.
But it’s difficult to see that trend continuing from this point forward with how concerned the government is with trying to slow down inflation. So as long as rates keep going up or stay high, they’re trying to push the cost of assets down versus where they were trying to create to print more money, which makes the cost of those assets go up.
So I do think you got to be able to pivot. You got to be able to be understanding that you need to stay high volume, you need to stay aggressive, but a conservative approach makes sense in this market. You’re not leaving money on the table anymore, being conservative. So I think that’s wise. Do you have any concerns about turning things over to other people in your business as far as who’s going to be doing the acquisitions?
Are you still going to be looking at every single deal before it’s bought and reviewing what they put together? Are they going to have some authority to make moves without running it by you?

Rob:
Yeah, that’s the hard part, honestly. I think I’m probably going to still be relatively involved because like I said, I’m launching Robuilt Capital, my big goal, my stake in the ground or the line that I’m drawing in the sand, I want to raise a hundred million dollars in the next five years. I’m dead set on that. I want to do that. I’m going to do that. And what I plan to do with that $100 million is I want to go and acquire campsite, RV resorts and basically remodel them and juice them up, if you will, to be like high-end glamp sites and unique stays.
So I just don’t think I can turn that over quite yet because I’m still not the RV park glamping assassin that I’m going to be. I’m very good at it, but I’m not good at good enough at it to just hand it over and direct. I think I still need to be in the weeds of this a little bit. But with that said, now that I’m hiring an acquisition person, possibly launching a property management company, I’m going to have the actual, I don’t know, the project manager, the investor relations person, the COO of the operation.
I’m going to have seven to 10 and most of these are already filled, but I’m going to have seven to 10 people that I’m having to actively train. It’s already hard to hire one person and train them for the role. I hired my first COO two or three months ago to run host camp for me and I’m involved. We talk every day. I have not been like, “Oh, here you go.” And I haven’t disappeared.
I’m in the trenches with him to train him to do that. So doing that with five to seven to 10 people at once, that’s going to be a real adventure that I’m a little nervous about, but also really excited about. So I’m looking to basically take an old school traditional approach to funds where you go and deploy them in multi-family or mobile home parks and put the Robuilt spin on it where it’s a little bit more of a glamorous, upscale experience.
I’m really excited to pioneer that. Because my intent is to pioneer that and be the number one fund that does that, then I’m sort of assigning myself sort of the trench digger, if you will. I’m going to be in the weeds of that, but I don’t know if that’s the healthiest approach, but that’s the approach that I’m going to take for now.

David:
I like you going big on something that’s unique. So you’re not saying, “I’m going to go buy a bunch of multi-family apartments that everyone else is buying.” You’re really banking on uniqueness. I’m going to do something other people aren’t doing. If I’m going to scale, if I’m going to be aggressive, I’m going to go big. I’m going to do it in a way where I don’t have as much competition as a form of risk mitigation. I think that that’s pretty wise.

Rob:
I mean, ultimately that’s my dream. I want to go heavy into unique. I think there’s the conservative layer that I’m placing on how I model all these things out. But then there’s also the extremely conservative layer that I’m now going to be working with investor money. So as a fiduciary, I don’t know, intermediary for my investors, I have to be even more conservative than how conservative I am now.
So a lot of is changing about how I’m investing and I’m curious, what about on your end? Is there any change in your risk versus your conservative approach to actually getting into properties now that you’re sort of in the trenches of all these remodels and all these short-term rentals that you’re about to launch?

David:
What I don’t like about the path that my choices took me is there’s a very long period of time from the point where I bought the house to the point where I’m going to get data back to see how the investment worked out. Takes a long time to do the remodels. The cities and the neighbors are causing a lot of problems. Then you get the property up and you don’t know when it’s going to start booking. You got to tweak with it like the different pictures or different design ideas.
It takes a little while for a short-term rental to pick up at speed. So it could easily turn into 12 to 24 months before I have solid data that I can say this strategy worked. And that’s a long time to go without actually having some input to be able to say, where should I pivot? So I’m kind of flying blind for a while.
I don’t love that. So during the period of flying blind, I really just focus on things other than acquiring more real estate. I’m either going to go back to an asset class that I already understand very well that’s much more predictable. This could be a long term rental, an apartment complex, putting money in with somebody else, flipping a house, something like that.
Or I put that energy into business. So it’s very difficult when things change this fast for people who are doing new stuff to figure out if they should scale or if they should go slowly. And I can definitely recognize that’s a challenge a lot of people are having. What are you doing to pivot right now?

Rob:
Oh, man. A lot. I’m a relatively diversified investor in the short-term rental space, but I actually want to do a lot of things in real estate. I have big aspirations. BiggerPockets has always been the golden handcuffs of investing because I’m really good at this one thing and I want to double down and niche down, but I see how many people in the world are crushing it in real estate and I’m just like, “I got to try all these different things.” So that was just me as a listener.
I’m like, “I want to try it all.” And then we interview so many people on the podcast that are amazingly talented and brilliant people that it inspires me to try new things. So I’m actually going to be doing quite a few things. I am going to probably not do so much short term rentals the way I have been where I was buying the one-off homes. But I’m actually going to be doing, like I said, the fund where I’m acquiring a lot more short-term rentals at mass.
I’m going to be doing a lot more medium term rentals. That’s my big push right now. I have two medium term rentals now. I have three and I love them. They’re super easy. I just locked in my biggest reservation ever on Airbnb for 33 grand for a six-month rental on my house in LA. I haven’t even heard from the guests since they checked in. It’s amazing. I absolutely love it.
So I am going to be focusing on getting more medium term rentals and focusing on developing contracts with medical agencies and different people like that. Because I know a lot of people that are crushing it in that space. Oh man, this is a really big pivot for me, but I’m actually going to be doing a little bit more rental arbitrage. I have a few reasons for it. We don’t have to get into it now, but I’m going to be doing a little bit more of that from an exploration and education side of it.
I want to be able to teach people how to get into it like zero money down. And then I want to actually get into reverse arbitrage, which is a new thing that I just thought of two nights ago. [inaudible 00:24:10]

David:
Where You would buy a house and let somebody else do the arbitrage so you don’t have to deal with all the headaches.

Rob:
Dude, you got this instantly. Everyone that I’ve talked to about this, they’re all, “I don’t get it.”

David:
Yeah. You’re getting rid of the worst part of being a short-term rental person. All the emotional ups and downs, the spikes, the headaches, the bad reviews, and you’re getting to own the actual asset, which is where most of the money comes from.

Rob:
Yes. And you get to charge a markup. So if I buy a place that’s 2,500 bucks market rent, I can tell an aspiring host, “Hey, I’ll let you rent it out on Airbnb, but you got to pay me $3,000 a month.” So not only am I ditching the low long-term rental returns, but I’m actually getting a premium on it. I don’t need a property manager. I can just rent it to an aspiring host and let them run their Airbnb journey and I get all the tax benefits.
I was in bed so excited about this two nights ago ’cause I was like, “Why isn’t this talked about more?” Long-term investors should be renting out their places to Airbnb hosts at a premium and you could double your returns.

David:
Yeah. That’s a way that when we talked about in the part one of this episode, how you can diversify risk and how portfolio architecture can help. Having a couple properties like this where you get to own a highly appreciating asset, that’s the market will work best in and it’s going to have to have a lot of meat on the bone for someone to make it worth their while. You’re not going to pull this off in Wichita, Kansas or Toledo, Ohio where the stuff is renting for $80 a night or something. It’s going to have to be a decent amount.
And the operator, it has to be worth their time to do it. But dude, if they’re going to absorb all of the worst parts of the business and pay you higher than market rent and you can own the property without having any of the headache, this is a great way to add some safety and some equity to your property without taking on the ease of ownership issues of a whole bunch of short-term rentals, which is kind of trying to babysit 25 toddlers all at the same time.

Rob:
Yeah. So to sum it up, I’m going to basically be doing long-term rentals, medium-term rentals, short-term rentals. So I’m going to diversify there and then acquiring large 50 to a hundred door properties that will eventually become glance site. So I wouldn’t say I’m necessarily… I guess it’s all pivots. They’re all small pivots, but they’re all pivots in my wheelhouse. That way I can at least still be in my element in some capacity.

David:
I asked you previously about your concerns with some of the mistakes you could be making, but now you have a little bit more clarity on the direction you’re going to pivot to. So do you have any more clarity on the types of mistakes you want to avoid going forward?

Rob:
Yeah. I’m trying to mistake proof myself right now like the way I am with recession proofing myself. All right. So I think the big mistake is the shiny object syndrome of trying to approach everything. I think that becomes a problem whenever you try to approach everything out of your wheelhouse. But everything I just talked about, the reverse arbitrage, medium-term rentals, short-term rentals and glamping, all of those are just different forms of short-term rentals in my mind. Things that I’m actually good at.
And so while I am spreading myself thin on the execution of how I’m doing it, it’s all within my expertise and knowledge. So I’m not super worried about the mistakes of the actual execution of those models. I’m just more nervous about, like I mentioned, not having the team to be able to execute them because I have three… I guess I’m more nervous about the mistakes at scale.
I’ve got three mid-term rentals right now. I don’t know what it’s like to have 30. That’s a lot different. I have 35 doors right now that are effectively all short-term rentals. It’s very different to manage 35 than it was to manage two. So right now, the only mistakes I’m nervous about encountering are going to be the scaling mistakes that I make with scaling like purchasing reverse arbitrage units at scale or medium term rental stuff.
But because I’m already doing most of this, I’m not super worried other than… I think, “Oh, you know what? Personal mistake, I think.” I think I’m going to make the big mistake of putting everything I have into this and that will bleed into family life, dad life and husband life. If I’m just going to lay it out there, I could see that being a big mistake that I make is not prioritizing what actually matters over this thing we call real estate.

David:
That’s very easy to do and it’s very wise of you to be planning for that ahead of time. And even if someone doesn’t have a family like me, sometimes those issues bleed over into just your… I don’t want to say your personal life, but your emotional wellbeing. When you’re up at night worrying about what’s going to happen or you borrowed money from investors and it’s not going as well as you thought, it can have a very big toll on how you’re feeling, the confidence levels you have.
Your mind can easily start to look for an escape and it can tell you crazy, terrible things to do to get out of those scenarios. So I think it’s wise to be considering what could go wrong so you can prepare mentally for how you’re going to handle those types of situations when they come up.

Rob:
Yeah, for sure. Well, what I’d like to do now is assume that we made all the mistakes and everything crumbled, we lost it all, and we went to zero. I want to talk about now how we would go from having $0 a net worth back to where we are today. You cool to jump into that idea?

David:
That’s a great idea. Let’s do it. The broken afraid version at BiggerPockets.

Rob:
All right, Dave, let’s fast forward. Okay. Let’s just say you make some crazy mistake. You’ve lost it all. You’re back to zero. David Greene is no longer green at all. He’s David eed.

David:
Yeah, the red.

Rob:
You’re in the red. Now you got to rebuild and start from square one. How are you going to get started? What’s your first step?

David:
First step? All right. I am probably going to do more than just investing in real estate. I’m going to look to diversify the way that my income is coming in because I’m at lost at all. I probably had too many eggs in one basket. I probably quit my job. I probably got super into investing, maybe one asset class like short-term rentals or something a little bit more risky. And then I had a bad couple months and boom, it was all gone.
So the first thing I wanted to do is to establish a much more solid base. So I want to scale horizontally before vertically. So I’m going to look for an industry where I can make money, where I’m still involved in real estate, which could be being an agent, being a loan officer, working for a construction company, being a contractor, consulting, working for a 1031 company, being a CPA. Anything I could do where I could help other people in real estate while helping myself.
Second thing, when I’m looking for properties to buy, I’m going to look for this stuff with the highest days on market in the best areas, especially if it’s more expensive real estate. Now, I realize this may come as a counterintuitive statement. You’re thinking, “Hey, the market is slowing down. Buy the cheapest properties you can find.” But that’s not what you want to do. That’s actually increasing your likelihood of losing them. I want to go for the stuff that used to sell for a million when the market was at its peak, and now that rates have doubled, it’s going to sell for maybe 650,000.
And it has the potential to go back to the million when the market does turn around and rates come back down. So I’m going to play the long game, not the short, fast game, which is probably what I did that caused me to lose that money in the first place. Is that making sense?

Rob:
It does. I want to ask you how would you choose your market? Is there a strategy for the market entry point that you want to get into?

David:
I want high days on market and I want an area that I believe in the next five to 10 years, more people with higher net worth are going to be moving into. Okay? So I don’t want to go invest in the part of town or the city where newlywed couples that have no money are going to go buy their house. You want to be where, all right, the wealthy people in California, in New York, in the northwest, in New Jersey, in these areas that were traditionally where wealth was gathered, where are they going to move to?
When they want to get out of there for whatever reason they have, high crime, bad weather, whatever it is, where are they going to go? That’s the place that I want to be investing in. Right now a lot of people are moving into Texas. That’s one market I’d look into. A lot of people are moving into Florida. They really liked how things worked out after COVID in Florida and the weather is better than where it is in Maine. That’s where I’m going to be looking into.
You and I bought a property in Arizona in the nicest city in all of Arizona where the wealth goes. You’re probably not going to crush it right off the bat investing in a market like that. You’re going to be like the tortoise coming out the gates. The hair is going to pass you up. The hair of cash flow, they’re going to go buy in Wichita, Kansas or Birmingham, Alabama. Some of these markets where the price points are lower, the price and rent ratios are more solid.
But wealthy people aren’t going to be moving into those spots. I’m going to be playing the long game because there’s opportunity there that I didn’t have when the market was hot. Now that the market’s cooled down, I’m not competing with as many other investors to get into these markets. They’re all doing the opposite. They’re all going after the cheapest property with the highest cash flow possible, not thinking about the future.

Rob:
All right. So if I understand this correctly, you’re going for the highest day on market. That’s going to be a strategy for acquiring good properties at a discount. You’re going to be looking for areas where a lot of people are moving to because of the tax savings, but also people are just moving out of California and going to certain areas. You want to pick up that incoming traffic basically, right?

David:
Before everyone else does. That’s exactly right. I don’t think other people are looking for opportunities there because they’re thinking, “Oh, that’s an expensive property. I want to buy a cheap one at this time. I’m going to be looking at the weather. I think that really matters.” Most people live where they live because that’s where their job is. But as work becomes more and more remote, you don’t have to live in North Dakota. People are going to start to figure that out.
Why am I in Fargo? I could be living in Miami. I could be living in Tampa. I could be living somewhere like Corpus Christi where it’s beautiful outside and I can still make money. So I’m going to go invest in those locations. The other thing I’m going to do is I’m going to utilize all the tools at my disposal when it comes to funding.
So I’m definitely going to use FHA loans. I’m going to house hack a house at least once a year. I’m going to try to do it more if I could get away with it. If I could convince a bank to give me a loan, I’m going to get a primary residence, live in it for nine months, rent that out and move into another one for whatever reason. Maybe my job moved or I had a sick family member, I had to go somewhere else. But I’m going to try to get away with as much 5% down properties as I possibly can in the best areas that I can justify so I can keep more money in reserves because I’m less likely to lose my portfolio again like I did hypothetically last time if I keep more money in the bank. So I don’t want to put 20 or 25% down if I have to.

Rob:
Okay. All right. Al good answers. Last one. How are you going to go about rebuilding your team? Because theoretically, all your current team, they’re gone. They’re out the window, they’re bitter that you lost everything, they lost their job. Now, you got to build a new team. How are you going to assemble those Avengers?

David:
I’m going to look for a property manager in the area that I want to buy the houses first because I don’t like managing property. And to me, that’s the hardest piece in the whole puzzle. This is why so many people manage their own properties. It’s very difficult to find a good property manager. It’s easier to find a good contractor or a good handyman than it is to find your own property manager that’s good.
So that’s the hardest piece. I want to get that first. When I find that property manager, I know they’re going to have contacts around town. They know the good handyman. They know the good contractors. They know the pieces that I’m going to need because all their other clients are sharing that information with them.
I frequently would say, “Hey, talk to my property manager. I don’t want to deal with it.” And then I would find that the property manager is now in cahoots with the rockstar realtor that I was using because when they met them, they realized they’re better.
Or I’d have a property manager that wasn’t that great and they would get me a bid and I didn’t like it, so I found my own person. And I was like, All right. Talk to the property manager. They’ll let you in the house.” So now the property manager is like, “Oh, this person is great.” We’re getting them as our referral person. So the better that you are, the more exposure you have to other people, the higher quality of referrals you start to develop.
From there, I’m going to ask about the top rated agents in town. I’m going to go and I’m going to find the people that either own real estate there themselves or sell a lot of houses. They’re going to help me find the deals. Those two people are going to help me find the loan officer, which is one of the easier spots to find. And then from there, I just need the contractor and I’ve got my core four and I can start buying in that market.

Rob:
All right. Now I want to fire around what you would do with certain amounts of money.

David:
Okay. This is interesting.

Rob:
You ready for this? Okay. So what would you do with a thousand dollars? You lost it all. You got a thousand dollars to your name.

David:
With a thousand dollars, I would probably host a meetup for as cheap as I possibly could. I would definitely cater it with Chipotle because there’s nothing that’s going to get more people to show up for a meetup than having Chipotle. It also shows that you’re a classy person and you can be trusted. Those are all qualities that Chipotle lovers enjoy. I’m going to have as many people come and I’m going to make as many contacts as I can and make as good of an impression as I can. I can probably stretch that thousand dollars into several of these and I’m going to have emails and phone numbers and names of all the people that came. That’s my new database.
I’m going to start off by just pouring into those people, building relationships, finding how I can help them and earning their trust, which I’m then going to turn into revenue through whatever real estate business I developed. If I became a loan officer, an agent, a contractor, a handyman, even, those are people that’s going to fuel my business by saying, “Hey, this guy David over here is a handyman. My buddy needs a new door hang at his house. My buddy needs a leaky pipe fix.”
I’m going to start creating revenue off of those relationships. And now every time I go meet somebody to fix something in their house, I’m going to let them know, “Hey, I’m looking to buy real estate. Let me know if you know anybody who’s looking to sell it?” I’m going to try to get some owner finance deals, some creative financing going on because I don’t have a ton of money, which means I need a ton of people in the network.

Rob:
Okay. How about $10,000?

David:
$10,000 is getting better. Now, I’m in a position I can probably get an FHA loan and I’m going to look for something right around $300,000 where the seller is going to pay the closing costs on that. I’m going to tell my agent they need to write the offers that way. I’m going to try to get the biggest and the best house in the best neighborhood possible that’s as ugly as I could possibly find.
If it’s ugly and it’s big and it’s in a great location, I’m going to want it and I’m going to just house hack that sucker with a grassroots campaign. I’m going to rent the rooms out if I have to rent the rooms out., I’m going to turn rooms into rooms that can be rented out. I’m going to have a person who’s got a trailer that they’re not using parking on my property and I’m going to rent that out to somebody else.
I’m going to scrape and claw to figure out a way to build up some cash flow from that first property that will keep my mortgage as low as possible or maybe even put some money in my pocket to help buy the next house.

Rob:
Perfect. How about $50,000?

David:
50,000, I’m starting to feel really good. I’m still going to house hack and do everything I said, but I’m going to have 30 to $40,000 left over after that to be able to buy another property. So maybe I take some of that extra 30 or 40 and I use that to improve the property I bought. Now, I can house hack a real fixer upper. I can get something that needs a lot of work and I can make it worth more which increases the equity. And then 12 months later I can refinance and hopefully pull out more and turn that initial 50 into more like 80, 90, maybe $100,000 after the refi.
So I’m not going to be able to buy something turnkey. I’m going to have to be very, very clever and put a lot of work into finding the property that needs a lot of work but has the highest upside. Okay? It’s a 2,800 square foot house in a neighborhood with other houses that are also big. But this is the one with the green carpet and the ugly wallpaper and it smells bad. Everybody walks into it and just turns around and says no, because they want something turnkey in that neighborhood and they can afford it. That’s the house that I want to go buy and.
I’m playing the long game. So 12 months later after I fixed it up and I put a little bit of money and some sweat and some tears into it, its values increase the most because the comps were much higher than the price I pay. There’s a bigger spread in the high to the low than some of the other neighborhoods with cheaper homes where the spread just is not that significant. You don’t have as much meat on the bone.
After that refinance, I’ll be able to repeat the same thing again, and at the same time I’ll be able to house hack. So if you do this right, you’ll have one house hack every year and then one fixer upper property like this, and you work those at the same time for several years in a row.

Rob:
No further questions, your Honor.

David:
Thank you very much. All right. If you don’t mind, I’d like to cross-examine the witness.

Rob:
Allowed.

David:
I’ll allow it.

Rob:
I’ll allow it.

David:
Sustained.

Rob:
There you go.

David:
You were going with court language, but you went with The Office’s Michael Scott. That’s what was so funny about that. All right, the year is 2023. You have lost your entire short term rental portfolio, yet you have not lost your fighting spirit. What is the first step that you’re going to take in rebuilding your empire?

Rob:
Well, there’s one thing that I’m really good at and it is marketing, sales and content. So I am going to be rebuilding my content system and ecosystem and platform to just make myself an authority again and really talk about the demise and the mistakes that I made and how those mistakes are going to make me wealthier and richer as a result. So I’m going to get out in front of the bad press of all the mistakes that I made with losing everything. I’m going to own them and I’m going to make really inspiring content that shows anybody that you can build from zero to hero all over again. Okay?
So I’m going to use my content as an opportunity to raise money. There’s no reason for me to scale slowly and build back from zero if I already have my knowledge. I think when you’re starting out in real estate, you have to go very slow because you just don’t know anything. I still retain my skills and knowledge. Right? So theoretically, if I lean on the mistakes that I made, I can go and I can raise money from an investor and use that to get into properties that are going to cash flow.
Now, I want to make money as quickly as possible. I need to be cash flowing. I actually need to make money. So I want to figure out how to get into different properties that make me money right out the get-go. And on top of that, I want to prove a little bit of credibility and reestablish a new track record. So I would probably actually start a property management company and I would manage Airbnbs for other people.
I would help them make a lot of money and I would try to get to 20 as quickly as possible so that I could go to an investor and say, “Hey, look at these 20 properties that I manage. I make all this amount of money for these 20 owners. I can make you that amount of money.” I’m going to do the sweat equity in exchange for equity in that property.
Now, probably what I’m going to do is put in no money, have the investor fund it, have the investor finance it, and I’m going to do everything. I’m going to source the deal. I’m going to work with realtors. I am going to furnish the place. I’m going to manage it. I’m going to do everything. I’m going to work my tail off so that this investor knows that I’m putting everything I have into this house.
Hopefully a strategic investor that will reinvest with me 2, 3, 4, 5, 6, 7 times. That’s going to get me some cash flow, but I also want to be working on appreciation at the same time. So through my different content, through everything that I’m doing, I’m going to do my best to join other syndications and other funds as a general partner, as a small role, whatever I have to do to get into a syndication so that I can have a small little piece of a pie of something that will eventually be a lot bigger.

David:
What role do you see yourself playing in that syndication? How are you going to bring value to them if you don’t have a ton of money?

Rob:
Probably the actual investor relations. I’m going to be the one meeting with the investors, walking them through everything. Not necessarily the number crunching. I’ll let the financial modeler do that, but I’m going to be in charge of the marketing. I’m really good at funnels. I know that I can create a funnel system that effectively reaches a large audience, and then from that funnel, that audience starts going down the funnel and eventually gets to the fund.
So between fundraising and actual marketing, I will be in charge of lead generation effectively for a fund and that will take care of my appreciation. So I want to try to get back appreciation and cash flow as quickly as possible. Equity and cash flow fuel, because those are the two components that are needed for hopefully a relatively sustainable lifestyle in real estate.

David:
Yeah. What I like about this is you’re not just relying on investing, you’re relying on your skills as a human being that you developed over time to give you that little push, that boost to help your building wealth. A lot of the people listening to this have skills they’re not even thinking about. They’re in marketing and they don’t realize that they could be helping a syndication with raising money or putting out better content. Right?
They analyze things for a living as maybe an insurance adjuster or something like that, and they’re not thinking about how they can help analyzing properties for a fund. So that’s very, very clever. Now it sounds like you’re not picking a market to rebuild, right? Because you’re going to link up with someone else who’s already done that.

Rob:
I’m trying to join other ecosystems and build it that way. I mean, if you think about Elon Musk, for example, when he wants to start a company, he’s not the one that’s actually doing it, right? He knows his skillset. His skillset is finding the right team, delegating it, providing the vision and kind of assembling it that way. But he’s never the one that’s in the trenches actually building that company from the ground up from a day-to-day tactical side.
So I don’t want to do that. I don’t want to be the person that’s doing a live-in BRRR and starting that process. I think marketing can solve a lot of those problems for me and get me back to where I was within a year if I really put a lot of time and effort into it. So from a market standpoint, I’m a big fan of national parks. So a lot of what I’m going to be proposing to investors into the people that I’m working with are to heavy up into some of these more recession resistant areas.
National parks are mother nature’s Disneyland, as I always say. So anything that falls within the Grand Canyon, Smokey Mountains, Yosemite, Yellowstone, I know that those are always going to be really rock solid properties and that that’s where I would probably heavy up is if I was going to start somewhere.

David:
All right. Now, if you’re going to source a team here as far as who you’re going to link up with, what are some things that you’d look for in the syndicators or the partners or however this is being structured that would make you think that’s the person I want to hitch my wagon to?

Rob:
So it kind of depends. If we’re just talking about me partnering up with an investor, I want a silent investor to just let me do my thing. I want a silent partner like, “Hey, I know you’re good at this. You’ve wined and dined me. I don’t want anything to do with this. I just need time to work that money, do my thing, embrace my mistakes, and go all in. So from an investor standpoint, I’m always looking for a silent partner. From the team standpoint, that’s a good question. I knew this was coming and I probably should have prepared for it.

David:
Well, you probably haven’t done this before, right? You haven’t found a syndication to throw yourself into?

Rob:
No, it’s just my syndicate. I started it. I started my own fund. I did that today. So I’m probably going to be working. I know what I’m going to do. I’m going to find a project manager type of person. Someone that’s very analytical, someone that’s very driven by logistics and details. That’s probably going to be the first hire on my team because I’m terrible at that. That is not my gig. I’m not good at that. I’m a visionary. I’m not good at detail oriented things.
So I need a counterpart that’s going to keep me on task, keep me on the path to where I want to go. So probably somewhat of a project manager or like a COO who’s willing to start from the ground, from the foundation and build up. Someone that’s like, “Hey, I’m down to be broke with you for the next couple of years. Let’s do this thing.” Someone that’s not focused on the cash flow benefit immediately.

David:
Wonderful. Okay. Let’s say you have a thousand dollars. What are you going to do with it?

Rob:
I’m going to invest that in some kind of course or some kind of education that is going to make me smarter, that’s going to make me money. I’m going to invest in that, or I’m going to change my personality type and I’m going to invest in $1,000 worth of books and read them. I’m going to use that thousand dollars to make myself smarter in some capacity, because you can’t do much with a thousand bucks in real estate. That’s always the advice. “All right. If you have a thousand dollars…”

David:
A thousand dollars gets you a lot of knowledge and wisdom through books.

Rob:
Yes, I agree.

David:
Brandon Turner had a point about this. He talked about how someone could have 10 or 20 years of life’s wisdom condensed into a $10 book and we just dismissed that like it’s not a big deal, but how valuable that actually is.

Rob:
Yeah. I mean, you can infinitely become smarter with one book, right?

David:
Yeah.

Rob:
So whether it’s that or some kind of little curriculum, something that teaches me. I just got to figure out how to make myself know something that I don’t already know.

David:
You also got to figure out how to make yourself spend more than four seconds doing one thing without having something else pop up that you have to go do. Because it’s going to be tough to read these books in your current state. I like that.

Rob:
Yep. Well, theoretically I won’t have a lot to do.

David:
Well, that’s a good point. Yeah. Maybe some of the money can be spent hiring virtual assistant to read you the books or you buy them on Audible. I suppose someone’s already taken that.

Rob:
Audible. Right.

David:
Yeah. All right. Same question with $10,000.

Rob:
$10,000. Like I said, I want to get cash loan as soon as possible. So I’m probably going to do a rental arbitrage deal or some kind of rag tag glamping operation, get into an apartment, pitch a landlord, beg them to let me release it on Airbnb. If they say no, I will say, “Hey, how about this? Let’s rent your apartment on Airbnb and we’ll split the profits that way they get some of the upside as well.
So I’m going to use $10,000 to go out and basically pay my deposit, my first month’s rent. About, let’s call it six to $8,000 on furniture and get it listed on Airbnb as soon as possible. Make some money. That’s option one. Option two would be like buy a $3,000 tent. Go find a property owner that has 50 acres, say, “Hey, can I put my tent on your property? Give you 25% of the cash flow that I make, and basically listed on hip camp Airbnb. I know that this is possible because my $3,000 tent grossed me $142,000 over the three and a half years that it was running.” So 10,000 bucks and get a couple of those, I hope.

David:
Glam pack. I like it. Okay, last question. Now you have $50,000. What are you going to do with that?

Rob:
That’s a really good question. I think I’m going to just go… You said the house hack. So I’m not going to do that because that would be a lame answer, but that was a good answer and I’m jealous that you said it first. I am probably going to try to get a second home loan and rent that property out on Airbnb. So I’ll try to get a 250K, $300,000 property in one of those national parks that we talked about. Probably not the Smokies. I’m going to be pushed out of there, but probably somewhere like Hawking Hills, Ohio.
I’m going to buy a property there and I’m going to get it set up so that I can make some cash flow. Because I lost everything, so I need to pay the bills. I got a family, they’re hungry. I want to make sure that everybody is okay. Equilibrium can be met as soon as possible.

David:
There you have it folks. That’s wonderful. Rob, this is our plan. If you dropped us into the middle of nowhere, broken afraid, without our portfolio, but with the knowledge we have now, what we would do to start over. Rob, anything that you thought of when you were hearing me talk that you wouldn’t have thought of or heard yourself say ’cause you had no idea what you were going to say when I asked you this question that you thought like, “Ooh, that’s really good. I want to hammer that point home”?

Rob:
Yeah. All of it really. But I’ll say this because my immediate thought was, “Oh, I’m going to make content and I’m, I’m just going to raise money that way. I’m going to do the thing that I’m good at and just get people to believe in me via social media. Because I’ve done it before. I do it every day now, right?” However, the thing I hadn’t considered is you’re doing the grassroots approach and you’re going to use your a thousand dollars to hold different meetups and get people there, get their emails, get their contacts, connect with them, network with them, see if you can partner with them, see if they’ll invest in your first deal. They’re exactly the same thing. They’re just different versions of each other and I like that.

David:
Well, I don’t have your rugged good looks so it’s harder for me to create as much attention and content on social media, but if you get me in front of somebody in person, I can work my magic. So I wish I could do what you were doing. You’re going to be holding a meetup in front of like 90,000 people because that’s all the views you get. If I made a video, it’d probably get 14 views.

Rob:
No, you just hit 10,000 subscribers. You’re moving on up in the world, my friend.

David:
How many do you have?

Rob:
550.

David:
That’s the same thing Brandon does. Brandon is like, “Good job. You got to a hundred thousand followers on Instagram and he’s at like 300,000. All right. So if people want to see, if people want to become one of those 200 something thousand subscribers that you have on YouTube, where can they find you?

Rob:
Look, they can find me on the Robuilt YouTube channel, R-O-B-U-I-L-T. I also recently did two videos for the BiggerPockets YouTube channel. So go check out the BiggerPockets YouTube channel. There’s some of the best videos I’ve ever made. I’m really excited about them and I want to make more. What about you?

David:
You can find me @davidgreene24 everywhere, even on YouTube. So if you want to be one of those 10,000 people, which is actually, if you think about it, they’re getting a bigger share of my attention than yours because you’re already so big.

Rob:
That’s true, that’s true.

David:
I’m just this little tiny guy in the space. So you want to go get some individual attention, check me out at youtube.com, @davidgreene24 or whatever your favorite social media is. You can follow me there. You can also check out my website at davidgreene24.com. That kind of shows all the stuff that I can offer you, ways that I can help you. There’s a lot of different things we do, so it’s good to kind of follow us there. And then Friday nights I go live on YouTube where people can come and they can ask questions and they can learn. This is just the best time ever in the world to learn stuff.
If you don’t like learning, this is a crappy time to be alive because there’s no benefit to it. But if you enjoy learning, you could just be learning almost the entire day every single day. Can you imagine living 1400 years ago and just being in the middle of the woods with you and your closest neighbor was God knows how far away and all you had was maybe your spouse to be there with you and you had to learn by doing versus now like the wisest philosophers in the world, the smartest people, the people that have spent years dedicated to just studying one tiny element of life like psychology and then one tiny element within psychology, like cognitive psychology, you can get all of that information basically for free if you just put the time into.
It’s kind of crazy how much information we have access to. I want to encourage everybody to take advantage of that because your life really does change as you learn more stuff.

Rob:
Well, I will say this, the thing that always trips me up about people 1,400 years ago, really up to 100 years ago, they didn’t have AC David. They didn’t have AC. They were just hot all the time. No, thank you. I like 2023. And with that, let me just say if you guys like this episode, if it was a nice twist, if you like the parallel universe of me and David losing it all and we proved ourselves to you on how we could rebuild our economical status, do us a favor, leave us a five star review on the Apple Podcast app or wherever you’d listen to your podcast. It helps us quite a bit. It helps us reach the top of charts. When we are at the top of charts, then that gets served up to new people that maybe wanting to get into real estate.
And if we’ve ever said anything that may have changed the trajectory of your life in a good way, we can do that for other people. If you help us with a little tiny five star review.

David:
We also get better guests for the shows if we’re at the top of the rankings and so we can make better content for you. Thank you very much, Rob. I appreciate you sharing everything you did. Your insight is brilliant as always. I’m going to get us out of here. This is David Greene for Rob “no AC8 for me” Abasolo signing off.

 

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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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FHA borrowers hit first, hardest by sinking economy


FHA Commissioner Julia Gordon
FHA Commissioner Julia Gordon

The fate of Federal Housing Administration (FHA)-backed mortgages in the ongoing downcycle housing market is being compared with a canary in the coal mine by several industry experts who track the sector and are seeing early warning signs of distress.

In recent months, the canary has been chirping with far less exuberance as inflation (now above 7% annualized), rising mortgage rates, declining home values and the potential of faster-rising unemployment spurred on by a potential recession in the coming year all grip the FHA sector. Those forces are now shaking the timbers of the federal loan-guarantee program. 

Although there are clear signs that some borrowers with FHA-backed loans are starting to feel the pressure, market experts who spoke with HousingWire, also stress that, as of now, it looks like the timbers supporting the FHA program, which serves first-time and other lower-wealth borrowers, are strong enough to handle the market disruption. That doesn’t mean, however, that all FHA borrowers will survive the downturn unscathed.

We’re not seeing anything that indicates a real problem yet. But if you were to look out over the horizon and ask where there is an area of risk, this [FHA loans] would be one of them. 

Rick Sharga, executive vp of marketing at realtytrac

Richard Koss, chief of research at mortgage-data analytics firm Recursion, said because FHA borrower are on the lower range of the income scale, they are impacted by the current high-inflation environment far more than middle-class borrowers that are served by conventional loans backed by Fannie Mae and Freddie Mac. 

“Lower-income families have very limited ability to adjust to this [inflation] shock, particularly as their savings tend to be low and their budgets are already stretched,” Recursion reported in a blog post earlier this year. “As a result, the overall impact of higher inflation can be severe for this group. 

“According to the 2021 HMDA [Home Mortgage Disclosure Act] data, the median income of FHA borrowers is $65,000 per year, compared to $85,000 for VA and $105,000 for conventional borrowers.”

Koss described the FHA borrower as “the canary in the coal mine” for the rest of the market. 

First-time homebuyers represent more than 80% of FHA’s purchase volume, FHA data show. Over the past 14 years, FHA has insured 9.1 million in mortgages valued at $1.7 trillion to first-time homebuyers, according to the agency’s most fiscal 2022 annual report to Congress on the state of its mutual mortgage insurance fund (or MMI Fund).

In addition, some 75% of all high loan-to-value (LTV) mortgages made in the nation to first-time homebuyers with credit scores below 680 are insured by the FHA, and the bulk of all high-LTV loans to Black, Latino and rural borrowers are FHA-insured, the agency’s most recent annual report states. 

“We’re not seeing anything that indicates a real problem yet,” said Rick Sharga, executive vice president of marketing for real-estate research firm RealtyTrac. “But if you were to look out over the horizon and ask where there is an area of risk, this [FHA loans] would be one of them. 

“The inflationary impact, I believe, is candidly understated most of the time.”

Delinquency rates rise again

Over the 12 months ending this past September, FHA managed to cut the number of seriously delinquent borrowers — those 90 days or more past due on their loans — by nearly half, from 660,000 to about 340,000. The FHA seriously delinquent-loan rate likewise has declined precipitously from its peak of 8.81% to 4.77% over the same period. Much of the run-up in that dour-loan rate occurred during the pandemic, FHA reports.

FHA is always, by definition going to be [guaranteeing] more risky mortgages that are more susceptible to any shift in the marketplace. And I think we’re seeing a shift in the marketplace right now.

Daren Blomquist, vice president of market economics at Auction.com

All is not coming up roses on the loan-delinquency front for FHA, however. Over the past eight months, the agency’s 30-day delinquency rate has been creeping upward, going from 2.72% as of April 1 to 4.35% as of Dec. 1, according to Recursion’s data. In addition, FHA’s early-payment default (EPD) rate, a measure of loans that become seriously delinquent within the first six months of the mortgage, also has been rising this year and is at its highest level since 2009, according to the most recent Black Knight Mortgage Monitor report.

FHA reported in its recent annual report that the EPD rate peaked at 9.27% at the height of the pandemic in July 2020 and has since declined to 1.7% as of October of this year, though it is up from the year-earlier mark of 1.5%.

“FHA is always, by definition going to be [guaranteeing] more risky mortgages that are more susceptible to any shift in the marketplace,” said Daren Blomquist, vice president of market economics at Auction.com. “And I think we’re seeing a shift in the marketplace right now.”

He added, however, that we’re still at less than half of pre-pandemic levels in terms of actual foreclosure auctions on properties.

“Now, what’s been encouraging is even though we’ve seen a little bit of an uptick in 30-day delinquencies, we really haven’t seen much in the way of serious delinquencies,” Sharga added. “So, they seem to be remedying those delinquencies early in the process, rather than rather than going further into delinquency and then into default.”

Falling property values

Adding to the potential future pressure on the FHA program, however, is the current climate of declining property values, which will affect more recent home purchases most. More than 25% of FHA-insured purchase-mortgage holders with loans originated during the first nine months of 2022 have dipped into negative equity, according to a recent Black Knight report, and nearly three-quarters have less than 10% equity in their properties.

Time will tell whether those 30-say delinquencies roll into 90 days and beyond.

Ed Pinto, director of the AEI Housing Center at the American Enterprise Institute

“We’re anticipating from peak to trough about a 5% drop in home prices nationally,” Sharga said. “But it’s going to be a very localized correction. 

“So, you’ll have markets in places like California where it would not at all be a surprise to see prices drop 10%. But you’re also going to see markets — particularly in areas like the southeastern states — where prices not only won’t drop but will go up because they’re still seeing population growth and job growth.”

Blomquist added that even a 2% decline in home values would impact FHA borrowers who bought a home in the first six months of the year.  “And then some declines after that would put them potentially in that negative equity position,” he said — a reality already surfacing in the Black Knight data.

As a result, the FHA could be facing a wave of future defaults, depending on the severity of home-value declines over the next year, the pace of inflation and the potential for rising unemployment if the economy moves toward a recession on the heels of the Federal Reserve’s monetary tightening policy.

The Mortgage Bankers Association projects unemployment could reach 5.5% by the end of next year. Home prices are already declining and are projected to drop further over the next year by anywhere from a modest 1.5%, according to Fannie Mae, to as much as 20%, according to some market forecasts.

“We expect that unemployment is going to go up, and the fact that you’re already starting to see increases, albeit off a very low levels, in 30-day [FHA loan] delinquencies [likely due to inflation], that is a bit of a [concern],” said Ed Pinto, a senior fellow and the director of the AEI Housing Center at the American Enterprise Institute. “…Time will tell whether those 30-say delinquencies roll into 90 days and beyond.”

A strong backstop for FHA loans

One bit of positive news that will likely spare the FHA sector from a collapse anywhere as severe as that experienced during the Great Recession is that the fund insuring FHA mortgages is now well capitalized. FHA’s recent annual report to Congress indicates that as of Sep. 30, 2022, “the MMI Fund achieved a capital reserve ratio of 11.11%, an increase of three percentage points from 2021.”

Sharga, Blomquist and Pinto all agree that the rising short-term FHA loan delinquencies is a trend they are keeping an eye on, but overall, they say the FHA program is prepared to endure some stress in the economy. However, they don’t discount that economic disruption would still result in a lot of pain for some borrowers.

There’s always a danger that to the extent that the market sees the 20% decline in housing prices that some people are forecasting [in the worse-case scenario], and a more severe recession, that could balloon this problem into a bigger problem 

Daren Blomquist, vice president of market economics at Auction.com

Pinto said if unemployment rises above 5.5%, “that’s going to start impacting FHA more and more.”

“I think FHA is capitalized for a reasonable financial event here and much better than they’ve been in the past,” he said. “So, that’s good news.”

Pinto added that the FHA borrowers likely to be most affected by a triple whammy of rising unemployment, high inflation and falling home prices are in markets like Detroit, New Orleans, Las Vegas, Louisville and Stockton, California — metro areas that have higher concentrations of FHA borrowers.

“We’ve been saying for some time that most places are going to be able to withstand house price declines that we’re projecting at 10% to 15% by the end of next year,” Pinto said. 

For places that have high concentrations of FHA borrowers, however, the fallout will be more pronounced, he stressed. “… It’s unfortunate that some people will have to sell their homes, some people will get foreclosed on, but it’s not going to be huge numbers.”

Pinto said his data shows the 90-day delinquency rate for FHA loans has stabilized in the 3.7% range, down form 7.18% in October 2021. Along with a rising 30-day delinquency rate for FHA mortgages, however, he said there has been a slight uptick in the 60-day delinquency rate in recent months — from 1.35% in June to 1.63% as of October on a non-seasonally adjusted basis. 

Sharga said even with FHA’s delinquency rates trending up a bit, they’re still below historic averages. “So, they’re performing worse than other mortgages, but they always perform worse than other loans, and they’re not unusually high for FHA,” he explained.

Blomquist added that FHA’s mortgage-insurance fund is very well capitalized now at slightly above 11%, “when the minimum is 2% of the total mortgages.”

“So, they’re in a very healthy financial position to weather an increase in defaults, but we are still very early” in the downturn cycle, he said. That means regulators, market leaders, lenders, loan officers and borrowers themselves should remain vigilant.

“There’s always a danger that to the extent that the market sees the 20% decline in housing prices that some people are forecasting [in the worse-case scenario], and a more severe recession, that could balloon this problem into a bigger problem,” Blomquist warned.



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HousingWire debuts Housing Market Tracker


Starting this week, I will analyze weekly data in a Housing Market Tracker article every Monday to provide a status update on the U.S. housing market and economy. This weekly tracker will give you live updates on the data lines that don’t need to wait for monthly housing data reports. 

The housing market is one sector that can turn positive or negative very quickly depending on mortgage rates or one-time shocks like we saw with COVID-19. With this weekly update, I’ll give you a heads-up so changes won’t catch you by surprise, and I’ll also point out things to look for during that week. 

The three categories I’ll cover will be the weekly purchase application data, the Altos Research weekly inventory data, and what the bond market/ mortgage rates did recently. Unlike sales and price data, which take 30 days to report, this housing market tracker will update data lines released weekly.

Purchase application data

Purchase application data is a forward-looking data line that should account for the sales data 30-90 days away. This has been a vital survey data for me over the past 11 years because the primary resident mortgage buyer is the driver of the U.S. housing market: when this data fades or rises, so does housing.

Last week we continued the positive purchase application data trend that started in November after the first weaker-than-anticipated CPI inflation report. Mortgage rates began to head lower in November, and purchase application data — which shows a waterfall dive in demand — has finally stabilized and bounced off the lows.

The weekly decline in purchase apps was a meager 0.1%. The year-over-year decline came in at 36% but since the peak decline was at 46% year over year, we have bounced off the lows in a noticeable fashion.

This is a stabilization period for this data line. For this trend to have more value, it needs to continue for 14-18 weeks. The bleeding in purchase application data has stopped. As long as the year-over-year declines get less and less, it’s a positive for the housing market.

Housing market inventory

Altos Research data shows that the weekly inventory fell from 521,957 to 507,934 last week. This is just for single-family residences. To get more details on this data line, check out the Top of Mind weekly podcast hosted by Altos Research founder Mike Simonsen.

One of my beliefs is that housing inventory can have a sustained rise if demand stays weaker over time. The last time we saw this happen was in 2014. Back then, purchase application data went negative for the year, similar to what we saw in 2022.

Traditionally, inventory falls in the fall and winter and rises in the spring and summer. We now have a traditional inventory fall, but purchase application data started to rise seven weeks ago. I look at purchase application data as a forward indicator of demand 30-90 days ahead. Since purchase application data started to rise seven weeks ago and it looks out 30-90 days, some of this decline in inventory is due to just better demand, not just the seasonal decline we see at this time.

The National Association of Realtors‘ monthly inventory data is presented with the existing home sales reports each month, and it is backward-looking, as are all existing home sales reports. The last four months have seen a decline in the NAR inventory data, which now stands at 1.14 million. We are on the verge of breaking under 1 million again, something that I didn’t think could happen this year with higher mortgage rates, but it looks like this will happen over the next two months. For some context, the all-time low in this data line was at 860,000 in January 2022.

Bond market and mortgage rates

The 10-year yield didn’t have a great week last week: bond yields rose aggressively even with the weaker PCE (Personal Consumer Expenditure) data last week. The news from the Bank of Japan sent a shockwave worldwide, sending bond yields higher earlier in the week.

Mortgage rates, while 1% below the recent highs, have moved up 0.19% basis points from the bottom that occurred on Dec. 15 to 6.32% today, Dec. 26. With transactions that included buy-downs and seller credit to lower rates, the rate some homebuyers are getting is lower than the headline numbers we see daily. However, it was a lousy week for mortgage rates. 

As far as housing market economic reports, we have the FHFA House Price Index and the S&P CoreLogic Case Shiller Home Price Index releasing this week. Pending home sales are coming up on Wednesday, and I don’t expect this report to capture the full extent of the recent seven-week push in mortgage purchase application data.

We also have some regional Fed manufacturing data, which has been terrible lately, and the all-important jobless claims data each Thursday. It’s a holiday-shortened week, and the market will be good to go the following week for the start of the year.

The weekly data had two positives and one negative. Purchase application data has found a bottom. I would like to see 14-18 weeks of this kind of action to call it a real trend. We have seen a bottom in the data line, which is a good sign if mortgage rates can head back down toward 5%. 

The weekly housing inventory is falling as it traditionally does this time of year, but some of this has to do with better demand. However, unlike the start of 2022, we wont’ start the year at all-time lows in inventory and mortgage rates at 3%. The housing market back then was unhealthy and by February of 2022 I coined the phrase savagely unhealthy because of bidding wars, which escalated higher in January, February and March until mortgage rates started to rise.

The Fed needs to see more balance which I believe we are getting as the days on the market are higher year over year. I am not a fan of the housing market when the days on the market are at the teenager level; this tends to mean we don’t have enough product for the demand out there, and prices can escalate high enough for the Fed to call for a housing reset.

It’s been a crazy year, for sure. We started the year with way too many bidding wars, then saw a massive increase in rates, which impacted demand significantly, only to have rates fall toward the end of the year, showing forward-looking data has stabilized.

Every Monday, I will provide this Weekly Housing Market Tracker with the most current weekly data, taking all housing data one day at a time to make sense of this marketplace.



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The title insurance industry prepares for battle


With the housing market slowing down from its pandemic-fueled frenzy, wire fraud threats, regulatory challenges and the perennial challenge of an aging workforce, the title insurance industry will have a lot to juggle in the new year. At HousingWire, we decided to break down the challenges the title insurance industry will be up against in 2023.

It was too darn hot: the housing market slows down

Many in the title insurance industry reported record years in 2021, but while experts were predicting things to slow down in 2022, the suddenness at which the market cooled was unexpected, or as Jodi Ketchersid, a Destin, Florida-based Corcoran Group agent said: “It was like, ‘Holy cow! What happened to the market?’”

At many title firms, the slowdown in homebuyer demand, due to rising mortgage rates and higher home prices, meant a decrease in order volumes.  At “Big Four” title insurer First American, the number of closed title orders in the third quarter of 2022 fell to 160,500 compared to 252,700 a year ago, while the number of purchase orders closed per day at Fidelity dropped 23% year over year in the third quarter.

On top of slowing purchase order volume, rising mortgage rates also decimated refinance orders. First American executives noted that refinance revenue had declined 68% compared to a year ago, on the firm’s third quarter earnings call with investors, while Old Republic International Corp.’s president and CEO Craig Smiddy told investors on his firm’s Q2 2022 earnings call that refinance activity had “dried up.”

As a result, many title firms have found revenue coming from different sources, including stronger than expected commercial revenue and other mortgage products such as home equity lines of credit (HELOCs).

A report by TransUnion showed that the number of HELOC originations nationwide, based on the credit bureau’s analysis, jumped from 207,422 for second-quarter 2021 to 291,736 for the second quarter of this year — a 41% increase. In addition, nearly $69 billion in HELOC credit limits and $27 billion in closed-end home-equity loans were originated over the first five months of 2021. That compares with $101 billion in HELOC volume and $38 billion in closed-end home-equity originations over the same period this year, according to a recent report by the Urban Institute’s Housing Finance Policy Center.

“I would say starting back in the spring we started seeing a lot of lenders switch to HELOCs,” Regina Braga, the president of RES/Title, said. “Currently, I would say the majority of our volume is some type of HELOC product.”

Prior to the recent rise in HELOC volume, Braga said her firm typically saw HELOCs as part of simultaneous closings where buyers would do a first mortgage and a HELOC at the same time. Product specific HELOCs, such as those for solar panels, were also common.

“HELOCs were definitely out there, but what is happening now is that you are seeing lenders that hadn’t really been pushing it as a main product line before and now all of a sudden you go to their website and it is the first thing you see,” she said. “They have always been there, but now they are at the actual forefront of the marketing lenders are doing.”

Braga anticipates that the market will slow down even further in 2023.

“The market has cooled way down, but I don’t even think we are necessarily there yet of what we are going to see,” Braga said. “The holidays and early part of the winter are always slow for the industry, but then as the spring comes, you will start to see a little bit more movement on the purchase side. We have already started to see sellers start to lower their prices to adjust to what is acceptable in this market, so that might drive more buyers in and then you will always have that steady level of purchase demand for people who need a home due to life events.”

For the title insurance industry, she feels this will result in a thinning of the herd.

“People that rode the wave of the boom might not be able to sustain it,” Braga said. “But I do think that companies that are diversifying, companies that have already been around for the long haul, they will be OK because I think diversification is the key and it we have learned anything in the title industry over the last year, it is that you cannot dedicate all of your business to one particular market.”

A thoroughly modern threat: Wire fraud

Although the title industry has dealt with its share of market slowdowns, shifts, recessions, and depressions, one challenge the industry will face in 2023, is decidedly 21st century.

As consumers demand more of a seamless and digital home-buying process, more of the closing process has migrated online, making home-buying transactions ripe for things like hacking, ransomware attacks and wire fraud.

In mid-November, the Federal Bureau of Investigations released its 2022 Congressional report on business email compromise (BEC) and real estate wire fraud. According to the report, in 2021, the Internet Crime Complaint Center (IC3) received BEC-related complaints with claimed losses exceeding $2.4 billion, far higher than the $360 million in claimed losses recorded in 2016. In comparison, the second highest dollar loss category reported to the IC3 in 2021 was investment fraud, with losses of approximately $1.45 billion.

In addition, ALTA expects the annual number of BECs to more than double in the next two years.

For the past several years, the FBI says BEC has consistently been the largest dollar loss by victims’ crime typology reported to the IC3, as “criminals have been refining their exploitation of technology, especially the internet, to carry out financial crimes.” According to a 2022 survey by ALTA, of all the reported wire fraud incidents that occur each year, only 17% of victims successfully recovered all of their funds, but 94% of respondents reported some amount of recovery.

“You have minutes to hours to act once you have knowledge that either your company sent money where it wasn’t supposed to go or you’ve got a buyer out there hanging because they sent $50,000 to a fraudster,” Matt McBride, the vice president of risk management and compliance at Shaddock National Holdings, told attendees at the 2022 ALTA One conference. “If it goes to 24 hours, your likelihood of recovery is 15%. If it goes to 48 hours, you are in the 2% range. If it goes to 72 hours, then it is gone. There is nothing anybody can do at that point.”

But even as the title industry improves its awareness and preparedness to deal with wire fraud attacks, the fraudsters are hard at work refining their tactics.

“The fraudsters keep getting more sophisticated and the frequency of attacks continues to go up,” Tyler Adams the co-founder and CEO of SaaS company, CertifID, said. “Fraud doesn’t sleep and even though transaction volume has gone down, the amount of fraud we are seeing hasn’t gone down, so your likelihood of getting hit with an attack is higher.”

As the industry looks to combat this problem, education about wire fraud and prevention is paramount.

“It starts with education because you can’t expect the consumer to educate themselves on this problem,” Matt Kilmartin, the vice president of sales at CertifID, said. “Also, a lot of business comes from referrals, so strengthening those relationships and making sure everyone is aware of the risks, the better. Title is at the middle of the transaction, but that doesn’t mean it should bear all of the responsibility.”

Kilmartin also added that clearly communicating when and how the closing will be conducted, as well as using things like two factor authentication to ensure you are sending the funds to the right place can also help prevent people from becoming victims of wire fraud.

What’s old is new again: the resurgence of attorney opinion letters

In early April, Fannie Mae sent shock waves through the title insurance industry when it announced that it would be accepting written opinion letters from an attorney in lieu of a title insurance policy “in limited circumstances. The announcement meant that Fannie Mae joined the other GSE, Freddie Mac, in accepting AOLs.

Prior to the advent of title insurance, before taking title to a property, the buyer required that the title be free of any rights, interests, liens of encumbrances of others for which the buyer would be responsible for. A title search would be conducted and then a conveyancer would issue an opinion on the title, incredibly similar to the attorney opinion letter option now available through the GSEs.

Since Fannie Mae’s announcement, the title insurance trade group American Land Title Association has taken a strong stance against AOLs and other title insurance alternatives. 

“Since Fannie’s announcement earlier this year, ALTA has been out front opposing the irresponsible use of title insurance alternatives that provide less coverage and introduce more risk for the lenders and the consumers,” Diane Tomb, the CEO of ALTA, told ALTA ONE conference attendees in mid-October. “This is a top priority for ALTA.”

Over the summer of 2022, Tomb said the impact of this policy change was expanded when the Federal Housing Finance Agency approved the GSEs’ release of their Equitable Housing Finance Plans.

“The intent was to promote affordable and sustainable housing opportunities for more households nationwide,” Tomb said. “One of the goals they outlined in those plans is a push to reduce closing costs, especially for low-income borrowers. Based on those plans, both GSEs are pushing pilot programs promoting the use of attorney opinion letters, reportedly as an alternative to reduce closing costs.”

So far, a handful of firms have begun offering AOL products including Voxtur Analytics, SingleSource Property Solutions, and United Wholesale Mortgage, whose CEO Mat Ishbia announced that the firm is hiring attorneys to review title and closing documents, AOLs and the risks associated with them. All three firms claim that the savings generated by using an AOL product instead of a traditional title insurance policy could save consumers up to an “entire mortgage payment.”

“The use of Attorney Opinion Letters as an alternative to title insurance is an established practice that provides security and coverage to the lender and borrower comparable to that of title insurance,” Voxtur’s CEO Jim Albertelli told HousingWire earlier this year. “As this alternative continues to grow in popularity, we anticipate that misinformation will continue to be released, particularly by those that see an alternative product as a competitive threat. The reality is that innovation like this leads to more efficient processes and lower costs that benefit homeowners, and that is exactly what we should all be striving to achieve.”  

ALTA, on the other hand, said it has not noted considerable savings in using AOLs versus a traditional title policy. Instead, ALTA warns that due to the risks posed by AOL coverage, using an AOL may cost a consumer more in the long run.

“These products that are going into the market — it is confusing because they are giving people who need it the most, less coverage,” Tomb said. “We haven’t seen any real data based on the conversation that it is going to save money. In some ways it could cost them more. They might actually lose their home.”

In mid-October, the AOL debate caught the attention of U.S. Congressman Blaine Luetkemeyer (MO-3) a top Republican on the Subcommittee on Consumer Protection, and Financial Institutions and Congressman Brad Sherman (CA-30), a top Democrat on the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. Together, the congressmen sent a letter to FHFA Director Sandra Thompson, sharing their concerns about the broadening use of attorney opinion letters.

“The plans aim to lower closing costs and make homeownership more accessible for low- to moderate- income and minority homebuyers. However, these initiatives appear to risk exposing these consumers to harm by not providing the same consumer protections as title insurance. They also raise concerns about the safety and soundness of the Enterprises, increase taxpayer risk which FHFA must consider as the GSEs’ regulator and conservator,” the letter stated.

“Given these issues, it is critical for Congress and other policymakers to understand how attorney opinion letters will be promoted to consumers and what representations will be made to encourage their use of this product,” it continued. “For example, Freddie Mac indicates its pilots will involve ‘targeted marketing and outreach’ through ‘lenders and community organizations.’ Many legal practitioners and respected legal scholars have argued that not requiring homeowners to purchase title insurance (absent an extensive written disclaimer explaining the risks to the consumer) should itself be considered legal malpractice. This raises concerns that the ‘targeted marketing’ of the closing cost pilots may fail to adequately convey these risks to consumers, misleadingly suggest to homebuyers that attorney title opinions have been endorsed by the Enterprises or the federal government, and even potentially cross the line into the unauthorized practice of law.”

ALTA said it was pleased to have the support of the two congressmen.

“We certainly think that the fact that it was a bipartisan letter means that it is going to get a lot more attention over at FHFA,” Steve Gottheim, ALTA’s general counsel said. “We hope that means that they really do take the concerns much more seriously seeing as they come from senior members of both house financial services and house small business committee, that they are able to really realize that this is not just an industry group coming to them with these concerns.”

ALTA hopes that this letter, as well as continued pressure from the trade organization and industry experts will encourage the FHFA to reexamine AOLs and press pause of the rollout of AOL products.

“So much of this hasn’t really been thought through in terms of how it is really going to play out in the marketplace and are we really providing a product or a load a moderate first-time homebuyer that has less coverage the potentially might need the same if not more in some cases,” Tomb said. “Then on the other side, from a capital markets standpoint, what is this going to look like in the market? Is it really costing less? We feel that these things should really be discussed further before this gets out into the marketplace and it doesn’t play out the way they expect.”

With regulatory focus honing in on closing costs and specifically the cost of title insurance, ALTA and others in the industry are looking for ways to lower costs.

Steve Berneman, the co-founder and CEO of Blueprint Title, whose self-proclaimed goal is to “shrink the title insurance business from an $18 billion business to a $10 billion business,” fully supports this goal.

“We believe that title insurance premiums are significantly too high and that if underwriters and agents were more efficient and took a different approach to the market, they wouldn’t have to charge as much,” Berneman said. “The more these companies can invest in technology and streamlining the process and reducing frictions within acquiring a title policy, the more they will be able to reduce costs.”

Gottheim added: “Over the last 10 years, rates have gone down 6% across the industry and that is important for homeowners and it’s because of the investment the industry has put into things around automation and using machine learning and AI to search title and come to a faster decision about the title,” Gottheim said. “These technologies come with a cost at the front end, but over time, they bring that efficiency and bring the price down.”

 Before the parade passes by: title insurance’s aging workforce

As the title insurance industry looks to work through these three challenges in 2023, the final hurdle facing the industry is not a new one.

“Every year since I have been in this role and even before that, attracting and retaining talent has been one of our top strategic priorities,” Tomb told attendees listening to PropLogix’s State of the Title Industry report webinar in early December. “We do have an aging workforce and it is something that we think about a lot. One of the things that we are currently working on is a new consumer facing website that is focused solely on bringing talent into the title insurance field.”

As of 2014 the average age of title insurance agents and brokers was around 60 years old, and the situation has not improved much, if at all.

The report, which was distributed in August 2022, found that 67% of respondents were over the age of 45, with the largest age brackets being 45-54 and 55-64 at 28% each. The second largest age bracket was 35-44 at 19%.

In addition to improving consumer outreach, David Townsend, the president and CEO of Agent’s National Title, told webinar attendees that he is also working at the college level to recruit younger people into the industry and has written courses for the University of Missouri law school.

“What we are seeing now with a lot of title agents, it is not the traditional search and exam that it used to be where you would go over to a dusty title plant and get in the card file,” Townsend said. “Now we are a data industry and a lot of what we do, the search, exam and commitments are provided by the underwriter or a third party. So, you are having to make sure that you understand where the data is coming from and more and more. I think you are going to see the jobs in our industry be data driven and technology driven and I think that is critical for us and that will skew younger to a certain degree.”

In addition, title firms big and small across the country have started offering internship programs, which have led to the cultivation and retention of new, younger talent.

“We were recently looking for a role replacement and ended up calling up someone from the internship program to see if they were interesting in coming back for a full-time job,” Ryan Swed, Stewart’s head of U.S. national commercial services, told HousingWire last November. “It has been a great way to expand our potential talent pool.”



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The 3 Signs of a Perfect Rental Property Market


What makes a great real estate market? If you’re a new investor, you might think that high rents and cheap home prices are all that matter, but you couldn’t be more wrong. Experienced investors search for more than just surface-level pricing when looking into where is worth investing. This is doubly true when you’re investing in short-term rentals and medium-term rentals—both of which require a specific area to succeed. So what would Ashley and Tony look for when scouting a new real estate market?

Happy Holidays and welcome back to another Rookie Reply! We hope you’ve got your presents wrapped and are ready for the greatest gift of all—Ashley Kehr’s singing voice…and some advice on real estate. This time around we’ve got a few technical questions that rookies may have trouble answering. These topics range from how to find the zoning on a rental property, whether to furnish your rental when renting by the room, when to hire an attorney for a real estate deal, and what makes the best real estate investing area!

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Ashley :
Happy holidays. This is Real Estate Rookie, episode 246.

Tony:
In terms of market selection, there’s three big buckets that I look at. I look at permitting, the policies in that market, I look at popularity, so the traffic of folks coming into that market. And then lastly, look at profitability. So if I look at the average return that I’m getting in a market versus the average purchase price, what does that ratio look like and am I able to hit my return?

Ashley :
My name is Ashley Kehr and I’m here with my co-host Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your investing journey. And today I want to shout out someone who left us a review on Apple Podcast. This review says I’m a real estate agent in Minnesota looking to invest in real estate, and I think I found the perfect virtual mentor to help me get started. This is the best place to learn if you’re filling overwhelmed. We appreciate that. If you guys are listening, and haven’t yet left us an honest rating review on Apple or Spotify, wherever it is you’re listening, please do. The more reviews, the more folks that we can reach, more folks we can reach, the more folks we can help. Actually, Kehr, this episode comes out a day before Christmas, and I got to say, I think the best Christmas gift I’ve gotten so far is knowing that you have a pretty decent singing voice. That was a nice little intro right there.

Ashley :
You know what? I’m shocked that you’re saying that because my voice is not nice. So that must be the only two words that I can sing. When I was younger, I always thought that I would have a life with a mic in my hand, but I always thought it was because I was going to be a Spice Girl, not a podcaster.

Tony:
Not a podcaster.

Ashley :
So I think that’s definitely way more fitting than me actually singing.

Tony:
Wait, but our good friend Kara Beckmann, she actually just released a Christmas album. So if you guys can go support Kara Beckmann. I don’t know, producer, if you guys can put a link to Kara’s like Spotify album in the show notes, we’d love to support-

Ashley :
Yeah, Kara, I think it’s on Apple Music. I don’t know about Spotify yet, but yeah, she’s @beckmannhouse on Instagram and is an amazing designer. She has a short-term rental, she has long-term rentals and she does the most amazing luxury house flips too. So you’ll have to go and check out. This has been a passion project of hers forever. And I think it just shows too, the power of real estate investing is that you get to pursue these passion projects as you’re building up your wealth and your time freedom through real estate is that you can be able to go off and do some of the things that you’re passionate about. So Tony was recently kicked off Instagram, so that must be his passion.

Tony:
Yeah, I was banned from Instagram for three days, but I’m back now from Instagram jail, so cool. But we got a good show for you guys lined up today. So one of the last show you guys are here before Christmas, we got question on house hacking and how to make your units stand out if you’re trying to rent that extra room. We’ve got questions about zoning and what to do if you’re trying to figure out to what can I do with this property after I purchase it? We talk about a little known phrase called the Chamber of Commissioners, and what exactly does that mean, and how does it play a role as a real estate investor? And then last thing we talk about is litigation and how to deal with attorneys and how to use them as a new investor. And Ashley goes on a world class example of how she worked with her attorneys. And then we actually added a little bonus question that came from my Instagram about choosing your market and how rookies can go about doing that. So lots of good questions that popped up in today’s episode.

Ashley :
Yeah. And we tailor that last question to short-term rentals or long-term rentals, but it can definitely be tailored to flippers too, as to some of the key points out of that too is to choosing your market and just where to even start when picking a market, especially if you already know you’re going to invest out of state. Okay, you guys, let’s get started with our first rookie reply question. This is a house hacking question from Tony Wong. Should you furnish the house if you’re renting out rooms? So I mean, it depends. You don’t have to, you could. That is really up to you. But I think one of the most common things is that you are furnishing the common areas.
So if you end up furnishing the kitchen, the living room, you can always put that into your listing as to, there’s two couches, there’s a big dining table, room for everybody in the house to eat at. But also if you’re going to furnish the bedrooms, you can increase your rent by providing a bed, a dresser, maybe even a desk in that room, and that can increase your value. That maybe won’t be valuable to everyone. There’s probably people that already have their furniture, so they’re going to want an empty room and not willing to pay that increase. So that is completely up to you, but I think at least it’s very common to furnish the common areas of the unit.

Tony:
Yeah, that’s a great answer, Ash. I guess just to try and make that determination, take a look at some of your competition. Are there other listings that are being offered for furnished rooms or is everything an empty slate or is it the other way around where it’s like every single room that’s up for rent is also furnished, right? So I think taking a look at what the competition is doing can help guide that decision.
But ultimately, Tony, I mean there is no right or wrong answer. I think what I would look at to make that determination is what does it cost for me to furnish that room and what additional rents can I get by offering it as a furnished unit? And if the difference is nominal, if people aren’t willing to pay much more for a furnish unit versus a non unfurnished unit, then maybe spending the additional capital to furnish that room might not be worth it. But if the difference between a non furnished unit and a furnish unit is pretty big, then maybe it makes sense for you to go out and spend that extra couple of thousand bucks to furnish that room as well.

Ashley :
And since this is a holiday episode, it is Christmas Eve when this comes out, I’m literally going to twist every question into some kind of relation to Christmas holiday spirit. And I apologize if you don’t celebrate Christmas, but send me a DM with what your holiday is and if you want me to turn an episode into a holiday theme, I will definitely do it. So please send it to me. So for this one, that may include including a Christmas tree into the common area to make it all nice and warm and cozy, maybe putting Christmas lights in the window. So there’s all different kinds of things you can do. So even in the 40 unit apartment complex I managed, there was some common areas. There was a community room where it had a little kitchenette with a stove and then a large table.
So anyone that rented an apartment there, they could actually rent out for free. They just had to reserve the room and they could have parties in there for baby showers, holidays, whatever in there. So one thing that we did extra was we would put up a fake tree in there every year, and it started out with all of the tenants kind of adding their own little ornaments every year and then the tree would be brought out and everything like that. And it was just this… Especially when we were leasing in the winter, which in Buffalo, New York, not a lot of people move in the winter because of the snow. So it was nice to always take people into that room and just show them like, oh, this is a community, here’s that.
And so maybe that’s not for everyone. They just want to be kind of left alone and don’t want to talk to anyone or do anything. So thinking about ways that you can make your house hack stand out from other ones, and I think Tony hit it on the nail as to look at your comparables, what are they doing? And maybe what can you do that’s a little above and beyond, and that’s maybe a little extra but barely cost you anything. I mean, Black Friday, you can get what? A fake tree for probably $25, just a small fake tree to put up and couple dollar store decorations.

Tony:
Yeah, I love the idea of the decorations. We actually do offer, or not offer, but decorate our cabins in Tennessee for the holiday season. So every year right around Thanksgiving we’ll throw up the Christmas decorations and then after first week of January we’ll pull them all down. We don’t do it in Joshua Tree, it’s not as common out there, but in Tennessee a lot of people come out there for the holidays. But something else you said about what are some small things you can do to make the space more competitive, once you said that thoughts were just kind of running through my mind. And it’s like, if I were renting out a room, what are some of the small things I could do?
Getting obviously a smart TV would be a big one. If you could have the smart switches. So if you have an Alexa in there and it’s like, “Dim the bedroom lights to 25%”, and it can do that for you. If you get automatic roller shades, if you’re only got one or two windows in a room, it’s not going to be super expensive. But the experience with the person that’s staying there to say, “Hey Alexa, let there be light”, and the shades come up, that’s a pretty cool thing to have. Zinus brand mattresses, I love a Zinus brand mattress. So yeah, there’s a lot of little things you can do that don’t have or don’t cost a ton of money but still give you that good return on your investment.

Ashley :
And you know what? It does kind of tie hand in hand with a short-term rental almost, I guess. There’s some compatibility there as to things you can take from a short-term rental and put into your house hack as things too. So if you are house hacking, you know what will be a… Do you give out your checklist for supplies to purchase for a short term rental, Tony?

Tony:
I do. Yeah, if you go to the realestaterobinsons.com/shoppinglist, it’s got all of our household essentials in there.

Ashley :
So if you are furnishing the living room and the kitchen, you could go ahead and use Tony’s list and then maybe create your own off of that based on what you actually need for your house. But at least that gives you a starting point is okay, I at least need to get utensils in the kitchen. It may not make sense for you to give everyone their own drawer, their own cabinet and they all have to bring their own silverware, their own spatulas, their own pans and things like that. So I think that’d be a great starting point to anyone who is looking to furnish their home is to go to Tony’s website or there’s a ton of other… The Maddens, [inaudible 00:10:43] Madden. She gives out her checklist too as to what they do. And I think Rob does too. Robuilt gives out his on robuilt.com.
So okay, let’s move on to our next question. This question is from Robin in Prentiss. The first question is, how do you find out the zoning on a property? Is this what you need to know if you want to build more houses on it?

Tony:
So I actually just had this experience, we were looking at some land and it was landed a great location that we’ve been kind of eyeing for a while and a lot of times when it’s listed they’ll put the zoning in the listing description, but the zoning itself, if it’s RL3, what the heck does that even mean? So typically what you have to do is you have to go to the city of the county’s website, they’ll have a link to their ordinances and inside of those ordinances it tells you the allowable use for each zoning like zoning description. So like, hey, this is only for rule, you can only build this there or this is zone commercial, you can do this or this is for mixed use or this is high density, this is low density.
So typically for me what I’ve seen is just going onto that city or county website is a great way to figure that out. And then the best way is just like if you can just go to the city or the county and ask them like, Hey, I’m looking at this parcel of land, can you tell me what it’s zoned for? We’ve called the county in different cities multiple times to ask those questions as well.

Ashley :
Yeah, if you go onto the GIS mapping for the county, you’ll be able to see, but I would always take Tony’s recommendation and actually call to verify, especially if that zoning is really going to rely on what your project is going to be. You can always go to the planning board and you can request to have the zoning changed, but that is something that you don’t want to commit to a project not knowing if that is going to be approved or not. So talking to the local code enforcement officer and even maybe a member on the planning board if that is something that you want to do, is to change the zoning of that property. And also finding out, because it does vary from state to state, or county to county, maybe even town to town as to what can actually be done on how a property is zoned.
So if it’s commercially zoned, are there limitations as to what kind of commercial properties can actually be put onto that property? So I think looking further and make sure exactly what those things are. And a lot of times you go to the town or the village websites, you can just pull that up and kind of read it. Very, very boring reading, but it’s in there. And so a lot of the towns that I invest in, there’s a code enforcement officer and it’s a very small town, so it’s not like they’re overloaded with stuff or you’re waiting years for permits. So I usually just send an email and ask my question and then get a response that way. I found that the easiest.

Tony:
And Robin, one thing you can do if you’re looking at a property, you’re looking at land or whatever it is, you can put as a contingency in your offer to say, contingent upon zoning allowing for X and like, hey, we’re not going to close on this land unless we can make sure that we can do what we want to do with it, we’re not going to close on this property unless the zoning supports whatever our end goal is for that property. So you can definitely write that into your contract as well. And your EMD doesn’t go hard until you’ve been able to validate that.

Ashley :
Okay. The second question is not sure how to word this next question, where can I find out information about a town and its future plans? A town was halfway burnt down and I would like to see if there has been any talk meetings about rebuilding. Would buying a property on that town be a good investment? Wow, first of all, that’s awful, the half burnt town.

Tony:
Half is burnt, yeah.

Ashley :
Yeah. I think the best place to start is the planning board because they’re going to approve any kind of development that goes into that area. So they would be the ones where people would bring their proposals as to what they want to redevelop there in that area and then they would approve it and they would kind of go through the process.
So going to that town’s webpage and looking when the planning board meetings are. Usually they are once a month, at least where I’m from. I don’t know, maybe if that’s the same everywhere. But you can also read the minutes online so they’ll have somebody take the meeting minutes that kind of goes over everything that happened during the meeting and you’re able to read those after they had the meeting too, so you could go back and look at meetings you’ve missed and see what they have, or even if you can’t attend, you can go ahead and read those meeting minutes, but the planning board would be the place to start.
Also, even just going down and talking to the town clerk, I guess it depends on how large your city is, but when you’re investing in small towns, and I’m assuming this may be a small town since half of it burnt and going and talking to the town clerk. Where my kids go to school, they actually send out a newsletter. The town there, it’s a village and the village sends out a newsletter every quarter with the water bills. And so it will go through like, oh we are in talks with so-and-so about bringing in this franchise or whatever to come in here and they update you on the new development or things that are happening.
There was recently patio homes that were being built and they’re not being paid by the builder or anything like that. They’re just trying to promote things within the community as to this development that is happening. Another place that I find out what’s going on more in the city of Buffalo is I’m subscribed to Business First. It’s a newspaper, I get it mailed to my house and I go through it where they go through real estate happenings, business happenings. So I find out some information there too as to what’s going on.

Tony:
That’s a great answer, Ash. I literally have nothing of value to add on top of that.

Ashley :
The other thing I would say is join Facebook groups. My mom is part of one that’s like Be Neighborly Springfield and so she’ll know things that are happening before I do one of the towns that I invest in because she belongs to the Facebook group because it’s everybody in there telling what they know or what’s happening or there’s a police car parked outside somewhere and everybody’s going on in these groups. So that’s really also a great way to gather information. I will say it, use it as a starting point makes you verify that information. When I was doing this new development for an investor, we were building a 40,000 square foot auto dealership and we had to have an environmental study, but we also had to have an archeologist study done because they had built a highway extension behind this property several years prior and they had found artifacts there.
So they required us to pay for an archeologist to come out from one of the city colleges and do an archeologist dig and ended up going to a phase two thing, cost us $15,000. But they went out and they marked all these red flags, went viral across the town’s Facebook, they found a dinosaur there, an Applebee’s is being built there. All these different rumors just going around and it was so funny, and all it was, there was a farmhouse that had been there, it was one of the first houses in the town from the 1700s. And when they had done that highway extension, they had started all this research on that person because they had found the barn. But now on our property they had found the house and there was the actual stone foundation still there, but it was like crazy. They knew how many cows he had, how much milk his pigs produced. It was wild. I would’ve been fascinated by it if I was not part of the team-

Tony:
The person trying to make it happen.

Ashley :
… that was paying $15,000 to try… And my project stalled to try to get this thing going. But yeah, it was just… So, make sure the Facebook thing, at least everybody knew there was something going on there, so you could see something’s being built there. But there’s other ways. If anybody would’ve went to the planning board minutes, they would’ve seen that we had approached and it was for a new dealership that was going to be built there. So that’s a funny story for you guys.

Tony:
Interesting. So no dinosaurs?

Ashley :
No dinosaur bunk because I would’ve shipped those right out to AJ Osborne.

Tony:
All right, so you ready for our next question? This one comes from Doug Smith and Doug says, what does it mean when a house is owned by the Chamber of Commissioners? So I’ve actually never heard of the phrase Chamber of Commissioners. I’ve heard of Chamber of Commerce, I’ve heard of commissioners in a county kind of level, but I’ve never heard of Chamber of Commissioners. So Doug, I can’t say with exact certainty what a Chamber of Commissioners is, but without too much context, what it sounds like is that this property is owned by some kind of public like agency. It could be someone associated with the city or the county.
And that could happen for a multitude of reasons why land or a house is owned by the local city. It could be that it was just left empty for so long and no one claimed it. Maybe there were liens or some other reason. There’s a lot of different reasons how cities and local governments end up as owners of properties. What I have found though is that typically they’re not eager owners of those properties and typically there’s some kind of auction that’ll happen to get rid of those properties that are owned by that local government. So that’s my take Ash. I don’t know if maybe you have more familiarity with Chamber of Commissioners.

Ashley :
Yeah, I’ve never heard it. I’ve heard of the Chamber of Commerce, but I’m assuming this is more of a board of commissioners maybe, but the town commissioner who maybe the property has been vacant, and the town has taken over the property. Maybe an abandoned title has been filed or something like that. And so most of the time when the town takes over a property, they are obligated to put that property up for auction. They can’t just go and sell it.
So if you did see a property that’s owned by a town, the first place you could go to is talking to the town clerk, is go right there and ask, I’ve seen this property here. But also if you look on the GIS mapping system for that county that property is in and pull up that property, you should get a mailing address too for the Chamber of Commissioners. And you can send a letter to that mailing address too and just say that you are interested in buying this property. And worst case scenario is that they send you the information of when the auction is or how they plan to sell the property.

Tony:
All right. Our last question for today comes from Alan Thomas Taylor. Alan’s question is, at what point in the process, if at all, get a buyer’s attorney when going to purchase property? Before you even make your offer? Never? This will be my first investment property. So I don’t currently have any legal paperwork drawn up, but want to make an offer on a three units property. So Ashley, New York is the state of litigation. So I’ll let you take the first answer here.

Ashley :
So if you are doing an off market property where you’re not using a real estate agent, I would definitely start with an attorney and just talk to them and at least hire an attorney so that when you are ready to do your deal, you have an attorney ready to go. And you don’t have to put a retainer down with an attorney, you just setting a meeting or calling an attorney and just saying, this is what I’m trying to do, is this something you specialize in? Have you done this for other investors? Things like that. So it says that this is your first investment property, you don’t have any legal paperwork drawn up, but you’d like to make an offer on a three unit. So you’re basically going to tell the attorney that and ask them what is the process that you would help me with when walking through this purchase and getting the contract drawn up.
So they may send you to one of their paralegals, which is perfectly capable of doing that, and it will be a lot cheaper too, because you’re paying a paralegal rate than an attorney rate. So find your attorney first and get lined up before you make the offer. And then what I usually do for off market offers is I do a letter of intent. So you can Google this and you can use a sample format online where basically it’s just saying that you intend to buy this property at this address from this person for this amount. And it’s going to state in there that this offer is contingent on attorney approval. So make sure it does say that in there. And then you’re going to have the seller sign, you’re going to sign it, and then they give it to their attorney and you’re going to give it to your attorney and they’re going to use that to drop your contract.
So if there’s any kind of contingencies, like an inspection, you’re going to want to have that in the letter of intent too. But it’s not going to be your real estate contract that you’re drawing up to purchase this property. This is just to get that offer in agreement and something to give to your attorney to actually drop the contract. A seller could change their mind. So the sooner an attorney can get that contract turned around and you get under contract, the better. So that’s why it’s important to talk to an attorney first, have them lined up so that when your offer is accepted, you can go ahead and have them go ahead and put that contract together. They’re probably going to need some information from you about the property to actually get it started. I know that my attorney always includes the SBL number for the property, which is kind of like the property tax ID number, the Parcel ID number.
They include exactly how many acres, they include, everything that’s included. So appliances, are you purchasing the appliances with this three unit, things like that. So make sure that when you talk to the attorney and when they send you the contract you’re going through and making sure that it specifies everything that you want as part of the deal and everything that you are offering as part of the deal too. And I think talk to them too about structuring the contract, maybe if you’re doing seller financing, things like that and figuring out can they help you actually set up seller financing too, where they’re putting a mortgage on the property for the seller, things like that.

Tony:
Actually, that was a masterclass and I can tell you’ve done this a couple times.

Ashley :
Yeah Quite a few.

Tony:
So Alan, we don’t know what state you’re in and every state’s going to be a little bit different. So that’s the process Ashley has to go through in New York. For me in California, whether it’s in… And I’m assuming you’re going off market here. For me in California, when I go off market, we usually just go through our escrow and title companies here. So when I have a new off-market deal, I send it to my escrow officer and then between escrow and title they drop the contract, they send it out to the seller or the buyer or whoever the other party is, and they manage pretty much everything for me. They do ask me just a few details about the transaction, but outside of that I don’t have to get too involved. So I think depending on where you’re at, whether or not you even need an attorney is probably the first question. In California, we don’t, other states you do.

Ashley :
And when you get that contract too, if it is a commercial property and it’s not just a residential contract to purchase property, if it is a commercial one, I recommend getting a new contract every time because the commercial properties can vary so much. But if your attorney sends you a residential contract, and they send you almost like a Word Doc of it where you can go and change things in, what I recommend too is that you go in and you put in the information and then send it to your attorney to review and say, does this look correct? Here’s the letter of intent, did I put everything in okay? And that saves you in attorney fees by doing it yourself, inputting the information.
For my operating agreement, for a loan agreement, things like that, I have just sample contracts where it’s highlighted in yellow, the things that get changed every single time. Then I just go through and fill them in. And then if there’s anything extra that’s different from the norm, then I go and find out what spot should that be put in, or I ask my attorney and then I get that final attorney just glance over, send back, good to go. And then I take it to the seller to sign.

Tony:
We do the same exact thing, Ashley, for our JV agreements. So we sit down with our attorney usually once or twice a year to make updates to the actual agreements. But when it’s done, same exact, and there’s just yellow boxes that we have that we need to go in and fill out every time we have a new partnership. And that’s so much more cost effective than having your attorney do that legwork every single time you submit an offer or have a new partnership or whatever it is. So when you reach out to your attorney specifically ask them like, Hey, when we’re done, can you give me a template that I can use for future transactions? That way they can show you where you need to fill in that information. I think we got time for maybe one more question.

Ashley :
Yeah.

Tony:
I have one that popped up in my Instagram DMs. So let me take this. This one comes from Nathan LaPortes and Nathan says, Hey Tony, Nathan here. I’m a first time potential buyer for a rental property. I’ve been listening to your podcast, I’m watching your YouTube piano for a little bit. And I’m really interested in buying myself a duplex in hopes of listening one side as a short-term rental and the other side as a medium term. The question is, what is the best way to search out and make sure that I’m buying in the best area with the best chances of returns? What resources do we have, or how do we go about choosing the areas to give us the best results and run our numbers the right way?
So Nathan, there’s a lot that goes into analyzing. Well, you’re not even asking about analyzing here. First you’re asking about market selection, and then within market selection, once you found a market, you have to analyze the deal. In terms of market selection there’s three big buckets that I look at. I look at permitting, the policies in that market. I look at popularity, so the traffic of folks coming into that market. And then lastly, look at profitability. So if I look at the average return that I’m getting in a market versus the average purchase price, what does that ratio look like, and am I able to hit my return? And then within a specific property, there’s really three things that I’m looking at. It’s location within that market because some parts of a city are probably better than other parts of a city.
If you’re in a lake town, being lakefront is probably better than being two miles away from the lake. If you are in an urban setting, being maybe in the heart of downtown is better than being on the outskirts. If you’re on the beach, beachfront is better than two blocks back from the beach. So every market probably has its location that makes more sense than somewhere else. So location is a big one. Next is the amenities and the design standpoint. So if you’ve got a property that really creates an amazing experience for your guest, even if you don’t have the best location, maybe you can make up for by making the property super amazing. So location, then amenities and last will be value. So how good of an experience can you give your guests in comparison to the price they paid for that property? So it’s more of a framework for you, Nathan, to look at. So in terms of choosing the market policies, popularity and profits, and then looking at the actual property, I’m evaluating location, amenities, and value. Anything to add to that?

Ashley :
Well, not to really the short term rental side, but I pulled up an article that I’d seen from Bigger Pockets for more of the long-term rental side. So the Bigger Pockets published this article, and it’s The Top 10 Real Estate Markets for Cash Flow in 2022 by Dave Meyer. So I think a great way to start out identifying a market is looking where the research tells you to go and also where other people are investing. So even before that, you need to identify what your goal is for real estate investing. Is it cash flow? Is it appreciation? Okay, so if it’s cash flow, then you’re going to look at this article, 10 Real Estate Markets for Cash Flow in 2022. If then you’re going to go, if it’s appreciation you want, it’s the long-term play you just want to cash out in 20 years after you’ve built up all this equity in these properties, then you’re going to look for the Top 10 Real Estate Markets for Appreciation.
So in this article, it goes through the top 10. And so the number one is actually Detroit with the median sale price at 63,000, the median rent 1400. And so the rent to price ratio is 2.2%. Okay, that information right there, that does not mean run to Detroit and buy property. This is a starting point. This is where you can kind of analyze that data. You have to go and verify. Just because it has that cash flow target doesn’t mean it’s going to not bring headaches, it’s not going to… These aren’t going to be properties that constantly need repairs. Are they going to be in bad areas, maybe where you have to deal with a lot of conflict, things like that. So you’re always going to want to look at other things too. Are they in good school districts, things like that. What class of tenant are you going to be getting into the property?
So maybe you want to be really passive, so maybe you want higher end properties where they’re more turnkey, they’re brand new. You don’t want to have to constantly send people to do repairs even though you’re getting a larger amount of cash flow. So think about all of these variables and what’s important to you, and then kind of work backwards from that. But you can start with where other people are investing and then kind of analyze those cities and those markets to see if they fit what you want to do, actually.

Tony:
I love that advice, Ashley. And I think a lot of times, especially new investors, they just want that magic bullet that says, pick this city, right? But there’s so many factors that go into choosing the right market for you because what’s important to Tony might not be as important to Ashley, and what’s important to Ashley might not be important to Tony. So there’s this balancing of priorities and goals and objectives that each market kind of caters towards. So I think the point of thinking about what’s important to you first is super, super critical. So Nathan, hopefully that little framework helps you make the right decision for yourself moving forward.

Ashley :
Yeah. And Tony, I have one more thing to add because I was kind of just eyeballing the cities and states, and right after I stopped talking, I saw number two, and I don’t know why not… You would’ve been talking when I looked at this whole thing, I didn’t see this before, but number two is Shreveport, Louisiana-

Tony:
No way.

Ashley :
… for cash flow. It is-

Tony:
Is it really?

Ashley :
… median sale price, 93,000, median rent 950 with rent a price ratio of 1.02%. So if-

Tony:
I knew it, I was good.

Ashley :
… you guys have been a long time listener about Shreveport, Freeport, whatever I thought it was called for two years that Tony had to invest in property. So I think right there is an example of just because that’s the best cash flow you can get, does not mean that is the optimal market to invest them.

Tony:
Yeah. Yeah. So for those of you that don’t know, I lost $30,000 on a property in Shreveport, Louisiana. It was profitable as a rental unit. We had it rented out for about a year and we were making a couple hundred bucks on it every month. Got some great financing to kind of take that deal down. But when we went to sell it, that’s when all the problems started popping up. So anyway, it was one of these rookie reply episodes, you can go back and find it, but we lost 30,000 bucks on a house in Shreveport.

Ashley :
And that also gives another example is that, yeah, you were getting the nice cash flow, but also there was lots of repairs and even if you wanted to put the house up for sale, eventually these repairs would start [inaudible 00:36:33]-

Tony:
All those things would’ve came.

Ashley :
Yeah.

Tony:
Totally, totally.

Ashley :
Well, thank you guys so much for listening to this week’s rookie reply. And I hope you guys all have a wonderful holiday season. And I completely forgot after question one that I was turning every question into a holiday theme. But I wish everyone Merry Christmas and a happy New Year, even though we’ll have an episode next week and I’ll wish you a happy new year again before that. But thank you guys so much for joining us. And I just want to say you guys are amazing and you guys had an awesome year as rookie investors and some of you have just taken off and we love hearing your guys’ story. So keep sharing them with us at the Real Estate Rookie Facebook group and we’ll see you guys on Wednesday for a show with a guest.

 

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



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