David:
This is the BiggerPockets Podcast Show 702.
I’m not against using 40-year loans and I’m not against interest-only periods. There is a danger to 40-year loans, and the last time we saw them was 2005, ‘6 when the market was red hot.
The reason that they introduced 40-year loans into the market was because you couldn’t afford the house at the price the seller wanted on a 30-year loan, which meant you couldn’t afford the house. So by making it a 40-year loan, they could reduce your payments to the point that you could now get pre-approved. That is dangerous because it allows you to pay more for a house than you really should be paying.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast, here today with a special edition Seeing Greene episode. What makes it special you ask? Well, because it’s a Seeing Greene episode.
In these shows, if you haven’t listened to one before, we take questions from you, our audience, asking specific things about situations they’re in or general questions about the market and what’s going on. And I do my best to give them the most sound advice possible based off of my experience with the portfolio of properties that I own myself. These are some of our most popular episodes, so I really hope that you like this one.
You’ll notice that the light is green right now, letting you know it’s a Seeing Greene episode, but I forgot and it was blue when I was actually recording the content. So don’t be surprised if you’re watching this on YouTube when the light turns to green to blue. That’s just me making a mistake, but instead of doing the whole thing again, I left it in there so you could see that me just like you is not perfect and I make mistakes also.
Today’s episode is awesome and we get into some very cool stuff, including if somebody should buy a house when renting actually is cheaper in the short term. This was a really fun one that we got into. If a 30-year loan or a 40-year loan with 10 years of interest-only payments is the better option. And how to make a decision between focusing on relationships or real estate when you feel that you got to make a choice and make a decision there.
This was a fantastic episode with some of the best questions we’ve ever received. I want to thank you all, give you a big shout-out for asking great questions and continuing to support the show by asking them.
Before we get into the show today’s quick tip brought to you in the Batman voice is consider that investing in today’s market is different than investing in a market even as short as six months to a year ago. Things are changing very, very quickly and that’s why you need to be listening to podcasts to get new information.
My personal strategy, the way that I’ve adjusted is I’m focused more on building a financial fortress than I am on just expanding as quick as I can. When I’m making investing decisions, I’m thinking about defense and how I can protect my wealth, not just offense and how I can grow it.
Most wealth will grow on its own over time if you make wise decisions. So you don’t have to focus on that, but you do need to focus on protecting what you have, especially as things change. So always ask yourself the question, what will I do if things go poorly?
All right, I hope you enjoy today’s show. Let’s get to our first question.
Collin:
Hey David, hope all is well. I am reaching out with a question for you on the house hacking strategy. So I’m currently looking to relocate to Boston, which is a fairly expensive market, and as I’ve started to crunch the numbers on the properties that I’m looking at, which are mainly three units, I’ve found that in many cases my out-of-pocket cost on a monthly basis would be more than if I rented.
And so what I’m trying to figure out now is if it makes sense to pay a little bit more every month than what I would pay if I rented so that I can get into a property earlier and start building up equity, building up my wealth, which is my ultimate goal, or whether I should focus in the short term on renting, paying as little as I can every month, saving as much money as I can and then getting into properties down the road.
Would love to hear your thoughts on this. Thanks so much as always for your time.
David:
All right, Collin, thank you for that. This is a good question. What do we do when we can actually rent for less than what it costs to own?
Well, there’s a few factors that I think you should take into this decision. You kind of hit on it at the very end there, so I know you’re thinking the right way. You’re asking, should I be trying to build equity or should I not and try to save a little bit of money? Because when you own a home, you pay for more than just the mortgage, the tax, the insurance. There are capital expenditures, there is maintenance. There are other things that are going to go into owning a home.
So the question here is really what do you want your future to look like? 30 years down the road, 20 years down the road, 10 years down the road, what kind of a position do you want to be in? Because while rent may be cheaper right now, it tends to not stay that way. Rent tends to not go down or even stay the same, it tends to go up.
And when you have inflation, rent goes up quickly, especially when you have a shortage of housing, which we have in most cities. Not everywhere of course, there’s some places where more people are leaving than are moving in, but man, if you’re in one of those areas that people are moving to and you’re not having increasing supply, rents can get out of hand very, very quickly.
The other thing is you’re talking about Boston. That is a high appreciating market and appreciation doesn’t just affect the value of the property, it affects what the rents are as well. So if you were asking this question and you were somewhere where you’re talking about a $65,000 house and rents are $400 a month, I don’t think there’s as much at stake there. That would be okay to continue renting.
But for you talking about being in a major metro area where prices are going to be going up, especially when rates come back down, where rents are going to continue to increase as wages increase and inflation increases, it becomes exponentially more expensive to continue renting in a market like that long term.
So one of the mistakes I see people make is they look at the rent right now versus the cost of home ownership right now, and it’s almost always cheaper to rent. In fact, I bet if you went back and studied the housing market over the last 50 years at almost every single point in that 50 years at the time you bought the house, it would’ve been cheaper to rent than to own. But if you go back to any of those points 20 years ago, 30 years ago, 40 years ago, and you compare it to now, owning is much cheaper than renting.
So do your best to face your fears and get away from this idea of what’s cheaper right now and think about the future. 10 years of paying that place down, of rents going up, but your mortgage being locked in place, pretty significant.
And with house hacking, I say this all the time, it’s not just that you’re saving in the rent you would’ve been paying going up, you’re also charging more rent to the people that are renting from you. So it’s a double whammy, so to speak.
In that case, it sounds like it would be better for you to buy right now, even though it might be a little bit more expensive than renting and own a home instead of paying somebody else. In 10 years, you’re not going to regret it.
Now, if you can repeat this process with a new home every year for 10 years, you’re probably going to be a millionaire. And this question of, well, should I have saved money on rent instead of buying isn’t even going to be in your mind.
All right, our next question comes from Adam Quinonez in SoCal. Is doing a HELOC on my primary residence wise for my first investment deal? Also, if yes, would it be a better strategy to use the BRRRR method to recoup the initial cost? Thank you.
Well, Adam, I can’t say for sure if you should use a HELOC on your primary residence to buy your first investment property because I don’t know what your financial situation is like, but I know that if it’s a good deal that usually ends up working well. If it’s not a good deal though, it can hurt you twice because now you’re saddled with extra debt and you have a property where you’re losing money on. This is where I don’t have enough information about your specific situation to get into this and this is where having more specific information about your situation would allow me to give you better advice.
The concern here is that because you haven’t bought a property before, you’re probably not going to make a great decision on your very first home. So now you’re increasing your risk factors and you’re increasing the likelihood that the deal you buy goes bad. Throwing a HELOC on top of it, you actually needed to do extra good to be able to pay for the extra money that comes out of the HELOC. So in some cases this could work out, in other cases it might not.
I would say I would not recommend that you go forward with this strategy unless you have enough money and reserves and you make a decent enough income that if you do lose money on the investment property, it’s not going to bankrupt you. It’s okay, everybody, to lose some money the first year, the first two years of owning an investment property. It’s okay to lose money in real estate, believe it or not, in the short term. It’s not okay to lose money in the long term and it’s not okay to lose money if you cannot afford to lose money in real estate.
That’s a really key point I want to make. This is why I’m always saying to save reserves, to continue working, to increase your income everywhere you can, to be a great employee, to work hard to push yourself because you want more money coming in to cover up for the inevitable risk of investing in real estate. It’s like everything else. There’s going to be times where you lose money.
Now to the question of should I use the BRRRR method? Yeah, that’s ideal because you’re giving a loan to yourself with this HELOC. You’d like to be able to pay that back after you refinance, but you just can’t assume that every BRRRR’s going to recoup a hundred percent of the money. In fact, oftentimes they don’t recoup a hundred percent of the money. That’s actually rare when that does happen. So you don’t want to depend on that.
And an alternative to BRRRR is house hacking. Look, if you go invest money in a BRRRR and you pull out 90% of it, you only left 10% of the deal. That’s a win, that’s better than 20 or 25% if you bought it traditionally. But you can house hack and put 5% down or three and a half percent down and when you do that, you don’t even have to BRRRR.
If this is your first deal, I’d much rather see you take the HELOC on the property and buy another primary residence to move into to house hack and get your housing expenses lower. Take the place you have now and make that a rental. Then I would want to see you go try to take on a rehab project, something big like a BRRRR that could go bad, if you’re having to borrow money from your HELOC to pay for it.
Again, you know your financial situation much more than I do. I didn’t have a ton of information to go off of here. But in general, if this is your first investment property, I don’t love you having to use a HELOC unless you have a great deal.
Drew:
Hey, what’s up BiggerPockets? First of all, really want to thank Dave and Rob. They’ve been extremely impactful to me in my journey for financial freedom. Thank you guys so much.
A little bit about me, my fiancée and I did a live and flip three years ago that just recently netted us 130K. We put all of that into a house hack, a one bedroom STR house hack that’s going to cash flow us 4K this month and should average over 2K cash flow per month.
I also just recently started a co-hosting company that’s allowed me to develop a lot of the systems I need to scale my portfolio while also helping other hosts be able to grow their business and increase their revenue and essentially pay for myself while managing their business for them.
I consume most of the content out there on Airbnb optimization, arbitrage, acquisition, how to scale my Airbnb business. And right now I’ve opened some HELOCs one on my house and one on my mom’s house, which should give us access to about 250K in capital. My goal is to become financially free via cash flow and then start building wealth.
So most of my cash is being saved right now and I want to start leveraging some of this debt. So how do I spend it? Should I primarily focus on, one, networking, content, social media and marketing? This would grow my co-hosting business and my fundraising credibility, capability. Two, acquiring my next STRs via arbitrage or purchase through the HELOCs to grow my cash flow and add to my visible co-hosting portfolio. Or three, investments in high level education on sales or content creation, which I consider to be my weak points right now.
I’ll be doing all three, so I guess you could say I’m in a bit of analysis paralysis in terms of how to take the next big step. Thanks again so much. You guys have truly changed my life. I appreciate it.
David:
All right, thank you Drew, and thank you for the kind words. Excited to answer your question here, and thanks for asking it. If any of you would like to have your questions submitted here, just go to biggerpockets.com/david. You can submit a question just like Drew did.
All right, Drew, if I remember correctly, it sounds like you got three options that you can put this money into. You can either invest into the business that you created to try to get more clients coming in to earn more revenue. You could invest into more short-term rentals or you could invest into education to try to improve yourself.
I don’t know enough of the numbers for how your business is doing, how much time you want to put into this to be able to tell where the best ROI is going to be. But I do remember you saying that you recently started this business and you only own one short-term rental right now.
I don’t think it’s super wise to try to scale a huge business teaching other people how to run short-term rentals when you only have one. You can’t know some of the problems that are going to pop up when you only have one property. Sometimes you hit it lucky and you get an easier one and as you get more and more, stuff pops up that you wouldn’t have known could go wrong.
You’re basically not going to be an incredibly well-rounded educator until you get several properties and you see things going wrong that you couldn’t have anticipated and you adapt to that. That’s why people pay a coach. That’s why people listen to a podcast like this. It’s not all the stuff I can tell someone that can go well. It’s all of the anticipation I have for things that can go wrong and how I prepare them to get ahead of those problems before they happen.
You also mentioned that you’ve been building out some systems. I don’t think you want to be coaching and training other people until you have well established systems that, like I said, help prevent mistakes from going wrong.
So right off the bat, I think it’s cool that you’re doing some coaching and you’re helping some people, but I wouldn’t want to see you dump a ton of gasoline on that fire because it’s still so small. You just got a little bit of kindling, you’ve been rubbing the sticks together, you got a little bit of smoke coming out. You don’t want to dump gas onto a fire until it’s a big healthy raging bonfire. Once you’ve got the solid base of wood that’s in there and the flames are hot, then yeah, dump your gasoline on it.
But if you try to dump too much marketing money onto a business that’s new, has barely got started, you don’t have systems, you don’t have support, you don’t have employees, you don’t understand how to do it, sometimes rather than the gasoline making the fire go bigger, it actually snuffs it out and you lose what you even have right now.
Now that brings us to option number two, should you buy more short term rentals? I’m leaning towards this. If you’ve got the one and it’s going to average 2K a month, I would lean towards you should get another one, because you’re going to have increasing returns on your time.
You’re not going to have to build a new system from the ground up getting a new short term rental, especially if it’s in the same market as the one that you have right now. You’ll actually be able to benefit from economies of scale, buying a second property in the same area, using the same systems, using the same software, and using the same knowledge. You’ll make a lot less mistakes. This is very synergistically sound.
Your third option was to invest in training, which you say is a weakness of yours or more courses. That could be good, but I think if you’re already managing a rental, it’s probably not necessary. I’d rather see you get a couple of them and hit a ceiling.
Let’s say you get three or four short-term rentals and you’re like, “Man, I don’t know how to keep up with customer complaints. I don’t know how to keep up with managing the cleaners.” At that point, you see what your own limitations and your flaws are. That’s when I would invest the money into the coaching.
Right now they’re going to be teaching you a bunch of stuff that isn’t even a problem in your business because you’re only running one and some of that money could be wasted. You won’t get as much value out of it.
So on one hand you’ve got your marketing company, on the other hand you’ve got investing in yourself, and then the other you’ve got the actual real estate. I’d buy the real estate and once I had enough of the real estate, I would invest in the coaching. And once I had some of the knowledge from the coaching and the real estate portfolio to back it up, then I would dump money onto the business you’re trying to create to show other people how to do the same as you. And at that point you should have a well-oiled machine and be well on your way to doing great financially.
Thank you for asking this question, Drew. I like that I got to dissect that and give you some advice. And make sure you keep in touch with us and let us know how it’s going.
All right, at this part of the show I like to read comments that y’all have left on YouTube from previous shows. This is one of my favorite segments of the show because sometimes you guys say some funny or some insightful stuff and I get to share it with the rest of the audience.
Our first YouTube comment comes from episode 687 and it’s from Laila Atallah. I love you’re Seeing Greene episodes, David. This episode was jam-packed with gems and it was intriguing to hear a bit of what’s going on your computer screen all day as you manage your businesses.
Yes, please do a lot more episodes where you and other investors share all the details start to finish and the dollar amounts and other relevant metrics of the deal, rehab, ongoing management costs, big repairs, cash flow, cash on cash return, et cetera. Also, please share a bunch of stories of people’s different real estate failures with all of the numbers of what exactly went wrong and the lessons we all can learn.
Well, I can see that Laila is definitely a stickler for details and she wants all the details. So we will keep that in mind and we’ll look for more people to come in and share specific numbers in the future.
Our next comment comes from Lorena Zaragoza. OMG, David, when do you sleep? Side note here, are you supposed to say OMG or oh my God? I’ve always read it as OMG when somebody texts that. I don’t ever actually read out loud oh my God. Same for WTF, which is why I think it’s funny that people send that because how much time are you really spending? But I don’t know. Let me know in the comments. Are you supposed to pronounce this OMG or oh my gosh?
OMG David, when do you sleep? I’m going through a divorce and I’m getting myself positioned to not only survive but thrive going from two incomes to just mine. Sold the marital home and used part of my portion as down payment on my home. Reserved money to build a 700 square foot ADU, fully stocked and furnished to rent out. I’m renting my master on Furnish Finder and will also list my ADU on Furnish Finder once it’s built.
If all goes well, I will have replaced 75% of my ex-spouse’s take home in just over a year. Please have an episode for people going through a divorce. I’m 50 years old and using my energy and resources to launch forward into my real estate investing journey. Thank you.
Well, I’m sorry to hear about the divorce there Lorena, but I’m glad to know that you are taking that negative energy and turning it into something positive by investing into real estate. So thank you for your comment and all the detail there and I do wish you the best.
Our next comment comes from TJ. I always look forward to Seeing Greene episodes. I like the format of having different personalities answering questions. This is a great episode. I learned a lot. Thank you.
Well, thank you TJ. We appreciate you guys being here. And we can’t make these shows without you, so go to biggerpockets.com/david and submit me your trickiest, your craziest or your most practical question. I don’t care what it is, I just want to be able to help other people by getting it out there and letting them hear.
All right, if you guys don’t mind before moving on, please take a second to like, share and subscribe this and then leave your own comment on YouTube telling me what you think of this episode. Anything funny, entertaining, insightful, profound, whatever you can think of. I love it.
Our next video question comes from Colin Higgins in Titusville, Florida.
Colin:
Hi David, my name’s Colin Higgins and I’m a realtor here in Titusville, Florida. Right now I’m reading one of your books. I’m actually listening to the audio book which is Sold. And it’s filled with tons of great information, but I did have a question about some things that you mentioned in chapter four.
In chapter four, you’re talking about things that you can bring to the table that help close the deal both on the buyer’s behalf or the seller’s behalf, what have you. And one of the things mentioned, which is offering the sellers a free or reduced cost renter buyback agreement in circumstances where the buyers would have to break their lease in order to move into the new home.
Now this is interesting to me because when I’ve heard of rent buyback agreements, I’ve always heard of them pertaining towards the sellers, so the sellers can figure out where they’re going to move next and that buys them some time. I’ve never heard it pertain to the buyers and I’m just curious what this exactly means.
Is it that they’re getting their lease bought out so that they can move in? How does this pertain to the buyers, if you could clarify that. But anyways, thanks for taking my question. I’m a fan of the show. I know this will help myself, it’ll help my clients and it’ll help everyone else on BiggerPockets and YouTube.
David:
Thank you for that, Colin. I appreciate your question and it’s going to be cool to get to share with other people what goes on behind the curtains in the real estate world of negotiating deals. Here’s the gist of what we’re getting at here.
When negotiating, my mind always looks for a way that I can give something up to the other side, that my side doesn’t care about or value. You don’t want to give up the things that your side really, really cares about, like the price of the home. That matters a lot to the buyer. You don’t want to have to give up by paying more because that’s going to hurt your buyer.
But there may be a situation where the buyer says, “I’m in no rush to actually move into the house. If the seller accepts my offer, I’m happy to let them stay there and rent the house back from me.” Well, sometimes your client can’t do that. Sometimes they got to move in right away. And so offering the seller rent back hurts your clients, but other times your clients don’t care, and in other cases it actually benefits your client to do that.
So I would frequently have people come and say, “Hey David, we want to buy a house.” By the way, if you guys are in my area, if you’re in California and you want to buy a house, please reach out to me. I am never too busy to help you become a homeowner or sell your house. I would love it if you do that.
So this person comes and they say, “Hey David, I want to buy a house, but I’m stuck in my lease for another three months.” Everyone thinks in their mind because they’re in a lease, they just can’t get out of it. Now, when the market was hot, I had many of these clients go to their landlord and say, “Will you let me out of the lease?”
And the majority of the time the landlord said, “Yes, I can rent it for way more than you’re paying right now. Give me a month to advertise it. When I find a new tenant, you can move out and they’ll move in.” And boom, the lease issue isn’t an issue at all, just no one thought to ask.
Well, in other situations the landlord may have said no, or you could have a situation like right now where rents probably won’t be higher than what your client is paying. So landlords aren’t going to just want to let them out for free. There’s going to be a penalty that your client doesn’t want to pay.
So in those situations, this is especially crucial in January, February, March where spring is coming and they’re going to get out of their lease in May or June, and I’m trying to avoid my buyer having to go into the market when it’s the hottest and the hardest to get a house. Well, if it’s wintertime, they’re at an advantage as a buyer.
So instead of waiting until springtime when their lease is over, I would say, what if we look for a home and we write offers on homes, but we say that the seller can rent it back for three months. What you do is you write the offers saying the seller’s going to rent the house back for whatever period of time it is that they need, and their rent is going to be whatever your client’s principal interest tax and insurance is.
Okay, so basically your client is paying the mortgage, but they’re receiving the equivalent from the seller of whatever that mortgage is so they’re not actually losing money. And when this works out, well, you’re shopping for a house in February, you get it at a better deal than you would’ve got it at in the spring, but your client doesn’t have to move in right away.
The sellers keep that, they stay in the home even though the title transfers to the buyers. The sellers stay there, which gives them more time to find their next house, which made them more likely to accept your client’s offer, which meant you could write an offer that was better for the buyer than the seller because the seller’s getting that flexibility. This also benefits the buyer because they don’t have to move into the property right away and they don’t have to worry about the expense of breaking their lease.
These win-wins are what negotiation is all about. It’s not about dominating the other side, putting your boot on their neck and forcing them to bow because you have the power. That’s the wrong way to look at negotiating. It’s about the agent being clever and creative, and that’s why I gave an example in the book.
Agents don’t even ask these questions. They don’t even ask the question of, if a client says, “Well, I’m in a lease right now.” Okay, well come to me in three months when you’re ready. Houses are a lot more expensive in the springtime than they would be.
Or what if they just start looking now, and if you don’t find anything you like, we don’t write an offer, but if you do, we write an offer telling the seller they can rent it back and if the seller doesn’t need to rent it back, we just move on from that house, we don’t buy it. There’s lots of creative options and as the agent, I really believe they need to do a better job of looking for ways to structure deals that benefit the clients they’re representing.
So thank you for asking that question, Colin. I am very pleased to see that you’re reading this book, that you’re caring about being a better agent, that you’re trying to represent your clients a bit more. We need more people like you in the BiggerPockets community that are taking this approach and actually educating themselves on how to do a better job. Real estate is very difficult and having a good agent can make it much easier.
If any of you are real estate agents and you want to hear more tips like this, go check out my other books. You can go to biggerpockets.com/store and you’re going to look for Sold, Skill, or my next book Scale, which will be coming out, all written for real estate agents to help them be better at their jobs.
Our next question comes from Dennis Robinson in Orange County. On one of the duplexes that I own that’s valued at 900,000, I have a 40-year fixed rate mortgage. The first 10 years is interest only at three quarters of a percent higher than my other identical duplex, which has a traditional 30-year loan.
While I’m enjoying the extra $1,000 per month cash flow on the 40-year loan, but I’m concerned that I’ll regret this decision in 10 years if I want to refi and no principal has been paid down. I’m 41 years old, so I feel like I’m just getting started in my investing career and I’m equally concerned about my long-term outlook as well as having a little extra cash to enjoy life, especially while my kids are young. Which loan would you consider a better choice in my situation?
Great question here, Dennis. All right, before I answer it, I want to give a highlight here. I’m not against using 40-year loans and I’m not against interest-only periods. There is a danger to 40-year loans and the last time we saw them was 2005, ‘6 when the market was red hot.
The reason that they introduced 40-year loans into the market was because you couldn’t afford the house at the price the seller wanted on a 30-year loan, which meant you couldn’t afford the house. So by making it a 40-year loan, they could reduce your payments to the point that you could now get pre-approved. That is dangerous because it allows you to pay more for a house than you really should be paying.
Now, I’m not against the 40-year loan in a situation where you already own the house, but you’re refinancing it because you’re not paying more, you’re just getting a lower payment, stretching it out over 40 years. The same is true of interest-only payments. I’m a fan of interest-only payments, but not if the reason you’re doing it is you couldn’t afford the payment that also had principal.
All right, moving on to the next part of your question, should you go for the 30-year payment or the 40 year with 10 years interest only? It sounds like your concern here, my man, is that if you go with the 40-year interest only, you’re not going to pay your principal down enough over 10 years. Glad you asked that question because now we get to talk about amortization, which is a fancy word to describe the process of paying down a loan.
You said that the duplex is valued at 900,000. All right, now I’m sure that you don’t owe the full 900,000, but you didn’t mention how much you do owe. Let’s assume that you put 20% down just so I can do some math here. Okay, so it’s worth 900, you put 180 down, meaning that you owe $720,000.
Now assuming an interest rate of 7%, again, I don’t know exactly what your interest rate is, your principal and interest would be $4,790. But of that only $590 of that first payment would be going towards paying down the principal. So if we fast forward this 10 years, because you’re talking about a 10-year interest-only period, that’s 120 months. At that time, your loan balance would be $618,000 where you started off at 719,000. So it’s about a $100,000 is what you’d pay off over 10 years.
It’s not as much as you would think. And that’s because at the beginning of loans being paid off, a higher percentage goes to the interest than the principal. So you’re not paying off an even amount. A lot of people think like, oh, if I’m making a $4,000 a month payment, I’m paying $4,000 off of my balance. You’re not.
In this case, your payment was 4,790 and your first payment only paid off $590. And at the end of your first year, your 13th payment went up to 630, barely anything. It’s like a $30 difference in this case, $40 difference. So if you’re thinking that you’re paying massive amounts down on your mortgage because you’re making a $4,790 payment, you’re not paying off $4,800 a month, you’re paying off 5 or $600 a month and it slowly goes up.
Over 10 years, you’ve only paid off a 100 grand, but the payments you’ll have made over 10 years, let’s figure that out right now, if we take 4,790 times 12. So every year you’re paying 57,480 and then you multiply that times 10 years, you’ll have paid the bank $574,800 only to have paid off a 100 grand. You’re not paying off the full $574,800.
And that’s why interest-only loans are not as bad as what you might think. You’re not eliminating as much principal as people think, and over 10 years I imagine it’s going to be appreciating also probably more than a $100,000 that you didn’t pay off.
Okay, so for your specific situation, I think your 40-year loan with a 10 years interest only is a better financial choice for you. Take that $1,000 a month, save the majority of it just in case something terrible happens. Don’t just live off of that $1,000 a month. Maybe live off a couple hundred of it.
Put the other 7 or $800 off to the side, so if in 10 years when you got to refinance or whenever you got to refinance, if you haven’t paid off that principal, instead you’ve saved all that money that you could put towards the principal in a worst case scenario. I always plan for the worst case scenario.
Hope I didn’t confuse you too much with all this math talk and calculators here, but I appreciate you asking that question, Dennis, because our whole audience got to hear how not as much of a loan is being paid off as most people think.
All right, our next question comes from Lincoln in the Dallas, Texas area. I have cash savings of about $500,000. I bought my first single family house three months ago with $250,000 cash and now I’m waiting for the six months to get a loan and pull 200,000 of that out. A typical single family house in the area is 3 to 400,000.
Should I continue the practice of buying with cash to hopefully get a better deal? I’m assuming this is true, and then wait to refi and pull out the 80% or should I use the 500K as down payments on several properties all at once? Ooh, this is a good question here, Lincoln.
All right, first thing is there’s a fallacy that you’re getting a better deal when you pay cash. It’s not guaranteed. Sometimes it does help. I don’t think that’s wise. What I’d probably do is I’d write the offer with financing. Like let’s say that you want to buy a house that’s 400,000 and you write the offer for 350. Write it with financing, and if they say no, say fine, what if I give you all cash?
If they say yes to the cash when they said no to the financing, you did get a better deal and that’s going to work out good for you. But oftentimes they’ll say yes to the offer that you wrote of financing, so you didn’t actually get it at a better deal with cash.
Cash closes tend to be more advantageous when the seller is in distress and time is of the essence, when they’re headed to foreclosure, when they’ve got a notice of default, when they need a quick sale, yes, a cash purchase can help you because you don’t have to wait for the loan to fund.
But my mortgage company frequently funds loans in 14 days or 16 days, and most cash offers are like a two-week close. It’s the same freaking thing. So don’t get too caught up in thinking that cash is getting you a better deal.
Another thing to consider, what if rates are worse right now than they’re going to be in the future? If you think rates are going to get better, paying cash right now and then refinancing into a better rate in six months would help you. But what if it goes the other way? What if you could get a 7% interest rate today, but six-month rates are at 9%?
In that case, any benefit you thought you got from buying cash is erased because now you have a higher interest rate when you actually go in there to refi it. So you have to follow what’s going on with interest rates and how things are trending before you can make that decision.
There’s also the fact that home prices could continue going down, which I don’t know is guaranteed, but I think that it’s probably more likely that they’re going to stay the same or dip a little bit than it is that they’re going to go up. And I’m basing this off the fact that I don’t think that they’re going to go back up again until rates go down and we don’t have any reason to think that rates are going down in the next six months.
So I don’t think buying a whole bunch of properties right now is in your best interest because the market could be softening up in a lot of different places. What I would prefer to see is that you buy properties with financing right now and if the seller says no, try to get a better deal with your cash and then refinance.
Thank you for asking the question here, Lincoln. This was very well thought out and it gave me a chance to answer a pretty tricky dilemma that I think a lot of people are facing that have stacked up cash and waiting for an opportunity like this.
All right, we have time for one more question and this is going to be a video question that comes from Wyatt Johnson in Billings, Montana.
Wyatt:
David, what’s up? My name’s Wyatt Johnson. I’m an electrician up here in Billings, Montana. A little bit of background on me. I’m 25, got three properties, should be closing on the next one here in January. But I’ve noticed that I’ve always put my work life above my social life, especially relationships and it sucks because I feel like a loser when I’m not hanging out with women and working too much, but then I feel like a loser when I’m hanging out with women because I’m not working as much as I think I should be.
So I was wondering if you had any advice on how to avoid that mindset and also be more effective at juggling the two things. Really appreciate you taking my question. Appreciate everything you guys put out there. My life would look a lot different if I didn’t have you to listen to every week. Thanks.
David:
Wyatt, what an excellent question you’re asking here. This might be my favorite question someone’s asked at least off the top of my head in a very long time. I love that you asked it. And you’re summing something up that I think a lot of people go through, especially if you’re someone who values yourself based on how productive you are. There’s personality tests that people can take that will determine how much they value productivity. This is a great question to ask me because mine’s about as high as it could be. If I’m not being productive, I don’t feel good about myself.
Now productivity comes in many different ways. It doesn’t just mean making money because that’s always what the people who don’t value money jump in, there’s more to life than money. They can’t wait to come in and say that. I know, calm down.
You could be productive with health and fitness. Spending time at the gym is productive, if you’re working out really hard. You could be productive with meal prepping, right? If you’re at the grocery store shopping for good food and then you’re putting it into your fridge to eat healthy, that’s productive.
You could be productive in your relationship, right? I’ve never really been in a significant long-term relationship that was stable. So I can’t speak on this 100%, but I know the people that have, they always say it’s work, it’s work. Well, I think what they mean when they say it’s work is that it requires you to challenge your own natural self, like your personality tendencies that you need to hold with a loose hand.
And they’re also saying it’s an investment. You are constantly investing in your significant others’ wellbeing. You’re investing in the relationship showing that you value. You never get away from that. So there’s many ways to be productive is the first thing I’m getting at, but I love being productive.
If I’m having a conversation with a friend or in a relationship, I don’t want to talk about the weather and sports. I want to get into significant things that matter. To me that’s being productive.
Now you’re posing this question of when I’m working all the time, I feel like a loser because I’m not enjoying all the fruits of my labor. I could be out there talking to some fly mamacitas and having a good time and being respected for all the work that I did, feeling good about myself. But when I’m doing that, I feel like I’m leaving something on the table and I could be working.
All right, I’m going to ask you to reframe the way that you’re looking at the situation. Don’t look at spending time with women as generally speaking, being productive. It’s the relationship that matters. It’s the woman that matters. If you’ve got a woman that you love that you can see I could spend the rest of my time with her, or you’re not sure, but that’s a possibility, the time that you put into them is an investment, if it’s for the purpose of figuring out could I marry them, could I be with this person?
And then once you realize that it’s not the right person, you invested time in getting to the answer, you’ve got your win, get out, get back to work, get back to the goals that you have and wait for the next person to come along to invest in.
If you’ve done that and you’ve got to the point that you’re like, I think this is one that I could spend the rest of my life with, you’re not wasting time spending time with that person. You are investing into a future with that person that should be paying off dividends.
Now, if that person sees you the same way, they’re not going to resent you going to work. They’re not going to resent you making money. They’re not going to resent you practicing a craft because they’re going to benefit for the rest of their life by the work you’re doing, the financials that you’re building and the empire you’re creating as an electrician. They’re actually going to invest into you because they want you to do that.
So when you find somebody that’s resentful that you’re not spending all your time with them or they’re not the number one priority a hundred percent of the time, or you’re not giving them enough attention, that’s a sign this is the wrong person because they’re not seeing you as a future. If they saw you as a future, they’d be investing into where you’re going, which is your job and your real estate investing because that’s part of their life. They’re going to benefit from all that stuff too.
If they’re seeing you as someone who just wants all your attention, all the resources that you have, but they don’t want to help you build more of those resources, that is a sure sign that this person is using you. They’re looking for something that they can take from you, not necessarily something they could give.
And maybe this is a lesson for all of us to learn, when you find the person who sees you as a potential person they could have in their future, they invest in you because a future with somebody, a partnership like that is something you share together. So investing in the other person is investing in yourself.
So to sum all this up, if you’re with a girl that you really, really like, you’re not wasting time and not being productive, you’re investing in your future. If you’re with girls that you don’t really like and you don’t see going anywhere, you are wasting your time and you’re not investing in your future.
And when you’re trying to figure out if that’s the right girl for you, use the same metric based on them. Is she investing into your future? Is she building you up and supporting you and encouraging you to do more, even if it comes at the expense of her own immediate gratification, the attention that she’s looking to get from you?
Or is she just trying to get your money and your time and your attention and your resources and she doesn’t care about if they’re ever going to run out because when they do run out, she’s going to move on to the next person?
I think this is something we all could benefit from learning and focusing on and I want to commend you for having the guts to ask this question. I don’t know if it answered exactly what you’re going for, but if it didn’t, make sure you send us another question with a beautiful background like you have in this one so that I can answer it again.
All right, that was our show for today. I hope you guys enjoyed a Seeing Greene episode where I just remembered I forgot to turn the light green behind me and it’s been blue this whole time. So I’m sorry if that confused you. I do get complaints about this. How am I supposed to know it’s a Seeing Greene when the light is blue? I realize that. Hopefully the title, calling it a Seeing Greene, me introducing it as a Seeing Greene and me talking the entire time without a co-host was enough for you to realize that was the case. I’m going to record another one pretty soon here and I’m going to have to remember to turn that light green.
Thank you guys all for your attention, for following us here. If you want to learn more about me, you could follow me anywhere online, @davidgreene24, that’s my handle on all social media. You could also check out my website, davidgreene24.com, which is new, but is being remade right now. So let me know what you think of it. You find a lot about what I’m doing, where I’m going, what I’m reading, what I’m buying, more stuff about me there.
Last but not least, please go to wherever you listen to your podcast, Apple Podcasts, Spotify, whatever it is and leave us a five-star review. Those help us a ton and we want to stay the top real estate investing podcast in the world. All right, thanks, you guys. If you have time, watch another video and I will see you on the next one.
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Too Hot, Too Cold or Just “Tight”
This article is part of our Housing 2022-23 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.
It is of little surprise to housing market prognosticators and participants alike that the biggest housing trend in 2022 was the market’s response to the record-breaking increase in mortgage rates, as the Federal Reserve tightened monetary policy to tame inflation. It’s also no surprise that the questions on everyone’s mind as we enter 2023 are: what will happen to inflation and how that will influence monetary policy and mortgage rates over the course of the year.
Headline Inflation is Over-Served
It has become apparent in 2022, and was recently confirmed in remarks by Fed Chairman Powell, that the Fed is focused on the dynamics of inflation in parts. The first part is core goods inflation, which increased dramatically in 2021 due to COVID-related supply disruptions in combination with a COVID-related demand surge for goods by domestic consumers. As the figure shows, that inflation surge is fading fast. Apparently, the transitory inflation story that was prevalent a year ago does apply, but only to the core goods sector of the economy.
The other, and significantly larger, sector of the economy is core services, which comprises over 130 million workers, 86 percent of total non-farm employment. Core services is almost 60 percent of the total Consumer Price Index and shelter makes up 57 percent of core services.
As the figure shows, service sector inflation is still rising, largely due to the shelter component. That may seem initially disheartening for the 2023 outlook. However, shelter inflation lags observed rental and house price increases by approximately one year by virtue of how it is measured. We already know that rents and prices are declining, so it’s just a matter of time — likely in 2023 — until the shelter component of inflation will cool.
If core goods inflation is already cooling and shelter inflation is expected to do the same, then what’s left? Core services, excluding shelter. Here, the crystal ball gets cloudier. Services providers are still struggling to find labor, their primary input. As a result, service sector wages are still growing quickly — faster than the overall rate of wage growth, which is pretty strong itself.
Less consumption demand would help, and this is why the Fed wants to keep raising rates. But by how much? The currently forecasted “terminal rate” – the Fed’s best guess at the level where they can stop raising the fed funds rate – is not too hot, not too cold, but just “tight,” which will likely be 5 to 5.25 percent by mid-next year.
Assuming the terminal rate is just right, and that core services excluding shelter inflation also shows signs of cooling in mid-2023, then we can forecast more upward pressure on mortgage rates in the first half of the year. The popular 30-year, fixed mortgage rate is loosely benchmarked to the 10-year Treasury bond. As the Fed continues to tighten monetary policy, that means more upward pressure on Treasury bonds and, therefore, mortgage rates — not the amount of pressure on mortgage rates that occurred in 2022, but just a little bit more.
Slighty higher rates imply sales trending further lower in the first half of the year because higher rates have a dual impact on sales: pricing out buyers who lose purchasing power and keeping some potential sellers rate-locked in. Prices will also continue to correct and reflect the new dynamic of less demand relative to slightly more, yet still well below historically normal, levels of supply.
The Light at the End of the Tunnel
But there’s a light at the end of the tunnel. If inflation responds as expected in early 2023 and the Fed’s terminal rate guess is right, that will indicate that we may have a handle on inflation by mid-year. It’s even possible that mortgage rates could then actually decline modestly in the latter half of the year, as inflation expectations ease and the risk premium due to uncertainty declines. House-buying power could be given a boost from lower house prices and modestly lower mortgage rates.
There’s plenty of good reasons to believe that this could come to pass in 2023. Core goods inflation is already cooling, shelter inflation is expected to do the same in the coming months and, in theory, tighter monetary policy should cool services demand. Forecasting is challenging and economists have been notoriously bad at it. Nonetheless, this is one plausible scenario for 2023.
But I must warn the reader, I have been advised by mentors that when forecasting I should either say when, or by how much but never both. And no matter what, do not look surprised when I get it right.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Mark Fleming at @mflemingecon (Twitter)
To contact the editor responsible for this story:
Sarah Wheeler at sarah@hwmedia.com
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Local Markets: Louisville, Reno and San Diego
Local markets is a HousingWire magazine feature spotlighting housing trends across the country.
Louisville, Kentucky
Affordable housing prices combined with a vibrant history and a thriving culinary scene have certainly made Derby City a popular destination for homebuyers. However, even Louisville’s active housing market has slowed down recently. “I haven’t been seeing as many multiple offer situations lately,” Christine Ridenour Lindsey, a local agent with RE/MAX Properties East, said. “Last year you might have 20 offers on a house and half of them would be cash.” According to Ridenour Lindsey, as the market has cooled, she has noticed fewer all-cash offers being made. This trend has made it easier for buyers with financing and other contingencies to purchase a home. Also helping buyers is an increase in housing inventory, Ridenour Lindsey said. “It is hard to tell if more homes are being listed or if things are just sitting a bit longer, but there is definitely more inventory,” she said. “Interest rates going up has slowed the market down a little bit, which we needed — it was unsustainable the way it was going.”
Reno, Nevada
Known as “The Biggest Little City in the World,” Reno, Nevada, has been a hub for everything from railway expansion to gambling to divorce settlements. The city was named after Civil War Union Major General Jesse L. Reno, who was killed in action during the Battle of South Mountain at nearby Fox’s Gap. It has become a major technology center as it is home to offices for Amazon, Tesla, Panasonic, Microsoft, Apple and Google. Accompanying the influx of tech companies has been an influx of tech workers, causing home prices in the metro area to rise rapidly. “We have seen tremendous growth,” Mike Wood, a local RE/MAX agent, said. “Since May of 2020 we have seen growth accelerating faster than the national average and this happened as well from 2003 to 2007, but then our decline was also accelerated. It is like a roller coaster: the steeper the climb, the faster the drop.” According to Wood, this latest market shift is no exception to the rule. “I would say our price decrease should probably rank within the 10 highest in the nation, percentage-wise,” he said. “And our buyers that do get under contract are a little bit more skittish and quicker to cancel, so I have seen a high number of back-on-markets.” Looking ahead, Wood said making sure homes are well staged and presented and priced fairly will be key to getting to the closing table.
Destin, Florida
In November 2021, the median home sales price in Destin soared to $650,000, a year-over-year increase of 28.1%, according to Redfin. Since then, prices have cooled considerably, dropping to a median of $605,000 in August 2022, just 1.0% higher than a year ago. But with beautiful beaches and great amenities, it appears that Destin’s popularity is here to stay. Family circumstances forced Destin, Florida-based Corcoran Group agent and leader of The Ketchersid Team Jodi Ketchersid to take a step back from her real estate career in May. When she returned to the industry in late summer, the housing market looked different. A lot different. “It was like, ‘Holy cow! What happened to the market?’” Ketchersid said. “It felt like it happened overnight, but it wasn’t like the light shut off. I think this area was being really undervalued for so long — prices were low — and then everything went crazy and house prices became almost hyperinflated as people were willing to pay well over list price.”
Boise, Idaho
Boise, Idaho, made quite a few headlines over the past few years as homebuyers flocked to the state’s capital city. In June 2022, the Boise housing market was the most overpriced in the U.S., according to an analysis of 100 markets conducted by researchers at Florida Atlantic University and Florida International University. The study found that property prices in the Boise metro area were 69% higher than they should have been given Boise’s long-term pricing pattern. But the rapidly appreciating home prices and rising mortgage rates have taken a toll on buyers’ purchase power, causing listings to sit on the market longer. “Houses aren’t flying off the shelf like they were last year with multiple offers,” Christina Ward, a local Keller Williams agent, said. Ward said this slowdown has led to an increase in housing inventory. In September, she said the metro area had about double the number of houses for sale as it did a year prior. “We have about 2.6 months of inventory and that is still a seller’s market.” Ward also noted that she is seeing fewer out-of-town buyers. “The buyers we are seeing need to move because they have to — they got a divorce or have an addition to the family, or a new job or are empty nesters wanting to downsize.”
San Diego, California
Like so many other markets across the country, rising mortgage rates have taken a toll on the San Diego housing market. According to the San Diego Association of Realtors, the median price of a single-family home in the county dropped 5% in August to $910,000. While still pricy compared to the national median sales price of $389,500, according to the National Association of Realtors, it is a significant decrease. “I have a lot of buyers that are popping back up out of the woodwork,” Alanna Strei, a local eXp Realty agent, said. “They don’t like the interest rates, but it is not stopping them, they just aren’t happy about it.” Despite the slowdown, Strei said home price growth year over year was still at about 15% in September. “The fact that we are considering that as slow is kind of insane,” she said. “It is still a great time to sell.”
This article was originally published in the December/January issue of HousingWire Magazine, click here to read the full magazine.
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Higher rates exposed Rocket’s vulnerability — can it prove itself as a fintech?
Rocket Companies, the parent company of what was once the largest mortgage originator in the country, capitalized on the all-time low mortgage rates during the pandemic years, racking up record profits through an enormous amount of refinances. Last year, it originated $351 billion in total volume — with more than double the refi volume of any lender.
But when mortgage rates started rising following downward pressures on inflation, its business took a hit and the unimaginable happened: Rocket Mortgage not only lost $166 million in the third quarter, but it fell from its throne. Rocket lost its origination crown to its chief antagonist United Wholesale Mortgage.
At $25.6 billion, Rocket’s origination volume in the quarter was 31% lower than that of Pontiac, Michigan-based UWM, which has been gobbling up market share with its aggressive pricing strategy in the broker channel.
To be clear, every lender has taken a hit this year, with the $4 trillion mortgage industry in 2021 declining to an estimated $1.7 trillion in 2022. But the high-rate environment seems to have exposed the vulnerability of lenders that are more reliant on refinancings through a call center model and don’t have strong relationships with real estate agents.
As the current high-rate business climate works against its refi-focused business model, Rocket is betting big on the strength of its platform – a single sign-on solution for the entire Rocket ecosystem consisting of real estate services, personal loans, used cars and rooftop solar systems through subsidiaries.
At stake is the title of the country’s largest mortgage originator — and proving its strategy of branding itself as a fintech which would enable Rocket to reach a bigger audience beyond the mortgage industry.
“As we navigate and adjust to the current environment, we’re continuing our long-term strategy of investing in our platform with an eye toward the future,” Brian Brown, Rocket’s CFO, emphasized to analysts in its recent earnings call.
Rocket is in a tough spot at the moment. UWM is aiming to cement its position as the country’s largest originator by undercutting competitors through cut-rate prices in the broker channel. Rocket is the second-largest player in wholesale and though it is a reliable source of purchase business, Rocket remains far behind UWM.
While UWM faces a risk of losing market share when it pulls back from its aggressive pricing strategy, the wholesale lender says its bountiful profit of $325.6 million in the third quarter and improved liquidity position offsets the shrinking margins from its ‘Game On’ pricing.
“Honestly, for the next couple of years UWM is positioned a little better because they don’t have expenses like Rocket from going on to other ventures,” Kevin Heal, senior analyst at Argus Research, said. “They’re staying in the lane of being a wholesale lender.”
Rocket, whose executives have frequently spoken about the long game and the cyclicality of the mortgage industry, declined to comment for this story.
Is Rocket Mortgage waiting for another refi boom?
Though Rocket Companies has evolved from a single mortgage lender to an ecosystem of businesses involved in personal finance, auto sales, home sale and solar panels, its main source of revenue continues to be mortgages. About 94% of its generated total net revenue came from its direct-to-consumer and partner network mortgage segments year-to-date.
“The mortgage business was such a large part of their business in 2021 to 2022; you’re not going to be able to replace that overnight,” Jay McCanless, senior vice president at Wedbush Securities, said. “I think in some aspects they would like to be viewed as a proptech or fintech company. But at the end of the day, the core of the business is mortgage in our opinion.”
The Michigan lender boasts partnerships that include Salesforce – which allows Rocket to offer its mortgage technology to banks and credit unions that collectively originate $1 trillion in mortgages a year through Salesforce Financial Services Cloud – and Santander Bank, that allows Rocket Mortgage to originate mortgages for Santander clients.
However, mortgage rates doubled from the start of the year to surpass 6% levels, and the lack of portfolio recapture have undoubtedly hurt Rocket’s mortgage business, Shampa Bhattacharya, director of the financial institutions group at Fitch Ratings, said.
Roughly six of every seven U.S. homeowners with mortgages have a mortgage interest rate far below 6% levels, according to Redfin. Homeowners are discouraged from moving because selling their home and buying another could mean giving up their low mortgage rate and taking on a larger monthly housing bill, creating a “lock-in” effect across the country.
Unlike UWM — which outsources its servicing, meaning that originations aren’t as dependent on the portfolio recapture aspect — Rocket owns those customer relationships and servicing portfolios, which would generate leads in a stronger refinance environment, Bhattacharya explained.
Rates are expected to go down to the 5% levels in 2023, but it’s highly unlikely that rates will decline to the 2 and 3% levels like it did in 2020 and 2021, raising questions on whether Rocket will be able to benefit from the refi boom as it did two years ago.
“Those loans would have really low customer acquisition costs, which is what makes them so attractive,” she said. “That business significantly reduced and it had a disproportionate impact on volumes and margins.”
Not having a local presence through branches nor relationships with real estate agents – crucial for winning over referral businesses in a purchase market environment – is an Achilles heel for Rocket in the current market.
Rocket bankers work instead at centralized locations and are given leads that follow up on customer inquiries regarding ways to save money, a former Rocket banker who requested anonymity, said in an interview.
“They had it set up where you would always get warm leads as much as you need for many hours a day,” said a former Rocket banker. “People inquired about saving money or cashing out, and a banker will follow up with them and transfer them over to a seasoned banker.”
The former Rocket banker focused on refinancing mortgages to lower rates during his three years at the company, but after intense training sessions on mortgage products and sales techniques, which last about six to eight weeks, bankers are able to handle basically any type of calls, the former banker explained.
In an effort to address criticism regarding the lack of relationships with real estate agents, Rocket set up a new team focused on cultivating relationships with real estate agents. However, the team was disbanded last year, according to a report by the Wall Street Journal in late October. Rocket didn’t provide comment on whether all the teams had been disbanded and whether it plans on setting them up again.
In a rising-rate environment, Rocket bankers have pivoted to persuading existing customers to get a cash-out refi — taking advantage of record home equity levels that ballooned during the pandemic, the Journal reported.
It’s a tough sell.
Getting potential borrowers to trade a 3% mortgage for a 6% one is like “pushing rocks up hills,” Colin Wyzgoski, who quit his job as a banker in August after taking time off because of work stress, told the Journal.
There’s also heavy competition for Rocket bankers to contend with.
“With the market starting to shift, lenders are starting to show back up in the door,” Jeremy Blanton, a real estate agent at RE/MAX Southern Shores, told HousingWire. “Now that the refi market slowed down they have time and are doing the customer support for agents again.”
For retail lenders, brand recognition is key. And this is where Rocket has a big advantage over others —when it comes to Rocket, arguably no one is better at marketing. It would be foolish to count out a company as well resourced and well known to consumers as Rocket is, observers said.
“If you can influence consumers through ongoing direct consumer marketing, that’s powerful if it works,” Andy Harris, president of Vantage Mortgage Brokers, said.
Harris explained that younger generations are “more savvy because data is more readily available online” and that’s why Rocket is trying to bill itself to be a fintech company and try to attract the younger age homebuyers in a different way.
Plenty of money on hand
For a company with a market cap of $15.5 billion and increased liquidity in the third quarter, Rocket is positioned to withstand the storm better than any other lender.
Having the cash and credit lines on hand to ride out the rough patches in the market — known as liquidity — could be what separates the winners from the losers in the mortgage industry.
“Rocket is willing to sacrifice some income for the next quarters to capture market share and pull guys out of business,” Heal said. “They have plenty of funding available to finance the mortgages in between the period when they are origination and when they get sold.”
Rocket’s SEC filing indicates that it ended the third quarter of 2022 with a “strong liquidity position,” which includes $800 million of cash on hand, $3.2 billion of corporate cash used to self-fund loan originations, a portion of which could be transferred to funding facilities – warehouse lines, which used to fund loan originations.
At the end of the third quarter, the value of mortgage servicing rights came in at $7.3 billion, an increase of $1.9 billion year-to-date. A rise in the fair market value of MSRs on Rocket’s balance sheet helps to bolster the lender’s asset position, which creates more collateral for borrowings or potential income from future MSR sales — all of which help pump up Rocket’s liquidity.
For now, Rocket is “dealing with relatively low leverage and fairly efficient operations” but red flags to look for include large cash burns combined with significant MSR sales, according to analysts.
“You are basically selling your forward cash flow at a discount rate,” Kevin Barker, managing director at Piper Sandler, said. “It’s selling your future earnings in order to maintain your current market share. That is ultimately going to be dilutive to long term franchise value.”
Rocket’s to-do list as a fintech
“Rocket is going into the quarter and the start of 2023 on a pretty cautious footing, it seems like they’re doing multiple things to expand the funnel,” McCanless said, adding that the company is getting creative to generate opportunities for purchase originations where they can.
The Detroit company claimed to have 24 million Rocket user accounts through Rocket Homes, Rocket Auto, Rocket Solar and Rocket Money as of the third quarter of 2022. The goal for Rocket is to bring these members into their business lines well before they are ready to buy a home — and get them to lock in mortgages when becoming homeowners.
“It’s all about building the sticky relationship with the end customer and then selling them the products when any need arises for a mortgage and they already have the customer,” said Bhattacharya. “If they come to Rocket, their customer acquisition costs are really low and their margins are high, that’s their business strategy.”
The most recent example of that effort is the launch of Rocket Rewards, a loyalty program that distributes points toward financial transactions across the Rocket platform for potential homebuyers. In turn, homebuyers can use points to get discounts in their closing costs in the future.
At the vanguard of Rocket’s efforts to be defined as a fintech is Rocket Money, the latest addition to the Rocket portfolio. Formerly known as Truebill — a personal finance app that helps people split bills and cancel subscriptions — Rocket acquired the business in December 2021. Rocket wants to use the app to acquire leads for the mortgage origination business at a lower customer acquisition cost.
“With a larger top of the funnel and a lower client acquisition cost, higher conversion through deeper client insights and personalized offerings, and client retention with increased lifetime value, Rocket has a significant advantage over others in the space,”Jay Farner, CEO of Rocket Companies, told analysts during its earnings call of Rocket’s long term strategy.
“As we see rates shift and adjust, if there’s an opportunity to help folks, we’re not marketing to a $2.5 million client base, we’re marketing to a $10 million client base, and that’s the vision of what we’re creating,” Farner said.
Rocket declined to make any executives available for interviews and referred to the third quarter earnings call for any details on Rocket Companies future plans.
Despite Rocket’s ambitions, it’s likely going to take a couple of quarters before the lender returns to profitability.
“Considering how far origination demand has fallen and the significant consolidation that has occurred in the space, we believe Rocket will continue to produce slightly negative operating earnings for the next couple of quarters (absent a sharp drop in rates),” analysts at Piper Sandler wrote in a report following Rocket’s third quarter earnings.
“With the mortgage industry heading into the winter months, we might be going into a recession, one of the most profound turnarounds,” Brian Hale, founder and CEO at Mortgage Advisory Partners, said of upcoming market prospects. “Everybody (every lender) is going to have a black eye here. It’s not a lack of desire for loans, the loans don’t exist.”
As with all companies, businesses must adapt to the changing times. Rocket is really trying to redefine themselves as a fintech provider not just a mortgage company, said Heal, of Argus Research.
“It’s yet to be seen if that strategy has yet to work out,” he said.
That is not to say that Rocket doesn’t have advanced technology, Bhattachary added. “They have a lot of investment going on and a lot of innovation going on in its customer acquisition channel.
“The trick,” she said, “is to stay around and be around when the market changes and the cycle turns around. Then we’ll see who is in a better position and why.”
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UMortgage to acquire brokerage firm NXT 
Philadelphia-based UMortgage struck a deal to acquire Dallas-based NXT Mortgage, the companies confirmed to HousingWire.
UMortgage is bringing NXT’s assets, technology, and people in-house, including its founder and president, Tyler Hodgson. After the transaction is complete, which is expected to happen within the next two weeks, NXT will be part of UMortgage, adopting its business model and compensation structure.
Founded in 2017 by Hodgson, NXT originated $255 million in mortgages over the last 12 months, 74% of which were purchase loans, according to the mortgage tech platform Modex. NXT has 35 active loan officers, the data shows.
“Tyler is a certified public accountant, and he did build some proprietary technology that helps with the onboarding process and makes it efficient and scalable. That was a big part of the value added to the company,” Anthony Casa, who founded UMortgage in 2020, said.
According to Hodgson, NXT and UMortgage have a common vision of building a one-of-a-kind platform for loan originators.
“Our partnership will allow us to grow more rapidly towards our shared goal,” Hodgson said.
UMortgage and NXT declined to provide information on the financial terms of the deal.
A source familiar with the transaction told HousingWire that UMortgage is paying over $10 million in cash and equity, and the payout is tied to the retention of the loan officers.
Hodgson, a Marine Corps veteran, will own UMortgage’s shares. He will also be a national sales leader, reporting to Todd Bitter, who was hired in December to replace Casa as chief sales officer at UMortgage.
UMortgage, wholly owned by UM Group Holding Company LLC, has done a series of capital raising rounds over the last two quarters. The company sold equity to 27 senior leaders, loan originators, branch leaders, and team members, with an average contribution of $200,000 per shareholder.
However, Casa, the CEO with board of directors oversight, said he retains voting rights. Casa posted on social media in early December that he expects to own less than 1% of UMortgage by January 1, 2025. The remaining 99% of shareholders will be LOs, branch leaders, and team members.
“Our corporate documents mandate that the CEO’s contract can never be longer than one year, which means each year shareholders will vote on whether or not they want the CEO to return. No one works harder than someone on a ‘prove’ it contract,” Casa said.
UMortgage is a broker shop and a non-delegated correspondent lender that works with over 22 lenders and banks. According to Modex, it reached $617 million in production over the last 12 months, with 302 loan officers and 22 branches.
UMortgage claims it gains 65 basis points from each loan and takes 14 calendar days on average to close a loan.
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Do 40-Year Mortgages Ever Make Sense?
Renting vs. buying a home, forty-year mortgages, HELOCs, and relationships vs. real estate. There’s something for everyone on this episode of Seeing Greene, as David tackles questions that go far beyond just basic investing. And as the housing market continues to get even more confusing, homebuyers, landlords, and sellers are stuck with some serious debates that only an expert agent, mortgage broker, and investor like David can answer!
When choosing to rent vs. buy a home, David uses some geographic-specific data to decide which markets make more sense to own. Then, we have a question on how an interest-only mortgage works, and whether not paying into principal is a waste of time or a better option for cash-flow-strapped landlords. If you’re thinking of buying a property in all cash, David has some advice as to why now may not be the time to use loan-free dollars to get a better deal. Finally, David takes a more personal question from a listener, asking when to put real estate over relationships and why dating feels like a “waste of time” when trying to build wealth.
Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot!
David:
This is the BiggerPockets Podcast Show 702.
I’m not against using 40-year loans and I’m not against interest-only periods. There is a danger to 40-year loans, and the last time we saw them was 2005, ‘6 when the market was red hot.
The reason that they introduced 40-year loans into the market was because you couldn’t afford the house at the price the seller wanted on a 30-year loan, which meant you couldn’t afford the house. So by making it a 40-year loan, they could reduce your payments to the point that you could now get pre-approved. That is dangerous because it allows you to pay more for a house than you really should be paying.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast, here today with a special edition Seeing Greene episode. What makes it special you ask? Well, because it’s a Seeing Greene episode.
In these shows, if you haven’t listened to one before, we take questions from you, our audience, asking specific things about situations they’re in or general questions about the market and what’s going on. And I do my best to give them the most sound advice possible based off of my experience with the portfolio of properties that I own myself. These are some of our most popular episodes, so I really hope that you like this one.
You’ll notice that the light is green right now, letting you know it’s a Seeing Greene episode, but I forgot and it was blue when I was actually recording the content. So don’t be surprised if you’re watching this on YouTube when the light turns to green to blue. That’s just me making a mistake, but instead of doing the whole thing again, I left it in there so you could see that me just like you is not perfect and I make mistakes also.
Today’s episode is awesome and we get into some very cool stuff, including if somebody should buy a house when renting actually is cheaper in the short term. This was a really fun one that we got into. If a 30-year loan or a 40-year loan with 10 years of interest-only payments is the better option. And how to make a decision between focusing on relationships or real estate when you feel that you got to make a choice and make a decision there.
This was a fantastic episode with some of the best questions we’ve ever received. I want to thank you all, give you a big shout-out for asking great questions and continuing to support the show by asking them.
Before we get into the show today’s quick tip brought to you in the Batman voice is consider that investing in today’s market is different than investing in a market even as short as six months to a year ago. Things are changing very, very quickly and that’s why you need to be listening to podcasts to get new information.
My personal strategy, the way that I’ve adjusted is I’m focused more on building a financial fortress than I am on just expanding as quick as I can. When I’m making investing decisions, I’m thinking about defense and how I can protect my wealth, not just offense and how I can grow it.
Most wealth will grow on its own over time if you make wise decisions. So you don’t have to focus on that, but you do need to focus on protecting what you have, especially as things change. So always ask yourself the question, what will I do if things go poorly?
All right, I hope you enjoy today’s show. Let’s get to our first question.
Collin:
Hey David, hope all is well. I am reaching out with a question for you on the house hacking strategy. So I’m currently looking to relocate to Boston, which is a fairly expensive market, and as I’ve started to crunch the numbers on the properties that I’m looking at, which are mainly three units, I’ve found that in many cases my out-of-pocket cost on a monthly basis would be more than if I rented.
And so what I’m trying to figure out now is if it makes sense to pay a little bit more every month than what I would pay if I rented so that I can get into a property earlier and start building up equity, building up my wealth, which is my ultimate goal, or whether I should focus in the short term on renting, paying as little as I can every month, saving as much money as I can and then getting into properties down the road.
Would love to hear your thoughts on this. Thanks so much as always for your time.
David:
All right, Collin, thank you for that. This is a good question. What do we do when we can actually rent for less than what it costs to own?
Well, there’s a few factors that I think you should take into this decision. You kind of hit on it at the very end there, so I know you’re thinking the right way. You’re asking, should I be trying to build equity or should I not and try to save a little bit of money? Because when you own a home, you pay for more than just the mortgage, the tax, the insurance. There are capital expenditures, there is maintenance. There are other things that are going to go into owning a home.
So the question here is really what do you want your future to look like? 30 years down the road, 20 years down the road, 10 years down the road, what kind of a position do you want to be in? Because while rent may be cheaper right now, it tends to not stay that way. Rent tends to not go down or even stay the same, it tends to go up.
And when you have inflation, rent goes up quickly, especially when you have a shortage of housing, which we have in most cities. Not everywhere of course, there’s some places where more people are leaving than are moving in, but man, if you’re in one of those areas that people are moving to and you’re not having increasing supply, rents can get out of hand very, very quickly.
The other thing is you’re talking about Boston. That is a high appreciating market and appreciation doesn’t just affect the value of the property, it affects what the rents are as well. So if you were asking this question and you were somewhere where you’re talking about a $65,000 house and rents are $400 a month, I don’t think there’s as much at stake there. That would be okay to continue renting.
But for you talking about being in a major metro area where prices are going to be going up, especially when rates come back down, where rents are going to continue to increase as wages increase and inflation increases, it becomes exponentially more expensive to continue renting in a market like that long term.
So one of the mistakes I see people make is they look at the rent right now versus the cost of home ownership right now, and it’s almost always cheaper to rent. In fact, I bet if you went back and studied the housing market over the last 50 years at almost every single point in that 50 years at the time you bought the house, it would’ve been cheaper to rent than to own. But if you go back to any of those points 20 years ago, 30 years ago, 40 years ago, and you compare it to now, owning is much cheaper than renting.
So do your best to face your fears and get away from this idea of what’s cheaper right now and think about the future. 10 years of paying that place down, of rents going up, but your mortgage being locked in place, pretty significant.
And with house hacking, I say this all the time, it’s not just that you’re saving in the rent you would’ve been paying going up, you’re also charging more rent to the people that are renting from you. So it’s a double whammy, so to speak.
In that case, it sounds like it would be better for you to buy right now, even though it might be a little bit more expensive than renting and own a home instead of paying somebody else. In 10 years, you’re not going to regret it.
Now, if you can repeat this process with a new home every year for 10 years, you’re probably going to be a millionaire. And this question of, well, should I have saved money on rent instead of buying isn’t even going to be in your mind.
All right, our next question comes from Adam Quinonez in SoCal. Is doing a HELOC on my primary residence wise for my first investment deal? Also, if yes, would it be a better strategy to use the BRRRR method to recoup the initial cost? Thank you.
Well, Adam, I can’t say for sure if you should use a HELOC on your primary residence to buy your first investment property because I don’t know what your financial situation is like, but I know that if it’s a good deal that usually ends up working well. If it’s not a good deal though, it can hurt you twice because now you’re saddled with extra debt and you have a property where you’re losing money on. This is where I don’t have enough information about your specific situation to get into this and this is where having more specific information about your situation would allow me to give you better advice.
The concern here is that because you haven’t bought a property before, you’re probably not going to make a great decision on your very first home. So now you’re increasing your risk factors and you’re increasing the likelihood that the deal you buy goes bad. Throwing a HELOC on top of it, you actually needed to do extra good to be able to pay for the extra money that comes out of the HELOC. So in some cases this could work out, in other cases it might not.
I would say I would not recommend that you go forward with this strategy unless you have enough money and reserves and you make a decent enough income that if you do lose money on the investment property, it’s not going to bankrupt you. It’s okay, everybody, to lose some money the first year, the first two years of owning an investment property. It’s okay to lose money in real estate, believe it or not, in the short term. It’s not okay to lose money in the long term and it’s not okay to lose money if you cannot afford to lose money in real estate.
That’s a really key point I want to make. This is why I’m always saying to save reserves, to continue working, to increase your income everywhere you can, to be a great employee, to work hard to push yourself because you want more money coming in to cover up for the inevitable risk of investing in real estate. It’s like everything else. There’s going to be times where you lose money.
Now to the question of should I use the BRRRR method? Yeah, that’s ideal because you’re giving a loan to yourself with this HELOC. You’d like to be able to pay that back after you refinance, but you just can’t assume that every BRRRR’s going to recoup a hundred percent of the money. In fact, oftentimes they don’t recoup a hundred percent of the money. That’s actually rare when that does happen. So you don’t want to depend on that.
And an alternative to BRRRR is house hacking. Look, if you go invest money in a BRRRR and you pull out 90% of it, you only left 10% of the deal. That’s a win, that’s better than 20 or 25% if you bought it traditionally. But you can house hack and put 5% down or three and a half percent down and when you do that, you don’t even have to BRRRR.
If this is your first deal, I’d much rather see you take the HELOC on the property and buy another primary residence to move into to house hack and get your housing expenses lower. Take the place you have now and make that a rental. Then I would want to see you go try to take on a rehab project, something big like a BRRRR that could go bad, if you’re having to borrow money from your HELOC to pay for it.
Again, you know your financial situation much more than I do. I didn’t have a ton of information to go off of here. But in general, if this is your first investment property, I don’t love you having to use a HELOC unless you have a great deal.
Drew:
Hey, what’s up BiggerPockets? First of all, really want to thank Dave and Rob. They’ve been extremely impactful to me in my journey for financial freedom. Thank you guys so much.
A little bit about me, my fiancée and I did a live and flip three years ago that just recently netted us 130K. We put all of that into a house hack, a one bedroom STR house hack that’s going to cash flow us 4K this month and should average over 2K cash flow per month.
I also just recently started a co-hosting company that’s allowed me to develop a lot of the systems I need to scale my portfolio while also helping other hosts be able to grow their business and increase their revenue and essentially pay for myself while managing their business for them.
I consume most of the content out there on Airbnb optimization, arbitrage, acquisition, how to scale my Airbnb business. And right now I’ve opened some HELOCs one on my house and one on my mom’s house, which should give us access to about 250K in capital. My goal is to become financially free via cash flow and then start building wealth.
So most of my cash is being saved right now and I want to start leveraging some of this debt. So how do I spend it? Should I primarily focus on, one, networking, content, social media and marketing? This would grow my co-hosting business and my fundraising credibility, capability. Two, acquiring my next STRs via arbitrage or purchase through the HELOCs to grow my cash flow and add to my visible co-hosting portfolio. Or three, investments in high level education on sales or content creation, which I consider to be my weak points right now.
I’ll be doing all three, so I guess you could say I’m in a bit of analysis paralysis in terms of how to take the next big step. Thanks again so much. You guys have truly changed my life. I appreciate it.
David:
All right, thank you Drew, and thank you for the kind words. Excited to answer your question here, and thanks for asking it. If any of you would like to have your questions submitted here, just go to biggerpockets.com/david. You can submit a question just like Drew did.
All right, Drew, if I remember correctly, it sounds like you got three options that you can put this money into. You can either invest into the business that you created to try to get more clients coming in to earn more revenue. You could invest into more short-term rentals or you could invest into education to try to improve yourself.
I don’t know enough of the numbers for how your business is doing, how much time you want to put into this to be able to tell where the best ROI is going to be. But I do remember you saying that you recently started this business and you only own one short-term rental right now.
I don’t think it’s super wise to try to scale a huge business teaching other people how to run short-term rentals when you only have one. You can’t know some of the problems that are going to pop up when you only have one property. Sometimes you hit it lucky and you get an easier one and as you get more and more, stuff pops up that you wouldn’t have known could go wrong.
You’re basically not going to be an incredibly well-rounded educator until you get several properties and you see things going wrong that you couldn’t have anticipated and you adapt to that. That’s why people pay a coach. That’s why people listen to a podcast like this. It’s not all the stuff I can tell someone that can go well. It’s all of the anticipation I have for things that can go wrong and how I prepare them to get ahead of those problems before they happen.
You also mentioned that you’ve been building out some systems. I don’t think you want to be coaching and training other people until you have well established systems that, like I said, help prevent mistakes from going wrong.
So right off the bat, I think it’s cool that you’re doing some coaching and you’re helping some people, but I wouldn’t want to see you dump a ton of gasoline on that fire because it’s still so small. You just got a little bit of kindling, you’ve been rubbing the sticks together, you got a little bit of smoke coming out. You don’t want to dump gas onto a fire until it’s a big healthy raging bonfire. Once you’ve got the solid base of wood that’s in there and the flames are hot, then yeah, dump your gasoline on it.
But if you try to dump too much marketing money onto a business that’s new, has barely got started, you don’t have systems, you don’t have support, you don’t have employees, you don’t understand how to do it, sometimes rather than the gasoline making the fire go bigger, it actually snuffs it out and you lose what you even have right now.
Now that brings us to option number two, should you buy more short term rentals? I’m leaning towards this. If you’ve got the one and it’s going to average 2K a month, I would lean towards you should get another one, because you’re going to have increasing returns on your time.
You’re not going to have to build a new system from the ground up getting a new short term rental, especially if it’s in the same market as the one that you have right now. You’ll actually be able to benefit from economies of scale, buying a second property in the same area, using the same systems, using the same software, and using the same knowledge. You’ll make a lot less mistakes. This is very synergistically sound.
Your third option was to invest in training, which you say is a weakness of yours or more courses. That could be good, but I think if you’re already managing a rental, it’s probably not necessary. I’d rather see you get a couple of them and hit a ceiling.
Let’s say you get three or four short-term rentals and you’re like, “Man, I don’t know how to keep up with customer complaints. I don’t know how to keep up with managing the cleaners.” At that point, you see what your own limitations and your flaws are. That’s when I would invest the money into the coaching.
Right now they’re going to be teaching you a bunch of stuff that isn’t even a problem in your business because you’re only running one and some of that money could be wasted. You won’t get as much value out of it.
So on one hand you’ve got your marketing company, on the other hand you’ve got investing in yourself, and then the other you’ve got the actual real estate. I’d buy the real estate and once I had enough of the real estate, I would invest in the coaching. And once I had some of the knowledge from the coaching and the real estate portfolio to back it up, then I would dump money onto the business you’re trying to create to show other people how to do the same as you. And at that point you should have a well-oiled machine and be well on your way to doing great financially.
Thank you for asking this question, Drew. I like that I got to dissect that and give you some advice. And make sure you keep in touch with us and let us know how it’s going.
All right, at this part of the show I like to read comments that y’all have left on YouTube from previous shows. This is one of my favorite segments of the show because sometimes you guys say some funny or some insightful stuff and I get to share it with the rest of the audience.
Our first YouTube comment comes from episode 687 and it’s from Laila Atallah. I love you’re Seeing Greene episodes, David. This episode was jam-packed with gems and it was intriguing to hear a bit of what’s going on your computer screen all day as you manage your businesses.
Yes, please do a lot more episodes where you and other investors share all the details start to finish and the dollar amounts and other relevant metrics of the deal, rehab, ongoing management costs, big repairs, cash flow, cash on cash return, et cetera. Also, please share a bunch of stories of people’s different real estate failures with all of the numbers of what exactly went wrong and the lessons we all can learn.
Well, I can see that Laila is definitely a stickler for details and she wants all the details. So we will keep that in mind and we’ll look for more people to come in and share specific numbers in the future.
Our next comment comes from Lorena Zaragoza. OMG, David, when do you sleep? Side note here, are you supposed to say OMG or oh my God? I’ve always read it as OMG when somebody texts that. I don’t ever actually read out loud oh my God. Same for WTF, which is why I think it’s funny that people send that because how much time are you really spending? But I don’t know. Let me know in the comments. Are you supposed to pronounce this OMG or oh my gosh?
OMG David, when do you sleep? I’m going through a divorce and I’m getting myself positioned to not only survive but thrive going from two incomes to just mine. Sold the marital home and used part of my portion as down payment on my home. Reserved money to build a 700 square foot ADU, fully stocked and furnished to rent out. I’m renting my master on Furnish Finder and will also list my ADU on Furnish Finder once it’s built.
If all goes well, I will have replaced 75% of my ex-spouse’s take home in just over a year. Please have an episode for people going through a divorce. I’m 50 years old and using my energy and resources to launch forward into my real estate investing journey. Thank you.
Well, I’m sorry to hear about the divorce there Lorena, but I’m glad to know that you are taking that negative energy and turning it into something positive by investing into real estate. So thank you for your comment and all the detail there and I do wish you the best.
Our next comment comes from TJ. I always look forward to Seeing Greene episodes. I like the format of having different personalities answering questions. This is a great episode. I learned a lot. Thank you.
Well, thank you TJ. We appreciate you guys being here. And we can’t make these shows without you, so go to biggerpockets.com/david and submit me your trickiest, your craziest or your most practical question. I don’t care what it is, I just want to be able to help other people by getting it out there and letting them hear.
All right, if you guys don’t mind before moving on, please take a second to like, share and subscribe this and then leave your own comment on YouTube telling me what you think of this episode. Anything funny, entertaining, insightful, profound, whatever you can think of. I love it.
Our next video question comes from Colin Higgins in Titusville, Florida.
Colin:
Hi David, my name’s Colin Higgins and I’m a realtor here in Titusville, Florida. Right now I’m reading one of your books. I’m actually listening to the audio book which is Sold. And it’s filled with tons of great information, but I did have a question about some things that you mentioned in chapter four.
In chapter four, you’re talking about things that you can bring to the table that help close the deal both on the buyer’s behalf or the seller’s behalf, what have you. And one of the things mentioned, which is offering the sellers a free or reduced cost renter buyback agreement in circumstances where the buyers would have to break their lease in order to move into the new home.
Now this is interesting to me because when I’ve heard of rent buyback agreements, I’ve always heard of them pertaining towards the sellers, so the sellers can figure out where they’re going to move next and that buys them some time. I’ve never heard it pertain to the buyers and I’m just curious what this exactly means.
Is it that they’re getting their lease bought out so that they can move in? How does this pertain to the buyers, if you could clarify that. But anyways, thanks for taking my question. I’m a fan of the show. I know this will help myself, it’ll help my clients and it’ll help everyone else on BiggerPockets and YouTube.
David:
Thank you for that, Colin. I appreciate your question and it’s going to be cool to get to share with other people what goes on behind the curtains in the real estate world of negotiating deals. Here’s the gist of what we’re getting at here.
When negotiating, my mind always looks for a way that I can give something up to the other side, that my side doesn’t care about or value. You don’t want to give up the things that your side really, really cares about, like the price of the home. That matters a lot to the buyer. You don’t want to have to give up by paying more because that’s going to hurt your buyer.
But there may be a situation where the buyer says, “I’m in no rush to actually move into the house. If the seller accepts my offer, I’m happy to let them stay there and rent the house back from me.” Well, sometimes your client can’t do that. Sometimes they got to move in right away. And so offering the seller rent back hurts your clients, but other times your clients don’t care, and in other cases it actually benefits your client to do that.
So I would frequently have people come and say, “Hey David, we want to buy a house.” By the way, if you guys are in my area, if you’re in California and you want to buy a house, please reach out to me. I am never too busy to help you become a homeowner or sell your house. I would love it if you do that.
So this person comes and they say, “Hey David, I want to buy a house, but I’m stuck in my lease for another three months.” Everyone thinks in their mind because they’re in a lease, they just can’t get out of it. Now, when the market was hot, I had many of these clients go to their landlord and say, “Will you let me out of the lease?”
And the majority of the time the landlord said, “Yes, I can rent it for way more than you’re paying right now. Give me a month to advertise it. When I find a new tenant, you can move out and they’ll move in.” And boom, the lease issue isn’t an issue at all, just no one thought to ask.
Well, in other situations the landlord may have said no, or you could have a situation like right now where rents probably won’t be higher than what your client is paying. So landlords aren’t going to just want to let them out for free. There’s going to be a penalty that your client doesn’t want to pay.
So in those situations, this is especially crucial in January, February, March where spring is coming and they’re going to get out of their lease in May or June, and I’m trying to avoid my buyer having to go into the market when it’s the hottest and the hardest to get a house. Well, if it’s wintertime, they’re at an advantage as a buyer.
So instead of waiting until springtime when their lease is over, I would say, what if we look for a home and we write offers on homes, but we say that the seller can rent it back for three months. What you do is you write the offers saying the seller’s going to rent the house back for whatever period of time it is that they need, and their rent is going to be whatever your client’s principal interest tax and insurance is.
Okay, so basically your client is paying the mortgage, but they’re receiving the equivalent from the seller of whatever that mortgage is so they’re not actually losing money. And when this works out, well, you’re shopping for a house in February, you get it at a better deal than you would’ve got it at in the spring, but your client doesn’t have to move in right away.
The sellers keep that, they stay in the home even though the title transfers to the buyers. The sellers stay there, which gives them more time to find their next house, which made them more likely to accept your client’s offer, which meant you could write an offer that was better for the buyer than the seller because the seller’s getting that flexibility. This also benefits the buyer because they don’t have to move into the property right away and they don’t have to worry about the expense of breaking their lease.
These win-wins are what negotiation is all about. It’s not about dominating the other side, putting your boot on their neck and forcing them to bow because you have the power. That’s the wrong way to look at negotiating. It’s about the agent being clever and creative, and that’s why I gave an example in the book.
Agents don’t even ask these questions. They don’t even ask the question of, if a client says, “Well, I’m in a lease right now.” Okay, well come to me in three months when you’re ready. Houses are a lot more expensive in the springtime than they would be.
Or what if they just start looking now, and if you don’t find anything you like, we don’t write an offer, but if you do, we write an offer telling the seller they can rent it back and if the seller doesn’t need to rent it back, we just move on from that house, we don’t buy it. There’s lots of creative options and as the agent, I really believe they need to do a better job of looking for ways to structure deals that benefit the clients they’re representing.
So thank you for asking that question, Colin. I am very pleased to see that you’re reading this book, that you’re caring about being a better agent, that you’re trying to represent your clients a bit more. We need more people like you in the BiggerPockets community that are taking this approach and actually educating themselves on how to do a better job. Real estate is very difficult and having a good agent can make it much easier.
If any of you are real estate agents and you want to hear more tips like this, go check out my other books. You can go to biggerpockets.com/store and you’re going to look for Sold, Skill, or my next book Scale, which will be coming out, all written for real estate agents to help them be better at their jobs.
Our next question comes from Dennis Robinson in Orange County. On one of the duplexes that I own that’s valued at 900,000, I have a 40-year fixed rate mortgage. The first 10 years is interest only at three quarters of a percent higher than my other identical duplex, which has a traditional 30-year loan.
While I’m enjoying the extra $1,000 per month cash flow on the 40-year loan, but I’m concerned that I’ll regret this decision in 10 years if I want to refi and no principal has been paid down. I’m 41 years old, so I feel like I’m just getting started in my investing career and I’m equally concerned about my long-term outlook as well as having a little extra cash to enjoy life, especially while my kids are young. Which loan would you consider a better choice in my situation?
Great question here, Dennis. All right, before I answer it, I want to give a highlight here. I’m not against using 40-year loans and I’m not against interest-only periods. There is a danger to 40-year loans and the last time we saw them was 2005, ‘6 when the market was red hot.
The reason that they introduced 40-year loans into the market was because you couldn’t afford the house at the price the seller wanted on a 30-year loan, which meant you couldn’t afford the house. So by making it a 40-year loan, they could reduce your payments to the point that you could now get pre-approved. That is dangerous because it allows you to pay more for a house than you really should be paying.
Now, I’m not against the 40-year loan in a situation where you already own the house, but you’re refinancing it because you’re not paying more, you’re just getting a lower payment, stretching it out over 40 years. The same is true of interest-only payments. I’m a fan of interest-only payments, but not if the reason you’re doing it is you couldn’t afford the payment that also had principal.
All right, moving on to the next part of your question, should you go for the 30-year payment or the 40 year with 10 years interest only? It sounds like your concern here, my man, is that if you go with the 40-year interest only, you’re not going to pay your principal down enough over 10 years. Glad you asked that question because now we get to talk about amortization, which is a fancy word to describe the process of paying down a loan.
You said that the duplex is valued at 900,000. All right, now I’m sure that you don’t owe the full 900,000, but you didn’t mention how much you do owe. Let’s assume that you put 20% down just so I can do some math here. Okay, so it’s worth 900, you put 180 down, meaning that you owe $720,000.
Now assuming an interest rate of 7%, again, I don’t know exactly what your interest rate is, your principal and interest would be $4,790. But of that only $590 of that first payment would be going towards paying down the principal. So if we fast forward this 10 years, because you’re talking about a 10-year interest-only period, that’s 120 months. At that time, your loan balance would be $618,000 where you started off at 719,000. So it’s about a $100,000 is what you’d pay off over 10 years.
It’s not as much as you would think. And that’s because at the beginning of loans being paid off, a higher percentage goes to the interest than the principal. So you’re not paying off an even amount. A lot of people think like, oh, if I’m making a $4,000 a month payment, I’m paying $4,000 off of my balance. You’re not.
In this case, your payment was 4,790 and your first payment only paid off $590. And at the end of your first year, your 13th payment went up to 630, barely anything. It’s like a $30 difference in this case, $40 difference. So if you’re thinking that you’re paying massive amounts down on your mortgage because you’re making a $4,790 payment, you’re not paying off $4,800 a month, you’re paying off 5 or $600 a month and it slowly goes up.
Over 10 years, you’ve only paid off a 100 grand, but the payments you’ll have made over 10 years, let’s figure that out right now, if we take 4,790 times 12. So every year you’re paying 57,480 and then you multiply that times 10 years, you’ll have paid the bank $574,800 only to have paid off a 100 grand. You’re not paying off the full $574,800.
And that’s why interest-only loans are not as bad as what you might think. You’re not eliminating as much principal as people think, and over 10 years I imagine it’s going to be appreciating also probably more than a $100,000 that you didn’t pay off.
Okay, so for your specific situation, I think your 40-year loan with a 10 years interest only is a better financial choice for you. Take that $1,000 a month, save the majority of it just in case something terrible happens. Don’t just live off of that $1,000 a month. Maybe live off a couple hundred of it.
Put the other 7 or $800 off to the side, so if in 10 years when you got to refinance or whenever you got to refinance, if you haven’t paid off that principal, instead you’ve saved all that money that you could put towards the principal in a worst case scenario. I always plan for the worst case scenario.
Hope I didn’t confuse you too much with all this math talk and calculators here, but I appreciate you asking that question, Dennis, because our whole audience got to hear how not as much of a loan is being paid off as most people think.
All right, our next question comes from Lincoln in the Dallas, Texas area. I have cash savings of about $500,000. I bought my first single family house three months ago with $250,000 cash and now I’m waiting for the six months to get a loan and pull 200,000 of that out. A typical single family house in the area is 3 to 400,000.
Should I continue the practice of buying with cash to hopefully get a better deal? I’m assuming this is true, and then wait to refi and pull out the 80% or should I use the 500K as down payments on several properties all at once? Ooh, this is a good question here, Lincoln.
All right, first thing is there’s a fallacy that you’re getting a better deal when you pay cash. It’s not guaranteed. Sometimes it does help. I don’t think that’s wise. What I’d probably do is I’d write the offer with financing. Like let’s say that you want to buy a house that’s 400,000 and you write the offer for 350. Write it with financing, and if they say no, say fine, what if I give you all cash?
If they say yes to the cash when they said no to the financing, you did get a better deal and that’s going to work out good for you. But oftentimes they’ll say yes to the offer that you wrote of financing, so you didn’t actually get it at a better deal with cash.
Cash closes tend to be more advantageous when the seller is in distress and time is of the essence, when they’re headed to foreclosure, when they’ve got a notice of default, when they need a quick sale, yes, a cash purchase can help you because you don’t have to wait for the loan to fund.
But my mortgage company frequently funds loans in 14 days or 16 days, and most cash offers are like a two-week close. It’s the same freaking thing. So don’t get too caught up in thinking that cash is getting you a better deal.
Another thing to consider, what if rates are worse right now than they’re going to be in the future? If you think rates are going to get better, paying cash right now and then refinancing into a better rate in six months would help you. But what if it goes the other way? What if you could get a 7% interest rate today, but six-month rates are at 9%?
In that case, any benefit you thought you got from buying cash is erased because now you have a higher interest rate when you actually go in there to refi it. So you have to follow what’s going on with interest rates and how things are trending before you can make that decision.
There’s also the fact that home prices could continue going down, which I don’t know is guaranteed, but I think that it’s probably more likely that they’re going to stay the same or dip a little bit than it is that they’re going to go up. And I’m basing this off the fact that I don’t think that they’re going to go back up again until rates go down and we don’t have any reason to think that rates are going down in the next six months.
So I don’t think buying a whole bunch of properties right now is in your best interest because the market could be softening up in a lot of different places. What I would prefer to see is that you buy properties with financing right now and if the seller says no, try to get a better deal with your cash and then refinance.
Thank you for asking the question here, Lincoln. This was very well thought out and it gave me a chance to answer a pretty tricky dilemma that I think a lot of people are facing that have stacked up cash and waiting for an opportunity like this.
All right, we have time for one more question and this is going to be a video question that comes from Wyatt Johnson in Billings, Montana.
Wyatt:
David, what’s up? My name’s Wyatt Johnson. I’m an electrician up here in Billings, Montana. A little bit of background on me. I’m 25, got three properties, should be closing on the next one here in January. But I’ve noticed that I’ve always put my work life above my social life, especially relationships and it sucks because I feel like a loser when I’m not hanging out with women and working too much, but then I feel like a loser when I’m hanging out with women because I’m not working as much as I think I should be.
So I was wondering if you had any advice on how to avoid that mindset and also be more effective at juggling the two things. Really appreciate you taking my question. Appreciate everything you guys put out there. My life would look a lot different if I didn’t have you to listen to every week. Thanks.
David:
Wyatt, what an excellent question you’re asking here. This might be my favorite question someone’s asked at least off the top of my head in a very long time. I love that you asked it. And you’re summing something up that I think a lot of people go through, especially if you’re someone who values yourself based on how productive you are. There’s personality tests that people can take that will determine how much they value productivity. This is a great question to ask me because mine’s about as high as it could be. If I’m not being productive, I don’t feel good about myself.
Now productivity comes in many different ways. It doesn’t just mean making money because that’s always what the people who don’t value money jump in, there’s more to life than money. They can’t wait to come in and say that. I know, calm down.
You could be productive with health and fitness. Spending time at the gym is productive, if you’re working out really hard. You could be productive with meal prepping, right? If you’re at the grocery store shopping for good food and then you’re putting it into your fridge to eat healthy, that’s productive.
You could be productive in your relationship, right? I’ve never really been in a significant long-term relationship that was stable. So I can’t speak on this 100%, but I know the people that have, they always say it’s work, it’s work. Well, I think what they mean when they say it’s work is that it requires you to challenge your own natural self, like your personality tendencies that you need to hold with a loose hand.
And they’re also saying it’s an investment. You are constantly investing in your significant others’ wellbeing. You’re investing in the relationship showing that you value. You never get away from that. So there’s many ways to be productive is the first thing I’m getting at, but I love being productive.
If I’m having a conversation with a friend or in a relationship, I don’t want to talk about the weather and sports. I want to get into significant things that matter. To me that’s being productive.
Now you’re posing this question of when I’m working all the time, I feel like a loser because I’m not enjoying all the fruits of my labor. I could be out there talking to some fly mamacitas and having a good time and being respected for all the work that I did, feeling good about myself. But when I’m doing that, I feel like I’m leaving something on the table and I could be working.
All right, I’m going to ask you to reframe the way that you’re looking at the situation. Don’t look at spending time with women as generally speaking, being productive. It’s the relationship that matters. It’s the woman that matters. If you’ve got a woman that you love that you can see I could spend the rest of my time with her, or you’re not sure, but that’s a possibility, the time that you put into them is an investment, if it’s for the purpose of figuring out could I marry them, could I be with this person?
And then once you realize that it’s not the right person, you invested time in getting to the answer, you’ve got your win, get out, get back to work, get back to the goals that you have and wait for the next person to come along to invest in.
If you’ve done that and you’ve got to the point that you’re like, I think this is one that I could spend the rest of my life with, you’re not wasting time spending time with that person. You are investing into a future with that person that should be paying off dividends.
Now, if that person sees you the same way, they’re not going to resent you going to work. They’re not going to resent you making money. They’re not going to resent you practicing a craft because they’re going to benefit for the rest of their life by the work you’re doing, the financials that you’re building and the empire you’re creating as an electrician. They’re actually going to invest into you because they want you to do that.
So when you find somebody that’s resentful that you’re not spending all your time with them or they’re not the number one priority a hundred percent of the time, or you’re not giving them enough attention, that’s a sign this is the wrong person because they’re not seeing you as a future. If they saw you as a future, they’d be investing into where you’re going, which is your job and your real estate investing because that’s part of their life. They’re going to benefit from all that stuff too.
If they’re seeing you as someone who just wants all your attention, all the resources that you have, but they don’t want to help you build more of those resources, that is a sure sign that this person is using you. They’re looking for something that they can take from you, not necessarily something they could give.
And maybe this is a lesson for all of us to learn, when you find the person who sees you as a potential person they could have in their future, they invest in you because a future with somebody, a partnership like that is something you share together. So investing in the other person is investing in yourself.
So to sum all this up, if you’re with a girl that you really, really like, you’re not wasting time and not being productive, you’re investing in your future. If you’re with girls that you don’t really like and you don’t see going anywhere, you are wasting your time and you’re not investing in your future.
And when you’re trying to figure out if that’s the right girl for you, use the same metric based on them. Is she investing into your future? Is she building you up and supporting you and encouraging you to do more, even if it comes at the expense of her own immediate gratification, the attention that she’s looking to get from you?
Or is she just trying to get your money and your time and your attention and your resources and she doesn’t care about if they’re ever going to run out because when they do run out, she’s going to move on to the next person?
I think this is something we all could benefit from learning and focusing on and I want to commend you for having the guts to ask this question. I don’t know if it answered exactly what you’re going for, but if it didn’t, make sure you send us another question with a beautiful background like you have in this one so that I can answer it again.
All right, that was our show for today. I hope you guys enjoyed a Seeing Greene episode where I just remembered I forgot to turn the light green behind me and it’s been blue this whole time. So I’m sorry if that confused you. I do get complaints about this. How am I supposed to know it’s a Seeing Greene when the light is blue? I realize that. Hopefully the title, calling it a Seeing Greene, me introducing it as a Seeing Greene and me talking the entire time without a co-host was enough for you to realize that was the case. I’m going to record another one pretty soon here and I’m going to have to remember to turn that light green.
Thank you guys all for your attention, for following us here. If you want to learn more about me, you could follow me anywhere online, @davidgreene24, that’s my handle on all social media. You could also check out my website, davidgreene24.com, which is new, but is being remade right now. So let me know what you think of it. You find a lot about what I’m doing, where I’m going, what I’m reading, what I’m buying, more stuff about me there.
Last but not least, please go to wherever you listen to your podcast, Apple Podcasts, Spotify, whatever it is and leave us a five-star review. Those help us a ton and we want to stay the top real estate investing podcast in the world. All right, thanks, you guys. If you have time, watch another video and I will see you on the next one.
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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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ALTA: Protecting property rights with title insurance
For most real estate industry professionals, title insurance needs no introduction. A trusted product, title insurance has been used to protect real estate transactions and property rights for over a century.
However, most Americans don’t learn about title insurance until they buy their first home and amid the often stressful, frenetic activity of the closing process, homebuyers can be confused about many of the settlement costs and why they need to purchase a title insurance policy.
Title insurance is different than most other insurance products. Unlike car and homeowners insurance, which requires a monthly premium and only helps you after there is a problem, a title search most often catches and addresses any problems before closing day and title insurance provides protection for as long as you or your heirs own the property.
ALTA CEO
Contributor
For title insurance, a homebuyer only needs to pay a one-time fee at closing, which is typically issued in the amount of the real estate purchase price. For a home valued at $250,000, the cost of an owner’s title insurance policy would be just 11 cents a day on a 30-year mortgage.
While other forms of insurance have seen rate increases in recent years, the average cost of title insurance coverage has decreased 7.8% nationally since 2004 and roughly 5% the past two years, based on the most recent industry data from 2021.
Title insurance is a comprehensively regulated product.
Across the country, state departments of insurance oversee the industry’s practices and rates to ensure they are not excessive, inadequate or unfairly discriminatory. Insurers then must justify their rates, using actuarially supported data, to state regulators. State regulators capture annual revenue and expense data from title insurance agents and underwriters for the purpose of measuring the profitability, competitiveness and reasonableness of title rates and charges.
The title insurance industry is regulated not only across all 50 states, but also at the federal level, with title and settlement companies required to disclose all fees on both the Loan Estimate, which consumers receive three days after applying for a loan, and the Closing Disclosure, which is provided to homebuyers three days before closing.
There are also strict guidelines for the way title and settlement fees are disclosed to consumers and when changed circumstances allow for alterations to the disclosures. ALTA was proud to work closely with the Consumer Financial Protection Bureau (CFPB) to help develop these regulations, which went into effect in 2015.
Title insurers’ upfront, curative work involved in a title search is critical to help reduce risk of claims.
Unlike other insurance products where most of the upfront cost is marketing, the upfront expense for title insurance is related to conducting a search of public records to underwrite ownership and lien risks. Much of the expense is invested in the efforts of land title professionals to review the title and purchase title data from local governments.
It is the title insurance company’s willingness to stand behind this work – even if the defect originated in faulty public records – that provides lenders the confidence that they have a first lien mortgage.
There is a difference between a homeowner’s policy and a lender’s policy.
A lender’s policy primarily protects against claims that may affect the lender’s mortgage lien and does not directly protect the homeowner’s property rights, which is why title professionals recommend that consumers purchase a homeowner’s policy to protect one of life’s greatest investments.
With title insurance, a claim is serious, and a loss means homeownership is threatened. Having owner’s title insurance means the cost of defense and legal fees that typically would be the homeowner’s responsibility instead are paid by the title insurer.
Recently, an attorney shared with me how one of her clients purchased a home in Connecticut. The buyers purchased title insurance, which turned out to be an excellent investment. Due to a misfiling, nobody knew of an encroachment until months after closing. It did not appear on the title company’s title search or municipal search.
The policy covered the full cost of fixing the issue and the customer incurred no cost. As we know, the one-time fee for title insurance is the best bargain and other options can cost people their home. Should a title issue arise on a property covered by alternative title insurance products — such as certain attorney opinion letters — a claimant would need to prove negligence on the part of the attorney to pursue the claim with them.
If not proven, a claimant would likely need to pay the legal costs involved to litigate the title matter, posing a financial burden and a significant risk to losing the property.
Consumers can shop around and should compare policies.
Consumers are encouraged to ask their title professional how rates are determined where they live and what services are provided in the fee, as well as to shop around.
CFPB research shows that the TRID regulations have helped consumers better understand their closing costs and compare competing offers.
Government-operated title insurance approaches are not less expensive.
The current government-operated system in Iowa is often cited as an alternative to traditional title insurance. However, the Iowa model is not transferable to other states. A congressional study concluded a government-run system would not make buying a home or business any easier or cheaper because of other costs consumers must pay associated with the real estate transaction.
In fact, Iowa’s total closing costs were higher than 12 other states in 2021. This system would not reduce homebuyer costs and would result in job losses.
Title insurance remains essential.
Due to their complex nature, title searches are done by expert title insurance professionals. Beyond a public records search, these professionals review the title documents found in the search and help resolve outstanding issues, such as getting prior mortgages paid off or making sure there are no outstanding amounts owed to contractors.
Forged or falsified documents, invalid deeds and incorrect property descriptions are just a few of the issues that must be examined over the course of a comprehensive title search. Then, they prepare the new deed and ultimately facilitate the closing.
In every county across America, title professionals are working diligently to protect most Americans’ greatest investment — their home. Title insurance is — and will always be — essential.
Diane Tomb is chief executive officer of the American Land Title Association.
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The “Sellers Strike” Has Begun—Why The Housing Market Is Going Dark
Back in March and again in August, I noted that “We are undoubtedly reaching the limits of affordability for Americans,” which should “cool the real estate market” and likely “cause a correction” but without the unpleasantness of a crash.
This, in my humble judgment, is still the case as the real estate market is—unlike in 2008—buoyed by much more qualified buyers with substantially more equity in their homes and long-term, low-interest, fixed debt versus the teaser rates of the early to mid-aughts. A chart of mortgage originations by credit score should drive that point home.
However, I was clearly wrong about one thing. I didn’t believe there was sufficient “political will” to really tackle inflation. That still may be true as the Fed could quickly abandon its current course. But given the litany of rate increases and the signals of more to come, it would appear that high-interest rates will be with us for quite some time.
Indeed, the 3% mortgage I got on my personal residence last year would be more than twice that now. As Dave Meyer put it, the Fed has made it clear that they want a housing correction to take place to reduce inflation and address near-historic levels of unaffordability.
So, where does that leave us now?
A Housing Correction and the “Sellers Strike”
This is what the number of new listings looks like in the Kansas City Metro Area, where I live:
New listings in September 2022 were down almost 600 from 2021, a 12.9% decrease. They were down a full 15.5% from 2020.
Thus, despite the rate increases, inventory only crept up from 1.5 to 1.7 months in September 2022. A balanced market is six months, so this is still considered a “seller’s market.” (Although I would argue with this, given how odd the current market is.)
It’s important to look at year-over-year (YoY) comparisons here as new listings follow a cyclical pattern and always fall off during the winter. For instance, the year-over-year trend for new listings nationally fell 23.6% YoY in October.
However, homes for sale are still up 5% from last October. This increase in inventory came in large part due to fewer sales and nearly 20% of buyers backing out of signed contracts. There are also some rather amusing headlines, such as “average sale-to-list-price ratio fell to 99% in September.” It had been a shade over 103%, which is, well, not exactly typical.
Overall, this is what Bill McBride calls “the sellers strike.” There simply aren’t very many good reasons for homeowners to try and sell their house right now. So, they don’t. Therefore, we should expect this trend to accelerate and be with us for quite some time.
Americans Are Staying Put
Of late, Americans have been substantially less likely to move than they had in years past. As The Hill noted in 2021:
“New data from the U.S. Census Bureau shows just 8.4 percent of Americans live in a different house than they lived in a year ago. That is the lowest rate of movement that the bureau has recorded at any time since 1948.
“That share means that about 27.1 million people moved homes in the last year, also the lowest ever recorded.”
Even before the pandemic, record lows were being set. The reasons for this are many, including an aging population, fewer children, and, of course, housing being so expensive.
In that same vein, the number of new home listings was also falling even before prices went through the roof and the recent interest rate hikes.
The average duration of homeownership went up to eight years, an increase of “about three years over the last decade,” according to The Zebra. The change in the median length of stay is even more dramatic. It has almost tripled from about five years in 1985 to 13.2 years in 2021.
If you think about it, it makes sense. Why move, particularly now?
Most homeowners (approximately 95%) have 30-year, fixed-rate mortgages. Anyone who took out a loan in the last five years has a rate below at least 4%. Why would you ever voluntarily pay off such a loan?
And as we have seen, fewer and fewer people are.
Interestingly enough, the same thing is happening in the rental market.
Tenants are renewing their leases at a record level. In April of 2022, over 65% of tenants renewed their lease versus just over 56% in 2019, according to RealPage.
This also makes sense if you understand that the giant rent increases you hear about are just for new listings. For example, back in April, when the year-over-year rent increase for new listings was 16.9%, NPR found that the average tenant was only paying 4.8% more than the year before.
The reason is that very few landlords are willing to raise rent all the way to market on current tenants. Increasing the rent much more than 5% often inspires a tenant to leave just out of spite. So, if rent is (or at least was) going up 16.9% elsewhere but only 4.8% where you are, you’re likely to stay put.
So, is the United States—birthed in a fight against monarchy and entrenched aristocracy—regressing to a realm of feudal serfs bound to the land they currently inhabit?
Well, for the time being, sort of.
Opportunities In This Very Odd Market
The Homeowner That Rents
The “sellers strike” has and will continue to buoy the housing market as long as interest rates are high (at least by post-2008 crash standards). At the same time, it is likely cooling the rental market, and I suspect many homeowners who need to relocate are choosing to rent out their homes instead of selling them, and thus the volume of rentals is increasing.
Asking rents are starting to moderate. From a high year-over-year increase of 18% in April, they are now down to just 7.4% in November and only 1.2% higher than in October.
Even still, rents are quite a bit higher than they were even a few years ago, so continuing to hold rentals as a landlord should do fine in the near term.
Furthermore, for any homeowner out there who needs to move for a job relocation or whatnot, the best play is likely to rent your current home and then find a rental where you are moving to. After all, the softening rental market will help you in finding a rental equally as much as it hurts you in renting out your current residence.
And again, why pay off your 2.65% loan on your current home to get a 6.95% loan on a new one? That is not a particularly lucrative form of arbitrage right there.
I suspect the “homeowner who rents” will become much more common in the next year or so. And while such ideas may come naturally to the readership of BiggerPockets, they likely won’t naturally occur to the “normal” homeowner despite it being in their best financial interest. So please make sure to enlighten others about their options in this high (by recent standards) interest rate environment.
Subject To
The next major opportunity is a bit more rife with uncertainty, and this is the infamous “subject to” strategy.
“Subject to” just means that the purchase is “subject to the existing financing.” Effectively, the buyer assumes an unassumable loan.
Or in other words, the buyer takes the deed to the property and makes the loan payments, but the loan stays in the seller’s name.
The advantages to the buyer, in this case, are obvious. If you can “assume” a loan at 2.85% on a property, how much does the purchase price even matter?
There are several problems, though. First of all, you need to seriously build rapport with the seller in order for them to trust you to pay their mortgage on a house they no longer own. After all, if you don’t make the payments, it’s the seller’s credit that will take the hit.
Secondly, virtually every mortgage and deed of trust has a “due on sales” clause. This allows a bank to call the loan due the moment the property transfers ownership. In the past, banks have very rarely done so. It might be different this time around, though. Would a bank keep a 3% mortgage on its books when the going rate is over 6%?
All we can really say is that we don’t know for sure. If you do employ this strategy, you should have a plan B to refinance or sell the property if the bank does elect to call the loan due.
Lastly, holding a mortgage without the corresponding property will seriously affect a seller’s debt-to-income ratio and make it very difficult to buy a new property. At the same time, as a subject to buyer, I would never want to pay off any mortgage made between 2018 and the middle of 2022. Thus, there could be a long-term conflict and even an ethical issue that wasn’t present so much when subject to’s first became popular in the early 2010s.
Even though you may not have a fiduciary duty to the seller, you should be very clear about what the ramifications could be with the seller upfront. I would recommend even coming to an agreement or something to that effect about how long you will keep that mortgage in place before refinancing or selling.
Conclusion
As long as rates stay high, the “sellers strike” should continue. Expect very low rates of new listings for the foreseeable future. The real estate market will soften and decline a bit, but without a strong incentive to sell, the sellers strike, amongst other factors, should keep it afloat.
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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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Class Valuation acquires Maine-based AMC PropertyVal
Class Valuation, one of the largest appraisal management companies in the U.S., has acquired yet another firm. It’s picked up PropertyVal, a Maine-based AMC that is among the largest independent residential appraisal firms in the state.
“We are a regional AMC with a strong network across New England, but our stronghold has been in the Maine and New Hampshire markets. To partner with an industry leader like Class Valuation will benefit both our lending and appraisal partners,” Robert Strong, CEO of PropertyVal, said in a statement.
It’s at least the third acquisition Class Valuation has made this year alone. In February, the company acquired Detroit-based AMC Metro-West, one of the largest independent residential appraisal firms in the country, with staff across 80 metros. In August, Class Valuation announced the acquisition of AppraisalTek, a Chandler, Arizona-based AMC. Class Valuation said it would bring on AppraisalTek’s 75 full-time employees.
Terms of the deal for PropertyVal, founded in 2006, were not disclosed. Class Valuation is owned by private equity firm Gridiron Capital.
The appraisal management company sector, like many across the housing industry, is undergoing consolidation amid increased regulatory pressures on appraisers and potentially disruptive technological changes.
Earlier this year, Arcapita, a Bahraini investment firm, acquired a stake in Nationwide Property and Appraisal Services for an undisclosed price, giving it access to its 15,000 licensed appraisers. Arcapita said at the time that with “appraisals being a regulatory requirement for mortgages for new home purchases, refinancing, and foreclosures, the $7.5 billion real estate appraisal services market has cumulatively grown by 32% since 2008.”
AMCs like Class Valuation are heavily influenced by changes to conventional appraisal standards.
Fannie Mae and Freddie Mac began accepting desktop appraisals for some mortgages this year, and Freddie has accepted hybrid appraisals as well. The VA also now accepts desktop and exterior-only appraisals.
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Will lower mortgage rates be enough to prop up housing activity?
The Federal Reserve’s decision to slow the pace of interest rate hikes this week pushed mortgage rates lower — and it happened in spite of the central bank reiterating that it would continue to tighten its grip on the economy next year. These lower rates are encouraging news for the industry, which saw rates climb past 7% in October, but whether that will be enough to prop up home sales is a question that has not yet been answered.
The average 30-year-fixed mortgage rate averaged 6.31% as of December 15, down two basis points compared to the previous week (6.33%), according to the latest Freddie Mac survey. At 3.12% one year ago, the same loan rates were about half of what they are today.
“Mortgage rates continued their downward trajectory this week, as softer inflation data and a modest shift in the Federal Reserve’s monetary policy reverberated through the economy,” Sam Khater, Freddie Mac’s chief economist, said in a statement.
In conjunction with the central bank raising the federal funds rate by 50 bps rate hike after its two-day Federal Open Market Committee, policymakers expect to lift borrowing costs to 5.1% by the end of 2023, an increase from its projection in September.
“The market’s reaction to Wednesday’s announcement from the Federal Reserve – in which members officially predicted a higher-than-previously-expected path forward for their benchmark interest rate – was less obvious,” Matthew Speakman, Zillow Home Loans senior economist, said.
The news took the wind out of the market’s sails initially, but assurances from Fed Chair Jerome Powell that the central bank would likely shift its outlook if more evidence emerges that inflation pressures are waning, helped to buoy investors’ spirits, sending bond yields – and the mortgage rates they tend to influence – back downward, Speakman explained.
“Altogether, mortgage rates remain at their lowest levels since the late summer as the year nears its end,” Speakman said.
The 10-year Treasury note, which dictates mortgage rate movements, dropped to 3.49% on Wednesday from 3.51% on Tuesday after the Bureau of Labor Statistics released the Consumer Price Index, which showed inflation slowed rapidly than economists’ expectations.
Homebuyers weigh their options
The Mortgage Bankers Association (MBA) expects the recent downward trend in mortgage rates to continue. Along with moderating home prices, declining rates should “encourage more homebuyers to return to the market in early 2023,” Bob Broeksmit, president and CEO of the MBA, said.
It was only last week that mortgage demand showed an uptick with rates trending downward after consumer prices showed slower-than-expected growth in October. The volume of overall mortgage applications rose 3.2% last week compared to the previous week, led by refinance and purchase.
“With more homes available for sale, and more of them sporting price cuts, some buyers are running the math and finding that the slide in rates is offering better options within their budgets,” said George Ratiu, manager of economic research at Realtor.com.
For real estate markets more broadly, continued moderation in inflation would diffuse the upward pressure that has led to this year’s surge in mortgage rates, Ratiu said.
“While a return to the 3.0% range is not likely in the near future, even a flattening of rates in the 5.5% – 6.0% range in 2023 would offer housing markets an improved foundation,” he said.
Realtor.com forecasts existing home sales to decline to 4.53 million units next year, down from the expected 5.28 million units in 2022. The National Association of Realtors projects home sales will slide by another 6.8% in 2023, dropping to 4.78 million.
The recent declines in rates leading to a stabilization in purchase demand is good news, but the bad news is that “demand remains very weak in the face of affordability hurdles that are still quite high,” Khater said.
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Why mortgage rates are likely to drop as 2023 housing outlook remains gloomy
On the heels of the central bank’s announcement to raise the federal funds rate by 50 basis points to 4.25%-4.50% on Wednesday, most economists and industry experts were on the same page about the housing outlook and which direction mortgage rates would be headed.
Growing concerns of a recession, led by the Federal Reserve’s continued interest rate hikes next year, will prompt mortgage rates to trend lower in 2023, according to numerous experts. However, activity in the housing market will remain depressed at least in the first half of next year as home affordability continues to be a challenge for homebuyers.
According to Mike Fratantoni, senior vice president and chief economist at Mortgage Bankers Association, there are increased signs that the U.S. is headed for a recession next year.
“Weaker growth typically leads to lower long-term interest rates, including mortgage rates,” Frantoni said in a statement.
Central bankers now expect unemployment to rise to 4.4% by the end of 2023, according to fresh projections, up from an estimate of 3.9% in September — when estimates were last published. Policymakers are also expected to lift borrowing costs to 5.1% by the end of next year, an increase from its projected 4.6% in September.
If recent trends continue with respect to consistent declines in inflation and an increasing risk of recession, we may be near the peak rate for this cycle, which is now expected to be just over 5%, Fratantoni said.
“The MBA is forecasting that mortgage rates for 30-year fixed-rate loans, which were at 6.4% last week, are expected to drift down and end 2023 around 5.2%,” he said.
Mortgage rates are taking the Fed’s move as a clear indication that the pace of interest rate increases will be moderate, and the market is hopeful that any increases in 2023 will be in the more typical 25 basis point increments, Marty Green, principal at Polunsky Beitel Green, law firm for residential mortgage lenders, said.
The 10-year Treasury note, which dictates mortgage rate movements, dropped to 3.49% on Wednesday from 3.51% on Tuesday after the Bureau of Labor Statistics released the Consumer Price Index, a timely inflation measure.
Bond yields reversed course and headed lower when the Fed chairman Jerome Powell was speaking, Logan Mohtashami, lead analyst at HousingWire said.
“This is the bond market saying to Powell, we don’t believe your lies, and the Pinocchio nose grew more extensive and more significant the more he talked today,” Mohtashami said.
While mortgage rates eased over the last few weeks, Danielle Hale, chief economist at Realtor.com noted that understanding the volatility in mortgage rates is important.
Volatile mortgage rates meant that “shoppers have to visit and revisit their budgets to ensure they’re set appropriately,” Danielle Hale, chief economist at Realtor.com, said.
“We expect higher rates are likely to stick around until inflation makes much bigger strides back toward the 2% target. But in a welcomed pace of change, we expect lower volatility in mortgage rates in the year ahead,” Hale said.
Realtor.com expects mortgage rates to reach 7.1% by the end of 2023, dropping slightly from the projected 7.5% by the year-end. It projected mortgage rates to average 7.4% in 2023, up from the expected 5.5% in 2022.
“Now the market is waiting to see whether mortgage rates will rise to keep pace with the Fed’s half-point rate increase this week, or if mortgage rates will drop on expectations that inflation will fall even more,” Holden Lewis, home and mortgage expert at NerdWallet, said.
Not much good news for homebuyers
Activity in the housing market, the most interest-sensitive sector, as noted by Powell, isn’t likely to fully recover until at least the first half of 2023. Housing services inflation has been very, very high and will continue to go up before coming back down sometime next year, Powell said of the industry — which has suffered due to elevated home prices, a lack of inventory and high mortgage rates that have chilled activity.
While mortgage rates are largely expected to drop, the combination of the holiday season and both buyers and sellers remaining on a strike won’t bring any meaningful impact to the housing market, Brian Hale, CEO and founder of Mortgage Advisory Partners, said. Unless housing prices or interest rates drop to 4% or 5% levels, he doesn’t expect to see any material change in the housing market.
The latest measure of mortgage demand, released last week, showed a rise in mortgage applications, but lower rates haven’t convinced home buyers to lock in their mortgage rates.
Rate lock dollar volume was down 68% year over year, driven across the board by purchase locks, according to Black Knight. Headwinds from both interest rates and affordability continue to challenge purchase lending, with the dollar volume of such locks down 37% over the past three months — and down by more than 50% from November 2021.
An improved interest rate environment convinced some buyers to re-enter the market, but “activity is far below what was occuring in 2022 as home affordability, the transition of the residential real estate market, and the fears of a recession continue to significantly dampen demand for housing,” Green said.
Existing home median price appreciation is forecast to slow at 5.4% growth in 2023 from this year’s expected 10.2%, according to Realtor.com. Existing home sales are also set to decline to 4.53 million units next year, down from the expected 5.28 million units.
Existing-home sales, which have fallen each month since January as mortgage rates surged on the back of the Federal Reserve’s aggressive campaign to hike interest rates to control inflation, are projected to slide by another 6.8% to 4.78 million in 2023.
The National Association of Realtors forecasts existing home sales to slide by another 6.8% in 2023, dropping to 4.78 million. The median transaction price for homes is expected at $385,000 next year, more or less flat by supply constraints, the NAR said.
“Next year will be a tale of two years — the first half of 2023 will be very difficult because even If rates drop, it takes time for borrowers to notice, sellers to adjust their price, a deal to get signed and a deal to get financed,” Hale said.
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