Cash flow is arguably the most important metric in real estate investing…that is if you’re talking to novice investors. Expert investors, like David Greene, know that cash flow is but one of many factors to consider when buying a rental property, and it’s arguably the least important. While rookie investors focus on building their cash flow, veterans focus on building their wealth while freeing up their time.

On this week’s episode of Seeing Greene, your jiu-jitsu and real estate sensei is back to drop some wealth-building bombs so you can work less, live more, and lead a happier life. David takes questions in the form of video submissions as well as questions off of the BiggerPockets forums. The topics of these questions range from HELOC (home equity lines of credit), buying rentals without a W2, cash flow vs. appreciation, and why rent appreciation isn’t matching home appreciation.

This is the BiggerPockets podcast, show 558.

Sometimes taking the safe road is the quickest way to guarantee that you lose. It doesn’t mean you should be risky but it does mean that you should not assume conservative or safe equals success. Sometimes it doesn’t and this is one of those areas. If they stay on the path that they’re on, they’re not going to hit financial freedom, they’re going to be working for a lot longer.

What’s up everybody? This is David Greene, your host of the BiggerPockets Real Estate podcast. Today here with a Seeing Green edition, where you will be submitting your video and forum questions and I will be doing my absolute best to answer them. Now, Brandon isn’t with me today, he’s with us in spirit and we put a little funny Easter egg into this video. Please, if you’re watching it on YouTube, watch all the way through and if you’re not, go check it out on YouTube, it’s going to be probably somewhere near the middle to the end of it that I think Brandon will get a kick out of.

Today’s show is all about teaching you how to build wealth through real estate. We do that by bringing on top performers, expert investors and just everyday regular people and laying out those tactics and mindset that they have developed that will help make you financially free. But here’s the thing, you got to make the simple and consistent decision to take constant action and that’s really what today’s about. We are digging deep into the problems people are having, hurdles that they’re experiencing or just decisions. I’m at a trail and I can go to A or B, how do I know which one to go? I know all of you are thinking it, I’ve thought it many times in my life, I still think in it many ways. I love being able to share what’s in one person’s head with the rest of the BP community.

In today’s show, we get into some awesome, awesome things. Make sure you watch it all the way through. We talk about why rents don’t keep up with the value of homes. Have you ever wondered that? Why is it that when homes appreciate the rents don’t go up to? I’m going to give a very detailed and thorough answer that should shine some light on why that happens. We talk about how to choose which market to invest in. When you live in one but you could invest somewhere else, do you have to pick one? Can you invest in both? What types of things should you get into in each individual market? And then we talk on how to decide between investing in someone else’s fund, like what Brandon’s doing with Open Door Capital versus buying your own deal. What to expect, what the pluses and minuses are of each and a strategy that allows you to do both. That and more is waiting just ahead.

Now, we can’t do this show unless we get questions submitted from you, the awesome audience so I’m going to ask you to please go to and submit your video question. Now, if you have a question but for whatever reason, you don’t think it’s worthy of the show or you’re just too shy, that’s okay too. Go to the forums and ask it there. You’ve got over two million BiggerPockets members that are all present on that site that can help you with that question.

I’ve asked you all to leave some YouTube comments and I want to share some of what those are and encourage you to keep leaving them because we do read them and we do try to make these shows in accordance with what everybody wants. The first one comes from, looks like Yugen, “Great content. Everything is perfect so far as you manage to incorporate life lessons on each question.” Well, that’s pretty cool. Thank you for that, Yugen.

From Georgie Brennon, “I just wanted to say thank you, David Greene. I spent the better part of a year developing my resume and applying for jobs with no success. After hearing your job search story, I called a buddy and asked if his company was hiring. I got an interview in two days and a job offer the next day. LOL. Thanks again, man.” That feels pretty good. That’s pretty cool.

And then finally from Jay, “Great analogies, just like that two loan offers with a few thousand dollars difference in closing costs on a refi, the higher closing costs ended up better as the lower interest paid back the difference closing costs in 22 months.” That is awesome. That’s exactly what I tell people is oftentimes you want to look at how much higher the closing costs are, what the rate difference is and see where your breakeven point is. You’re probably going to have the property more than 22 months. That’s an amazing application of exactly what we talk about here and I’m glad that I got to help save you some money.

Again, I just want to remind you all, make sure you watch this one all the way to the end. And without further ado, let’s bring in our first guest.

Hey, how’s it going, David? I’m Clyde and that’s little Clyde. Basically my question today is about acquisition. Properties for investors in my area are going for about $200,000. I currently have a HELOC for $100,000 and I’m just wondering which route I should take in order to finance the property. It really doesn’t seem like 20% down will work because I’m sure that a lot of these people want their money immediately. I was just wondering which route I should take or should I use the HELOC to do hard money? I’m not really sure what to do. Thank you for this time and I appreciate everything you are doing at BiggerPockets.

All right, Clyde, little Clyde, thank you very much for asking that question. It gives me an opportunity to answer some stuff that I really like. We can also tell that little Clyde here is going to be very financially savvy when he gets older, if he’s listening to BiggerPockets in the crib. Your question, if I understand it correctly is, should I put 20% down on an investment property when the market’s really hot and people are looking to sell to the strongest buyer? Or should I take out a HELOC of a 100,000 plus a 100,000 of hard money so that I can write the equivalent of a cash offer? And I want to take a minute to sort of explain what sellers care about when they’re taking an offer from a buyer.

The first thing is that whether the cash is coming from your bank account or it’s coming from a HELOC or it’s coming from a hard money lender or it’s coming from a conventional lender, it’s all cash to the seller. They don’t care where that cash is coming from. The reason that they don’t like when a buyer is buying a house with a loan, is that the lender will have conditions that they want the buyer to meet or the property to meet in order to lend on the property.

That could be something like an appraisal. If the house appraises for less than what you put under contract for, the bank or the lender is worried, they’re getting a bad deal so they want you to put more money in the deal to make up the difference in the appraisal. It could be them looking at you, Clyde as the borrower, specifically what’s your debt to income ratio? What your credit score? How long have you had your job? Did you get your hours cut back when you’re in the middle of escrow? Those are all things that can throw deals off when you’re borrowing money to buy the property.

What I’m highlighting here is it’s not the fact you’re getting a loan. It’s the conditions associated with the loan that cause the problem. You could go with the hard money lender and they typically have less conditions associated with the loan. Now again, it doesn’t matter to the seller where that money’s coming from, what they care about is how you wrote your offer. If you’re waiving a loan contingency and you’re waiving an appraisal contingency, in many ways that now is the same to the sellers if you’re paying cash. If you back out of the deal, you would lose your deposit. Same goes with a cash offer. That’s the first thing to understand is loans themselves are not what’s bad, it’s the conditions associated with the loan.

Now regarding the down payment that you asked about, is 20% down not enough for these people because they want their money? I just want to highlight their money comes at the close of escrow. When you put in your 20% and the bank puts in there 80%, it’s all the same to them. It doesn’t matter where it comes from. They just want that money. The reason that sellers will often say, “I want a bigger down payment,” is not because you’re giving them more money. That’s what it feels like to you. You’re putting more money in the deal but it just means the bank is putting in less money. What the seller’s concerned about is if you don’t have a lot of money in the bank, you’re going to get scared and you’re going to back out of the deal.

We sell high price real estate in Northern California. It’s not uncommon. I’d say maybe half my deals are in the million dollar range. And if you’ve got 200,000 to put down and another 400,000 in the bank, when that roof needs to be replaced and it’s a $20,000 roof or something like that, that doesn’t scare you. You don’t back out of the deal when you got $400,000. If someone says, “I can put $600,000 down,” the agent, the listing agent and the seller both feel good that that deal’s going to close because they have enough cash. They’re not going to get scared. When it’s an FHA loan, when it’s a VA loan, when it’s a low down payment loan, it doesn’t mean that the seller’s getting less money, it means the buyer is more likely to get scared and back out of the deal. And that’s why they don’t like these buyers that have low down payments.

Now 20% is very strong. That’s not low. Here’s my advice to you. I don’t think you have to go through the HELOC and the hard money, which is more expensive lending than the conventional lender that you’re already working with. I think 20% is fine. Don’t worry about putting more money down, worry about showing proof of funds that shows I have more money than this 20 grand. If it’s a $100,000 property, you’re putting $20,000 down, show them that I have another $80,000 in the bank and then write your offer in a way that gives them more protection. You may say, “I’ll do a really shortened period for the inspection and I’ll do a shortened period for my loan contingency,” so that they know in seven days or in 10 days you’re committed or you’re not committed. That’s what the seller cares about.

I think personally people get too caught up in the down payment. The sellers don’t care about the down payment. The sellers care about how much money you have, that you can close the deal. The lender or cares about the down payment. You should only be increasing your down payment if you want to or if you’re getting a better deal on the loan, not just because the seller wants that. But thanks very much for asking this question. I really appreciate that and send little Clyde my love.

Let’s go to the forums and the Facebook groups of BiggerPockets and pull out a few questions. The support that you are all giving each other is awesome and I’d love to see you keep that up.

First question from Diana C. in New York says, “I’m trying to wholesale real estate and build some capital to be able to buy rentals. However, I do not have a job with W2 income. When I earn enough money through wholesaling, what can I do to start buying rentals since typically I need two years of income to qualify for a loan? Is there anything else I should be doing right now?”

Very good question, Diana. And unfortunately, in this case, the struggle is real. It is true that if you want to get conventional financing, you’re going to have to show not always two years but a period of time where you’ve been making money. And you may find that that wholesaling income doesn’t count the same as W2 income. You’re an 1199 independent contractor when you’re making money as a wholesaler, you’re not working for someone else. That money is not steady and consistent. It varies from deal to deal. There’s a very good chance that even if you do build up income from two years from wholesaling, that’s going to make it harder to get loans to buy real estate. And this is one of the reasons why I don’t encourage everybody to quit your job and just jump into this thing because financing is highly dependent on consistent income.

Now you got a couple things that you can do if you want to start buying rentals and you’re making money through wholesaling. The first thing is the boring thing. You could just get a job and do that while you wholesale and make sure that you make enough money from that job to get financing. The second thing is you could find a cosigner. You could find a person who does have consistent income, that will help you qualify for the loan and either pay them to be able to help you get the loan and not put them on title or put them on title and give them a share of equity. Either way is an option that you could use somebody else’s income if you don’t want to get it to help you qualify for that loan.

The other thing is you could do direct deals with sellers. You’re already wholesaling. You’re talking to sellers and you’re getting properties put under contract. Maybe a couple of these you could just buy on terms instead of wholesaling them to somebody else. You get a $120,000 property under contract, and you say, “Hey, instead of selling this house and getting your money right away, what if I buy it from you and I make a payment to you like you’re the bank?” The seller of the property might not care that you don’t have a W2 job like a conventional lender would, that’s another way that you can get around it.

And lastly, you could start a partnership with another investor and you could bring money from your wholesaling into the deal and they could get the financing. That’s another way that you could be able to put deals together. And the last one I would say, I just thought of this, is you could buy commercial properties. If you buy commercial properties, you will be able to use the income from the property to qualify for the loan, not the income from you, Diana. My mortgage company has a product where we do this all the time for people. We get them loans based on the money coming in from the property and we make sure it covers how much the property is going to cost. And we can go in qualified irregardless of how much money that they are actually making in their own personal life. You are going to have to be more creative but it’s not impossible.

Next question comes from him. Nate L. in Kansas. He actually has two questions so let’s get to the first one first. “In your experience, if you transfer a property into an LLC, does a lender see the business as the holder of the property or would they still include that on your debt slash income since you’re backing the LLC? Or does this vary by lender?” Now, this is one of those questions that I’m going to answer but I do have to say, I am not a CPA so I can’t give you tax advice but here is how I understand it.

The first part A, yes, it does vary by lender. There’s certain companies and products we have that don’t look at it like the debt is not on your name, it’s in the LLC’s name and so it doesn’t count against you. But conventional lenders, where everybody tends to want to be because they have the best rates and the best terms, they will usually look at the LLC and hold the debt and the income against you. And the reason is, LLCs are pass through corporations. Even though the property is owned by the LLC, you own the LLC and so you are one who is responsible for managing that LLC, which means that the debt the property has is going to be held against you. But the income will be also. If you’re buying income producing properties, this does not hurt you nearly as much and you don’t have to worry about it as much either.

The exception to this would be not an LLC but a C Corp. C corporations are looked at as separate I identities. This is why I’m saying I’m not a CPA because this enters into the question. And instead of the C Corp being passed along to you or the income passing through to you, it stays in the C Corp and you are basically an employee of that C Corp, meaning all of the property that the C corporation owns, you’re not responsible for the same as you as an employee would not be responsible for whatever company that you work for, the real estate that they own. That’s one of the benefits of the C Corp. The downside obviously is it’s harder to get money out of them and there’s more rules with how to structure them.

The second part of Nate’s question is, “When using the BRRRR method, I always hear you say, ‘Get pre-approved before looking for a property.’ Does this apply to both the hard money lenders to purchase initially in rehab and the bank lender you’re going to refinance through?” That is a very good question, Nate. And the answer is, yes, it would apply to both. You know that the last stage of BRRR, well it’s repeat. The one right before that is going to be refinance. You want to make sure that the lender you’re going to refinance through is going to give you the loan. They’re going to probably look at your income, your debt to income ratio, the debt that you’re carrying, your credit score and they’re going to say, “You would be pre-approved to get a loan for this amount, with X amount of equity.” If you’ve got 20% of equity in the property, they’ll give you 80% loan of a certain amount they believe you can repay. You definitely want to do that before you get jumped into this project.

The second piece is that you don’t want to go writing offers on properties if you don’t know if you have a hard money lender, if that’s who you’re going to use, that will even approve you for the deal. You got to talk to the hard money lender if that’s what your goal is and find out what other criteria they have to let you buy that property. Do they care about how much equity’s going to be in it? Do they care about the area that it’s in? Do they care about the price point? Every hard money lender is different. They’re not all selling their loans to the same places like conventional lenders are. They have their own unique criteria because they have their own set of investors that are putting money to buy these properties. Absolutely talk to both of them and get a very clear picture of what they want and then target your search based on those parameters.

When I myself was sort of amplifying my portfolio with the BRRRR strategy, I realized just how important financing was. Once you get more than 10 financed properties, you can no longer get conventional loans, which is what everybody’s used to. These are Fannie Mae, Freddie Mac loans. You as the person who’s buying it don’t always know or care what type of loan it is. You just want to know what the terms are. What’s my interest rate? What are my closing costs? Is it fixed or adjustable? People don’t understand why certain loans are better than other loans but once you get more than four, those conventional loans, which are typically the cheapest, become harder and at 10, you can’t get them anymore, especially for investment property. You’re forced to find alternative sources of lending.

And what I found was, even though I was a very good investor, I bought very good deals, I added a ton of equity to it, I made good money, lenders just didn’t want to lend to any investor that had more than a certain number of properties. And so I found myself getting close to not being able to finance deals because I didn’t know the rules of the lender. I actually found a bank that let me take out a line of credit that would let me borrow 75% of the appraised value after my rehab was completed and I would finance those deals on that line of credit. And then when I used up the whole line of credit, I would refinance into basically am umbrella alone where all those properties were put together in one bunch and analyzes if it was a multifamily property. 10 single family houses would be looked at like a 10 unit apartment complex.

But what I’m getting at is my whole strategy was put together based on what the lender required. I had to build what I did around what they would allow. That’s how important financing was. Don’t be afraid to do the same thing. If you’re hitting a point where getting a loan is hard, find out how you can get the loan and then put your strategy together to comply with that.

Hey David, sorry about the shirtless, but at the local pool soaking up the day. My question is, by the way, love all the content on BiggerPockets. Fantastic. I learn tons. My question is, I own my primary residence mortgage in my name, my fiance, soon to be wife, pays half the mortgage. Is there a way that you know of that I can show a potential lender that she in fact does pay half the mortgage so my debt to income ratio reflects more of what reality is? Again, thanks so much. Love the content. Thank you.

Hey Matthew. First off, don’t apologize for being shirtless. I’m shirtless too. This is some really hot content we’re making and it makes it hard to stay fully clothed. I understand. Now when it comes to your question, you are in a bit of a conundrum here. If I understand you right, you’re saying that you own the property in your name and the loan is in your name but your fiance has been making half of the payment and so you’re not technically on the hook for the full amount and you’re wondering if there’s a way that you can show a lender this is a situation that we’re in, the $800 or whatever it is that she pays I shouldn’t have held against me.

Now here’s the problem. While that may be happening in practical terms, you’re the only one that’s on the hook for that loan. If your fiance broke up with you, decided she didn’t want to make that mortgage payment, got her own house, whatever would happen, you would still be liable for that full payment. And what they’re looking at is what is the debt that you are liable for? What do you have to pay, you’re responsible for? Not what are you actually paying? Now you may find some unconventional lender. We’re talking about hard money lenders, private financing, some of the non-qualified mortgages that our team does. By the way, those are not as expensive as you think. I do on myself and oftentimes it’s rates between four and four and a half percent. They’re not bad at all. That may give you an exception.

But anything conventional that you’re talking about, I’m not aware of anything you could do to get out of it. The only thing you could do is add her to the loan basically and have her responsible for half of that payment. But even then, usually what happens is both of you are responsible for the full payment instead of splinting it in two. Unfortunately on this deal, that’s probably not going to work out for you unless you refinance the property in a different way or you found a lender to do your next loan that wasn’t conventional. If you’re in one of the states that we operate in, send me a message, I’ll get you connected one of our guys and see if we can help you with that. If not, you’re probably going to have to increase your income or lower your debt or buy the next property in your fiance’s name and let her debt to income ratio, which isn’t affected by your property, be what they use to qualify you.

Dustin Byer:
Hey David, thanks for taking my call. My name’s Dustin Byer and my wife and I had kind of a mental roadblock question for you. We have a net worth of around $2 million and we run a bunch of businesses and we have four kids ages four through 12. We’re rather busy. All of our net worth is tied into those businesses and the house that we live in and we were trying to basically diversify and create more passive income. And so we can invest about 10,000 a month. And my question is, would you invest in those small things along the way? Or save and stick it in something like Brandon’s Open Door fund since we’re so busy all the time? Curious your thoughts. Thanks. Bye.

First things first, Dustin, thank you for the video. And this is a pretty awesome problem to have. If I hear you correctly, what you’re telling me is you are pretty successful with running your businesses. You have properties that you previously bought that have a lot of equity that have contributed to this net worth of $2 million, which is awesome. That’s fantastic for you and your wife and your four kids who are probably eating away at that net worth every single chance they get. Macaroni and cheese doesn’t come free. And your question is, what should you invest in? Your fear, your concern is going to be, I don’t want to put all my money into something that’s going to take a lot of time. Something like a short term rental could be really bad for you because you’re running your businesses. And that’s why you’re wondering about investing in someone else’s deals like Brandon’s with Open Door Capital, where you could put the money in, be completely passive.

That is a very good option for you. I would look into that if I was you. However, you’re investing in real estate but you’re not investing in real estate. You’re investing in a fund and this is just the way I look at it. When you invest in someone’s fund, from your perspective, it doesn’t matter that they’re investing in real estate with it. It could be investing in a hedge fund or in stocks that could get you a similar return. From your perspective, you’re giving your money to someone and you’re getting it back with interest. That’s good. You should do it. I do it all the time but I also know that isn’t going to help me achieve the purposes that people tend to look to real estate to help them achieve. Most people are buying real estate because they want to plan for their retirement. They want to grow their net worth. As you’ve seen, it’s worked for you. They want passive income coming in that they can live off of.

Those are not the only things to chase in life. There is definitely an argument to be made for investing in funds like this. Like I said, I do it myself and in the future I’ll be raising money for people looking for the same thing. I just want everyone listening to have clarity that if you’re thinking, I need financial freedom, I want to own a bunch of rental properties, I want to be able to refinance them and buy more. I want to do all the cool stuff, Brandon and David talk about. This isn’t going to get you there. This could be a step in the direction of getting you there. It could help you get more capital coming in. It could also help you earn a return on your capital while you’re in this busy season of life, where you’re running businesses and raising children.

From that perspective, yes, I think that would be really smart. You should be investing into funds of reputable people but you can’t let yourself believe that that temporary solution is going to get you to the permanent goal that you want to hit. You need to look at it like doing this is going to help me accumulate more seeds that I eventually will go plant real estate to get my own trees. I would, if this was me, here’s what I would do. I would set a timeline and I would say, “My youngest kid is going to be whatever age I think I’ll have more time.” Maybe they go into high school, ninth grade, maybe you make it 12th grade, “and my oldest child will be 18 and I won’t have to put as much time into them in 10 years. In 10 years, I’m going to get very serious about buying a lot of real estate. How much money can I make and amplify through investing in other things over the next 10 years so that when I get there, I have X amount of money?”

You’ve said you can save 10K a month, take 10K a month, that’s $120,000 a year. What can you add on that return? If you get a 10% return, that’s another $12,000 in a year. If you get a 20% return, that’s another 24,000. You’re saving 120 plus you’re earning 24,000 if you make 20% in Brandon’s fund or whatever fund you go into, which gives you 144,000 times 10, 1.44 million. That’s what you should have when you’re ready to start investing. Now, you more or less know it’s going to be somewhere in that range, unless you make more from your businesses.

But then I would say, what turnkey properties can I buy while I’m on that journey of investing in these funds? Now, when I say turnkey, I don’t mean from a turnkey company. I just mean, what can I buy in a really good area that doesn’t need a lot of work that won’t be a headache that I can buy it, have a property manager manage it and it will be fine? I don’t have to manage a big rehab. I don’t have to deal with constant tenant turnover. I may not get a ton of cash flow but that’s okay because my target is 10 years out so I don’t need cash flow right now. I need cash flow then. And maybe pick up a property every couple years that fits that criteria, while doing what you’re doing with investing into funds.

And then the last thing that I want encourage you to do is to figure out how to automate your business. Everyone hates it. Nobody trains us how to do this. It’s the hardest part of everything but if you can hire people and get your business automated to where you have more time, you can put more time into buying real estate, which is where your real wealth is going to come from. That’s exactly what I’ve been doing. The last three years. I’ve been getting my butt kicked, trying to hire, trying to train, trying to manage, trying to get good agents on the David Greene team and I finally have them. They’re doing great. I don’t have to do as much of the work.

It’s semi-passive income coming in on the David Greene team. Now I took that energy and I’m focusing it on the mortgage company, building up the loan officers, working with my partner, hiring new people that want to hang their license with our brokerage, finding more agents we can help do loans for their clients, finding people that need to refinance right. Building up that until that becomes passive income. When that happens, I will have all my time back plus these businesses that are bringing in revenue and I can put all of that revenue and that time into buying more real estate, which is where the real big gains come from.

I know I’ve given you a lot of advice and it’s kind of centered around business, which many of our listeners that are W2 workers don’t relate to but you are running a business when you’re buying real estate. And I do want you guys to understand when we interviewed Robert Kiyosaki on episode 500 of the BP podcast, he gave so of really good advice concerning the purpose of business is to buy real estate and take on debt. To take on debt and avoid taxes. That’s the purpose of a business and you do that through real estate. All the business income you’re making is great. It’s only useful to you if you can invest that into real estate and save on taxes, take on more debt using other people’s money to build this empire so that when your kids are gone, you’re not just now starting to build wealth. You actually have had it going. You also can’t jump in with both feet. I understand you’ve got four kids, that sounds like a lot of work.

Put some method of diversification in there where you consistently put money into Brandon’s deals and then you also buy a couple deals for yourself. And then at the 10 year mark, you can stop putting money into Brandon’s deals, you can put it all into real estate until you’re like, dude, I have enough, I don’t want any more of these homes. And then just keep investing into funds like Brandon’s and let them do all the heavy lifting.

We’ve had some very good questions today. I am loving how this podcast is shaping out. Every single time we do it, the questions get better and better, deeper and deeper and they really give us a chance to break down and reverse engineer what it takes to be successful in investing. I love getting to do this because instead of just listening to the story of somebody else who built real estate, you get to get deep into the specific questions or struggles or obstacles or opportunities that other people are having.

In fact, if you notice the pattern of what I’m getting into, most people believe they’re at a situation or an obstacle that they can’t overcome but I’m looking at it and I’m seeing that there are several ways that you could overcome this. I really hope you guys benefit from seeing just the way that my weird brain works as I look at of how I can get A plus B, how I can take advantages of strengths in different markets while also limiting my downside. Real estate is one of the few things that has so much creativity that can be applied, that you can make almost any situation work.

Thank you guys very much for submitting these questions. Please go to, submit questions there. And maybe when you come across somebody that’s asking you something that you don’t want to answer or you don’t think that they should be asking you or you just don’t have the answer for, tell them to go ask their question there. It’s kind of cool to be able to be aired on the BiggerPockets podcast and you can share it with your family and friends and let them know that you were on the biggest real estate podcast in the world. If you guys could take a quick minute to please hit the like button on YouTube and share this with anybody that you think would benefit from it, I would really appreciate you as well as leave me a comment of what you think about the show so far.

Our next question comes from Solly M. in Hayward, California. Hayward is very close to me. I represent lot of clients in that area, helping them get houses and I was just looking at houses for myself a month ago or so in Hayward. Any of you in Northern California or if you’re in Hayward specifically, please let me know. I’d love to get to know you guys better. Maybe go to the Red Chili in Hayward, best Vietnamese Thai fusion that I’ve ever had. It’s probably my favorite at restaurant and we need to get connected and have you at some of the meetups I put on.

Solly asked, “My husband and I are buy and hold long distance passive investors. Our goal is to grow passive income, enough to retire in the next five to seven years. Basically we want to build a nice nest egg. We are following a rather conservative, slow paced strategy. We used our own savings for down payments and repairs and used conventional mortgages on five single family homes, four conventional and one BRRRR in suburbs of Detroit, which are A and B plus areas. Our average cash flow is about $300 per door. The ROI is about 5%. After two years of experimenting and learning, I now realize that we can’t achieve goals with this strategy. My question is, what should we do differently to increase ROI but still remain conservative enough? Generally, I believe in quality over quantity. Rather than owning four properties with $100 of cash flow per door, I prefer one door with 400 cash flow. Thank you.”

What a good question that we have here. A few things that I’m going to assume based on Solly’s situation. The first is when she says that they’re buy and hold long distance and passive. And I know they live in Hayward. They probably have pretty good jobs that pay pretty well but require a lot of their time. Maybe this is software engineers. Maybe they work in some of the tech companies that are not far from Hayward. That would be the Silicon Valley area, if you’ve heard of it, where wages are really good and you have great opportunity, but it is a lot of your time. You spend a lot of time commuting because traffic can be hard. And then you spend a lot of time committed to accomplishing the goals that your project manager’s giving you at those companies. I don’t know if I’m right but Solly might be sitting there nodding her head saying, “Yep, he totally gets it.”

Now what Solly said that so profound that you all need to hear is that taking the conservative approach at every single step is actually shooting them in the foot at hitting their goal. They want to be able to retire with cash flow in five to seven years. But looking for properties that are not cash flowing quite enough or not appreciating quite enough, being extra conservative so to speak, has stopped them from hitting that goal. And this is a perfect example of what I was saying earlier. Sometimes taking the safe road is the quickest way to guarantee that you lose. It doesn’t mean you should be risky but it does mean that you should not assume conservative or safe equals success. Sometimes it doesn’t and this is one of those areas. If they stay on the path that they’re on, they’re not going to hit financial freedom. They’re going to be working for a lot longer.

Now, a few things that I can look at with your strategy right now, Solly, that I think would probably need to change. I agree that I’d rather have one door with $400 cash flow than four doors with 100. I don’t know that I would say that that’s risky. Sorry, I don’t know I would say that’s conservative that having less properties with more money is harder to do. I think that you wanting to buy in the Detroit area feels safe to you because you probably really like the price of the homes. That’s what I’m guessing drew you there. They are priced low and they’re in A to B neighborhoods so the gain that you’re getting is easy to get in and not a lot of headache because the tenants are great. The downside is they’re not appreciating very much and they’re not making you a lot of money. That’s what you need to question yourself on.

My philosophy is that cash flow is incredibly difficult to build. And what I mean by that is if I want to cash flow $10,000 and I’m going to get a $100 per door, that’s a lot of doors that I have to get to get it to 10,000. In fact, I probably wouldn’t even want it once I had it because that’s a lot of work. Even if you get to $500 per door, to get to $10,000, what would that be? Two houses is a 1,000 so that’d be 20 homes that you’d have to own to get to 10,000 in cash flow. And $500 a door is very hard to hit. You’re probably more looking at 40 to 50 homes. A better strategy, the ones that I employ involve delayed gratification, specifically when it comes to cash flow.

Rather than trying to get 10,000 a month in cash flow and then saving $10,000 to go invest into real estate, I take the opposite approach. I try to build equity because I can control equity much more than I can control cash flow. Cash flow depends on what the market gives me. Equity is something I have a lot more creativity in. I can buy fixer upper homes. I can add value to homes. I can look for the worst house in the best neighborhood. Typically as home values appreciate, rents do too but rents don’t keep up. Because at a certain point, if rents kept up with home values, people would say, “My rent’s too high, I’m just going to go buy my own house.” Inflation helps the home value even more than it helps rent, although it helps both.

What I do is I buy properties in areas that I think are going to appreciate over time. I build equity in those and then I 1031 all that equity into the cash flow thing that I want, like an apartment complex. It is much easier to build a million dollars in equity through elbow grease and smart decisions and time and then transfer that million dollars into a cash flowing property where an 8% return would say make me the 10,000 a month that we’re talking about, than it is to try to wait for my cash flow to equal a million dollars And then do something with that. What I would say is stop investing in areas that are this conservative. You guys need to get into something that has a higher ability to appreciate over time, where there’s going to be less building, less supply. It’s going to be harder to get into initially so you’re going to have to put more time into getting it under contract. You may have to pay over asking price, where you may not be doing that in the Detroit suburbs that you’re in right now.

You’re going to give it up on the front end. It’s going to be harder work to get that property. But once you have it, it’s going to go up a lot. What if we helped you, because I work in your area, find a house in the San Jose area? You’re going to put a lot more money down. It’s going to be more work to get it. But once you’ve got it, the rents are going to go up so much more and the values are going to go up so much more. If you bought a handful of houses in somewhere in the San Jose market and you let each of them appreciate by 300,000 and you had four of them, you got 1.2 million that you can then go invest and you’ve met your cash flow goals once you convert it.

What I’m getting at is while cash flow is the goal, it doesn’t need to be the first step. Make it the end goal. And that’s what I’m doing. I look to build appreciation first and I transfer that into cash flow later versus just chasing cash flow right off the bat because that’s where you run into the situation you’re in now where you’re realizing it just takes too long. I don’t have 900 years to live before I’m going to get there. Thank you very much for asking this question. I hope I answered it well so everybody understands that I’m not saying cash flow doesn’t matter. I’m just saying I can get to cash flow quicker if I pursue it through appreciation and that doesn’t mean taking risks. That means buying fixer upper properties, buying in the best neighborhoods, getting really good deals and then waiting. Lastly, we live close to each other so reach out to me and I would love to be able to help you do something out here.

Next question is from Palmer in South Carolina. “As is probably pretty common in this current market, my rental units have gone in value substantially over the last few years. As they’ve gone up in value, the rental income has not kept pace with the spike.” Side note, this is me not Palmer. That is exactly what I just described when we were talking about Solly’s question is that they don’t. They both go up, but they don’t go up proportionally.

“I am looking to start selling and was wondering what factors I should take into account or if I should sell it all. I’ve been trying to think of selling in much the same terms as I consider when buying. As an example, if there is a house on the market for 80K that would bring in a $1,000 a month, then given all the other expenses that are reasonable, this makes good sense to purchase. If the same house was on the market for 120K and brought in the same $1,000 a month, then this deal I would pass on. That’s because the money’s opportunity value is worth more to me than the house. But why doesn’t the same apply when the house I purchase for 80K appreciates to 120 K and the rent lags the appreciation? Some of my houses have almost tripled in value and tripling rent would put me well above market rates. I understand there are tax burdens and other factors, including appreciation, income stream, et cetera, that need to be considered and was wanting to hear your thoughts on when to sell a rental unit.”

If we had some kind of alarm, I would totally hit the button because this is going to be my favorite question of the entire day. This is big boy and girl stuff, folks, and you won’t hear answers like this almost anywhere else. Not because I’m tooting my own horn but because I don’t think other people think about these questions. But because I work with people who own real estate or want to buy it every single day, I’ve had to figure out why Palmer is in the situation he’s in because he’s exactly right. What Palmer has realized is that as the price of the house goes up, the rent doesn’t go up with it. That’s the first thing I’m going to address.

The next thing I want to make sure that I cover is that he says, “If I could buy a house for 80,000 that brought in a $1,000 a month, I would buy it but I to buy a house for a 120,000 that brought in a $1,000 a month.” In fact, I’m going to start there because I want to highlight a few things. Palmer’s logic is sound. He wouldn’t spend a 120 to get a cash flow stream of a 1,000 in rent or revenue, not cash flow. And he would do it if he only had to spend 80,000 to get a $1,000 in revenue for rent. Where I think Palmer has it wrong and a lot of other people are in the same boat, especially if you’re somewhat like a newer investor. You don’t own a ton of properties, is his logic is built on the foundation that cash flow is why you buy real estate. And this is coming up a lot.

Cash flow is not why I buy real estate. It is a wonderful perk. It is icing on the cake. I really like it. But cash flow alone pales in comparison to the wealth that I build from buying a $500,000 property, putting 50 grand into it and making it a $700,000 property. That’s $150,000. Cash flow takes a long time to build up that wealth. The first thing Palmer that I want to challenge you on is look at real estate from a more broad lens. Don’t zoom in and say, “Cash flow is the only reason why I buy real estate.” Say, “Cash flow is a reason why I buy real estate.” And at some form of your life, usually near the end of our lives, cash flow is much more are important than when we’re 24 years old.

In fact, I’m going to go out here and say a controversial thing. If you’re 24 and you’re trying to retire in two years and you want all this cash flow so you can do it, that may be good. If you feel that’s the calling on your life, that’s cool. It may be one of the worst things that ever happened to you. You gain a lot in life through working and learning and developing skills and letting that mature you and screwing up and having mentors tell you, “Hey, you screwed up. Do it better.”

There’s a lot to be said from going through life, working for people or working with people or doing some form of, I don’t just sit on the couch and watch Dancing With the Stars. It’s good for your character. It’s good for your relationships. It’s good for friendships. You build a richer life by doing something difficult, which most jobs have some bearing degree of difficulty. I’m not a huge fan of I’m 20 years old and I want to be retired in three years and never work again. You might be robbing yourself of a lot of what life offers you.

And that’s one of the problems with this cash flow, cash flow, cash flow. I need cash flow. Is it sort of sets you up to make some worse decisions in life. Doesn’t mean cash flow is bad. Cash flow is incredibly important, especially if you don’t have a ton of money. That’s the first thing I want to say is look, if that or $120,000 house that you don’t want to buy because you would only buy it if it was for 80. If that one goes from 120 to 240 in six years and the 80,000 house goes from 80 to 90 in that same six years, you made way more money on the 120 house even though the cash flow of a 100 bucks or whatever the difference is, very nominal, wasn’t that much. The rent probably went up faster on the 120 house than the 80 house too. Guys and gals, as you’re considering these things, ask yourself if you are obsessed on cash flow and if that obsession is getting in the way of you making better decisions.

Now, why does rent not keep up with the price of homes? Man, I love answering this. I talk to my team about this all the time. Here’s what you got to think about. The people who rent homes sometimes rent them because they want to, they don’t want the commitment of owning a home. They don’t want the maintenance and the upkeep. There is a percentage of people who rent that come from that point. I would say the bigger majority of people who rent would want to own but they can’t. They can’t get a loan or more importantly, they can’t afford the house. They can’t save up the money to buy it or houses are too expensive for them to be able to buy. And so what happens is they become a renter by default. They don’t want to be renting. Most renters if you said, “Do you want to own your house?” They would say, “Yes.” Oftentimes in it’s the price that stops them from doing it.

Now, if you’re a person who can, let’s say that you bought this house for 120 and the rent was a $1,000 and Palmer here is saying, “Well, if it goes up to 240, shouldn’t the rent also double? It should go to $2,000.” The problem is at a certain point when let’s say the rent hits 1,800 or so, maybe 1,500, let’s go with that, the tenant if they could afford that rent would be better off buying. They could get qualified to buy the house themselves. You start off with tenants are always typically in the lower priced homes. Doesn’t mean that they’re bad homes. They’re just in the lower part. They’re not buying luxury homes. Not as many people rent that.

Prices of homes go up, rents go up, you start to see this happen and then the rent hits a ceiling where the tenant either can’t afford it so they’re going to stop this house and go get a cheaper one. Or if they could afford it, they’re like, “Why am I going to pay $2,000 a month for rent when I could own the house with a $1,600 mortgage payment?” And that’s why they don’t keep up. What you find, if you really think about it in most areas where investors are investing, if they’re cash flow, they’re not the nicest areas. They’re not the most expensive homes. You typically take the city and the lower rung of it is where you’re going to find that you can actually make your money as an investor. There’s not a ton of investors that own a lot of Beverly Hills real estate is what I’m getting at.

You’re in the situation, Palmer, where your house has naturally outgrown being used as a rental. I want you to think about a child that just has a sweatshirt and they got bigger. Maybe this sweatshirt stretched a little bit but at a certain point that it couldn’t keep up with the child growing. You need a new sweatshirt. It is natural in the real estate investing cycle to take a house that doesn’t cash flow as much as it could, meaning if you look at the equity on your property and you divide it by what it brings in every year, your return on equity, that number is lower than the return on investment you would get if you bought another property. And when that happens, if what you want is cash flow, you sell it, you take your gain and you go buy two to three more properties and you start the process over.

If you wait and get frustrated that rents aren’t keeping up, you’re never going to get anywhere. What you have to recognize is I did so well that I out kicked my coverage. This doesn’t work as a rental anymore. I will sell it and turn it into three rentals and start that process over with them, letting them grow. You can buy and hold forever. There’s nothing wrong with that. But if your goal is cash flow, buy and hold forever actually works against you in many cases.

Our next question is from Daven like raven. “Structuring an owner financing deal in Atlanta and there is a bit of land in the back that I would want to build on. Is that something I could get financing for? Or would I need to pay for that in cash? Assuming I got permission from the owners, P.S. It would be a cash flowing property, short term rental or long term rental.”

Daven, so your question, if I understand it correctly, and by the way, Daven and David are very similar there. Is you’re buying this property, it’s got land in the back. You want to build on the land and you’re trying to figure out how to finance that. There’s a few things that we need to look into here. First off, the quick answer, if you’re expecting can I put 5% down or 10% down and the bank will give me the rest of the money to build on it? No, they will give you those really good loans when it’s the property is already improved or the land is already improved with what’s typically a property. That’s not the case here. You’re not going to be able to borrow money the same way you would when you’re buying the house in most cases.

You should look into if the city or the county will allow you to reparcel that land. In which case you may be able to basically splice it off from the main parcel that you’re buying, create a second parcel with its own APN or assessor parcel number, I believe it is. You get a new number for property taxes and it’s like owning two properties now. You could sell that land or you could build on it. Either way, when it comes to the building, you’re going to have to get some form of a construction loan. You may find a hard money lender or a primary or a private lender that will let you do it but it’s going to be more tricky. How these loans usually work is they don’t give you all the money at once because they think if I give you 300 grand to build a house, you might just take off and go to Switzerland, I never see you again. They also think what if I give him 300 grand and all he does is get the foundation built, the contractor rips you off, or you don’t know what you’re doing?

They’re very concerned that that’s going to go poorly. Versus when they give you a loan on a house that’s already built. How many ways can that go wrong for them assuming the house is built well? They’re going to say, “Here’s your first draw. Here’s a chunk of money. This is the interest you’re going to pay on that money.” And then you’re going to build the first phase of it, say the foundation and all the concrete and get your plans drawn up. Sometimes you have to pay them interest on the money that you’re not using because they can’t lend it to anybody else. I’ve heard that referred to as Dutch interest. I don’t know where that comes from but if they’re like, “Hey, you need 300 grand. We’re going to give you 80 grand right now but that other 220, we can’t give it to anybody else. You got to pay us, usually a smaller rate on the money, you’re not using in a bigger rate on the money that you are.”

After they send someone out to verify that the construction was done well and it’s completed, they give you your next draw of say 80 grand and now you’re going to put up the framing and you’re going to do some of the other stuff and it’d be you’re rough in or whatever. And they go through phases like that with lending you the money. Now, the rates will be much higher than you’re used to because this is much more risky for them. A lot of things go wrong when you’re building a house. And I remember when I was a brand new person, it was 2005 and I was so frustrated with what house prices we’re doing and I said, “I’m just going to build my own house.” I just had no idea what it was like to build a house. And I thought the same thought I think a lot of other people think. Housing prices are getting so high. I’ll build my own. You’re probably not going to.

Even the guys I know that have construction licenses don’t build their own homes. They still look for houses already built and then try to fix it up. I don’t want to discourage you from trying to build a house on the property. I do want to let you know, it has many more moving pieces. You might lose money doing this that you could have made in other areas. And this is one of the reasons that even though Californians are allowed to add ADUs to their houses, it’s not always a good financial decision because sometimes the ADU might cost $200,000 to build and you could have bought a whole house for $200,000 down and had two really big houses and nice ones versus one house with a tumor, the ADU type of a thing. I’ve said it before, financing makes deals. And I don’t want anybody here to get caught up in, oh, I would have a short term rental, longterm rental with cash flow whatever. If it takes all your capital to do that, you’d have been better off putting that capital into other opportunities where you can get a better return.

And our final video question of the day comes from Mark in Northern Colorado.

Hey David, it’s Mark Amatee from Wellington, Colorado. I’m about an hour north of Denver and maybe 10, 15 minutes north of Fort Collins. My primary question is, should I do a HELOC on my primary residence to pull out about $54,000 in equity to then buy income producing property in Ohio? Or should I wait until the house has say a $100,000 in equity? Right now it’s a three, two, it’s a new build and I’m going to be turning the downstairs into an extra two beds, a bath and a kitchenette. It’ll be a five bed, three bath after that.

And the second part of the question is, which market should I try to focus on, the Colorado market or the Ohio market where I lived all my of life, know people and they know me? And what I’m doing out here in Colorado is I did get my real estate license but that could take forever to find clients or get to know people out here. But once I do get the downstairs finished, I’m going to be getting roommates. I’ll do a little bit of house hacking and that could provide maybe a 1,000, 1,500 a month just depending on what rent would be and who I can get.

That’s basically all I have. And basically I’m just trying to make it as a real estate investor. And in real estate sales, I did a flip in Ohio, bought for 9,000, did some updates to it, basically at the end of the day, I made about 35,000 on it and then took that money kind of moved back here to kind of start a new life out here. Appreciate it. Thank you for your service as a cop. I was a cop as well and thanks, have a good one. Bye.

Thank you, Mark. Hope you’re enjoying your time out there in Colorado. That’s actually the mecca for BiggerPockets. They are located in Denver. I love every time I get to go visit them, they got awesome staff and friendly folks. What you’re your question is, is basically coming down to, where should I buy? Should I keep buying in Ohio where I know the market and I’m comfortable? Or should I buy more in Denver where I live right now? Before we answer that and I do have some good practical tips for you, let’s talk about the pros and the cons of each so that the listeners can understand my thought process.

The first thing that I like to say is, is whenever I’m given a A or B question, I want to figure how to turn that into a, A and B answer. Now I think that one of those books like Millionaire Next Door might have talked about that’s something that millionaires do is they often try to say, “Well, how can I have both?” And I do naturally think that way. And I think you can pull that off with this situation that you’re in. Let’s talk about the merits of Ohio. The price point is smaller. The deals are probably easier to come by and when I say deals, I just mean the ability to get something under contract, because Denver can be very hot and your cash flow will likely right out the gate be stronger than in Colorado.

In Colorado, the upside would be you’re likely to see much more appreciation. Rents are going to go up more. The value of the property is going to go up more. You’re going to have less headache from the majority of the tenants because you know people there so you can kind of pick the people that you’re going to rent to. Overall, my opinion would be Colorado is going to build you more wealth than Ohio but Ohio would be easier to get started. Colorado has the higher upside, Ohio has the smaller downside.

What I would say is how can we do both? Now, what’s going to limit you is you’ve got 54,000 that you believe you can pull out of that HELOC which is not a ton of capital to make a lot of things going but it is enough. You also mentioned that you may be fixing the property up. Here’s what I would say. Take out the HELOC with what you have now, get that $50,000 out. Do your rehab and then get another appraisal on your home, see that you’ve added value and get that line of credit to go higher. If your house is worth $500,000 now, after you fixed it up maybe it’s worth 600,000. They let you borrow 75% of that extra 100 grand. That’s now 75,000 that you’d be able to theoretically borrow on top of the 50. You’re going to have more room to play if that’s the case.

But let’s start with the initial 54,000. I like that you said you flipped a house in Ohio that you bought for nine grand and made 35. That’s 60, 70% of the total capital you have right now of the 50,000 that you can take out. Can you do that again? Can you flip a couple houses in Ohio and build that nest egg to get it bigger? That’s the first thing is I don’t want you dumping your money in Ohio because it won’t earn you as big of a return over time but that doesn’t mean it’s useless, you can’t do with it. Use that money to kind of make more money short term. Flip a couple of those houses. If you get a good contractor and you can do two or three of them and you know how to find those deals, turn that 50 into a 150 doing maybe three, four or five flips. That changes everything.

While you are doing that, house hack a new place in Colorado every single year. Now here’s why I’m telling you that. Everyone assumes cheaper properties equal lower down payment, equals I can buy more. And they forget that when you’re buying investment property, you got to put 20% down. If you put 20% down on an investment property in Ohio or 5% down on a house hack in Colorado, you could buy a house that’s four times as much money in Colorado and it’s the same capital out of pocket. That’s what I think you should focus on. Every year, find a new house hack that you buy with a primary residence loan, three and a half percent to 5% down depending on what you can get. It’s not going to take up all your capital. And then with the rest of your capital, use it to flip houses in Ohio. If you’re not going to flip, then only BRRR. You need to buy something in Ohio that you can get your capital back out. You don’t want to sink it in there because it won’t grow as fast but you do want to play in that space.

The BRRRR method will work great in a market like that if you can find more fixer upper properties because the price to rent ratio will support it. BRRR is much harder in Colorado so don’t BRRRR in Colorado. You don’t need to BRRRR in Colorado. You’re only putting three and a half to 5% down. That’s basically the same thing as a BRRRR without all the work. What I’m getting at here is both properties have strengths to them. You got to plan on both of it. Ohio will work very good for BRRRR and for flipping because you know people, you can find deals, you can build the capital you have. Colorado will work better for the longterm place. Ohio is short term, Colorado is longterm where you’re going to continue to put low down payments down and build up your portfolio there. And if you do this right, you shouldn’t be putting all of the money that you make in Ohio into Colorado.

Then nest egg should continue to grow in the middle and you pull some of it out to go into Colorado and you put some of it back into flipping more houses in Ohio and you have two sustainable wheels that are turning at the same time that are growing your wealth and you just let real estate build it up for you the way it does, boring and slow over time.

All right, folks, that wraps up another episode of the Seeing Green BiggerPockets Real Estate podcast. I have a blast doing these. I really appreciate those of you that are sending in your questions and I’d like to see more. If you like this, if you heard this and thought, that was incredible, that was amazing. Or even, eh, it was mediocre. He was okay but he could have been better. Put that in the comments. I want to hear on YouTube what you guys like and what you don’t like.

Also, you can comment on the show notes and get a conversation going with other people who listen to this, if you go to Look it up. See what other people are saying, throw your opinion in the hat and get a conversation going with other people who are learning things just the same way that you are as well. All right, please be sure to follow BiggerPockets on Instagram @biggerpockets, my best friend Brandon @beardybrandon and myself @davidgreene24 and get more content and more insight into what’s going on in our worlds. For today’s show, this is David, no shirts, no shoes, no problem, Greene signing off.




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HomeSmart is a growing real estate brokerage that may go public, but the company faces questions about its business model and the compensation of founder and CEO Matt Widdows.

Founded in 2000, Scottsdale, Arizona-based HomeSmart is the seventh largest brokerage in the country by transaction sides, or how many times a HomeSmart agent represented the buyer or seller in a deal, according to RealTrends.

Last Friday, HomeSmart filed an “S-1” with the Securities and Exchange Commission, a document that conveys HomeSmart’s intention to sell company shares to prospective investors and the public.

HomeSmart has yet to give itself a valuation or declare how much money it seeks to raise in a public offering. The company generated $478 million revenue in the first nine months of 2021 – a figure that includes what income is earned by their independent contractor agents, and posted a $2.3 million net loss, according to the filing.

HomeSmart, like Compass, Keller Williams, eXp and other brokerages, states it has unique technology to modernize real estate.

“HomeSmart is a revolutionary real estate enterprise powered by our proprietary end-to-end technology platform,” declared the first page of the voluminous SEC filing, later elaborating: “We have been developing our software in-house over the last 20 years and have a 100% adoption rate across our agents.”

There’s substance to HomeSmart’s claim, argued Steve Murray, senior advisor at RealTrends and longtime real estate industry consultant.

“HomeSmart does have one of the most interesting tech platforms out there as it has been internally built and basically covers all aspects of a brokerage firm’s operations,” Murray said. “The fact that it has been used for years and built upon and it’s a totally cloud-based platform does make it both unique and useful to its own operations.”

And HomeSmart has grown its agent base 30% the last two years from 17,841 agents at the end of 2019 to 23,197 agents as of Sept. 30, who are spread across 47 states. HomeSmart is a “flat fee” brokerage, meanings its agents pay a set transaction fee per deal instead of a commission percentage.

HomeSmart’s revenue soared 74% from the first nine months of 2020, when the company reported $275 million generated. But that growth came with the company veering from the black to the red. HomeSmart posted a $7.1 million profit in the first nine months of 2020, before the $2.3 million loss at 2021’s three quarter mark.

Also, $447 million of HomeSmart’s revenue in the first three quarters of 2021, or 94% of its total revenue, returns to its agents as “commission and other agent-related costs.”

A not insignificant component of HomeSmart’s finances is what is funneled to, and from, Widdows.

The CEO commands a $960,000 salary but has also received multi-million-dollar yearly payments from a “corporate reorganization.” For example, in 2020, an unspecified HomeSmart subsidiary gave Widdows $10.1 million. Widdows, though, also made a $6.5 million “contribution” back to HomeSmart the same year.

Also, HomeSmart entered into two “eight-year note payable agreements” for which Widdows will get $3 million and $7 million each, plus interest. The deal is partly mitigated by a separate $2 million “note receivable agreement” between HomeSmart and Widdows.

Messages left with HomeSmart were not returned.

“He is taking out more money than he is putting in despite the company being barely profitable,” said Lloyd Greif of Grief & Co. investment bank in Los Angeles. “That’s probably not the best practice.”

Greif, a financial adviser for decades, expressed confusion about Widdows putting in, and then taking out, money at the same time. “Why not just take out in a lesser amount?” Greif said.

But Wayne Guay, an expert in executive compensation at the University of Pennsylvania, said these are perhaps not dubious dealings.

“The corporate reorganization may, in fact, have been executed to facilitate the company’s IPO, which may have required various payments to various parties to get everything in order,” Guay said.

One related matter revealed in the filing: Angelique Chambers, described as living with Widdows and working as a loan officer for HomeSmart subsidiary Minute Mortgage, was granted in July restricted stock units worth almost $300,000.

Greif saw the stock options to a personal acquaintance – and workplace subordinate – as ethically questionable. “He can’t run the company as a personal piggy bank,” Greif said.

The post CEO Matt Widdows pushes HomeSmart toward IPO appeared first on HousingWire.

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The tides of the mortgage industry are changing as we head into 2022, and just like the sand under the waves, we can expect the appraisal landscape to shift along with it. Appraisers, like many other service providers, must adapt to market changes to accommodate their clients’ needs. Whether it is providing appraisal services, underwriting services or title services, a mortgage application cannot proceed without their input. 

We have reviewed and analyzed recent stakeholder and government data, and we are pleased to deliver the following analysis and predictions for 2022.

It is fairly well-known that the appraisal industry has a supply and demand issue. Freddie Mac recently released trend analysis of appraisal activity for appraisals submitted to the Uniform Collateral Data Portal. This data clearly illustrates the issue: 

  • Appraisal volume exceeded the high-water mark of 700,000 monthly submissions to the appraisal data warehouse on multiple occasions in 2021. Prior to 2020 it was a rare occurrence for volume to exceed 600,000 per month. 
  • The number of appraisers completing appraisals for transactions eligible for sale to the GSEs has remained relatively flat.  

In addition to the supply and demand issue in 2021, we also saw continued challenges around appraiser throughput, appraisal turn times and appraisal fees. 2021 also introduced change at the policy level, as appraisal waivers began to slow down and the FHFA’s announcement to allow desktop appraisals. 

We’ll dig deeper into each of those topics below, but first we’ll explore one of the biggest driving forces on appraisal: market volume.   

2022 Outlook for volume

Mortgage rate predictions for 2022 by industry stakeholders show rates for 30-year fixed mortgages to range from 3% to 4%. As of this writing, in 2021, 31 of 45 weeks had mortgage rates below 3%. The last time the 30-year mortgage rate was at or above 3.5% was in March of 2020. Prior to that, we have to go back to October 2016 to see rates at 3.5% or below.  

Meanwhile, the Mortgage Bankers Association (MBA) is forecasting purchase mortgage originations to increase 9% in 2022 and refinance originations to decrease by 62%. Appraisal demand from generators (i.e., HELOC and private clients) is expected to remain stable to slightly declining. 

How does this impact appraisal volume? Mathematically, the MBA predictions result in a loss in demand between 30% to 35% for appraisals associated with mortgage originations. As application volume is anticipated to shift from predominantly refinance activity to purchase activity, we anticipate the demand for appraisals in the mortgage sector to decline 15% to 20% with other demand generators pointing toward stability or slightly declining.

In a recent Fitch Ratings analysis on nonbank mortgage origination outlook, analysts stated that “rising rates fueled by the tapering of Fed asset purchases and home price appreciation from the growing disparity between housing supply and burgeoning demand are also expected to contribute to lower volumes and margins into 2022.”

Appraiser supply

It is worth addressing the overall appraiser supply here as well. Analysis of appraiser credentials in the U.S. shows continued decline. According to 2021 data from the Appraisal Institute, the current number of state-issued appraiser credentials is 93,309, which is more than 3,000 fewer credentials cited in a 2019 Appraisal Institute study, which put the number of credentials at 96,856 in 2016. Attrition and supply continue to be a market concern. 

Efforts to date to bolster the ranks of credentialed appraisers has resulted in reducing the rate of decline, but decline continues nonetheless. Perhaps diversity, equity and inclusion efforts by industry stakeholders and the Appraisal Foundation’s PAREA efforts may bear fruit in the future; however, significant impacts to increase the ranks of qualified appraisers are not anticipated in 2022.  

Appraiser productivity

According to our analysis of data released by both Freddie Mac and Fannie Mae, the count of active appraisers based on mortgage activity has been mostly flat since 2018, with minor fluctuations. The rise in sales and refinancing activity in 2021 resulted in increased appraiser productivity, ranging between 50% to 100% per appraiser. 

How does this convert on a per appraiser basis? With 40,000 appraisers having their appraisal work submitted to the GSE appraisal portal, the median throughput level pre-2020 was approximately 10 appraisals per month, or 2.5 per week. From 2020 through 2021, that throughput level increased to 15 to 20 appraisals per month, or 3.75 to 5 appraisals per week.   

And while appraisers have shown they have adjusted processes to produce at a higher level of output on a weekly basis, no significant process changes are anticipated to contribute to be a drag on productivity.   

Turn times

Unfortunately, a centralized source measuring market-level appraisal turn times does not exist. Data is often limited to anecdotal experience by individual lenders, users of appraisal services and reporting by a handful of appraisal management companies. In general terms, prior to 2021, it was common for appraisals to have an average turn time between 9 and 12 days. Based on analysis of three national AMC quoted turn times on their websites, in 2021, the turn time range expanded to 8 to 21 days. Those states having the fewest number of appraisers often show the longest cycles. These numbers are in line with what we see lenders experiencing using the Reggora platform. 

While pipeline volume plays a large part in the equation, the geography and the supply of appraisers in particular markets are contributing factors and the range of turn times can vary significantly across localities within the marketplace. 

The National Association of Realtors projects 2022 home sales activity to be slightly lower than 2021. As a result, we should expect to see overall appraisal turn times improve. To keep this in perspective, a 20% decline in demand when production is 3.75 appraisals per week results in a decline of one appraisal per week per appraiser. For locations where the supply of appraisers is abundant and the appraisal process itself can be completed in a standardized amount of time, we anticipate a return to pre-2021 levels with turn times of 8 to 10 days.

In locations where there are limitations on the supply of appraisers, or the amount of time it takes to complete an appraisal is extended due to lengthy drive times and data-challenged locations, only modest gains are anticipated and extended turn times will continue to be the norm.

Of course, fluctuations will occur due to seasonality, as the appraiser supply is anticipated to remain fixed and demand is variable. If there is heightened risk of either supply side or demand side variations, then the above predictions would need to be revised. 

Appraisal fees

Due to the supply and demand crunch, appraisal fee escalations and upward pressure on fees has received much attention in 2021. As we expect market volume to drop by at least 20% to 30% moving into 2022, it is anticipated that some relief of fee pressure will occur; however, complex submarkets, complex properties and appraisals in locations deemed difficult, where the appraiser is required to expend more time on an assignment, will continue to see fee pressure. The introduction of desktop and potentially of alternative products, should also assist in helping fees to come down from their 2021 levels, but they will most likely stay elevated compared to historic norms.

GSE Appraisal Policy

Both Fannie Mae and Freddie Mac have underwriting programs that allow lenders to waive the requirements for an appraisal in certain circumstances. No or low cash-out refinance applications receive the largest share of waivers. From June 2020 through May 2021 the percentage of appraisal waivers increased, and activity averaged approximately 385,000 per month. However, when looking at waiver activity measured from January 2021 through June 2021, the data show a decline of approximately 11.5%. We expect that number to continue to decline as refinance activity slows down. 

In addition to appraisal waivers, desktop appraisals have also been a topic of conversation among the GSEs. In October, the FHFA announced that desktop appraisals, similar to what was allowable during the COVID-19 appraisal flexibilities, will be allowed as we move into 2022. We also expect desktop appraisals to replace some of the loans that were previously qualifying for appraisal waivers. Finally, we also see a possibility for the introduction of an even broader set of alternative appraisal products that incorporate new technology and processes to further address issues with turn times, racial bias and supply constraints.

Racial bias

The topic of racial bias in real estate, and in appraisal, has been a hot one. 2021 brought forward the Property Appraisal and Valuation Equity (PAVE) Interagency Task Force to address inequity in home appraisals. PAVE is required to bring forward a final action report in 2022. And while it is unknown what the final recommendations will be, PAVE’s focus is multi-pronged, and recommendations are anticipated revolving around government oversight, industry practice, consumer and practitioner education and making available high-quality data to combat racial inequality. 


There’s a lot of change happening across the industry, and the foundation for appraisal is more like sand than stone. As we head into 2022, we can expect some balancing and displacement to occur. While demand for appraisal services is anticipated to drop due to less refinance activity, we will also see increased demand stemming from fewer appraisal waivers and more desktop appraisal products. And while turn times and fee pressures are anticipated to retreat back to pre-2020 levels, there remain supply pressures, particularly in geographically challenged markets. There will also be a focus on responding to the anticipated PAVE task force recommendations, whether they be on a regulatory front or through establishing new industry practice. 

One thing is for certain: As change happens in 2022, appraisers will need to rely on their skillset to measure, analyze and navigate that change. 

The post Here are 7 trends to watch in the 2022 appraisal market appeared first on HousingWire.

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While layoffs sweep the mortgage industry, particularly consumer-direct lenders, non-qualified mortgage (non-QM) lenders are going on a hiring spree.

Non-QM lenders Angel Oak Mortgage, Acra Lending and Newfi alone currently have at least 130 openings on jobs listings sites.

According to Evan Kidwell, chief operating officer at Griffin Funding, a consumer-direct lender that launched non-QM operations in November 2020, the company is willing to hire newbie LOs and processors and give them on-the-job training.

“If you have non-QM experience, we can throw you right in, you’re going to have a job right away,” he said. “If you’re willing to learn and you’re coachable and trainable, that works too.”

Kidwell said his company is looking for loan processors to identify fraud in non-QM loans, in addition to loan officers.

The hiring trend at non-QM lenders stands in sharp contrast to recent layoffs at some consumer-direct lenders, which specialize in conventional refinance loans. In recent months,, Intefirst Mortgage and Wyndham Capital Mortgage announced loan officer layoffs. With the three companies combined, over 1,000 employees have received pink slips.

Acra Lending, which rebranded from Citadel Servicing last year, more than doubled its headcount year-over-year from 200 employees to 420 in 2022. Keith Lind, president of Acra Lending, said that in a few months, the company will have over 500 employees.

“The area of focus for us right now is hiring LOs,” Lind said.

Riches in the niches

The Mortgage Bankers Association has forecasted that mortgage originations will grow by 9% to $1.73 trillion in 2022. Non-QM lenders are optimistic that loan originations outside the purview of the government-sponsored enterprises will propel that growth.

In a recent interview with HousingWire, HomeXpress, a non-QM lender, predicted the sector will double its market share in the coming year, from 5% in 2021 to nearly 10% in 2022.

One reason the non-QM sector is expected to take off, according to non-QM lender executives, is because self-employed borrowers and those who work in the gig economy need homes. Current GSE guidelines make it difficult to for borrowers who don’t have a traditional salary to qualify for agency-backed loans.

“I think there’s so many self-employed borrowers who have felt like they’ve kind of been pigeonholed into only being able to do one type of loan for so long and they’re just now finding out that non-QM could be an option for them,” said Kidwell. “I would say most of our clients didn’t even know non-QM was an option two years ago.”

Kidwell also said that real estate investing is another segment that is driving more business to non-QM. “I would say probably at least 30% to 40% of our clientele are real estate investors,” Kidwell said.

The Federal Housing Finance Agency recently announced new upfront fees for second-home loans which, much like the abrupt and now-suspended caps on such loans last year, are expected to give the private-label securities market a boost.

And as rising mortgage rates slow the flood of refinances, lenders are preparing for increased interest in non-QM. Alex Naumovych, an LO at Draper and Kramer Mortgage, said that his company’s upper management has urged LOs to give more thought to non-QM programs in 2022.

“In 2020 and 2021, there was so much refi volume that no one really had the time and patience to deal with these types of loans,” said Naumovych. “This year, everyone will have a little bit more time as well, they’ll be providing a little bit better service and paying more attention to those loans.”

Non-QM loans, Naumovych noted, are more time-intensive to originate, because they do not go through an automated underwriting approval process, as loans backed by the GSEs do.

Some market participants are also closely eyeing regulatory changes that could dampen the non-QM market by expanding the pool of loans able to get QM status.

The Consumer Financial Protection Bureau‘s new General QM Final Rule replaced the 43% debt-to-income ratio limit in favor of more flexible pricing guidelines, allowed jumbo loans to get QM status and provided additional ways to verify income or assets. The new rule is slated to be implemented on Oct. 1, 2022.

Redwood Trust, in a report published in April 2021, noted that if the rule is implemented, “the increased flexibility will likely result in loans that would previously be deemed as non-QM qualifying as QM going forward…a corresponding reduction in non-QM lending will follow.”

The regulatory uncertainty didn’t diminish Lind and Kidwell’s confidence in the non-QM sector, however.

“I learned a long time ago to not get too worried about those things,” said Kidwell. “The riches are in the niches.”

The post Non-QM lenders hunt for LOs as consumer-direct model falters appeared first on HousingWire.

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A prospective tenant’s rent references can tell you a lot about their rental history. And, checking a rental history report as part of the screening process is just as vital as verifying a prospective tenant’s credit history, employment, and income. After all, tenants who have a history of moving frequently or being evicted may not be the ideal candidate to fill your vacancy.

If you want to complete a thorough rental history check, you need to ask the potential tenant a series of questions and then the facts with previous landlords. That said, checking a tenant’s rent references may not be as straightforward as it seems. For example, some landlords will give a glowing report about a bad tenant who’s still occupying one of their properties just to get rid of them. Or, you may have applicants without any rental history, making it impossible to check. Plus, there may be legitimate reasons for what appears to be unusual behavior, like a tenant moving frequently in a relatively short period of time. 

Whatever the case may be, most landlords agree that going through the process of rental history verification is a crucial component of property management. So how can you ensure that a rental applicant is a good match for your rental vacancy? Well, you can find helpful tips on how to decipher a rental history report below.

What is a rental history report?

A rental history report is a report that contains information on a tenant’s current and prior housing. This may include the current address and the contact information for the landlord or property owner.

The report should also contain two or three previous addresses for the tenant. Any information about late rent payment, rent debts, or eviction records is also essential—as this information comes in handy when you’re making decisions on who to rent your properties to, and who you should steer clear of.

How to check a tenant’s rental history report

A tenant’s rental history report is just as important as verifying their income or credit score. A thorough screening process can help you identify a great tenant who pays rent on time and looks after the rental unit.

Conversely, skimping on the screening process can cost you in the long run. After all, it’s more difficult to get rid of a bad tenant than to let one rent your property.

To get you started on the right path for checking a tenant’s rental history, here are four steps to follow:

1. Start the rental history report using pre-screening questions.

The rental verification process starts when you first speak to the prospective tenant by phone or email. Before you start, it’s a good idea to check with your current state laws and the Fair Housing Laws to be clear about the questions you can and cannot ask a prospective tenant. 

In general, though, you should be ready to find out the following information: 

  • How long they have been living at their current address
  • Why they are moving
  • Whether they are willing to submit a rental application and authorize a background check
  • Whether they are willing to provide references from previous landlords and employers
  • Whether they have been evicted from a previous apartment

It is helpful to ask some of the questions on the rental application during the call and then note the answers. This information is important because you can check the verbal answers against the information included on their rental application—as well as the information former landlords provide.

2. Use the rental application process to build a rental history report.

The rental application form should gather information about the prospective tenant’s current and previous addresses. This should include the dates in which the tenant lived at the addresses as well as the landlord’s contact information. It is also essential to ask for consent to contact previous landlords. 

Most of the time, the tenants who have nothing to hide will be OK with you calling former landlords and rental property owners.

Related: How technology can help process rental applications faster.

3. Check the rent references.

If the tenant consents to a check of their rental history, you then have to take on the laborious task of making lots and lots of phone calls to verify the information. You may have the urge to skip this part, but don’t give in to the temptation. Doing so could mean the difference between renting to a great tenant or renting to a bad one.

The goal of calling previous landlords is to verify that the tenant’s information is accurate. It’s also an excellent time to ask how the tenant treated the property and if there were any lease violations that occurred during the tenancy. If possible, it would be best to ask open-ended questions to better understand the tenant better. 

For example, you can ask how the tenant maintained the property, what the communication was like, and why they would rent to the tenant again. 

Before calling the landlord, it’s also a good idea to do an internet search to confirm the contact information you were given for the landlord. It’s not unheard of for a tenant to give a friend’s contact number as their landlord’s number. The friend will then pose as the prior landlord. 

Thoroughly checking a tenant’s rent references takes time, of course. However, it’s worth spending the time on vetting possible tenants to find a suitable tenant for your rental unit. 

4. Verify information with the tenant.

Let’s suppose the rent references you check out differ from what the tenant has stated during the screening call or on their application. In that case, it’s worth the time to check with the tenant on the discrepancies. These could just be simple mistakes or purposeful inaccuracies on the part of the other party. For example, a prospective tenant is able to provide misleading information just as easily as a landlord is able to lie about a tenant. 

Of course, it’s not easy to know who to believe in these situations. You will have to rely on your own judgment, but asking a few questions usually clears up any misunderstandings. And, if you call at least three former landlords, you might be able to get a better idea of who is telling the truth.

Rental history online services

Savvy landlords also use property management apps to run complete background checks—including rental history—on tenants. Not only can the apps build a profile of a tenant’s rental payment history, but they can also be used to run credit checks, look into criminal history and eviction history, and see employment history.

Related: The pros and cons of property management software.

Why rental history matters

Rental history allows you to get an idea of your prospective tenant—which is why it’s so important. For example, previous landlords can tell you if the individual paid rent on time, if the tenant looked after the unit, and whether was a good tenant. This information is a good indicator of how the tenant will treat your property and your rental agreement—so you should never skip a check of a prospective tenant’s rent references. 

However, rental history is just one aspect of the screening process. For example, employment history and bank statements can help you determine whether a prospective tenant can afford the rent on the unit. A credit check can provide insight into their attitude toward paying bills on time or getting into debt. 

What if a tenant has no rental history?

There is always the possibility that a prospective tenant has no rental history to rely on. In that case, the typical rental background checks can help determine a first-time renter’s suitability as a renter instead.

You can check their pay stubs, employment history, and ask for additional references. Also, first impressions are important, so their behavior during the interview could help you determine if they are a good fit. 

And, just because the prospective renter is a first-time tenant with no rent references doesn’t mean they will be a bad tenant. If you verify their proof of income and their credit reports check out, they are probably OK to rent to. If you are in doubt, you can always ask for a co-signer on the rental agreement.

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Final thoughts on tenant rental history

A tenant’s rental history is a vital part of the screening process. Ensuring that rent references check out and they have enough income to afford the unit can help you make an informed decision in the rental process. While it may take some extra work upfront, checking a prospective tenant’s rental history can save you time, stress, and resources in the long run because you’ll know you have the right tenant for your rental unit.

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This article is part of our Housing 2022 forecast series. After the series wraps, join us on February 8 for the HW+ Virtual 2022 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.

As the U.S. enters the third year of the pandemic, the 2022 housing market remains on stable ground. Existing-home sales for 2021 are expected to show the highest levels in 15 years. While interest rates are projected to rise in 2022 to 3.5% for the 30-year-fixed rate mortgage by year end, the rate increases may temper demand in 2022. With frenzied housing demand normalizing in 2022, homebuyers are likely to see home price gains in single digits rather than the rapid double-digit pace of 2021. Housing demand in 2022 is anticipated to remain steady given familiar demographic, workforce and familial dynamics spurred by the pandemic.


The median age of a first-time buyer for the past three years has remained 33 years old. Between 1981 and 2018, the median age of first-time buyers ranged between 28 and 32. There are 23.4 million adults aged 28-32 in the U.S. right now, the largest number of adults by age category. There will soon be a wave of potential buyers aging into the first-time buyer age group. These young buyers are not without headwinds, such as low affordable housing inventory, rising home prices and student debt. 

NAR data shows that first-time buyers have overcome rising home prices to patch together a downpayment, through diversifying their downpayment source, using savings, downpayment help from family and friends and stock market/401k loans to assist in their path to ownership. Younger millennials may have also helped as they moved back home during the pandemic at record numbers, thus skipped paying market value rent to a landlord. The highest share of young adults since the Great Depression moved home, and will now be re-emptying the nest as they purchase homes. Additionally, 38% of student debt borrowers were able to use the pandemic to pay down their student debt by paying more to their principle of their debt or cutting spending on entertainment. 

Movement for more space

As of week 33 in the U.S. Census Pulse Survey, 23.5% of households had at least one family member who worked remotely due to the coronavirus. As the omicron variant spreads, if workplaces are able, many are maintaining fully remote or hybrid plans. This flexibility is likely to continue and become permanent as recruiting and retaining talent becomes increasingly difficult for CEOs. Workforce flexibility allowed consumers more freedom in their choice of location for home buying. In the latest Realtors Confidence Survey, 88% of buyers purchased in a suburban, small town or rural area. This is up from 85% one year ago. 

Buyers are moving to suburban areas not only for the square footage but for the affordability and inventory that are more likely to be found in these regions. Even before the pandemic, it was more likely for a young millennial buyer to purchase in a small town rather than an urban center. Housing affordability, space and inventory become top priorities in decision making when buying a home, in addition to proximity of family. Regardless of this movement, there will always be the attraction of city centers for some buyers who want the walkability and amenities. These buyers may be reinventing the suburbs with walkable town centers and gathering places for their children and pets. 

Familial dynamics

In the last year, a desire to be closer to friends and family ranked as the top reason for repeat buyers to purchase a home and for sellers to sell a home. The needs of buyers of all ages have evolved not only in what they need from their home — a home office, a bigger yard, and more room to cook — but also who lives near their home. Support systems are now a top priority for neighborhood choice, edging out both convenience to job and affordability of homes. The reason to remain close to family may differ for different homebuyers. For working parents, elderly relatives may be the extra set of hands needed as schools continue to grapple with hybrid, remote and in-person schedules. The growing share of single women homebuyers may desire family and friends to be close, but not within her own home. Young adult buyers may seek the comfort of families nearby after moving from family homes, and retirees may pursue the benefit of being close to grandchildren. 

Known unknowns

The next year is not without unknowns. Where will the pandemic go next? What is the next variant after omicron, and what impact will it have? Despite these unknowns,  purchasing a home continues to be an  investment buyers want to make for their financial future. Even with the expected increase in interest rates, homebuyers can lock in a historically low rate and know with certainty what their monthly cost will be for the next 30 years. The American Dream of homeownership is a constant, providing both financial and housing stability within a sea of societal uncertainty.

The post What are the drivers of housing demand in 2022? appeared first on HousingWire.

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Early in 2021, when I was talking about how people should worry about home prices overheating, I had a glimmer of hope that maybe toward the end of 2021 we would be spared another seasonal collapse of inventory. Inventory always falls in the fall and winter, but I hoped it wouldn’t be a repeat of 2020.

Unfortunately, that didn’t happen and recent data shows that we are at fresh new all-time lows in housing inventory, with mortgage rates and the unemployment rate both under 4% currently.

Houston, we have a problem.

I have always been mindful that the years 2020-2024 have the potential for unhealthy home-price growth, but now that we are entering year three of this unique five-year period, it’s time to see when mother economics will give us clues about when this madness with meager inventory will end. We are in the middle of January 2022 and spring selling season isn’t too far away. I don’t believe any of us want 2023 to start off with new fresh all-time lows in inventory.

Mortgage demand needs to slow down

A big theme of my work here at HousingWire has been to show you that since 2014 purchase application data has been rising just as total inventory has been slowly moving lower. Demand is growing and stable, excluding the COVID-19 pause. Unfortunately, we need to see weakness in demand for inventory to rise and get into a range that I am 100% rooting for, between 1.52- 1.93 million. This level, while historically still low, will mean the days on market will go higher, and this will give people choices.

Here are two charts from the National Association of Realtors that will show that homes simply come off the market too fast to give housing a breather.

This data comes from the recent existing home sales report which has been outperforming lately.

The best way to track whether mortgage demand is slowing down is to look at the MBA mortgage purchase application data from the second week of January to the first week of May. Typically, this data line falls in volume past May, so February to April are the real key months to focus on.

For some perspective, you really only want to look at the year-over-year data with this data line and also realize that we are still dealing with COVID-19 comps until mid-February: after that, we should be fine on a year-over-year basis. For example, today, purchase application data is down 17% year over year and has been showing negative year-over-year trends since the middle of 2021. However, once you make COVID-19 adjustments, the demand was stable in 2021 and picked up toward the end of the year.

My 2022 existing home sales range is lower than what we are currently trending at: I am looking for a sale range between 5.74 million and 6.16 million.

If housing is really getting softer, you will see year-over-year declines of 15%-30% in this data line. We had this happen only two times in the past eight years excluding the recent data that need COVID-19 adjustments.

In 2014, purchase application data on-trend was down 20% year over year because rates had spiked up higher in the second half of 2013. We saw softness in housing toward the second half of 2013 as well. Total inventory levels rose in 2014 and adjusting to population, that was the lowest level in MBA purchase application data ever. Still, with that slowdown in demand, monthly supply never broke above six months. However, the rate of price growth cooled down and days on market grew.

Higher rates created balance in the marketplace in 2013-2014 and also in 2018-2019. While I do believe the rate of growth of home prices are cooling, it’s still well above my comfort zone for the years 2020-2024. I don’t want it to seem like I am rooting against housing, I just would like to see more balance in the marketplace. There is a reason I was warning about home price growth with inventory and mortgage rates low amid stable demand.

In 2020, for about six weeks purchase application data took a dive as Americans were pausing due to the first experience of COVID-19. Back then people took their homes off the market so the inventory data didn’t move too much higher outside a brief increase as people realized the world wasn’t ending. We had purchase application data down over 30% year over year, which took sales down as buying paused. However, sales shot right back up higher, quickly.

So, for 2022, you want to keep an eye on the year-over-year data, especially past mid-February toward April. If you see year-over-year declines in the data, then the days on market should grow. I am not talking about 5% – 8% year-over-year declines, I am talking more like 15%-30% year-over-year declines after COVID-19 adjustments are made. When it really matters, this data line will show you double-digit percentage moves both positive and negative. If you’re looking for balance like I am, this is where you want to look. This data line looks out 30-90 days as well, so you get the picture: the critical time for this data line is coming up in 2022.

Don’t spend too much time on mortgage credit getting looser or tighter

One area that you don’t need to focus too much on is mortgage credit availability. I know many housing bears had hoped that credit getting tighter in 2020 and 2021 would crash the housing market. However, credit is very liberal today, as it always has been. However, since we’ve had no exotic loan debt structure post-2010, credit looking tight on paper just doesn’t have the same impact as it did from 2005-2009. At that time sales were declining from a high level and credit was getting very tight from the standards that facilitated the demand from 2002-2005.

From the chart below, it looks like credit got very tight from the start of COVID-19 and not much has been happening after that. In reality, most loans in America were basic vanilla 30-year fixed loans, and credit flowed for the most part during the COVID-19 crisis and recovery, all the way from 2021 to 2022. So if credit availability grows or declines, it’s only on the marginal loan products that are being used to buy primary residence homes. This isn’t like the peak of the housing bubble where 35% of the loans that were being done were ARM products. That number is below 5% now, so you don’t need to worry about the 30-year fixed loan being shut down. Or you don’t need to concern yourself that exotic loan debt products are coming back into the system pushing credit availability up

From the MBA:

Lastly, it falls back on the bond market

As you can probably tell from my writing, I believe and love a balanced housing market. What we have currently isn’t a balanced market. I really didn’t need to worry about this from 2008-2019, because I never believed we had the demographic demand to push total sales over 6.2 million to drive inventory levels to such low levels.

Well, that isn’t the case in the years 2020-2024, hence why I have always separated these two periods: from 2008-2019 and then from 2020-2024. With that said, in the past, higher mortgage rates, while never crashing the existing home sales market, have been able to cool things down and create more days on the market. The only problem is that this will require the 10-year yield to break over 1.94% and keep rising with some duration. This obviously hasn’t happened and this hasn’t been part of my forecast in 2021 or 2022. You can see why I am concerned.

Even with the hottest economic growth in decades, smoking hot inflation data — like we saw in the CPI report today — and all the talk about the Fed rate hike and taper, the 10-year yield currently right now is at 1.72%. Don’t forget, with the bond market, the trend is your friend, as I talked about in a recent article on jobs data.

What we know today is that we are starting 2022 spring at fresh new all-time lows in inventory for single family homes. Mike Simonsen, a friend from Altos Research creates weekly charts on the meager supply of inventory.

Here in Southern California, the amount of inventory in Los Angeles County is 4,432 homes, in Orange County it’s 954, and In San Diego it’s 1,254. Think about the millions of people who live in these areas and we are looking to start the year at 6,640 homes for sale.

Now, seasonality works both way. Inventory will pick up in the spring and summer and fade in fall and winter. However, as you can see, we are far from levels I would consider to be balanced, where days on market grow and people have choices. Since we are in year three of my five-year unique housing demographic period, demand being stable means getting the velocity of inventory to rise in a big way is difficult. The only way we can get some relief is if mortgage demand fades because that is the primary driver of housing demand. As we all know, the forbearance crash bros failed dramatically in 2021.

I would keep a close eye on mortgage demand, especially from mid February to April, to gauge whether mortgage demand is fading, which would allow days on market to grow. If this doesn’t happen, we are going to have another year of unhealthy home-price growth. Mother economics, she is a serial killer and will leave clues on what the economy is doing — the trick is always looking in the right spot. Remember, always be the detective, not the troll.

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The Federal Housing Finance Agency’s announcement last week that it will hike upfront fees for high-balance and second-home loans effective April 1 will provide a boost for the private-label securities market, according to executives at one of the leading sponsors of private-label securities.

In fact, FHFA’s new fee structure for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac is expected to largely offset the effects of other recent policy changes that were projected to be a drag on the secondary market in 2022, according to Dashiell Robinson, president of Mill Valley, California-based Redwood Trust.

“We do view the announcement to be a constructive one for the non-agency market,” Robinson said. “The new pricing framework … should shift supply toward private market participants, like Redwood. 

“In today’s current market, we see private-label securitization execution for these [high-balance and second-home loan] products as more favorable than selling to the GSEs, which should only become more apparent.”

Redwood, through its Sequoia Mortgage Trust (SEMT) conduit, brought to the market a total of nine securitization deals in 2021 backed by 4,705 loans valued at nearly $4.2 billion, bond-rating agency records show. The first securitization deal of 2022 issued through Redwood’s Sequoia conduit (SEMT 2022-1) involved a loan pool of 751 mortgages valued at $687.2 million, a Kroll Bond Rating Agency report shows.

“Redwood, through our Sequoia program [as of year-end 2021] has securitized nearly $30 billion of high-balance loans, across 76 deals since 2008,” Robison said. “We also distribute close to 50% of our production via whole loan sale to various insurance companies, asset managers and financial institutions — additional important sources of liquidity to the private sector.”

Chris Abate, Redwood’s CEO, added: “The FHFA’s announcement provides welcome additional alignment between private capital and the GSEs in furthering our collective goals for housing access and affordability. Redwood remains a highly complementary partner to the GSEs, and we view these changes to be constructive for non-agency origination volumes overall.”

That alignment, however, is subject to policy changes that bend and flex the relationship between agency and non-agency markets over time. The latest policy change for Fannie Mae and Freddie Mac will bump up loan-level origination fees for high-balance mortgages by between 0.25% and 0.75%, based on a tied loan-to-value schedule. For second-home mortgages, the tiered fees will increase between 1.125% and 3.875%.

Two other recent policy changes announced last year, though, were deemed negative for the private-label market because they were seen as pushing more mortgages and securitizations toward the GSE bucket. 

In November 2021, FHFA, which oversees the GSEs, announced it was bumping up conforming loan limits for 2022, with 95% of U.S counties being subject to a new baseline GSE loan-limit of $647,200, while some 100 high-cost counties will have conforming loan limits approaching $1 million. As the GSE loan-limit box expands, it takes loans away from the private market, loans that can be pooled for private-label securitizations. 

Likewise, a surge in private-label transactions and deal volume in 2021 was propelled initially, in part, by FHFA policy changes in January 2021 to the preferred stock purchase agreements (PSPAs) governing the GSEs. The key change was a cap placed on the GSEs’ acquisition of mortgages secured by second homes and investment properties. The private-label market boost from those changes was undone, however, by their suspension last September and are now under review by FHFA.

FHFA Acting Director Sandra Thompson, nominated by President Joe Biden to become the permanent director of the agency, appears to be listening to the private market’s concerns about GSE mission creep, at least when it comes to the question of affordable housing.

“Compared to previous years, the 2022 conforming loan limits represent a significant increase due to the historic house-price appreciation over the last year,” she said at the time the new loan limits were announced. “FHFA is actively evaluating the relationship between house-price growth and conforming loan limits, particularly as they relate to creating affordable and sustainable homeownership opportunities across all communities.” 

The recent decision by FHFA to beef up its upfront loan-pricing fees for high-cost and second-home loans starting in April appears to be delivering on that promise, given it expands resources available to the GSEs for addressing affordable-housing concerns while also widening the playing field for the non-agency market.

“For the industry, we expect the announcement to drive non-agency origination volumes higher, generally offsetting the projected decline from the higher conforming loan limits,” Robinson said. “We also believe that the new loan-level price adjustment for second homes is a logical surrogate for the prior cap as it provides additional subsidy in a more predictable pricing fashion for origination. 

“Overall, 2022 supply outlook industry-wide for non-agency RMBS [residential mortgage-backed securities] is positive.”

But what the government gives, it also can take away again in the future. “Ultimately, if the new policy remains that way for an extended period, you will see the private-sector step in and possibly create greater liquidity,” said Tom Piercy, managing director of Denver-based Incenter Mortgage Advisors. “But does it go the way of the second-home and investor-loan caps … six or nine months from now?”

But it’s not likely that a policy reversal on the GSE loan fees will be in the cards anytime soon, according to some industry observers, assuming Thompson’s confirmation hearing goes well for her this week and she is named the permanent director of FHFA. Those observers point out that the federal policy for the government controlled GSEs is guided by the administration in power.

The January 2021 changes to the PSPAs that capped the GSEs’ purchase of investor-property and second-home mortgages, for example, was a policy initiated under the Trump administration. The caps were suspended in September 2021 under the Biden administration. It is in that context that the upfront loan fees are now being boosted.

“While there have been many policy changes as of late for originators to digest, there are currently significant growth drivers for the industry,” Redwood’s Robinson said.  “[Those include] the move to the new qualified mortgage (“QM”) definition, anticipated growth in non-QM [mortgages] as originators look for more products to combat higher rates, and slight easing of the overcorrection in lending standards that occurred due to COVID, particularly as the economic recovery remains solid. 

“We have witnessed a number of recent and on-going examples of the strength and importance of the non-agency market, especially in addressing the evolving needs of the housing market,” Robinson added, “and we would expect that positive momentum for the industry across non-agency products to continue.”

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The mortgage industry is coming out of back-to-back amazing years, and while 2022 still holds great opportunity for the industry, it also signals a pivot point for market participants. In recognition of the transitions ahead, Pennymac is making changes to ensure that 2022 forms the foundation for long-term value for its wholesale partners.

Specifically, Pennymac is changing the name of its wholesale division from PennyMac Broker Direct to Pennymac TPO. To learn more about the intention behind the rebrand and Pennymac TPO’s plans for the future, HousingWire sat down with Senior Managing Director Kim Nichols to learn more.

HousingWire: Let’s dig into the name change. Why now, and why Pennymac TPO?


Kim Nichols: Pennymac has enjoyed a long track record of success. Through the years, we’ve grown into one of the most prominent and highly respected players in the mortgage space, and we want to use our success as a platform for our wholesale partners’ growth.

This is much more than a name change for the company. It’s a stake in the ground for our broker and non-delegated partners. We’re deepening our commitment in this channel to help them on their own journeys of greatness. As Pennymac TPO, we will extend our foundation of greatness to our partners, giving them the resources they need to grow, however, they want to grow.

 HW: What resources can brokers and non-delegated lenders expect to see from Pennymac TPO in 2022?

KN: We’re making a major investment in our technology with POWER+. We’ve worked closely with our partners to understand what they need and have designed technology enhancements that will roll out in phases during 2022.

These new features will drive greater speed, efficiency and transparency into the loan process, ultimately creating a better experience for our broker partners and their clients.  We are first pushing these enhancements into the broker segment with a later phase driving additional services and capabilities into the non-delegated correspondent segment.

HW: What more can you tell us about POWER+?

KN: We developed POWER+ by truly listening to the voice of our clients.  We took two approaches. First, we had focus sessions with key partners and extracted detailed feedback from various users, including LO’s, processors and broker owners.  In addition, we meticulously logged client feedback regarding challenges in the loan process.  We also wanted to understand what aspects of our current technology and process our partners love.

One thing that truly resonated for us is how much our partners value our people. Having access to engaged, knowledgeable team members during any step of the process was a big differentiator.

The culmination of all of this is our new POWER+ technology.  It’s not simply technology that powers our partnerships. It’s also People… people who communicate, people who care and are knowledgeable.  People are the +!

We boiled their needs down to three main focus areas: speed, efficiency and communication.

HW: Let’s zoom out. From a bird’s-eye view, what do you hope these changes help your partners accomplish?

KN:  It’s our job to make our partners look great in the eyes of their customers and referral partners.  Let’s talk about purchase transactions. The emotions and anxiety in the homebuying process are amplified in a market where housing supply is very tight.

If a buyer fails on a contingency, there are multiple backup offers sitting there behind them and it might be several months before they can get into contract on that next home.

If we zoom out, we have to think about how we can enhance the experience since that is a reflection on our partners. What helps this process? It’s speed, efficiency and communication every step of the way.  Our tech, workflow and people all have to be focused on those things.

HW: Can you discuss Pennymac’s commitment to servicing?

KN: Where the borrower is serviced matters. Quality of loan servicing is a direct reflection on the broker or lender who originated that loan.  We’ve had brokers and non-delegated partners sign up with Pennymac for this very reason.. They know that we will maintain the same great service after closing that our partners delivered on the way to the closing table.

We retain servicing on all our loans. We are one of the few top wholesale lenders making a permanent capital investment in our servicing and now service over $500 billion.

Our partners appreciate the fact that we retain our servicing. It gives them peace of mind knowing that Pennymac will care for their clients after closing and that borrowers will not be subjected to the possibility of servicing transfers and the administrative burden associated with that experience –  Resetting passwords, auto pay, escrow reconciliation and general familiarity with a servicer’s portal, etc.

Plus, for Pennymac-to-Pennymac refinances or purchases, we have the ability to net escrows for their customers, significantly reducing cash to close in many cases.

It’s about being great on every loan, for every customer, every day in every part of the process up through closing and beyond.

We know what solid and sustainable growth looks like, feels like, and how to extend it to our partners. Whichever way our partners want to grow, we want to help them chart the course, and give them the resources to make it happen.

Our partners have made us who we are. Now, we want to return the favor. We can’t wait to join them on their personal journeys of greatness.

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HW+ Fannie Mae

Fannie Mae opened 2022 with its 45th credit-risk transfer (CRT) deal through its Connecticut Avenue Securities (CAS) real estate mortgage investment conduit, or REMIC, bringing the collective value of notes issued through the conduit to nearly $52 billion since the first offering in 2013.

The 45 CAS deals involved credit-risk transfer (CRT) notes issued to private investors against reference loan pools of single-family mortgages valued collectively as of the time of the transactions at just under $1.7 trillion. The initial deal of 2022 is the start of what is expected to be a busy year For Fannie Mae on the CRT front.

“In 2022, we look forward to bringing [to market] approximately $15 billion in our on-the-run CAS REMIC transactions, subject to market conditions and other factors,” said Devang Doshi, senior vice president of single-family capital markets at Fannie Mae. 

Through a CRT transaction, private investors participate with government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac in sharing a portion of the mortgage credit risk in the reference loan pools retained by the GSEs. Investors receive principal and interest payments on the CRT notes they purchase, but if credit losses exceed a predefined threshold per the security issued, then investors are responsible for absorbing the losses exceeding that mark.

“When they do a credit-risk transfer transaction, it’s taking risk from that huge bucket [the reference loan pool] and selling off most of the credit-risk pieces,” said Roelof Slump, managing director of U.S. RMBS at Fitch Ratings. 

The initial CRT deal of 2022, CAS 2022-R01, involves a $1.5 billion note issued against a reference loan pool of 180,002 residential mortgages with an outstanding principle balance of $53.7 billion. In the final CRT deal of 2021, CAS 2021-R03, Fannie Mae issued a $909 million note against a reference pool of 117,000 single-family mortgages valued at about $35 billion. 

The prior two deals in 2021 involved CRT notes with a combined value of nearly $2.2 billion.

CAS Series 2021-R02, was issued in November and involved transferring loan-portfolio risk to private investors via a $984 million note offering backed by a reference pool of some 125,000 single-family mortgage loans valued at $35 billion. In October, the agency made a $1.2 billion CRT note offering, CAS Series 2021-R01, backed by a reference pool of 246,836 single-family mortgage valued at $72 billion.

Prior to restarting CRT offerings last year, Fannie Mae had backed away from the CRT market for a time — with its prior transaction closing in March 2020. Fannie and Freddie’s efforts on the CRT front were bolstered recently by pending changes to their capital-reserve rules that are being advanced by the Federal Housing Finance Agency (FHFA), which oversees the GSEs.

Pre-sale reports prepared by Kroll Bond Rating Agency on Fannie’s latest two deals include a note caution for at least one facet of the agency’s CRT transactions. The reports point out that appraisal waivers were issued for about 44% of the reference pools in each transaction. 

“Loans with appraisal waivers have comprised an increasing percentage of agency loans, including those in CRT reference pools,” the KBRA notes in the presale reports for both the CAS 2021-R03 and CAS 2022-R01 deals. “It should be noted that while the acceptability of a property value or sales price based on the use of proprietary models and market data is assessed, it does so without Fannie Mae having performed a property review or having obtained a valuation of the property.

“As a result, KBRA applied a broad valuation haircut to such loans.”

The KBRA reports also indicate that the reference-pool loans in both CRT deals have broad geographic diversity, compared with typical non-agency deals, which helps to insulate the mortgage pools from regional economic shocks. In addition, the borrowers involved in each deal have solid credit scores — in the range of 760 on average — and an average debit-to-income ratio of 33.7%, which the KBRA reports state is “consistent with prime-quality underwriting.”

On another front, the other government-sponsored enterprise giant Freddie Mac, recently announced that its single-family credit risk transfer (CRT) program is projecting note volume of at least $25 billion in 2022. 

Its CRT program was founded with Freddie Mac’s issuance of the first Structured Agency Credit Risk (STACR) notes in July 2013. In November 2013, its Agency Credit Insurance Structure(ACIS) program was introduced. 

Freddie Mac issued more than $18 billion in CRT notes across 10 STACR and 11 ACIS deals in 2021, according to the agency. Some 50% of the Freddie’s single-family mortgage portfolio, or more than $2.5 trillion in mortgages, is covered by credit enhancements, according to an agency press release.

“Freddie Mac … plans to optimize our CRT offerings in 2022,” said Mike Reynolds, vice president of single-family CRT at Freddie Mac. “We expect a record year for STACR and ACIS issuance.”

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