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Homepoint to jump into the non-QM market


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Houses

Add Homepoint to the list of lenders entering the non-QM market in 2022 amid a fall in origination volume. 

The wholesale lender is preparing to launch two non-qualified mortgage products this year, including bank statement and investor cash flow loans.

“We’re currently in the process of assessing our entry point into non-QM loans. Our team has experience working with those products,” Phil Shoemaker, Homepoint’s president of originations, told HousingWire. 

The non-QM sector, which largely includes self-employed borrowers and those who work in the gig economy, is expected to take off in a landscape in which accelerating home prices and higher interest rates push borrowers outside the Fannie Mae and Freddie Mac credit boxes.

So far, United Wholesale Mortgage (UWM), the nation’s largest wholesale lender, has launched new non-QM offers. In March, the lender announced a bank statement product for self-employed borrowers and loans for real estate investors. Current government-sponsored enterprise guidelines make it difficult for these borrowers who don’t have a traditional salary to qualify for agency-backed loans.

According to Shoemaker, Homepoint will also pursue borrowers who fall into those buckets: one that allows borrowers to qualify for loans based on their bank statements as opposed to a traditional W2 salary; and the other for real estate investors, a business purpose loan that considers the investor cash flow. 

The executive said Homepoint will not rush to launch the products because it requires an efficient operational infrastructure, as it is not “something you can haphazardly jump into.” 

“We do believe that in a purchase market, products will become more and more important,” Shoemaker said. “We’ve been focused on jumbo, and then we will be leaning into non-QM in a very responsible way because there’s a lot of borrowers out there that are underserved by either the prime jumbo market or the agency market.”

Based on the recent home appreciation across the country, the Michigan-based lender launched the Homepoint Jumbo Preferred in January, with flexibilities such as delayed financing and loan amounts for qualified borrowers that begin with $1 above conforming county loan limits up to $2.5 million. 

The product does not require mortgage insurance on primary residential loans with up to 90% loan-to-value (LTV). It is available in 15- year and 30-year fixed terms, on purchases and rate-and-term on primary, secondary, and investment properties. Shoemaker said the home appreciation is “here to stay” due to the imbalance between supply and demand. 

Another product Homepoint is preparing to launch is a partnership with a company to help homebuyers compete in cash offers – the executive did not share more details about the product. “You do see several startups out there trying to solve this. We want to be on the leading edge of solving this problem. But you will see a pretty rapid expansion of these options across all vendors.”  

The higher-rate landscape has chipped away at the profitability of Homepoint’s parent company, Home Point Capital, in recent quarters as margins in wholesale have declined. The company turned a $19.3 million profit in the fourth quarter, a sequential decline from the $71 million it notched in the third quarter. But Home Point Capital was largely saved by a sale of $13.1 billion in Ginnie Mae servicing rights, which generated nearly $175 million. Homepoint is exiting the Ginnie Mae servicing space, and recently announced it would also move all of its mortgage servicing processing work to ServiceMac, another cost-cutting move.

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This global investment firm wants to become a non-QM rainmaker


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Minneapolis-based CarVal Investors, a global alternative investment manager and long-time player in the mortgage market, has launched a real estate mortgage investment conduit, or REMIC, that plans to work with loan originators around the country to develop and acquire innovative nonagency mortgage products.

The new REMIC, Mill City Loan Holdings LLC, will serve as a mortgage conduit for funds managed by CarVal while also developing relationships with originators to acquire “residential mortgage assets across multiple strategies,” according to a CarVal statement announcing the launch of the REMIC, which will do business as Mill City Loans.

A REMIC is a special purpose tax vehicle that holds pools of mortgages and issues multiple classes of ownership interests to investors in the form of pass-through securities, such as bonds. REMICs are tax exempt under federal law, although the income earned by investors is taxable.

“We expect it to be a challenging [mortgage] market from a volume perspective due to interest rates and credit spreads,” said David Pelka, head of RMBS business and a principal at CarVal. “However, we are optimistic on both opportunistic mortgage-loan acquisition opportunities as well as continued product evolution of non-QM — not just this year, but through this economic cycle. 

“This is why our funds founded a mortgage conduit, Mill City Loans.”

CarVal Investors is a major player in the investment management world, with a focus on acquiring, managing, selling and securitizing loans, including credit-intensive assets, such as non-QM mortgages. Pelka said his firm has invested more than $24 billion in nearly 2,000 loan portfolio transactions globally since 2014. CarVal, which also has offices in New York, London, Luxembourg and Singapore, currently has more than $11 billion in assets under management — including corporate securities, loan portfolios, structured credit and hard assets.

The investment management firm and its affiliated funds also are active in both the residential whole loan and RMBS markets, with some 30 years of experience buying, managing and trading nonperforming, sub-performing and reperforming loans. CarVal has acquired $10 billion in whole loans over the past decade and a half, Pelka added, and securitized $5 billion in residential mortgages, primarily through its Mill City Mortgage Loan Trust shelf.

As the mortgage market transitions from a refinancing-dominated cycle to one where rising rates move purchase mortgages to the forefront, Pelka said he expects many originators will be looking for more inroads into that purchase market, such as innovative non-QM loan products. CarVal’s new REMIC will act as a tool for providing liquidity for that evolving market, according to the Mill City Loans website.

“Mortgage volumes overall will be under pressure as long as rates are high, increasing and/or volatile,” he said. “Non-QM will need to be re-priced to higher coupons as well, which will also impact volumes.

“I expect it will be a challenging environment for originators,” Pelka added, “which is why we are excited to have Mill City Loans as a mortgage conduit to meaningfully partner with originators to offer interesting nonagency mortgage products.”

The range of nonagency, non-QM mortgage products is broad and encompasses the self-employed borrower as well as entrepreneurs who purchase investment properties — and who can’t qualify for a mortgage using traditional documentation, such as payroll income. As a result, they must rely on alternative documentation, including bank statements, assets or, in the case of rental properties, debt-service coverage ratios. 

Non-QM mortgages also go to a slice of borrowers facing credit challenges — such as a recent bankruptcy or slightly out-of-bounds credit scores. The loans may include interest-only, 40-year terms or other creative financing features often designed to lower monthly payments.

Pelka said Mill City loans will be led by mortgage-industry veterans Trey Jordan, former general counsel at New York Mortgage Trust; Mike Petersen, a former TCF Bank executive with experience in capital markets and loan-portfolio management; and Kent Usell, a mortgage and investment banking expert who worked previously at New York Mortgage Trust and alternative investment firm Oak Hill Advisors.

“We see significant opportunity,” Pelka said, “both navigating the current uncertainty, but also partnering with originators [through Mill City Loans] to develop meaningful nonagency mortgage products.”

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UWM targets real estate investors with new loan product


United Wholesale Mortgage (UWM), the nation’s largest wholesale lender, announced on Wednesday a new product that will qualify borrowers for investment properties based on the monthly rental income, rather than the their current income.

This is the second new non-QM product the Pontiac-based lender has launched this month – the wholesale lender also unveiled a bank statement loan product for self-employed borrowers.

Rising interest rates, already in the mid-4% range, have dramatically slowed refinancings, forcing originators to look toward other products that entice purchase buyers or those with equity in their existing homes.

According to UWM, the product called Investor Flex is a 30-year fixed Debt-Service Coverage Ratio (DSCR) loan option for real estate investors. It is available on purchase and refinance loans up to $2 million and can be used to finance up to 20 properties.

“It will also be offered for short-term rental properties, giving brokers another competitive selling point when targeting real estate investors,” the company said in a statement Wednesday.

The new product targets real estate investors, a group that represented 16.4% of all home sales in the third quarter of 2021, according to the RealtyTrac Investor Purchase Report.

Investors paid a median purchase price of $245,000 to fix-and-flip and long-term rental properties, compared to a median price of $302,000 for all home purchases. But most of them pay in cash: 79% of all investor purchases were cash sales in the third quarter of 2021.   

“Rising home prices and inflation make it difficult for investors to achieve their return on investment (ROI) objectives, but they make it even harder for the average consumer to afford to buy a property,” Rick Sharga, executive vice president at RealtyTrac, said in a statement.

He added: “So, even though investor profit margins may be declining, it’s possible that we will continue to see the investor share of purchases increase over the next few quarters.”

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Fannie Mae finalizes two additional credit insurance risk transfers


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On the heels of completing its first credit insurance risk transfer (CIRT) deal of the year in early March, Fannie Mae has announced that it has executed two additional CIRT deals. 

The newest deals, CIRT 2022-2 and CIRT 2022-3, together transferred $1.8 billion of mortgage credit risk to private insurers and reinsurers. 

“We appreciate our continued partnership with the 25 insurers and reinsurers that have committed to write coverage for these two deals,” said Rob Schaefer, Fannie Mae’s vice president for capital markets. 

The initial deal of 2022, CIRT 2022-1, also transferred millions of dollars of credit risk to a group of private insurers and reinsurers. That credit risk is tied to a $26.1 billion reference pool of single-family mortgages. 

As part of that initial deal, Fannie Mae will retain risk for the first 25 basis points of any loss on the $26.1 billion reference loan pool. If that $65.3 million retention layer is tapped, then the 22 insurers and reinsurers will cover the next 295 basis point of loss on the pool, up to $770.7 million. 

CIRT offerings 2 and 3 work similarly. The covered loan pool for CIRT 2022-2 consists of some 87,400 single-family mortgage loans with an outstanding unpaid principal balance of $26.5 billion. The covered loan pool for CIRT 2022-3 involves 76,600 single-family mortgage loans with an outstanding unpaid principal balance of $23.3 billion. 

With CIRT 2022-2, Fannie Mae will retain risk for the first 25 basis points of loss on the $26.5 billion covered loan pool, representing a $66.3 million retention layer. If that layer is exhausted, then the 22 insurers and reinsurers that are part of the CIRT deal will cover the next 335 basis points of loss on the pool — up to a maximum coverage of about $889 million. 

With CIRT 2022-3, Fannie Mae will retain risk for the first 65 basis points of loss on the $23.3 billion covered loan pool. If that $151.6 million retention layer is used up, then the 23 insurers and reinsurers that are part of the deal will cover the next 385 basis points of loss — up to a maximum coverage of some $898 million.

The coverage terms for the latest CIRT deals, like the initial deal of 2022, are based on actual losses for a term of 12.5 years. Fannie Mae can cancel the coverage on each deal after five years by paying a cancellation fee.

“Since inception to date, Fannie Mae has acquired approximately $17.6 billion of insurance coverage on $612 billion of single-family loans through the CIRT program,” Fannie Mae said in a statement announcing the new CIRT transactions.

In addition, Fannie Mae also is transferring mortgage credit risk to the private market through its separate Connecticut Avenue Securities (CAS) real estate mortgage investment conduit, or REMIC, program. It’s most recent credit-risk transfer (CRT) transaction via the CAS program — and third of the year — was a $1.24 billion note offering backed by a reference loan pool of 150,395 primarily single-family mortgages valued at $44.4 billion.

With the completion of that third CRT transaction unveiled in March, called CAS Series 2022-R03, Fannie Mae will have brought a total of 47 CAS deals to market and issued over $53 billion in notes since its initial offering in 2013. Through the CAS program, the agency has transferred a portion of the credit risk to private investors on some $1.7 trillion in single-family mortgage loans, as measured at the time of the transaction. 

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Opinion: Does your title M&A strategy add up?


Most title business owners dream of the day they can sell the firm they’ve built for the maximum multiple. Others look forward to building their brands with strategic acquisitions when the timing is right. Here are some tips and pointers on crossing that finish line with maximum results.

Although it might be their dream to sell, title business owners cashing in on the decades of blood, sweat and tears they spent building their businesses often face challenges. When the time comes to enter the mergers and acquisitions stage, either to cash in or to accelerate growth, so many of these same professionals cast caution to the wind and step into the market with little to no experience or understanding of the possibilities.

Similarly, other title business owners eagerly anticipate the moment when the market is right for them to grow their own brands via M&A. However, more than a few aggressive growth strategies relying on M&A are executed without thoughtful planning. It’s one thing to throw buzzwords like “due diligence” around when the time comes to build an M&A strategy, and yet, quite another to walk away with maximum ROI.

Making a plan

As is the case with any other business endeavor, the M&A phase starts with careful, educated planning. That shouldn’t start with the wishful determination of the multiple one might wish for in selling a business, nor the lowest possible valuation for the target of an acquisition. Instead, it starts with the “why.”

For many seeking to retire, exit the industry ahead of a tough market cycle or even start a new venture, that “why” is simple enough. For others, though, such as the owner of a mid-size firm seeking accelerated growth via M&A, difficult questions need to be asked. What is the business model after the acquisition activity, and what kind of business best fits that model and/or offers the most potential growth after acquisition? Is the target being chosen for past performance; geographic or market location; market potential or something else?

As you begin to flesh out your objectives, it’s never too early to start collecting information. Consider, for example, the source of your target leads. Some leads may come to you from a third party, such as an M&A advisor. In such cases, just be aware that firms that are known to be on the market are also more likely to be coveted commodities as that advisory firm drives up interest from a wider market.

As you define your goals and strategy, consider the motivation of the owner selling your target business. Get an introduction to the owner. Listen to the “chatter” of real estate agents or underwriters at local conferences. You never know what you might glean from a friendly underwriter agency rep who walks into your target firm’s business after a particularly challenging day!

Another big element of the planning process is experience and expertise. If you’re an owner who has been involved in the M&A process before, you have an advantage over one who hasn’t. However, that doesn’t mean you wouldn’t benefit from having additional experience or expertise (a business partner, a consultant, etc.) to ensure your vision is objective.

And although one who has built and operated a title business over time likely has some quality insight when it comes to evaluating other title firms, that experience is all but irrelevant when it comes to knowing the ins and outs of M&A. So, unless this isn’t the first (or second, or fifth) rodeo for your team, don’t go it alone!

Know thyself. Know thy buyer (or seller)

If “know thyself” is sage advice, then “know thy buyer” is just as important to owners seeking the highest multiple possible in selling their firms. The title industry, in particular, brings several wrinkles to the game. Each potential buyer has different priorities, different ways of evaluating a potential purchase and different motivation.

So whether it’s a national title underwriter, a mid-sized agency seeking to grow its footprint or a private equity firm entering the title market for the first time, it’s imperative to have access to the understanding of which players are looking for what at this moment, and in the near future, and how they value what they’re seeking.

Similarly, if you’re making the acquisition, your seller’s motivation should also inform your strategy. The seller who’s simply looking for a payday and who indicates little motivation to help you transition is also signaling to you that the transition may be a little bumpier. Your target acquisition’s historical growth revenue could well take a hit in the early days after its seller has moved on.

On the other hand, many operators have spent decades building something more than just a title agency. Many times, they’ll want to know that their team is being put in the hands of a good operator. Those owners are often willing to stick around for a year or two to ensure that the legacy they’ve built remains strong. And they’ll be vetting you for culture, integrity and industry reputation before being willing to sell to you.

You’ll also need a good understanding of a number of factors before putting a number on your selling point or final offer. Obviously, market conditions, both now and as forecasted in the next year or two at least, are important. Understanding the state of the M&A market itself is just as important.

Right now, the market is hot in the title industry, with insiders and outsiders vying for firms seeking to sell. Is the firm you’re seeking to acquire a hot commodity in the eyes of your M&A competitors? Or do the unique characteristics of your target mean you can set the pricing without fear of being outbid?

Only once you have a reasonable and informed grasp of all of these factors is it time to set your offer price or selling point. Even then, plan to have some flexibility.

Due diligence

Again, this is a term with a wide variety of meanings depending on what level of experience and expertise the buyer and/or seller have in M&A transactions. Some elements are fairly obvious: performance and P&L; operating and production systems; the drivers of a target’s success (or lack thereof). You’ll likely seek indicators of how an acquisition would likely perform once its previous leadership has departed.

However, it’s a bit surprising how many title business owners seeking to acquire fail to account for some very important factors in their due diligence process. Anyone, for example, planning to merge two or more existing businesses will likely know the general title production system being used by the agencies coming together.

However, brand name alone isn’t enough. In a time of heavily customized integrations and modifications, one agency’s SoftPro may be worlds apart from another’s. The ResWare system your target firm operates may have dramatically different workflows from yours.

Similarly, not all title businesses (agency or otherwise) are created the same. Is the firm you’re evaluating for purchase truly a “full-service shop,” or is it a refinance shop that changes its marketing materials when the market changes? Not every agency is equipped to manage some of the specialty lines either. If you’re not used to running a builder-focused agency, you don’t want to have to learn how after your latest acquisition.

Another common concern in title M&A considers what the operational team of the agency being acquired looks like underneath. Was the selling owner heavily hands-on? Were the top two or three managers, who are also leaving after the sale, involved in all aspects of the business large and small?

Growth potential is critical as well. Review as many years of financials as your potential purchase will provide. Are you purchasing a once-large firm that scaled back after a few tough years? Does the firm’s team have the capacity to grow again?

If your means of evaluating the nature of a potential merger or acquisition excludes any review of their compliance and cybersecurity policies and tools, it’s time to seek more expertise to inform your M&A strategy. Any number of unpleasant and ROI-killing developments that went undiscovered or unsought can easily emerge after the transaction is finalized.

Most owners involved in an M&A transaction will likely pore over the books and P&L statements of the businesses they’re about to acquire. But not everyone has an objective standard or formula for the true growth potential of those businesses. The best-planned and executed mergers or acquisitions aren’t simply the sum of the entities being brought together. Instead, the best deals create new entities that are greater than the sum of their parts. 

Beyond the obvious, savvy entrepreneurs in the title M&A space find ways to drill down on the business model being acquired or merged, including how its rank and file are trained to do their jobs. If the operating plan of an agency acquiring another requires the specialization of tasks, for example, it is important to know that the rank and file of the agency being acquired is accustomed to owning entire files, rather than simply parts of the transaction.

Review service contracts. Understand the compliance program in place (or lack thereof). And investigate what (if anything) has already been put in place to protect the acquired office’s systems from cyberattack.

Evaluation

The asking or offer price in title M&A will depend heavily upon who’s buying, who’s selling and their respective motivations. Private equity firms tend to search for high-potential ROI, and that starts with Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). This formula leans heavily on an agency’s actual net income, which many feel is a much better indicator of a company’s potential profitability.

Title underwriters, on the other hand, tend to review EBITA plus remittance.  And many title agents making acquisitions start simply with gross revenue.  Again, their formulas will depend on what they’re seeking and why. For example, an agency with strong gross revenue but poor margins has tremendous worth to the acquiring agent planning to employ an extremely efficient management team and production model. I’ve even seen purchases made solely for the quality of staff to be rolled into a larger, central operations model. In such cases, EBIDTA fails to provide a true roadmap to the best targets.  

Your valuation process must be more sophisticated than spit-balling what a savvy purchaser might consider in his or her own evaluation of the company you are selling. It all starts with knowing who might be interested in purchasing a business like yours. It is also critical to understand their motivation, as well as what they consider to be the most valuable elements of your business.

What a regional title insurer might look for in buying a title agency can be very different from what private equity firms want. Do you have intangible assets (such as proprietary intellectual property or a unique, robust database) that could increase the value of your firm in the eyes of a potential buyer? How do the most reliable forecasts and projections rate your firm’s likely performance against hard, historical data?

Far too often, title business owners begin and end their valuation process with revenue and/or profit, and add in the most common recent multiples. But without understanding what potential investors or purchasers truly value in businesses like title agencies, most sellers end up leaving cash on the table.

ROI

For business owners initiating a growth strategy, determining an accurate ROI on new acquisitions is a fairly challenging endeavor. While dividing the acquired company’s earnings by the purchase price is at the base of most transactions, there are multiple other difficult-to-measure considerations that can play a part in the equation.

For example, acquiring a well-known brand may well be measurable in part by its revenue, but there will likely be a very real impact across the acquiring company’s revenues because of the brand equity being acquired as well. Perhaps a newly merged company brings an especially efficient and skillful staff into the larger entity, with the obvious positive impact on the total business’ performance.

Another all-too-common mistake made by owners inexperienced with M&A is measuring the ROI too quickly or having grandiose goals. Plan on waiting at least two years to evaluate your transactions. Where EBITA is the primary indicator on an acquisition, most operators expect to need three to five years to regain their investment if the multiple was three to five times the indicator.

Of course, the goal is to employ efficiencies that will shave that number of years down. Almost no two title agencies or businesses operate exactly the same way. There are bound to be hiccups, surprises and bumps in the road when it comes to bringing such entities together. Expect some staff turnover as well.

No two mergers or acquisitions are ever quite alike. But considering the stakes involved for buyer and seller, experience and expertise can play a major role when it comes to M&A, especially in an industry as unique as the title industry. Even the most experienced, successful title agents can be at a serious disadvantage when selling their businesses to savvy private equity professionals or seasoned underwriters.

And far too often, it’s because those owners have failed to consider all of the variables or take advantage of tools they didn’t even know existed.

Aaron Davis is the CEO of AMD Enterprises.

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

To contact the author of this story:
Aaron Davis at aaron@amd-1.com

To contact the editor responsible for this story:
Sarah Wheeler at swheeler@housingwire.com

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Fannie Mae rolling out its third CRT offering of 2022


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Fannie Mae is off to steady start on its path toward issuing $15 billion in notes this year through its Connecticut Avenue Securities (CAS) real estate mortgage investment conduit, or REMIC.

The agency is about to unveil its third deal this year through its CAS credit-risk transfer vehicle. The March offering, CAS Series 2022-R03, involves transferring a portion of the agency’s loan-portfolio risk through a $1.24 billion note offering backed by a reference loan pool of 150,395 primarily single-family mortgages valued at $44.4 billion.

Private investors, through a credit-risk transfer (CRT) transaction, participate with government-sponsored enterprise (GSE) Fannie Mae in sharing a portion of the mortgage credit risk in the reference loan pools retained by the GSE. Principal and interest payments are paid to investors on the CRT notes they acquire, but if credit losses on the reference pool exceed a predefined threshold, then investors are responsible for absorbing the losses exceeding that level. 

The details of the current CAS offering, not yet officially announced by Fannie Mae, are revealed in a pre-sale ratings report issued by Kroll Bond Rating Agency (KBRA). The report indicates that the average remaining loan balance for the loans in the reference pool is $295,109, with a weighted average interest rate of 2.95% and an average original loan-to-value ratio of 73.7%. 

The states with the largest concentrations of mortgages in the loan pool are California, 21%; Florida, 7.1%; Texas, 6.5%; and New York, 4.5%. Rocket Mortgage originated 11.6% of the loan-pool balance while United Wholesale Mortgage was the second-largest originator, at 8.3%; followed by Wells Fargo, 6.1% and loanDepot, 4.3%, according to the KBRA report.

“When considering the average California percentage in KBRA-rated prime jumbo pools (approximately 45%-50%), the California concentration of this [current CAS] transaction is relatively low at 21%,” the KBRA report states. 

The KBRA report, however, did indicate that 41.5% of the 150,000-plus mortgages in the $44.4 billion reference pool received appraisal wavers, resulting in the bond-rating agency applying “a broad valuation haircut to such loans.” 

Appraisal-waiver offers are issued through Fannie Mae’s Desktop Underwriter platform and make use of the agency’s robust database of some 50 million appraisal reports, along with data from Fannie’s Collateral Underwriter platform.

“Fannie Mae allows lenders to underwrite certain loans without a traditional appraisal, subject to certain eligibility requirements,” the KBRA report notes. “…Loans with appraisal waivers have comprised an increasing percentage of agency loans, including those in CRT reference pools.

“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 Me Mae having performed a property review or having obtained a valuation of the property.” 

With the completion of its third CRT transaction this year, Fannie Mae will have brought 47 CAS deals to market, issued over $53 billion in notes since its initial offering in 2013, and transferred a portion of the credit risk to private investors on some $1.7 trillion in single-family mortgage loans, measured at the time of the transaction. 

Earlier this year, a Fannie executive said the agency expects to issue $15 billion in notes through CAS transactions in 2022. This latest deal brings the agency, after less than three months into the year, to nearly the $4 billion mark — or at slightly more than a quarter of its annual goal.

The initial Fannie CRT deal of 2022, CAS 2022-R01, involved 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. CAS Series 2022-R02, the second offering this year, involved transferring loan-portfolio risk to private investors via a $1.2 billion note offering backed by a reference pool of 149,393 residential mortgage loans valued at $44.3 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. 

Prior to restarting CRT offerings in 2021, Fannie Mae had backed away from the CRT market for a time — with its prior transaction closing in March 2020.

In a related transaction, Fannie Mae earlier in March also completed its first credit insurance risk transfer (CIRT) deal of 2022 as part of its ongoing efforts to share mortgage risk with the private sector. The deal transferred up to $770.7 million of credit risk to a group of 22 private insurers and reinsurers. That credit risk is tied to a $26.1 billion reference pool of 87,600 single-family mortgages. 

As part of that deal, Fannie Mae retains the risk on the first 25 basis points of any loss on the loan pool. If that $65.3 million retention layer is tapped, then the 22 insurers and reinsurers will cover the next 295 basis point of loss, up to $770.7 million. The coverage is based on actual losses over a 12.5-year term. 

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UWM appraisal shakeup makes small splash


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UWM’s headquarters in Pontiac, Michigan.

United Wholesale Mortgage (UWM) announced late last year that it would turn the appraisal space on its head by launching an in-house appraisal program.

Even if it has not made quite the outsized impact UWM said it would, appraisers mostly like the wholesaler’s new program. Some appraisers take issue not with the program itself, but with the software and payment platform it uses.

When it launched the Appraisal Direct program in October 2021, UWM said it wanted to address some of the problems of appraisal management companies (AMCs) and eliminate a bottleneck in the origination process. It also added a sweetener for appraisers: In contrast with AMCs, UWM would not take any part of an appraiser’s fee.

According to a dozen appraisers interviewed by HousingWire, UWM’s program pays more and more quickly than other AMCs, is welcoming to trainees, and has friendly members on its team assisting appraisers.

The main flaws, according to appraisers, are the third-party vendors that UWM uses to run the appraisal program. Appraisers dislike Anow, the program’s appraisal management software, and Stripe, its payment processing platform.

Appraisers have called the Anow platform “busy” and “confusing.” They also say the fees for using both vendors are higher than comparable services. However, despite the fees, appraisers are still pocketing more money by using UWM’s program than other AMCs.

Melinda Wilner, head of operations at UWM, said that “nothing is perfect” but that the lender has made a lot of gains since launching the program.

New blood in the appraisal space

UWM announced that they would coordinate appraisals in-house in September 2021 and the following month, it was available to the public. 

Currently, the program has a team of 250 people “dedicated to assigning, taking down orders, all those great things,” Wilner said.

Before launching the initative, Mat Ishbia, CEO of UWM, said in a Facebook Live address that while AMCs add value to the industry, appraisals have been a stumbling block for the mortgage industry and UWM would fix that. 

 “We’re going to take one of the biggest negatives in the mortgage industry out of play,” Ishbia said.

The Detroit-based wholesale lender is working to address some shortcomings that have been associated with AMCs — mainly that they don’t pay appraisers on time, and they sop up a substantial part of appraisers’ fees.

UWM promised last year that appraisers would be paid the next business day after a successful appraisal completion, and for the most part, that has been the case. Appraisers said the average time for receiving payments ranges from one to three days.

Paul Charron, a Massachusetts-based appraiser who has done 50 orders through UWM’s program since signing up in October, said that he receives his fee within two to three days after uploading the report. That stands in sharp contrast to his other clients, where 99% of the time Charron said he gets paid within a month.

Jennifer Quinn, an appraiser based in Oregon, said that UWM pays above average rates.

“Fees paid are good,” she said. “They accept my turn times, which are typically about four weeks out. They don’t have a lot of superfluous revision requests, which is nice.”

Appraisers say that they pocket close to $470 for a conventional property through UWM’s program. Appraising the same property for another AMC amounts to an average of $400. 

Wilner said that UWM is putting “more money in the appraiser’s pocket” because it does not charge the fees AMC’s typically do.

“We’re not a company that’s out there trying to make money off of the appraiser’s backs,” Wilner said.

Dana O’Hara, a veteran appraiser of over two decades, said that UWM is the only AMC that is friendly towards trainees. 

“UWM has open arms for that, and I have a wonderful trainee who is really bright and he’s picking up on stuff and it’s really good,” said the Florida-based appraiser. “There is a lack of appraisers, and there’s going to continue to be a lack of appraisers and the industry has been making it impossible for people to bring in new blood, so I think that UWM is really the leader here.”

Overall, appraisers are excited that a new player has entered the appraisal space.

“As far as Appraisal Direct goes, I want it to succeed in a massive way,” said Matthew Vasicek, chief appraiser at Expert Valuation and Consulting. “It took a huge set of onions for them to run a program on short notice and up against some of the competitors that are involved, and sort of say, Look, you guys aren’t getting the job done, so maybe we can.”

Third party discontent

When the program first launched, there were some growing pains. One appraiser complained about a late payment for an appraisal, while another said that he received double payment for an order. 

An appraiser from Colorado noted that UWM’s appraisal program is not mindful about the time that it takes to complete an appraisal in rural parts of the country. She emphasized, however, that she hopes the wholesale lender will succeed in the appraisal space.

Another point of annoyance for some appraisers is UWM’s underwriting.

“I write my report so that it can be understood by a high schooler,“ an appraiser who requested anonymity said. “But I don’t think that at this level, I should have to write them to be understood by a fifth grader. There are some common terminology or appraisal principles that I’ve mentioned in reports where they just don’t get it and need further clarification.”

But the primary complaint about UWM’s appraisal program has nothing to do with the program itself.

Appraisers don’t like Anow, the appraisal management software used by UWM.  

For one, appraisers complain that the software is not user-friendly.

“It’s very busy,” said Jennifer Quinn, appraiser at Jennifer Quinn Appraisals. “Working for AMCs, I get a letter of engagement and everything that I need to know is right there on the letter of engagement. When I first started using the Anow platform, it took a while to figure out.” 

Quinn added, “I just feel like they’re trying hard to do something that doesn’t really need to be done.”

Laura Jones, a Virginia-based appraiser, said that for a one-person appraiser shop, the software platform is too overwhelming.

“They have a comparable database that you can build and there’s an analytics thing that you can use, but there’s nothing here that’s of interest for me, but that may be because I’m a single person office.”

Wilner said that UWM looked at multiple vendors and settled on Anow. She noted that Anow is quick to receive feedback and make changes.

Appraisers also say that they have to pay a $15 platform fee to use Anow, which is higher than what other software platforms charge—with fees on these platforms ranging between $6 to $8, appraisers noted.

Appraisers say they prefer platforms that are easier to navigate and cost less, such as Mercury Network, Appraisal Scope and Appraisal Valet.

UWM is currently offering a one-year free trial to access Anow, but once the year is up, appraisers will also have to pay a monthly fee to access the software, appraisers said.

Loni Pincocki, a Michigan-based appraiser, said that if UWM continues to partner with the software company she won’t be using UWM’s appraisal program. “I’m already nickel-and-dimed to death as an appraiser,” she said.

After the Great Recession, AMCs became a ubiquitous part of the appraisal process, acting as a “firewall” between a lender and the appraiser, but by doing so, AMCs significantly cut into appraiser’s pay. And appraisers are bracing for more pay cuts after Fannie Mae announced it would start accepting desktop appraisals. 

Appraisers also complain of the 2.9% fee Stripe, a third-party payment app the UWM program uses to pay appraisers, charges

“UWM didn’t really tell anybody in advance that they would have to pay, they would only pay through Stripe, and Stripe charges pretty hefty fees to send payments to the appraisers,” said Vasicek.

Wilner said that other AMCs often include vendor costs into the portion of the fee they take from the appraisal, which UWM doesn’t do. She reiterated that UWM’s program puts more money into the appraiser’s pocket than competing AMCs.

Industry reacts to UWM’s appraisal program

Many in the appraisal space see the entry of new players as a good thing and expect more lenders to follow suit.

Jody Bishop, president of the Appraisal Institute, said in a statement that “any progress that further evolves client relationships toward using the services of highly qualified designated appraisers is a win.” 

“We are hearing about more situations like this, and other innovations, including internal staff models and use of technology platforms or ‘portals,’ that help lenders manage the appraisal function with quality top of mind,” said Bishop. 

Brian Zitin, CEO of Reggora, an appraisal tech company, said that he’s observed a movement where lenders want to be more involved in the appraisal process. 

 “[Lenders] want to be able to react with the market and have more control over our appraisal performance,” said Zitin. 

Zitin noted that while this may be an operational investment for some lenders, there are advantages.

“You have faster appraisals for the borrowers than what was happening before,” said Zitin. “With a lender going directly to the appraiser, there isn’t that AMC cut, so appraisers are making more money.”  

However, no other major lender in the space has followed UWM’s lead in doing AMC work in-house. 

Phil Shoemaker, president of originations at Homepoint, said that he doesn’t think that there will be a trend of lenders running their own national appraisal panels because it isn’t a cost-effective or scalable solution.

“If you’re doing it correctly, you still have to do all the work that an AMC does,” he said.

Instead, Shoemaker said that Homepoint, another pure-play wholesaler, is taking a hybrid approach. 

“We believe there are certain markets that are challenged and will remain challenged because of their growth dynamic, so we’ll establish our own internal panels and be highly focused with our resources in those areas,” Shoemaker noted. “But for 80% of the national market, there are really good AMCs out there and we will continue to align with those AMCs because we think that is the best way to support our broker partners.” 

Wilner said that she is slightly surprised that lenders did not follow suit right away by launching something similar.

“We tend to get a lot of followers of the things that we do but on the other hand, I don’t know how many lenders are willing to not make it a profit center,” she said.

James Kleimann contributed reporting.

The post UWM appraisal shakeup makes small splash appeared first on HousingWire.



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Boosting Your Appraisal, Backward BRRRRs, & Capital Raising Risks


BRRRRs, property classes, raising capital questions and more are in this episode of Seeing Greene! As always, your investor mentor, top agent, and shiny-headed host of the BiggerPockets Podcast is back to walk through real-life questions and examples brought to him directly from listeners just like you. This episode walks through a lot of the struggles new and intermediate investors have when trying to scale. So even if you’ve got one unit (or none), you’re probably in one of our guest’s positions.

Investors all over the country are enjoying the spoils of this hot real estate market and need to know the next best move to make. In today’s show, David touches on topics like how to scale when you feel overleveraged, the four hurdles that stop investors from building portfolios, how to tell whether a rental is an a, b, or c-class property, whether or not to raise money on your first big deal, and why every BRRRR needs to start backwards.

If you heard a question that resonated with you or you’d like David to go more into detail on a certain topic, submit your question here so David can answer it on the next episode of Seeing Greene. Or, follow David on Instagram to see when he’s going live so you can hop on a live Q&A with the bald builder of wealth himself!

David:
This is the BiggerPockets Podcast, show 585. When you want to BRRRR, start with knowing what’s going to affect the value. The lender who’s going to be doing the refinance is going to be the one who understands how that works. So you want to talk to your representative, whether it’s a direct lender or it’s a broker like us that finds you one. Ask them, “Hey, which way should I go,” and then develop your strategy based off of what they’ve said. If you don’t like what they say, well then look for another loan officer, another lender, another whatever person that’s going to finance this, and create a different strategy.

David:
What’s going on, everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, here with a Seeing Greene episode. On these episodes, we get questions directly from our listener base, you, and we answer them for everybody to hear. So we have several really cool questions that come up today. We talked about financing and what type of loan would be appropriate for the right type of property. We talk about scaling. That’s one of my favorite questions that we get into today, is “How do I scale without burning out, or without making mistakes, or without taking on too much risk, or without leaving meat on the bone? Can I be going faster, and I’m not going fast enough?” We talk about if we should be raising money from people, and what point that actually becomes relevant. And then I threw in my 2 cents about the way that I raise money, and my philosophy behind the responsibility that we have when we’re borrowing people’s money that frankly doesn’t get spoken about enough.

David:
And then we talk a little bit about how real estate… Sometimes when you talk about it, it seems so simple and easy. Should it be harder? Should we be making it harder? Are we overthinking, or are we under-thinking? So we tackle a lot of the really common questions that people ask, many of them when people are getting started, but we also get into some higher-level stuff. Today’s quick tip. We want to do more live shows. So I love being able to answer video questions like this. The problem is sometimes I have to speculate as to what the person really means when they submit their question. I love it when they’re here and I can dive in deeper and find out what they’re really facing before I answer the question. So if you wouldn’t mind, go to biggerpockets.com/david, leave a video question, and in that question say, “I would be willing to be interviewed live on the podcast and get direct coaching from David and his co-host.”

David:
If you do that, my producer will reach out to you. We will let you know when the time is scheduled to do that. You could be here live. You can tell all your friends that you featured on the BiggerPockets podcast, and I’ll get to answer your question. I’ll also be very, very grateful. I’ve had people that have come to work with me because they’ve been on these shows and I’ve got to talk to them. I’ve had people that I partnered up with to do different things. A lot of relationships are built just by taking that step. So we want to hear from you. Please go to biggerpockets.com/david, submit your question, and let us know if you’d be willing to show up for a live show where we answer it more thoroughly.

David:
All right, last thing I want to say is make sure that you subscribe to this channel, that you like it, and that you’re following me on social media. I’m DavidGreene24. If you’re too shy to ask a question on the podcast, well first off, get over it. But second off, I’ll help you get over it. Send me a DM. Tell me what your question is. I want to be able to help. If you live near me in California, I definitely want to be able to meet you, because I do meetups out here. I want to get you plugged in, and I’d like to hear more about what you got going on. So submit me questions, DM me with anything that you are embarrassed to ask about in a public forum, and without further ado, let’s get on to today’s show.

Chad:
Hey, David. My name’s Chad, and I live in the upstate of South Carolina. We are trying to scale into real estate as we have been taking advantage of the tax-free capital gains that we’ve made on our primary home by moving every two years for the past several years. We tried our hand at flipping a house without living in it while we were in an apartment, and that went really well except for the tax implications from those capital gains. So we decided that wasn’t a way to build wealth or to scale into real estate for us, so now we are trying to get into it quickly. My question for you is: What is the best route for us to take going forward? And are we on the right path? We kind of have an idea based on our knowledge and understanding of real estate and investing from the BiggerPockets community. Where we are at right now is that this summer, we had purchased a property with two houses on it in the Smoky Mountains of North Carolina.

Chad:
We just finished one of the studio houses on the property and have launched it on Airbnb, and the other house we are seller financing and selling to one of our contractors there. We decided that project was too big to take on from out of state. So now that we have that one launched, we just bought our neighbor’s house and are about to launch that on Airbnb and other STR platforms in the next week or so. We decided to go into the STR route, because even though it’s somewhat risky with that endeavor, it does seem to scale faster as far as capital and cash flow there, and I thought this could be a good way to pivot into long-term and commercial real estate once we refinance and consolidate debts. So our current plan is that in the next few months, once we’ve been six months on title on the North Carolina property, we’ll be cash out refinancing that one and hopefully pulling the new equity, if not just consolidating the debt that we have.

Chad:
We used a HELOC from our primary home and a small personal loan to finish and furnish up that property, and we’ll also be getting all of our funds out of the property once the seller financing contract is complete, hopefully sometime early next year. The other home that we just purchased, we used a private money loan, and that’ll be sometime in the beginning of next year that we should be able to cash out refinance once we connect with another local lender. We’re still getting quotes on the rates and things like that for that. So that’s kind of my question, is: Are we on the right path? Because we do want to do this long-term. My W-2 kind of seems to be getting in the way, and we’re very tired at this point after renovating one property and switching right over to the next one. I’m on that lookout for another deal, but I don’t see a way to continue acquiring real estate at the end of this year until we finish consolidating those debts and hopefully have new equity to work with.

Chad:
I know that one thing that will be in the way when we do go and refinance is how much I get paid on my W-2, because the STR income won’t be counted towards our debt-to-income ratio. That’s what I’ve been told by the lenders. So using our own equity from these properties, we’re hoping to get into multifamily 10 or 12 units, or commercial property. I guess I’m a little vague with exactly specific what I’m asking, but does this sound like a good path? Are there other nuances that I don’t see that we could be acquiring other deals during this time? And as far as my own job, I am trying to pivot within my own industry of IT to increase my income to make that debt-to-income look better. And thanks for all your time, and you’ve been great to listen to on the podcast. I appreciate it.

David:
All right. Thank you, Chad. I appreciate the kind words there. Glad that you’re liking the podcast. There’s a little less beard, but there’s a little more bald. All right. So that was a little bit of a long-winded question, but I think I have an idea what you’re getting after. You’re trying to figure out… You’re saying, “How do I scale,” but then you’re also telling me what your current plan is. And I think what you’re looking for is for me to break it apart and tell you if it is sustainable, if it will work, and what you would do different, which is kind of what I do. As a consultant, I look at all the different pieces that my clients have with what they’re trying to accomplish. I run it through the weird matrix of my brain after seeing as much real estate deals as I’ve seen in the time that I’ve been doing it, and I come up with a plan that will maximize efficiency for the person according to their goals.

David:
So you’ve got several things you’re doing well, and it sounds like you’re willing to do whatever it takes to make it. So right off the bat, Chad, I think you’re going to hit your goals, which is great. So let’s talk about how we could do it the fastest way. When it comes to scaling, a lot of people ask this question: How do I scale quickly? Now, I’m going to paint a picture, or an analogy, if you will. Imagine that you’re trying to run a race, and the further you can run, the more money that you’re going to make. That’s sort of what we’re talking about here. The more properties you can buy, the further can get into growing your wealth, the more money that you’re going to make. The question to ask is: What will stop me from doing that?

David:
Now, some people lack ambition, they lack drive, or they’re afraid. Those are people that we make mindset episodes for. You’re not going to run very far in the race if you’re afraid to get started, or if you’re lazy, or if you feel like you don’t know how to run, or you’re in terrible shape. Those are people that need to learn how to analyze deals, listen to podcasts, educate themselves, because that’s what’s going to stop them from running. The goal is to get as far as you can. There’s other things that slow people down though. Other than that, maybe you’re carrying weights around. Maybe you don’t have enough energy to keep going. So what we’re going to talk about right now are the four things that I think slow most people down. Now, we are assuming that mindset is not a part of this, because from what you’re telling me, it’s not an issue for you.

David:
The four things I wrote down when I was listening to you that will slow someone down from running the race are going to be: running out of capital, that’s a finite resource, running out of time, that’s a finite resource, running out of opportunities like deals to get, that’s a finite resource, and then running out of the ability to finance, because you’re probably not going to pay cash for everything. That can be a finite resource. And you sort of touched on all of those at some point in your question. We’re going to start with capital. Most people will struggle with real estate investing because they don’t have enough money. I’m just being completely honest with you. Brandon Turner wrote The Book on Investing in Real Estate with No (and Low) Money Down. Fantastic book, lots of strategies. Do them. But I will also say those strategies work. They take more time and they are harder than if you just have a lot of money.

David:
I can run further and faster with the resources I have than someone can getting started, even with those techniques. Now, that does not mean they should not do it. I’m just saying if I’m in really good shape and I can run for four hours without getting tired, you can’t keep up with me if you’re new to running. You have to use these strategies to make it work, but you have to stop and take breaks. It’s harder for you to run. What I’m saying is don’t compare yourself to somebody who’s got a lot of capital, because they’re going to run further than you. Just let that inspire you, that someday you will have that capital and you can run that way. The two strategies that I recommend more than anything for people that are capital restricted, which is most new people, which is why I’m starting there, is house hacking and the BRRRR method.

David:
The BRRRR method is a way of buying a property, fixing it up similar to what I think you said you’re trying to do in the Smoky Mountains, and then refinancing afterwards to get your money out of the deal. That gets you your capital back. It can be reinvested. You eliminate the problem of running out of money. That’s why I wrote the BRRRR book. The second is house hacking. Now, I didn’t write the house hacking book, but I could write a book on that because I’ve helped hundreds and hundreds and hundreds of clients as well as doing this myself. It is an amazing strategy. What I tell people is you should always house hack one deal a year before you even try the BRRRR method. If you can get a primary residence loan and put 3.5% down, 5% down, you don’t need to do the BRRRR method.

David:
You don’t need to do all the work to get your capital out of the deal, because you barely put any capital into the deal. So the first thing I would say to you, Chad, is you and your wife should be house hacking one property a year. Find the best neighborhood that you can get pre-approved to afford. Find the right floor plan, get that house, split it up however you do it, whether you do a triplex, duplex, a place with a basement, an ADU, you add an ADU, you switch the floor plan. Whatever you’re doing, figure out a way to do that first. That will be the biggest thing. If you just buy one house a year like that, and then every year or maybe every two years you also do a BRRRR thing, you’ll be good. You won’t have capital restrictions.

David:
Then you’ll have enough equity like what you’re seeing in your primary residence, that you can pull it out and you can just run faster. The next thing I’ll say is time. It doesn’t sound like you’re time-restricted, but if you’re taking this new job on, that is going to become at a certain point a restriction for you. So continue to buy real estate, continue to work, like you are, to save money and to help your debt-to-income ratio so you can keep buying, but know at a certain point you’re going to need to quit that job. The next would be opportunity. Make sure you’re investing, that you have a strategy where you’re investing in an area or in an asset class that will allow your time to be fruitful. If you’re chasing after the same deals that other people are chasing after and you just can’t get anything under contract, you need a change of strategy.

David:
If you’re looking for deals that are just way too good, like there’s someone else that would buy it for much more than the price you want it for, you need a new strategy. You’re limited in your opportunity, and it doesn’t sound like that’s your problem right now. It actually sounds like you’re making some pretty good headway when it comes to finding deals. And the last is your financing, and here’s what I want to say about that. It’s good you’re getting a job to improve your debt-to-income, but you don’t have to do it that way. Companies like mine get people pre-approved based off income that the property is going to make, not the person. So you could switch right now. Now, the trade-off is you might have a slightly higher rate. It’s usually around half a percent or more to do those loans, but those are the ones that I use.

David:
I don’t use my own debt-to-income ratio, frankly, because I don’t want to have to show all of the taxes that I have, the businesses I own. My situation becomes more complicated. I don’t have a W-2 job in the sense where an employer pays me. I own businesses and pay myself out of those businesses, so I have to sort of show this really long paper trail of why I paid myself the amount I did, why I didn’t have to pay taxes because it was sheltered by real estate. It’s just a hassle, so I use loans where we take the income from the property to qualify me. And you can do that same thing. You can reach out to me, and I’m happy to look into that. If you don’t want to reach out to me, just find a lender and ask them about a loan like that so you don’t have to stay work in that job to keep buying real estate.

David:
I don’t know that these loans will be around for forever. They’re good loans. They’re 30-year, fixed rate. They’re not shady subprime-type stuff, like what we saw before, but I’m taking advantage of them while they’re here. Right now, there’s so much money that’s flowing around because we printed so much of it that lenders have a lot of it, and they need to get rid of it, and so they’re looking to make loans based off the income of the property. That’s a way that you could remove your time restrictions. So the four restrictions are capital, time, opportunity, and financing, and I believe I gave you a strategy to help with all of those. The next thing or maybe the last thing that I’ll say when it comes to the situation is we all want to sprint and get as far as we can, and that’s why I like this running analogy.

David:
Because if you’re trying to go as far as you can, you don’t necessarily start off going as fast as you can. Sometimes, trying to run as fast as you can will burn you out, and you’ll end up getting passed up in the race, or you won’t go as far as what you could have. When I go running, I start off very slow and I get warmed up, and I actually speed up as I go until I start to get tired, and then I slowly wind back down again. I think that strategy would be better for someone who wants to scale a portfolio. Don’t go buy 17 houses all at once and then try to figure out what to do. We’ve had people on this show… We’ve had them on different versions of this where they say, “Hey, I just bought six properties and I don’t have enough capital to rehab all of them. What do I do?”

David:
Well, you have a capital restriction. There’s not really a lot you can do. You’re in a bad spot. You got to sell it off, similar to what you have going on in the Smoky Mountains. That was a really good example. You’re having to sell a property to have enough capital to fix up the other one. So don’t try to go fast, but what you want to go is far. You want to do this at a pace that you can handle. Just buying a house a year in a good area puts you in a really good position for your future. BRRRRing another one after that puts you in a really good position for your future. Saving the short-term rental income that you’re making and putting that towards buying more properties puts you in a better position for the future. You’re not going to start off running as fast as you will be running in five years. The important thing is that you don’t too fast too quickly, and never make it to five years to where you can step up your game then.

Lourdes:
Hi, David. My name is [Lourdes 00:16:00]. I’m in Denver, Colorado. Today is January 10th, and my question is how to tell if an area is A, B, C, or D. And what if it’s mixed? What if you have really nice single-family homes, and around the corner, there’s some low-income duplexes? That’s it. Thank you.

David:
Hey, thanks, Lourdes. I really like this question, because we rarely ever get to go into the why of things. Most people just look at the what, but true experience and truism is gained from chasing the why. Why do we call them A, B, C, and D-level properties? Well, if you think about when we bring it up, it’s only when we’re describing a neighborhood to somebody else. I just bought a house in a B-class area. I look for houses in a C-plus area. I only want to buy A-class real estate. The letter doesn’t really matter, doesn’t make sense. That’s why we don’t have F. Why does it stop at D? It doesn’t go to F. That doesn’t make sense. Just the way it is. What we’re really communicating when we convey that is the personality of the real estate, and this is something I’ve been saying more often. Real estate has personalities.

David:
A-class properties are probably not going to cash flow when you first buy them. They might break even, but you may actually lose money on them. But over a long period of time, they’re going to go up in value a lot. The rents are going to increase a lot. You’re going to get equity probably faster than you get cash flow, and they’re going to be a joy to own. You’re not going to have a lot of problems with those properties. Those are good properties for a long-term perspective and for people that make really good money and need a place to park it, but they don’t need cash flow right off the bat. That’s the personality of that deal. A B-class property is also pretty good to own, not a joy to own, but it’s really fun to own it. You’re not getting a ton of issues.

David:
You are going to get still appreciation, but not as much as an A-class property. And you’re also going to get a little bit more cash flow, but not as much as a C-class property, but more than an A-class property. That’s kind of where I end up falling. I’m getting into some A-class stuff now. I used to not touch it very often. Now, I’d say maybe 40 to 50% of what I’m buying is A-class. Before, it would’ve been maybe 10%. But I still buy more B-class property than anything else, I would say. The personality of a C-class property is going to be heavy on cash flow, easier entry, probably a property that’s going to need some work. If you’re selling an A-class property on the market, you probably fixed it up before you sold it because you had the resources to do it.

David:
If you came to me and said, “David, help me sell my house. It’s an A-class property,” I’m going to talk to you about what we can fix up to get you top dollar, and you’re going to be able to do it because you have the money. C-Class properties, the owner might not have the capital to do that, so you’re more likely to be stepping into meat on the bone, and this is why most investors start there. It’s kind of like training wheels. You can add value to it, you’re not competing with the really wealthy people because they don’t want to own it as much, and it’s going to be stronger on cash flow than it is going to be on appreciation, which probably matters to the newer people that don’t have as much capital.

David:
D-class properties are going to be very little appreciation, if anything, compared to the other ones, a lot of headache. They’re not going to be a joy to own. Your cash flow potential is the highest, but the real benefit of a D-class property is going to be how easy it is to own it. There’s not a lot of competition to get it. You can get all these cool tricks, like seller financing and subject to. The people who own those properties are trying to get rid of them, so they’re going to play the game you want to play. You’re going to probably dictate the terms on a lot of those deals because the seller’s motivated, but they’re motivated for a reason. They don’t want to own that property. A-class property is the same owner might have it for 10 or 20 years. D-class properties tend to change hands every couple years, because people get worn out. So understanding the personality of the property will help you know where you want to get into it.

David:
But what I’m doing is I’m break down how I see A, B, C, and D-class so that instead of saying, “Is this an a A, a B, a C, or a D,” you say, “What is the personality of this? Well, this would be a great deal to get into because I wouldn’t have any competition, but man, it would be really hard to own it. There’s a lot of crime. There’s not a lot of tenants that want to live there. The school scores are low. It’s not going to go up in value.” We typically call that a D-class property, but who cares what we call it? What you need to know is how would this property work once I own it. What would it be like to operate it? And does that fit for my goals? Okay, to the second part of your question, what about neighborhoods that are both? They’re not really both, but what you described is what if you have a really nice single-family home, and then a low-income duplex that’s right next to it.

David:
It’s probably not a low-income duplex if it’s in a neighborhood right next to a nice single-family home. It’s probably just being rented to lower-income tenants. But that doesn’t mean that it’s a bad neighborhood, or it’s bad tenants, or it’s actually a problem. It just is that specific landlord might have chosen tenants that could be causing problems. Or maybe they’re not causing problems at all, they’re great, but they can’t afford to own in a neighborhood that nice, and that’s why they’re renting there. I don’t know this specific property. Now, keep in mind that’s how I’m answering this question, is I haven’t seen the house. So if this is just a haunted house, just something terrible, don’t hear me saying that you should go buy it, but what you’re describing to me is what I look for.

David:
I want to buy the duplex in the great single-family home neighborhood. It’s very rare to find that. And the reason is that most cities, when they do their zoning, they clump it up. They go, “Here’s where all the single-family homes go. Here’s where all the multifamily homes go.” And the multifamily tends to be buried in the corner, and it’s never looked at, and that’s where all the mildew grows, because it doesn’t get enough sunlight. And then you get nothing but all the tenants, and then more and more tenants start moving in there. There’s no pride of ownership. The income goes down, the neighborhood goes down. The police presence goes up, the crime goes up. That’s what you’re trying to avoid. What I like are the benefits of multifamily property, higher cash flow and less risk, mixed in with a great neighborhood of single-family homes where I’m not going to get all those issues that I described when the zoning is separating multifamily from single family.

David:
It’s better if you mix it all in together and you have a nice ratio of both. So what you described, Lourdes, would actually be what I would be pursuing. I want to find multifamily property in a neighborhood that’s B or A-class, because I’m going to have more appreciation from that property. And just imagine that it’s a duplex there, and I can rent it out and get twice as much cash flow as a regular house because it’s a duplex, or maybe three times as much because it’s a triplex. And then five years later, I want to sell it. Well, if I bought it in the section of the neighborhood that is zoned for multifamily, I’m not selling it for much. I’m going to sell it to another investor. They’re going to be looking at like it’s a D-class neighborhood, and they don’t want it. I’m stuck. But if I’m going to sell it and it’s in a nice single-family neighborhood, maybe someone buys it who wants to house hack.

David:
Maybe the David Greene team is representing a buyer, and we find that house for our client. We say, “This is the one you want to buy. You’re going to be in the best neighborhood, and you’re going to rent out the other unit to someone else to reduce your income.” Now that person’s willing to pay extra to have that property. It’s worth more to them because of the income it brings in. That’s the way that I’m looking at it. I’m actually looking for deals just like you described, so I would highly encourage you to chase after those ones with more vigor than if it was a multifamily property that was not in a single-family neighborhood.

John:
Hi, David. I appreciate your haircut. Thank you for representing. My name’s [John Mark Burely 00:23:35]. I am currently running a roofing company with my brothers. My wife and I have a barn wedding venue, and we had a two-unit rental, first purchased back when I was 18 or 19. Had the option to buy it on land contract here in Michigan. Bought that thing, had it paid off pretty quickly. Recently got news that my job… Over a year ago, a year and a half ago, my job was going away. I managed 11 apartment complexes for a company, and they were selling the whole portfolio. So plan B came on the horizon. Got my two-unit with a wholesaler. Sold that thing, took all the cash, and bought a 12-unit complex. So I have this 12-unit complex. Lose the job, take on this roofing company with my brothers.

John:
It’s going good. I want to keep building the portfolio, the rental thing. I think that’s where to be. I have the opportunity right now to make offers. They’re both off market, but I’m in touch with the owners for a 32-unit apartment complex and then a 235-unit storage unit complex. Both looked like really good deals. One of them I used to manage for the prior company, and it was out of their geographic zone, so I contacted the owner. I said, “Hey, man, you guys want to offload that?” So I’m going to be paying more per door than what we sold it to them for likely. It’s 2021, the beginning of 2022, so market’s hot right now.

John:
I’m curious. Do I try to raise money from other folks to buy these new complexes and hold onto the 12-unit? Or should I sell the 12-unit and try to milk it for everything I can, and use that cash as down payment for these bigger-sized complexes? I don’t like being over-leveraged. I don’t like owing people who I know. That’s a nerve-racking feeling. I’ve just never been in that world, so I’m not familiar with it. And I’ve heard of and seen relationships go sour over money, so I don’t like to get money between friends. So I’m curious what your counsel would be. Is this something where, “Hey, man, leverage the happy investor culture that you’re in, and use other people’s money to make these purchases and then pay them back over time and be over-leveraged”? Or sell and move on, and kind of do it the slow, steady way? So I’m curious what your thoughts are. I appreciate your feedback. Thank you.

David:
All right, John. Your hair’s looking great as well. Soon as I saw your video, I thought, “Oh, looks like I’m looking into mirror.” Let’s see if I can break down the question you’ve got here. You mentioned that you left a job as a property manager, so I’m assuming that means you are capable of managing and analyzing a property. You started a business, a roofing company, so you have some income coming in from that. And that tells me that you are a problem solver, and you don’t need someone else to lay a path out for you, so I’m going to give you advice based on those things. That’s what I can tell from listening to your video. Your question is: Should I raise money from other people to buy the bigger unit that I want to buy? And you gave two examples of self-storage or an apartment. Or should I sell what I have and use that money to buy the bigger property?

David:
And then you mentioned some of the concerns you had, some of the emotions you were feeling, like you don’t want to raise money from other people. You don’t want relationships to go bad. Let me give you my perspective on capital raising. So I do it as well. I have the website investwithdavidgreene.com. People can go there if they want. They can invest with me. I take a different approach than most people do. The average… [inaudible 00:27:27] the average, but just the more common person that I see, much more common, is they say, “Hey, if you want to invest in real estate, you can invest in this deal. I’m going to buy this apartment complex, this self-storage. Look at the prospectus, look at the proforma. If you think it looks good, you make the decision to invest in it. And if it works out, you’re expected to get this return. But if it doesn’t work out, you’re going to lose your money.”

David:
And that has gotten along pretty well, because most real estate has been going up in value. So even if they make mistakes, it’s sort of covered by all the appreciation we’ve seen. This has been a good time to be lending money. I don’t love that, because it should be the operator’s skill that determines how well the investment goes, not the market just helping them because we’re seeing so much appreciation. When I let people lend money to me, when I borrow money, I’m not doing it by saying, “Look at the deal and see if you want to invest. Lender beware. You’re doing this at your own risk,” type of a thing. I understand most people that are investing with me don’t understand how real estate works. Otherwise, they’d probably be doing it themselves.

David:
They want the benefits of real estate. They see the strength of it. They like the safety of it, but they don’t know how to do it themselves. So they’re really not invest investing in the deal, they’re investing in David. So I have mine structured to where they get paid independent of how well the deal does. If somebody lends me money, they get their interest payment, and it’s not quarterly like most syndicators do. It’s every month. It just goes right into their bank account, as if they were getting direct deposit from a bank or interest from a bank, and it doesn’t matter how the deal does. And I do it like that because I don’t think that they’re investing in the deal.

David:
I think they’re investing in me and my word, and my word matters more to me than if a deal goes bad and I go, “Hey, sorry. I lost all your money.” You’re exactly right the relationship goes poorly, because in their mind, their expectation was they were investing in you, John. They weren’t investing in that deal. They don’t know how real estate works. So if you lose their money, they’re mad at you. They were trusting you. And I think this is important to recognize. Most people investing in real estate, I don’t think you’re investing in the deal. That’s the cop out the syndicator uses to be like, “Hey, don’t blame me. You knew what you were doing,” and that’s why I just don’t do that. My word matters too much. The platform I have here on BiggerPockets matters too much. I can’t default on debt. I just wouldn’t be able to sleep at night, and people would lose trust in me, which matters more to me than whatever wealth I could build by borrowing money and doing what other syndicators do.

David:
So this is my perspective on the advice that I am going to give you. That’s why I wanted to kind of put that out there. That’s also a bit of a pet peeve of mine that I think just raising money is so easy that people are doing it fast and loose. They’re not very good at what they do, they’re not very careful, and they’ve been getting away with it. But musical chairs is going to end at some point, and all those people that put their money in real estate are going to lose it, and then they’re going to blame real estate. And I hate that. I hate when people blame real estate, rather than blame the operator who screwed up or the decision they made that was unwise. For you, I would say there’s a way we can do this where you can do both.

David:
If your gut is telling you you don’t want to raise money, it sounds like you haven’t done it before, don’t do it on your first deal. Sell your 12-unit, then go buy the storage facility or the apartment, whatever you’re going to buy. Use your own money. Put a lot down, more than you normally would. That’s going to give you quite a bit of equity in that deal. After you’ve done that and it’s been stabilized, you’ve improved the rents, you’ve made more money with it, then go raise capital and say, “Hey, I’m not raising money to buy a deal. I’m raising money for a deal that I already bought. So I can secure your money with a lien on this property in second position,” which is probably the same thing they were going to get if you used it to buy it. But you’re not making them take all the risk of what if you screw up managing and operating the property. You’ve already shown, “I’m managing and operating it well.”

David:
So it’s less risky for them to give you the money after you’ve stabilized it. Now, many people hear this and go, “I never thought of that.” It’s because most people that are borrowing money and raising money to buy real estate don’t have any of their own, and it’s because they don’t have enough experience. They can’t do what I’m describing, because they don’t have the resources to do it, because they don’t have the track record. They’re trying to learn on the person’s dime who’s giving them the money, and that’s what I don’t like. It’s better if you do it the way that I’m saying. Once you raise the money, after it’s been stabilized, you’ve effectively paid yourself back. And this may sound unconventional, but it’s not shady. It’s not shifty. There’s nothing wrong with this. People do the same thing with the BRRRR strategy.

David:
They go, “What do you mean you’re going to refinance it after you already bought it? I thought you use a loan to buy?” Well, you do, but you could also use a loan after you buy it. It’s kind of the same process. This is the same thing that I’m describing. When you raise that money on the property you’ve already bought, so it’s safer for these people, then go buy another 12-unit or comparable to what you sold with the money that you’ve raised. Now you’ve got both. You didn’t have to give anything up. You also eliminated the risk for your investors, and you forced yourself to prove that you know what you’re doing before you raised money. That’s the way that I look at problems like this. I usually put the onus on myself to take risk off of other people’s plates instead of saying, “Well, here’s the risk. Make up your own mind if you want to do it.”

David:
So I’m hoping more people will raise money the way that I’m doing it, so that there’s less bad of a reputation that gets out in the real estate investing community. We haven’t had a lot of that right now, but I promise you if you were raising money in 2005, there’s a lot of people that lost money letting people borrow it in 2005. And they blame real estate, they don’t blame the operator. So let’s not do that. Let’s keep a solid relationship with real estate. Let’s invest our money with the right operators who have experience doing it, and let’s make sure that we’re not chasing after the highest returns ever, which is also exposing us to more and more risk.

Andrew:
Hey there, David Greene. Andrew Cushman here. I don’t have a question, but I just wanted to say great job on the Seeing Greene episodes. They’re awesome. I listen to every one of them, even though most of the questions don’t apply to me, simply because you do such a good job explaining things to people that by me listening to you do it, it helps me answer questions better when I get asked similar questions. So anyway, just want to let you know you’re doing an awesome job with those episodes. They’re great, and keep it up.

David:
Well, Andrew, I don’t know what to say other than thank you. That’s very sweet of you. It actually means quite a bit, because this is a nervous and scary position to be in. I don’t know what questions are coming at me. They could be anything related to real estate. I could look like a fool. It is a little nerve-racking, so the fact that you’re saying that means quite a bit. And that just goes to show Andrew’s character. He’s such a cool guy. Andrew’s a very good friend of mine, and I would encourage you guys to follow him as well as check out some of the episodes that he and I have done together. So Andrew is my multifamily investing partner. We’ve created a system of how we underwrite, analyze deals, and then pursue them, so the LAPS funnel. How we find leads, we analyze them, we pursue them, and then we have success.

David:
And if you would like to learn more about that, check out the show that we did with Andrew featured here. All right, we’ve had some great questions so far, and I want to thank everyone for submitting them. You can submit your question at biggerpockets.com/david, because we need them so we can make awesome shows like this. I wanted to play some feedback that we had from YouTube comments so that you guys can hear what some of the people have been saying on YouTube, and I also want to encourage you to head to YouTube and leave me some comments that I can see there. My producer wanted me to let you know that we’ll be seeing Andrew Cushman on the next episode of 586. Make sure you check out 571, episode number 571 on phase one of multifamily underwriting, and then tune in for phase two, which is where we go into it deeper.

David:
So Andrew is basically my partner, like how we just heard from John and he was describing how he wants to raise money. Well, Andrew and I do the same thing. We raise money from people, we go invest it into real estate and multifamily, and we have a screening process that we use to make sure we’re not buying the wrong properties. And Andrew’s my really, really good friend, and I trust him quite a bit. And we basically break down for you all: This is what our underwriting process looks like. These are the exact steps that we do. We actually, now at this stage, leverage those steps to other people that come work for us. They started as interns, and now they’re employees of the company, and that’s how systemized we are that other people can do this work. So if they were able to learn it, you are absolutely able to learn it yourself.

David:
So make sure you check out that episode. It’s going to be 586. And before you listen to episode 586, listen to episode 571, where we get into phase one. 586 is going to be phase two. All right, next comment comes from Dave H. “You asked for comments and feedback, and here it is. This series of detailed Q&A has been some of the best content for a newbie like me. Some of the questions are exactly what I would’ve asked. Other questions from more experienced investors got me thinking about things I hadn’t considered. Keep it coming.” Well, Dave H., thank you from Dave G. I will do my best to do that. Now, if I’m being fair, while I appreciate your compliment how good the show is, the show is only as good as the questions I get asked. If people don’t ask questions or they ask lame ones, I can’t really make a good answer out of that.

David:
So I want to give the attention here to the people who have been submitting their questions. Please keep doing that. Go to biggerpockets.com/david. Submit your question there. Make it as good as you can. I really love these consulting-type questions where you say, “I’ve got this asset and I’ve got this goal, and I’ve got these things working for me and these things working against me, and I can come up with a strategy.” It’s sort of like how Brandon and I would talk about how you got to have tools in your tool belt so that when different problems come along, you know what to do. I feel like the contractor with a tool belt full of tools, and I get to show you guys which tool that I take out based on what problems are being presented to me, and then everyone gets to learn. So please keep those coming, and also thank you for the kind words, Dave.

David:
Next comment, “I would like you guys to cover getting financing in an LLC and keeping away from your personal credit for investors looking to scale, but coming with that strategy, making your personal credit and your business credit worthy to get mortgages in your LLC’s name.” Okay, this comes from New Image Properties LLC. Please, come on here and ask us a question about what you’re trying to do. I would’ve to speculate to get into this now. I’d rather be able to have you on maybe on a live show, where you could tell us what you’re thinking. Based on what you’re saying here, my understanding is you look at it like an LLC has its own credit, and then you have your own credit, but most lenders don’t see it that way. They see an LLC as an entity.

David:
But you are the manager of that LLC, and as the one making decisions for that LLC, they’re going to look at your credit. Now, if you want to get a corporation, doesn’t have to be an LLC, but a corporation and use that business to buy property, you can, but you need to usually show a track record of that corporation making real estate payments. So we can talk about that more. If you want to submit your question, I’ll get into how that works. It’s something that I do myself. So I own C corporations and S corporations, and I can buy real estate in the name of the corporation, but only when I can show a track record that those corporations have owned real estate have been making the payments. That’s sort of how you develop credit for a corporation. But it doesn’t work the same as a FICO score, which is what most of us are used to when it comes to understanding how a company looks at credit, because that’s how they do it personally.

David:
Thank you for that, though. All right. Are these questions resonating with you? Have you also thought, “Man, I wish I could avoid having to use my own credit,” or, “I want to buy more properties in the name of an LLC, because it’s safer”? Have you wondered what you should do to scale faster? Well, if you have questions that are similar, please go to the comments and tell me what you’re thinking. Leave a comment below and let me know what you need to think about, and don’t forget to subscribe to this channel. So take a quick second while you’re listening, get your finger out, stretch it a little bit. Hit the like button and hit the share button, and tell somebody about this podcast, and then subscribe to it, because we want you to get notified every time one of these Seeing Greene episodes comes out.

Pedro:
Hi David, this is Pedro. It was great meeting you at the BPCON2021. I have a question regarding the BRRRR strategy. So currently I have a house hack in Long Beach, California, and I also have single-family BRRRR rental in the Kansas City market. I’m now looking to buy a fiveplex in Kansas City as well. For the single-family BRRRR, I did the rehab in a way that would put my property in a higher set of comps so I could get a higher ARV, therefore getting more money during the cash out refi process. However, I know that as I’m getting to the fiveplex space, I’m going to be relying on commercial lending, and therefore they’re going to be looking at the net operating income. Therefore, I know that in order to get a better appraisal, I need to either increase my rental income or decrease my expenses or do a combination of both. Therefore, I wanted to get your thoughts on what’s the best way to BRRRR a property that relies on commercial lending for the refi process. Thank you, and have a great day.

David:
All right, Pedro, thank you for that. I totally remember meeting you at BPCON. I believe we spoke a couple times, and you’re one of those people that has the “Whatever it takes, I’m going to get it done” attitude. So I love that. You also brought up a great point that I want to highlight here. When you’re using the BRRRR method, what you’re really doing is starting at the end and working backwards. What you’re trying to do is make a property worth as much as you can so that you can refinance it so that you can put a renter in there. And in order to do that, you have to rehab it. And in order to have that, you have to buy it. So even though we describe BRRRR and the steps you take, you actually start with the end in mind and develop a strategy backwards from there.

David:
Now, the common way we describe BRRRR is for residential property based on comparable sales, and the fastest way to improve the value of a residential property is to improve its condition, so the rehab is typically where that happens. But you bring up a very good point. If it’s a commercial property, they may be looking at comps, but they may be looking at the NOI, the net operating income, and they may be looking at some combination of the two. So what I would say is you need to talk to your lender before you do this. If it’s us, talk to us, if it’s another lender, talk to them. But guys, everybody who’s hearing this, please hear me say this. Pedro, I love that you’re asking the question. You’re just asking it to the wrong person.

David:
All you have to do is go to the bank or the lender or the broker or whoever that’s going to refinance it and say, “David, I want to refinance my five-unit property. How can I increase the value of it?” And then we’re going to look at the different people that we’re going to broker your loan to, and we’re going to say, “Well, this one’s going to use comparable sales, and this one’s going to use net operating income. Which one of those do you have the most control over?” And you would say, “Well, it’s already pretty nice. I don’t think I can improve the condition. And there’s no comps around that are actually going to be much higher than this one, so I could probably improve the net operating income by jacking up the rents.” We’d say, “Okay. If you could get the rents up to this amount, this is how much they borrow,” and then you have your strategy.

David:
And it might work the other way, where you can’t move up rents, but there’s a lot of comparables that are priced higher because you got to at a good price. Then you know how to move forward. So I’m using this as an example for everyone. When you want to BRRRR, start with knowing what’s going to affect the value. The lender who’s going to be doing the refinance is going to be the one who understands how that works. So you want to talk to your representative, whether it’s a direct lender or it’s a broker like us that finds you one. Ask them, “Hey, which way should I go,” and then develop your strategy based off of what they’ve said. If you don’t like what they say, well then look for another loan officer, another lender, another whatever person that’s going to finance this, and create a different strategy. But someone like you, Pedro, who’s got the attitude you have, I have zero doubts you’re going to make it work. Just find the right lender, talk to them, and they’ll set you straight.

Dominic:
Hey, David. Thank you so much for taking my question. I currently do not have any rental properties and I’m looking to get my first unit, which is going to be a two to four-unit small multifamily. I want to use either a NACA loan, which Tony Robinson talked about on the recent Rookie Reply podcast, or an FHA loan. And from there, what I want to do is add value to it, kind of BRRRR, but I don’t want to take my money back out. I always want to transfer the loan from either a NACO or an FHA to a conventional, so that way I don’t have to have the owner occupancy restrictions of those loans over my head, and have a little bit more flexibility with it.

Dominic:
So I guess my question for you is this. I know what I just said, it’s simple in nature, but it’s not going to be easy. But because it seems so simple, I feel like I’m missing something. My specific question is am I off-base here? Am I missing something? And I guess my follow-up question would be how do you navigate real estate knowing that there’s a lot of simple concepts that are very powerful, even though they’re not going to be easy in practicality? How do you know that you’re still on the right track and not oversimplifying something? Hopefully that makes sense. Thank you so much, David.

David:
All right. Thank you, Dominic. I really like this question. Here’s where I want to start. Most of the strategies that you hear described on how to scale with real estate, if you really think about it, almost all of them are based on the financing of real estate. The BRRRR strategy and everything that’s involved is all about how you get your capital back out based on the fact that financing is in your benefit. If the property’s worth more, you can refinance it. You’re just capitalizing on the power of a refinance. House hacking is capitalizing on the power of a primary residence loan to buy property that will still generate income. Most strategies you hear about are based on financing. So you’re asking the right question, because you’re talking about financing.

David:
Now, what you said was “I want to use an FHA loan,” or I believe you said a NACA loan, “to get into a house, but then I want to refinance it into a different loan so that I can use that FHA loan again to buy the next property.” So let’s start with that. There’s several kinds of loans, but I just want to give a broad overview of what you’re looking at. You’ve got government loans and then you’ve got non-government loans. Government loans are typically VA, USDA, FHA, and then just conventional. And when you hear us say Fannie Mae or Freddie Mac, what we’re describing when we say that are companies that sort of ensure loans that… These companies have partnered with the government so that once they give you the loan, Fannie Mae or Freddie Mac will buy it from whoever gave it to you so that that company gets more money. They can go give another loan out. That’s how that works.

David:
And they have tighter guidelines for those loans than they do for non-government loans, but you typically get a benefit. An FHA loan is a very low down payment with the very low credit score. A VA loan available to veterans could be no down payment and no PMI. The Fannie Mae Freddie Mac loans typically have the best interest rates. That’s the benefit of those loans. But then you get into the space where you don’t qualify those anymore, and you’ve got jumbo loans, you have nonconforming loans, you have debt-service coverage ratio. You’ve got all these different types of options. And then I guess the third one could be credit unions and savings and loans institutions, typically what we call portfolio loans. So that’s banks or lending institutions that lend and keep the deal on their own books. They don’t go sell it to anyone else. So when it comes to your specific situation, you’re asking, “If it’s that simple, why isn’t it easy?”

David:
It could be easy. If you bought a house with an FHA loan, you put 3.5% down, and you wanted to refinance out of that so that you could use another FHA loan, that wouldn’t be too hard. There’s conventional loans that you could refinance into where you put 5% down. So let’s say you buy a $500,000 house, and you put down 3.5%. So that would be $17,500, and then you want to refinance into a conventional loan that needs 5% down. Well, that would be 25,000. As long as you have $25,000 of equity in that deal, plus enough to cover your closing costs, you can do that. So you walked in with 17,500. If you gain another 20 or 30,000 in the year, you would have enough at that point to refinance into a conventional loan. You could buy another house with an FHA loan. But you might not have to.

David:
FHA loans are not the only loans you can use to buy a primary residence. There are conventional loans with 5% down. Now, right now, they’re not able to used for multifamily, in most cases. Those are for single-family residentials, because the government guidelines shift a little bit, but still, you can just buy another single-family house with another 5% down loan the next year and not even have to worry about refinancing. Then the year after that, you can do the same thing again. That strategy is simple and easy. And that is why I say every single listener of this podcast, every single real estate investor, assuming they can manage a property or pay someone else to do it and have the funds to do it, should buy a primary residence every year and house hack it.

David:
You should go in for 3.5% to 5% down. You buy in the best neighborhood, the best area that you can. You live there. You rent out parts of the home to other people. There’s tons of ways to do it. You do it with a duplex and a triplex and a fourplex. You do it with a basement. You do it with an ADU. You do it with two houses on one lot. You rent out the rooms of the house. You buy the house, you put up some walls, and you make it into separate spaces. There’s lots of ways you can do that, but it is simple and it is relatively easy. It’s just not convenient to have to share your house or share your space or whatever, but there’s ways of doing it that you don’t have to share the space. I house hack, and I don’t have to share the space.

David:
I just take a portion of the property, I wall it off. I make sure it has its own bathroom and its own little kitchen area and its own bedroom and that it has a separate entrance, and I never would ever have to see those tenants. And I can do that any time I want, so I know everybody else can do it too. Everything in addition to that is what gets a little more complicated. That’s when you’re chasing after really good deals with tons of equity where there’s a big rehab. That’s where it becomes a little more complicated and not easy. But Dominic, just start with what I said. Buy a house every year and house hack it. And then in addition to that, if you want to buy out of state, if you want to do the BRRRR method, if you want to buy commercial property, you have all these options that will become known to you that you don’t have to jump into right away.

David:
Just do those in addition to the meat and potatoes that I described. And if you do it the way I’m saying, it won’t be hard. It won’t be complicated. It won’t be as risky. You’ll be paying yourself instead of a landlord. You’ll benefit in so many ways. This the best strategy. Everyone should be doing it, and everything else in my opinion should just be considered supplemental. All right, I want to thank all of the people who called in or who left a video message for me today. I appreciate you. We got some really good stuff. We got to hear from Dominic there, who had a question about “This real estate thing seems like it should be harder than a really is. Am I missing something?” We had John, who’s trying to figure out if he should raise money or if he should sell a property and buy something else.

David:
We had several other people that came in here, and they had questions that I thought were really, really good that I hope as you listen to it, you both learned something and you had your eyes opened to how you can make a strategy work. The goal of this is not to overwhelm you with information. It’s to equip you with the information that you need to take action, start buying real estate, and start building wealth. I am really, really glad I get to be the person who walks through this with you, who gets to experience this with you, and who gets to teach you, a lot of the time from my mistakes, in what I think you should do. If you’d like to reach out to me, I’m @DavidGreene24 on all social media. Send me a DM. We can talk about loans. We can talk about real estate representation. We can talk about consulting. We can talk about a lot of the other stuff that I have going on that might be able help you.

David:
And if you’re not on social media, just send me a message through BiggerPockets. I check that. I have one of my team members check that sometimes. We want to make sure that we get in touch with you, because helping you build wealth is what BiggerPockets is all about. Please consider sharing this show with anybody else that you know that’s into real estate and might have fears about it. The more that they know, the less that they will worry. And make sure you leave me a comment on YouTube, and tell me what do you think about this show and what would you like to see more of. And then lastly, I want to talk to you, so go to biggerpockets.com/david and submit your video questions so you can be on the podcast. I can help you, and all of our other listeners can benefit as well. Thank you very much for listening. If you’ve got some time, please check out another one of our videos or podcasts, and I will see you on the next one.

 

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The housing market is now savagely unhealthy


HW+ home on street

The National Association of Realtors reported that existing home sales for February came in as a miss of estimates at 6.02 million. This level is still within my 2022 forecast sales range between 5.74 million and 6.16 million. Last year I discussed sales levels coming back down to 5.84 million and I am looking for more of the same in 2022, at the 5.74 million level.

The month-to-month fall of existing home sales was noticeable, but I didn’t buy the January print of 6.5 million because I thought we had some spillover demand from December, so this month’s sales look right.

NAR Research: Total existing-home sales sank 7.2% from January to a seasonally adjusted annual rate of 6.02 million in February.

While demand is solid, the savagely unhealthy aspect of housing is continuing. Inventory has broken to all-time lows, but it doesn’t look like the year-over-year data will be positive at all this year unless demand softens up. You can see why I have been on team higher mortgage rates for some time now because we don’t have any other way to get off this madness.

NAR Research: Unsold inventory sits at a 1.7-month supply at the current sales pace, up from the record-low supply in January of 1.6 months and down from 2.0 months in February 2021.

Now inventory is about to have its seasonal push, but the key is that we want to see inventory increase year over year, not have declines year over year. At this point, I will be grateful for being just flat. However, negative year-over-year inventory is not what we want to see.

Total inventory data is deficient, and this was my biggest fear in the years 2020-2024, and it happened. Inventory has been slowly falling since 2014, so if demand picks up in 2020-2024, it can collapse to shallow levels. Currently, the total Inventory from the NAR is 870,000.

To get the housing market to be sane and normal again, we need inventory to get back in a range between 1.52 – 1.93 million; this is still historically low, but this gives the housing market a breather from the madness that we see today.


Since the end of 2020, I have tried my best to stress that home prices overheating should always be the concern in 2020-2024. You can’t have the best housing demographics ever, with the lowest mortgage rates and the best loan profiles with falling inventory for eight years, and not be concerned about this during 2020-2024.

I thought creating the term forbearance crash bros in the Summer of 2020 would help educate homebuyers. However, we still live in a society where the premise that housing will crash 40%-80% is looked at as a logical view. After 11 years of listening to people talk about housing crashing from 2012-2022, you have to ask yourself who is the bigger fool: the fool, or the fool who follows them? A significantly older man named Ben said that.

Home prices are still overheating even today because we currently have a raw shortage of homes. This is not a good thing and is why I am on team higher rates.

NAR Research: The median existing-home sales price rose to $357,300, up 15.0% from one year ago.

One of the critical data lines that I want to see improve this year is days on market. My concern now is that some sellers are feeling stressed about this market, which should never happen because this is the best seller market ever. However, a seller is also a natural homebuyer, unless they’re an investor. People who sell need to live somewhere.

With such meager inventory, inflation has risen so much., even for rental housing. You can see why some sellers are stressed now. Nobody wants to sell their home at a mortgage rate of 3.25% or lower if they can’t find a home they like, then be forced to rent at a higher cost. Americans are starting to realize now that being a homeowner was the best hedge against this burst of inflation.

So what I would love to see is that days on market grow to create a pause in this housing market, so some sellers don’t feel stressed about selling and kill off this super-hot price growth. Sadly enough, that hasn’t happened yet.

NAR Research: First-time buyers were responsible for 29% of sales in February; Individual investors purchased 19% of homes; All-cash sales accounted for 25% of transactions; Distressed sales represented less than 1% of sales; Properties typically remained on the market for 18 days.

To show some historical perspective on the NAR breakdown of the different types of homebuyers, the chart below shows market conditions back in 2016. As you can see from this NAR report, cash buyers as a percent of sales is slightly lower now than levels in 2016. However, distressed sales are down a lot today compared to back then, and sales to investors are 19% today compared to 16% back then.

From NAR in 2016: First-time buyers were 32% in November; Investors were 12%; All-cash sales were 21%; Distressed sales were 6%.

The current existing home sales report continues the trend of an unhealthy housing market but it is now becoming a savagely unhealthy one. I need people to understand that shelter cost differs from the prime focus on rising and falling home prices. Housing is the cost of shelter to own the debt; it’s not an investment. This is the most prominent housing demographic patch ever recorded in history.

This housing market isn’t driven by FOMO (Fear Of Missing Out) or people trying to make a quick buck. That was the housing market of 2002-2005, not what we have today. You can easily see below that we don’t have the credit boom as we did during the housing bubble years. We have solid replacement buyers: people needing shelter.

The problem we have now is that we have a raw shortage of inventory for the number of Americans that need homes. Demographics are solid, the unemployment rate is under 4%, and even with the rise in mortgage rates, they’re still under 4.5% today. As you can see, we have had a lot of capacity for home-price growth with current homebuyers. However, I have lost my five-year home-price growth model of 23% in just two years, and inventory has worsened in 2022. So now, I consider this not just an unhealthy housing market, but a savagely unhealthy housing market.

The post The housing market is now savagely unhealthy appeared first on HousingWire.





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The 5 Steps That Will Bring You More Deals, Friends, and Mentors


If you’re new to investing in real estate, you may not have run your first real estate analysis yet. But as soon as you start looking at properties, you’ll become a spreadsheet wizard in no time! With so many investors counting on automatic analysis from modern, hyper-specific real estate calculators, old-school investors beg the question “do these calculators really make a difference in the deal?”

Today, expert investor, home flipper, wholetailer, and almost every other real estate title in the book, Jonathan Greene, joins us to talk about what new investors are missing out on. While many investors run spreadsheets and analyses before seeing a deal, Jonathan does it the other way around. Jonathan will drive to a property, walk the property, and then after taking a look at some specific parts of the property, will run a deal analysis. He walks through the system that not only makes this efficient but worthwhile.

If you’ve been around the BiggerPockets Forums for some time, you’ve probably recognized Jonathan’s name (or face). He’s an active contributor, responding to forum posts almost every day and chatting with new investors every chance he gets. Jonathan has found deals, mentors, partners, and great friends thanks to online forums, like BiggerPockets. If you’re looking to get the most out of your virtual networking, Jonathan shares his five tips on extracting huge value from the collective minds of over two million real estate investors!

David:
This is the BiggerPockets Podcast Show, 584.

Jonathan:
Everything I learned, I learned from my dad and from trial and error. So in the new world of investing, I’m a dinosaur. I still work the old-school way, based on feel, and everything that I can see, smell, touch inside a property tells me more than a calculator a lot of the times.

David:
What’s going on, everyone? It’s David Greene, your host of the BiggerPockets Real Estate Podcast, the show where we teach you how to build financial freedom through real estate. Not only do we have the biggest and best podcast in the world when it comes to real estate, but we are completely dedicated to helping you find financial freedom through real estate itself.
So if you’re looking for how to improve your life, make more money, build your wealth, protect the wealth that you’ve already built, have more freedom, travel the world, make more friends, be part of an awesome community, you found the right place. At BiggerPockets, we have more than two million members that are all on the same path as you, sharing what they’ve learned along the way and helping each other to get there.
We help you by bringing in guests that have built portfolios, that have solved problems, that have made mistakes, and then share with you what mistakes they made so that you don’t have to make it. On today’s show, we have Jonathan Greene, who’s a BiggerPockets pillar. He is frequently found in the forums giving really good advice to people. He runs a hotel business. He has a real estate sales team. He’s flipped houses for 20-plus years. And he gives some really, really good advice about how you can use the actual website BiggerPockets effectively to build your wealth.
Here to join me in my interview, Jonathan, is my co-host Rob Abasolo, who crushes it to day. Rob, what were some of your favorite parts of today’s interview?

Rob:
Well, honestly, first and foremost, Jonathan is as nice and authentic as it comes. I mean the guy is obviously like he gives and he gives and he gives to the BiggerPockets community. So it’s really nice to just unpack his philosophies, and really talks about how to bring value to your peers on the BiggerPockets website, on the forums.
We talk about things like how finding and analyzing deals is part art and part science, and really dives into the philosophy of somewhat contradictory in a sense to what we’re always told, which is he’s not all about the numbers. He’s all about somewhat the visceral reaction he gets when he actually steps into the home, and then gets into the numbers. We also talked about how to reach out to people, how to reach out to someone, potentially a mentor, and how you can bring value to that person so that they can hear you out.

David:
Yeah, this show went too fast. I think that there was a whole lot more that we could have got from Jonathan. One of my favorite parts is when we talked about when an experienced investor like himself is walking a property, this is what they are looking for.
This is the feel that they’re trying to develop when they’re there and how that comes from looking at so many properties over time that you eventually develop this gut instinct that can guide you through the process, which I think a lot of our newbie listeners would really benefit from hearing, because when you’re new, you’re just terrified. You just keep asking the same question. Am I doing the right thing? Am I about to make a mistake? Am I doing this right? Am I doing this right?
In our show, we get into how to know if you’re doing it right, what to look for to make sure that you don’t make some common mistakes, and then how not to find yourself getting advice from the wrong people. I think that’s also pretty relevant, too.
So it’s great. You guys are going to want to listen to this one all the way to the end. Before we get to the show, we’re going to get into today’s quick tip.
All right, today’s quick tip is if you’re listening to the podcast and you’re not on the BiggerPockets website, that, my friend, needs to change. Sign up for an account on BiggerPockets and check out all the amazing information in the forums and then also the blogs.
At some point, you may want to update to a pro membership where you get access to a lot of cool perks, including calculators to analyze deals for you so you don’t have to worry about making big mistakes. But in the beginning, even if you’re not ready to go pro, you should at least have an account and check out everything that the site has to offer.
All right, I’m excited to get into this interview with Jonathan. This is a lot of fun. Rob, anything you want to add before we bring him in?

Rob:
No, I’m excited too, man. He’s one of the ones that I can just tell this one’s going to hit with the audience today. I have a feeling we’re going to be having him back on the podcast soon.

David:
Jonathan Greene, welcome to the BiggerPockets Real Estate Podcast.

Jonathan:
Oh, thanks for having me. It’s an absolute honor to be here.

David:
We had Robert Greene the author on. Then we have me, David Greene. Now we have Jonathan Greene. So you are joining quite an elected group of people. We’re really happy to have you. So can you give us a little bit of a background as to where your areas of expertise and experience are and then what you’re doing today?

Jonathan:
Yeah, absolutely. So I’ve actually been investing for more than 30 years. I grew up and learned from my dad who was an attorney, but also a real estate investor. I was out at foreclosed homes from five years old on, climbing through windows, looking at them, wondering why we went to so many yard sales every weekend when my dad was offering on every single property. Over the years, I just learned so much from him.
I went through different careers as an attorney and inside of the art world. Then eventually I transitioned to really full-time investing. I also am licensed. I have a big on-market real estate team as well. But everything I learned, I learned from my dad and from trial and error. So in the new world of investing, I’m a dinosaur. I still work the old-school way based on feel, and everything that I can see, smell, touch inside a property tells me more than a calculator a lot of the times.

Rob:
Yeah, quite the evolution.

David:
Wow.

Rob:
So we started off, you were an attorney and then you’re in the art world a bit here, now full-on real estate mogul. Do you ever miss the other stuff that you used to do, the law side of things, or are you all in on real estate these days?

Jonathan:
Never. Yeah, and I mean the whole time I was investing in real estate. I was investing from the time I was 18 on my own, figuring out what to do, and doing flips and doing modified hotels and things like that. But, no, I mean a tiny part of me misses trials, but, no, I’ll pass on that. I’m really happy in all aspects of real estate.
I think to be this invested in real estate as I am, you actually have to love houses. I love houses. I will look at any house at any time. I don’t care when, I don’t care how long. I just like looking at the quirks and intricacies of houses, and then assessing where somebody, including myself, can make money on them.

David:
I feel like we’ve got a bit of a real estate connoisseur here. You’re the guy that swirls the wine in the glass and you want to smell it. You go into the home and you’re swirling it around. It’s cool to hear someone who’s looking at it from that perspective, because it’s evolved into technologically based.
But it looks like to me is everyone’s trying to take a property, put it in a spreadsheet. They just jam it into this container of an Excel sheet or a Google sheet, force it into something that can be understood through numbers, and then make a decision based on those numbers under the illusion that that is safe.
As someone who owns real estate, I’ve just seen that it’s so much more of an art than a science. There are so many things that you cannot anticipate going wrong that will go wrong. Then there’s so many other times when you say, “Well, I’m going to think it’s going to appreciate by 3% every year,” because that’s what inflation is like traditionally. Then certain areas outperform others remarkably. There often is an element …
Like Rob and I are buying a house right now. We’ve talked about it a little bit. We’re raising money to buy that deal. Part of why we liked it was the feel that you get from that property. It was very, very unique. It had amenities that nothing around it had. When you enter into it, you get this feeling of like this is a special place that we believe will translate into money in a way that a spreadsheet just can’t describe.
So I’m curious, I know I’m setting you up for a very difficult task here, but can you elaborate a little on this lost art of understanding real estate from the experience of the person that’s going to be using it?

Jonathan:
Yeah, please, and I think we’ve just established we probably really are brothers with our names now, because I couldn’t agree more. It’s really I blabber on about this so much because I get so many investors who will bring to me the spreadsheet and I say, “Well, what’s that? How many properties have you seen?” and they say, “None.” I say, “Well, how do you even know what all those numbers mean? What do you know what 300 or 400 looks like in your market until you see what it smells like?” I need to know what 200 feels like, 300 feels like.
I don’t use calculators or spreadsheets at all. I use them if I’m vetting commercial deals because I’m running cap rates and I really want to know what that is. But that is never, for me, the defining decision, like you said. I go a lot on old-school feel, but I mean, again, I do have the experience to be able to do that.
But I think that new investors can be missing out on a lot by not getting into the crevices of real estate investing. That means having a feel for what’s good. Just like you were saying the house that you’re looking at, you feel it has something else to offer that nobody sees, that’s always why I flip. I find houses to flip that I think other people can’t see what I can see, more than just removing a wall or making it look pretty, but something in the feel for that end buyer who’s going to fall in love.

David:
Yeah. I want to make sure I don’t come across as reckless. I’m not saying go to a property, listen to a feeling and buy it based on that feeling. That is not the same thing.

Jonathan:
Same.

David:
You’re not like … What are those people call that have the little thing they hold out in front of them and they look for water in the ground? They walk around, and boom! It hits the ground, okay, dig here.

Rob:
Water miners.

David:
Yeah, water miner. There you go. Water witcher. It’s not that. So Brandon Turner said something remarkably intelligent one time, which he does more often than you would think from looking at him. He’s not a Greene. He was talking about how when people like he and I that are experiencing something make a decision, we do make it off of our gut. My gut will tell me that’s a good property or not. Often it’s not hard to make the decision. It’s hard to articulate to somebody else how I know that that is a good decision.
What he said is that’s because we have this very complex algorithm, that data has just poured into it over and over and over. We’ve seen things work out. We’ve seen things not work out. We’ve learned why they worked out or didn’t, similar to a professional fighter who’s in MMA, who has trained for so long that they can just recognize that person shifted their weight. They’re about to throw a kick or a punch, and they’re already moving before it comes. They don’t have to think about it. It’s a feel.
But what Brandon was saying is that if we actually broke down where that feeling comes from, it would be based on facts. We have to just have a lifetime of facts that we’ve seen that has been stored in our brain and our body that then manifests themselves through a feeling.
I was like that as a cop. I would be in situations sometimes and just think this feels wrong. I need to get out of here right now, and I would. Then later I would look back and say, oh, my whole back was exposed when I was right there. That was a terrible position to be in, or something else.
So as someone like you, Jonathan, I guess what I’m wanting to highlight is you have earned the right to have that gut feeling from the amount of time that you’ve spent in real estate. But it is very encouraging to people that a spreadsheet is a form of like … It’s like training wheels on a bike. There is a time where, as a new person, you do need that. You have to understand, is it going to make money or not? You need the software to tell you it.
It shouldn’t be the only thing making the decision. There still needs to be a lot of other factors that go into it. So I just wanted to highlight it’s not either-or. It’s not feeling or spreadsheet. It’s a spectrum that you’re operating underneath. I’m really excited to hear more about your background and how you’ve developed that feel that you’ve got. Rob, I think you had something you wanted to say there.

Rob:
Well, I do agree with that because I’ve got … So I always say that when you’re comping out a deal, when you’re running a deal, it’s part art and part science. When we’re starting out, it’s all science because you’re like, “Oh, I’ve got my spreadsheet. I have to trust that.” But as you gain experience, you start knowing what sticks out, what you like about properties, what’s not going to perform well, especially in the world of Airbnb.
Jonathan, you’re probably like this, because you say that you love looking at houses. You look at houses every day, so do I. I’m on Redfin every day. Now I’m at the point where someone brings me … Like someone will bring me an Airbnb deal and then I’m like, “That’s going to work.” They’re like, “But how do you know?” and I’m like, “I just do. I do because I’ve comped to that house.” I haven’t comped that house out, but I’ve comped to that house out a thousand times in various forms over the last five years.
Because of that, I know it’ll work. Then I’ll throw up numbers and they’re like, “How did you know? How did you know it’s going to gross $85,000?” I’m like, “Because I’ve done it two million times at this point.”

Jonathan:
Yeah. I mean I agree. I think it goes to what you said, it’s the data’s in my brain. And so, for somebody new, we don’t expect them to know all that.
The calculators are super valuable. I just find that they’re more valuable after you’re in person, and too many people are using data to make decisions without being in person. Once you go in person and then you go calculator, it all makes sense, because you’ve actually seen what is there.
You have to know the difference between all the price ranges in your area, especially if you’re doing rehab. I mean if it’s turnkey, great. I mean just look at the spreadsheets. But again, still, it’s probably not going to be as tight as you want.
I think repair costs are the missing thing for most investors. If you’re new, you just don’t know it. Who are you going to rely on to tell you what the repair costs? What the three of us are saying is, and from what Brandon said, from our experience, I can do the data in my head and say, okay, remove a wall. I know how much that is. Move that, add a big island. I know what those costs are.
So I mean I think from my end, again, nothing … I love new investors, I love helping them, but I want them to look at properties, because you can’t learn anything if you’re not seeing them in person. I think that’s where we all agree. It’s not that it’s either-or, like David said. It’s just you need to use all these things together, not just data. You’re not going to learn enough like that to be a great investor.

Rob:
Well, yeah, I mean, David, I’m curious. How do you walk that line yourself personally, as someone who’s bought out estate sight unseen a lot of times? I mean I’ve got to imagine there’s a little bit of a balance here with this concept, right?

David:
That’s a great question. I knew that as soon as we started talking that people were going to be thinking, “How is David telling me I need to see a property when he also said you don’t have to see it?” It depends on the type of property you’re buying.
So when I’m buying tract houses in Arizona, which I was doing a lot of in 2014, ’15, or so, I’ve seen enough tract houses, I know what those neighborhoods look like. I could describe to you exactly what a housing community in an HOA is like. There’s only so many variations of a floor plan that you could put together, that once I know it, I can tell from looking at pictures what I’m going to expect of that property. I know no house in a housing community, in a tract home like that, is going to be that much different from all the other homes. There’s just not a lot of uniqueness in them.
So the asset class itself is largely all the same house to me. It’s just a different version of the same house. If you’re buying a commercial property and you’re familiar with the area, what you’re doing is you’re buying an income stream. So in those senses, there isn’t rare amenities involved in it. It’s just that’s the area where businesses are allowed to operate based off of zoning. You’re not going to get very many companies that say, “I don’t want to put my business there as opposed to here because I don’t like the feel of the parking lot.” They’re going to ask what’s the location and what’s the rent.
So in those cases, I don’t have to see the property and get a feel for it. But when I’m buying other properties, like luxury properties … So I just put one under contract today in Moraga, California, which is a really expensive area east of San Francisco and Oakland. It’s a house up in the Hills, very unique, 5,000 square feet, really funky floor plan. Just looking at comps, you would think, “Oh, the comps are here, this house is here. That’s a good deal. I should buy it.”
Well, if you saw what this house looked like with the way that it’s situated, it’s goofy. It’s like a Frankenstein. It was like put together in different ways. You could make that house work if you were a family that had six kids and you needed a bedroom for all of them and you love that area. But those are not the people that are going to pay enough rent to make it work.
So I needed to see that house to figure out how am I going to move around walls and add bathrooms and create different floors? Is there ways to create separate entrances so I can adjust this property to make it function as a multifamily property?
I can’t do that from pictures. Maybe like a Matterport, you can try to get an idea. But you still have to see the home to get a feel for, “Oh, I don’t think this is a good idea. The master bedroom for this unit is directly outside of the kitchen of another one,” and they’re going to hear each other through the walls. That’s not the right way to do it.
So in those instances where you are buying a unique property … It’s not a tract house; it’s not just like this cookie-cutter thing that there’s a million pieces of data already and it fits in there … I do recommend outside of that that you look at the property and you understand it until you’ve done it enough times that you can look at the pictures, you already know the neighborhood, you already know the type of amenity, or you have a person on your team who understands that and they can give you that feedback.

Rob:
Yeah. So we have an understanding here of your underlying philosophy, Jonathan. So actually, for a little bit of context, can you tell us where your portfolio stands today? You started off with the foreclosures. I’m sure you’ve … I know, because you’re pretty active on the BiggerPockets forums. I know that you’ve grown to a pretty massive portfolio here. So can you tell us a little bit about yourself here?

Jonathan:
Yeah. I mean it comes and goes, really. I’ve never been a door investor. I don’t care how many doors I have. To be honest, I have no idea because I don’t really count like that. But I’ve owned every type of proper there is and I’ve probably done every type of strategy there is. I’ve done a lot of flipping in my career. I’ve probably flipped … I don’t know. I’m not a mass flipper, so I’m not someone who wants to do 50 a year because I’ve never had a flipping company. I’ve just done it on my own.
I’ve probably, in my career, maybe flipped, I don’t know, 50 houses. I’ve owned lots of houses over the years through my dad. But right now I have an LP stake in a 15-unit industrial park in The Hamptons, which we have a giant offer on, which is …
It’s interesting. For somebody like me who’s a long-term investor, I’ve learned to let things marinate. I think that’s what new investors have trouble with. They’re trading and they think it’s long term. But I’ve hold a lot of properties for 30 years, and this year we’ve been liquidating a lot.
So I really flipped one or two houses at a time. I probably owned between 10 and 20 doors at a time, trade them out and trade them up. The one thing I’ve never been big on, I’ve just never owned a lot of multifamilies. I think in the future, I probably will own more.
But I’ve owned commercial fiveplex, had 15-plex industrial park, and I’ve basically made careers out of single-family homes. The honest truth, which is the weirdest thing about investing that I think nobody really talks about, the best deals that I’ve ever made are on houses I lived in, because I’m good at buying houses. I know where to buy before … So I’ve doubled my money in Florida multiple times just on buying houses. I think that’s what keeps me as an old-school investor.
Right now my thing is I’m looking for main street commercial. That’s my 2022 thing. I think that main street’s got damaged from COVID. There’s a lot of open leases, which means there’s a lot of open possibilities to buy mixed-use buildings. So I’m really interested in that commercial main street mixed-use where I can get two retail and put in something that I want, which could be for one of my attorneys or for my team, and then use the other side for something creative that one of my kids may want to put in a business.
But I like having the option of a residential and commercial together. I think mixed-use is huge. I like hedging my bets with commercial against residential. So I know I have longer leases with commercial. Then upstairs, I have a little bit more leeway to do what I want.

Rob:
That’s a really nice tidbit there, man. One of my dreams, one of my ideas has always been to lease out a main street building, or the first unit on it, and tint out the windows completely to where you can’t see inside, but it’s actually an Airbnb on the inside of it. You can see outside and see everyone walking back and forth. I’ve always thought that’d be a good idea. So maybe with that, I’ll give it a shot.

Jonathan:
Yeah, and just as a drop back, I was doing Airbnb before Airbnb existed. My sister and I were doing Vrbo and HomeAway way back in the day and did great on it, learned a lot of strategies that helped. But right now, every single property that I buy I think is a potential Airbnb literally anywhere. I think it’s possible with the opportunities you have in placements.
So I think there’s a lot of new investors interested in that, but there’s definitely some things to look out for. But I think it’s cool that you can buy a multifamily now. You can intend to house-hack it, and then you could Airbnb the other side, close to hospital or close to a college. It’s just making so many options for investors if they invest smart to have those opportunities. I’m not sure about the tinted windows, but …

Rob:
We’ll workshop it.

Jonathan:
Yeah. Yeah.

David:
So here’s a question for you, Jonathan. When you are checking out a property and you’re getting that feel for it, maybe give us an idea of what kind of properties you’re typically looking at and what the experience is like for you as you walk into it.

Jonathan:
Yeah. I mean I’m looking for where the biggest costs are initially. So cosmetic, I don’t really worry about. I know how to fix everything cosmetically. I know how much everything costs. I want to get into the dirty parts. I want to go to the basement first. I want to see is this boiler or furnace going to work? Because that’s going to be $7,000 to $10,000. I look for all the things that are unseen.
Foundation, obviously, is big. My last two flips both had foundation repairs that cost more than expected, but I also got a good deal on it because of that. I do things, I think, that now are more common, like I’ll do sewer inspections on every property because if I have to redo an entire sewer line, that’s going to be $15,000. Maybe nobody does it and nobody finds out, and then it overflows into the basement when I’m trying to get ready.
So I look at all the anomalies or things that people wouldn’t see first. Then I go back to cosmetically, like you were saying before. I’m usually looking to move a wall in between a dining room and a kitchen in your typical compartmentalized home, open it up, move the island out. Then upstairs, if I’m looking at …
Like similar to the property you were talking about, if I’m looking at something with an excess of bedrooms, I’m often looking, can I combine a bedroom and make a giant primary suite that’s going to work better for somebody?
These days, as we all know now, after two years of a pandemic, I’m looking for small nooks in a house that I can turn into offices or cool different things, little places that can turn into something where people can work from home.
I think it’s really important. A lot of people are not going back to work in terms of going to an office. So when I’m staging a flip or looking, I’m just looking for those. A lot of random closets can turn into really cool offices. Especially for people who do podcasts. A closet can really work. So I like to think outside the box like that.
But from where you started, I look at the weirdest things that people will miss first, because that’s how I know that I can buy the house and it’s how I negotiate with sellers, especially if it’s on the market, because once I alert them to all the things that I’ve found, technically if we found it and we have documentation, they’re going to need to take into account that. If there’s a seller’s disclosure or once I let the agent know, then there’s going to be a possibility that they need to disclose it, which gives me leverage to get my deal the way I want.

David:
Yeah. I can tell from the way that you’re describing that this is what you look for in a house you’re going to flip, because those are amenities that people would care that want to house to live in. They’re going to want an office to work out of. They’re going to want a bigger bedroom. If you can take two small bedrooms and make one big one and give it a really big walk-in closet, or if it’s got a bathroom that can be connected to it, that’s going to make people go gaga when they’re looking at the home.
The example I gave was more a buy and hold property. How do I take this property that nobody wanted as a flip and turn it into a property that I can rent out?
But the point remains is you’re looking for the highest and best use of that property and how it can be modified or adjusted to make it more desirable. I really think, in today’s market, you’ve got to have these eyes. I don’t know … I wish Brandon was here, because he always has a way of creating some fancy marketing term for what I’m trying to describe. But it’s this way of looking at a property and seeing what it should be of making the deal, not just finding a deal.
That’s how it worked 2010 through 2015 or so. You would just look for the most motivated seller that you could find and write a really low offer, and boom, you made money in real estate. Well, now you’ve got …
Like this house that I’m buying in Moraga. It was on the market for nine months or so and didn’t sell. So I had to go find a listing that had been expired, figure out how to get in touch with the seller, and then start negotiations. It lasted about two months as I walked this property with my contractor many times to figure out how we would make it work. But it was a deal that I made.
Man, if you’re someone who’s trying to invest in one of these high-growth markets, like what I’m recommending people get into, this is the key. That’s why we’re talking about this now.
I’m going to pivot a little bit here. You’ve been on BiggerPockets for a long time. You have thousands of posts on the website. Can you walk us through what being successful in the BP community looks like and how you’ve used BiggerPockets to help your real estate investing business?

Jonathan:
Yeah, I mean BiggerPockets has always been huge for me. I mean I think I knew a lot when I showed up on BiggerPockets, but I had to watch to see how everything works to see how I can be an asset to the community. I think, over time, I figured out my best practice.
For me, somebody like me, I just like to add value. I have never have an ask ever. So I always have on my schedule every day BiggerPockets time. I go in, I make sure I’m on for at least 15 minutes and make at least five replies, sometimes more. But, yeah, I mean I have five steps for success that I think are important.
I will say that some people on BiggerPockets think I’m a little harsh, and I promise I’m not. The problem with, I think, a lot of just forums is a lot of people just want echo chambers, which is in here, or backpacks. I think that’s how people lose money. People who don’t know about real estate will tell everybody, “Do it, do it, do it. It’s great. Great deal.” They call me the deal-killer in my circles because I always say … They say, “Is this deal good?” I was like, “No, it’s the worst deal I’ve ever seen. Are you crazy?” They don’t feel bad because I’m saving them money.
So I’m very, very straightforward. I think, obviously, like on the internet, it’s sometimes too straightforward for people. But I’ll give you five tips that I think are really helpful, because I’ve used BP. I mean I have hundreds of real-life friends that I met on BiggerPockets. Plenty of investors and agents who ended up on my team I met through BiggerPockets, and never because I was out trying to recruit. It’s just because all I do is answer questions and try to add as much value as possible.
That’s the first one is always come from a place of value. I think that’s really important on any internet site. Are there going to be people selling things? Sure. But I think if you’re, over time, just trying to help people, you’ll develop real relationships, which something we’re talking about will then turn into real-life deals, because people always ask in the forums, “How do I find a mentor or a coach?” You build relationships and get to know people instead of just hoping, “Hey, I want a mentor. Can I have one?”
It’s people looking for help. But I think if you’re there to add value or have questions of value, you’re going to get a lot farther in terms of what you can learn on BP, because the learning is endless, but there’s a lot of stuff on there. So you need to know where to look and who to trust, I think, in terms of the answers on there.

Rob:
So what’s your advice? I’m assuming that you’re constantly getting hit up on the BiggerPockets forums, like, “Jonathan, will you be my mentor?” What’s something that someone could tell you or do that would really get a response that’s like, “All right, here’s what you need to do”? Is there any kind of secret formula there to blindly adding value to someone on the internet?

Jonathan:
Yeah. I mean I think like asking questions, I mean I’m sure David gets tons of pings. For me, I just want someone who’s honest and has a strategy. I don’t want to give them a strategy. I want someone to say, “This is what I’m doing. How’s this sound?” Again, not a hundred thousand words, but pretty succinct.
I respond to hundreds of people a week and I’ll do 15-minute Zooms with as many as I can as long as they’re presenting something that they’ve already done the work. I’m not going to do the work for somebody else. So when somebody says, “Should I pay for mentoring or coaching?” I always say, “No, you need to just build relationships first,” which is my second point.
I think that’s really what I want. I want someone coming to me not for me to tell them what to do, but I want them to tell me what they’re doing and then me give them some advice. I love having those conversations.
I mean wholesaling is a divisive topic. People have all their decisions on it. Myself, not a huge fan of doing it, but I like people who do it the right way. So when I see a new wholesaler and they’ve laid out a plan, that’s where I’m going to come in and say, “This plan actually looks really good,” and then I’m going to do the Zoom on that.
So I think the disconnect with getting answers from people that are reaching out to either David or myself, or to you or to anyone, it’s that they need to bring something with them. If you want a mentor in real estate investing, you have to have some value to add, whether it’s hustle or contracting background. So even if you want to ask a question, bring some value in the question so I can give you feedback instead of saying, like, “Where should I invest?” That’s like, I mean, just throw a pin in the water. You can invest anywhere.

David:
Yeah. I want to second that. I had a bit of an epiphany in 2022 when I sat down with my real estate sales team, the David Greene team. I came up with a vision for how the company was going to go. One of the things I realized is we have way too many agents that are saying, “Tell me what to do to get started,” like, “What do I say if I call somebody?” or, “I don’t want to call them. How do I get over my fear of talking about being an agent?”
You’re laughing because you see exactly where I’m going with it. I realized I can’t really help you with that. What I need is for you to say, “I held six open houses this month. This problem kept coming up where they would ask me a question that I didn’t know how to answer.” That is a thing I can help somebody with. Trying to convince them to go hold open houses when they’re scared is not something I can help them with. That was one of the changes that we made is you learn from doing, you go do it, and then we guide you in a better way to do it.
But, like you said, if you come with nothing, there’s not really anything that we can do to tweak the way you’re doing or give you a different way to look at it. So I wholeheartedly agree. That is so insightful because those messages I get where someone says, “Help. I don’t know where to get started. What market should I invest in? Where should I get money from?” they’re just asking questions that I don’t know what to tell them.
It would take so much effort to figure out their personal situation and give them advice based on it that, frankly, we’re just not going to do that. We have our own businesses that we’re running and our own employees that we’re trying to help. So, god, that is so good, is that if you’ve already got a plan and you’re in the middle of working it, that’s when a mentor or a coach can really help.

Jonathan:
Always. With the coaching, I think people always ask, “Can you coach me now?” and I said, “The best time to get a coach is when you have an existing business that you want to take to the next level.” You don’t need a coach to learn how to be a real estate investor. You need BiggerPockets. Get on the forums, build relationships, learn what people are about.
But, also, I’m a certified life coach. With life coaching, which I put into my business, the most important thing is someone can’t tell me, “How am I going to get myself centered?” I don’t know. What do you like? So my job helping investors is to make sure them, same as what you’re talking about the team, tell me what your goals are. Let’s figure out how you can get to those goals, but you have to hold yourself accountable. I’m not going to do the work for anyone.
I think when someone says, “Hey, what market should I invest in?” or a very vague question, I just know they haven’t done the research on their own to put them in the place. That’s the same person who says, “Hey, I want a mentor. Can someone mentor me? I don’t have anything to offer. I just want it.” Bring something. Everybody has something of value.
There’s no person who can’t be a good real estate investor. That’s absolutely true. It doesn’t matter your educational background. But you have to be willing to be educated on real estate investing and learn from other people. That’s the most important thing, I think, that’s out there.

Rob:
Yeah. I agree. Go study the concepts, then come to me with a specific question on how to apply the concept. But don’t come to me with a question to just explain the concept, like, “Hey, can you just explain this really general thing? I could go and research it and Google it, but I want you to type out a very long Instagram message that basically walks me through it.” I’m just like I mean this is hard. I want to help people. But I think when people do demonstrate a little bit of due diligence, I’m like, “All right, I’ll play ball.”

Jonathan:
You’ll get so much further. It actually goes into two of the last of the five total points. One is search the forums before you ask a general question. It seems easy to think, and I know that a lot of people get on and ask a general question, but the problem is you’re going to get bad answers, because those of us who’ve been here on BiggerPockets for five, 10 years, we’re probably going to make jokes, not because we don’t like you, just because if you ask about an LLC, it’s been asked a thousand times.
So if you’re doing the due diligence, just like we’re saying, it proves you want to be a member of the community more. If you’re saying, “Hey, I looked up all the forms. This is the one thing I couldn’t get the answer with,” I guarantee you you’re going to get the best answers you’ve ever seen. If you just put in vague questions, you’re not going to get it.
That also goes to one other, which is don’t look for an echo chamber, which I think is really popular. When somebody wants a deal, it’s always, “I want to put this square peg into a circle hole.”
I was just responding today on BiggerPockets to that exactly. Somebody said … I think the headline was something to the effect of, “How do I make this deal work?” I said, “I don’t have to read anything what you said, because if you’re asking how you make a deal work, you’re already in the wrong spot.”
I think a lot of new … In any context, not just investors, they come to forums to try to get a yes. Then when you tell them a no, they get mad. But what would be my motivation for telling someone, “No, don’t do that deal”? I don’t even live near there. I don’t want the deal. I’m trying to help.
But I think it’s a new way where a lot of people want the pat on the back and the yes, but there are people like me who are just going to say, no, I really think it’s a bad deal, but I’ll have reasons why. I think it’s more helpful. I don’t want anyone to make a bad first investment, because they’re not going to be an investor after that. I,

David:
So you just highlighted another one of your points, which was don’t look for the echo chamber. So to summarize where we have, we’re at always come from a place of value, build relationships first, don’t look for an echo chamber, and search the forums before you ask a general question. What would the last of the five pieces of advice be that you have for how to use BiggerPockets?

Jonathan:
Yeah. This one, I think, is more common for the agents who come on BiggerPockets. It’s stop selling yourself. That includes market-based, too. A question will come up, like, “Where should I invest” and then all the agents rain down, like, “Of course, it’s my city.” It’s not great … And the question’s not great, but it’s also … Like I much prefer … It’s like if you go on Yelp and say, “Where’s the best Chinese food?” and then the first four local Chinese restaurants say, “It’s here. It’s the best.” That’s not valid to me. I want to hear from the alternative sources who’ve used the products, or I want to hear from investors in those areas, like, “I’ve done this amount of investing.”
So any public forum, it’s not new on BiggerPockets, but I think everyone will get further … It occurs on Facebook groups all the time. You’re never going to get anywhere just selling yourself. Will you make a few sales? Sure, but I really think that the value inside Bigger …
If you look at the people who have answered the most questions, they’re all, all value. They’ve never sold anything. I’ve never gone onto the site hoping that I get a client. I end up with a lot of relationships, but because I have no interest in selling any of that.

David:
What do you think about the BiggerPockets member who is trying to sell themselves to the influencer or the mentor, the person that they’re hoping will help them?

Jonathan:
Yeah. I mean I think if you go back to the context we were talking about, if you want a mentor, I think you do have to bring value. But I think there’s a difference between bringing value and selling yourself for a product. If I’m an agent and I’m saying like, “Hey, I work with local investors,” we all know the rules on BiggerPockets. Don’t do that. Talk about the areas.
If someone asks about real estate in New Jersey, I go in, I answer the questions, and I get out. They can search on me and find out what I do, but I just think there’s a real fine line in terms of credibility. When you go over it, I think you lose the credibility as someone who’s going to be a long-term participant in the site.

Rob:
David, you and I just talked about this in the episode right before this one, with one of your agents, Johnny.

David:
Yeah, that’s exactly right. That’s why I’m interested to hear Jonathan’s perspective, because I think the people that are doing this at a successful level are all doing the same thing. It’s that idea that success leaves clues. We shouldn’t be surprised that there are certain things that pop up that are very common with the best contributors on BP, one of them, like Jonathan said, is that they’ll tell you what you don’t want to hear. People don’t like that, but it’s true.
I think I have a bit of a reputation as someone who just says just buy real estate no matter what, gungho, just buy, buy, buy, because I’m often encouraging people to take action. Then people are shocked when they message me off BP or off the podcast and I’m like, “No, terrible idea.”
I just had a conversation with someone yesterday who was saying he lives in Alameda, California, which is a really good market just outside of Oakland, like the best area, but it has really good schools, low crime, great place to buy. He’s paying $3,500 a month in rent.
I was saying, “You need to house-hack. We can find you a place where your mortgage is going to be $5,000. You’re going to be collecting $3,500 a month in rent. You’re going to be paying $1500 to live in one of the best areas that’s going to appreciate. You’re going to have great tenants.” They were like, “I think I want to go invest in Detroit because the home prices are lower and it feels safer.”
I think I just shocked him that I’m like, “I am staunchly opposed to that. That won’t be safer. You are going to hate real estate investing.” That’s like dating the wrong person and making you just hate love. You’re not going to want to date anybody after you go through that. It was different than the David that people hear when I’m on the podcast talking about it.
It’s probably worth pointing out that when I’m giving advice on something I think someone should do, I am very, very encouraging. I’m like punch through whatever obstacles you have. You have to get there. But if I see it going down a road that I think is bad, I’m going to be just as blunt about I’m not even going to help you if that’s the way you go because I think you’re going to get hurt.

Jonathan:
Yeah. That’s a fantastic dichotomy of answering real estate. Well, I mean I do the same. I think you’ve really summarized it great, because I want everyone to be invested in real estate. It’s great. I love it. I want all my agents to be investing. However, that doesn’t mean go, go, go on every deal. When you send us one deal, we might say no. But that doesn’t mean we’re not pro-investing.
I mean it’s a great way to break it down because I do think everybody should be investing or learning about it. I just want them to be ready and then take feedback on the deal.
There was just one thing I wanted to say, because we talked about the value on BP. To me, there’s a great metric to see who adds the most value. It’s upvotes versus posts. So when I looked and I was new, I would look and see, oh, well that person’s made 2,000 posts, but they have 2,900 upvotes. That means each post at least has one up vote. So every time I look …
I mean I know all the people who comment the most and I can see them like, oh, 10,000 posts, 14,000 upvotes. I know that that’s valuable contribution. If you see someone with 5,000 posts and 20 upvotes, nobody likes it. That’s where I think you want to look at your own metrics. Are you being a contributor and a participant?
That’s why I always answer questions. I very, very rarely ever start a post because there’s really no point. I’m there to provide answers. I have a lot of background knowledge, and I just try to pop in on anything that I see.

Rob:
It’s really great, man. Well, I think given your experience and everything like that, I think now would be an appropriate time to move into the deal deep dive, if everybody’s okay with that. Dave, anything else you want to say to round this one out before we jump into it?

David:
I’ll probably just add that Jonathan has so much value to bring that we didn’t get to all of it. So don’t think if you’re listening to this, this is all that Jonathan has. I would highly recommend that if you’re hearing this podcast, that you do go look up Jonathan on BiggerPockets. Send him a colleague request and then message him or communicate there, because we barely scratched the surface of what Jonathan has done in his career with investing in real estate and in flipping homes and in the different assets classes.
So I’m going to take the blame on this one that I didn’t get deep enough into Jonathan’s expertise. I hope you can forgive me. I’m going to use the fact we had this same last name.

Rob:
Some people just have so much. It’s like an hour-long podcast is really tough to dive into, I mean someone with such a wealth of knowledge.

Jonathan:
I will literally respond to everybody on BiggerPockets. I mean I don’t talk on the phone, so I love BiggerPockets. I set lots of Zooms. But again I have hundreds and hundreds of real-life friends from BiggerPockets, and that’s not an exaggeration. They’re great. I meet them. Some I’ve met in person, some I haven’t. We’ve had relationships for years just talking about investing.

David:
All right. Well, thank you for that. That will move us onto the next segment of our show. It is the deal deep dive. All right, Jonathan, this is the segment of the show where we are going to dive deep into one specific deal that you’ve done and learn as much about it as we can. We’re going to fire questions off at you back and forth. If you could just answer those questions, we’ll move right through here. Question number one. What kind of property is it?

Jonathan:
This one was a single-family purchased off-market, what I would call pre-foreclosure. That was direct mailers. I was sending out direct mailers. It was like an alert email with a little bit of a pre-foreclosure vibe. Got the call, took the call myself, went right out, figured out what they owed on the property, and then offered them a little bit more, which may be in your questions coming.

David:
Yeah. That would be the next question. How much was it?

Jonathan:
It was $225,000. I bought it for cash. So this is actually an interesting part of the story. They owed $209,000. Every offer that they had got before that was under $200,000. I knew that the market was topped out on the ARV, like around under $400,000, but I knew I could get over $400,000.
So I said, “Listen, I’ll give you $225,000 so you can walk away with $16,000.” I also gave them a use and occupancy agreement for 10 days after closing so they could move, and that had penalties on it. They ended up taking all 10 days. So I did get another $250 a day on that. So it was $225,000 straight cash purchase price on that one.

Rob:
Okay. So that was how you negotiated it. You brought out the cash, the big dollars. How’d you fund it?

Jonathan:
That one, I used a line of credit. So I have a line of credit. I have my own cash. Sometimes I use my own cash and sometimes use line of credit. For anyone who doesn’t know, line of credit is, I guess, better percentage-wise. It’s based on assets that I have. So I think on that one at the time, it was the first with this company. So I was probably on about upwards of 7% and maybe like a point and a half on that.
Then I financed the rehab on my own. I just paid cash for the rehab. I don’t like doing the rehab part of … I like to do that on my own because then I start to like nicer stuff as I’m flipping and I’m going to spend more anyway.

David:
Right out, okay. What did you do with this property? It was a flip?

Jonathan:
Yeah, it was basically … I wouldn’t say a gut job, but it was a full reno. Rehabbed every single room, house, redid the whole kitchen, blew out two walls. We put in what … It was an electric fireplace, but it was like a big structure that made it look cool. Again, it was another … Like you were saying, it was an oddball house that had a first floor bedroom, and the first floor bedroom had an en suite, but there was no first floor other bathroom.
So I opened the door to the dining room so now it was a first floor bathroom, but also still an en suite if they wanted. Then there was two beds and a bath upstairs. One of the beds upstairs was big. So it really had two primary suites, but everything was upgraded. Then painted the outside, reroofed it, and basically … There was no structural things that I had to do on it.
For this one, we did not finish the basement. Sometimes I will on the higher end. This one, I was trying to match what price point I thought I could get. Also, I think there’s just a lot of new home buyers who like DIY. So I like to leave them a project that they can think they’re going to do on their own, whether they’re ever going to do it or not. It wasn’t the type of basement that would’ve been amazing for finish. So I just left it instead of wasting my money.

David:
When you do that, it almost makes it feel better, because nobody wants to feel like they paid the full market price at the top of the market.

Jonathan:
Exactly.

David:
Even though they probably did do that. But if you get to leave something to say, “Hey, you can fix this,” it gives that feeling that, “Oh, I can add value to my house after I buy it.”

Jonathan:
Yeah, and it has to basement. You can’t do that in the kitchen. I’ve got to do something where I know like, “Hey, that attic, you can do later, or the basement, but I’m going to do everything nicely.” So, cosmetically, it looks like obviously it’s brand new.
I know you’re going to ask the rehab on it. The rehab was probably in the $60,000 to $70,000 range. Then holding costs and stuff were probably $10,000 or $15,000 I probably had about $80,000 in, so I was at a $305,000 value, like how much I had into it when I went to put it on the market.
But side note, I purchased it on 01/15/20, and then COVID obviously hit on 03/20. So I went into stall mode. We didn’t work for three months. Then, fortunately, on this one … I was doing two at the same time. This one I got going and I ended up putting it on the market. We ended up closing on October of 2020. So the turnaround was still pretty good.

Rob:
Yeah. So usually we would ask what’s the outcome, but you sold it, right?

Jonathan:
I sold it for $405,000. So I cleared about a hundred on it, barring any other fees. At a $225,000 purchase price, a hundred clear was pretty good. I think if you go way back to what we talked about in the beginning of the podcast, the reason I knew I was going to do fine on this deal is because I knew that the ARVs were around $400,000, and I always set my ARV low. So my flipping spreadsheet, I probably had it set at $375,000.
Then over the course of time, COVID hit and we’re like, “Oh no.” Then we saw prices started to go up. Then we’re watching the comps. I like to give myself a windfall at the end, like I have it locked at $375,000. Then I put it on … I think I probably listed it for $399,000 and sold for $405,000. I was very happy.
Didn’t get a ton of offers, which at the time it was COVID. You couldn’t show as much. But, yeah, I mean a hundred spread on that buy was a good one.
I think it just goes to show you can get places off-market. There were other people off-market trying to buy it, but I was smarter than them because I was willing to give up whatever, $10,000. Everyone skimping to offer them just $200,000 when they owed $209,000. You can’t offer someone less than they owe on a pre-foreclosure. That doesn’t make any sense. So I gave them a little money and I think that’s what got the deal done.
In the end, again, I do build good relationships. The sellers came back to the open house when I listed it, which I’m sure is a little bit sad because they always want to build the house that they like. But I always invite them back if we have a good relationship, just because I try to take it as I’m going to caretake the home. I’m definitely going to flip it, but I’m going to keep the character that you had on it. It’s why I can negotiate those off-market like that.

David:
So last question of the deal deep dive, what did you learn from this deal?

Jonathan:
Patience. I mean I think none of us expected to be flipping and then COVID happened. So I’m not, in general, a patient person, but I’ve learned … There’s never one flip where I don’t learn patience. I don’t get too crazy. I know my numbers. I know even if things go wrong, I’m going to make money. It’s just a matter of how much money I’m going to make. If I make a little less on one, I’ll make a little more on another one.

David:
That highlights the real estate is more art than science. When you make your living in this space, you just make a peace that there’s this ebb and flow. When you hold these rigid ideals, like if you had gone into that deal saying, “I am going to make $105,000 on this,” and you end up making $102,000, it has an emotional impact on you where you’re like, “Oh, I’m not good at flipping houses,” instead of, “I just made $102,000.”
Sometimes it’s subconscious, sometimes it makes into your conscience, but you have to hold it with a loose hand. Just like you said, you can’t know a shelter in place was going to happen from COVID.
I also noticed that investors beat themselves up when things don’t go well, but when it appraises for more than what you thought, or when the market goes up way more, you’re never like, “Well, that was great. Now I feel better about being in this asset class.” You just say, “Oh, well, that just happens. I got lucky.” The next deal could be terrible.
But you’ve got to go with both. Sometimes they appraise low, sometimes they appraise high. Sometimes you get multiple offers, sometimes things happen and you get one. It’s that understanding that you knew that home, when you made it the way that you did, someone was going to want to buy it, that whether you made as big of a profit as you wanted, you weren’t going to lose money because you designed it in a way that would be desirable.
So I love that you’re sharing that and that you have that mentality as somebody who’s been around real estate for long enough that you win some, you lose some. But what you don’t want to do is force a round peg into a square hole. That’s where you just lose everything.

Jonathan:
Yeah. I just think you have to know that you’re going to take losses if you want to be in it long. Not necessarily losses. I have had big losses, but that was due to the economic meltdown in 2008. But just like you’re saying, sometimes if you’re at a deal and you know you’re not going to make as much as you thought, the first thing I think of, well, at least I’m going to get my deposit money back. Maybe I’m not making a profit, but now I’m going to take that deposit money, use it for something else and do a better job.
I’m not a genius. Market conditions, like you said, change. But I have to know I’m in this for the long haul. So if I hit a double on one, great. I’ll try to hit a triple next time. Sometimes I’ll hit a single. It’s not really a big deal as long as you are really in it for the long haul.

David:
I love the baseball analogy, because when you’re playing baseball, the pitch comes in, you have a half-second to make your decision, you swing. Sometimes a pitcher leaves it over the middle of the plate and you get really good contact and sometimes it doesn’t. You can’t make yourself hit a home run. Home runs come to you, usually from someone else’s mistake. And so, that’s how real estate often feels.

Jonathan:
Yeah. I mean think about baseball, 300 hitters in All Star. I mean we all want to do better than 30% of our deals go well. I think probably 90% of my deals go well, so how can I complain? 30% good in baseball. That’s a great point.

David:
All right. We’re going to wrap up the deal deep dive and move on to the next segment of the show. It is the world-famous …

Speaker 4:
It’s time for the fire round.

David:
In this segment, Rob and I are going to fire questions at you. These questions come directly out of the BiggerPockets forum. So you might be the most qualified person ever in the history of this podcast to answer these questions. Question number one, what do you consider networking faux pas? What are things at meetups people should not do?

Jonathan:
I’ll go back to sell yourself, but I’ll also say … I guess I wouldn’t say be too eager, but I’d say your eagerness has to be based on your willing this to be a participant, not trying to drive something only for yourself. Being aware of what you want. It doesn’t mean that other people want it. I think everyone has to come with a participant mindset for all networking. Who do I want to meet? How can I add value to them? In turn, they will probably add value to me down the line.

Rob:
Biggest new investor mistakes when reaching out to mentors.

Jonathan:
Oh, wow. It’s going to be right along the same line. It’s asking a question that you haven’t done the research on to try to figure out anything yourself. The best answers that you’re going to get are when you’ve really tried to get the answer and you’ve narrowed down the thing that you really need help on. Those are easily answered by experienced investors. I can tell you we all appreciate that much more than, like we were saying before, where should I invest? It’s just not enough information. It means you haven’t done the legwork to try to help someone give you the best answer.

David:
Next question, how would you recommend picking an out-of-state market? Do you have any tips to offer in this regard?

Jonathan:
Yes. Oh, this is a great one. I actually have a little system. It’s two-pronged. You make a list … I didn’t even know this was coming. Good setup. It’s a list of two things. One, make a list of every place that you’ve ever lived in your life or gone to school. Two, make a list of all the friends and family members, the ones that you like and trust, where they currently live or have lived.
The reason why you do this is because those are now areas where you have a competitive advantage. You’ve either been there, so you know the landscape. So even if you’re looking out of state, you know the streets, you know where you’ve gone.
Then your second one is if you have friends or family, but you haven’t lived there, you have the competitive advantage of trusted boots on the ground.
If you take those two lists and then you balance them against all the things we’re looking at on BiggerPockets, if Dave comes out and data will tell you something, you take your list and compare to lists. I guarantee you places on your lists will work with some of the hot investor markets. Then you’re already building yourself into a competitive advantage market instead of just flying blind and having to build an entire team that you don’t know.

Rob:
Perfectly said, perfectly succinct strategy. I love it. Last question, possibly the most important question of the podcast, if I change my last name to Greene, will I be successful?

Jonathan:
I think David and I agreed before that the answer is definitely yes. As long as you don’t botch up our names, which we talked about before, you’ve just got to keep it. It’s just Greene. The E is silent. Keep it real.

Rob:
Duly noted.

David:
I don’t know why that extra E is at the end of Greene. I understand it’s not normal. But, no, it’s not Greene, it’s not Greene. It’s not any form other than Greene. Also, keep an eye out for imposters on social media, because once you see there’s someone that has a level of success, they can easily misspell your handle on social media and then reach out to you pretending to be somebody else. It’s not hard to get pictures of somebody and make a profile.
So there’s a lot of that going on, which is one why we recommend that you go to the forums to get your advice, because you can know you’re actually talking to Jonathan when you’re looking at his BiggerPockets profile.

Jonathan:
Absolutely.

David:
All right, last segment of the show. It is the world-famous …

Speaker 5:
(singing)

David:
In this segment of the show, we ask every guest the same four questions every single episode. Question number one, what is your favorite real estate book?

Jonathan:
I’m so prepared for this, and I’m going off to the side with Never Split the Difference by Chris Voss. Because I have a legal background, I know that everything in real estate is based on negotiation. You can do all the data analysis that you want, if you’re not good at negotiation, you’re never going to close deals.
There’s never been a better book on negotiation than that book, and just understanding how to deal with people. It’s the same as a lot of what we’re talking about. All negotiation is relationships and how you can use the relationships to move the deal forward. The audio book is amazing too, because you get to hear him do the late night DJ voice, which is really important.

Rob:
Fun fact: David carries that around everywhere he goes. It’s always in his pocket. You can see it’s just there, man. It’s always nice.

David:
It’s like in those movies where you see the hero get shot and you think they’re dead, but then it turns out like they actually have a book under their shirt. That is what the book is for me.

Jonathan:
Yeah.

Rob:
Next question, favorite business book.

Jonathan:
I’m going to give a top one and then a backup. Number one, for sure, without any question, is The Slight Edge by Jeff Olson. I’ve literally made hundreds of people read it. I think it’s very, very scalable in terms of what you want to do in real estate. Start small, do the same thing every day, turn around in a year and look how far you’ve come.
Then the backup to that is Who Not How by Dan Sullivan and Dr. Benjamin Hardy. If you’re growing a real estate business as an investor, you need to read Who Not How, because you can’t do everything. That’s the main thing that I’ve had to learn in all parts of my business. Who can I hire to do this because I don’t want to do it anymore? Now I’ll be able to through 3X or 4X my production because of that.

Rob:
Very nice. Very nice. So when you’re not expanding your real estate empire, what are your hobbies? What do you do for fun?

Jonathan:
I like aimless walks in nature, which sounds boring. But I am getting older. I love nature. I love taking pictures of nature. Then my son has made me into a board game aficionado. We play board games literally all the time. He has like 20, and we’re on the top hundred board games list playing a new one two, three times a week. It’s great for the mind. It helps the mind work and it helps give me a break from real estate.

David:
All right. In your opinion, what sets apart successful investors from those who give up, fail, or never get started?

Jonathan:
Definitely coachability, and I don’t mean that in like you have to have a coach. You have to be able to learn from other people to be good in real estate. That’s a direct representation of what you can do on BiggerPockets.
If everybody can just take in all the advice of conflicting opinions as well, that’s being coachable, not always thinking that you know the answer, because I can tell you, from 30-plus years in real estate investing, I’ve never done a deal where I didn’t learn something new. The second that I think I know everything is the second I’m going to blunder a deal and turn into a failure.

Rob:
Just bringing the fire today, Jonathan. Final thing here, tell us where people can find out more about you.

Jonathan:
You can obviously find me on BiggerPockets. I’m pretty easy to find on there. On social, most of my handles are TrustGreene with an E at the end, like David and I always have to tell people. I have a pretty YouTube channel. I think it’s Jonathan Greene RE. Then, again, my podcast is coming out soon. It’s called Zen and the Art of Real Estate Investing. It’ll probably be out by the time we finish this, but it’s not out yet.
But, yeah, you can find me all over. I do the same on Instagram. TikTok, I play around with. But you’ll find the same messages there. Not out there to sell anything. A lot of it is just doing what I can to help people learn more. And a bunch of nature photos, because I don’t care to sell everything. A lot of stuff’s just what I like on social.

Rob:
Dave, what about you? Well, Mr. 24 here, Greene24. Where can people find you on the internet?

David:
Yeah. You made a funny joke about that earlier, where you said apparently there’s 23 other David Greenes running around because that’s why you had to pick DavidGreene24, which is funny because Brandon used to tease me about the exact same thing. He’s like, “You didn’t play in the NBA. Quit putting a number on your name like you think you’re cool.” He wanted me to put like TheRealDavidGreene or TheReal_David … But I think that’s even cheesier. So it’s DavidGreene24.

Rob:
I think you should do like TheRealistDavidGreene. TheRealist.

David:
Yeah, that’s exactly like Keepit100DavidGreene, something like that. I like TrustGreene. That’s pretty good. But, yeah, you can hit me up on LinkedIn, Instagram, anywhere else. Then on YouTube, I’m David Greene Real Estate. How about you, Rob? Where can people find out more about you?

Rob:
They can always find me on the YouTubes at Robuilt. You can find me on Instagram, @Robuilt as well. And you can find me on TikTok at Robuilto. Friendly reminder to everybody listening to this, David and I will never ask you to send us a message on WhatsApp or we will never ask you for crypto or Bitcoin.

Jonathan:
Can I just add one more thing at the end? It’s a props for David.

David:
Yeah, please.

Jonathan:
So we use the book Sold in our book club last year for my new agents. Absolutely knocked them out of the park. So we’re just waiting on Skill number two, because I have it scheduled for August. So we need that release. But it’s the perfect book for new agents learning how to do the business nuts and bolts. I gave it to every agent on my team to read as part of our book club, and they really liked it. So just wanted to tell you that in person since it’s the first time we met online. Yeah, absolutely.

David:
Thank you, Jonathan. I really appreciate that. Skill is going to be coming out any day now, I believe. When this one airs, it should be coming out. So Sold was for new agents just to learn how to be profitable. I think Skill is a much better book, frankly, because it focuses on how agents can become top producers and be really, really good.
Then I’m wrapping up the third one, Scale, which is going to be how to build a team so that you can take real estate sales and create it into a form of passive income, much like investing. So thank you for saying that.

Jonathan:
Yeah, absolutely.

David:
That book doesn’t get referred to nearly as much.

Jonathan:
It’s in our book club.

David:
Rob, any last words?

Rob:
No, man. Jonathan, thank you so much for coming in, sharing your POV, and really just being authentic. I mean it’s very clear why people love you on the BiggerPockets channel. You keep it real. You bring the good and you’re also very real with people. I think that, to me, is kindness. You give without expecting a return. So we thank you very much, good sir.

Jonathan:
Oh, thanks so much for having me. I was waiting for so long. I was so happy when I got the email. So it’s been a real pleasure and an honor to get on here and do the podcast.

David:
Yeah, keeping up with the baseball analogy. You were sitting in the bullpen, you’re waiting. The coach comes out, manager taps the left arm-

Jonathan:
I was ready.

David:
… calls in Jonathan, and you crushed it. You just struck out the side and took it home. That’s exactly right. Thank you very much for your time and being here, we appreciate it, as well as the contribution you made on BiggerPockets throughout the years.
Everybody listening, stop what you’re doing right now. Go to BiggerPockets, look up Jonathan, send him a colleague request, and let him know that you appreciated this episode. If you’re in the area … Jonathan, which area are you in? The New Jersey area?

Jonathan:
Yup. Well, my team runs all over New Jersey, and that is Streamlined Properties On-Market. So you can find that at streamlined.properties. But, yeah, New Jersey. But I will communicate with any investor in any market. I love helping investors with great questions, anytime. Always available in the BP through the inbox.

David:
Awesome. So reach out to him if you need an agent or if you’re looking for deals, or if you have a deal that you would like to wholesale to Jonathan. Follow Rob at Robuilt and follow me at DavidGreen24. We’re going to get you guys out of here. If you like this episode, go listen to another one. This is David Greene for Rob “Man of Few Words” Abasolo, signing off.

 

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