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HousingWire Annual: NewRez’s Silverstein explains Computershare acquisition strategy

CEDAR CREEK, Texas — Real estate investment trust Rithm Capital Corp.’s $720 million acquisition of Computershare Mortgage Services Inc. allows the company to improve its fee-based income as the deal includes the purchase of Specialized Loan Servicing LLC (SLS).

“The SLS platform for us is very much the focus as to how we think about fee-based income and third-party business,” Baron Silverstein, president at NewRez, a subsidiary of Rithm, said on Wednesday afternoon during the HousingWire Annual conference, held Oct. 10-12 at the Hyatt Lost Pines.

The deal will add a mortgage servicing rights (MSR) portfolio of about $136 billion in unpaid principal balance to Rithm. It includes $85 billion in third-party servicing and the SLS MSR portfolio.

Following the transaction’s closing, which is expected to happen in the first quarter of 2024, SLS will operate under NewRez, the eighth-largest U.S. mortgage lender in the first half of 2023, with a production of $17 billion in loans, per Inside Mortgage Finance data.

“When we think about the market that we’re today, then to the extent that we can diversify versus utilizing our capital to continue to grow our platform; doing fee-based business on a sub-servicing perspective; helping customers stay in their homes; and helping MSR owners or MSR investors service the asset that they own. That’s our core strategy from a growth perspective,” Silverstein added.

According to Silverstein, Rithm has focused on building its servicing portfolio and adding origination capabilities through acquisitions over the last few years.

For example, the Caliber Home Loans $1.675 billion deal in April 2021 brought in a large servicing portfolio, expanding the company’s direct-to-consumer and wholesale businesses and the distributed retail platform.

Silverstein said the integration of Caliber is “completely done,” with the company recently rebranding the distributed retail division into NewRez.

He also noted that acquisitions can be complicated. That’s why acquirers should make integrations as simple and quick as possible. The market can shift, and it could be challenging to add new products or create efficiencies amid legacy structures, he said.

In July, Rithm struck a deal to acquire Sculptor Capital Management Inc. for $639 million, leading to a dispute among the shareholders at the asset management firm.

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Princeton CEO Rich Weidel on the promise vs reality of mortgage tech

Sarah Wheeler: In the past you said that technology isn’t a differentiator, it’s just an equalizer. Do you still think that?

Rich Weidel: Yes, and even more now that we’re seeing in this down cycle which technologies provide value and which are just an expense.

It wasn’t that long ago that technology was going to change everything. If you go and look at headlines from 2013-2014 — everything was revolution and transformation and technology was going to lower costs. You would get phone calls constantly from tech vendors during that period, and they’d talk about 30%, 40% ROI and how much tech would decrease turn times. And I think we saw an advantage among some of the first movers — these companies came out of the crisis and were able to take advantage of technology, that’s when they really started to grow.

Today, though, there’s almost zero differentiation. Within mortgage companies, even those that have huge scale versus small scale, they’re offering really the same borrower experience and the same loan officer experience. Obviously, they’ve got some different systems to handle hundreds of loans a month versus thousands or tens of thousands. But if you go and look at the financials, there’s no differentiation in terms of cost per loan or speed to close with any correlation that I’ve been able to see on technology spend.

So essentially, the two biggest promises of technology, that it would lower costs and increase speed, have not materialized in any way.

SW: How does that impact you as a mortgage lender CEO?

RW: A lot of vendor contracts are just killing mortgage companies right now, because they’re stuck in these multiyear contracts with minimum standards. That model just doesn’t work. You’re signing a contract in 2020-2021 when the industry is doing $3.5 trillion, and you have to commit to a multiyear contract with x number of seats or minimum units per month. At Princeton, we’ve always been very risk-averse, and that comes from my experience in commercial real estate and debt and leasing.

The second problem is that in a tightening margin environment, you could have per-unit vendor costs that are more than the revenue that you’re getting in. That means no matter how many loans you do, you can’t make money. So the technology that’s supposed to save you can also be the thing that drives the mortgage company into bankruptcy.

SW: How do you fix that?

RW: For 95% of mortgage companies, the answer is buy and integrate and optimize.

SW: How do you feel about your tech stack?

RW: We really like our tech stack. I don’t think there’s a huge amount of differentiation between vendors, and the shiny toy of today is typically not the shiny toy of tomorrow. That hot tech thing you had to have in 2018? Nobody’s talking about that anymore. And some of the vendors that were the darlings of 2021, raising all the money, they’ve now got all that venture capital and all that carried interest and all that expense load that they just can’t price. While some of your smaller vendors who were bootstrapped don’t have that cost structure and they can be more flexible in their pricing to meet the moment.

But you have to make sure of your counterparty risk with that vendor, because you don’t want to build your system around a technology partner that’s not going to be there in a year or two.

SW: We’re seeing a lot more repurchase requests, and some of those seem to be on minor loan defects. How should technology be helping there?

RW: Sometimes you have problems on loans that are due to technology — so a disclosure doesn’t fire right, or you’re not calculating the ARM interest correctly. Those can be catastrophic if it goes on for a long period of time. But typically, if the technology is causing an issue, if you’re doing your QC prefund correctly, you catch it on one or two loans and then you can correct the technology issue and it works.

The thing that the mortgage industry cannot correct for is human error, and there always is human error. And then on top of that, our industry is under attack from fraud from all sides. Because of that, I think we at Princeton do way more than is required by the agencies from a QC perspective on our prefund. We overinvest on the QC part.

SW: What part does tech play in attracting great LOs?

RW: You have to figure out your differentiated value proposition. There are a lot of good companies with a lot of good products with good rates with good fulfillment. If you’re going to grow in this business, you have to have that. Well, then what? If you study salespeople, in mortgage or any industry, the biggest things that hold salespeople back once they have good fulfillment rates and the basic stuff is an under investment in prospecting activities. Well, my experience is that where you can get the biggest lift with salespeople is actually in the technology and the automation around prospecting. So we built our sales machine around that.

We use technology, marketing and support systems to do some of that prospecting on behalf of loan originators and we’ve been slamming at that for like six or seven years now. And we keep in touch in a very dynamic, personalized way with referral partners and customers and we have a competitive advantage on that.

In Q3 our loan originators added on average 2.88 new referral partners. And that means the average loan originator at Princeton closed a loan in Q3 with 2.88 Realtors they’ve never worked with before. If you think about the lifetime value of the customer, well, you get a loan a quarter from each Realtor, three Realtors in a quarter, and they’re each good for four loans a year, that’s 12 loans. Average commission is $3,000. That’s $36,000 a year from just those three Realtors, plus the ones you add in other quarters. Now we’re talking about a $100,000 opportunity. Wow. If we were to invest in that differently, what would that look like?

In 2018, which was a difficult year, every phone call with a loan officer felt like they were talking about leads: leads, leads, leads. Nobody talks about leads anymore. Now it’s all rates.

SW: As the CEO of a lender in this environment, what keeps you up at night?

RW: I often think that my job is to try to make the best decisions that I can based on the facts that we have. What’s really difficult about this industry is we don’t know what volume or margins are going to be three, six, 12 months from now. It’s really hard to be prepared for what’s coming next so I think the question is: are you willing to react as the facts change to meet the moment? And that’s what we ask ourselves as a leadership team.

We used to do that monthly, but it was too short of a cycle, because you wind up overreacting on 30 days of data so we do it on a quarterly basis. We put a game plan together for three months and at the three-month review we ask: What were our predictions? Where did we land? What do we wish we would have done differently? And how do we want to adjust for the next three months or three quarters?

We make money on the up swings and lose money on the down swings, and when it’s stable, we just make average profits. Even if volume stays at the $1 trillion or $1.5 trillion level, the industry will be sized for it and it won’t be great, but it’ll be okay. We’re just still in the problem of there’s too much capacity. Everything needs to size back to the steady state.

SW: What’s the biggest lesson you’ve learned on technology?

RW: The lesson of technology, for us, has been that so much of the difference in technology is about the way that the people utilize it. So we talk not just about tech, but technology, people and process. Those three things added together will equal the result: It’s really a systems engineering question. And so much is it of it is the human capital of how you’re integrating those types of things.

I’m in some owners working groups, and somebody will bring up a tech and either they’re having great success and we’re struggling with it, or we’re having great success and they’re struggling with it. And you see that the same technology deployed in different cultures and with different processes sometimes works and sometimes doesn’t work. So you have to ask: Are we utilizing the technology to its fullest capacity? And is it a tech problem, a people problem, a process problem, or some combination of those three?

SW: Looking to the future, are you optimistic?

RW: I’m super optimistic about housing in America. We are in an industry that isn’t going anywhere. We’re also in an industry that’s relatively commoditized, so you can’t hate the game, you just have to know the game that you’re in.

Princeton is a company that’s been around for a long time, but we haven’t peaked. And so these market resets, while they’re terribly painful, are like forest fires — they have to happen to clear out all the overgrowth so there can be flourishing on the other side. Unfortunately, there’s a lot of pain during that process.

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Building An Empire, Building Opportunities

Rithm increases to $676M its offer to acquire Sculptor

Real estate investment trust Rithm Capital Corp. has increased its offer to acquire Sculptor Capital Management Inc. by 7.62% to $676 million amid competition from a group of investors and a dispute among the shareholders at the asset management firm.

On July 24, Rithm said it struck a deal to acquire the New York-based company for $639 million, or $11.15 per Class A share. The transaction brings to Rithm Sculptor’s $34 billion of assets under management, including real estate, credit and multi-strategy investing spectrum.

The July deal led to a dispute among the shareholders at the asset management firm as Sculptor also received a $12.76 per-share bid from a consortium of investors, including Boaz Weinstein, Bill Ackman, Marc Lasry and Jeff Yass.

Sculptor said it still prefers the deal with Rithm due to the closing certainty. However, it put pressure on Rithm to increase its bid.

The new offer announced Thursday brings the price per share to $12. The boards of directors of both companies have unanimously approved it, the parties said.

In a statement, Marcy Engel, chairperson of Sculptor’s board of directors, said they are focused on “consummating a transaction that maximizes value and certainty of closing for Sculptor stockholders.”

Michael Nierenberg, chairman, CEO and president of Rithm, said the deal creates a “superior asset management business.”

All regulatory approvals necessary to close the deal have been received. A share of 85% of the fund investors consented to the agreement, but this is subject to change at closing. Sculptor’s board recommended that stockholders vote for the deal at a special meeting on Nov. 16.

Sculptor anticipates that the transaction will close in the fourth quarter of 2023.

Citi acted as the exclusive financial advisor to Rithm. PJT Partners was the financial advisor to Sculptor’s special committee. Sculptor’s financial advisor was JP Morgan Securities LLC.

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Building An Empire, Building Opportunities

From Burnt-Out Tech Worker to $95K in Passive Income in 2 Years

Off-market real estate deals can make you a millionaire in just a few YEARS. Instead of buying the nicest-looking rental property in the best area through a brutal bidding war, David Lecko went the opposite route, purchasing the properties nobody else wanted, finding deals simply by driving for dollars or paying someone else to do so. He went from a burnt-out nine-to-five worker to financial freedom in just two years by following this strategy, and you can do it, too!

David was working all day and all night, making a meager salary with almost zero time freedom. His boss, who worked far less than he did, outsourced his business and had rental properties on the side. David knew that to be in the same position, he’d have to mimic his boss’ path to wealth. So, after work, David would drive around his local area, looking for the tallest grass, the biggest roof repairs, and the worst paint jobs. He finally found his first deal, which cost less than a used car, but ended up springboarding David to make millions.

In today’s episode, David will walk through EXACTLY how to find off-market real estate deals the RIGHT way, how to get around the lazy lists that most off-market investors use, and how to turn a few properties into millions of dollars of wealth and close to six figures a year in passive income. And in today’s tough housing market, finding deals like these is even MORE crucial. So, what are you waiting for? Financial freedom is only a couple of years away!

David:
This is the BiggerPockets Podcast show, 830.

David Lecko:
I actually started in 2016 when I worked for somebody who had five rental properties, and I was like, “Why do you have this?” He said, “Well, unlike the stock market that can go up and down, if you get rentals and you buy them right and manage them well, they’ll always make money.” That’s what motivated me to go looking for some of these real estate deals. There weren’t any, nothing was going to cash flow until I found out about going off market and then providing value to somebody, getting a discounted property, fixing it up. That’s actually led me to 2 million in rentals that I have today with a million-dollar equity position.

David:
What’s up everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, and the baddest real estate podcast in the world. Every week we bring you stories, how-tos and the answers that you need to make smart real estate decisions now in this current market that is ever-changing. We have a great story for you today. Joining me is my overly eccentric co-host, Rob Abasolo, who is either being a mime or doing ASL for those who are watching on YouTube. Rob, how are you today?

Rob:
Oh, my gosh. Dude, I got home at 4:00 AM last night. Now, I feel like I’m on vacation. Now, I feel like I’m on vacation, because being on a plane with a two and a three-year-old for 12 hours? Hmm.

David:
Today we’re about to speak with David Lecko. He’s going to be describing the strategy that he’s used to build a $2 million portfolio with $72,000 a year in cashflow that he started with only $4,000.

Rob:
It’s crazy, man. On top of that little fun fact, he’s also the founder of DealMachine, which we didn’t really talk about in the podcast today. He’s got a really cool story and really breaks down, I mean, really everything from the beginning, I think it’s going to be encouraging for a lot of people to hear his story.

David:
Absolutely. Today’s quick tip is going to be brought to you by Rob, who actually has some advice to share that came out of today’s show.

Rob:
Hey, when you see an opportunity, take action. You’re going to hear why today at the very end of the podcast. We talk about a deal that I just did because the moment I saw the opportunity, I made the phone call and got stuff done.

David:
There you go. Strike when the iron is hot because it doesn’t stay hot forever. As we know, decisions are made based on emotions and emotions change. When you’ve got the right opportunity, don’t waste your shot. Much like Eminem said, you may never get it again. All right, let’s bring in David. David Lecko, welcome to the BiggerPockets podcast. How are you today?

David Lecko:
I’m great, thank you so much.

David:
Nice, man. Can you give our listeners a quick rundown of who you are, where you invest, and how long you’ve been investing for?

David Lecko:
I actually started in 2016 when I worked for somebody who had five rental properties and I was like, “Why do you have this?” He said, “Well, unlike the stock market that can go up and down, if you get rentals and you buy them right and manage them well, they’ll always make money.” We know Warren Buffet says the rule is don’t lose money, never lose money. That’s what motivated me to go looking for some of these real estate deals, but there weren’t any, nothing was going to cashflow until I found out about going off market and then providing value to somebody, getting a discounted property, fixing it up. That’s actually led me to 2 million in rentals that I have today with a million-dollar equity position and about $95,000 in net cashflow expected this year. Last year was 72, but I did a couple of acquisitions this year. Those properties were acquired over about a two-and-a-half-year period from 2017 to ’19. Then I chilled out for quite a while. I had a lot of appreciation. I’m now re-motivated to go acquire some more rental properties.

David:
All right, I want to ask you, Rob, a quick question. How long do you think we’ll still hear stories about people who heard about real estate from a human? Because now with YouTube and social media, it’s bombarded by real estate. I just realized, that’s how people used to say it. Like, I met a guy in a restaurant one day, mysterious man smelled of rich mahogany and leather-bound books. He told me he had rental properties, and I was so fascinated. Versus what it’s like now. I’m just curious, Rob, what your perspective. Do you think that anyone will ever hear about real estate from a human from this point forward?

Rob:
That’s very funny. I was legitimately just thinking about this because everyone that I follow on Instagram, they are all real estate people. It’s all like, “Here’s five rental strategies you need to perfect in 2022. Here’s how to make $10,000 cashflow.” That’s all my Instagram is. I’m like, man, the entire Instagram landscape has really changed for the real estate industry, but that is really a big part of how people even find out about real estate. I don’t know. I think the days of the coffee shop, meeting with an older real estate vet and they teach you everything and take you under their wing, I feel like those, yeah, it’s getting a little bit more rare these days.

David:
That’s true. Also, I feel like when you talk to someone before they tell you what they actually had versus when you hear something online, now it might be someone with a house they live in and one investment property, but they’re talking about it as if they have 50 rentals. That’s a little different too. It’s easier to find out about it, but you got to dig a little bit deeper to figure out what’s really going on, and that’s what we’re going to do today. David, we’re going to hear all about your expertise in a second here, but give me an idea on what strategy or tactic is working for you right now.

David Lecko:
I’m doing two things right now. I’m paying a driver to look for rundown properties. I’m sending marketing and I’m getting calls back answered by a call center, and then I follow up and do a virtual appointment. The other thing I’m doing now that’s new for this year that I’ve had a couple successes with so far, is actually making offers on properties in the MLS in my market that are over 45 days old and I’m sending 70% offers to those properties. I’ve sent about 500 of those offers and done about three deals, in the last three months I would say.

David:
You’re taking steps just to get the ball rolling. You’re trying to get the conversation going, just get that first date and then see where things go.

David Lecko:
Actually, the on-market listings that I’m giving it 70% off, they’re actually just receiving offers. 70% off as is, and you never know what they’ll accept unless they have a low offer in their hand. That’s actually, I mean they’re signing it and I’m like, “Oh, wow. I have a property on your contract.”

Rob:
I have a question about that. You’re making these offers, presumably if they’ve been on the market for 45 days. We’re getting towards the point where that listing is going to expire. That agent is probably going to lose the contract, is my guess. When you make an offer, how are you actually doing that? Do you have a realtor representing you making that offer, or are you just making that offer to the listing agent and asking them to represent both of you?

David Lecko:
It’s through an agent and I use a software that connects to her email and uses her contract and fills in the DocuSign details. I have a slider that says what percentage do I want to send out all my offers. I usually do 35 per week because she’ll get an influx of emails and texts and she does respond to those. Some of those end up being a counter. That’s how I get the ball rolling. It doesn’t take her time, but we have a process and a tool that we use that allows me to send those offers like that.

Rob:
Hold on. That sounds like the most system and process-oriented way of doing this. I just thought you were calling, “Hey, make this offer.” You actually have this, I don’t want to say automated, but really efficiently laid out to where if you’re going to make 35 offers, are you actually examining all of those properties running the numbers on them, or you’re just like, all right, hey, if it’s 70% and they accept, I’ll then run my numbers?

David Lecko:
The second thing. I’m doing a little bit of filtering, I just want a three-bedroom, two-bath house with a certain square footage. I’m not doing these offers on commercial buildings or I’m not doing it on a two-bedroom, one-bathroom house because I just do want it to actually be a property that I’d probably buy.

David:
We’re going to get into those details a little bit later. Before we move on to the show, just remind me, which area are you buying these in?

David Lecko:
Indianapolis, Indiana.

David:
We’re going to talk about the Indianapolis market as well. We’ll ask you some tough questions, so get yourself prepared for that. Hopefully, it gives you an opportunity to shine. Let’s start with a story. Tell me about a moment before you found real estate, when you knew things had to change?

David Lecko:
Man, my life was actually horrible. I’m working for this company for two years on a product that I actually built before I ever worked there, and I sold it for $10,000 now as a recruitment tool in another industry. The reason why I bought it is because there’s advice from Gary Vaynerchuk, for example, that says, you shouldn’t take the most expensive, the highest-paying job, you should actually go work for somebody that you want to emulate. That’s exactly what I did. I sold this tool I built and it was a low cost, and I was getting paid $55,000. On the first day, the CEO says, “Hey, David. Please don’t share what you make with anyone else on this team because nobody else makes that much.” I was like, “Man, I don’t even feel like that’s that much.”
I took a $20,000 pay cut to get here, and I did though really working a ton and I’m working a ton. I’m the software developer, I’m the tech support, I’m the trainer. When there’s a problem, I’m not actually having anyone else be able to do those things, so there’s no backup. I’m actually the most knowledgeable person that they have. This culminated over two years. I’m learning a lot. There was always these times where I take my computer to the bar with me if I was going to go out with friends, because something’s going to come up, I want to be able to fix it instead of have to drive home and come back. Finally, I’m at my best friend’s wedding and I’m actually in the wedding party. I leave the reception because I got the call, something is wrong and I’m out in my Honda Accord, 10-year-old Honda Accord with my hotspot and I’m fixing this tool.
I was like, man, he was upset, his wife was upset. I felt terrible because I’m missing the reception. I knew that something had to change. I knew that the owner of this company of mine had these rental properties, and so I knew I needed to start taking action towards making a change, towards finding an off-market deal. At the time he said, well, he bought these properties in 2009, which was a great buying opportunity, and I was a little bit discouraged by that. It wasn’t his intention, but I looked at the market and I couldn’t find anything that would cashflow. Thankfully, I went to a meetup and found people that were doing deals all the time. That’s when I realized you can’t just time the market. You’ve got to find deals in whatever market condition exists. You’ve got to figure out how to find good deals in all those conditions.

Rob:
You went to a meetup and you said people are doing deals. As someone that didn’t know anything about real estate or not all that much, you go to a real estate meetup and you find out that people are doing all these things. What kind of deals were they doing and then were they all doing so many types of real estate that it was overwhelming? What was that first experience even like?

David Lecko:
Well, it was pretty awesome, because they actually had a prize that was a random drawing for all the attendees, and I won the prize. It was an iPad, and I thought, “This has got to be a sign.” I’m not super spiritual, but this definitely doesn’t feel bad. This is great. I won this iPad and I immediately sold it for 500 bucks and I used that to start sending postcards to distress properties. I remember, there were people doing a lot of stuff, but the prevailing theme was wholesaling.

David:
I love this. What you’re saying is if somebody’s having a hard time getting started, they need to go to events, win prizes, and then pawn off the prize to get the capital C to get started. Correct?

David Lecko:
Yeah, exactly.

Rob:
I love it. I love it because instead of just having an iPad where you could log into Netflix and hang out and do nothing, you’re like, all right, look, I could have this iPad or I mean, it’s basically a free $500 that I can use to experiment and just do random things with in the real estate world and see what sticks. Somehow you land into the postcard world. How did you even learn about that?

David Lecko:
There was definitely a blog post on BiggerPockets that I saw on driving for dollars. The unique aspect of it was this person was putting the photo of the house on the envelope. That was something that they said gave them a better chance, a better response rate. From this day forward, every piece of mail that I’ve sent has the photo of the house on the property. Not the Google photo, like an actual photo that he took. People called back, still to this day, they’re like, “I got a few pieces of mail, but I called yours because it looked like you put a lot of time in it.” Or, “I could tell you’re really here. I could tell you were local.”

Rob:
That’s cool. You went to BiggerPockets, you figured out the idea of driving for dollars. You’ve unlocked a really great entry point into your real estate career and it seems like it’s working. How did that feel emotionally for you for it to start clicking really, I mean it seems like it’s relatively soon into your career?

David Lecko:
Well, there was a period of time where I was just looking for the rundown properties and I wasn’t sending out the mail yet. I was prepared for it. I had the money set aside for it. What I was focused on was finding the properties. It was so much fun driving up and down and just picturing myself buying this property. It felt really awesome. Two months into that, I had a nice list on a tablet of paper, but my stomach sank to the floor when I saw one of these properties had started construction. I went home, looked up. Sure enough, this property actually recently sold and I looked up the price. I wasn’t an expert on numbers, but I felt like it was way lower than what I would’ve even felt comfortable offering. I knew that could have worked for me. I had this terrible feeling that I didn’t even reach out yet, spent so much time just thinking about these homes that I wasn’t following up.
I realized humans have a lot of follow-up issues in general, and I needed to start nipping that in the bud and doing something. I went to go put those letters together with the photos, and that’s when I realized putting letters takes a long time, and at the time, you couldn’t send out mail one at a time. You had to buy a minimum of 200 with some mail house. That’s what left me doing them myself in my basement, which took quite a bit of time. That was the next struggle for me. I’m glad I did it because I didn’t have a ton of money and I heard over and over the driving for dollars is the best list.

Rob:
Well, there’s something ironic about the fact that you were making this list on a tablet of paper instead of an iPad, an electronic tablet. That’s pretty funny. You find this house, you find out it’s the one that got away, but not really, because you never even tried to get it to begin with. Then you get into this time suck. At this point in your journey, was time something that was very important to you or was that the beginning of your journey where time is all you had? Tell us about the emotions of that time in your real estate career.

David Lecko:
Well, as you know, I was working a job that was time-consuming. I don’t know the exact hours. It had some flexibility during the day, but it required lots of stuff at night and random times when people were using the software and I would need to go and fix it. I was feeling quite burnt out. I did enjoy driving around, but when it came time and I realized how time-consuming this was, it just didn’t feel like I had time. Working 9:00 to 5:00, couple of random things for work in the evenings. Now, I have to not only go out and look for properties, but I got to put them together and there’s not enough time left to go hang out with friends, to go eat dinner or anything else like that that I needed to. I was definitely feeling like the candle was burning at both ends.

Rob:
For sure. I think a lot of people feel that way, especially at the beginning of the real estate career. If you’re working a 9:00 to 5:00 or if you’re working any kind of job, and then when it’s over, you still have to do the real estate stuff to get that going as well. At this point in your career, did you have a very clear why defined, like your mission statement? Did you know what you wanted? I know that you missed some important moments in the best friend’s wedding and everything like that. Had you already defined what your why was?

David Lecko:
I had missed some important moments. I also noticed the owner of the company I was working for and learning so much about, didn’t put in the hours that I was. Now, I got the sense he did at the beginning, but I wanted that. I didn’t want to have to work so much for a small salary that I couldn’t even talk about. I wanted something more. It was definitely, I wanted time freedom, but it probably even goes back to high school where I saw some kids had these really cool cars and I wanted that. I wanted more than what I had growing up. I was driven by those two things.

David:
David, when you look at why you were driven for time freedom, can you trace it down to a specific event that happened in your life, an experience you went through, something you witnessed? I think a lot of us would like to have time freedom. We would rather not have to work for somebody else. If you’re lacking the motivation to get out there and make it happen, because it comes at a price. As you well know, you give up a lot of security, you maybe work more hours in the beginning when you’re trying to build that. What do you think about your story specifically led to you having that fire that you were able to use to get over the hump?

David Lecko:
My dad worked at a telecom company. He had a friend that was a contractor. I didn’t really know what that meant. They were buddies. That friend was not only a contractor himself, but he owned a contracting business. He would place people in different companies like this telecom company, and he would make a portion of their earnings as well. I met him at a breakfast with my dad. He gave me a book called The 4-Hour Workweek. That book taught me that you could build a business so you can earn income that’s not limited by how much time you put into it as long as you’re the one who’s actually setting up the business in the right way. That has to be my moment where I knew there was a better path than what I had been exposed to in the just W2 world.

David:
What about that quest for time freedom led you into our world of real estate?

David Lecko:
Well, it seemed like rental properties were pretty stable. If they were never going to lose money, if they were always going to appreciate as long as you manage well, it seemed like the more rental properties I get, the more secure salary I can have, where a business might have fluctuations, that was intimidating to me. A rental properties is physically, you could touch it, you could see it, you can rent it out for a certain price. Then when I went to the Federal Reserve graph on rent rates, I saw that it never went down. Even in 2008, it stayed constant for a year and it kept climbing up. That’s what seemed like it would give me the security the most secure way.

David:
It wasn’t that you heard someone else talking about it or you heard it on a podcast or a YouTube channel. Was there a certain influencer that caught your attention or did you just sit down and logically think through real estate makes the most sense?

David Lecko:
The time when I figured out real estate would make the most sense was the boss that I had at the final job that I had, had five rental properties. I asked him, I said, “I put my money in a 401k, why do you invest in real estate?” He told me it’s because you’ll never lose money as long as you buy them right and you manage them well. I had seen my 401k go up and down and felt like I had no control, and the feeling of control is just such a good thing. I knew that, that was something I wanted to go after at that point.

Rob:
Yeah, man. Let’s fast-forward a little bit. You go to this meetup, you sell the iPad, you get your postcards out. One of your dream deal gets away and you realize I got to take action. Where did that actually culminate into your first deal? Tell us about how that first deal actually took place.

David Lecko:
I got a phone call and he says, “Hey, I’d like to get an offer on my property.” I just knew after putting in 300 properties over the course of six months that it must be this small house, I remember with a blue tarp over the entire roof. I just knew that was probably it. When I looked it up, sure enough, it was. I didn’t know what to actually say next because I had never done this before, Rob. I just said, “Well, how about I meet you at 6:00?” I got off the phone as soon as possible, and once again, when I met him at 6:00, I didn’t know what to say. I didn’t know what to ask. I said, “Well, let me just take some pictures and I’ll just ask you about things that I see while you’re walking me through the house.”
Then it wasn’t a very big house, it was 600 square feet. I took the photos and then he said, “How much will you offer?” Again, I didn’t know, so I was like, “I’m going to get back to you 24 hours. I’ll have an offer in front of you.” I went home and I was going to offer $10,000 for this house. Now, it was in rough shape. I found out later that he thought I was just going to demolish it, but I ended up repairing it. I’ll tell you that I actually remembered this episode on the BiggerPockets Podcast where they said, “If you don’t feel like you’re uncomfortable making this offer, if you don’t feel like you might be offending them, you’re not offering lower enough. Because there’s going to be problems you’re going to encounter, and if you don’t leave yourself the profit margin, you’re going to find yourself in a bad place where you own this deal that you’re upside-down in.”
Instead of offering $10,000, I remembered that and I offered $4,782. Now, it was specific because I felt like that would help him see I approached this in an analytical way. I actually looked at some of the comparable sales by square foot, and then I subtracted the cost of everything that I knew I needed to do in that house, which was pretty much everything. Then I did subtract $10,000 for my profit, or in case something unexpected came up. I showed him that transparently. I said, “This is how I got to your offer price. I can make you this cash.” Because I actually had $4,000 and he waited a day. I got nervous, but he just said, ultimately, in a super calm voice, “I’ll accept it. Let’s go forward with it.” That’s how we ended up doing my first deal.

Rob:
I just want to make sure I got these numbers right. You offered $4,750 for an entire house?

David Lecko:
It’s 600 square feet. It was the smallest house in the neighborhood. There wasn’t even really a true exact comp because all the other houses were 1200 square feet. That’s right. 4,000 bucks.

Rob:
That’s great. You ended up renovating it yourself or is that what happened next?

David Lecko:
Good thing to know here is in the Midwest, Rob, as you know, there’s these neighborhoods that a house in perfect condition may only be worth 50 grand. You can get in trouble investing in these neighborhoods because you buy a house for 4,000 and you put 45 into it. It’s like, you don’t have a deal. That’s just a house. A lot of times it takes more than 45 grand to repair one of these crazy things. I thought this one could be worth a hundred grand. My plan was get four no interest credit cards. I applied it all on the same day because I was like, let me do it all at the same time. Maybe I could trick the credit bureau so they don’t know I have all these other cards. I did $65,000 renovation and then I rented it out for 99. It’s rented for 1200 now, but that’s how I ended up doing it. I still own the property to this day.

Rob:
Cool. When you took out the credit cards, I mean it’s not like you can just swipe your card to pay for vendors and stuff. Were you doing a cash advance? Did they send you a check that you could deposit into your account or what?

David Lecko:
I think those are really good. I didn’t know about those. The contractor that I found would actually let me swipe a credit card, yes, on his square account that he could use to receive payments. Now, he did charge me the extra 3% fee, but that was the only option I had.

Rob:
Well, you’d probably pay that regardless, even on a cash advance anyways. You buy this property, you rehab it, and that’s it. You were financially free, right?

David Lecko:
No, I didn’t know how to pay off those credit cards.

Rob:
Tell us about some of the lessons from that deal.

David Lecko:
I thought I could get a mortgage because on my account it appreciated for $100,000. Even though it was rented out for a 1% rural property, about 900 or a thousand bucks a month, the mortgage companies didn’t value the property like I did because there was no other house with that small of a square footage, and so I couldn’t get it to appraise, so I was stuck. It’s a good thing that my job actually picked up, my business for my primary income picked up. I ended up using that to pay down the credit cards. If I hadn’t done that, I would’ve been stuck. I would’ve had to go to a private lender or to sell the house or to get some type of bridge funding. That’s ultimately how I got unstuck, was I was able to ultimately pay those off. Another lesson that I learned was working with a contractor. A great way to find a contractor, the way I found him was I asked another real estate investor that I knew from one of those meetups who I should use, so he gave me his name.
Now, he didn’t have a crew ready, but he put one together. AKA, a group of people he hadn’t worked with before. Ultimately, after a month in, I was like, “Yo, what’s going on?” He’s like, “Well, they’re just doing this or that. They’ll start back in a week.” I got that about four or five times. I had a hard conversation with him. I was like, “Look, we’ve got to cut ties. Obviously, this isn’t going to work out.” I had paid him too much. I had paid him 50% of the project’s value. He had not done 50% of the work. I needed a refund if we were to part ways. We met in person. I think if you’re going to have a hard conversation with somebody, having it in person goes such a long way. It shows that you care and you can really read each other’s body language that way. That’s what we did. He ended up giving me a refund on one of those credit cards, and I started searching around for somebody else that could solve the problem.
The lesson there was actually don’t give huge chunks of payments, but do smaller increments. The other lesson was let him pick a due date himself at the beginning, then maybe add on a couple extra weeks and say, “All right, if you want this project, commit to this date. I’ll give you a couple extra weeks of padding. If it’s late, $50 per day from you that it is late.” Those are how I operate now with renovation projects. Two lessons there. Then the third one was I had to ask around for somebody who could bail me out of this project that was halfway complete that had a budget that wasn’t going to work anymore. Sometimes real estate investors have a special guy that can bail you out. When you need help, start talking with other people instead of just trying to figure it out yourself. Those are three lessons from that first deal.

Rob:
Going back to that second one about the timing. David, you have a trick of the trade here. I don’t know if you still do this, but didn’t you used to bonus your contractors based on if they hit their deadline? You would say, if you hit this deadline and you actually get done in time, I’m going to give you 1% more or something like that, or did you fall out of that strategy?

David:
How could you possibly know that since you never read any of my books? This is impressive.

Rob:
Well, I read the one book. I read Burr and I am in the first chapter of Pillars, which is not out yet, but it will be.

David:
Right on, man. Yeah, that’s exactly what I would do.

Rob:
David, I like that way more.

David:
You like what way more?

Rob:
I like the bonus for completing it on time, and I think people would be really motivated by that.

David:
Here’s what I would do. I realized there was a bit of a power struggle going on, and when I say that, I don’t mean in an unhealthy way, just human beings have different incentives. When we are an investor, our incentive is to get the work done as fast as possible, as cheap as possible, and as well done as needs to be done. The contractor’s job is to get as much money as they can, take on as many other jobs at the same time as they can and be held the least amount of accountable. They’re going to take on all these different jobs, they’re going to spread their crews thin. What you get is this clashing of, you said you were going to be done by X and them not wanting to tell you, well, I didn’t bid this right or I didn’t know the details, or the guy that was supposed to be working on it didn’t show up to work, or he ended up sucking. Or I had to put them on another job because we didn’t do that one right so yours fell behind. You never get the truth.
What I figured was I just want to fight my way to the top of the funnel of priorities in their head. When we were discussing the scope of work, I would say, look, this is going to be a contract, which you should be familiar with because you are a contractor. As a contractor, how long will it take you to do this job? They would give me a timeframe, say eight weeks. I’d say, okay, what if I give you nine? Oh, yeah. That should be no problem at all. Well, yeah, it definitely shouldn’t be because you told me eight. Here’s the deal. If you get this done in nine weeks, I will pay you what we agreed upon and I gave you an extra week of some grace. If you get it done less than that for every day that it’s early, I’ll give you a bonus of this much money. If it’s late, this is how much is going to come off the last draw. If they’re like, whoa, whoa, whoa, I can’t guarantee it’s going to be eight weeks.
Well, now you know the truth. You just do a little bit of digging and the truth will come out. If they go, yeah, no problem at all. Now, they’re incentivized to keep your job as the priority because they want to make all the money they were supposed to get and they hopefully want to make more money, which makes you a more important customer than the person who’s complaining that they left some paint on the cabinets or one of the tiles wasn’t laid correctly and they got to send someone back. They’re going to make that person wait five weeks. They’re not going to make me wait five weeks, and if somebody with paint on their cabinets has to wait five weeks, I’m okay with that. I’m not okay with it when it’s me when I got a 12% hard money loan and the market is shifting all the time, and if they don’t fix this thing, then the next thing can’t get done. We all know how the domino effect works.

David Lecko:
I think that’s really smart. Now I’m going to have to read that book to figure out the percentage that you pay as a bonus because I want to start doing that.

Rob:
Yeah, man. It sounds like you guys had similar strategies except David does actually do a percentage of money or whatever. You do this deal and it seems like it’s going pretty well. You’re obviously starting to move into your real estate business here and you talked about driving for dollars. Now, a lot of people can be a little wary about driving for dollars as extremely time-consuming and sometimes not worth the time. What would you say to that? Because I know you’ve built your business effectively on this model.

David Lecko:
Definitely. The advice I was hearing from everyone at that meetup was to go Drive for Dollars. At my time, there wasn’t really another option because just the group that I was with, they were saying that, that’s what I need to do. Then I totally get though that it can be time-consuming. If you’re a doctor, this may not be the strategy for you. It’s great if you have more time than you have money. Because the list is so good, these big real estate investors don’t typically do it because they’re buying these lists that are easy to get and they’re just spending more mail, spending more money on more marketing to those bigger lists, which is required because they’re competitive and they’re bigger lists and they’re less niche.
The driving for dollars list is a list that nobody else has. You’re the one who drove around and found those rundown properties. Plus, if a tree fell on a house that was vacant, that’s not going to show up on any list. You can’t buy that list. It’s hard to get. If you put in the time to do it, you can actually get a deal for smaller amount of money, because there’s less properties you have to market to, and there’s less people that are marketing to that homeowner. Therefore, you’re not going to have as much competitiveness in terms of them trying to shop around and get the best price. That’s why I like driving for dollars and why it’s been a really great business

Rob:
Actually, can you just run us through what is driving for dollars? I want to make sure that everyone at home is on the same page as us because we’re going to be talking about this a little bit more.

David Lecko:
Driving for dollars is a strategy to find a real estate investment by looking around for a rundown property. Then you look up who owns it and send the owner a letter asking if they want a cash offer on their house, and if they do, they call you back. That’s what driving for dollars is. The reason why it works is because that house is run down. They probably can’t sell it on the market. If something happens in their life, they might not have the cash to deal with a medical expense or deal with something that would cause them to have to move. They need to unload that property. Like a pawn shop. When you take somebody to the pawn shop, you’re not getting the top dollar, but you do want to take it there because it’s the easiest thing to do, it’s the quickest way to get cash and move on to the next thing in your life. People do that with their house. People need that service with their house and driving for dollars is a great way to identify those types of properties.

David:
Can I tell you why I like that strategy? Because it’s very difficult to do, which means nobody else wants to do it. There is a trend in our country, in our culture of how do I automate, delegate, systemize? I wanted to do a thing that makes me a bunch of money on its own and I just show up to the money tree and I pull the dollar bill out of the business, but I don’t want to have to pull the weeds, water the tree, shelter the tree, check the pH balance of the soil. I don’t want to do the work of a farmer. I just want it to grow and give me money. There’s become an obsession with that and there’s little tiny ways this will work for a short period of time. We saw it with crypto, we saw it with NFTs. Drop shipping at one point was like, it was like you struck oil and there was all this gold, and then everyone rushes into it, it dries up. It’s not a sustainable thing. You just might get lucky.
The popular way that most people are running businesses like you, David, is they’re trying to automate a system that sends letters that look like they’re handwritten, that hires somebody else in another country to oversee the job, that leverages out the answering of the phone and tries to qualify the leads and then sends somebody else to the house to go negotiate with the person. When it becomes easy like that, it just means everyone else can do it and someone with more money, more experience, more resources than you will just do it better. You end up chasing the same deals that everybody else is chasing, asking how come these strategies that I heard people talk about on the podcast don’t work? Driving for dollars cannot be leveraged. You can’t pay somebody to go out there and just drive around and look for the right homes, at least not effectively.
You have to go do it. When you do that, you find the property that’s not getting bombarded by other people. You find the lead that you actually have a chance to nail down and you get to make the connection with that person. You get to go talk with them, build rapport, use all the skills that you’ve built. Not some employee that is like, I only want to do the bare minimum and I only want to get under contract if it’s easy. They can hit the layups, but they miss the tough shots. That’s what I love about what you’re saying. This is the strategy and I see you smiling because it sounds like this is landing with what you’ve recognized in your business that our listeners can go apply because it’s real and it’s honest and it works. It’s not looking for a cheat code that everybody else has already found. What do you think about that perspective?

David Lecko:
I think it’s absolutely true. I think that’s why it works so well, is because the easy way to do it is to go buy a list of absentee owners or go buy a list of high equity. It’s just the easiest thing to do. People do that. Seeing the property, laying eyes on the property is something that is harder to do, and I think that’s why it’s such a better list.

Rob:
I think there’s always going to be growing pains with really any model if you want to achieve automation or anything at the largest scale, I mean you do. I think that’s always really tough to do. I’m curious, David, obviously you were the one driving around doing a lot of your own deals when you were doing this. How did you actually scale out of that? Because I know you said that time was so important to you, and this sounds like, I know you said it doesn’t necessarily have to be a time-consuming strategy, but when you were starting out, I’m sure you hadn’t figured that out. How did you actually scale in a way that was effective when it came to driving for dollars”

David Lecko:
I just kept doing it and I kept doing deals. As soon as I had done maybe $200,000 of, I did a couple of bird deals where I got the cash out and I could recycle that money. That’s when I realized, all right, maybe my job is worth what you can actually hire somebody to do this for, which might be $20 an hour looking at Amazon driver salaries. We can get into that, but that’s whenever I figured out maybe I shouldn’t be the one driving anymore. That was a couple of years into it after I had done several deals and after I learned a lot of the neighborhoods that I wanted to buy in, knew those by heart already.

Rob:
We’ve actually heard a couple of interesting strategies on BiggerPockets of how people, I don’t want to say automate, but increase their deal flow. We had someone on the podcast said that they give flyers to pizza delivery people and they say, “Hey, anytime you see a distressed property or if you’re delivering to a distressed property, leave this on the pizza box or leave it on the door or whatever.” I’ve also heard of people doing that with UPS drivers and all that type of stuff. It seems like you can get creative with ways of increasing your deal flow. Did you ever go down that route or did you just go straight to hiring somebody?

David Lecko:
I never did the pizza delivery thing. There’s basically three ways that you could hire a driver, and most of them are tricky if you don’t know exactly what you’re doing, which is still what makes driving for dollars great because it’s difficult to scale. Here’s the three payment strategies that people use. They either do per hour or they do per deal added or they do, you get a bonus when I close a deal, like to the pizza guys. People have made it work. I have not. One thing I’ve observed is that if you’re going to give a bonus when you close a deal, that could take three months. These houses have been distressed for a long time, so they’re not going to sell right whenever they get a postcard from you. You need to keep sending postcards. Every basic marketing advice says it takes 10 to 13 touchpoints before somebody responds to your marketing.
You’ve got to catch them at the right time. By the time that happens, the person you trained what properties to look for, they probably have moved on because they have bills to pay, they need to live their lives. Unless it’s like your mom, your spouse, somebody that loves and caress about you and can stick with you for three months without payment, I don’t know that I’d spend time training anyone for this model where you pay a fee just when you close a deal. The other one is per property added. Some people might pay 25 cents to $2 for each property that looks distress that they add. You could do that. It has worked. All three of these have worked, but I don’t like that one because people like security of knowing how much they’re going to make, and we think about jobs in terms of hourly payment.
That’s why the hourly payment is actually the best when you’re going to recruit somebody reliable and you want them reliable. If you’re going to spend time training them, you don’t want to train them and have them go away. I posted a job on Indeed for hourly, and I got a bunch of people responding. I set up five interviews on a Saturday and every person actually did not come to the interview. I texted them, I was like, “What happened?” One person even said, “I moved to Florida.” It’s like, I felt so disrespected, it was a huge waste of time. I knew I needed to change something. I incorporated a test project. Now, I posted the job again. When they applied, I said, “Please send me a two-minute video. Download this app that I use to look for rundown properties. It’s free, no cost. Just add three properties. Text me when you do that. I’ll Venmo you 10 bucks.”
That really weeded out people. If they did that, I knew they were tech-savvy. I knew that they had read my instructions instead of blindly apply. I knew they were serious. Then I pretty much had a 100% show up rate when I scheduled an interview. Finding them, I would incorporate a test project like that. Then $5 more than what Amazon drivers make is fair because the driver that works for you is they’re going to actually be using their own car and paying for their own gas. They will want to work for you because they love seeing that money that’s a little bit more than what they could make at Amazon. It’s a good deal for you as well because they’re paying for the car and the gas. If I were to say a couple of more pitfalls, have a weekly meeting with this person to review the properties they added and make sure that they feel like they’re a part of the team as well. That’ll keep them going week after week and stick with you for a long time.

David:
We’ve covered the bottom of the funnel, the hiring and the delegation of how you’re going to spread out some of the workload. What about the top of the funnel? How are you going to build this list of potential opportunities to pursue?

David Lecko:
I actually was given the advice that if you find a hundred rundown properties, that’s about what it takes to get a deal. Now, as time goes on, I’ve had the fortune of working with a lot of people who scale their Driving for Dollars teams, and I noticed that it depends on your market. If you’re in a lower-cost market, I’d recommend four to 500 rundown properties marketed six times each. If you actually are in the more expensive markets like Seattle, Los Angeles, somewhere in New York State, you may need to add as many as 1500 to 2000 rundown properties before you get a deal. Now, if you’re wholesaling, typically you’re going to get 15% of that value of the property as an assignment fee. You’ll notice that even though you spend more time and money to get a deal in a high price market, you’re going to make a bigger profit. It’s easier to get started in a Midwest market that’s lower cost. You’ll make a smaller profit, but it’s easier to get started.

David:
Why is that? Is that because most people are attracted to the higher profit market, so you’re just competing with a lot more people?

David Lecko:
Wish I had the answer, I just know what I observed.

David:
This is a principle that runs throughout business, that’s pretty good for us to talk about it. I talk to my team about this constantly. This will apply to many things in life, but definitely to business. What I say is, it’s easy in, hard out, hard in, easy out. When you buy an online lead for a real estate team, like the David Greene team, and we go to Zillow and we say, “Hey, we want to buy a Zillow lead.” They’re very easy to get what we call leads. People will say, “Hey, I want to know about this house on Main Street.” They’ll ask a question, but they’re not reaching out to you because they want you to be their agent. They just wanted to know about a house and they were forced to go through these hoops they had to jump through. They’re very hard to close. You got to get a lot of them and put a lot of work in to close anything, but they were easy to get.
When you go to an open house and you meet a person organically and they’re motivated to look for a home and they’re out on their weekend trying to find one and they haven’t found a good agent, you build a stronger relationship with them, way easier to put those people into contract. This happens with a lot of things. The toughest markets to get your foot in the door in will make you the most money over the long term. The easiest markets to get into are easy for a reason. There’s not as much competition, there’s not as much demand or there’s a whole lot of supply. You will make less money later. It’s just this idea of delayed gratification. It’s not that one way is better than the other, it’s just know what you’re getting into. What’s your experience like David, with running the business when it comes to the things that are easier to get the phone to ring? Do they tend to have the smaller amount of margin in them?

David Lecko:
Yeah. I would say definitely the things that are easier to get the phone to ring have a smaller amount of margin in them. The easiest thing that I’ve ever done is pull a list of high equity properties to have 35% or more equity. Then also, they actually expired on the MLS. You can pull that list straight out of a tool and you could start sending postcards or calling them. Of course, they want to sell their house. They listed it and it failed. Everyone else is calling those people. The fact that you’re going to try to approach them, how do you make your deal sound sweeter than the rest? You compete on price and then the margin shrinks. Exactly what you’re saying.

Rob:
I have a question. I guess I don’t really understand how this part works. You said that you’re looking for something that has higher equity, so that means that the owner has a lot of equity in the house? Meaning, in your mind, if they’re a distressed seller, theoretically, there’s more wiggle room for them to come down? How do you even figure out how much equity someone has in their property? It seems like that’s private info now.

David Lecko:
I use DealMachine to go look for these rundown properties. It has public info. It also estimates the equity they have on there. Just to be clear, when I’m driving for dollars, I don’t even look if it’s absentee owner, owner occupied. I don’t look at anything. I just look if it’s distress, I send the letter. When David was talking about do easy things have smaller margin? I was using that as an example, because separate from driving for dollars, I’ve pulled a list of just properties that expired on the MLS with decent equity, and it turns out a lot of other people pull that list too so that the margins are smaller there.

Rob:
Sure. Okay, cool. If you’re driving for dollars, I know that at this point you have a whole system for getting everything out automated offers made, but do you have a target profit or assignment fee or ROI that you’re looking for on a specific property?

David Lecko:
I’m looking for something in the range of perfect condition, $200,000. I want to either do a Burr deal where I put in 75% and that way I can refinance out and have no money in it at all. The Burr strategy, read David’s book, or I actually just want to analyze the rental. Say, well, could this cashflow at least 500 bucks at that price point? Meaning, the difference between what my mortgage payment will be and what I can rent it for would be 500 bucks. Those are two analysis that I look at to see if I want to actually do a deal.

David:
Question for each of you. If you had an opportunity to be all in for zero money on a Burr and you’re still having 25% equity, so houses were 200 grand, you’re all in for 150, $50,000 of equity, but none of your own cash is left, you got it all out. However, it loses $150 a month in negative cash flow in the first year. Is this a bad deal or a good deal and why? Let’s start with you, David.

Rob:
It loses how much? You said $250?

David:
150 a month.

David Lecko:
I’ll say this, I wouldn’t keep it. If it was worth 200 and I’m 150 in, got all my money back out, I would sell it. I would never keep a property that loses money for myself.

David:
Great point. You would just basically take that 50,000 of equity and you’d sell it. Same for you, Rob?

Rob:
I don’t want to keep it. I was just negotiating a seller finance deal last week or two weeks ago, and I laid out the numbers. I said, “Hey, man. Look, this is going to lose on a long-term rental, 200 bucks a month.” He’s like, “Well, the thing about rental properties is other people are paying your mortgage, and so sometimes you got to take a small loss. At the end of the day, the appreciation and the location is all that matters.” I was like, “Look, I understand what you’re saying. I don’t go into any deal where I lose money.” We renegotiated the terms, at least break even.

David Lecko:
Some people will do that deal. I know I could be able to sell it because if you own a rental property in San Francisco, a $3 million house may be only rented for $5,000. That doesn’t even cover the mortgage payment. Could barely even cover the taxes, but people buy them, just not me.

David:
Same question, but now the house is in a prime market in the country, it’s worth 800,000. You’re all in for whatever, 75% of that is, very nice location, but it’s still losing $150 a month in cashflow. However, when you look at the principal pay down, you’re paying off much more than the 150 a month. The appreciation is all but guaranteed and you know that rents are going to be going up pretty significantly in the future because it’s such a gray area with less supply. What’s your answer now on that same scenario, David?

David Lecko:
I still wouldn’t do it because I don’t want to have to babysit a property. I don’t want to have to calculate how much of my active income I have to suck away to actually keep that property afloat. I want to scale properties and the only way to do that is to make sure they all positive cashflow. I think I learned this from the cashflow game that goes along with the Rich Dad Poor Dad book is you can’t get out of the rat race if you have negative cash flowing properties. Now, sometimes randomly you could get the appreciation and sell it, but you’re still not out of the rat race yet until you actually buy cash flowing rental properties that are positive. Again, I would sell that deal, use the cash to buy some cash flowing properties.

Rob:
I really don’t like to lose money on a monthly basis just because I’ve worked so hard to get my cashflow where it is. With that said, I feel like you want me to say I would buy it, so I’m going to say yes. No, I’m just kidding.

David:
I see that there’s a lot more hesitation in each of your answers though. There was like, hmm. It moves the needle a little bit, right?

Rob:
Of course. I guess the caveat to that is like, I would take a deal that loses money if there’s a clear path to not lose money. Let’s say that I’m inheriting a tenant that’s under market like you said, and as soon as they move out, I can increase rents to not lose the money, and that’s going to happen within a year, no problem. I can do that. If it’s like I’m inheriting a three-year lease where I’m losing 500 bucks a month, no, I would never do that. If it’s going to turn pretty quickly, then yeah, sure.

David:
What if this property that we just mentioned at $800,000 can have a cost stake study done and the bonus depreciation is going to save you 50 grand that year?

Rob:
Yes. You see? Now you’re asking a good question.

David:
I guess here’s what I’m getting at, are you losing money if you’re only looking at the monthly income versus expenses or are there other factors at play in the overall investment of real estate?

David Lecko:
Yes, 100%. That’s a very fair point because yes, I think if you knew that you were going to, like you’re talking about Burr, flip it, get out of it in the next three years and you’ve got a ton of equity in there and you’re only going to lose, let’s say 10 or $15,000 in rents, but you’re going to make $200,000 from that flip or something. Totally, I think at that point, it would make sense.

David:
What about you, David?

David Lecko:
I would flip it. I would make the quick cash. Unless it’s making me money $500 per month, I’m not going to keep it myself. I still might do the deal if I was going to go ahead and sell it.

David:
What I hear you saying is that you would create energy through capital gains of a flip and then read or invests that energy into the cash flowing real estate that you know can find somewhere else, right?

David Lecko:
That’s right.

David:
I like it. Great stuff.

Rob:
Is this a preview? Is this the Blinkist of Pillars of Wealth?

David:
Wow. Dude, you’re getting good. This is scary good. I think I picked the right co-host. Look at this, man. That was really, really good. The book that’s going to follow it is just an understanding that most people were taught how to buy real estate using a training wheels model, which was just cash in cash out every month. That cashflow was the only thing that we were trained to look at. Once you get into real estate investing, Rob, like you were just mentioning, you own quite a few properties now, you start to see that it’s not quite that simple. That there’s energy that’s flowing in and out of these assets in many different ways. It could come in through equity that you bought at below market value. Equity where you forced equity. The cashflow doesn’t stay the same every year.
Rents go up in some areas or you can add units to properties to make them worth more. Certain areas tend to appreciate more than others. There’s tax benefits owning real estate. Then I think things also change if let’s say that David’s business that he’s running is bringing in 50 grand a month in profit, well now that $150 a month he might be losing isn’t as significant as when it’s like, dude, I’m on a tight budget. I got to get out of the rat race. For the people listening, we’re not all in the same position and the part you start at is not going to be the part you end up with. It’s okay if your model and your blueprint doesn’t look exactly like everybody else’s. David, for the person who’s starting off here, the real estate investor, who’s the ideal avatar that should consider driving for dollars?

David Lecko:
I think somebody who’s not got a lot of extra cash that they’re willing to invest in marketing. I think that if you haven’t done a deal before, it’s a great way to learn your neighborhood. The combination of those two things would be what I would recommend who should drive for dollars.

David:
What do you think, Rob?

Rob:
I think this is going to make the most sense for the newbie. I think obviously, anybody can enter this, but a lot of the times, people who are already relatively established already have their deal flow established. They’ve already got their deal flow going from people that are driving for dollars. It does seem a little bit more of an entry point for most people. With all that said, I just locked down a seller finance property, driving for dollars as well, like a week ago. Accidentally driving for dollars, I was driving in my neighborhood and there’s a for sale sign with the flag on top of it that said seller finance, and I was like, well, hey, I’m driving and I’m going to make the call and I made the offer.

David:
What a smart marketing strategy for that seller. That’s a smart agent or whoever put that together. That’s a great idea.

Rob:
Dude, it was a dream. It was a dream. 3% interest, 10% down. I mean, 30-year maturity. He just doesn’t want to pay the capital gains. Here’s the best part, everybody, he has 150 units in Houston multifamily, and he is like, “I’m wanting to get rid of them all over the next couple of years.” Guess who’s going to be first in line? This guy right here.

David:
I mean, you never know when you’re doing the right actions and you’re taking the right steps, what that’s going to turn into. I think that’s awesome. Now, David, these days you’re cash-flowing about 72 grand a year and you’ve got more coming. You’re helping other people find and close deals all over the country. Do you have the time freedom now that you were looking for in the beginning?

David Lecko:
100%. I could live off 72 grand if I wanted to. Now, I do spend a little bit more from other active income, but I’ve got the time freedom. What I love doing is getting up at 4:00 and going wake surfing three times a week. That’s something that’s not super cheap, but I’ve got the time freedom and the disposable income to be able to do that. That’s one way I love spending my time freedom.

David:
What kind of a sentence starts off with what I love doing is waking up at 4:00?

David Lecko:
It’s 4:00 PM. I get up. No, I don’t wake up at 4:00 AM, I get up from my desk at 4:00 PM.

David:
Okay, all right. That might make a little bit more sense to me than I love waking up at 4:00 in the morning. Rob’s been spending the last three months dragging himself through broken glass, trying to get to the gym, waking up early and letting us all know the whole time how terrible it is. Then David walks in and says, “My favorite thing to do is wake up at 4:00 in the morning. That’s what I use my time freedom for.” You’ve been able to experience a life you wouldn’t have been without real estate. You’re doing the things you love. They keep you charged up. You’re getting your wake surfing done, you’re experimenting with different barbers. You found the perfect wave to your hair, which I don’t think should be lost on our audience since you do love wake surfing. I wonder what Rob’s equivalent would be. Maybe mountain climbing. The quaff kind of looks like a bit of a, have you tried that yet before, Rob? Since his hair looks like a wave and he likes to wake surf?

Rob:
I feel like mine does also kind of look like in this particular moment, it’s got this bottom cloth and then there’s another cloth on top of it. I woke up like this. I got in at 4:00 AM last night.

David Lecko:
That’s when I was waking up.

David:
That’s funny, David, when it comes to landing these deals that you find the opportunity, you go talk to the seller. What we didn’t talk about are some of the psychological tools, scripts, whatever. What advice do you have for the person who thinks that they found an opportunity, they want to go open a conversation with the seller? Obviously, with your experience, you can write a person off who’s not serious, not motivated. You can also navigate the conversation when it’s a little more complex, but just for the person who’s like, man, I want to go talk to him, but I don’t know what I’m supposed to say. Are there books? Are there podcasts? Are there influencers? Who do you recommend that people listen to, to get better at having those uncomfortable conversations?

David Lecko:
I think Brent Daniels’ Talk to People would be a great person to follow and check out his Cold Calling Scripts on how to talk to people and have those conversations. Because ultimately, there’s only two things that give you money in this business, it’s finding distressed properties and communicating with the owners.

Rob:
I actually did a podcast with Brent not too long ago. Very nice guy. Love the philosophy. Seems very successful. Talking to people, what a novel concept, right?

David:
Right. I think for people that are good at talking to people, the assumption is why is this so hard? For people that are bad at talking to people, it’s like up there with public speaking. What I don’t want is for the people that are nervous about it, they don’t have a natural skill with other human beings conversating, but maybe they’re great at analysis or they have a great work ethic. I don’t want them to be afraid to go initiate contact. It is a skill that can be improved. I think when I read Pitch Anything by Oren Klaff, we had him on the show to talk about him. That was one of the takeaways I had is, there’s an actual science to communication. If you could get this down, people will listen to what you have to say and they will see your perspective and it will greatly increase somebody’s confidence with communication, which is what I teach to the people in my company.

David Lecko:
Communication is the foundation of life. I just started taking a storytelling class for the very same reason. It doesn’t matter if you’re trying to sell something, if you’re trying to entertain friends. The ability to communicate in a way that inspires people to listen and stay with you all the way to the end is the foundation of every relationship or every transaction. It’s just so important to life and I believe that.

David:
Awesome, man. That’s a great, great story and you did a great job of communicating today, so thank you for that. For people that want to communicate with you more, where can they find out more about you?

David Lecko:
You guys can follow me, dlecko on Instagram or if you want to check out DealMachine, get a seven-day free trial. We help people find distressed off market properties and make sure they’re communicating with those owners, which is so important. One of our top customers, and I host the DealMachine Real Estate Investing podcast where we interview people who’ve done their first wholesale deals.

Rob:
Love it. What about you, David?

David:
You can find me at davidgreene24 or davidgreene24.com to see what I got going on and how I can help people build their wealth. Rob, how about you?

Rob:
You can find me on YouTube over at robuilt where I talk about real estate, short-term rentals and life, liberty and the pursuit of happiness, and on Instagram too. All of it. If you want the goofy videos, go to Instagram.

David:
If you’ve got something off this episode and you want to keep learning more, check out BiggerPockets Podcast, episode number 781, where we have a round table discussion with Rob, Henry and I on the beginner’s guide to finding undervalued off-market deals in any market. Episode 731 with Brent Daniels or the Rookie Podcast, episode 241, where Sahleem Lee was interviewed, who went from being a line cook to a long-term investor with 32 wholesale deals. David, thanks for being here, man. Really appreciate you sharing your story as well as the details that you did. We will have to have you on again and follow up with how things are going. This is David Greene for Rob reading his second book Abasolo, signing off.

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

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HousingWire Annual: CoreLogic says climate change should be factored into financial analytics

CEDAR CREEK, Texas — Natural disasters are becoming more severe and more frequent. So far in 2023, 24 billion-dollar natural disasters have struck the United States, according to data from the National Centers for Environmental Information at the National Atmospheric and Oceanic Administration (NOAA).

This marks the all-time highest number of natural disasters causing $1 billion or more in losses in a year — and the year isn’t even over yet.

The alarming data underscores why housing professionals need to understand the financial impact of climate change on the real estate industry, George Gallagher, senior leader and principal of ESG, climate risk, natural hazard and spatial solutions at CoreLogic told attendees during a session at HousingWire Annual on Wednesday.

In an industry that is always looking for more data and more insights, CoreLogic’s financial analytics around climate change can offer “a path to clarity,” Gallagher said.

For instance, CoreLogic provides housing professionals with portfolio studies that have a special focus on climate risk. These studies help locate a concentration of risk (i.e. flooding or wildfires) in a loan portfolio to address potential problems.

A number of players in the industry benefit from the risk data, including real estate investors who need additional insights to make informed decisions. For example, if a property is exposed to high climate risk, its market value may decline. This may give investors pause as to whether a particular real estate investment is a sound one.

Loan servicers can use predictive analytics that map natural disasters to prepare for a wave of mortgage delinquencies after a natural disaster strikes.

“As professionals are underwriting loans, servicing them or investing in loan portfolios, there is a big increase in the price of homeowners insurance,” Gallagher highlighted. “And this has to be factored into the calculus for underwriting, the profit potential for servicing, as well as how those loans are packaged into a security.”

The CoreLogic presentation at HousingWire Annual is timely with the anticipated release of the Securities and Exchange Commission’s climate-disclosure rule.

Started in March 2022, the SEC proposal seeks to amend disclosure law to better account for climate risk among public companies. If finalized this fall, the rule requires public companies to disclose items like greenhouse gas emissions or the physical risk posed by any entity they might control, among other items.

If adopted, the rule might have a ripple effect on housing agencies such as the U.S. Department of Housing and Urban Development (HUD), the Federal Housing Finance Agency (FHFA) and Federal Housing Administration (FHA), which might enforce similar requirements.

Gallagher also pointed to growing concern about the threat uninsured climate-related losses pose to the broader financial system and economy.

In January 2021, the FHFA issued a request for information focused on climate and natural disaster risk management at Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

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HousingWire Annual: loanDepot’s Frank Martell talks Vision 2025 ‘wiggle room,’ profitability

loanDepot‘s CEO and president Frank Martell said the mortgage market will remain challenging in 2024. Still, the company is working to make money and, when the market turns, accelerate growth in a profitable, sustainable way.

To get there, Martell said loanDepot is still committed to its Vision 2025 plan, announced three months following his arrival to the company last year. But it was built to have a “little bit of wiggle room” to adjust to market conditions and opportunities for tomorrow.

Martel spoke during the HW Annual Conference held from Oct. 4-7 in Austin, Texas.

“We put in place a Vision 2025 program, which looked at where we want to take the company as we go through this cycle and then come out the other end as a stronger, better and more successful company,” Martell said.

“The market has changed a lot. It has been laid down about five times since I joined the company, and you have to react to that and adjust to that. So, the Vision 2025 was built to have a little bit of wiggle room to adjust it. It’s about addressing and resetting for today’s reality, but also looking at what are the opportunities out there for tomorrow.”

loanDepot hired Martell in April 2022, three months after he retired from CoreLogic. He announced the Vision 2025 plan in July 2022, which included simplifying the organizational structure, focusing on client service, quality, automation and operating leverage.

The target was to reach $375 million to $400 million in annualized cost reductions by the end of 2022 and run-rate operating profitability exiting 2022. loanDepot has been able to narrow its losses. In Q2 2023, the lender recorded a loss of $34.3 million in non-GAAP adjusted net income, compared to a $60.2 million loss in the previous quarter.

“We are still likely to face a tough market in 2024. But I’m feeling pretty good about rebounding into the spring selling season. And so, we’re working to make money in this market. And then, as the cycle turns, to build the company and accelerate growth in a profitable, sustainable way.”

Running a public company, Martell said that amid a challenging mortgage market, “the most important thing is not to try to play with stock price.”

loanDepot’s stock closed at $1.47 on Wednesday.

“Investors have a view of this sector in general; every company has a low valuation, and certainly in mortgages,” Martell said. “And there are some winners currently in the housing market that are doing better (…). What people are looking at is the companies that are going to come through as winners.”

Martell said loanDepot is investing in fundamental, underlying systems and looking at the point-of-sale technology. As the mortgage market discusses topics such as first-time homebuyers, affordability and the new generations of borrowers, lenders must develop different solutions and interfaces.

“We have a lot of investment going into how we interact with them, make them successful homeowners, and make the experience a little less painful and more productive.”

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Mortgage rate lock volume plummeted 20% in September as rates soared

Mortgage-rate-lock volume fell 20% in September, led by a combination of seasonal decline in purchase activity and rising interest rates, according to Optimal Blue’s Originations Market Monitor report.

September’s rate-lock decline continues a four-month trend of falling mortgage volumes, with month-over-month purchase locks down 20%, cash-outs down 17% and rate/term refinances down 18% in September. Total loan volume fell 33% over the same period compared to a year ago.

““The refi share of total lock volume ticked slightly higher from 12% to 13%, primarily as a result of seasonal purchase declines. Cash-out volumes continue to be the lion’s share of refis at roughly double that of rate/term volumes, with virtually no mortgages in the money to refinance,” Scott Smith, interim CEO of Optimal Blue, said.

Purchase lock counts – which exclude the impact of rising home prices – were down 32% year over year, and 39% from pre-pandemic levels in 2019.

While conforming loans still made up the majority of production at 57% in September, conforming volumes trended well below pandemic levels, according to the report.

FHA and VA loan production both gained in activity share to 20.6% and 10.4%, respectively. The lock-production share of nonconforming loans – including both jumbo and expanded guideline loans – grew in September to comprise 11.1% of the total.

The average loan amount increased to $353,000 in September while the average purchase price on locked loans remained the same at $450,000.

The 30-year conforming fixed rate rose 33 basis points during the month to close at 7.41%, according to the Optimal Blue Mortgage Market Indices. Rates for FHA loans averaged 7.18%, VA loans were 7% and jumbo loans were 7.6%.

The 30-year, conforming rate spread to the 10-year Treasury yield narrowed 17 basis points, with the 10-year ending September at approximately 4.6% – nearly 40 basis points above the highs set last fall.

“As the market reacted to the Fed’s ‘higher for longer’ message, we saw mortgage rates pushed to multi-decade highs in September,” Smith noted. “We also continue to see average credit scores remaining high, suggesting tight credit availability and a relatively small cohort of buyers who can make a purchase in this historically unaffordable environment.”

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How to prepare a comparative market analysis (CMA) report

A Comparative Market Analysis (CMA) is a detailed report that helps real estate agents evaluate and determine the market value of a property. It is an essential tool that allows agents to clearly communicate a pricing benchmark for a property. Successful agents create effective and accurate CMA reports that help their clients make informed decisions.

A CMA report includes information on similar, comparable properties in the area, including recent sales, active listings and current market trends. Like you, as a real estate agent, I have prepared many reports analyzing pricing trends to help provide guidance to buyers, sellers and investors alike. In this article, I’ll share the steps, what to include, what not to includes, and how to assemble a CMA report that’ll impress your clients.

In this article

Key takeaways

— A comparative market analysis report can provide valuable insights for both buyers and sellers, as well as real estate agents.

— For buyers, it can help them determine if the property they’re interested in is priced correctly and if it is a sound purchase. This may affect their life savings since buying a home is one of the largest purchases one can make!

— For sellers, it can help them determine the best price at which to list their property and ensure they get the best return on it. Sellers would be able to carefully review comparable properties on the market as well as those that have successfully closed.

How to prepare a CMA report for your clients

The most important factor in any CMA is the quality and accuracy of the information that goes into it. Proper research, and a thorough understanding of the data you’re including is required to get the best information out of the analysis.

If your CMA is put together in haste with irrelevant information, it will not be a helpful tool for anyone and may reflect poorly on you as the agent presenting it. It’s imperative that agents invest their time to properly prepare comps!

To create an effective and accurate CMA report, you need to consider several factors, including:

What is included in a CMA report
What doesn’t belong in a CMA report
How to choose or determine which comps to include
How to evaluate each potential comp
Market and neighborhood trends

Information your CMA report must include

You should include both active listings and closed listings in your CMA report. Your comparative marketing analysis should include the following data points:

Location of relevant listings that are comparable
Pricing of active listings
Selling price of recently closed sales in the same building or area
For recently closed listings, length of time property was on the market
Size and number of bedrooms and bathrooms in all comparable properties (known as comps)

Information to exclude from your CMA report

Personal owner information: Do NOT include names or details of any owners in the comps. The ideal comparison is an “apples-to-apples” analysis without the unnecessary distractions of irrelevant data.
Property appraisal information
Detailed outline or description of each property. CMA reports are simple and effective tools. These details are more relevant and appropriate in an appraisal. However, you’ll want to consider all of these details when choosing your comps. More on that later.
Unlike Properties: Omit any properties in completely different locations or those in a different size or price range.

Assembling your comparative market analysis

I usually develop a report that is broken out into five sections, outlined below. Here are the steps you should take to develop your CMA report

Step 1. Gather subject property details

Whether you’re evaluating a listing for a seller client or potential property for purchase for a buyer, you’ll want to include details about the subject property, to include the home’s size, lot size (if applicable), age of the property, any renovations or upgrades, the condition of the property, its construction or design style, as well as its physical address and location.

Step 2. Select active listings comps

Choose active listings near to the subject property. The distance will really depend on your market and your knowledge of the surrounding neighborhoods. Choose properties of like kind. If your subject property is a single-family home, focus on single-family homes in the same school district.

Ensure that active comps are ones that have similar lot size, square footage, number of bedrooms and bathrooms, and number of parking spots included with the property (if it’s an apartment or condo). If active listings are abundant, you’ll want to limit your chosen comps to those that hit the market most recently.

Pro Tip:
Five to eight properties are the sweet spot. Floorplans are a bonus, but many agents don’t include them.

3. Recently sold comps

You’ll want to include recently sold properties of the same type and size, noting the same factors as with active listings comps. Choose properties that have sold in the past six months or in a period of rapid market movement, in the past three months. Focus on properties that closed with reasonable terms and within a reasonable number of days on market.

Pro Tip:
You don’t need to include all the property details in your Comparative Market Analysis. They are more appropriate for an appraisal. However, it may be helpful to add short descriptions like “renovated” or “XL terrace” to show unique features of the properties you’ve included in a “Notes” section at the end of your CMA report.

4. Detail market and neighborhood trends

Here’s where your hyper-local market knowledge can really shine! It is essential to consider the micro-market or neighborhood trends when creating a CMA report. For example, in New York City where I live and work, many different neighborhoods border each other and are very close together – but property values vary significantly from one to the next.

It behooves you to confirm where any property sits when including it in the list of comparables as it may greatly affect the pricing. Including these details can show your client that you are a highly knowledgeable agent in your hyper-local area!

5. Develop your analysis or executive summary

For an apples-to-apples comparison, you’ll want to adjust for the differences between your chosen comps (both active and sold) and your subject property. For example, if one of the sold comps had an additional parking space, you’ll want to adjust its sold price down based on the local market value of a parking space. In a densely populated urban area, parking is at a premium, whereas in the suburbs, a parking space might not hold as high a value.

If an active listing has two bedrooms and your subject property has three bedrooms, you’ll want to adjust your price recommendation accordingly. Again, this is where your local market expertise is highly valuable to your client. Understanding the features and their value in your market is crucial to creating an accurate comparative market analysis for your client.

The full picture

Once you’ve gathered all the necessary data, it is time to put it all together. It is crucial to structure the report in a way that is easy to view and understand for your clients. What good is a report that you can’t read? You can use digital tools or print out the report, depending on your clients’ preference.

You’ll likely see a trend emerge from the comps you’ve chosen and can give your buyer or seller an estimated value or market price for the subject property in question. If they are a seller, you can suggest a conservative, moderate and aggressive selling price for their listing. If they’re a buyer, you can suggest a conservative, moderate or aggressive offer price for the subject property they’re interested in. You get the picture!

A note on timing

Now that you’ve done all the market research and analysis, it’s time to present your findings to your client. I find it helpful to send my comparative market analysis via email a few hours prior to an in-person or virtual meeting, where details can be discussed. This gives your clients an option to review or scan the document and prepare questions if needed.

On the other hand, sending it days in advance may result in clients canceling the meeting as they may feel as if they have your analysis and no longer need your expertise and services. I like to point out to clients that we will review the minutiae in our meeting. Presentation is key here!

Where to find good CMA report templates online

There are numerous templates available online that can help you create an effective and accurate CMA report. You can find free templates or purchase more advanced ones to provide your clients with a more detailed report. Your brokerage may also have a branded template available for use. You may also want to find a few and take the best formatting of each to create your own using tools like Canva.

Providers	KeyFeatures	Starting Price	Learn More
Etsy	Choose your level of design customization. Options for every budget. Professionally designed templates.	CMA Report templates startign at $2	Etsy
Canva	Wide variety of free, customizable templates and fonts. Download to multiple formats. Premium stock images.	Free, with paid plans from $12 per month	Visit Canva
HouseCanary	Tools to help you select comps. Property value insights.	$10 per report	Visit HouseCanary
Cloud CMA	Interactive, cloud-based tool. Premium, printed CMA reports.	$49 per month	Visit Cloud CMA
ShowingTime	A suite of productivity tools for agents, including appointment setting. Branded, visual reports.	$45 per user, per month	Visit ShowingTime

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Frequently asked questions: CMA reports

What's the difference between a comparative market analysis and an appraisal?
A comparative market analysis is an evaluation of a property’s value based on comparable properties in the area. It allows agents and their clients to compare similar properties relevant to their analysis.
An appraisal is a more detailed professional report that provides a property’s appraised value based on a thorough inspection and analysis of the property’s condition and features. It is used by lenders and third parties to ascertain a specific price point of a home.
How many comps should be included in a comparative market analysis?
There is no set number of comps that should be included in a CMA report. The number of comps you include will depend on the availability of comparable properties in the area and the quality of the data. I like to focus on having three to five ACTIVE listings and three to five recently closed properties, for a total of five to eight properties, for a complete picture.
What data sources should I use in a comparative market analysis?
When creating a CMA report, it is essential to use reliable data sources. These may include local real estate listings, county property records, and MLS databases. The information should be recent and relevant to the current market. If there are no data points, older items may be included but there should be a footnote disclosing this.

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Building An Empire, Building Opportunities

HousingWire Annual: FHFA’s Sandra Thompson addresses loan buyback issue

The Federal Housing Finance Agency (FHFA) Director Sandra Thompson said Wednesday that the agency is working to provide more clarity on its framework and use alternatives amid a spike in Fannie Mae and Freddie Mac‘s loan buybacks.

The GSEs’ loan buybacks have been one of the top complaints among mortgage lenders in a near 8% mortgage rate environment. Thompson addressed the issue during a session at the HousingWire Annual conference held Oct. 10-12 in Cedar Creek, Texas.

“We want to figure out a way to balance the repurchase requests and the repurchase alternatives in a way that makes sense for everybody, because I’m very sympathetic to the environment that we’re currently in. But I’m also sympathetic to making sure that we purchase loans that are heavily manufactured in the way our expectations require,” Thompson said.

According to Thompson, the loan repurchase framework was implemented nearly 10 years ago – the first thing she worked on when she started at FHFA. However, after record volumes of loans purchased by the enterprises in 2020 and 2021, there was an increase in repurchase requests in 2022.

“But I do realize that we’re in a completely different interest rate environment now. And repurchasing those loans in this high-interest rate environment certainly causes losses,” Thompson said.

She continued, “So, we’re working with the enterprises to look at how can we provide clarity [on the framework] (…) We want to make sure that we have quality loans. And that’s true on both sides.”

Thompson said she thinks not every repurchase request “either has or should end up with a repurchase.”

“Because every single defect is not a major defect. There could be some way or alternatives to repurchase that need to be considered,” Thompson said. “For example, if we’re talking about income, you may have more information that can help support a DTI [debt-to-income ratio] (…) There may be supplemental information that comes to the enterprise after the fact that probably should have met with the loan file. “

Technology also has a vital role in this discussion.

Thompson said, “If there are tools that can be helpful to the QC [quality control] process, that certainly would be helpful sooner rather than later.”

Thompson added, “It helps when you have some experience of people engaging with the enterprises on these processes because what I’ve heard is, in some cases, this isn’t always true.”

During the session, Thompson said that “there is urgency” on the loan repurchase matter.

“From my perspective, the repurchase request has gone down since the early days of 2022. It takes about six months after a loan is delivered for the processes to take place. And so we are seeing a downward trend in terms of repurchase requests.”

She added, “But what I would like to get in place is our repurchase alternatives and making sure that both parties – enterprises and the sellers – have a good understanding of what the requirements are.”

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Building An Empire, Building Opportunities

RESPA enforcement is back — are you ready?

What do beach trips, baseball tickets and fancy dinners have in common? All are violations of the 1974 Real Estate Settlement Procedures Act (RESPA) … or maybe they aren’t — it depends on the circumstances and who you ask.

Although RESPA prohibits quid pro quo payments, known as kickbacks, it allows for so much else, leaving room for interpretation.

“Regulators would like to think that their rules are very black and white, the problem is that black and white creates gray space,” Jerra Ryan, the vice president of Firstline Compliance, LLC, said in early June. “The only way you can navigate that gray space is to define what your black is in that space.”

And the market has gotten much darker over the last few years.

After six years of no enforcement actions and a rapidly declining housing market, RESPA attorneys believe some in the industry may be more willing to test the boundaries.

“I think folks tend to get creative and take a bit more risk than they might be willing to take in a market where rates are lower,” Holly Bunting, a partner at Mayer Brown in the areas of residential mortgage banking and consumer finance, said in an interview.

Colgate Selden, founding member of the Consumer Financial Protection Bureau (CFPB) and an attorney at SeldenLindeke LLP, agrees: “People are getting more desperate in the mortgage industry in general. And they’re starting to ignore compliance or entering into agreements without fully documenting and monitoring them like they should, hoping they’ll make it through this downturn.”

But this might all be coming to an end after the CFPB’s latest enforcement action on RESPA and mortgage kickbacks. The Bureau issued orders against Freedom Mortgage Corporation and Realty Connect USA Long Island in mid-August, its first such enforcement action since 2017.

More than a dozen industry pros and attorneys told HousingWire that RESPA rules are unclear, leaving violations to flourish in a shrinking market. However, the Freedom case represented a “wakeup call.”

Kickbacks in a shrinking market

A shrinking market, defined by high mortgage rates and low inventory levels, appears to have exacerbated the existing mortgage kickbacks problem, industry pros told HousingWire. That’s because real estate agents and loan officers are in survival mode and desperate to close new business.

For lenders and brokerages, the risks of LOs or agents overstepping are high. A CFPB enforcement action could “force already financially weakened lenders into bankruptcy,” Selden said.

“This should be part of the cost of your doing business – compliance and risk monitoring for these types of things. If you can’t do that, then maybe you should look at strategic options or shutting your doors anyway,” Selden added.

More vexing for lenders and brokerages is that RESPA rules remain unclear, despite recent guidance from regulators and the existing consent orders.

For example, paying for lead lists or desk rentals is typically not a RESPA violation. But that comes with some caveats. One can’t spend more than the reasonable market value, must also use these services and actually receive them. Regulators may also demand that you prove all of this. Otherwise, it could be seen as a payment for a referral, attorneys said.

The same happens with concert or sports tickets as a marketing opportunity. Can the LO back up the narrative?

“If you just give the real estate agent the tickets, you don’t go to the game, and you don’t sit and try to schmooze, that seems more like a thank-you thing for being of value in return for referrals, as opposed to a marketing opportunity and relationship,” Brian Levy, counsel at Katten and Temple, said.

The lack of clarity and myriad interpretations from regulators is a major frustration for industry firms.

“The line of what is legal and illegal depends on who is running the CFPB,” Steve Murray, partner at RealTrends Consulting, said.

Murray adds: “Under the Obama administration, they basically just did away with marketing agreements even though many were written and performed within the laws that came out of the Bush administration. Then the Trump administration went back to more of where the Bush administration was, but now with Rohit Chopra [under the Biden administration], things are going back to where the Obama administration was.”

The consent orders themselves are not always helpful in explaining the actual activities involved or rules as they only show one side of the story–the CFPB side. The orders can give insight into what the agency thinks the rule is or wants the rule to be. But the other party entering the consent order usually denies the allegations and is not permitted to say anything about the law.

Companies typically agree with these orders because they want to avoid spending the resources fighting regulators in protracted litigation, whether in court or elsewhere. This makes the accusations a poor source of information to better understand the rules.

“It often seems cheaper and less risky for mortgage lenders just to pay the penalty and move on in life,” Troy Garris, co-managing partner at Garris Horn LLP, said.

In the spotlight: MSAs

The consent order against Freedom and Realty Connect focuses on marketing services agreements, an example of how the RESPA’s interpretations have evolved over time. Under MSAs, a lender or title insurer markets the services of a real estate agent or brokerage, and vice versa, in exchange for a set fee.

In 2015, the CFPB released guidance to MSAs since its investigation showed that lenders, appraisal management and title insurance companies used it to disguise kickbacks and referral fees. Basically, the CFPB found that MSA participants failed to provide the services under the agreements.

Following the 2015’s guidance, many industry participants concluded that the CFPB considered MSAs to be a RESPA violation.

Mike Golden, co-founder and co-CEO at @properties, said that the company had a mortgage MSA years ago for a while, which was a “nice income stream.”

“But when the CFPB cracked down on that around eight years ago, we stopped it outright,” Golden said. “It was a bummer to lose the income stream, but it wasn’t worth the risk based on the potential penalties and some of the ways the government looked at it.”

In October 2020, the CFPB published new guidance in the form of frequently asked questions on the RESPA Section 8 topics to provide more precise rules, considering that the bulletin from 2015 did not provide regulatory clarity, the CFPB stated.

The guidance included, among other things, that the MSAs ought not to be directed to a specific individual but to a broader audience of potential customers, the services must be actually performed and the compensation must be at market value.

Based on this guidance, the CFPB alleged that Freedom provided real estate agents and brokers with incentives, including cash payments, paid subscription services and catered parties in exchange for agent and broker referrals for mortgage loan offerings.

Freedom, the company’s attorneys, Realty Connect and the CFPB declined to comment on this story.

In its consent order, the CFPB said that more than 2,000 real estate agents and brokers accepted free access to subscription services, such as property reports and sales comparables. In turn, most of them made mortgage referrals to Freedom’s traditional retail loan officers.

“There were some classic, fundamental RESPA violations here that are pretty clear: the subscriptions for the real estate agents to look at property valuations and other defrayals of expenses for stuff that they would use in their business — that’s the classic, old school ‘things of value’,” Selden said.

However, some of the allegations could be clearer, attorneys said.

Levy, of Katten and Temple, said the CFPB failed to connect the dots on a RESPA violation when it mentions Freedom sometimes documented the number of referrals to track performance under the MSA agreement.

“In any marketing spending, you need to track your return on investment,” Levy said. “However, if you vary the payment under the MSA based on the amount of referrals generated, it could be a problem, because the reason you are tracking it is that you want to pay for the referrals and not for the services.”

Selden said a way to solve this problem is to track overall application volume, which is not necessarily resulting in closed loans.

“But the more applications you get, the more chances they might get closed on eventually. That’s traffic coming to the company, not necessarily referrals. And that’s the point of advertising,” Selden said.

Levy also raises questions when the CFPB mentions that Freedom encouraged its MSA partners to use a third-party smartphone app, which its loan officers would share with the brokerage’s agents, who would later share with clients. The app featured the Freedom LO’s headshot and Freedom logo at the top and included buttons where the client could contact the Freedom loan officer directly for assistance.

“What I think CFPB needs to say is that Freedom tied the MSA payments to making sure that these smartphone apps were distributed. That would have been problematic because that’s essentially paying for what amounts to a referral if that app is a way to communicate only for Freedom,” Levy added.

(Editorial note: Levy and Selden are not involved in the case and provided their opinions based on the consent order.)

New enforcement actions on the horizon?

Industry experts believe that the Freedom case opens doors to more RESPA-related enforcement actions, and not just from the CFPB. State attorneys general may also pursue cases.

When the CFPB was created, it mainly targeted small actors, which is not the case now. But lenders always seem to get in trouble because “that’s where the money is,” attorneys said.

Francis Riley, a RESPA attorney, said the Freedom case may seem like a pivot for the CFPB, “but one has to remember that this resulted from an investigation that most believe started over three years ago.”

“So it cannot be viewed as something new or a new focus by the Bureau. This could be closing the book on an investigation that did not materialize as strongly as the initial investigators might have thought. This may be why the fine is relatively small, notwithstanding the length of time the alleged conduct was carried on and the number of participants (those who received the benefit who are also liable under RESPA).”

Now that a company allegedly receiving the kickback has been slapped with a fine, “it should be a wakeup call,” Riley said.

According to Gretchen Pearson, the broker-owner of Berkshire Hathaway HomeServices Drysdale Properties, many smaller top-performing agents and teams think they can fly under the radar and are using “sham MSAs to do mortgage kickbacks.”

“The agents don’t think they will get caught because they are smaller, and the CFPB wants to go after big fish,” she said. “But the LO will take up a corner of the ad space and pay for the whole advertisement, and it is getting sketchier with digital marketing.”

Based on an advisory opinion released by the CFPB earlier this year, anything directed to the consumer online, such as a mortgage lender’s logo on a real estate brokerage’s website, could be considered co-marketing and needs to be evaluated to see if it fits within the scope of an accepted referral.

According to sources, when mortgage kickbacks flourish, there’s no fair game for real estate agents and loan officers. Moreover, homebuyers don’t have access to all the options available in the market.

Jack Granger, a New Jersey-based community mortgage loan officer at TD Bank, believes mortgage kickbacks affect mainly underserved communities.

That’s because “people are desperate to buy and not as financially astute.”

He estimates that “three out of 10 potential borrowers don’t even get to” a loan officer offering the best options. It means these homebuyers are not referred to competitive programs, which would provide lower down payments, no mortgage insurance and grants for closing costs, saving the homebuyer thousands of dollars a year.

Ken Trepeta, the president of RESPRO, said it’s important that “everyone plays by the same rules and we definitely don’t want to end up in a situation like 50 years ago when RESPA was enacted and just have an environment that is rampant with kickbacks.”

“We do not want to see a situation again that inspires Congress to act again and feel like they need to do something draconian because the current law is not being followed — you want the enforcement so that doesn’t happen.”

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