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Mom-and-Pop Investors Fueling Foreclosure Auction Market

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According to the 2019 Buyer Insights Survey Report, released this week by Auction.com, more than half of foreclosure auction buyers are mom-and-pop investors who are purchasing between one and five properties a year. The survey found that 51 percent of foreclosure auction buyers plan to purchase fewer than five properties in 2019, and 22 percent plan to purchase more than 10 properties for the year. Only 2 percent of buyers said they plan to purchase more than 100 properties in 2019. “Foreclosure auctions are no longer dominated by larger investors able to navigate what was an opaque process of purchasing a property at the courthouse steps or from a hard-to-find REO asset manager,” said Jason Allnutt, Auction.com CEO. ”The majority of foreclosure and REO auction buyers are now smaller, mom-and-pop investors who are taking advantage of a much more accessible buying experience.” Among the report’s additional highlights: 73 percent are purchasing properties in the South region of the country, the highest share of any region. Other regions of the U.S. came in at Midwest (39%), Northeast (22%) and West (13%). 24 percent said their local housing market is overvalued, with a correction possible. 33 percent expect to see home price appreciation between 3 and 5 percent over the next 12 months. Novice investors were identified as the biggest competitive threat to buyers surveyed. Rehab-and-flip was the most popular investing strategy. 49 percent budget at least 20 percent of the property purchase price for rehab costs. The Auction.com 2019 Buyer Insights Survey Report is based on a survey sent to more than 4,700 buyers who had purchased at least three properties on the Auction.com platform. The survey was conducted between June 6 and June 20, 2019, with 197 buyers responding.

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The Hidden Weapon: Property Managers

Property managers can be the difference makers for profitable portfolios. Owning rental properties can be an outstanding investment. But managing and growing a portfolio is also full of inherent challenges and risks. Managing tenants, rehab and general maintenance, vacancy cycles, and even legal and code-related responsibilities can be complicated and challenging—often requiring a range of specialized skills, strategic vendor partnerships and operational capacity. Property managers can identify trends across your portfolio that you might not see. Trends they may identify in preventive maintenance, tenant screening and so on can help you to proactively make your portfolio more profitable and create a better experience for your tenants. Enhanced Tenant Experience Tenants are often a real estate investor’s primary revenue source. They can also be the cause of some of your biggest business risks, which is why creating and managing a tenant experience is one of the most important functions of a property management company. Working with a property manager who enhances a tenant’s renting experience can ultimately result in longer leases, fewer vacancies and your ability to maximize rents. A property manager will be available to your tenants 24/7 to handle emergency maintenance repairs, rent collection and move-ins/move-outs. They can also ensure that any damage is handled quickly, so that a small problem doesn’t become a big disaster. Better Operational Practices Property managers should have the resources to facilitate online payments, present key performance indicators and other data, eliminate extended vacancy and provide access to qualified and competitively priced maintenance/repair services. Property managers’ knowledge of local, state and federal landlord-tenant laws will ensure that all practices are in compliance. They should also have adequate processes in place to ensure proper record retention. In addition, property managers are experienced in recovering NSF checks (checks returned for “not sufficient funds”), collecting debts and evictions. Outsourcing these activities removes the burden from your operation and helps to insulate you, the investor, from having to carry out potentially difficult tasks. Property managers can also streamline tenant screenings and enhance due diligence, including checking credit reports, past evictions and criminal history. All of these help to ensure that only desirable tenants rent your properties. The Right Tenants Unfortunately, not all tenants are equal. Putting the wrong tenant in your investment property can significantly affect both short- and long-term profitability. Tenant screening goes beyond the basic credit check. Be sure you have a thorough understanding of the property management company’s tenant selection criteria. In a market with greater than 95% occupancy, it is an opportune time to charge your property manager with finding the optimal tenant. Finding the right tenants and keeping them happy increases the likelihood of lease renewal. A property manager should also look to increase profits by increasing rent at renewal. They will be able to gauge what a reasonable—but also profitable—increase should be, while also staying compliant with landlord/tenant laws. The Upside of Upkeep Most property management firms have standing relationships with a range of contractors from plumbers and roofers to HVAC technicians and excavators. Those relationships can mean less costly and faster repairs. Speed is a critical factor for many reasons, most notably tenant convenience and alternative living expenses. Routine maintenance, upkeep and upgrades increase the value of your property. According to data surveyed by PropertyMeld from  5,800 units across three markets examined over 18 months, preventative maintenance and overall upkeep can also reduce tenant service requests by 38%, thus cutting down on unexpected expenses. Regular inspections will ensure the property is kept in good condition and that the fire alarms are fully functional, while also verifying that all individuals living in the property have been screened and are listed on the lease. At time of move-out, the property manager should conduct a thorough inspection of the property and provide a report of all required and recommended repairs. Property managers can also help enforce that your tenants maintain an active renters/tenant liability insurance policy. Such a policy will help preserve the stability of your primary property and casualty coverage. According to a recent study by SES Risk Solutions, over 55% of all fire losses were tenant-induced—losses that would have been largely recoverable via subrogation, if a renters/tenant liability coverage were in place. Most importantly, a  property manager takes the burden of the day-to-day operations off the investor, allowing the investor to focus on growing the portfolio. A trusted property management firm can also allow investors to expand their holdings beyond a tight geographical area. Finding the Right Property Manager Property management companies often focus on specific property types (single-family dwellings, multifamily dwellings, condominium units, etc.), so it is critical that your property manager has the specialized experience to handle your unique needs. Property managers should be an expert in their respective field and be quick to adapt to changes in the market and industry (i.e., marketing approach, tenant communications, etc.). Select a property manager that wants to establish trust and offers consultative services, such as through a dynamic Not to Exceed (NTE) amount for repairs and maintenance. Additionally, look for property managers that have policies and guarantees that protect you if they are unable to place a new tenant within a reasonable time. Marketplaces (such as Roofstock), and property managers will sometimes waive fees, cover rent and offer one-year guarantees on repairs and maintenance. Several industry events provide great access to property managers, including IMN’s Property Manager Forum. Online searches are also another great place to start. Here are key search terms to use: <Your City> Property Managers <Your City> Property Management Rental Property Management Rental Management Property Management Companies Near Me Ask for recommendations from your local chamber of commerce or property manager associations such as the National Association of Residential Property Managers (NARPM), read blogs and network with fellow investors. It’s also a good idea to talk to your insurance carrier or other risk management specialists to find out if you’re fully covered and to ensure your prospective property management company carries the right insurance.

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Cyberattacks: The Quiet ROI Killer

Tips for minimizing risk in today’s digitally reliant world By Zach Fuller Market shifts, tenant issues, lawsuits and maintenance expenses are risks we think about and plan for regularly in our investment endeavors. Proper planning and safeguards help you keep the returns you’ve built, both in your business and investment portfolio. However, there is a “ROI killer” that happens quicker, hits harder and is more elusive than perhaps any of the others—a cyberattack. We hear about cyberattacks on Fortune 500 companies almost daily, leading many people to believe that big brands are the primary targets. But, most people do not realize that for every breach mentioned on the news, there are thousands more that go unannounced around the U.S. Victims range from mortgage companies to venture capital groups and, yes, even technology service providers. Small Targets, Big Payoffs The real estate industry is made up primarily of smaller organizations without significant IT budgets and rarely with an in-house cybersecurity team. As a result, these companies are easy targets for cybercriminals. Whether you have a personal portfolio of properties, are a regionally recognized title company, or are a nationwide lender, you are the perfect target for financially motivated cybercrime organizations around the world. You may ask, “Why would they want to come after me?” The answer is simple: You deal with sizable assets, are involved in complex transactions and rely on some level of trust in other parties to run your business. Most of all, technology is a required part of your daily operations. Cyberattacks are financially motivated and often successful in extracting significant amounts of money from the victim. For the individual investor, an attack may be escrow funds unknowingly transferred to an account controlled by a criminal rather than the escrow account. For the title company or lender, attacks can range from theft of large amounts of personal and financial records, to stopping business operations in their tracks until a large fee is paid to the attacker. Reduce Your Risk Knowing that most cybercriminals are financially motivated and looking for the quickest income, you can follow simple practices to make yourself and your company a harder target than others. When the cybercriminal’s potential gain is less than the resources required to achieve it, they move on to easier targets. Here are a few ways to reduce risk: For Companies  (title, lenders, PE  firms, retirement plan custodians, etc.) Align to a standardized cybersecurity framework such as NIST SP 800-151 or CIS Controls. Build a culture of  security, starting with leadership support. Deliver staff awareness  training quarterly. KnowBe4 is a great  platform for this. Conduct annual risk assessments and  penetration tests on critical systems. Ensure you have a complete set of IT and security documentation. These include documents such as an Incident Response Plan, password policy, acceptable use policy, bring your own device (BYOD) policy, etc. Carry cyber insurance. Although a reactive measure, cyber insurance is inexpensive and likely to be used. For individuals Have situational awareness. If a request doesn’t feel right, pick up the phone and make a call to verify. Just because an email appears to come from someone you know, it doesn’t mean it is legitimate. Use two-factor authentication. Use an authenticator application (e.g., Google Authenticator) when possible, instead of a pass code being sent via text message. Set up critical accounts with a separate and private email address rather than your daily business or personal account. Keep all software and firmware updated on your computer and network. Ensure your home and office router default usernames and passwords are changed, both for Wi-Fi and router administration. Use a virtual private network (VPN) service when working from any public Wi-Fi. Use hard passwords with a minimum of 12 characters and no common words (password managers are great for this). Implement lock screens on all devices and remote wipe capability on mobile devices. Back up your files regularly, encrypt the backups (there are many tools available for this online), and then “unplug” until next backup. Ensure your vendors (title companies, etc.) are following accepted security practices to reduce the chance of your own information being compromised in their breach (security questionnaires are available online). Dark Clouds There is a dangerous myth that has caused many cyberattacks among smaller organizations. This is the myth that cloud-based services will keep you secure. From Google G-Suite and Office 365, to Salesforce and Dropbox, we all use cloud-based services to support at least portions of our business operations. Using the “cloud” absolutely makes sense for most small-midsize businesses. It provides tremendous capabilities while reducing the required investment in IT infrastructure. However, even the services with the most sophisticated security measures can be compromised if users don’t configure their accounts properly. For example, recently an investment group experienced significant losses after an executive’s primary email account was hacked. This account was used for everyday communication, so it was publicly known. It was also used to register the company’s domain name, for cryptocurrency accounts and to access the cloud-based storage containing information about all the company’s high-net worth investors. The attackers were able to hijack the domain name, taking company communications offline (email accounts and website), steal cryptocurrency accounts and compromise the security of the investors by accessing their sensitive data. Trust is vital in the investment business. One can only imagine what a  company’s investors must feel when the company seems to have disappeared digitally. Suddenly, investors can’t reach their point of contact and the company website is down. To make it worse, the investors get notified that their personal information and even bank account numbers are now in the hands of criminals. Sometimes this notification comes from the  criminals themselves as  a form of extortion. Situations like these show how critical proactive cybersecurity is for organizations of all sizes  in today’s technology-reliant environment. Whether you take proactive measures yourself or hire professionals to protect your company, cybersecurity is a requirement of doing business. There are already enough variables and risks in the

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Making a Market that Works for Everyone

PeerStreet’s “two-sided marketplace” wins across the board. By Carole VanSickle Ellis When PeerStreet co-founders Brew Johnson and Brett Crosby started PeerStreet in 2013, the industry lacked the vocabulary to even describe the innovative online marketplace they had created. Although “two-sided marketplaces” did already exist (think: Amazon, Uber and Airbnb), the real estate industry had a notable lack of them. The new company’s aim was to change this and, in the process, create a completely unprecedented environment where real estate entrepreneurs, accredited investors and private lenders could conduct successful transactions in exponentially growing volumes. PeerStreet is the industry’s first two-sided marketplace for investing in real estate debt with investors on the one side and lenders on the other, Johnson and Crosby explained. “While a one-sided marketplace builds one business, a two-sided marketplace scales thousands of businesses,” COO Crosby said. “This creates a social-impact element in two-sided marketplaces that is one of PeerStreet’s defining advantages.” That advantage has served to make the fintech platform one of the most attractive in an increasingly crowded field thanks to the transparency and market access the entire company—now more  than 200 strong—holds  in such high regard. “It’s a $3.5-$4 trillion equity value market,” said Johnson, PeerStreet’s CEO. “There are about $150 billion in transactions and acquisitions that take place [in the broader real estate market] from investors buying investment properties every year. Only about 30% of the acquisitions have financing attached to them.” PeerStreet believes it holds the answer to resolving that fragmentation and creating a positive, productive environment as part of the solution. Hyper-Fragmentation Leads to a Growth Explosion Solving the inherent problems associated with fragmentation was a top priority in 2013 when Johnson and Crosby first started the PeerStreet project. By 2015, when the company opened its doors to the general public, they believed they were well on their way. “We had to level the playing field between Wall Street and Main Street,” said Jason Harris, PeerStreet’s director of strategic sales. The fragmentation in the real estate lending market means that the local borrowers in the space frequently cannot access adequate capital. The local lenders in these instances have never had access to this kind of secondary market. Access to such a market, via the PeerStreet platform, provides new levels of liquidity, stability, technological capabilities and affordability in the mortgage market for private money lenders. It was clear early on that the key to providing this kind of access is PeerStreet’s innovative two-sided marketplace. The platform exemplifies the fintech- enabled marketplace model, offering a combination of financial services, software engineering and market opportunity. “PeerStreet serves to bridge the gap between lenders and capital markets by offering a secondary market beyond the traditional securitization market,” said Johnson. “Accredited investors can make more informed decisions and diversify their portfolios with unprecedented levels of data and transparency into their investment options. Private lenders can access myriad diverse capital sources and technology to make lending more efficient. Of course, key to all this are the real estate entrepreneurs who are borrowing capital, then going out and purchasing and enhancing more investment properties.” Scaling Up Across the Spectrum In an industry where investment capital can be difficult to access and retain, PeerStreet’s success and subsequent expansion is certainly due to its transparent, outwardly focused company culture. The entire team receives training on and participates in ongoing discussions on major performance metrics and corporate transparency. The company is also dedicated to employee growth, offering regular opportunities for leadership, growth and new challenges. “This is a company that is built on the fundamental values of openness, transparency and unlocking value for our customers rather than trying to extract value from them,” said Crosby. “Part of that process involves cultivating a work environment that encourages a hardworking, talented team to continue to transform the way the lending industry does business.” Harris added, “If we continue to execute that vision, we will continue to create and expand on  a unique, self-sustaining  market with limitless potential.” Part of that potential exists in its most basic form in smaller-scale investors, who often struggle to find their footing in today’s highly competitive real estate markets. On the other side of the equation, many new investors are nervous about making large capital investments at the outset. PeerStreet offers initial investments as low as $1,000 and automated reinvesting for $100. “That ability to invest in a fractional piece of an individual loan is crucial,” said Johnson. “It gives every investor a shot at diversification.” This scalability and accessibility generally did not exist before PeerStreet’s dual marketplace platform. A combination of legal innovation and technological development made the entire multilayered process possible. “We’re investing tens of millions of dollars into technology to create value for investors so they can save money and time,” said Crosby. The Technology of Underwriting PeerStreet’s underwriting engine is another example of the massive returns the company reaps from its investments in technological advancement. The platform’s automated underwriting engine works in tandem with traditional analyst review to create a fine-tuned loan review system with predictability and peace of mind a top priority. “Between the loan originator’s credit evaluation, the underwriting engine’s investment criteria overlay and traditional analyst review, there are multiple layers of diligence that underlie every loan,” Johnson said. That scrutiny of each potential investment from multiple angles could keep both the platform and the PeerStreet product in demand regardless of where the economy  falls in its cycle. When  real estate markets are heated, PeerStreet can enable active, experienced, high-volume investors to either leverage some of their returns into private loans or, through its loan-purchasing system, access return on capital more quickly and cycle that capital back into the system. At the same time, the ease of access to the platform and relatively low barrier to entry may keep newer and lower-volume investors in the equation and participating in both housing growth and economic expansion. When markets cool and conventional financing becomes harder to come by, investors focused on acquisition can use the

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Northeastern States See Recent Changes in Lien Status Priority and Legislation

Regulators, lenders and servicers must keep a keen eye on developments. By Ralph Stebenne Recent legislative enactments and judicial rulings have lenders and their servicers paying close attention to unpaid homeowner and condominium assessments. New Jersey and New York have introduced newly crafted legislation that will require increasing surveillance and expenses in the servicing of loans from these Eastern Seaboard states. The District of Columbia has issued a recent judicial ruling that may allow an association’s lien to have priority over a mortgagee’s first lien.  What’s Happening in New York? New York passed Bill A1800, an additional chapter to their Vacant Property Registration Act. This additional legislation demands extreme diligence in the servicing of at-risk borrowers. Bill A1800 puts added stress on servicers and their vendors to determine if a property is vacant in a timeframe that many servicers will find impossible to meet. The bill also carries extreme liabilities  if followed to the letter of the law. To wit, a seven-day contact period to determine vacancy sets in motion a call for a series of drastic responses, including rekeying, winterizing, and boarding  up doors and windows, where applicable. Condominiums and co-ops can be extremely difficult to contact and gaining entrance can be impossible. These issues alone are alarming, but what looks to be a last-second addition to the bill, Section K, states that the servicer “… pay homeowners’ association or cooperative fees as needed to maintain the property.” Servicers and lenders may be required to pay all fees as they come due before foreclosure in order to “maintain” the asset. This is a vague requirement and will likely need to be further legislated. Codification of this law will put even more liability on the lender and servicer, as it is evident what direction these laws are taking. And in New Jersey . . . New Jersey has broadened the super priority umbrella to include all associations and has extended the lien timeline to five years with proper filing of paperwork. New Jersey had instituted a six-month lookback for condominium associations, which has now been extended to include all associations. Bill A5002/S3414 also includes a renewable priority lien that can be carried back for five years. This bill overrides existing association governing documents. Servicers and their default servicing teams will have to pay close attention to all foreclosure and lien notification documents to accurately total liabilities that are now incurred in association foreclosures in the state of New Jersey. DC Developments The District of Columbia’s Court of Appeals issued opinion No. 16-CV-977 in September 2018. Here they reviewed the decision on LIU vs U.S. Bank Nat’l Ass’n, 179 A.3d 871, which concerned a foreclosure sale initiated by the association for unpaid dues and other fees. The association’s Notice of Foreclosure Sale advertised the sale of the unit subject to the first deed of trust. The sale took place in January 2013, with the successful bidder buying the unit for $11,000. In January 2015, Capital One filed to foreclose the unit, to which the buyer counterclaimed to quiet title. The initial trial court required the buyer to abide by the foreclosure sale agreement: that the purchase was subject to the original mortgage. The Court of Appeals reviewed the case and vacated the decision, forcing the buyer to abide by the initial agreement. The case was remanded to be reheard by the lower court, with the future decision reviewable by the Court of Appeals. It is the Court of Appeals’ opinion that the association’s enforcement of its super priority lien by foreclosure resulted in the “extinguishment” of the first mortgage, an outcome we had not seen in the District of Columbia. Several states have given lien priority to associations’ claims, allowing the foreclosure of the first lien, and the District of Columbia may be the next to join that group. It will be imperative for servicers to begin reviewing their portfolios and their District of Columbia loans for accuracy and completeness. This case, as well as developments in other legislative and judicial proceedings, needs to be carefully monitored. Servicing and foreclosure strategies need to be altered to meet these new developments. It is evident that there is a push to add more states to the super lien group and to expand the powers of associations.

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Warehousing Some Respect

Greg Rand watched his mother work hard to build her real estate business, even though realtors often didn’t get much appreciation. He was determined to change that image. By Greg Rand My earliest business memories are related to real estate because my mom, Marsha Rand, launched her real estate career when I was in elementary school. She went from a rookie agent to a top producer, to a branch manager and finally the owner of her own firm. Century 21 Rand was a startup that had culture as its foundational value proposition. It was quintessential Century 21—a rowdy band of women who sported gold jackets and took on the town. Entrepreneurial Foundation I learned three key things about the business from watching this all unfold. First, entrepreneurship in real estate works. Second, family is the most important thing, unless an agent is having a problem, and then solving their problem is the most important thing. And third, the public didn’t appreciate real estate agents enough. Every time a real estate agent was depicted on TV or in movies, they were lampooned. That was my mom! I still remember how it bothered me as a kid. I worked in my mom’s  company in many mission- critical capacities: licking envelopes, answering the phone, sticking photos into photo books…. I graduated to taking pictures and having them developed at a 24-hour photo. I observed that something important was taking place in that office. People would come out of conference rooms elated. “They just bought their first house,” someone would tell me. Or they would come out looking horrified. “They just bought their first house!” The range of emotions told me something weighty was going down. It didn’t make sense to me that a profession in which something so important was being handled was also made fun of. The Dawn of Data One day when I was answering the phone on the weekend, I had a revelation. I had been trained not to give out the price of the house until I got the caller’s phone number. Hmm. The caller wanted information, and we weren’t providing it. I filed that impression away for a few years until I learned about the coming “information superhighway.” I read a speech from NAR president Bill Chee in which he characterized the situation as a bunch of hungry lions coming over the hill while a few chihuahuas fought over a piece of meat. Those little dogs were about to be devoured. The chihuahuas were realtors, the lions were the consumer public and the meat was housing data. They wanted it. We were hoarding it. And the internet was going to blow us to smithereens. The customer wanted information, and we were intentionally getting in the way. At the time, I was 24 and making six figures as a mortgage sales guy. I quit that job to start a company based on “public access to MLS.” Mike Toner, a college buddy and I launched RealtyVision, one of the first two companies in the country to display interior tours of houses on computer. This was pre-internet. The computers were encased in kiosks in public places. Our business model was fatally flawed due to lack of distribution. If we had held out a couple of years, RealtyVision would have been a website and I would have retired by 30. But we didn’t hold out. We ran out of money and got jobs. HFS, Inc., the company now known as Realogy, had hired Bob Pittman as the new CEO of Century 21. Bob was one of the founders of MTV, so he was a whiz kid CEO. I pitched RealtyVision to Bob’s team, and they said “no.” Instead, they offered me a job to do half-day technology seminars for their agents. This was 1996. I did 70 cities in 18 months. We showed audiences ranging from 20 to 400 real estate agents that technology was not their enemy. I have some priceless memories of the first time my audience saw things like email attachments. As the Technology Evangelist, I got to work on the IT team that deployed the first Century21.com, which was also one of the first real estate websites with MLS data. Public access to the MLS was a huge success, and I believe it’s the reason the industry has thrived for so long. The customer wanted access, and we gave it to them. You can make fun of realtors all you want, but they stared down those lions and made friends. If they had held out and fought the release of MLS data, there is no doubt they would have gone extinct. All in the Family That was a wild ride that allowed me to make a minor impact on a large part of the country. Then my mom pitched my brother Matt and me to join her in the family business. My dad wanted to retire, and she wanted to begin a transition. I jumped at the chance to have a deeper impact, if on a smaller geographic scale. It was an honor to be asked. I had spent almost a decade in the real estate tech space. Now it was my time to work on the other side of my theory—that real estate is too expensive to take lightly. Real estate is a financial service. This was late 1997. We switched from Century 21 Rand to Prudential Rand. Flying the flag of a financial services powerhouse was perfect for where we wanted to take the company. We grew from $7 million in revenue to over $50 million within 10 years. We layered in mortgage, insurance and title businesses. We did our best to present a “business suit” version of real estate sales. We were a top-quality firm, but we were still essentially doing it the same way as everyone else. In 2008, we switched to Better Homes and Gardens and took on a much softer brand, which has worked like a charm. Launching a Dream I

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