REI INK

Old-Fashioned Standards, Modern-Day Success

Fay Servicing CEO Ed Fay believes every good relationship is long-term and evolutionary When Ed Fay, founder and CEO of Fay Servicing, discusses best practices in mortgage servicing, he likes to talk about the “something old” his company offers customers and clients. “We are about ‘old-fashioned’ standards in our business: talking to people, understanding what the situation is, trying to find the best solutions and just working out distressed loans,” said Fay. “We started out exclusively as a special servicer, and everything we have done since then stems from our efforts to expand the aspects that people like most about us: the quality of care we provide on both the investor side and the customer side.” Fay Servicing was founded in 2008 to meet the biggest industry challenge at that time: handling an expanding onslaught of past-due mortgages. Fay’s previous decade in the servicing industry working with household names like Countrywide and HSBC gave him unique insight into the ways the industry was changing—and not always for the better—in the wake of the housing crash. Fay hoped to avoid the financial losses to investors that come with a “collection-shop” approach to mortgage servicing. His clientele clearly appreciated the effort. Today, Fay Servicing is active in all 50 states. Its affiliated businesses, such as its renovation and fix-and-flip contracting services, operate in 49 of 50 states. “We do not try to be all things to all people, but we do try to treat every single person we work with the right way,” Fay said. “We work with different styles of loans than most servicers, and our style is a little different from other servicers as well.” Fay is particularly proud of his company’s customer satisfaction ratings, which hover just over 98% even though many customers at the company are in some level of mortgage distress when they first encounter the company. He credits that high level of satisfaction to his company’s dedication to helping borrowers work through their payment issues, including figuring out ways to bring loan payments down when refinancing is not an option. Fay Servicing also helps customers visualize foreclosure alternatives, such as selling and downsizing, rather than simply accepting the default. Each customer is assigned to a specific company representative rather than being treated as a case number and bounced through an automated system. As a result, Fay Servicing is often able to create winning situations out of losing ones. For example, in Chicago, the company was able to work with the owner of two homeless shelters to avoid foreclosure on those properties. Another customer who bought her home in 2006 and faced litigation and delinquency shortly after, described Fay Servicing getting her mortgage as “a blessing” due to the efforts of her personal account manager. “Foreclosure is, frankly, not good for the community. Our core business is being a servicer, and both our servicing business and our affiliated businesses support that,” Fay said. “Having additional ways to help people makes a big difference.” Creating Long-Term Relationships Fay focuses on flexibility, and his company structure demonstrates that. In addition to servicing performing and nonperforming notes, Fay Servicing’s affiliate companies have done more than 4,000 flips, served countless insurance clients and made thousands of sales. They take pride in always helping investors and borrowers look at challenges and opportunities from every angle. “We wanted to create a unique situation for our customers and investors that helps them cover all their bases,” said Fay. He emphasized that his company is a servicer first and a flipper second. “I never compete with my clients, but it is my job to make sure I meet my fiduciary responsibility to tell my client what the payoff will be if they repair a home first compared to selling quickly,” he said. “Once they make that decision, we are positioned to help them make repairs, make the sale and, if they want to source properties, we can help with that as well.” Al Roti, president of Construction Renovations LLC, the construction and contracting affiliate of Fay Servicing, explained how his company works with Fay Servicing to provide that wide-angle perspective to investors. “We do things differently thanks to our phased workflow. We break down the renovation process so each specialist is focused on one phase of the workflow: multiple stages for pricing, comps and actual repairs; a billing team; and a management team once the renovations are complete,” he said. Roti believes A-to-Z asset managers who handle procurement, construction and then sales or renting are simply spread too thin to perform at optimal levels for their clients, even if they are experienced in all of those areas. To combat this on behalf of investors, Roti’s experts obtain multiple opinions, present them to investors and leverage their own specialized expertise to create a winning scenario for the project. Fay explained that Roti’s unique approach to his side of the business is the kind of trait he looks for in every member of his staff and servicing team. “Every time I am looking to add opportunities for our investors, I go out and I look for the smartest people in the country and the brightest people in the industry,” he said. “We have a number of different companies, and the thing that ties them all together is hard work, good people and a willingness to integrate to serve the customer and the investor.” Key to Future Success That integration that Fay holds so dear has been a driving force in every angle of Fay Servicing’s evolution since he started the company out of his house in 2008. “My primary goal has always been treating people the right way,” he said. “Part of that includes having integration in the business.” To Fay, integration is also the reason real estate investors and professionals survive economic downturns—or the reason they don’t. “Whether you earn your experience the hard way or you hire it, you have to have very good, very detailed knowledge about the space in which you are

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Digital Certified Funds Automate Rent Payments

Digital innovations in property management reduce the risk of late payments and chargebacks. Landlords have long required new residents and those with a history of late payments to pay with money orders and cashier’s checks. Both are known as certified funds. Now, with the help of real-time financial verification data, residents of multifamily properties who are required to pay with certified funds can do so without leaving the comfort of their homes. And, property managers can streamline receivables collection. How it Works Digital certified funds, also known as online certified payments, give multifamily property operators a fully-automated front-office platform—and a paperless process. Residents can make online certified payments via a mobile device or desktop browser to pay their rent. The process starts by verifying user identity and bank account ownership. Next, the user’s transactional and behavioral data is analyzed in real time in order to authorize a certified transaction. This then allows the capture of funds from the user’s financial institution and settles the funds risk-free to the property. Automated Payment Logic The latest technology can also do the heavy lifting and minimize the manual overhead when it comes to preventing and processing late payments. Certified funds are typically required upon move-in, but property managers understand they are often used for residents who have a history of late payments. With the latest rent payment technology, property managers can use certified payment logic to set parameters that only present certified payment options to residents based on their past behavior. With this new automation, operators have the ability to avoid returned late payments by only accepting digital certified funds once a payment is deemed late. Additionally, operators can customize different settings based on each property’s needs, such as easily accepting prepayments from residents, which is beneficial when residents head out of town before their rent is due. Chargeback Protection Chargebacks were introduced more than 40 years ago, designed as a consumer protection effort to instill confidence in credit cards. Yet, the increasingly fraudulent consumer use of chargebacks is having a significant impact on property bottom lines. Recently, a multifamily regional property manager in northern California reported that they faced a loss of $15,000 in credit card chargebacks within a single month—from just two residents. One resident disputed six months of rent charges, and the other resident initiated a chargeback on several months of rent as well. As a result, the owner requested they stop accepting credit card payments altogether. However, using digital certified funds, the property manager was able to continue accepting credit card payments while removing all the risk from future potential chargebacks. Unfortunately, these aren’t isolated incidents. A 2019 study found that 81% of individuals admitted to filing a chargeback out of convenience and a considerable percent of the dispute cases were lost. While it is less common to see chargebacks on rent payments, these often occur with rental application fees and other property add-on services. In fact, Verifi, an industry leader in end-to-end payment verification, did the math on chargebacks. They found that every dollar lost to chargeback fraud costs the property an estimated $2.40. So, $100 in chargebacks can cost the property $240. Even for a single property, chargebacks can have a marked effect on net operating income while taking a material amount of time for property managers to resolve. However, those that have moved to modernized rent payments platforms have been able to avoid them. Cash Equivalent Payments  Because of widespread risk management practices among property management companies, cash equivalent payments are often required for certain situations. For example, a resident must obtain a traditional money order at a kiosk. Because money orders typically have caps on their value, a renter may need to obtain several money orders to reach the value of the payment. Another form of digital certified payment is also offered by MoneyGram, allowing residents to make payments via digital money orders from any MoneyGram kiosk. With more than 30,000 kiosks accessible in private and public locations, residents can now send all types of payments, at any time, without being subject to paying in person during the property manager’s office hours. MoneyGram comes with some market-leading built-in risk protections, including automatically attributing all payments made with MoneyGram to the correct apartment unit, thus eliminating the need to disclose additional sensitive informationwhich is often the case with cashier’s checks and paper money orders. Ultimately, paper money orders and similar forms of payment aren’t as safe as once believed. Repeated incidents of fraud over the last decade shows they can be easily stolen or tampered with. They also require manual processing, leaving them prone to errors and increased processing time. When payments went missing or were stolen, residents had to send the property manager another form of paper payment while the issue was being resolved. By sending and processing certified digital payments, renters and managers are assured zero risk. Digital money orders ensure lower liability since they require less handling, improved data accuracy because they eliminate manual payment processing, reduced theft and fraud, and immediate payment confirmation. Digital innovations are having a marked impact on traditionally manual financial processes, and they are reshaping the way property owners and investors manage their P&Ls. The combined benefits of these tech innovations deliver an opportunity to improve and exert some control over resident behavior and mitigate risk while protecting the bottom line for owners and their investors.

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SFR in the Age of Covid-19

How the coronavirus could impact the single-family rental market At the start of 2020, the future was very bright for the single-family rental market. Rental demand was growing, and real estate investors had a clear and immediate opportunity to make money in the coming year. Tight rental inventory and funding seemed to be the biggest challenges that investors would face in the most desirable markets of the U.S. For the savviest investors who were able to pay attention to emerging trends, there were no obstacles too large that could put a damper on the opportunities that lay ahead of them. However, that all changed with the emergence of the coronavirus. As we draw closer to the middle of the year, we’re starting to get an inkling of the virus’ impact on the global economy. Let’s delve into the immediate impact this pandemic has had on the real estate industry, specifically on the single-family rental market. Affordability Concerns As the coronavirus continues to disrupt businesses and drive down the U.S. stock markets, there is a very real concern about how individuals and businesses will suffer as a result. During the last decade, low inventory in the single-family rental market drove the growth of rent prices. But for current and prospective renters who are dealing with loss of income, affordability challenges will be a growing area of concern. According to CoreLogic’s Single-Family Rent Index, released in March 2020: “U.S. single-family rents increased 2.9% year over year in January 2020, down a bit from the gain of 3.2% in January 2019.” Also “increases in rents averaged 3% over the past year, which is more than double the rate of inflation over the same time period.” With rents increasing at double the rate of inflation, there is no question that this has negatively impacted affordability. This is what poses the biggest future issues for investors who purchased SFR properties in areas of the U.S. that showed the most promise in terms of growing rents. ATTOM Data Solutions already reported that “single-family rental returns moderated in the first quarter as rents did not increase as fast as the price growth for investment rental properties.”  That means investors already might not be seeing the returns they had initially hoped. While rental demand will remain in these areas of the country for the foreseeable future, rent may no longer be affordable for current or potential tenants. Investors may ultimately have to take a hit on their SFR investments and lower rent prices. New Construction & Build-to-Rent At the beginning of 2020, new construction and the build-to-rent niche were poised to become a much larger segment of the market for investors. However, with the onset of the coronavirus, these areas of the market now face a variety of obstacles to their growth. First, short-term demand has fallen due to potential buyers being worried not only about their personal health and the risk of being in public, but also due to their financial health. The full economic impact of COVID-19 is still unknown. With so much financial uncertainty, it is unlikely for demand to remain strong in coming months. There are also supply-chain disruptions to consider, both domestically and internationally. China, the world’s largest manufacturer, has been hit hard by the coronavirus. It is inevitable then that there will be a drastic reduction in available materials. Unfortunately, as factories and businesses have shut down in the U.S., there is no way to supplement this loss by producing materials domestically. And even if materials are currently available, fewer people will be willing or even able to work on new construction and build-to-rent projects due to mandatory work restrictions in many areas of the country. What About Short-Term Rentals? Travel is one of the industries hit hardest by COVID-19. That does not bode well for the current outlook on short-term rentals. Broad travel restrictions with indeterminate end dates means short-term rentals will sit without occupants for the foreseeable future. Owners of short-term rental properties who may consider turning them into long-term rentals as a way to remedy the current situation face a different set of challenges though. First, there is the issue of trying to find a tenant. Besides the obvious difficulties of trying to get a tenant in place during a pandemic, many short-term rental properties are in areas that are desirable to travelers but not to long-term renters. Second, the home may require substantial maintenance, updating or a complete overhaul to be appealing to a long-term tenant. Often these issues are not a concern for short-term occupants. Finally, there is the concern of cash flow. Will the property be nearly as profitable as a long-term rental as it was as a short-term rental? In most cases, probably not. If a long-term tenant does end up occupying the property, unless they are paying month-to-month or signing a short-term lease, the owner will not be able to use the property as a short-term rental until the existing lease expires. On the positive side, short-term rental investors who are able to weather the storm should benefit from the huge travel boon that is most certainly to occur once the threat of the virus has dissipated. With folks adhering to self-quarantines, it is inevitable that people will want to get out and travel again at the end of all of this. Which Way Will the Housing Market Go? To set aside the doom and gloom for a moment, in a survey conducted by Redfin in March 2020, “about 40% of Americans anticipate that the recent spread of the novel coronavirus, also known as COVID-19, will have a negative effect on the housing market.” However, maybe more surprisingly, “half of the respondents expect no effect at all on the housing market, while 8.9% predict that it will have a positive impact-likely due to the recent drop in mortgage rates.” While there is still optimism that the coronavirus will have little effect on the housing market and home sales data from January into February

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Are We Headed for a Corona Recession?

What that means for real estate investors? There might have been some question about whether the coronavirus would lead the U.S. into a recession. The hoarding of toilet paper makes me think it’s certain. Not because we’ll run out of toilet paper—the U.S. and Canada produce volumes of it—but because hoarding means consumers are really worried and are changing their spending behavior. That won’t just flip back in a few months. It’s consumer behavior—what consumers think and do—that grows or shrinks the economy, not bank failures or layoffs at airlines. Consumers are 70% of the economy, and they’ve already been on edge the last few years. Consumer debt, even after you consider inflation, is at the highest levels we’ve ever seen—$12,000 per man, woman and child. And the growth of jobs in 2019 was at the lowest rate since the last recession. So, it’s not surprising that the rate at which consumers have been spending was already slipping. I didn’t expect a severe slowdown this soon, but when the economy is fragile to start with, anything can happen. That’s why the coronavirus isn’t the cause of the recession that now seems inevitable; it’s the catalyst, suddenly accelerating a slowdown that was already in the works. Consequences for Real Estate Recessions produce government reactions and public responses that strongly affect real estate. This time we won’t see massive foreclosures and a wholesale drop in home prices as happened after 2008. In fact, it’s much more likely that the effects this time will actually be good for real estate investors. The government will push interest rates even lower. This means, for example, that financing an investment in rental property not only will be cheap, but the returns on alternate investments like bonds and CDs will remain poor. Investment funds and other sources of money will welcome real estate projects. Banks in particular are now so heavily dependent on consumer loans that they have a large incentive to shift more money into real estate. More consumers will need (and want) to rent. Homeownership for young adults has been declining for decades, to around 35%. With incomes stalled, home prices high and more people with student debt living in expensive big cities, that trend will continue. And after promoting mortgages and homeownership relentlessly for the past 50 years, the government may (that’s more of a guess) finally provide more policy support and tax breaks for renters. Specific Markets Some real estate markets were in a home price boom in the past few years. Think: San Francisco, Seattle, Denver, Miami, Las Vegas, Southern California and others (see Chart 1). Because the local economies were doing well, I thought the bubbles could end in a soft landing. Now I don’t think so. Eventually, these will be great places for investors in rental properties. After all, that’s why the bubbles happened—more demand than supply—but first we need to see where prices will settle. Some markets with large renter populations are better immediate bets, even though demand will flatten everywhere for a short while. They’re not high-growth markets, but they aren’t overpriced and the ratio of home prices to annual rents is favorable. Think: Chicago, Memphis, Detroit, Atlanta and others (see Chart 2).  

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GROUNDFLOOR Stimulus Program Launches

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Atlanta-based wealthtech platform GROUNDFLOOR has launched a new program to ensure that capital for residential real estate development continues to flow during the COVID-19 financial crisis. The new program allows investors to earn an additional 4% interest rate bonus for90 days on qualifying investments. “Our community of individual investors is a powerful force that is keeping the value chain of real estate finance moving forward on fair terms for all,” said GROUNDFLOOR co-founder & CEO Brian Dally. “The GROUNDFLOOR stimulus program rewards investors for stepping in to provide real estate entrepreneurs and developers with the funding they need to keep their businesses, and our economy, moving.” GROUNDFLOOR, which is not a fund or a pool, was founded in 2013 as a result of the Great Recession. The founders’ vision was to open private capital markets to all by making them more broadly decentralized and more resilient during challenging times. It was the first company qualified by the U.S. Securities & Exchange Commission to offer direct real estate debt investments via Regulation A for non-accredited and accredited investors. The company has raised $22 million in equity capital from several sources, including venture capital and online public equity offerings. As of its most recent round of financing in 2019, the company is 20% customer-owned. 

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Yardi Introduces New Payment Deferral Technology

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Yardi has released a software update that allows residential property management companies to manage and track rent deferral payment plans and recoveries. The company fast-tracked the release of the update to allow property managers to accommodate residents impacted by COVID-19. “Helping property managers serve their residents and maintain business continuity is a top priority for Yardi. With unemployment claims skyrocketing, our clients were looking for ways to aid residents who are having a hard time paying rent during the coronavirus pandemic,” said Tamara Berndt, vice president of residential services at Yardi. “This solution can manage and track payment deferrals and recoveries on a large scale.” The deferral payment plan and recovery tool allows payment plans to be set up for residents who ask for financial accommodations, and it creates a recovery schedule of the deferred amounts. Once the deferral agreement is signed, lease charges are automatically created each month with the deferred amounts and recovery charges as appropriate. Gross potential rent isnot impacted. The new technology is available to Yardi residential clients, including multifamily, single-family, affordable and military properties.

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