REI INK

U.S. Home Sale Profits Remain High

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…But Take Unusual Fall In Second Quarter ATTOM, curator of the nation’s premier property database, released its second-quarter 2021 U.S. Home Sales Report, which shows that profit margins for home sellers took an unusualdip in the second quarter but still were far above where were they were a year earlier. In a sign that the housing market remained super-heated but that investment returns may be declining, the report reveals that the typical single-family home and condo sale across the United States during the second quarter of 2021 generated a profit of $94,500. That was up from $90,000 in the first quarter of 2021 and from $60,572 in the second quarter of 2020. However, the profit margin on the median-priced house or condominium—he return on investment that sellers made on their original purchase price—declined from 48.4% in the first quarter of this year to 44.9% in the second quarter. While the latest margin remained 13 points above the 32% level recorded a year earlier, the drop-off marked a rare decline during a time of year that usually produces some of the best returns for sellers. The last time typical returns on investment dropped nationally during any second-quarter period was in 2008. The mixed picture of high, but reduced, profit margins came as the national median home price hit yet another record in the second quarter of 2021, reaching $305,000. That was up 11% from $275,200 in the first quarter of 2021 and 22% from $250,000 in the second quarter of 2020. The annual price surge marked the largest since at least 2006 and was two to four times greater than increases seen just a year ago. Still, profits dropped in the second quarter of this year because price gains—high as they were—were smaller than increases that recent sellers had been paying when they originally bought their homes. The gap between the latest price gains and earlier increases caused the dip in profit margins. While home prices rose from the first to the second quarter of 2021 in 98% of U.S. metropolitan areas with enough data to analyze, investment returns rose in only 56%. The recent price and profit trends reflect a housing market that has continued its decade-long upward spiral, even as the Coronavirus pandemic has damaged significant sectors of the U.S. economy since it hit early last year. Amid rock-bottom interest rates and worries about living in congested virus-prone parts of the country, a glut of buyers have been chasing a tight supply of homes for sale, raising demand and spiking prices. “Prices and profits from the second quarter painted yet another picture of a housing market in high gear—except for one thing. Profit margins dropped in the second quarter, which is very unusual for any Springtime period because that’s when the housing market is usually hottest or close to it,” said Todd Teta, chief product officer at ATTOM. “While it may just be a momentary thing in today’s volatile market, it’s definitely something to keep an eye on in case it’s a sign that the market is finally cooling or giving in to some of the economic forces connected to the virus pandemic.” Other Takeaways Profit margins rose annually in more than 80% of metro areas around the U.S. and quarterly in slightly more than half Western metros continued to have highest profit margins; southern metros have smallest Prices up in almost every metro area Homeownership tenure fell to 8-year low Institutional investment shot up to nearly a 6-year high Cash sales up to six-year high FHA-financed purchases at nearly 14-year low

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3D Tours Utilized on Zillow Rentals

Increase SFR Property Leads by 40% … Decrease Dayson the Market by 30% By Kori Covrigaru Most house hunters start their property searches online today and digital tools such as a 3D virtual tour make viewing a rental home remotely even faster and easier. Whether from a smartphone or laptop, 3D tours allow consumers to get a realistic experience and feel for what a single-family rental (“SFR”) property is like without having to visit it in-person. According to a recent Zillow study, most Americans would like to use digital tools while home shopping, and a vast majority (79%) of those surveyed said they wanted the ability to view a 3D virtual tour. At PlanOmatic, we recently measured the impact of 3D tours for SFR property marketing on the Zillow Rentals platform, which includes Zillow, Trulia, and Hotpads. Zillow is the leading real estate and rental marketplace dedicated to empowering consumers with data, inspiration and knowledge around the place they call home, and connecting them with great real estate professionals. Our 3D tour study was conducted in partnership with a national provider of well-maintained single-family rental homes. The purpose of the study was to determine if the provider should invest in a 3D tour solution to use on Zillow Rentals—their number one lead source—to attract more rental prospects and to provide a superior client experience. Our study data found an increase in lead activity and applications, and a decrease in days on market (“DOM”) when a 3D tour was published on the Zillow Rentals platform. The data revealed the following: Lead activity in the single-family rental home provider’s CRM showed an increase of more than 40% when a 3D tour was published on Zillow Rentals Lead activity from Zillow Rentals increased by 101% when a 3D tour was published on the platform Applications submitted per property by prospective residents increased by more than 35% when a 3D tour was published on Zillow Rentals The DOM showed a 30% decrease for properties that used a 3D tour on Zillow Rentals compared with properties that only had photos on Zillow “Essentially all home searches start online today, and this has fundamentally changed the way properties are marketed. Our clients are trying to get as much property information in front of the consumer as possible, and a 3D tour stands out online allowing future residents to walk through the house imagining themselves there without visiting in person,” said Tim Rose, Director of Operations for PlanOlabs at PlanOmatic. “Our study was conducted to test whether a 3D tour had a measurable impact for our client, and the results prove that by publishing a 3D tour on the Zillow Rentals platform, SFR owners will generate more property leads and applications, and reduce the days on market.” Rose added, “This is a case of supply and demand. Consumers are demanding and prioritizing 3D experiences online, and by adding 3D tours to the Zillow Rentals platform, SFR owners and operators are meeting that demand with a high quality virtual experience that their future residents now expect.” The 3D tour study was conducted by PlanOlabs, the research, data, and consulting hub at PlanOmatic that analyzes and optimizes the property lifecycle for SFR investors, owners and operators. At PlanOlabs, we analyze SFR investors’ current state and use our industry experience to optimize their operational and marketing processes in order to scale and meet their portfolio growth goals. For this particular test case, PlanOlabs tracked more than 70 of our partners’ properties across two markets—Dallas and Houston, Texas. We created a 3D tour for Zillow Rentals for half the properties in each market and compared that to a control group of properties that received a standard professional photo shoot. The test case properties were tracked between May 10th and June 30th.

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Investor Profile

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**Publisher Note** Scott Sekulow passed away on Thursday, August 12, 2021, just one month after granting this interview. Scott had been hospitalized several days with COVID. John Holman, his Development Agent, said, “Scott was one of the really good guys. He was a leader in the council, always generous and willing to help other people. He will be missed!” From all of us at REI INK, Rest in Peace. “The Flipping Rabbi” Scott Sekulow, aka “The Flipping Rabbi” (a moniker bestowed by Emmanuel Lewis, the star of the 80’s sitcom Webster), bought his first HomeVestors® franchise in 2018 in Atlanta, GA. After only three and one-half years, his company, JNS Real Estate Investments, Inc. has become the Number One franchise in Atlanta. He bought his second franchise two months ago in Augusta, GA. He is also the founder and Rabbi of Congregation Beth Adonai in Atlanta which he formed in 2002. Having grown up in retail, he was a partner in his first business at the age of twelve; a pretzel booth at the Atlanta Flea Market. By age 18, he was a licensed real estate agent, only to give it up a few years later to pursue other interests. Feeling the call of the ministry, Scott went back to school in 1993 and received a BS in Biblical Education. Since then, he has ministered in the USA, Israel, the former Soviet Union, South America, and India. As a hobby, he got into flipping houses after rehabbing a rental property for his mother-in-law. He bought one of his houses from a local HomeVestors franchisee who convinced him to get involved with HomeVestors. Scott looked at HomeVestors as a great way to help people. “I don’t buy houses, I solve problems,” Scott explained. One such example concerns a decorated Vietnam Veteran who served eleven years in the military. After losing an eye and not getting much assistance from the VA, the veteran needed help and just a “little” money from his house so he could move in with a friend. Scott was not only able to get $10,000 more than expected from the sale of his house, but the Ministry also paid for the veteran’s moving expenses. Multiple Exit Strategies Scott has also taken a different approach as a HomeVestors independent business owner. One of the factors that initially attracted Scott to HomeVestors was that they offer multiple exit strategies for properties, be it wholesaling, fix and flip or buy and hold. So, as the market changes you can change your focus, as well. From the beginning, Scott’s focus has been on working with and selling to hedge funds, and in most cases not even rehabbing the property, just selling directly to them. While the Atlanta franchise focuses strictly on wholesaling, the Augusta franchise, SNJ Real Estate Solutions Inc., concentrates on both wholesaling and buy and hold. When a rehab is necessary, enter Judy Sekulow. The couple met while both attending Mercer University in Atlanta. Scott graduated with a BA in Management and Judy with a BA in Marketing. They married in 1989 and are the proud parents of a daughter, Natalie, born in 2001. According to Scott, “Judy has the decorating eye.” Today, the Sekulow team buys 70 houses per year consisting of wholesale deals and “cosmetic” fix and flips. They also recently began adding properties to their personal real estate portfolio. Even during the COVID lockdown, their businesses grew while other companies experienced a loss or shut down altogether. Scott attributes this to the fact that there is no competition among HomeVestors independent business owners. “We all work together, give advice to each other, and help each other. HomeVestors corporate has built a strong bond within the organization.” He also attributes it to the fact that real estate is a relationship business and not merely staring at your computer screen and being an “instant buyer.”   HomeVestors What exactly does it mean to be a HomeVestors business owner? Owning a real estate business is life changing and naturally comes with risks! When you become a HomeVestors business owner, you get immediate access to motivated seller leads, financing resources for qualifying purchases and repairs, one-on-one coaching with your local Development Agent, proprietary software for analyzing properties and deals, and access to a nationwide network of coaches and peers. Your house-buying business is yours and you run it as your own venture with a focus toward your individual business goals. If you are interested in a franchise, contact April Nealey at april.nealey@homevestors.com Each franchise office is independently owned and operated.

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Capital Gains Challenges Ahead for Landlords

Creative Investors Could Hold the Key to the Solution & Incredible Returns by Carole VanSickle Ellis When Eddie Speed encounters a challenging situation, the 40-year veteran of the performing and non-performing note space has a history of tackling the problem with a combination of creativity and determination—and he usually is able to work out a winning solution. Speed has never seen anything quite like the financial challenge coming down the pipeline for investors facing capital gains taxes in 2021, however. Changes in Capital Gains “The current presidential administration is getting ready to disrupt the real estate investing business in ways most people cannot yet imagine,” Speed warned. “They are basically planning to double capital gains very, very soon.” He is referring to President Biden’s much-touted campaign promise to change the capital gains taxing process in order to tax the nation’s highest earners at a rate of nearly 50 percent. Currently, these individuals pay about 24 percent in long-term capital gains, and White House officials say that the country’s top tax bracket is still “able to manipulate the tax system in their favor.” The change to capital gains is allegedly designed to “level the playing field” while increasing federal tax revenue by raising taxes for households making more than $400,000 a year. This policy, if it passes into law, could disproportionately affect individual real estate investors who tend to generate the majority of their returns (and income) through the sale of property rather than via a more traditional, annual salary. In particular, landlords hoping to liquidate their portfolios will suffer, and Speed says the only solution he can see at present is to act quickly and creatively to get ahead of the looming problem. “According to the Urban Institute, about half of all individual landlords’ properties are currently free and clear, meaning there is no mortgage on those rental properties,” Speed said. Historically, this would have been an ideal position for a mom-and-pop landlord planning to use the income from rental properties along with some liquidation to support themselves in retirement. Thanks to the proposed capital gains policies, however, the tax burden associated with selling free-and-clear properties could soon be crippling. Speed believes that the pending hit to returns that landlords can generate upon sale of a property combined with the after-effects of the COVID-19 pandemic that have left more than 10 million tenants owing more than $6,000 in rents each could spur many landlords to sell now— if they can do so in a way that protects the returns they have been cultivating throughout the life of the investment. That is good news, he insists. The Strategy “With this policy, the president has done the biggest favor in his political career for investors using seller financing,” Speed said. “This is the least-understood market niche in real estate, but investors willing to work in this space have about six months to act on this incredible opportunity and help a lot of burned-out landlords in the process.” Seller financing involves the owner of a property holding a private note on that property in order to make a sale. The note, like any other property-backed loan, is legal and binding, but the current owner of the property holds the note instead of sending the buyer to another party in order to borrow money for the purchase. Seller-financed loans can have down-payments, creative terms, and interest rates that are set or variable just like “conventional” bank loans. They have been popular with creative real estate investors for years because they permit vast flexibility in pricing, purchase terms, and, crucially for Speed’s strategy, payment schedules.  “If a landlord has a rental property that they acquired for $100,000 and now it is worth $250,000, [upon selling that property] that landlord would have a capital gain of $150,000. However, if the landlord were to sell the property using seller financing and collect payments over the next 15 years, they would pay one-fifteenth of the capital gains every year for the next 15 years,” Speed explained. He added, “This option frees up landlords who would like to sell right now to do so. The key is that real estate investors who want to buy these properties do not have very much time in which to reach these landlords, explain the strategy, and transact the deals.”  Speed, of course, already has that process in place and in action. His company is working with partners to reach landlords on a scale and at a pace seldom seen even in creative real estate. “Thanks to our partnerships and business relationships, we can work quickly to reach landlords and then explain in a compelling, persuasive way exactly what we are offering to do,” he said. Over the course of his career, Speed has shown real estate investors how to create investment-grade notes for many purposes, including acquiring those notes and recapitalization. Through NoteSchool, his training program for investors who want to create note transactions and create investment-grade seller-financed notes, Speed is helping other investors refine the process of reaching sellers and explaining this limited-time strategy to them. “The current environment is perfect for seller-financing because there is a sound, easy-to-explain reason that a landlord-seller should seriously consider carrying a note not just one year or five years but long-term,” Speed explained. “For the deal maker real estate investor targeting the small-time landlord, this can create huge savings on interest for investors buying these properties, increase their volume of acquisitions, help investors develop strategies that create more favorable terms than what a bank or mortgage company might be able to agree to, and solve a huge, life-altering problem for landlords who might otherwise find their real estateportfolios decimated by these new guidelines on capital gains.”

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Insuring Your Flip

Risk Management Considerations During the Fix and Flip by Shawn Woedl While high housing prices and increased cost of materials has led to a drop in house flipping in the first quarter of 2021, it is still expected to be a profitable venture. Though purchase prices are high, the aggressive market also means buyers will be lined up when the flip is complete. Plus, distressed inventory is expected to surge as mortgage forbearance is lifted. With more skin in the game for either the buyer or the lender, it is increasingly important that flippers have the proper insurance in place to protect their investment asset. What type of coverage do you need? As a baseline, you would likely want to carry dwelling insurance and premises liability. Your property insurance would cover physical damage to the property caused by the perils covered under your policy. The perils that are covered will vary based on the coverage form you purchase, the two most commonly available being Basic and Special. Basic form covers such things as fire, storms, smoke, explosion, and vandalism. The causes of loss that are covered are listed on the policy. Special form coverage is the most comprehensive coverage form as it covers anything that is not listed as an exclusion in the policy. Of note, Basic form coverage does not include Water Damage or Theft. Because a property under renovation is likely vacant, it can be ripe for thieves looking to acquire newly installed appliances, pipes, or building materials. And water damage caused by a burst pipe may sit for days before it is discovered. The specific type of coverage you need may depend on the complexity of the work being done. Major structural renovations have different needs than mostly cosmetic updates. But a standard homeowners policy is not the right fit, nor is a “landlord” policy. These types of policies require the property to be lived in—homeowners usually requires that the occupant be the property owner (or the insured). If the owner files a claim on a vacant flip property under renovation that carries a landlord policy, the insurer can deny the claim for being uninhabited. If you are simply doing cosmetic or simple updates, a vacant property policy may suffice. Be sure that your agent knows that the property is being renovated. For larger projects, you will want to consider a Builder’s Risk policy. This coverage can extend to any materials on site that you own but does not cover the tools or equipment of any contractors that are left on site. When you purchase your property insurance, choose your property coverage amount that is equal to the purchase price of the property PLUS the renovation budget. If a property loss occurs midway through the project, keep in mind that the loss settlement cannot exceed your invested capital at the time of loss, which may be less than your total coverage limit. This is to ensure that you are not profiting from insurance. Keep any receipts for purchases you make along the way to submit as part of the claim. Your premises liability (or general liability) can protect you legally if a third party is injured while on the property. Vacant properties are magnets for explorers, and you could be held liable if someone who wanders onto the property is injured on the premises. Ideally, your liability limit starts at $1 million per occurrence. Keep in mind – premises liability does NOT extend to injury of someone you have hired to work on the project and be on site. Nor will it cover poor workmanship or negligence after the project is complete if you do the work yourself. What about your General Contractor? If you are doing a flip large enough to require a general contractor (GC), always hire someone who is properly licensed to complete the work for which you hired them. The licensing requirements are specific to the state. Your GC (and any subcontractors) should carry their own liability insurance to cover their business operations and their employees, including Contractor’s General Liability and Workers Compensation (if they have employees). Contractors Liability covers damage to your property for which the contractor may be responsible as well as coverage for Products and Completed Operations, ensuring that the GC is liable for any negligence in workmanship that leads to a lawsuit. When you hire a GC to work on your project, you should require them to add you (whatever entity that owns the property) as an additional insured on their liability coverage. This does two things: First, it extends coverage to you if you are named in a lawsuit caused by their negligence. Let’s say your contractor cuts corners when installing a staircase railing. After you have placed a tenant, the handrail breaks causing your tenant to fall. This type of liability claim would be picked up by your general contractor’s liability coverage and not your premises liability, protecting your loss history and future insurance costs. Second, if you are listed on the policy, you will be notified if the coverage lapses or is cancelled while the project is still active. If you own the property and doing the renovation work yourself, your premises liability protection does not extend to your actions and work while performing the contractor’s role. More specifically, you would need to purchase the contractor’s general liability coverages listed above AND premises liability coverage for incidents that are not connected to the project. To obtain this coverage, you will need to obtain the proper licensing as required by your state. Insurers are leery of covering flippers for fear of cutting corners to save a buck, so it may be tricky or costly to obtain this coverage as a flipper. You will still want to hire licensed and insured subcontractors for more specialized services like electrical, plumbing, foundation and structural work.  Ways to mitigate risk at your flip Maintaining a safe project site and taking some basic security measures can help mitigate the risk of

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Spotlight On Residential Real Estate Investment Loans

by Eric Atlas Residential Investment Loans (“RILs”) are business purpose loans secured by “fix and flip” or rental properties owned by professional investors and secured by 1st lien mortgages. Bridge loans are short-term loans (usually 6 to 24-months in duration, with an average life of less than a year) to property investors who buy, renovate, and sell homes for profit (the aforementioned fix and flip investments) or lease, refinance and hold longer term. Man Global Private Markets (“Man GPM”) both provides senior credit facilities to RIL loan originators and purchases RIL whole loans, with a current focus on bridge loans of ~$350-500 thousand on average, with a loan to cost ratio (“LTC”) between 75-85% and post-renovation loan to value ratio (“LTV”) between 65-75%.  HISTORICAL PERSPECTIVE The RIL market has historically flown under the institutional radar due to a variety of structural factors and investing trends. Historically, originating/processing RILs has been challenging for large banks and other institutional players. Due to the small loan balance, operational intensity, scaling difficulties and shorter loan duration, RILs can be too high touch for some lenders’ origination and operational capabilities. The second reason is that RILs are “commercial” loans with “residential” collateral. As such, there has not been a natural home for these assets on many trading desks. Lastly, these loans often do not qualify for inclusion in Fannie Mae or Freddie Mac pools. Government-Sponsored Enterprises’ (“GSEs”) qualifications in the space have historically been focused on a borrower’s debt to income (“DTI”) ratio, which limits the amount they can borrow, rather than the asset-based approach employed by most non-bank lenders in the space. Therefore, the RIL market was traditionally dominated by local/regional lenders (e.g., hard money and “mom-and-pop” lenders). Naturally, where there was limited capital, there was limited origination. As a result, the market stayed relatively small, leverage stayed relatively low, and rates were high (e.g., low double-digits for bridge loan originations). Despite this, the underlying credits were quite strong as borrowers tended to be experienced property investors. Since 2015, institutional capital, led in part by Man Group—one of the first institutional players to enter the space—has become increasingly interested. This interest has resulted in the creation of a robust secondary market and originator access to institutional financing (through warehouse lines and securitizations). As more institutional capital entered the space, originators grew, and competition increased. Prior to COVID-19 hitting, the RIL market had matured, but was still fragmented, offering outsized yields compared to other residential mortgage asset classes. However, due to the COVID-19 outbreak, early 2020 presented new challenges to the RIL market, with originators, loan buyers, and borrowers all facing new issues. Loan originators faced liquidity concerns as the secondary markets froze; buyers feared stay in place orders would reduce demand for real estate assets; and borrowers were unable to get home improvements done quickly and safely without risk of getting or spreading the virus. Despite the new challenges, as the pandemic spread, the US housing market (and with it the RIL market) rallied, with demand for homes increasing. With COVID-19 accelerating millennials’ move to suburban single-family homes, remote work opportunities arising, and growing social distancing, backyards and other home amenities became increasingly desirable. As the real estate market rallied, institutional allocations to real estate assets followed, increasing 10bps year on year, from 10.5% to 10.6% of overall allocations. Coming out of COVID-19, the RIL market has proven its resiliency. Despite substantial challenges, the market performed well in our view, with RIL delinquency rates staying below those of comparable residential and mortgage assets (non-QM and RPLs in particular) and origination volumes returning to pre-pandemic levels. And while yields in many asset classes have tightened post-COVID-19, rates in the RIL market are comparable to pre-pandemic levels, with yields comparatively stronger in the spread space as risk free rates have tightened. WHY RESIDENTIAL INVESTMENT LOANS? In our opinion, RILs are an attractive investment option for institutional investors today looking for diversification and yield. First, residential investment loans showed relative resiliency through COVID-19, maintaining lower delinquencies throughout the pandemic than other non-agency mortgage asset classes. Second, RILs command a premium over many other fixed income and real estate debt investments. Indirect exposure, through CMBS / RMBS / SFR ABS, may no longer yield the same returns it once did. Third, RILs could offer significant structural mitigated risks. The shorter maturities of bridge loans mean principal is repaid to the lender quickly, providing protection against significant market shifts. LTVs/LTCs provide significant cushion against substantial market declines, which have historically taken several years. For example, the peak-to-trough decline during the Global Financial Crisis took more than five and a half years, with house prices peaking in July 2006 and troughing in February 2012, with the largest single year drop of 12.7%.  Finally, RILs are secured by one of the largest and most liquid real estate assets in the world. As of December 2020, the US housing market consists of ~140 million units, of which ~80% are single family homes. As of June 2021, single family homes in the US are on market only six days (on average) prior to purchase. While this is due in part to COVID-19-induced tailwinds, the existing housing shortage in the US (a deficit estimated by Fannie Mae to be ~5.5 million and growing) is expected to sustain it. As investors grapple with how to navigate the post-pandemic investment landscape, we believe that the RIL market has demonstrated its worth and provides institutional investors the opportunity to invest in high-quality, highly resilient assets, with attractive risk-adjusted returns that are collateralized by one of the largest and most liquid real estate assets in the world. Any opinions, assumptions, assessments, statements or the like (collectively, “Statements”) which are forward-looking, with regards to the market or the portfolio (including portfolio characteristics and limits), constitute only subjective views, beliefs, outlooks, estimations or intentions of (The Manager), and are subject to change due to a variety of factors, including fluctuating market conditions and economic factors. Statements expressed herein may

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