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Stuart Denyer2 Posts
For more than 15 years, Stuart Denyer has been passionate about investments due to the high energy and fast-paced nature of the industry. He took this passion and applied it to the real estate investment space when he co-founded New Western in 2008. As CEO of New Western, he and his business partner revolutionized the way residential real estate is bought and sold. New Western transformed the typical real estate transaction into something that takes a matter of days to accomplish rather than weeks, months or years. The New Western portfolio of companies encompasses New Western, HomeGo and Sherman Bridge Lending. They help homeowners move on from difficult properties while providing opportunities for local real estate investors to improve their communities.
Distressed Housing
A Winning Strategy for Main Street and Wall Street By Stuart Denyer It is no secret that the single-family housing market faces a severely constricted supply of inventory. Reports suggest that the country has experienced an “underbuilding gap” of 5.5 to 6.8 million units since 2001 with only a 1.7-month supply of homes currently for sale. The perfect storm of low supply and high demand has created record prices and fierce bidding wars. And now, investors and buyers face new fears of inflation, higher costs for labor and materials and skyrocketing rates—currently 4.8% for a 30-year mortgage. But there is a category of housing that has weathered the volatility of the Great Recession and is poised to continue to be a gamechanger for investors large and small: distressed housing. According to a White House brief, “approximately 40% of U.S. housing stock is at least 50 years old and more than 15 million properties are vacant even as families struggle to find affordable housing.” While builders are struggling to dig out of the hole and fill the gap, investors can fix-and-flip, or buy-and-rent, an older property much faster than a new build. From Wall Street to Main Street The opportunity with distressed housing is not new but was born out of the chaos of the 2008 foreclosure crisis. Companies like New Western served as an exit for institutions and banks to offload foreclosure properties and get out from under large pools of nonperforming assets. Many of these distressed properties made their way directly from Wall Street into the hands of Main Street investors who were only just beginning their journey as SFR investors. Not only did this provide opportunities for mom-and-pop investors, it also benefited communities across the country as these homes were given new life and neighborhoods were improved one property at a time. Prior to the Great Recession, small investors used conventional means to find and buy properties. But 2008 changed everything. It was time for disruption and data was the answer. In 2012, big institutions like Invitation Homes, a subsidiary of Blackstone, and American Homes 4 Rent began buying properties at the courthouse steps at or above market value. Their data projections allowed them to project future profit that local investors just did not anticipate. New Western saw an opportunity to help bridge the gap. We aggregated foreclosure data and applied core algorithms to identify opportunities, allowing investors to identify and purchase their next property within days. Fast forward to today, and Wall Street’s investment in data and technology has made it to small investors on Main Street who can now tap into tools that they did not have access to before—from real estate platforms and apps to workflows and exit strategies. One example of how a small investor can capitalize on data is to identify properties with two lots on them. While a large institution is unable to work in such a fragmented space, a smaller investor can isolate available properties like this online and acquire them with a plan to resell the unit on one lot and retain the second lot for investment purposes. Bringing Wall Street technology to Main Street has also allowed for the online integration of property management, home viewing, and maintenance, all of which had historically been a time-consuming and inefficient process. These platforms, intuitive websites, and user-friendly apps have enabled small investors to easily expand and scale their business. On the flip side, big institutions may have big money and Big Data, but today’s market requires hyper-local intelligence. The Street has realized that technology cannot replace human insight. Pricing is happening at the neighborhood, block, and even individual house levels. Localized networks are a must. As a result, mom-and-pop investors are now offering inventory, local market information and understanding back to Wall Street institutions. The big institutions require large amounts of scale and swaths of land to build and rent. They are leaning heavily on local investors who aggregate inventory. Main Street plays an important role in helping Wall Street learn and scale. The Power of Small Being small allows tremendous flexibility and creativity to improve ROI—often in ways that are just not feasible for big buyers. In high-density areas, the small investor is able to capture benefits that are more difficult to attain for an institutional investor, such as renting garages or driveways to create cash flow. Savvy investors have gone into subsections of Seattle and have been very fast and innovative to create value—from getting a zoning exception for a pre-built nanny pad to building a free-standing apartment unit in the back. Investors are able to buy a property that looks like it is complete, but realize a significant profit—profit that would have been left on the table without an insider’s understanding of the local market. In expensive markets like Los Angeles, small investors have popped the top on detached garages to maximize limited lot size. Adding a room and renting a unit or simply reselling the property with an additional bed and bath creates huge value as the cost to build out the additional square footage is far surpassed by the potential return. The Rental Reality “Investors are chasing rising prices because rental payments are also skyrocketing, incentivizinginvestors who plan to rent out the homes they buy,” notes Redfin economist Sheharyar Bokhari. However, large institutions often do what is in the best interest of share-holders, not middle-class Americans. To put some numbers to it, institutional investors own approximately 450,000 homes in the U.S., more than half the total number of homes for sale right now. “Investors are buying everything from finished homes to entitled land and anything you can imagine to get scale,” commented Margaret Whelan, chief executive officer of Whelan Advisory Capital Markets. In some California markets, “neighborhoods that were formerly ownership neighborhoods…are being slowly, or not so slowly, turned into renter communities, and not renter communities owned by mom-and-pop landlords but by some of the biggest private-equity firms in the world,” commented Peter Kuhns, formerly director of
Risk Mitigation Isn’t Just For “Risk Managers”
Risk mitigation starts with originations, continues through relationship management and lending, and merely “plays out” if a loan starts going sideways. By then it can be too late … It’s often been said, “The time between economic recessions in the United States is like a baseball game, one inning for each year.” Whether you agree or not, it’s hard to argue the current economic recovery has gone into “extra innings” since the Great Recession technically ended in late 2009. That said, despite not just one but two yield curve inversions in 2019 (the classic “canary in the coal mine” for an impending recession), there are many key barometers indicating that the next recession—even if it’s just over the horizon—is not imminent. We continue to enjoy record low unemployment, positive wage and GDP growth, generally modest inflation (occasional spikes driven mostly by higher energy costs), strong housing demand and a record stock market. So why should we be more vigilant than ever about managing and mitigating risk? Shouldn’t we all be making hay while the sun shines? Yes, the last 10 years have been great for real estate investors—possibly the best ever. This, in turn, has attracted a lot of smart, innovative capital and new, tech-driven ways of delivering it, making this very much a “borrower’s market” today. The space has also witnessed a lot of new “efficiencies” that make underwriting, funding and servicing loans easier and more “customer friendly” than ever before. As a result, borrowers—especially those with experience, strong net worth and liquidity—enjoy a variety of attractive, convenient financing options. The problem is, it’s getting harder to find good deals with viable exit strategies. And no matter how efficient capital markets have become (we’ve already seen several unrated securitizations for REI loans in recent years), demand—and therefore loan liquidity—will always outpace the supply of quality deal flow. The U.S. housing shortage, driven by historically low interest rates coupled with a limited and therefore rising labor and material costs, has been well-publicized. Despite this, other than large “build-to-rent” master-planned communities and other portfolio or “consolidating” transactions, investors and lenders are naturally compelled to take more risk just to generate the same or even lower returns. All that indicates we’re in a market at or near its peak. The challenges investors face finding good deals combined with an abundance of aggressive (or, shall we say “less than acceptably risk-adjusted”) borrowing options is creating a perfect storm of narrowly profitable deals using higher leverage. All this is a recipe for “significant near-term dislocation.” Risk and reward will always find a way to rebalance, sometimes painfully so. Risk management (i.e., evaluating and forecasting risk) and developing tactics and strategies to mitigate risk must be everyone’s responsibility. Now more than ever, an ideal risk management culture starts further upstream during general marketing and originations and merely continues through underwriting and the end of the loan lifecycle. Marketing Actively manage solicitations and marketing/advertising (human, digital and everything in between) toward the most desirable regions, products or borrower types based on your long-term credit risk strategy. Do not focus on the highest potential immediate volume, lest you’re left “holding the bag” when the music stops. For example, if you want seasoned borrowers, don’t troll through “expert forums” and platforms where new(er) or lesser experienced investors are more prevalent. Make it clear you value client experience and financial wherewithal., Discourage riskier, less seasoned leads. This sounds easier than it is, for the lure of volume and what appear to be attractive gross yields often result in adverse selection—this is a time-tested truism. Originations Despite all that hard work generating new leads, don’t become so committed to “closing the deal” that you avoid red flags or spend too much time trying to fit the proverbial square peg into the round hole. If a deal doesn’t work (i.e., a borrower clearly isn’t qualified, property values look questionable or debt serviceability and recoverability/exit look challenging), it’s better to give a quick “no.” In that case, either introduce them to another suitable borrower or decline the opportunity outright. Encourage them to keep looking for a better deal and to come back next time. No one likes to waste time and, rest assured, your erstwhile borrower will appreciate your candor and refer you to others who may be a better fit. Being thoughtful and direct “pays it forward” in numerous ways. Underwriting Stick to your underwriting standards. Don’t find ways to bend criteria or make exceptions just because you can sell them to your credit committee or financing partners. For example, if you’re traditionally a fix-and-flip lender who lends up to 90% of cost (or 75% of after-repair value) to borrowers with at least three successful transactions at 12% and 2 points, stick with that and focus on delivering a superior, consistent customer experience. Be responsive and collaborative, suggesting ways borrowers can become more profitable, better project managers or more efficient builders. Really dig into construction budgets to help ensure projects are viable and you are not otherwise funding into a default. Treat the borrower’s precious resources as if they are your own, and help position them for mutual success, even if that means less leverage or occasionally passing on an opportunity. All of this mitigates risk in the long run. Servicing Don’t give borrowers a reason—legitimate or not!—to blame you for projects going sideways. Poor loan servicing can often create an unrecoverable downward momentum that will only increase the risk of loss, let alone profits. Rather, help borrowers by promptly responding to requests or funding draws or simply “working with them” as unforeseen circumstances arise. Don’t burden them with artificial constraints (e.g., sticking to hard-and-fast construction completion dates even in the face of unexpected but understandable delays such as bad contractors and permitting challenges) when sensible flexibility can yield a much better outcome for everyone. Put differently, don’t be a source of frustration for good, honest, proactive borrowers working hard to harvest their investments and pay you back … they’ve
