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Capital Markets

2023 Midyear Update

Squid Games and Green Shoots for Private Lending By Eric Abramovich The private lending industry emerged from 2022 battered but hopeful. At the halfway mark of 2023, we are really starting to feel the repercussions of Fed policy slamming the brakes on the economy. Just like the anti-lock braking mechanism of modern cars, where pressure is released and reapplied in a pumping fashion in order to stabilize the stop, the Fed is doing its best to slow the economy down without grinding activity to a halt. That said, the Fed has caused Wall Street to sneeze, and the private lending industry has definitely caught a cold. While there are signs of thawing with green shoots sprouting if we just look, it feels like we keep reemerging from the last round of squid games only to find that there’s another round left before we reach safety. As we look back at the carnage and the challenges ahead, we also wonder how long the malaise might last. Unlike the consumer mortgage space, which is having its own severe challenges in this environment, our nascent private lending industry has an even worse liquidity profile because it isn’t backed by the government agencies Fannie and Freddie. The institutional capital that came in gradually from 2013 and then quickly during the pandemic has rapidly retreated, creating a world of winners and losers — those with capital to lend and those without. Encouragingly, securitization markets seem to function at the right price, but a public RTL (aka fix/flip) deal hasn’t closed since January, mainly because the pricing offered is too high for private lender and borrower tastes. In stark contrast to the times when every lender had more capital than deals, the liquidity has now congregated around a few national lenders backed by well-capitalized insurance companies and less-leverage-reliant asset managers hungry to own the space. This has created a multi-polar world of sorts, where those not aligned to a strong pole are facing existential crises. The survivors are getting stronger even in the face of declining borrower transaction volume, buoyed by less intense competition from the fallout of their misaligned competitor lenders. But even for those aligned to the seemingly strong poles today, safety in the next round of private lender squid games is far from guaranteed. The Next Domino to Fall The banking crisis was the next domino to fall, and so far, the fallout and readthrough to our industry have been muted, with both risks and opportunities emerging. A year ago, some in the private lending industry all but dreamed of being acquired by a bank — with cheap permanent capital coming from stable deposits. The regional banks have also been providing much-needed liquidity in the form of warehouse lines to local and national lenders. The previously unthinkable bank runs are causing severe pain for those exposed, but for those aligned to the right poles, the retreat of banks is bringing back bankable real estate investors as borrowers. Further scarcity of capital has brought pricing rationality back to markets like California, where there was an almost perpetual bid on below-market-rate borrower loans. Table funders are reveling in providing liquidity to smaller lenders whose warehouse lines are constrained. It has been a mixed bag so far, but as if the banking crisis and the potential contagion aren’t bad enough, there is potentially an even more sinister evil spirit lurking in the background, which could be the next round — the ‘commercial real estate (CRE) bomb.’ While our discussion here is focused on private lenders that lend to residential real estate investors, with the impending maturity wall of loans against CRE quickly approaching, rates up dramatically, liquidity already scarce, and subsectors such as office and retail obliterated by pandemic trends — we need to stay cautious. Residential housing is showing very strong signs of resilience and holding its ground as an attractive investment, and while the negative perception seems contained to CRE, the fallout can lead to a vacuum where the relative value effect causes institutional capital to gravitate toward the most attractive opportunities. That is, an institutional investor might favor allocating capital toward deeply discounted distressed CRE assets versus residential assets that have barely budged from their valuation high-water marks. Are We Approaching the Last Round? It’s always difficult to call a market bottom or an end to a cycle. Surely the banking crisis has put us closer to the end, and usually, government intervention, this time via the FDIC stepping in and guaranteeing deposits, is a strong sign we’re approaching the last round. There are positive signals everywhere. Residential real estate transactions show surges in activity in reaction to slight downticks in mortgage rates, indicating a market buoyed by pent-up demand and lack of supply that is simply weighed down by affordability challenges, not crushed by them. Inflation is retreating, however begrudgingly, and there seems to be more chatter around rates coming down than going up. After a brief dark period for home builders, optimism abounds once again, and sales of new homes have been very strong. Fix/flip profitability signals, calculated as the difference between the buy and sale price on a 12-month hold, are as bad as they’ve been during the Great Financial Crisis — which is interesting as a sensationalist headline, but in reading between the lines, this looks like a bottoming out indicator. Coming into the Spring selling season, there have been sharp rebounds in HPA (Home Price Appreciation) in a lot of markets, and counterintuitively, some markets are now at their all-time highs. The green shoots are definitely sprouting, but only time will tell if this is a dead cat bounce or a trend with real legs. The mixed signals and crosscurrents are strong, but here at Roc360, we take the long view. We have focused on diversity of capital for our lending businesses and have built up an ecosystem for real estate investors. We’ve made sure to broaden our loan products while enhancing our ancillary products and services

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An Economic Reality Check

Now, What Are You Going to do About it? By Phil Mancuso In the thirty-five years I have been in mortgage and real estate, I do not know if I have quite seen anything like the last few years. How does one observe, measure, plan and trade around an entire economy that has been shut down for months, only to see it not fully re-open for well over a year? Then pumping unprecedented sums of currency into the system while continuing to navigate what has been an ever-widening wealth gap, which has only been made worse by said seizure and resuscitation? And once we have endured and accomplished all that, how do we finally expect to safely land that massive, ill-conceived and unwieldy ship? In two words; you don’t. You don’t because the data with which decisions are made is stale and imperfect. You don’t because the numbers and the people interpreting those numbers have never lived through these conditions, nor have they navigated an economy that seemingly becomes obsolete daily thanks to the internet and machines. You don’t because our economic behaviors change daily, swiftly and without warning. You don’t because the Fed knows two speeds; run like hell or smash into a wall at top speed. And lastly, you don’t because the Fed had it right to begin with, inflation was transitory. Our Economic Health In fact, our economic health has been transitory since the 1980s, buoyed by events like stock and housing bubbles, Baby Boomer inheritance bonanzas, intra-year tax cuts, QE-infinity and most recently COVID stimulus checks. Guess what has not nurtured that health? Income. Pull any income chart over the last three decades and you will find it has not moved much, even with the recent boon in wages. So, when that bonus money runs out, so too does prosperity. I have said for several decades that rates are never going up and I’ve yet to be wrong. That bell has now tolled for much of America and the numbers are only starting to show it, but on the streets we can feel it, on Twitter we can see it. You do not have such massive discourse or discontent when all is well. The bond market, which always sees that forest through those trees has been screaming it. Mainly because all the hints have been hidden in plain sight. ISM prices paid peaked in June of 2021, yet CPI only breached a 5 handle last month. In fact, you would have to go back to April 2020 to find a worse level than this past December’s ISM price component. Further, we had two consecutive negative quarters of GDP, which formerly was considered a recession before we redefined the term and we are now predicting, even trending back to that in the second half of this year. Or, maybe it is as simple as the good ole’ eye and smell tests. Malls were packed in the Summer of 2021, yet today they are often found empty. I have asked many retailers, builders, tradesmen and others and they have all said the slowdown is palpable. Never mind asking your friendly neighborhood loan officer. And there is that little thing about bank failures. In fact, three of the four biggest failures on record, and yes that includes the depression and 2008, just happened recently. Everything is fine. Nothing to see here. But what about all these high prices? In a word, scarcity. The Fed is trying to fight demand-pull inflation. That is the inflation that rate hikes can tame. But how do we have demand-pull inflation in the absence of historically normal supply levels? Unpopular opinion: we do not have inflation; we have a goods and services shortage. Monetary policy cannot fix that problem. The million-dollar question is will supply ever return? I have heard arguments from very credible supply chain experts, on both sides. On the not so bright side, one such compelling argument was that the western consumption model is on life support. We are running out of everything and will be forced to live like people in Europe and the farEast with fewer, better, and more expensive things. There will be more customization, smaller closets and homes, steak dinners becoming more the exception for special occasions or for the wealthy. The Near-Term Inflation Outlook There was a time when things were built to last and not cheap and disposable. We have too many people and too few resources. I would imagine shortages also have not been helped by four record years of factory fires and explosions, highlighted by a 129% jump in 2021. What if we go back to one-car households? Smaller houses? Less consumption? We had two TVs in our house growing up and one of those was a small portable TV. Now some houses have a dozen. In fact, my first rear projection TV cost over $5,000 in 1998 dollars. That would buy me ten or more today in 2023 dollars. The good news is we would have a long way to go to return to a high price-low consumption model. So, what if prices do not go down en masse? The worst outcome is stagflation, high prices, bad economy. It is very rare. In fact, it has only happened one time and it was driven by a gas shortage. The good news is prices across many measures are coming down, so that outcome seems unlikely. In fact, if you discount the last year or so of price increases and drill down over a longer-term view, you will find that many if not most household items are actually very cheap using relative dollars, especially electronics. TVs, computers, phones, vacuums, etc. are in fact incredibly cheap adjusted for inflation. My first computer was about $4,000 all in 1980 dollars. Even most cars are relatively cheap. A simple Google search of a 2002 Ford Mustang will tell you the MSRP was $24,390. That same car today is $27,770, not even a 1% annual price increase.

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Understanding Capital Markets Can Lead to Consistent Success

The Effect the Markets Have on Investor Activity By Mitchell Zagrodnik It is no secret that the real estate investment space has been growing consistently over the past few decades. Whether someone is looking to purchase a property, renovate it, and then flip it for a profit, or they just want to purchase a nice cash-flowing rental property for passive income, there are multiple avenues investors can take to lead to a prosperous career in real estate investing. But as the second half of 2022 led to swings in the market due to rate increases, 2023 has started off with a more conservative outlook in the space, with most people wondering how the market is going to play out. Experienced investors who have been in the industry for decades have seen the worst of the worst, with the 2008 housing market crash. Newer investors are seeing their first volatile market after a few years of a very favorable market and low rates, and may be wondering how to navigate this new playing field. Looking at capital markets data and being able to identify trends in the market are a great way to stay ahead of the game and prepare for the future. What are Capital Markets? The definition of capital markets as described by Oxford Languages is “the part of the financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments.” In real estate, the industry has its own particular capital markets, which are designed to accommodate the needs of investors and developers. Through this structure, businesses can gain capital by issuing securities to investors, who with these purchases, hope to earn solid returns on their investments. Overall, these markets are meant to act as a framework for how assets are valued, financed, and transacted from businesses to investors. And as investors, it is beneficial to have an overall understanding of how not only to invest in the real estate market, but to put in the time and research to better comprehend how your purchases fit into the grand scheme of the market. Real estate capital markets consist of both primary and secondary markets, and both are key factors of the financial system. The primary market is where the loans are originated, and then once they are created they can then be traded with investors either as securities or as some other type of financial instrument. The secondary market acts as a channel for the funds to get in the hands of investors in order to fuel investment activity and lead to a stable and functioning economy. Since mid-2022, the economy has been fluctuating and the Fed has taken steps to try and stabilize it through constant rate hikes that have a ripple effect on the real estate investment space. The Effect the Markets Have on Investor Activity Since the second half of 2022, interest rates have been on the rise and because of this, they have a heavy impact on real estate transactions. When interest rates increase, the cost of capital increases making real estate investments less profitable and lowers the demand for these assets. This is a prime example of what we have seen happening in the market since the middle of 2022. The consistent and frequent increases in interest rates led to overall lower valuations of assets, having ramifications throughout the market. When interest rates are lower it is the opposite, costs are lower and real estate investments are more attractive. It all comes down to returns on the investments. With higher rates that have continued to rise, projected returns are lower, and the uncertainty on where price points will land on these acquisitions is leading some investors to steer clear. Where will the property value appraise at? How much longer is the Fed going to continue to raise rates? These are questions that many investors are asking, but there are also those investors that can read the market and current trends, and because of that they are looking past the short-term volatility and focusing on the opportunities in the long run. The Trends You Should Look For Whether you are new to the real estate investment space or a long-time veteran, it is important to always have a student mindset. Even in times of consistency in the market, it is imperative to always be prepared for when the market gets more fluid and unpredictable. There are trends and data in the market that investors should always keep an eye on. A good place to start is by keeping an eye on housing supply and demand. In real estate for every action, there is always a reaction, so when supply is lower, demand is usually driven up. The same is said for the inverse, when supply is there then the prices are likely to lower. Looking at housing starts and building permits as well is a great way to stay ahead of the curve. If there is an increase, then that could potentially lead to a rise in housing prices. Also, keeping an eye on migration patterns throughout the United States can be a good indication of market conditions to come. Housing is expensive, especially in big metropolitan areas, and that trend seems likely to continue as prices and rents continue to soar to record levels. Even with the recent efforts to slow down appreciation, there has been little impact to help with affordability. Factors like low inventory and difficulties with new builds contribute to this as well, among other issues. Regardless, people are leaving the expensive areas and moving to smaller, more affordable areas. These are just some of the patterns and trends to be aware of as investors in a changing market. Getting Ahead in a Changing Market Real estate capital markets are the engine that makes that industry run. They provide investors with the opportunity to receive capital in order to help fund their real estate projects, whether that be rehabbing and selling a property or looking to

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Less Pain, More Gain

How Tech is Reshaping the Real Estate Transaction By Brien McMahon In recent years, the residential real estate industry has been moving faster than ever before by virtually every measure, from the number of days homes stay on the market to the transaction processing times homebuyers expect. That is a sign of a vibrant, in-demand industry — but it is also a reminder that some aspects of the real estate business are overdue for an upgrade. Although the U.S. real estate market is one of the largest and most developed markets in the world, it is largely served by legacy players, many of which are stuck in the past and struggling to reinvent their business models. As a result, real estate investors, agents, lenders and consumers have been frustrated by antiquated processes, unmet promises and a lack of high-quality, integrated digital solutions. That might sound like a gloomy state of affairs, but it makes the promising innovations on the horizon all the more exciting. The real estate market is primed for disruption by new entrants that are more agile in delivering innovative digital business models that address the challenges consumers and professionals must navigate. This article explores some of the key pain points market participants currently face, and previews how a new generation of tech solutions are poised to make things better in a big way. Key Pain Points for Consumers:Understanding and Navigating a Confusing, Antiquated Process HomeAdvisor recently found that 86% of house hunters agree that the homebuying process is stressful, thanks to its many structural pain points. According to a survey by the National Association of Realtors (NAR), 33% of buyers aged 22 to 30 report that simply understanding the process itself is the most challenging part. While an incredible amount of information is available to consumers online, it can still be difficult to navigate without professional assistance. People want expert professionals they can turn to; the NAR survey indicates that credibility and trustworthiness are the most important factors when hiring a real estate agent, and that it is especially important for younger consumers. For more than half of potential homebuyers, the most challenging part is finding the right property, according to NAR. Buyers typically search for eight weeks and look at a median of nine homes. Once prospective buyers find a home they love, they still must navigate the many, sometimes vexing or archaic, steps in the buying process. They are certain to encounter multiple sources of friction along the way, from digging up obscure documentation for the mortgage application to the sometimes-befuddling title and closing processes. Key Pain Points for Agents and Brokers:Frustrating Tech “Solutions” That Solve Little The number one challenge real estate agents and brokerages face is simply keeping up with technology, according to 2019 research by NAR. Many real estate agents end up spending far too much time dealing with the various workflow systems and portals they need, instead of doing what they do best: helping clients buy and sell real estate. Agents and brokers often must use 10 or more individual solutions, and there has not been a full-service option for transactions across the home buying journey. This requires agents to manage their relationships and data in a highly fragmented and frustrating way. For example, consider the process of creating a comparative market analysis (CMA) for a property, the traditional report that helps agents and their clients contextualize the value of a property based on recent sales in the surrounding area. Compiling this essential piece of research is a time-consuming and largely manual task – one that has not changed much in decades. According to a 2022 research survey conducted by homegenius, Inc. and the Residential Real Estate Council, the majority of real estate agents surveyed spend over half an hour on a single CMA, with 31% stating it takes them more than 45 minutes. While there are a lot of great CMA tools out there, agents still must access multiple sources to compile suitable information before organizing it in a professional format. Key Pain Points for Lenders:Rising Costs, Secular Business Risks Despite continual investment in technology, loan production costs have increased by more than two and a half times over the last decade to an all-time high of $9,470 per loan in the fourth quarter 2021, according to MBA mortgage performance report data. Similarly, these investments have not substantially shortened the time required to close a transaction or meaningfully facilitated the complex coordination of stakeholders involved in a closing. Lenders also continue struggling to develop relationships with local real estate agents in a purchase market, and many are concerned about disintermediation from their customers. Key Pain Points for Real Estate Investors:Managing Complexity in a Rapidly Changing World Every real estate investor has their own unique portfolio and complex set of issues to navigate. However, one capability that every successful investor has is an ability to manage a wide array of competing factors to ensure that time, capital and other resources are focused where they matter the most. That depends upon having access to the information and tools that help them make the best decisions and execute on those decisions as efficiently as possible. A Market Ready for Change Every participant in the real estate transaction process, from investors to prospective homebuyers, is eager to bid these pain points goodbye. The COVID-19 pandemic accelerated the enormous changes in our personal lives with the reliance on digital solutions. Both consumers and businesses are now increasingly comfortable with digital solutions like Amazon, DoorDash and Instacart, resulting in broad and enhanced changes to the way we used to do things. Now taking hold in real estate, the question is not whether, but when real estate transactions will be driven by companies delivering digital solutions that leverage big data and analytics powered by advanced technology. Real Estate 2.0:An All-in-One Approach, From Search to Close What does this new-and-improved digital future for real estate look like? At Radian, we believed the best way to overcome the

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“Housing Crisis?”

Is the Fed Trying to Cool Down a Hot Housing Market? By Jennifer McGuinness Federal Reserve Governor Christopher Waller has stated “The housing market is definitely out of whack,” and even shared a personal story about how he recently sold his St. Louis home to an all-cash buyer with no inspection. He was further quoted as saying, “We’ll see how the interest rates start cooling things off going forward.” Low borrowing costs introduced to insulate the economy from COVID brought about a reported 35% rise in home prices over the past two years. While home prices are not part of the inflation indexes tracked by the Fed, they do feed into other factors, such as rents, and this is an influential component to inflation. Rising interest rates mean that borrowing for a house is suddenly more expensive. The 10-year Treasury note yield, a benchmark for mortgage rates, has risen due to expectations that the Fed is going to quickly increase rates. The average 30-year-fixed rate for a mortgage loan is now 5.42% as of May 19th, over a 2% increase since the year began. The last time mortgage rates rose this fast was in 1994. At that time, there was a 20% decline in home sales as the Fed increased rates and based on that, home price appreciation slowed. While many of the economists and Wall Street research teams predict a decrease in home sales again, they are much more conservative and have projected this at approximately 5% annualized by the end of the year. A Market Comparison The market however is very different than in 1994. Today, record-low housing stock, higher household savings, and a job market where there are approximately 1.5 jobs available for every person looking, not to mention the additional “mobile” or “remote” nature of today’s worker, are creating fundamentals that could materially impact many forecasts. The sale of homes that have been previously owned are at a two year low as of March, and mortgage applications were down as well. For the first time in a while, we have begun to see list price reductions on homes for sale with an average days on market of 17 and mortgage applications remain above pre-COVID levels. A review of housing data shows that the correlation between home price appreciation and mortgage rates, while still strongly correlated, has been decreasing the past 20 years. Record low inventory over the past couple of years also means there has been, and is, plenty of pent-up demand, particularly among Millennials ready to set up a home, whose share of purchases has been growing. Today, the average age of the first-time home buyer is 33 years old, and I believe we will see household formation numbers increase dramatically, as my opinion is that they have been under reported due to the pandemic and quarantine. Due to the rising cost of alternative housing, Baby Boomers have not downsized as quickly as anticipated and this is keeping, at times, larger homes from coming onto the market and these are generally the homes that are sought by the younger home buyer. In addition, too few new homes are being built. Pre-pandemic, we were already seeing millennials, who were renting in urban areas, moving out of those areas to more suburban locations and purchasing homes. However, the pandemic really accelerated those moves and we saw a lot of other people moving out of the cities and even moving to different states where, for example, the cost of living was/is better. The other thing that is very different now versus during the housing crisis, is that at that time there was over a 12-month supply of homes available for sale. In a healthy market, you will generally see a 6-to-7-month housing supply, and right now, we are generally seeing a 2-to-3-month supply. During the housing crisis, there was always the option of buying a home at foreclosure auction as many of the homes were underwater. But that is not the situation today. Approximately 90% of borrowers in foreclosure have positive equity, and over 20% of them sit in a 50% equity position. According to realtor research data, the share of all-cash sales was the largest in nearly eight years in March, a sign that much of the supply will be purchased by both investors and second home buyers. Another important note is that rent prices have gone up 14% year over year and we are seeing really strong housing permit numbers right now from builders. While this is positive, they have been under-building for approximately 10 years, so it will take them another four to five years to catch up. Foreclosure Activity Foreclosure activity dropped from March to April, but it was still up 160% year-over-year. One interesting data point is that while foreclosure starts were pretty much flat, foreclosure completions were much lower, as 90% of borrowers in foreclosure have positive equity. Based on this, many foreclosures will result in home sales rather than foreclosure auctions leading to less “distressed” real estate for purchase. According to ATTOM Data’s most recent Foreclosure report, “Lenders repossessed 2,830 U.S. properties through completed foreclosures (REOs) in April 2022, down 36% from last month but up 82% from last year. The states that had the greatest number of REOs in April 2022, included: »          Illinois (417 REOs) »          Pennsylvania (266 REOs) »          Michigan (187 REOs) »          Ohio (150 REOs) »          California (148 REOs) The major metropolitan statistical areas (MSAs) with a population greater than 1 million that saw the greatest number of REOs in April 2022 included: »          Chicago, IL (347 REOs) »          Philadelphia, PA (149 REOs) »          New York, NY (128 REOs) »          Detroit, MI (64 REOs) »          St. Louis, MO (53 REOs).” An interesting fact is that the homes we are seeing in active foreclosure were generally 120 days delinquent pre-pandemic and should have been foreclosed approximately two years ago. Also, the foreclosure rate today is still at about half of the normal level. What’s Next The Fed

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Fix-and-Flip Appraisals

Understanding the Process is Key to Success By Mark Cassidy With its latest acquisition of Nationwide Title Clearing, Covius has completed its third successful strategic acquisition in the past three years. Being part of such a diverse group of experts is both exciting and beneficial, with expertise across the mortgage lifecycle that benefits our clients and our industry. NTC’s capital markets solutions help mitigate risk post-closing while our Service 1st valuation solutions help lenders, and fix-and-flip investors, manage risk for an asset that is in transition. It behooves these investors to understand what lenders expect to see in fix-and-flip valuations. When qualifying a borrower for a traditional mortgage, a typical lender will focus on some combination of the 4Cs: capacity (to repay), capital, collateral and credit. While credit and capital do factor into fix-and-flip lending decisions, collateral, or the value of the property before and after renovations, plays an oversized role in determining whether or not a loan is approved. For this reason, investors need to understand how fix-and-flip lenders approach valuations, what to expect during the appraisal process and what some of the red flags are that can delay the decision or even kill a deal. Let’s start with the process. Different lenders take different approaches to valuations: Some have staff appraisers and others use local appraisers. Large national bridge lenders tend to rely on appraisal management companies (AMCs). In most cases, an AMC, like Covius’ valuation risk management solution Service 1st, does not do the actual appraisal. Instead, the AMC selects the right independent appraiser in a given market, assigns the work and then performs quality control reviews on that valuation. Selecting the right appraiser for a fix-and-flip assignment can be challenging because, as we will discuss, a fix-and-flip appraisal is often more complicated than the standard residential mortgage appraisal. Not One Appraisal, but Two A fix-and-flip appraisal is significantly broader in scope than a traditional residential appraisal. It requires the appraiser to produce two valuations: an initial value based on the current state of the property and then a post-renovation value, known as an after-repair value (ARV). Each of these valuations must be arrived at using Uniform Standards of Professional Appraisal Practice methodology and supported by separate sets of sales comparables. In addition to the valuations, the appraiser is also required to evaluate the investor’s renovation budget. To add another level of difficulty, there is no standard form for a fix-and-flip appraisal. Lenders often have customized requirements for how they want their valuation presented. From a practical standpoint, this means that the appraisals are completed using a combination of Fannie Mae appraisal forms. It also means that appraisal QC software can be less effective in reviewing these reports. Easier Said Than Done In order to produce a realistic ARV, the appraiser needs to be able to understand the investor’s vision for the project and also have the requisite construction knowledge to determine whether or not the project is viable, based on the proposed budget and anticipated end result. Finding comparable sales for both sets of the valuations can be challenging, particularly if the subject property is extremely distressed. Similarly, the appraiser must determine if the property does or does not conform to the current market. If not, can the non-conforming issues be addressed compliantly within the local zoning rules? This frequently arises with single-family properties being converted into multifamily, for example. Keep in mind that unlike typical construction projects, a full set of plans are often not available for the appraiser to review at this point in the process. Reviewing the budget is also a crucial step. Depending on the size of the project and the sophistication of the investor — and whether or not a builder or architect has been involved in the early stages — some budgets are well developed and clearly presented. Others may be more rudimentary and less detailed. Regardless, it is up to the appraiser to make a judgment call as to whether the proposed budget is realistic, can cover the planned improvements and will result in the expected increase in value. It is not unusual for the appraiser or the AMC to come back to the investor with questions about the budget or the proposed renovations if something appears to be confusing: for example, a $50,000 budget that is expected to cover the addition of a whole new second floor. The average fix-and-flip appraisal can be done in 10 to 15 business days, depending on the location of the property and whether it is occupied. How to Improve Your Odds Be as thorough as possible with plans and specifications and note any enhanced architectural features. For example, if a bathroom is being enlarged and upgraded, note the increase in size, additional windows and where higher cost trim and materials will be installed. Provide blueprints if available for changes to floorplans, and/or note before and after measurements and net increase in square footage. Elaborate on site improvements, such as additional parking, a larger driveway, gated parking or a fence. Fix-and-flip appraisals are more complicated than traditional appraisals and present a series of challenges for the appraiser. At the same time, however, they give appraisers an opportunity to think outside the box and to use their entire skill set. A large national fix-and-flip lender was recently interviewed by an appraisal publication and made some observations that are worth sharing. “It is true that these types of appraisal reports take additional time and effort, but these properties usually make a positive impact on the market,” he said. “Every time a distressed property is acquired and renovated it not only provides the potential buyers an opportunity for improved housing, but it also often has other positive impacts such as gentrification of the market, improving its value and marketability.” I could not have said it better myself.

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