REI INK

Perspective

The Economic Bubble is Hiding in Plain Sight

Investors, beware and be aware—constriction is coming. We are so far into the longest economic expansion in the history of the U.S. that just about everyone—no matter how bullish on their particular market—is stuck in a waiting pattern. Currently, our economy, our country and, arguably, our housing market are all subject to an array of uncertainties, including: COVID-19 (the novel coronavirus that first appeared in Wuhan, China) and its impact on global health and the Chinese economy. The 2020 U.S. presidential election. Cybersecurity threats, including the recent Equifax breach that compromised the data of an estimated 145 million Americans. A volatile stock market. A looming housing affordability crisis. Inflation. Student loan debt. Overall consumer debt. The list goes on and on. Despite the uncertainty, the economy and investors are not behaving as most would expect. They are behaving as though we are in the middle of an economic expansion rather than riding high on what can only be called a bubble, to put it bluntly. Investors who fail to acknowledge and react strategically to the presence of this bubble will fall hard in the next 12-24 months. Do not be among those who simply shut their eyes and refuse to acknowledge that sooner or later, the end of this upswing is coming. I tend to be a pretty unpopular guy when I say we are in a bubble or that the economic expansion is barreling toward the end of its life. I understand. No one likes to hear that the “good times” are almost over. Our industry does, however, gradually seem to be accepting that an eventual economic downturn—or at least a leveling off—is realistically inevitable. 3 Things to Know About the Bubble When it comes to the next several years and our economy, there are three things every investor and small business owner must realize: 1)  Real estate market cycles have historically been twice what “conventional wisdom” says they are. Looking back over 200 years instead of just 20, you will see that the biggest market cycles for real estate are not seven or 10 years, as most people think they are. Rather, they are about 18 years. Counting from the crash (2007 or 2008), you can see we are sitting right on the 18-year threshold as we enter 2020. Keep in mind that not every recession is exactly like the one we just went through—most recessions are not 18 months long! In fact, the average length is 11 months, and the two prior to the Great Recession lasted nine months (the savings and loan crisis of 1990-1991) and eight months (the dot-com bust). Although some economists are warning that the present extended boom will be followed by an equally extended bust, the odds are against this happening. Why? Because the Great Recession was a result of a combination of negative behaviors in two of the pillars of our country’s economic stability: the housing market and the financial markets. While some may argue that not everyone “learned their lesson” after the housing crash and financial meltdown, most of the problematic, institutional behaviors that led to that crash have since been remediated. Takeaway // Not only is it unlikely the next downturn will last as long as the last one, but it is also unlikely it will stem from the same weaknesses in the system. 2)  The next downturn is unlikely to hinge on housing. Supply and demand remain (and likely always will) the most influential factors in the life span and nature of real estate cycles. For this reason, the next downturn and economic cycle will be different from any other correction when it comes to real estate. More than ever before, regional real estate performances will diverge from one another. Some areas will rise significantly in value while others fall. This happened to a limited degree during the 2008 housing crash, particularly in areas of the country like Dallas, Texas, which had not experienced the astronomical appreciation rates the rest of the country had leading up to the crash. When the market fell, the Dallas market softened slightly and then proceeded to go on the tear it is still experiencing today. By comparison, Boston went through a major upswing prior to 2008. But by 2009, houses were selling for half their former value. Likely, the next downturn will certainly affect the housing market and real estate sector, but it is unlikely to be caused by the housing market. This means that different facets and tiers of real estate will react differently. It is far more likely that a recession will disproportionately affect higher tiers of the housing market, driving owners in those brackets downward to lower-cost residences, than send the entire housing supply plummeting in value. Looking into my “crystal ball,” my best prediction is that if you invest in areas with price ranges between $300,000 and $600,000, these will be the properties most likely to go “on sale” during the next downturn. By comparison, highly populated areas with homes under $200,000 will continue to rise in value because it is nearly impossible to build properties at that price point in today’s market. Upper-tier properties have been overbuilt, and lower-tier properties are undersupplied and in high demand. Takeaway // If you can buy homes under $200,000 in areas where there is any type of job stabilization, you will be in prime position to build your portfolio during the downturn and benefit over the long term from your foresight. 3)  Inflation will be part of the equation. Although the Federal Reserve seems determined to keep interest rates low for as long as possible—probably until after the presidential election—it will eventually be impossible to continue to postpone inflation and an economic correction. When interest rates do normalize and we see 6% or 7% interest rates once again (which are still quite low by historic standards), the affordability of the midrange properties I mention in #2 will diminish greatly. Takeaway // Lower-tier, affordable housing will be the hottest “ticket” in

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The Evolution of the Single-Family House Space

The new asset class on Wall Street is single-family homes, with a new focus on build-to-rent communities. In 1979, I purchased my first single-family investment property. It was located in Williamsville, New York, and I paid $23,200 for it at a mortgage foreclosure. After investing slightly more than $10,000 to renovate it, I sold it for $57,000, netting a profit of $20,000. That deal changed my life. I’ve been involved in more than 3,000 transactions across 12 states and 50 cities since then. According to Zillow, that first house in Williamsville sold for $289,900 on Sept. 24, 2017. That is exactly why we all invest in real estate, particularly single-family homes. One of my early mentors, Chuck Gorrow, told me that he wishes he’d kept every house he bought rather than selling them. It should be obvious that a rental portfolio can replace your job income, and eventually you can choose to work. And that’s what I did. I acquired houses one at a time at foreclosures, from distressed owners or off the multiple listing service (MLS). Times Have Changed The single-family housing business used to be relegated to mom and pops. The more sophisticated real estate investors would acquire apartments and commercial space. Well, we all know that isn’t the case anymore. The new asset class on Wall Street is single-family homes, with a new focus on build-to-rent (B2R) communities. The reality is that the hedge funds, family office and entrepreneurs resurrected the single-family housing business when they entered this space around 2012. At that time, mortgage foreclosures were prolific, and the entrance of these large, well-capitalized companies helped absorb massive amounts of defaulted properties. This stabilized communities, cities and regions of the country. It clearly expedited the resurgence of the U.S. economy through massive investment of time, materials and laborers to fix and rehab these properties and make them available for rent or sale. Everyone started to make money from realtors, mortgage brokers, lenders, laborers of all kind, appraisal companies, home inspection companies, property managers, materials providers as well as the entrepreneurs and the hedge funds themselves. These were good times. A lot of money was made and invested back into local communities. All this activity made it very difficult to find and keep good laborers. Laborers of all kinds were able to achieve higher wages as a result of the strong demand for services. The tremendous shortage of skilled labor is still a problem in the U.S. Because of that challenge, we hear often about the need to make businesses more efficient. Technology has leveled the playing field for all of us at one level or another. There is an application for almost everything. Technology allows us to access more information to make informed decisions faster than we could in the past. And I’ve got news, the speed of information will continue to increase, allowing all your competitors to get the same information as fast as you get it. Thus, the ability to make fast decisions and take action is more important than ever. The Problem Starting in 2009, U.S. single-family house investors acquired distressed and foreclosed properties to create single-family home rental portfolios at record rates. Today, distressed and foreclosed properties comprise only 2% of the residential real estate market. Seven years ago, I had a team of five people looking at auction houses in eight counties in the Atlanta metro area. We would purchase 8-22 houses each month. I can still remember how I would look at up to 55 houses a day, five days a week before auction. It was a lot of work, but I loved it and we did quite well. Once we rehabbed the property and placed a tenant, we would sell within weeks to overseas investors or hedge funds for cash. It was the best of times, because our cash was recycled every 60-75 days. I’ve never experienced anything like that. In the end, we bought, sold and managed more than 1,000 houses in a six-year period. Something very interesting also happened at this time: I acquired hundreds of lots. Hey, I was never a “lot” buyer because lots don’t pay rent. What I observed was an incredible opportunity to stockpile lots and wait for the market to turn. It didn’t take long! I sold one community undeveloped in Douglasville, Georgia, to DR Horton. I had 78 lots in the second phase of a community. Since that time, they’ve completed the community. I also contracted with a builder to build eight houses in a community in Fairburn, Georgia, that I had pre-sold to Australian inventors who had pre-sold to Chinese investors. At that same time, I had 56 lots in the subdivision of Regency Park in Hiram, Georgia. This was my second B2R community to be built out. The beauty of the transaction was in the details and the outcome. I did a joint venture with an experienced builder on B2R properties. The Paxis Group, led by John Wojtas, built 52 of the houses that we had pre-sold to Jay Byce, who was involved with American Residential at that time. Due to the quality of the builder and the buyer, we went from start to finish on 52 houses in one year. The Newest Asset Class on Wall Street Little did I know that B2R would take off. Now, many hedge funds are clamoring for it. Literally, it’s exploding. At the November 2019 IMN conference for single-family houses, everyone was involved, or trying to get involved, with B2R. You see, there are simply not enough homes to rent in the U.S. The last recession really shook up American homeowners, especially the ones who lost their equity through foreclosure. Higher home costs, fear and the desire to maintain freedom and flexibility has changed the landscape of home ownership in the U.S. In fact, homeownership is at its lowest level in 60 years, and it’s not necessarily the American dream anymore. There is not a negative stigma with being a renter.

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The Rise of SFR 3.0

Technology is shaping the latest phase of single-family rental—and new opportunities await both investors and renters. Single-family rental (SFR) investing has existed for as long as landlords have owned detached single-family rental homes. In modern times, a landlord is any individual(s), government body or institution that provides housing for people who either can’t afford or don’t want to own their own homes. Great Recession Triggers SFR 2.0 Although various new ways to leverage debt did enter the market, not much fundamentally changed in SFR for centuries. Even the types of investors who owned the units stayed relatively consistent during “SFR 1.0,” with most being wealthy local businessmen. But the foreclosure crisis set the stage for SFR 2.0. Here’s how. In 2008-2009, at the height of the Great Recession, the residential real estate market was tanking. But by 2010-2011, as home values began clawing their way back toward their 2006 peaks, investors were increasingly attracted to this asset class. These new investors included many first-time investors, ranging from individuals to very large institutional investors. The market not only saw the entrance of “large” owners but also an increase in the number of institutional investors. Many of these new institutional investors for the first time bought single-family properties by the hundreds and  even thousands. Consider the words of American investor Warren Buffet who in February 2012 remarked: “I would buy a couple of hundred thousand homes if I could figure out a way to manage them.” After the bottom was established, residential real estate began following the stock market—which has continued to surge, more than doubling in value. Nearly nine years later, SFR has proven to be a viable institutional asset class. It currently boasts three public real estate investment trusts (REITs)—American Homes 4 Rent, Invitation Homes and Front Yard Residential—and many large private funds whose numbers are growing. Additionally, beginning in 2020, even more money is already slated for allocation to this asset class by first-time SFR institutional investors. Positioned for SFR 3.0 Today, we are entering yet another stage of single-family rental—SFR 3.0. The shifts in SFR from 2011 to 2019 occurred at a dizzying speed when compared to the incremental changes of the previous hundreds of years. Technology innovations provided tools not only for better analyzing market data but also for executing every part of the rental process. Meanwhile, all this new dry powder is looking to get going at a time when distressed inventory is at its lowest volume level in the last decade. So, what’s a new investor to do? Fortunately for these new groups, many of the original service providers who helped initial institutional aggregators build their portfolios are still around. Further, they have welcomed technological advances openly and now offer services directly to investors. This group includes Entera, SFRhub, Mynd and ResiPro—all technology-backed service providers whose founders have provided services to various institutional investors across multiple states. Others include JWB out of Jacksonville, Florida, who are very active in a single city but cover every service investor need. These turnkey services include building new homes specifically for rental from the ground up, as well as sourcing distressed homes to renovate, renovations, leasing, managing, maintaining and selling investment homes. Technology will only continue to make system and process flow easier and more transparent. When combined with machine learning and AI, even more information can be shared with more people, the rate of data harvesting will increase and the data itself will be even more accurate. These developments open up the SFR asset class even further. Investors with a smaller amount of capital behind their first fund or even an individual who wishes to invest in a fraction of a single rental home can now do so through a group like Roofstock. Perhaps most interesting for the next growth phase of SFR is Build-To-Rent (BTR). BTR involves small regional homebuilders like Kinloch Partners and ResiBuilt, who are specifically building new homes for rentals across entire communities, or even scattered lots one at a time. Finally, with more capital inflow and institutional activity, both large and small investors will continue to push out to more locations, seeking more geographic diversity. Going forward, local agents, and even the national brokerages they work under, will have to get involved. Many have already started announcing their official foray into representing investors at large by first representing sellers through iBuying. “iBuying” is the term used for companies that bid on homes from potential sellers by offering a firm price and a quick close. Opendoor is a leader in the iBuying movement. This venture-backed iBuyer purchased about 10,000 homes from January to July 2019. Zillow Offers, another iBuyer, closed about a third of Opendoor’s  volume. Offerpad closed just under 2,000 homes  in the same period. Interestingly, many of the founders of these companies were early leaders in building large pools of single-family rentals for their institutional partners. These innovators used their experience to create these iBuyer companies. Each week it seems as if another national brokerage announces they are officially an iBuyer. Yet just over a year ago, many publicly stated they would never become an iBuyer and openly campaigned against the model. Relatedly, many brokerage houses are also embracing “concierge,” meaning they provide specific renovation services either directly or indirectly for their clients who are selling. In some cases, the agent’s broker or an affiliate may pay for the renovation costs. In other scenarios, the homeowner may borrow money from a private lender who will use the soon-to-be for sale home as collateral, getting paid back contractually at closing. In other cases, venture-backed groups like Figure allow homeowners to borrow directly from a private lender for specific home improvements. Just as independent booksellers promoted their stores as having salon-like atmospheres offering book signings, lectures, children’s story times, reading groups and so on, many real estate companies will do the same with property-related services. These include not just the purchase and sale but also general contracting, lending and education about the entire

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The Handshake

In a relationship business, you must genuinely build the relationship to get the business. By Mike Tedesco When I was 12, my brother John got me an after-school job selling newspaper subscriptions. Armed with nothing but our wits (and free umbrellas if you signed up), we hustled door to door and quickly became the newspaper’s top salesmen. In those four years, many a door was slammed in my face, but I learned how to approach strangers. I became quite good at it. These skills would later help me tremendously as a young loan officer, and I quickly became a top producer. I continued to develop this craft even as I began my own company. The Value  of Personal Connections Over the last 13 years, I built Appraisal Nation from three men with two lenders into 120 employees with more than 1,300 lenders across America trusting us for their valuation needs. My entire growth strategy is focused on one core principal: This is a relationship business and to get the business, you must build the relationship. Getting from first encounter to client is a long process, but the first encounter is always the most important. In the modern age of technology, true personal connection is becoming rare. I built my sales model on a different philosophy than most. I believe that if we are going to have a relationship business, we must actually meet our prospects and build from the very first interaction: the handshake. For the last decade, I have reinvested a large percentage of our profits into face-to-face interactions by sponsoring and exhibiting at more than 50 lending conferences a year. In that time, I have personally attended more than 400 conferences and shook thousands of hands. You may think meeting someone would be easy: Shake a hand, say hello and ask for their business. But, the process is a lot more complicated than  it appears. The wrong  first impression could mean never having the opportunity to earn someone’s business.  There is a lot that goes into meeting a new prospect. Preparation is key. Before you shake a hand, you need to be prepared both physically and mentally. Hawaiian  Shirt or Tie? Being prepared physically sounds straightforward enough. You simply look and act professional. You should always know your venue, know the crowd that attends and know the location. If I’m attending a retail banking conference in the Northeast, I wear a three-piece suit, sharp tie, cufflinks, stay collars, the works. If I’m at a broker show in Orlando, maybe my attire will be matching polo and slacks with shined shoes and a coordinating belt. I went to Credit Union conference in Honolulu a couple of years ago. I’d never done this conference before and was a little concerned, so I called the event director who advised that most people would be in Hawaiian shirts and flip flops because they incorporate a vacation into the show. I followed his advice and fit right in. The vendors in suits looked out of place. When you’re unsure, simply ask the event organizers about the general attire. And when you are unsure, always err on the side of caution. You can always take the tie off. Another big part is grooming. Unfortunately, the number of people who come up to me smelling like last night’s outing is astonishing. A fresh haircut, good grooming (brushed teeth, clean nails, etc.) and properly pressed clothes will make you look and feel like you belong. Always carry mints or gum. You will be doing a lot of talking, and your breath will get stale. Remember, never turn down a mint. There is usually a reason it is being offered. When possible, get a good night’s sleep. An average conference day for me can be 16 hours or more. Know Your Company and Products Being physically ready is only one part of being prepared. You have to be mentally ready as well. You would be surprised by the number of people I’ve met who have no place being where they are, whether in their position or at the conference. They are not equipped to answer questions, and they make their company look like a late-night basement startup that hired them from an online questionnaire. Know your company and products intimately and have value to offer. If you do not have all three of these, do not attempt to sell your product. Once you have mastered your company and believe in it, you should be confident enough to go to a conference. Confidence is key. If you don’t believe in your product, or do not want to be at the conference, or don’t like talking to strangers, it will show. Remember, you are the face of your company when you are traveling. What you do is a direct reflection of your company. This includes your appearance and behavior at airports, dinners and even clubs. Make a fool of yourself drinking too much and people will think your company is not responsible. If you look disheveled, unprofessional or ill-informed, a prospect will think your company is as well. Care about yourself and your company so you and the company are seen as a positive example. Finding Your Target The next lesson is to always have a target. Before I ever go to a conference, I look over the attendee list and send our present clients short emails asking to meet up for a 15-minute check in. I then send emails to the top 10 lenders I want to do business with. These may not be the largest, but they are the 10 that I know that we will align well with. I usually get three or four responses. Two will immediately say they’re “not interested.” That’s not a problem. I will follow up with them at the show because what they just did was start a dialogue, and I like dialogue! Another might say, “Please speak to so and so,” and I will. Then another will say, “I

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Create Your Opportunity and the Rest Will Follow

It was early January and I was hastily plodding through two to 3 feet of snow in lower Manhattan trying to make it to 85 Broad Street before the 7:30 a.m. global call.

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Grow Your Network, Grow Your Business

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Why strategic relationships will take your company to the next level Everyone knows the phrase, “It’s not what you know, but who you know.” In the mortgage industry, this is especially true. In an industry that relies heavily on referrals and word-of-mouth recommendations, it is surprising how often companies overlook the importance of developing strategic partnerships and underutilize existing relationships. Although identifying and establishing connections with potential partners can involve a great deal of work, when done properly, the benefits easily outweigh the effort. Cultivating strong referral relationships should be a top priority for any company in our industry. It is a highly effective way to increase the visibility of your business and grow your customer base without straining your marketing budget. What Do You Want to Accomplish? For those just starting out, forming strategic partnerships may seem a bit daunting. However, the first step is simple: Determine why your organization is looking to form these alliances. Once you figure out what you want to accomplish, you can start researching which potential partners align with your goals. Researching prospects will typically be one of the most time-consuming parts of this process, but it is a crucial step in finding the right partners. Here are some key factors to consider when seeking out potential partners. What commonalities exist between your company and potential partners? Seek out companies that offer products or services that cater to a similar industry or niche. This increases your chances of working together because these companies will have a similar customer profile. They can also easily identify what customer needs exist in the space. When you initiate the discussion of forming a strategic partnership, they can tell immediately if this is an opportunity that will benefit their clients. Another factor to consider is the nature of the business itself. Does this company provide a product or service that complements your business? For example, if you are a lender that specializes in real estate investment loans, partnering with a company that provides proprietary data on foreclosure inventory throughout the country is a no brainer. Finding a partner with a complementary product or service allows you to provide additional value to your customers with minimal effort. You are giving them access to additional resources they might not otherwise have just by working with you. This creates a clear advantage over your competitors. A final factor to consider is this: Are the companies you perceive as competitors truly your competition? One of the most common mistakes companies make is overlooking a potential referral partner because they assume they are a direct competitor. Much like your company has a specialty, a “competitor” also has their established niche. There are often things that your competitor can’t or won’t do, which creates a unique opportunity for your business. For example, RCN Capital has established referral relationships with numerous other lenders that, on the surface, seem to offer similar loan programs. However, maybe these lenders can’t lend nationwide and receive loan requests from states they can’t do business in. The lenders will send those requests to RCN. RCN will reciprocate by sending requests for programs we don’t offer, like loans for small-balance commercial properties, to those lenders. These pseudo-competitors often make the best referral partners because their customer profile is nearly identical to your company’s. Plus, you have an additional resource for customers that may be looking for something you aren’t currently offering. Approaching Potential Partners Once you’ve completed your research and identified potential partners that align with your goals, it’s time to pitch the idea of a partnership to your prospects. When drafting a proposal, clearly outline the benefits for all parties. It can be easy to focus on what benefits you want the other company to bring to the table, but to form a long-lasting relationship, you must create a win-win scenario for both sides. Developing a mutually beneficial partnership often starts by initiating an open conversation with your referral prospect. Start by highlighting the synergies that exist between your companies. Discuss the mutual goals a partnership could accomplish. From there, develop a plan of action with clearly defined deliverables. Remember to consider how much effort will be required from each company to achieve these objectives. Potential partners may not be able to devote as many resources as you may think, so it’s important to be flexible with your ask in these situations. If either you or your prospect are concerned the partnership would tax company resources, come up with a plan that starts with smaller deliverables spread out over a longer period. You can agree to revisit and modify the partnership on a quarterly basis once you know what is and isn’t working. It is common for partnerships to start slow and ramp up over time. Finally, once you have come to a verbal agreement, put everything in writing to protect both companies. Putting the agreement in writing also gives everyone one more chance to review the terms of the agreement before proceeding. Things that weren’t taken into consideration in your initial discussions might come to light when other members of the company review the agreement. A written agreement not only solidifies the terms of your partnership but also helps provide future clarity for the relationship. The agreement gives both parties something to refer to should there be any question of what needs to be done and when it needs to be accomplished. There is nothing wrong with including language stating the agreement can be amended at any time to allow flexibility and room for the partnership to grow. Communication Is Key Once your partnership agreement has been executed, it’s smooth sailing, right? Yes and no. One of the most important things to remember is that communication is key to maintaining a successful partnership. Many referral relationships fail because of lack of communication. Never assume that no news is good news. You took the effort to initiate a partnership, so make the effort to maintain it. As your referral relationship

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