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Single-Family

Alternative Strategies: Off-Market Properties are the Hidden Gems for Investors

Options Within the Single-Family Industry by Rick Sharga For those not interested in splurging on Bitcoin or fighting with hedge funds over GameStop shares, there are no shortage of alternative investment opportunities in real estate. Typical real estate transactions involve working with a real estate agent, finding a property listed for sale on the local multiple listing service (MLS), and competing with other investors and traditional homebuyers to purchase the property, either for the purpose of renting it or re-selling it at a profit. Often someone becomes an “accidental investor,” by buying a new home and deciding to rent out their current property; or buying a vacation property and renting it out to other vacationers when they’re not using it themselves. But for more experienced—or at least more adventurous investors, the hidden gems are often off-market properties, which are not listed on an MLS. Finding these properties requires more homework and using specialized resources; sometimes requires non-traditional financing; and these properties often take longer to transact on. But these off-market properties also provide the opportunity for greater financial return on investment (ROI). Virtually any type of real estate investor can benefit from off-market properties, which typically have fewer potential buyers competing to purchase the home (and bidding up the sale price). Lower sales prices are critically important for fix-and-flip investors, whose ROI depends on buying at the best price, minimizing repair costs and time, and selling at market pricing. Wholesale investors have ready buyers – both fix-and-flip and buy-and-hold investors – but are lacking inventory in today’s MLS market, so finding off-market properties is critical. And investors looking for rental properties have the same issues—too little inventory, and purchase prices that are too high. So where can investors find these hidden gems? Let’s take a look at a number of possibilities. Hidden Gems: The Distressed Property Ecosystem In spite of the foreclosure moratoria in place today from the Federal Government (along with some state and local government actions), there are still foreclosure properties available for investors to purchase. And when the moratoria and the CARES Act mortgage forbearance program have expired, it’s very likely that there will be a surge of defaults. Historically, many of these properties have been repossessed by the lenders (bank-owned, or REO properties), and subsequently listed by real estate agents for sale. That’s unlikely to happen in this cycle—there’s more demand than supply of homes for sale, and homeowners have a record amount of equity. Even with a significant increase in default activity, it’s likely that many of these properties will be sold before the foreclosure auction. If that scenario plays out, it means investors need to focus most of their efforts on properties in the earliest stages of foreclosure (the Lis Pendens filing in judicial foreclosure states and Notice of Default in non-judicial states). During this pre-foreclosure phase, the homeowner has a predetermined amount of time to try to cure their default; if they can’t do this, the property is scheduled to be auctioned off. But it’s during this period of time when investors need to reach out to these financially-distressed homeowners and attempt to negotiate a discounted purchase. Given the rapid price appreciation of homes today, a savvy investor should be able to work out a deal that pays off the debt to the lender, gives the homeowner cash to get a fresh start, and still represents a lower-than-market purchase price. Default notices are available in the public record and can be found in the County Recorder’s Office; published in legal journals and local newspapers; or found online in subscription sites like RealtyTrac. When reaching out to distressed homeowners, there may also be a chance to execute a short sale—a sale where the purchase price is below the amount owed on the mortgage. This generally only happens if the homeowner can prove financial hardship to the lender, and local market conditions suggest that the lender would be better off taking a lower amount on the sale than executing a sometimes-expensive foreclosure. Investors should consider the purchase price compared to the potential resale price of the home, or the potential cashflow generated as a rental property to determine whether or not a short sale makes sense. Foreclosure Auctions Not all properties will sell prior to the foreclosure auction. Some are vacant and abandoned, leaving no one to negotiate with. Other times homeowners may be in denial and wait too long to attempt to avoid a foreclosure. For whatever reason, foreclosure auctions also represent an opportunity to find off-market deals. Each state has slightly different rules regarding these auctions, but generally they’re live events, often held at the county courthouse or an adjacent facility, and executed by either the sheriff in judicial states, or a trustee in non-judicial states. The properties at these auctions must be purchased with cash or a cashier’s check (sometimes 100% on the day of the auction, sometimes 10-20% on the day of the auction with the remainder due in a few days or weeks). Many of these properties are marketed on online auction websites like these (in alphabetical order): Auction.com, Hubzu, RealtyBid, ServiceLink Auctions, Williams & Williams, and Xome. Investors should keep in mind that these auction properties often represent the highest ROI of all foreclosure properties, but also come with the most risk, since they’re sold as/is, without the benefit of an internal inspection. There are also sometimes tax or mechanics liens levied against the property, so it’s important to get a title report, and do whatever diligence is possible to mitigate the risk. Real Estate Owned Bank-owned homes (otherwise known as REO—real estate owned) probably will not be as plentiful this cycle as they were during the Great Recession for the reasons mentioned above, but are worth researching since they often offer relatively good ROI potential. Some of these properties are sold at deep discounts, but at various levels of disrepair, so inspections and accurate repair estimates are critically important. Check with local real estate agents to find

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Design Tips: Accent Walls

Renovating a Room With Just a Little Bit of Work by Alyssa Sprague Accent walls have become an increasingly popular way to give your home a unique and personal touch. And they can be designed to renovate any space or style. The walls can range from varying levels of difficulty as well, making it a perfect homeowner DIY project that elevates a room to a more upscale feel that fits into any budget. The designs homeowners use can be individually tailored from subtle to bold. So, if you are not quite ready to take a big leap, you can always start small and add into it as your style changes! The easiest way to add an accent wall is as simple as applying a coat of paint. Paint one wall in a room a different color and consider using a different finish on the paint to really make it stand out. This color can be just a couple shades darker (or lighter) than the remaining walls in the room. Or you can go as far as using a bright bold color like yellow to brighten the space and make the room feel bigger. Since an accent wall is meant to be different, consider using a dark color like navy blue or black on a single wall. When combined with lighter colors through the rest of the room, a dark accent wall can add depth without overpowering the entire room. While wallpapering your entire home (or a whole room) is definitely a thing of the past, homeowners have been impressed by the ability of a single wall of wallpaper used as an accent wall. The right wallpaper will give a space a more interesting design without having to fill the wall with décor. Especially with a temporary wallpaper (no long-term commitment) that can be easily removed, this is a huge opportunity to add in personal touches with a design that could be subtle or quirky—completely dependent on your personality! If you are looking to take on a bigger project, there are many ways to personally design and create an accent wall using varying wood materials— reclaimed wood, shiplap, or even using 1″x2″s to give a textured design without using paneling. While this will be more time consuming, with additional planning the final product is more than worthwhile. This type of project also allows for many pattern options: square/rectangle, herringbone, or even any pattern you create yourself! The wood design will naturally add more texture to the wall and painting it semi-gloss white can give it the same feel as upgraded chair rail or wainscoting. You can also consider painting this designed wall a bold color! When combined with a bold color, the wall will really pop and have a more glamorous outcome. Overall, adding an accent wall to your space can completely renovate the room with just a little bit of work! This will make the room have more dimension—whether it be your bedroom, living room, or dining room. The possibilities are endless! 

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The Single-Family Rental Market Has Become a Search for Supply

Investors Are Exploring New Ways to Expand Supply by Greg Godderidge The durability and stability of the Single-Family Rental (SFR) market is one of the few real estate investment bright spots of the past year. If the 2020 trend continues, the SFR asset class is positioned to be one of the biggest stories of 2021. With the backdrop of a national housing supply/demand imbalance, the SFR growth trend is so strong that a new Build-to-Rent (BTR) micro-SFR market has been created by enterprising and forward-looking market participants for the purposes of creating additional rental housing stock. Build-to-Rent single-family homes coupled with traditional single-family properties are forming the backbone for a vibrant SFR industry. What is driving this demand for tenants, builders, and investors? And is there a role for evaluation service providers? According to the Census Bureau, occupancy rates across all single-family rentals averaged 95.3 percent in the third quarter of 2020, holding steady from the second quarter, following a 100-basis points spike from the first quarter. That is the highest reading for the SFR market since 1994. From their 2007 lows, occupancy rates for all SFR properties are up by 5.6 percent. What’s driving occupancy rates skyward is a combination of relentless demand and evaporating supply. Increasing numbers of Millennials have been fueling demand as they have formed families and moved out of multifamily properties. The COVID crisis accelerated demand for SFR properties as tenants have moved from cities in search of more indoor and outdoor space. At the same time the traditional sources of rental property inventory have dried up. Foreclosures are on hold nationwide, retirees who are usually looking to downsize are staying put during the pandemic, and it is getting increasingly difficult to find mom-and-pop property owners seeking to sell. Creating New Supply Together, those pressures have spurred home builders to create additional supply. Build-to-rent properties have been on an upward trend for the last two decades but have skyrocketed in the past year. There were more than 14,000 BTR starts in the third quarter of 2020, representing a 27 percent pop over the previous year, according to the National Association of Home Builders. Investors have taken notice, attracted not only to the steady cash flow of rental properties but also its stability. The most attractive element is opportunity. The SFR market is still small and fragmented with the 20 biggest single-family rental operators controlling only about 300,000 units. That leaves roughly 16 million rental units nationwide that have not yet been aggregated and securitized. Expansion into this vast untapped sector of the market is dependent on the ability to review and evaluate properties at scale. This has been a challenge during a public health crisis when in-person and on-site inspections are limited. Radian offers a range of services to facilitate securitization of SFR and BTR properties. Our collateral review and validation services include a thorough review and validation of sponsor and/or borrower data, property documentation and loan files. This is especially important for large institutional investors. In fact, we have served as diligence agent for every institutional SFR securitization transaction to date. Professional due diligence services allow buyers to have more control over their acquisitions and at the same time give lenders an extra level of confidence in the quality of the transactions they underwrite. SFR Market Being Driven to New Heights Currently, approximately only 6 percent of new single-family homes are purpose-BTR, which should contribute about 700,000 new units over the next 10 years. That is not nearly enough to meet demand, says real estate advisor RCLCO. Based on current trends, RCLCO believes the SFR market will likely be undersupplied over the next decade, despite the increased attention the segment is currently receiving. A historic confluence of economic, demographic, and public health trends is driving the SFR market to new heights. As the market matures and earns more recognition as its own asset class, new investors including institutional players, will explore new ways to expand supply, either by aggregating existing properties or building new ones. One prediction seems certain: The industry will continue to rely on professional collateral review and diligence services to make that search for supply more profitable.

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Increasing Curb Appeal

Setting the Mood for Showing Your House by Shannon McNabb First Impressions The old saying always seems to ring true and that is that first impressions are particularly important, and they last. Houses listed for sale currently are often posted online and “for sale” signs are placed in front of the home. When potential buyers pull up to the home, what they see first is crucial because it is going to set the whole mood for the showing of the house. Curb appeal is vital when it comes to marketing your investment. Picking the right paint scheme One of the many things you can do to increase curb appeal to prospective buyers is exterior painting. So, what is the right scheme? Are you in a more urban area or a more traditional area?  The aesthetic you choose for your house needs to match what is going on in the surrounding area.  Regardless of what is currently trendy, you can always spark interest with a “pop” color, a color that makes your house stand out from the rest. Maybe a navy-blue front door with matching shutters.  Personally, the favorite for this writer is a beautiful yellow with a nice color on the shutters that makes sense. Your comps in the area will help determine what is trending, and right now, “pop” colors are trending.  One thing we have seen recently is painting a brick house. It is a cost-effective enhancement that gives your property something extra that the house next door does not have. Doing something, anything, for the landscape of the property Overgrown yards are often noticed, not only by the neighbors, but also by your prospective home buyers. When thinking about landscapes for the potential homebuyer, think about what can be easily maintained by them in the future. Spruce up the garden beds with fresh mulch and a nice perennial that can withstand your region’s climate changes. Make it easy for them and let them know that the upkeep can be simple. Plant a few easily maintained trees to add some life to the property. Add some stonework to define paths and emphasize the areas that have been added to make that first great impression. A little bit can go an awfully long way. Staging for your desired audience Perhaps your budget does not include exterior repairs or professional landscaping. Or maybe the house does not need a lot of exterior work. Another way to make your property appealing and welcoming is by adding a feature that makes the future homebuyer know that this could be their home. By simply adding a seasonal wreath or a nice outdoor patio set can show prospective buyers that your home can be their home, something they can add their personal touch to and make it theirs. Make sure that what you choose for the exterior can be for any family type. This could range from a full exterior set (for a front porch) or even a nice accent piece such as a beautiful potted plant (for limited space). So, how important are first impressions? The first impression of your property can mean everything to the person looking at it.  It can be the difference between a “sale” and a “no-sale”. It can show them the possibilities, or it could show them that it is not for them. Make sure that your home is inviting and that everybody is always welcome. And besides getting top dollar for your investment, that is what we all want. 

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Home Flipping Continues to Decline in Third Quarter

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…But Profits Reach New High ATTOM Data Solutions released its third-quarter 2020 U.S. Home Flipping Report showing that 57,155 single-family homes and condominiums in the United States were flipped in the third quarter of 2020. Those transactions represented 5.1 percent of all home sales in the third quarter of 2020, or one in 20 transactions. That figure was down from 6.7 percent of all home sales in the nation during the second quarter of 2020, or one in 15, and from 5.5 percent, or one in 18 sales, in the third quarter of last year. While the home-flipping rate dropped again in third quarter, both profits and profit margins increased. The gross profit on the typical home flip nationwide (the difference between the median sales price and the median paid by investors) rose in the third quarter of 2020 to $73,766—the highest amount since at least 2000. That amount was up from $69,000 in the second quarter of 2020 and from $61,800 in the third quarter of last year. The gain pushed profit margins up, with the typical gross flipping profit of $73,766 in the third quarter translating into a 44.4 percent return on investment compared to the original acquisition price. The gross flipping ROI was up from 42.9 percent in the second quarter of 2020 and 40.3 percent a year ago. The improvement in the typical ROI marked the second consecutive year-over-year increase following nine straight quarters of declines. The continuation of opposing trends, with flipping rates down but profits up, reflected broader national housing market patterns as the worldwide Coronavirus continued spreading across the United States. Home prices kept soaring throughout most of the country in the third quarter as buyers—often seeking larger or more wide-open spaces—chased a dwindling supply of homes for sale. Rising values continued pushing a nine-year boom in the housing market even as much of the economy struggled to overcome high unemployment and other damage from the pandemic. “Home-flipping again generated higher profits on less transactions across the United States in the third quarter of 2020 as investors continued to make more money on a declining number of deals,” said Todd Teta, chief product officer at ATTOM Data Solutions. “This all happened in the context of the pandemic, which has created unusual circumstances for the housing market to thrive, and that has included the home-flipping business. Too much is uncertain these days to say whether the latest trends will continue. But for now, the prospects continue looking up for home flipping after a period when they were trending the opposite way.” Home flipping rates down in more than 90 percent of local markets Home flips as a portion of all home sales decreased from the second to the third quarter of 2020 in 148 of the 159 metropolitan statistical areas analyzed in the report (93.1 percent). (Metro areas were included if they had a population of 200,000 or more and at least 50 home flips in the third quarter of 2020.) Among those metro areas, the largest quarterly decreases in the home flipping rate came in Killeen, TX (rate down 44.5 percent); Savannah, GA (down 43 percent); York, PA (down 42 percent); Greeley, CO (down 41.5 percent) and Springfield, MA (down 39.8 percent). The biggest quarterly flipping-rate decreases in 53 metro areas with a population of 1 million or more were in Raleigh, NC (rate down 39.1 percent); Atlanta, GA (down 38.5 percent); Kansas City, MO (down 38.3 percent); San Diego, CA (down 38.1 percent) and Rochester, NY (down 37 percent). The biggest increases in home-flipping rates were in Davenport, IA (rate up 18.5 percent); Hilton Head, SC (up 16.8 percent); Scranton, PA (up 12.2 percent); Amarillo, TX (up 10.9 percent) and Kalamazoo, MI (up 7.7 percent). Typical home flipping returns rise in two-thirds of markets Homes flipped in the third quarter of 2020 were sold for a median price of $240,000, with a gross flipping profit of $73,766 above the median investor purchase price of $166,234. That gross-profit figure was up from $69,000 in the second quarter of 2020 and from $61,800 in the third quarter of last year. The increase boosted the typical return on investment in the third quarter of 2020 to 44.4 percent, up from 42.9 percent in the second quarter of 2020 and from 40.3 a year ago. The ROI in the third quarter stood at its highest point since the first quarter of 2018, when it was 48 percent. Home flipping profit margins increased from the third quarter of 2019 to the third quarter of 2020 in 104 of the 159 metro areas with enough data to analyze (65.4 percent). Markets with the biggest gains included Brownsville, TX (return on investment up 182.9 percent); Austin, TX (up 176.4 percent); Waco, TX (up 157.4 percent); Springfield, MO (up 145.3 percent) and Savannah, GA (up 143.6 percent). Aside from Austin, TX, metro areas with a population of at least 1 million that had the biggest annual increases in flipping profit margins in the third quarter of 2020 were Raleigh, NC (ROI up 74 percent); Phoenix, AZ (up 69.8 percent); Kansas City, MO (up 55.9 percent)and Las Vegas, NV (up 54.4 percent). The biggest year-over-year declines in investment returns on home flips during the third quarter of 2020 were in Corpus Christi, TX (ROI down 77 percent); Hilton Head, SC (down 72.9 percent); Boulder, CO (down 69.1 percent); Wilmington, NC (down 58.9 percent) and South Bend, IN (down 54.1 percent). Investors sell for at least double their purchase price in 14 markets Median resale prices on home flips in the third quarter of 2020 were at least twice the median investor purchase prices compared to a year earlier in 14 of the 159 metro areas with enough data to analyze (8.8 percent). They were led by Pittsburgh, PA (151.9 percent return, up from 127.9 percent in the third quarter of 2019); Hickory, NC (136.3 percent return, up from 110.3 percent a year ago); Scranton, PA (117.1 percent return, up from

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Leveraging Big Data in Real Estate Investing

Post COVID-19 Forbearance & Foreclosure/Eviction Moratoria by Michael Jansta Let’s face it, nobody had 20:20 vision for real estate investing going into 2020. Now in 2021, even after all that we’ve seen and learned in 2020, our vision forward doesn’t appear much clearer. What we do see is COVID-19 continuing to rage on in all parts of the country despite vaccines in deployment, mortgage forbearance programs set to close but with the possibility of extension and moratoria on foreclosures and evictions extended until the end of January 2021 but also with a possibility (if not a probability) of being extended. Moratoriums on foreclosures put a stop to foreclosure sales in courtrooms and on the courthouse steps across the country. A mere trickle returned as abandoned/vacated homes and land were allowed to proceed to sale in some parts of the country. The double-whammy came from occupied REO and HUD’s Claims Without Conveyance of Title (CWCOT). A major source of post-foreclosure investor stock was hit by a nationwide eviction moratorium. With an eviction moratorium in place and continual extensions of that moratorium, attaining occupancy became virtually impossible to forecast. Basically, the acquisition of foreclosure sales and occupied post-foreclosure properties became exponentially riskier. Investors looking for distressed real estate were forced to turn to the retail market where demand was surging due to lack of inventory and historically low interest rates or compete over the small amount of existing pre-COVID vacant REO stock on or coming to market through property preservation channels. As of Dec. 6, 5.48% of active loans were in forbearance, according to the MBA, and trending down. This totaled approximately 2.7 million mortgages. At the same time, new forbearances requests hit their highest levels since early August showing that an increased COVID-19 surge is leading more homeowners to seek relief. This trend late in the year could be homeowners seeing protection as the window to enter a forbearance plan was scheduled to end on Dec. 31st. If the trend continues, we could see further extensions of forbearance options for affected homeowners. Either way, it still means that fewer homes will be headed to foreclosure in Q1 and Q2 of 2021 and that means less distress at foreclosure sales and REO/CWCOT second chance auctions. Lack of traditional inventory will force investors to get more inventive and figure out how to find deals within their existing markets, new markets, new sub-markets and the homes within them using data…BIG data. When leveraging all the data available today, investors need to be cognizant that these really are unprecedented times and the pandemic created unprecedented economic spikes in its wake. Data trends in nearly every sector set high & low peak records, jumping a decade worth of increases or decreases within a single quarter.  These wild movements broke data science models in every industry, including real estate. This is the reason we all hear about V, W and K shaped recoveries. In real estate, loans in forbearance spiked up then slowed dramatically to a much lower rate, loans in default have climbed from 3.8% to 6.3% (3.6 million loans) from August 2019 to August 2020 and, similarly, unemployment spiked up and then dramatically slowed. These statistics are often built into real estate market models and can deliver false positives and negatives. It is more important than ever to know which data is being applied within each model so you can make educated decisions factoring in the swings from 2020 that will continue into 2021. At Altisource, we look at dozens of public datasets to build into our models for our institutional clients and to validate the advice and recommendations for investors and agents/brokers who leverage our Equator, RentRange and Hubzu platforms. It requires crunching data sets like US Census data which includes Household Income (HHI) with home price data, our proprietary RentRange rental data, loan performance data (forbearance and delinquency) and many others into dashboards so we can compare markets with each other to see things like how many and what percentage of loans are delinquent, in forbearance or both. When you can map this data to MSAs you can then begin to layer in other data (examples would be employment data from the Bureau of Labor Statistics and Department of Labor or actively marketed rental or sale listings) to predict which markets might be more attractive for real estate investing when artificial barriers like forbearance and moratoria are modified or removed. When you layer this data over time into models with dashboards, we can look at a specific market in different ways: Household Income as a percentage of rent or home value trending over the past 5 or 10 years in that market. Comparing markets can show where high wage growth beats low wage growth and how that compares to real estate price increases versus rent increases. Some of these models can be productized like RentRange where markets or individual properties are analyzed to calculate cash flow and yield potential based on known comparable rents. Another example is at the property level on Hubzu.com where we crunch dozens of datasets to populate the investor calculator on each property on the Hubzu.com marketplace with estimates of current value, rent potential powered by RentRange, vacancy, property management cost, property taxes, HOA amounts, rehab costs and more to estimate monthly cash flow and gross/net yields. Investors can adjust these numbers in real time to see potential returns based on different auction bid amounts. Looking at a real market example, like Pensacola, can help to put things into perspective, especially when you compare that market to others across the country. Above is a “jitter plot” which looks at market data across the top 200 markets in the U.S. and shows how markets stack up against each other. The dark spots show where the Pensacola MSA ranks in each category within these top 200 markets. The first two columns show that rent (+36.5%) and home prices (+39%) have increased significantly compared to the other markets putting Pensacola in

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