REI INK

Home Flipping Activity Drops, Returns Remain Near Seven-Year Low

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In the third quarter of 2019, overall home flips dropped 12.9% over the previous quarter and  were down 6.8% from a year ago, according to  ATTOM Data Solutions’ third-quarter 2019 U.S.  Home Flipping Report. Home flipping rates were down in 78% of the local  markets (115 of 147) analyzed in the report. This decline came after an unusually active flipping  market in the spring. The declines stood out as the  largest quarterly and annual drops since the third  quarter of 2014. The homes flipped in the third quarter represented 5.4% of all home sales during the quarter. That level  was down from 6% percent of all home sales in second quarter 2019, but up slightly from 5.2% a year ago. Homes flipped during the reporting period typically generated a gross profit of $64,900, an increase of 1.8% from the second quarter and 3.5% from a year ago. Still, that gross flipping profit translated into a 40.6% return on investment compared to the original acquisition price, which marked a decrease from the 41.1% gross flipping ROI in the second quarter. The latest returns on home flips stood at the second-lowest point since 2011, barely above the 40% ROI from the first quarter of this year. “After a springtime selling binge earlier this year, the home-flipping business settled way down over the summer amid a continuing scenario of languishing profits,” said Todd Teta, chief product officer at ATTOM Data Solutions. “The retreat back to more normal levels of sales comes amid broader market forces that are making it harder and harder for investors to complete the  kinds of deals they were getting as recently as last year. Those forces are keeping profits way down from post-Recession highs and show no signs of easing.” Maksim Stavinsky, co-founder and COO of Roc Capital, noted that borrowers’ declining profits on flips are leading to much greater interest in renting out renovated properties instead of flipping them. “We have been seeing a decline in projected and realized profits for borrowers on projects, despite the fact that borrower financing costs have been meaningfully coming down,” said Stavinsky. “This has led to much greater interest and activity in our rental programs.  We expect these trends to continue.” While home flips purchased with financing continued to drop in the third quarter, those bought with cash climbed, up from 56.3% in the second quarter and 54% a year ago. Eight markets bucked the trend, however, and had third quarter 2019 gross ROI flipping margins of at least 100%. Those markets included Pittsburgh, Pennsylvania (132.6%); Scranton, Pennsylvania (122.5%); Flint,  Michigan (111.2%); Cleveland, Ohio (109.8%) and  Hickory-Lenoir-Morganton, North Carolina (109.7%). Homes flipped in the third quarter of 2019 were sold for a median price of $224,900, with a gross flipping profit of $64,900 above the median purchase price of $160,000. That profit figure was up from a gross flipping profit of $63,750 in the previous quarter and up $62,700 in the third quarter of 2018. But with prices rising on investor-purchased homes, the median 40.6% return on investment was down from the post-Recession peak of 52.1% in the second and third quarters of 2016. The average time to flip nationwide in the third quarter was 177 days.

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Median Home Prices Unaffordable for Average Wage Earner

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Home ownership consumes 32.5% of wages in fourth quarter 2019 The fourth quarter 2019 U.S. Home Affordability Report, released in mid-December by data provider ATTOM Data Solutions, shows that median home prices in the fourth quarter of 2019 were unaffordable for average wage earners in 344 of 486, or 71% of the U.S. counties analyzed in the report. The figure represents a slight improvement from previous reports. It was down from 73% in third quarter and 75% from a year earlier. The report analyzes median home prices from publicly recorded sales deed data collected by ATTOM Data Solutions and average wage data from the U.S. Bureau of Labor Statistics in 486 U.S. counties with a combined population of 235.2 million. The report determined affordability for average wage earners by calculating the amount of income needed to make monthly house payments on a median-priced home, assuming a 3% down payment and a 28% maximum “front-end” debt-to-income ratio. “Payment” included mortgage, property taxes and insurance. Average 30-year fixed interest rates from the Freddie Mac Primary Mortgage Market Survey were used to calculate the monthly house payments. The required income was compared to annualized average weekly wage data from the Bureau of Labor Statistics. “Home prices rose across the country by 9% year-over-year in the fourth quarter of 2019, and the typical home remained a financial stretch for average wage earners. However, homes were actually a bit more affordable because of declining mortgage rates combined with rising pay to overcome the continued price run-up,” said Todd Teta, chief product officer with ATTOM Data Solutions. “As long as people are earning more money and shelling out less to pay off home loans, the market should remain strong with prices continuing to rise, at least in the near term. Those are big ifs, but for now this report offers some decent findings for both home seekers and home sellers.” The largest populated counties where a median-priced home in the fourth quarter of 2019 was not affordable for average wage earners included Los Angeles County, California; Maricopa County (Phoenix), Arizona; San Diego County, California; Orange County, California (outside Los Angeles); and Miami-Dade County, Florida. The 142 counties (29% of the 486 counties analyzed) where a median-priced home in the fourth quarter of 2019 was affordable for average wage earners included Cook County (Chicago) Illinois; Harris County (Houston), Texas; Wayne County (Detroit), Michigan; Philadelphia County, Pennsylvania; and Cuyahoga County (Cleveland), Ohio. Home Price Appreciation  Outpacing Wage Growth Home price appreciation outpaced average weekly wage growth in 369 of the 486 counties analyzed in  the report (76%). The largest counties where this occurred were Los Angeles County, California;  Cook County, Illinois; Harris County (Houston),  Texas; Maricopa County, Arizona; and San Diego County, California. On the other hand, average annualized wage growth outpaced home price appreciation in 117 of the 486 counties (24%), including Orange County, California; Miami-Dade County, Florida; Kings County (Brooklyn), New York; Queens County, New York; and Santa Clara County (San Jose), California. Wages Needed to Buy a Home Among the 486 counties analyzed during the  reporting period, 311 (64%) required potential homebuyers to allocate at least 30% of their annualized weekly wages to the purchase. Counties requiring  the greatest percent included: Marin County, California (outside San Francisco; 111.2% of annualized weekly wages needed to buy a home) Kings County, New York (103.6%) Santa Cruz County, California (outside San Jose; 103%) Monterey County, California (outside San Francisco; 88%) Maui County, Hawaii (84.9%) A total of 175 counties in the report (36%) required less than 30% of potential homeowners’ annualized weekly wages to buy a home. Counties requiring the smallest percent included: Baltimore City/County, Maryland (11.2% of annualized weekly wages needed to buy a home) Bibb County (Macon), Georgia (12.4%) Rock Island County (Davenport), Illinois (14.4%) Wayne County (Detroit), Michigan (15.2%) Richmond County (Augusta), Georgia (15.2%)

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Steady (& Silver): Tampa’s 2020 Growth Patterns

The city is poised for a prolonged economic expansion. As 2019 ended, several Florida cities hit the headlines for incredibly low unemployment. Tampa, Florida, was near the top of the list. With a 2.2% increase in jobs and just 2.7% unemployment, the city sometimes called “The Big Guava” is poised for a prolonged economic expansion in 2020 and 2021. This is good news for real estate investors in all sectors of the industry. The area is rife with expansion, development and a strong demand for both new and existing housing. “Not only does the Greater Tampa Bay area have a population of nearly 3.1 million, but around a third of those people are renters,” observed Jonathan Waysman, a managing partner at Tampa-based Momentum Group. The boutique investment firm specializes in turnkey real estate investments, off-market discounted properties and real estate investment services in the Greater Tampa Bay market. “When you combine our seven-year population growth of 10.85% (105% faster than the national average) with our job growth, which is about 18% faster than the national average, we believe you have an extremely strong, sustainable market for rentals going into the New Year,” Waysman said. Thanks to its prime location in Florida, which has had one of the lowest tax burdens in the country for decades, Tampa is particularly attractive to some of the most influential populations in today’s housing market: young professionals and baby boomers. The former move to Tampa to take advantage of relatively affordable housing options and the expanding local economy, while the latter view the area as a prime location in which to spend their retirement. “Tampa is one of the most affordable, large markets in the country right now,” said Dennis Cisterna, CEO of Guardian Residential, a single-family residential investment fund, and CIO of Lafayette Communities, another SFR investment platform focused exclusively on build-to-rent opportunities. “We implement several different strategies within the Tampa market right now. We buy build-to-rent communities of either single-family homes or townhomes, then operate them the same way you would an apartment community. Tampa fits the bill for us because it is still a relatively affordable market, has strong rental demand and has showed good employment growth.” Adriana Pop, senior associate editor at Yardi Matrix and author of the data firm’s fall 2019 Tampa market report, agreed. “Multifamily demand continues strong in Tampa, boosted by above-trend population and employment gains,” she wrote in third quarter 2019. Pop cited the area’s 20,000 “high-skill, high-wage STEM positions” for much of the market’s stability and ongoing expansion. Those positions accounted for roughly a third of all job openings in Tampa over the past year. Plenty of Investment Potential Remains Although investor activity has been strong in the Tampa area and there have been local concerns about housing affordability in 2020, new development trends in the area support continued economic expansion and associated population growth. Pop cited “a combination of below-average rents and steady economic growth” for “luring investors to Tampa,” but predicted housing demand and the inventory intended to meet it would continue to grow in the New Year. “Multifamily sales reached $2.9 billion in the first 10 months of 2019, surpassing last year’s cycle peak of $2.6 billion. Developers have also been active, delivering 5,000 units, while another 7,900 are under construction,” she said. Waysman cited the I4 corridor in Polk County as another area where investors can still gain a foothold in Tampa’s ongoing growth (see sidebar below). “Polk County and the Lakeland-Winter Haven area, both located in the vast space between Tampa Bay and Orlando, are becoming more and more appealing to new businesses, large companies and new residents,” he said. “Big companies are taking advantage of the quickly merging areas that seem to be on track to become one massive metropolis.” The Lakeland-Winter Haven area’s population rose by more than 4% in 2018 and appears on track to repeat that growth in 2019, according to Momentum Group data. “Polk County itself has seen a 10.6% growth in population since the last census, compared to 4.7% nationwide and 9.6% statewide,” Waysman said. “The I4 corridor benefits from proximity to Orlando without the costs that inevitably come with being located directly in that city and, of course, from proximity to the opportunities in Tampa.” For investors interested in short-term rentals, Tampa offers plenty of opportunity as well. Mashvisor’s Heba Baker noted that Tampa represents the ideal market for investors considering Airbnb and other short-term rental platforms because of the attractive climate, relative affordability, strong rental market and lack of short-term rental regulations so far. “Florida has banned local governments and municipalities from passing laws that prohibit short-term rentals, [and] so far, there have been no city-level or county-level ordinances passed,” Baker said. Thanks to state-level licensing requirements and an agreement between Airbnb and Hillsborough County that leverages tourist taxes to support the local economy, Hillsborough, for which Tampa is the county seat, brought in more than $673 million in tourist development revenue in 2018. When the final 2019 numbers are in, last year appears likely to easily surpass 2018’s milestones, and that revenue contributes to Tampa’s presence on multiple “best places to buy a vacation home” lists. Emerging Issues with Housing Affordability Not surprisingly, Tampa’s economic growth and associated population expansion are creating some potential housing affordability issues for 2020 and beyond. However, Waysman said, unlike most cities of its size, Tampa has room to grow and its population can rent or buy in desirable locations. The National Association of Realtors (NAR) agreed, pegging the Tampa market as one of 10 U.S. housing markets it expects to “outperform over the next three to five years” thanks to domestic migration, housing affordability for new residents, consistent job growth compared to the national average, population, age, attractiveness for retirees and home-price appreciation. Marco Santarelli, founder and president of Norada Real Estate Investments, noted that the sale-to-list price ratio in Tampa hovered just over 98% in 2019, with median list prices in the area trending

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A Window of Opportunity for Exponential Growth

EXIT Realty’s Tami Bonnell builds on human potential. For Tami Bonnell, CEO of EXIT Realty, everything in real estate is about opportunity. “Everything we do at EXIT is about helping regional owners, broker-owners and associates have more control of their businesses, their investing and their lives,” she said. We mentor our agents along the path to investing and so many of them choose to work with EXIT because of the opportunities the organization represents. She noted that EXIT is built on human potential and considers it her “job” to support EXIT’s real estate professionals and help agents optimize their growth and productivity. “At EXIT Realty, the opportunities are truly limitless. There are opportunities for true entrepreneurs to have regional ownership (owning the rights to a state or province), own their own brokerage, become an EXIT associate and invest by working with our real estate professionals,” she said. When Bonnell refers to “EXIT,” she means EXIT Realty Corp. International, a full-service real estate franchisor that originally opened for business in Toronto, Canada, before expanding across North America. EXIT operates on its unique “EXIT Formula,” often referred to as “Real Estate Re-Invented.”  The company not only offers intense and highly customized support for all associated agents and professionals, it also rewards those individuals for bringing other successful agents into the business by providing “residuals” (short for residual income) to its agents and their beneficiaries throughout their professional careers, into retirement and even after death. “Every person who is introduced into the company is, obviously, introduced by another associate in the company. That associate will receive the equivalent of 10% of the gross commissions earned by the agent or agents they introduced into the company for as long as the associate continues with EXIT,” Bonnell said. The program permits up to $10,000 per sponsor per year and continues into “retirement,” which occurs when the introducing associate’s activity falls below eight transactions per year. At that point, the retired individual receives 7% residuals with their brokerage receiving the other 3%. “We have helped support our regional owners, broker-owners and associates through caring for an ill parent, an illness in their family, and even knee and hip replacements,” Bonnell said. “That residual income gives them flexibility when they need it and a ‘Plan B’ for retirement that does not require them to keep working in real estate for the rest of their lives.” Bonnell noted the com- pany’s residuals may even be inherited; beneficiaries receive 5% after the death of the agent while the brokerage receives the other 5%. “We have already paid out over $460 million in residual income to our people,” she said. “That steady, ongoing income and support has had a huge impact on our agents, but there is so much more to this company.” Serving as a Trusted Advisor Bonnell identified EXIT Realty as a company she wanted to be associated with long before the real estate corporation made major headlines in the U.S. “I’ve been instrumental in building three major brands prior to EXIT,” she said. “I actually came looking for EXIT and bought the rights to the New England states in 1999.” By 2000, Bonnell was vice president over the U.S. organization at the company. By 2001, she was president. In 2012, when she received the title of CEO, Bonnell pledged to not only build up the company but also to stick with the core values of human potential and putting people first that EXIT initiated from the very beginning. “Sixty-four percent of the population believes companies should do this, and I’m dedicated to that goal,” she said. “It has been shown time and time again, if you put people before profits, you will make more profits.” To that end, Bonnell has spearheaded EXIT endeavors that improve the real estate businesses of its associates so they can grow upward and outward in directions best suited to their specific needs. For example, EXIT was the first company to join the REI Referral Network, a partner organization with REI INK magazine, that was launched to provide a platform for real estate practitioners—agents and brokers—to connect with real estate investors.  EXIT’s efforts often revolve around educating associates to read market signals, communicating effectively with different types of buyers and sellers with very different types of goals, and leveraging their specific personality traits and strengths toward the growth of their businesses. “We offer our agents a vast array of tools and resources to help them identify and leverage their strengths,” said Bonnell, who sold her first house when she was 13. “I sold on-site for builders until I was old enough to get my real estate license, but what I really fell in love with in this industry was the ‘back room.’ I found the average person who owns a real estate business did not really know what they had or the true value of their company and the depth of their own skills. I wanted to change that and support those people. That is my passion.” Bonnell’s philosophy of investing in people was a perfect fit with EXIT’s dedication to equipping its agents with the tools to become what Bonnell refers to as “trusted advisors” for their clients and colleagues. “The human element is what led us to initially invest in real estate investors and real estate professionals,” she said. “We want our agents and professionals working closely with clients who are a good match for their skills. We help them do their homework on the human behind the transaction they are facilitating for two reasons: It is the best way to help that human, and it is also the best way to transact the best sales.” Bonnell, who has broken plenty of sales records herself, added, “It’s about making things personal, putting yourself in your client’s shoes and understanding their wants and needs. We live in a high-tech world, but consumers still want trusted advisors who understand them and who also offer the speed and transparency that come with good

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Q&A With Toorak Capital Partners

Toorak is building new spaces in the real estate lending sector. Just a few years ago, there were very few options for real estate investors seeking to finance single-family rental properties, obtain single- family and multifamily bridge loans, or renovate single- or multifamily properties on an individual versus institutional scale. But in 2016, John Beacham, CEO and founder of Toorak Capital Partners and founder and former president of B2R Finance (now Finance of America Commercial), decided the time had come to change that. “Before Toorak arrived on the scene, there really was very little institutional participation in this space. Capital was limited. Interest rates were really high. Loan terms were not particularly good for borrowers,” Beacham recalled. “Just over three-and-a-half years ago, we saw a massive opportunity to institutionalize this space, and we took it.” Led by Beacham and backed by capital from KKR, one of the biggest private equity funds in the country, Toorak has partnered with more than four dozen loan originators around the U.S. to date. “As a result of our entry into the small-balance, business-purpose, residential, multifamily and mixed-use lending space and our active acquisition of loans, the market has changed radically and for the better,” Beacham said. “Capital is available for deals. Lending capital is more plentiful now. Interest rates have come down by more than 200 basis points over the past three years, and the market has standardized and modernized. This has benefited borrowers and lenders dramatically, and we are proud to have been a driver in this process.” REI INK sat down with Beacham to learn more about how Toorak first entered the real estate lending scene and what he envisions for the company in the coming year. Q: Who has benefited most from Toorak’s presence in the marketplace? A: Real estate investors borrowing money and doing deals have benefited the most from our presence, even though most of them may never have heard of our company. We do not make loans directly, but we provide the capital to the lenders who do. We have invested in more than 10,000 loans totaling more than $3 billion to date. If you work with an institutional lender or a local lender in your market who is making loans on your deals, many of those deals are likely to end up being funded by Toorak.  We work with private lenders around the country, many of which are regionally focused. They are the lenders who provide loans to local real estate investors, and those deals are powered by capital from Toorak. Q: From your position “behind the scenes,” what trends are you seeing in real estate that real estate investors should know about? A: We are currently seeing a natural evolution among the borrower base. Many investors that were doing deals on single-family homes are now doing two- and four-unit properties and multifamily properties instead. We responded to that increased demand for this type of multifamily capital by dedicating $1 billion in capital in 2020 solely to multifamily loans. Q: That’s exciting! Why did you decide to allocate that $1 billion? A: Our customer base and our lenders have been asking for this, so we are allocating that capital to their needs along with a significant amount of staff and internal resources. This commitment will provide the level of service our lenders require so that they can make the loans investors need. We kept hearing from our lending partners that they were getting massive amounts of demand for small- balance, multifamily bridge loans. There just is not a lot of high-quality capital with good terms and solid backing to finance those types of assets. We reverse engineer questions that we get from our lending partners about the types of capital available to figure out what is happening in the market. Then, we develop products to meet those demands. For example, as a country we have massively underinvested in our housing stock for more than a decade. The amount of new housing being built in this country has not kept up with population growth over the past decade. With the rising difficulty of acquiring well-positioned land and more difficult permitting processes in many areas, new housing has become really hard to build. A lot of the deals we finance directly solve that problem by taking existing properties and adding units to those properties. For example, investors may take a single-family home and turn it into a three- or four-family property or tear down that single-family home and replace it with a multifamily building. There is also a demand for smaller and denser housing units closer to where people live and work. We take information like this and look at what the borrowers are looking to accomplish on the deal to make sure a deal makes sense. If the core transaction works for both the borrower and the lender, then we (via our lending partners) are willing to support those deals financially. Q: What is the best thing about working in the lending space that Toorak occupies? A: We love the fact that we partner with lenders across the country to help them grow their businesses. What is really satisfying is seeing them start off doing $3 million or $5 million of volume each month, and then by working with Toorak and having access to regular, consistent capital, seeing them build up their business over a period of years. In many cases, they may grow to three or four times what the business was before. They are able to responsibly grow their business while maintaining high credit standards, low default rates and very low loss rates across their portfolios. That is what gives us the most satisfaction here at Toorak. Toorak Capital Partners is an investment manager formed in 2016 and headquartered in Summit, New Jersey.  Learn more about the company at ToorakCapital.com or reach John Beacham at jbeacham@toorakcapital.com.

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Understanding Hard Money Loans Versus Fix-and-Flip Loans

Why you may be confusing the two and missing out on your best options Fix-and-flip and hard money loans are among the most popular financing programs for investors in single and multifamily homes. Although they are two different products, many people both inside and outside the mortgage and real estate industries believe they are the same. This the furthest thing from the truth. Mortgage originators who work with these types of borrowers should know about the array of loan programs that are designed to meet clients’ financing needs. There is something for everyone, regardless of the type of investor and their loan scenario. Let’s take a look at the differences. Hard Money loans A true Hard money loan is an asset-based loan, which means the financing is based on the loan to value (LTV) of the asset. Unlike the fix-and-flip loan, it doesn’t go through full underwriting, and there are no minimum FICO requirements for the borrower because it does not have many guidelines or criteria. A hard money loan also doesn’t have as many restrictions as one might think, considering that it’s “just money,” So, there’s no worrying about bankruptcies, foreclosures, collections or any other restrictive factors. Many states have nonjudicial foreclosure laws that allow hard money lenders to get their money back quickly if borrowers default on a mortgage. These foreclosure laws make the lenders more comfortable doing a high-risk loan, especially if they are holding the note and not selling it on the secondary market. The biggest misconception borrowers have is that a hard money loan will have a high interest rate even if they are qualified and have a high credit score. The fact is you can receive interest rates and terms that are similar to conventional financing yet still retain the benefits of a loan with no income- verification requirements. Hard money is not a blanket statement that covers all private money loans. Due to the lack of guidelines and underwriting, a true hard money loan is generally capped at 65% loan to value or less. For example, you have a home worth $1 million and you want $500,000 against it (50% loan to value), you are able to receive the money within one to two weeks (from day of application), commonly as a first lien position because, again, it’s just money. This example is normally in the form of a bridge loan, which is short-term financing for a period of 12 to 24 months. One of the main reasons hard money loans are intended for investment properties only is due to the high-cost regulations and the unfortunate existence of predatory lending. For these reasons, you cannot put such high interest rates and cost on an owner- occupied property. Fix-and-Flip Loans Fix-and-flip loans are asset-based loans too. But, they are subject to more underwriting guidelines and criteria. While hard money loans focus solely on the asset, fix-and-flip loans consider both the asset and the borrower. Why do people confuse hard money loans with fix-and-flip loans? Because both the loan and the laws are very similar. They are both private money to an investment property. Virtually all fix-and-flip and hard money loans are funded by hedge funds.  It is possible for the money to come from the same place; however, the underwriting is completely different. Contrary to hard money loans, fix-and-flip loans are usually sold on the secondary market and go through a full underwriting with vastly tighter guidelines. For instance, depending on the lender, fix-and-flip loans have a minimum FICO requirement. Additionally, the borrower cannot have any late payments, foreclosures, judgments or bankruptcy on their credit for 24 to 36 months. Further, a fix-and-flip loan is a rehab loan, meaning it’s a loan that you use to acquire a property and then receive the funds to rehab that property in short-term financing (12 to 18 months). Depending on who you are working with, it is important to bring something dynamic to the table to help you close your loans quickly, efficiently and professionally. Make sure that when you move forward with a mortgage lender you know all the details of your loan, why they are utilizing that program and whether that loan program is being properly presented to suit your needs. The biggest misconception borrowers have is that you must pay a high interest rate for a hard money loan even though you have a high credit score and are a qualified borrower. The fact is, you can receive interest rates and terms very close to conventional financing while still utilizing a no-income verification loan. Hard money is not a blanketed statement for all private money loans. As you look for a lender, consider a provider that offers real estate investors both hard money and fix-and-flip loan programs, among an array of other programs. Further, ensure that your loan scenario is carefully curated by a senior loan officer or professional who can qualify the loan for a mortgage program that best suits your needs. This ensures that each scenario is matched with the lender’s ideal and best possible program.

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