The Taste Tester Investor
Co-Hosted by RCN Capital & REI INK and Sponsored by Five Brothers Asset Management, Vantage Point Title and Urban Surfaces
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REI INK’s 2023 Real Estate Outlook
Changing Trends Bring Opportunities in the New Year By Carole VanSickle Ellis As the end of 2007 drew to a close, the state of the housing market was not confusing; it was just bleak. 10 million mortgage borrowers were set to lose their homes. New-home sales volumes had fallen by more than 26% (a record), and the median price of a home had fallen by 10%. The housing market was clearly heading for a nasty, nasty crash, and the whole country knew it as the 2008 New Year rolled around. Now, 14 years later, the word “crash” is floating around real estate circles again. However, it does not necessarily mean the same thing it did in the mid-2000s, and that is a good thing for real estate investors and the national economy as a whole. “A crash would be a consistent with a lot of foreclosures: people losing their homes with prices falling below the amount of mortgage debt that is owed, and people being forced or voluntarily leaving their homes,” explained Mark Zandi, chief economist at Moody’s Analytics. Lawrence Yun, chief economist for the National Association of Realtors, agreed, declaring around the same time that today there is “no actual crisis in terms of foreclosures or people being forced to sell at a loss.” However, both economists and many other real estate professionals and analysts agree: A correction is coming. The question, for most investors, is one of where the correction will hit rather than if or when. “The market is going to shift,” said Virginia real estate investor and agent Chris O’Neal. “We went through COVID, and you did not see very many foreclosures and short sales [during that time]. Now, the market is definitely set to drop a little, but that just means it is a good time for investors to pick up some of these deals.” O’Neal, who teaches real estate agents how to acquire investment properties for their own investment portfolios, does not expect his market to experience a particularly dramatic downturn, but he said that he is already seeing changes as 2022 draws to a close. Properties for sale may not be in as good of a condition as they were just a year earlier, and sellers are definitely feeling more motivated to get a deal done and closed. “When people are worrying about foreclosure or in pre-foreclosure, they are not making upgrades before they sell,” O’Neal explained. “If they cannot pay their mortgage payment, they probably are not paying to fix up the house. These properties will usually go to investors because most [retail] buyers do not want to tear up floors, remodel kitchens, or replace a roof right after they move in.” Rick Sharga, executive vice president of market intelligence at ATTOM Data, also expects a “slowdown” in real estate in 2023, but emphasized that a variety of factors should combine to prevent a full-fledged housing meltdown. “From a price standpoint, we are not likely to see a housing crash in 2023,” he observed in late November 2022. “Year-over-year prices are still going up, although not as rapidly as they were a few months ago. We are facing another year of very low inventory and demographically driven demand [from young adults entering the market], and we are not likely to see builders overcrowding the market in the coming year,” he explained. “The whole supply-and-demand environment going into 2023 is the opposite of what it was [heading into] 2008.” Sharga did note that corrections were likely to be highly localized, with some markets potentially experiencing double-digit losses while others hold steady or even continue to gain value. “The reality is that it comes down to the local market,” he concluded. “California could drop 10% off its peak, while the southeast might not see price declines at all. ‘Zoom towns’ could see huge declines, but there could be a short-term boom in single-family rental (SFR) markets as home prices climb out of reach.” Zoom Towns Could Spiral Down In early 2020, the entire country took a hard turn into remote work, discovering that not just any internet connection (or open-plan room layout) could support several kids watching online school and two adults working remotely and full-time. However, as the year progressed and the pandemic refused to fade, more and more workers settled into remote work and, for many, the new full-time home-office lifestyle meant new opportunities they had never previously imagined. As workers moved themselves and their families to more scenic locales thanks to the absence of a required commute, “zoom towns” sprang up in attractive locations offering relatively affordable housing like Boise, Idaho; Bellingham, Washington; and Nashville, Tennessee. Home values in zoom towns shot upward. Nashville prices rose 56% between February 2020 and September 2022, while Boise posted roughly 20% gains in 2020 and 25% gains in 2021. In fact, the population of Idaho as a whole grew by nearly 3% during the pandemic. “Historically low inventory coupled with rampant demand resulted in above-average price growth and a highly competitive market [in zoom towns like Boise],” observed Norada Real Estate Investments founder and CEO Marco Santarelli. “However,” he added, “The changes we are seeing now in Boise price growth, inventory, and slower market times are moving us toward more normal market conditions.” Given that Moody’s rated Boise as 72% overvalued in 2022, those “more normal market conditions” could represent huge opportunities for a real estate investor willing to watch and wait for the bottom of a zoom-town price correction. Another factor in the zoom town correction trend will be employers’ willingness to permit remote work in the post-pandemic market. Although some analysts predict that one in four jobs will become permanently remote by the end of 2023, others warn that remote work could be on its way out. “Conditions for remote work appear to be cooling down much faster than for non-remote jobs,” observed LinkedIn head of economics and global labor markets Rand Ghayad in his November 2022 labor market update. He
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How AVMs Provide Intelligent Valuations in an Uncertain Market
A Critical Tool for Investors to Mitigate Investment Risk and Determine ROI By ATTOM Team AVMs (automated valuation models) are found on almost every real estate site — from Zillow to Redfin. They are perfect tools for a quick property valuation, but what about their accuracy in times like these, when nobody really knows which way the market is going to go? Is inflation going to continue to slow the rise in property prices or is low inventory going to push them higher? Do these AVMs consider macroeconomic or critical local economic factors? While most AVMs consider the usual data points like comps and property characteristics, many fail to consider the macro environment or the smaller details, like the fact that a home has not been renovated in twenty years and is decked out with outrageous floral wallpaper and shagpile carpets. So how do you reliably depend on an AVM when making investment decisions? Real estate professionals generally use AVMs to more accurately price properties and to aid in negotiations. It is an essential tool in real estate investment decision making. They also may use AVMs when deciding how to structure a deal (should they waive the appraisal contingency, for instance?) and in marketing their services and properties. Since real estate is a highly local profession, having detailed and granular valuation data can be a huge advantage in many ways for these professionals. Valuations in Volatile Markets The more volatile the market, the harder it is to value a home or to price it well. Take today’s real estate market as an example, where there are so many uncertain macro forces affecting a property’s valuation. A look at the most recent nationwide data shows the median price of $339,815 in the third quarter of 2022 was down 2.7% from $349,266 in the second quarter of 2022, but still up 9.4% from $310,500 in the third quarter of last year. Two diametric macro forces are currently at play in the real estate market. Rapid inflation is causing property prices to slow because high interest rates are making mortgages expensive. But, at the same time, housing inventory remains low. It is a complex macro environment, unlike any we have seen in several years and one that investors and real estate agents are having difficulty navigating. The hardest part of a property valuation in the current climate is ascertaining exactly where the market is at any one time. Property valuations based on a sellers’ market of just a few months ago are particularly unreliable, the market could slow, stagnate, or reverse course at any time. Property valuations in volatile markets are much less complex when leveraging valuation intelligence based on data — the exact type of data utilized in AVMs (automated valuation models). These models use property, environment, and macroeconomic data, combined with predictive analytic algorithms, to produce accurate valuations, even in current market conditions. An AVM provides a more realistic perspective to property valuation. A Winning Team While a data-based approach to valuations can prove more accurate, not all AVMs are the same. AVMs are software-based tools that determine property values using mathematical or statistical modeling combined with a variety of data. However, the valuations produced by an AVM, are only as good as the data being used. If the data is outdated or inaccurate, the valuation will be outdated and inaccurate also. Almost every AVM will use data points such as tax assessor value, property features, and sales history for similar properties in the area, but many are not equipped to consider factors like the condition of the property, recent renovations, or even the proximity of comparable properties. Some will include outliers in the comp data —properties that sell for extremely high or low prices and skew the results — while others will not. Of course, the best valuations use a combination of AVMs and human appraisal. The AVM can place a check on errors and omissions from the real estate appraiser, and the real estate appraiser can make sure the valuation reflects the condition and aesthetics of the home and its salability. In the absence of a paid appraiser, AVMs offer fast, accurate results to mitigate investment risk, determine ROI and inform purchasing decisions. How Do You Find the Most Accurate AVM? AVMs that utilize data outside of public records information and consider the most current and local transactions have a higher degree of accuracy. ATTOM’s AVM relies on neighborhood boundaries and recent sales transaction data, which always contains the most up to date information available. This helps to capture the micro-location deviations in the local real estate market, in order to provide a more well-rounded individual property valuation. The valuation differs from property to property depending on which is likely to yield the best results: statistical models, market metrics derived from small clusters of similar properties, or ensemble (value blending) approaches. AVMs that are based on a robust set of data points, updated weekly, and go through a number of modeling techniques are generally quite accurate. At ATTOM, 70% of the valuations are within 10% of a home’s eventual sale price, and 82% are within 20%. Over a recent three-month period, the median difference between valuation and sale price was 3.5%. Some AVMs, similar to ATTOM’s, will also provide both minimum and maximum valuations and a unique confidence score for each property. This allows users to get a big-picture view of a property’s value, as well as any potential for variance. Rental AVMs Rental AVMs are another critical tool for investors. These are best utilized when looking to evaluate the potential profits, return on investment, and viability of new investment properties. Investors may also use a rental AVM for analytics purposes, often to identify trends in specific geographic areas and markets. ATTOM has recently introduced a proprietary rental AVM, yet another valuation tool for investors and real estate agents. The rental AVM is a valuable tool because it estimates the potential income for rental properties under current market
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Progress Residential
Partnership, Data & Technology Combine for SFR Success By Carole VanSickle Ellis Ask Progress Residential CEO Adolfo Villagomez about the “secret” to the company’s exponential growth, and his answer will be simple: “When customers like your product, they buy more of it, and that helps you drive growth.” Then, he will almost certainly add, “You cannot do these things by yourself.” The answer sums up, in fewer than two dozen words, Villagomez’s approach to the industry of single-family rental (SFR) housing in the United States today, and it also reflects Progress Residential’s longstanding focus on delivering, to residents and renters, one of the most foundational products in American culture: “a place to call home.” In an effort to make rental homes more homelike, Progress Residential has broken a number of barriers conventional to rental properties. One of the most significant concessions is the company’s nearly universal “Pets Welcome” policy that is bound by very few exceptions other than those imposed by local homeowners’ associations (HOAs). As the company website states, “From pit bulls to Pekinese, your furry family members are welcome here.” Given that 90 million American households reported owning “at least one pet” in early 2022, the policy opens the doors of Progress Residential’s roughly 90,000 homes in 30 U.S. markets to many renters who otherwise might have struggled to obtain SFR housing without abandoning their furry friends. Historically, landlords have often been reluctant to permit pets on their properties because animals — especially those with fur, claws, and fangs — tend to exacerbate the element of “wear and tear” on property values. However, Villagomez said, both company employees and customers “love” the policy and are excited about it. That excitement, he explained, plays a key role in the overall success and growth of Progress Residential. “We operate with the resident in mind at all times,” Villagomez explained. “When you combine empowered employees taking the best possible care of residents with modern data and technology, you create amazing customer experiences. This is what is driving the success of the Progress Residential portfolio.” Dave Feldman, executive vice president of real estate and strategic operations, added, “Our differentiated approach to curating portfolios for investors while also providing residents with access to quality housing options is what enables us to scale the way we have and serve our customers as effectively as we have.” When Feldman joined Progress Residential in 2014, the company had fewer than 10,000 houses and was operating in just a few markets. Founder Don Mullen had a vision, however, and he was determined to scale the company. Feldman was part of that plan to scale and has remained with the company and focused on the vision ever since. “I have spent the last 20 years in various roles in real estate, from investments to national operations, leveraging data, analytics, and technology to inform strategy and drive consistent execution,” Feldman said proudly. “For the last eight years, I have been on that journey with Progress through my involvement with national operations, real estate investment management, and creating strategic capabilities that optimize our ability to thoughtfully invest capital on behalf of our investors and serve our residents.” Leveraging Data & Technology on Both Sides of the Equation As a privately owned, SFR home company serving eight times the number of households today as it served when Feldman joined the team in 2014, Progress Residential is one of the largest rental-home providers in the United States. Scaling operations as the company continues to grow is vital on both sides of the equation: Residents need to be able to rely on the company to provide reliable, positive management experiences while investors in the company naturally expect positive returns and growth into new markets and sectors. The key to achieving this balance, Feldman said, is making sure that the right parties are involved in the care and consideration applied to strategic and key tactical decisions. “Our acquisitions efforts span three different channels,” he explained. “We invest in homes on a one-by-one basis primarily through the MLS; we partner with developers and homebuilders on new-construction homes and dedicated rental communities, and we acquire larger portfolios of stabilized and unstabilized houses from short-term owners and smaller-scale owners of the asset class.” This broad spectrum has enabled Progress Residential to offer not only a vast array of SFR assets to residents but also to provide investors with a diversified approach to this type of rental asset, Feldman added. “We have the ability to acquire through a variety of channels, create value for investors, and provide access to quality housing options for our residents,” he concluded. Such a large, diverse portfolio requires specialized management, Villagomez chimed in. “One of our key differentiators is our use of technology empowered by data,” he said, noting that the company could not continue to grow and scale at the current pace without constantly applying the information it gleans from its own data to “drive profitable growth and improve the customer experience.” Investing in Affordable Housing, Access & Action Recently, the company launched a new set of programs and initiatives intended to evaluate and optimize what Villagomez refers to as “the leasing and living experience.” This means Progress Residential is “looking into our service/maintenance approach, our customer operations, and value-added services for residents,” he explained. Progress Residential recently launched flexible security deposits in some markets and, perhaps most exciting, has begun “making investments into affordable housing as a business driver.” “This is something I’m particularly proud of because it is a situation in which we learn of a need, partner with the appropriate entities in a city, and help people find homes that are safe, comfortable, and affordable,” Villagomez said. Recently, Progress Residential partnered with the mayor’s office in Atlanta, Georgia, as well as several nonprofit organizations serving the area to help relocate a community in dire need. Many of the households living in the unhealthy multifamily apartment complex of Forest Cove needed three- or four-bedroom homes in order to comfortably
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A Voice for the Industry Advancing Private Lending
Building Community and Strengthening the Industry’s Legislative Voice By Jon Hornik, Esq. For decades, private lenders operated independently of one another, with little need for a unifying body to guide or protect our interests. With the influx of institutional investment, private lending has become a more sophisticated and high-profile industry. We need a collective voice and vision to help usher us into this new space. Today the National Private Lenders Association (NPLA) fills that void. Founded in September 2019 by Leonard and Kathleen Rosen, the NPLA was created to support, protect and advance the Private Lending Industry. Since its inception, our organization has served as a platform where industry peers collaborate, share expertise and information, and support the continued growth of Private Lending. In November 2022, we (Jon Hornik, Esq. and Private Lender Law, the practice group of LaRocca Hornik Rosen & Greenberg) acquired the NPLA. The organization is also guided by Managing Director, Amy Kame, and 2023 Advisory Council, including Jeff Tennyson, Lima One Capital; Eric Abramovich, Roc Capital; Jeffrey Tesch, RCN Capital; Stephan Leccese, Sharestates; and Chip Cummings, Northwind Financial. As we move into a new era with new leadership, the NPLA is focused on three foundational pillars: » Industry Advancement » Building Community through Education and Mentorship » Strengthening the Industry’s Legislative Voice Industry Advancement The NPLA is made up of capital providers, lenders, brokers, developers, and industry service providers. Our organization harnesses the experience and knowledge of the brightest minds in our space. These individuals have a deep understanding of how capital markets flow and how credit decisions are made. This includes understanding interest rate and credit spread risk as well as real estate underwriting and how the concepts relate. Over the last decade, we have seen incredible advancements in the Private Lending industry. Prior to 2015, our lending environment was fragmented, consisting of family offices and individuals providing capital where conventional lenders would not. In 2015, Wall Street discovered Private Lending as an alternative asset class and transformed the industry we see today. Its participation provided legitimacy while companies formed and grew with cheaper capital. During this time, conventional lending guidelines and underwriting standards became mainstream. We are on the cusp of further innovation and advancement in the next decade. As we navigate these changes, our Best Practices and Ethics Committees will continue to set standards for the industry, ensuring our asset class becomes more institutional and attractive to additional sources of capital. Building Community Through Education and Mentorship The NPLA is about fostering community. Our role is to provide a much-needed platform for our membership base to stay connected, especially in times of market volatility and uncertainty. The NPLA is uniquely positioned to serve as a space for industry leaders to collaborate while educating and mentoring the next generation of Private Lending professionals. With the issues facing the housing market today, including low housing stock, eroding affordability, and an uncertain interest rate environment, members understand the need to collaborate on solutions. One of our most trusted resources is our bi-weekly video conference call. At the meetings, members and guest speakers discuss critical issues facing our industry, including macroeconomic changes, demographic and geographic trends, supply chain issues, legislative developments, and more. The NPLA’s pillar of mentorship focuses on facilitating partnerships and expanding members’ knowledge and perspectives. We understand that the continued growth and success of Private Lending depends on members adhering to best practices and ethical lending standards. It is up to us to move the industry forward. Strengthening the Industry’s Legislative Voice The collective voice of NPLA members will define the Private Lending Industry for years to come. Our Legislative Committee plays a significant role in this effort, as it monitors all state and federal regulatory changes that may affect our industry. The committee keeps members informed through quarterly legislative reports and timely legislative alerts, and we have built a strong track record of legislative success over the last three years. For example, we successfully lobbied against the following New York bills to protect the interests of Private Lenders: » Senate Bill 3060E (Transfer Tax) » Senate Bill 1061 (Commercial Finance Licensing) » Senate Bill 5470 (Commercial Financing Disclosure) We partnered with industry groups, led by Robert Finlay from Wright, Finlay & Zak, on the Coalition Opposition to defeat California Senate Bill 1323, which proposed to amend California’s foreclosure process. Furthermore, after a strong lobbying effort from the NPLA, Governor Murphy conditionally vetoed New Jersey Assembly Bill 793. The “Community Wealth Preservation Program” proposed to revise procedures for the sale of residential foreclosure properties and would have curtailed lending in the state. As we look ahead, there is a common theme in recently proposed legislation to restrict the ability of business entities to own residential housing. Legislators across the country are selling a narrative that investors are driving up home prices, taking affordable housing stock off the market, and limiting home-buying options. To contest legislation such as this, we need to continue our collective messaging about the critical role we play in improving neighborhoods and providing access to housing across the country. The legislative landscape changes quickly. Our responsibility is to be the industry’s voice while presenting a more accurate and positive image of Private Lending to the public and legislators across America. The Importance of Giving Back As we work to support one another professionally, we also understand the need to look beyond ourselves and give back to those who are most vulnerable. That is why we are committed to partnering with organizations that positively impact our communities. In 2022, NPLA members raised $31,000 for Habitat for Humanity of Greater Miami. Donations went directly to support the construction of affordable homes in the Miami community. Since 1989, Habitat for Humanity of Greater Miami has helped over 1,300 families achieve the goal of affordable home ownership across the county. In 2023, we are proud to announce our partnership with St. Jude Children’s Research Hospital. The mission of St. Jude is to advance cures
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Becoming Pet Passionate
Spread the Word – and Stay Pawsitive By Victoria Cowart, CPM Are you acquiring residential rental property and wanting to start on the best foot? Here’s a question that will impact approximately seventy percent of your renters. How will you respond to pets in your rental properties? Will you prohibit pets? Will you become pet-friendly? Or will you push yourself and your success by becoming pet passionate? Available data today says 76% of the property management industry consider themselves and their rental properties pet-friendly. Contrast that with those seeking pet-friendly housing, with 72% saying it’s hard to find. Also, consider that somewhere north of 90% of residents and property management professionals agree that pets are important family members. The Industry Response The rental property management industry today has a wide variety of responses to pets. Some companies prohibit cats and dogs in their rentals, some permit pets, and even have no restricted breeds of dogs. In contrast, other companies have ten or more restricted breeds. Some companies have no weight restrictions, while others have varying weight restrictions from 25 to 100 pounds. These policies are all over the map. So again, what will your pet policies and pet restrictions be? And if you’re willing to permit pets, where do you stand on pet-related fees or deposits? The industry has pet rents, nonrefundable pet fees at move-in, and occasionally additional deposits as well. Some areas of the country have regulations on these rents, fees, and deposits. How will you structure those? As you continue or begin new property management endeavors, these are great questions to ask yourself. But you may ask yourself again, “Why is it so important?” From a human perspective, pets promote relaxation, reduce loneliness and depression, and reportedly caused their pet parents to report a higher life satisfaction than non-pet owners do. One study showed that 80% of pet owners say their pet makes them feel less lonely, and 54% connect with others more readily. Pre-pandemic, one in ten adults would raise their hand and admit to being people living with a mental or emotional disability. Would it surprise you to learn that it is now four in ten? And where does, if it does, that factor into your policymaking in this arena? Pawsitively Exciting But let’s not shy away before we’ve given this a full once over. Let’s quantify this a bit further. Twenty-seven percent of households in the country have children, whereas 70% of households have pets. This means that today’s households are more likely to include pets than children under the age of 18. Our most extensive group of renters, millennials, are very pet enthusiastic. Seventy-five percent of people in their thirties own a dog, and 50% of people in their thirties own a cat. The resulting pet population is astonishing, at 230M+ cats and dogs in our country in 137M+ households. Those are statistics that are hard to stare at for long if you’re thinking of being less than pet friendly, but pawsitively exciting if you’re on the road to becoming pet passionate. As you read this, you may be saying, “But they make such a mess in rental properties.” And while many share that sentiment, there are statistics on this as well that are worth considering before you decide on your pet policies. One source said, “Pets are a safe bet in the rental housing industry.” “How so?” you might ask. The statistics show that only 9% of pets caused damage and that the national average value of that damage is only $191. With that said, what do your customers, renters, really think about pets in rental housing? Seventy one percent of renters know that pets create community—bringing people together. And not surprisingly, there was a better than seven out of ten correlation between the presence of pet-related amenities and the likelihood of rentals and renewals. Beneficial Results of Being Pet Passionate Studies show several beneficial results when we become more pet passionate about our policies. Among them, an increased disclosure about pets, leading to fewer unauthorized pets, a decrease in the risk of unvaccinated bites, and the creation of a tie that binds — community. Additionally, you receive more applications, more potential renters per available rental, a competitive edge, and faster and easier leasing. Eighty-three percent of property managers say their rentals rent faster, and 79% say their rentals are easier to fill with more inclusive pet policies. Are your levels of pet passion on the rise yet? Let’s get even more specific about the areas of enhanced performance. Turnover is lower in more pet-inclusive rentals. \Pets are a reason for turnover 24% of the time. With more inclusive pet policies, the occupancy duration is longer as well. Instead of 18-month tenancies in more pet-prohibitive rentals, pet-passionate rentals can have renters for 27 to 46 months. And with an average December 2022 rent in the country at $2007 per month, every month of additional tenancy counts. With even one extra month on average, that’s $2007 in additional rent and better than a $40,000 boost in property values at a 5% CAP rate. And in addition to additional months, renewals are enhanced as well — with one pet-passionate PetScreening partner reporting a whopping 80% of pet-owning residents renewing their lease. Eighty percent renewals, anyone? With reductions in turnover, you will save money marketing your vacancies. The National Association of Realtors says landlords spend less than half as much money advertising their pet-friendly units. And let’s be sure to address the ever-present pressure — vacancy. One study revealed that pet-friendly rentals have a vacancy rate that is 4% lower and that their vacancies rent ten days more quickly. With all these statistics, what are your reasons for remaining pet-prohibitive? Or are you already pet friendly? Pets make our renters happier, create community, increase their length of stay, increase revenue, decrease vacancy, and do wonders for your bottom line. Become pet passionate, spread the word — and stay pawsitive.
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