REI INK at IMN East
Co-Hosted by RCN Capital & REI INK | Sponsored by Five Brothers Asset Management, The Home Depot and Urban Surfaces Taste Tester Investor – Another great culinary event themed “Spice Up Your Life with Indian Cuisine.”
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Sacramento, California
California’s Capital City Remains an Anomaly…In a Good Way By Carole VanSickle Ellis Just before the start of the 20th century, the residents of Sacramento decided to enact a sea change in the local geography. Believing the “City of Plains,” as the area was called in 1855, to be too flat and swampy, locals began planting cottonwoods and imported eucalyptus trees to help dry out swampy areas and create a greener landscape. Later, locust trees, willows, elms, palm trees, and fruit trees would also become part of the program until Sacramento was no longer known for its flat, treeless plains and became known as the “The City of Trees.” By then, the city boasted “more trees per capita than Paris,” according to local historian and ecologist Paula Peper. The result of this concerted botanical effort would ultimately be one of the world’s largest, most closely managed, and highly concentrated urban forests: a living, growing example of how residents of this city prioritize certain beliefs about nature, diversity, and even energy savings. Understanding the local population’s innate drive to at least attempt to control and manage every aspect of the Sacramento landscape is crucial for investors entering this real estate market. Community planning plays an outsized role in home values in Sacramento just as it does in any municipality where urban planners (or arborists) effectively leverage government resources and funding as well as public sentiment, but the city also remains what Clint Lien, vice president of cost research and product development at residential repair-cost estimation platform The Bluebook International, Inc., calls simply “an anomaly” in the broader California landscape. “Sacramento has always been a mix of urban, suburban, and farming communities,” Lien said. “It is right on the river, the state capital, has many popular museums, and maintains a solid tourist draw. With the many resources and diversity [in the Greater Sacramento area], housing has always been considered a solid investment there, and it has generally been considered a great place to raise a family.” Lien explained that Sacramento traditionally offered Bay Area families seeking “more affordable, urban lifestyles” the opportunity to own a home or rent in an area that would otherwise be financially out of reach. Of course, Sacramento is not immune to modern problems like unaffordable housing and homelessness, which investors must bear in mind when operating in this market. “Like many other California cities, Sacramento has found itself in quite the predicament recently,” Lien said, citing fallout from the COVID-19 pandemic’s work-from-home trend, a 67% increase in the unhoused population over the past three years, and slowing new construction as problems that must be addressed in order to shore up the area’s housing market. “There is definitely a need for change, and the next two or three years will dictate how well the demand for housing and influx of community investment will play out,” he concluded. U.S. News & World Report real estate editor Devon Thorsby agreed, noting that the Sacramento area’s approved permits for new-construction, single-family residential properties came close to a five-year low in January of this year at 352. This represented a 44% drop over January 2022. “Considering that Sacramento hit a five-year peak for single-family permits in June 2022 at 989, the drop in plans for construction activity is even more stark over a relatively short period of time,” she said. Thorsby noted “builders are struggling to offload new-construction homes that have already been completed.” If history is to be believed, if any city’s population can effect lasting change on the economic and real estate landscapes, it will be the population of Sacramento. While the future of the “City of Trees” may no longer hinge on whether local policymakers favor fruit trees or hybrid sycamores, residents’ belief in their ability to improve the local economic and literal climate and track record in doing so makes any community initiatives and unusual local trends worth watching for investors. The “Two Housing Market Bottoms” Coming to Sacramento In February of this year, Sacramento appraiser and local market analyst Ryan Lundquist predicted that the local market would face “two market bottoms” in the coming months. “I recommend watching for a price [bottom] and volume bottom [that] may not happen at the same time,” he wrote on his blog. Lundquist emphasized the need for improved housing affordability in order for home sales volumes to increase, observing that as the end of Q1 2023 neared, the Sacramento market was “missing about 40% of buyers.” By June 2023, Lundquist appeared to be feeling more optimistic, calling the first half of the year “stunning,” but warning, “Sellers are still sitting back” as listings remained down about 40%. He added, “Low mortgage rates are keeping many sellers in their homes, and higher rates have been keeping many buyers from purchasing [and]… lower supply has met lower demand. Thorsby noted in March of this year that Sacramento tends to look “relatively affordable compared to Golden State counterparts San Francisco, San Jose, and Los Angeles,” but emphasized that investors using these metrics alone risk overlooking the area’s high costs compared to other parts of the country. With just over two months’ worth of inventory slightly easing tension on the buyers’ side of the equation, there is still a significant imbalance between supply and demand in the area. For renters, inventory is even tighter; the U.S. Census Bureau reported in January that Sacramento rental vacancies were below 1%. By comparison, the national housing supply is hovering around 3% and national rental vacancies are about 6%. Sacramento May be the Best West Coast Option for Many The question for investors, potential homebuyers, and sellers in Sacramento remains: When will the market actually “hit bottom” and, in this post-pandemic environment, what will that actually mean? For those who experienced the housing crash and subsequent financial meltdown in the mid-2000s and are eagerly awaiting the deals that come with a “foreclosure tsunami” type of crash to the bottom, this downturn is likely to feel very unlike their
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homegenius
Creating an Innovative Ecosystem for Investors By Carole VanSickle Ellis When Tim Reilly, executive vice president of asset management at homegenius parent company Radian, talks about homegenius, he describes a company that is a product of decades of evolution in the single-family residential (SFR) space. In fact, said Reilly proudly, this emerging Radian brand is more of an “ecosystem” than a mere company, with a service line offering what the company refers to as “a new path for real estate’s future” via connecting people, data, and software to create comprehensive solutions. The homegenius brand revolves around the idea that all “players” in a real estate transaction, homebuyers and -sellers, agents and brokerages, lenders and servicers, and real estate investors, all benefit from increased transparency across the board while conducting a transaction. “Every client wants more data,” observed Rebecca Smith, vice president of business development for the asset management division of Radian. Smith has worked within the Radian family of companies for 15 years and in the real estate industry for 23. She continued, “We are always trying to consult with our clients, figure out the best ways for them to access and use data, and then leverage our technology to those ends. The breadth of data we have been able to acquire and meld across different venues to benefit mortgage and real estate clients is some of the best in the industry.” Because homegenius is part of the Radian family, the company’s claim to “next-level analytics and insights” into market trends and home price estimates has a much firmer, deeper foundation than many of its industry competitors. Smith noted that during her early days with the company during and after the housing crash in the mid-2000s, most clients were focused primarily on rental rate trends. “Naturally, they wanted to see what the cash flow in different investment properties and markets would look like,” she recalled. Demand was so strong that Radian enhanced its BPO (broker price opinion) product to include a rental addendum dedicated solely to serving this portion of the company’s clientele. “We have been through so many iterations of the market and ebbs and flows over the last 20 years; we are well equipped to shift with the industry’s data needs depending on the scenario,” Smith concluded. “Our clients’ data and technology needs are constantly evolving and changing. We are dedicated to evolving with those changing asks,” Reilly added. He recalled the early days of single-family residential investing, noting that the SFR real estate market was much more in its infancy than it is today and observing that homegenius data and analytics build on information gleaned by parent company Radian during those years. “In the early days of the SFR market, investors were buying foreclosed homes that were not repaired, not rehabbed, not stabilized, and not easy to assess,” Reilly explained. “We managed our national distributive network of real estate brokers, agents and inspectors in order to provide educated, accurate assessments about what the after-repair price of a given property would be, how much those repairs would cost the investor, and how much that investor might make after the repair spending while simultaneously building our QC (quality control) process using real-time property transaction data to ensure that the best-like-listed and -sold comps were being selected by the agents who were pricing these properties.” Reilly compared those early days of development under the fire of the foreclosure meltdown and subsequent financial crisis to a triage situation. Company experts would focus on individual properties to first understand the investment strategy associated with a set of repairs, then track the costs of those repairs, and finally conclude, months later, with an analysis of the repaired price of the property and how the repairs and other strategic decisions factored in. “Fast forward to today and you do not see that uncertainty because there is not the same type of wave of foreclosures and distressed properties. We are in a more stabilized housing market,” Reilly said. He added, “We provide such sound insights today because [in the early- and mid-2000s] we worked hard to create technology, processes, and analytics to be able to understand property pricing and repair data and put it into our modeling in order to understand the entire life of the asset and investment.” Today, the homegenius diligence and valuation platform powered in part by the latest OCR, SQL and RPA technology provides that same level of attention to detail and constant evaluation and reevaluation of data to clients interested in all types of real estate investments. “These techniques enable us to serve build-to-rent communities, which are a relatively new asset class, as well as developers who may be working on products in markets with relatively few comparable assets in the area,” Reilly concluded. “There is no question that the SFR space, including the build-to-rent space, is healthy, and there is still a lot of unspent [investment capital] in the market,” Reilly noted. “A lot of investors are still wanting to get into this space, and we are here to provide them with all of the information they and their teams could possibly need.” Bringing Entire Teams Together & On Board When Reilly and Smith talk about homegenius, they repeatedly return to the idea of many facets of an investment team working together with transparency to positive effect. This transparency has been a top priority for homegenius from the beginning, Reilly said, noting that investors and investment firms considering entering a new asset space often use the homegenius platform to get a clear, full picture of what their options really are before “jumping in” with a new investment strategy. This is particularly true in the build-to-rent sector, in which relatively few real estate investors have extensive experience but where there is an increasing amount of interest. “We find investors look to us to help them with understanding how to approach a site for a build-to-rent community,” Reilly said. “Through homegenius, they can access services from real estate agents, property
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The NPLA Publishes the Private Lending Glossary
A Standard Language Will Bring a Level of Cohesiveness Across Industry By Amy Kame With its intricate terminologies and concepts, the private lending industry can be seen as a dynamic ecosystem teeming with various entities and processes. In this environment, lenders, borrowers, regulators, and investors coexist and interact, propelling the industry’s growth and evolution. With this type of interdependence, a universal language — or, in this case, a standard glossary of terms — is essential to ensure the smooth functioning and effective interaction of all parts. As the private lending industry evolves and matures, it becomes increasingly crucial to establish a set of standardized terms and definitions. The need for a comprehensive glossary becomes more evident as it gradually transitions from a niche sector into a more institutionalized industry. A standard glossary is a valuable asset to the industry as it ensures uniformity in communication, understanding, and interpretation across diverse stakeholders — including legislators, the general public and the lenders themselves. The NPLA is proud to publish the first Private Lending Glossary, accessible at nplaonline.com. The glossary was authored in a collaborative effort by senior leaders of the private lending industry: » Jonathan Hornik, Esq., Private Lender Law » Jeff Tennyson, Lima One Capital » Eric Abramovich, Roc Capital » John Beacham, Toorak Capital Partners » Stephan Leccese, Sharestates » Jeffrey Tesch, RCN Capital » Chip Cummings, Lima One Capital. The Growth of Private Lending The private lending industry has undergone a significant transformation in the last 10 years. Before 2015, this sector consisted of a scattered group of family offices and individual lenders offering capital in spaces where traditional lenders were reluctant to venture. However, a shift occurred in 2015 when Wall Street and institutional capital identified private lending as a promising alternative asset class, sparking a transformation for our industry. This recognition from institutional capital boosted the industry’s legitimacy and catalyzed its metamorphosis. An influx of more affordable capital led to the emergence and growth of new firms. As the industry evolved, it started integrating more conventional lending guidelines and underwriting standards. This shift toward more quantitative models and standardized risk assessment increased private lending’s transparency and predictability, further solidifying its place in the broader financial ecosystem. It is time for the industry to take another step forward and adopt a standard language that will bring a new level of cohesiveness across industry firms. New Explorer’s and Stakeholder’s Understanding In this intricate financial ecosystem of private lending, legislators, developers, and the general public are akin to explorers, needing a comprehensive guide to understand and navigate its complexities. A standard glossary of terms serves as a trusted field guide for these explorers, offering a clear understanding of the unique species of loans, types of lenders, the different property types, and the diverse ways loans are serviced. What is the difference between a Table Funder, White Label Lender, Wholesale Lender, etc.? What loan products do these lenders offer, and what financial analysis and risk assessments are performed before funding a loan? The glossary provides a roadmap for new explorers to understand the complexities of private lending and how it can be a viable option for borrowers compared to traditional funding sources. For example, private lending can be seen as an essential and stable financing source for borrowers. Due to interest rate increases and recent bank failures, tighter lending standards from regional banks are making it harder for builders and developers to secure funding. According to the National Association of Home Builders (NAHB) quarterly Survey on Acquisition, Development, and Construction (AD&C), in the first quarter of 2023, 117 builders responded and reported AD&C financing was more costly than in the fourth quarter of 2022, even as mortgage rates were stabilizing. 66% of survey respondents cited that their traditional lender reduced the amount they were willing to lend. For many builders and developers, private lending might be uncharted territory. The glossary bridges the knowledge gap and demystifies the industry, making it more approachable to outsiders and thus promoting better engagement with all stakeholders. Better Informed Policymakers Such a guide can also lead to more informed policymaking, better investment decisions, and a general increase in trust and confidence in the industry. When the NPLA was founded in 2019, our founders believed the sector needed effective representation at a legislative level. Jonathan Hornik, Esq., NPLA Executive Director and General Counsel, stated the important role legislators and regulators have on private lending, “What the private lending industry does is provide needed capital to improve housing. Our job at the NPLA is to help legislators understand the positive impact our members and all private lenders have on their communities.” Hornik continued, “What lawmakers want to know is, ‘What is the impact on my community as a whole and why?’ The NPLA reviews legislation and ensures that policymakers understand the ramifications of legislation on the private lending community,” he said. Legislators and regulators play a significant role in shaping the private lending industry. Adopting a standardized glossary of terms allows us to communicate more effectively with these stakeholders, enabling them to better comprehend the nuances of private lending. This shared language serves as a bridge, connecting policymakers with the industry, enhancing mutual understanding, and fostering more informed, beneficial legislative and regulatory decisions. Enhancing Our Reputation Within this ecosystem, private lenders, capital providers, and industry service providers are key inhabitants who need to communicate and interact effectively for the ecosystem to thrive. A shared understanding of these terms is crucial when it comes to different loan types, loan tape data items, and loan servicing definitions. A standard glossary ensures that lenders, regardless of size or reach, speak the same language, fostering a healthier business environment and enhancing operational efficiency. A glossary is not just a tool for understanding; it is a badge of professionalism and maturity. It reflects our industry’s commitment to clarity and transparency. Furthermore, it contributes to maintaining ethical standards, fostering trust, and enhancing the overall reputation of the private lending industry. Capital markets are
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Invasion of the Property Snatchers
The Financial and Community Impact By the End 2 End Team Your property is being taken without your consent and your knowledge. You find your asset is being essentially snatched away from you by a squatter, an individual living in your property while having no title, no rights, and/or no lease. Despite the squatter having no right to the property, it now falls upon you to determine how to remove them from your residence. You are not alone. This is one of the largest issues that plagues the real estate industry, and is quickly becoming a nationwide epidemic affecting many communities, with the hardest hit areas being our major metropolitan areas. While this is a growing problem, there are strategies you can take to protect your property from being invaded. While there are strategies to protect yourself from squatters — what do you do if you have fallen victim to this growing problem? What to Do The first step is to understand that squatters come in many forms. It will be helpful for you to understand what type of squatter is in your property to determine how to move forward. The type of squatter can vary from a vagrant to individuals who are well versed in the process of occupying vacant properties. In some cases, a vagrant occupant may be removed from the home by simply contacting your local authorities and rekeying the property. However, if you have a professional squatter, these individuals are aware of squatter rights and will pose a larger risk to the property and the timeline to legally obtain possession of the property. The worst-case scenario is a “master squatter,” where the property owner is not the only victim of this crime. A master squatter is a scam artist who is presenting themselves as an entity who has the authority to rent out the subject property. They rent the property to an inexperienced or high-risk renter who will pay the deposit and rent payments to the fake property management company that will disappear once the tenant becomes aware that they were scammed. The tenants will have a fake lease and in some cases are out a substantial amount of money due to a large deposit or were requested to pay for their lease in advance. In this scenario, you can either help relocate the tenant through relocation assistance or proceed with an eviction process to remove the tenant from the property. To plan on how to protect your asset, it is important to determine how the squatters or master squatters obtain access. In a day and age where technology continues to evolve exponentially, how do you bring a benefit to the user that does not open up a larger opportunity for deception or fraud affecting the property owner? How the Scammers Work While technology is helpful to market your property for rent, know that scammers are targeting vacant properties posted online by rental companies and social media outlets. They will copy the photos, place them on their own social media platforms claiming that they own or manage the property and are seeking tenants to occupy the unit. When they find an interested party, they will go online to the site where the property is listed by the actual property manager or owner and request an appointment to view the unit. During their visit to the property, they will find a way to leave something open to allow access to that unit after they leave, whether that be unlocking a back door, opening a window, etc. They then come back and access the property and change the locks. They create fake leases and accept funds from unsuspecting renters and provide them with the keys. Some of them have really done their homework using doctored leases used by some of the largest Single Family Rental Companies; therefore, to the uneducated renter, they appear to be legitimate. Soon after moving in, these victims find out that the person who rented the property to them did not have the legal right to do so. They will try to contact the person only to be harassed, hung up on, blocked or find that the phone number no longer works. A large percentage of these people also find out later that they are also now victims of identity theft, as the person they provided all of their personal information to was a criminal with ulterior motives. Once the property owner receives confirmation that their property has been occupied by illegal occupants, their first instinct is to call the police and have them removed and/or arrested; however, unless there are obvious signs that trespassing has occurred, the authorities will refuse to assist in the removal of the unauthorized occupants. In most cases, they will refer to it as a civil matter that needs to be addressed with the eviction courts. This process can be rather difficult when the property is occupied by an unknown person whose name you do not have, and this information is required to file an eviction action in many states. Some states will allow you to file under Jane or John Doe, others do not, posing yet another challenge for the homeowner. Depending on the state and the situation, it can be a lengthy process to obtain judgment to move forward with a sheriff lockout. The challenges have been compounded by extended delays with the courts and sheriffs that have been created by the pandemic. In some states, we are seeing lockouts being scheduled months in advance. Unfortunately, this process is resulting in large losses for the property owner. Not only have you lost months of rental income, but you are spending hundreds of dollars on legal fees to obtain possession of a property that has been illegally inhabited. The Impact to the Community Unfortunately, the financial impact can be much greater than the loss of rental income and the legal fees spent to obtain possession of the property. In addition, the property owner will be required to pay
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Purchase Price vs Market Value
“Price is what you pay. Value is what you get.” — Warren Buffet By Julie Parker The booming market of residential real estate we experienced nationwide in 2021 through the first half of 2022, saw buyers purchasing homes at well over list price. The buying phenomenon of that time is now causing some waves in the appraisal industry as current valuations of those properties purchased during that time period are being requested. Many of those new homeowners are feeling the fallout of paying sales prices which exceeded the value of the property at the time of purchase. After a year+ of ownership, some homeowners are seeking appraisals or other forms of valuation of their recently purchased properties to determine value for various transactional purposes. The answer to the question, “What is my property worth?” is one that may be a bit disappointing for some. The owner’s expectation is generally that the property’s appraised value will meet or exceed the sales price previously paid. The Key Words to Note are “Price” and “Value” Expectation born without consideration of all elements at play, when forecasting the most probable result, can lead to disappointment. The failed expectation in this case is the result of regarding the accelerated sales price of the property and its actual market value at the time of the sale, as one and the same; or price=value. The reality is that during the purchase frenzy of that time, buyers were knowingly paying prices well over market value. The buyer’s willingness to do so was the result of a perfect storm of low volume, high demand, and historically low interest rates. In 2022 as interest rates began to rise, sales prices continued to increase and buyers still sought to quickly purchase out of fear that interest rates would continue to increase. A telling indicator of these noted factors at play is that realtors were educating their buyers and confirming that they were willing and able to pay an appraisal gap due to an accelerated purchase price that would be necessary to capture the sought after listed property in such a market. It became standard practice for appraisal gap clauses to be placed within purchase contracts with buyers agreeing to pay the difference between the purchase price of the property and the appraised value. It is an interesting notion that an informed buyer, who knowingly paid the appraisal gap, would now have an expectation that the current appraised value would be equal to or greater than the accelerated sales price previously paid. Especially given market trends since that time, the second half of 2022 saw sales prices decrease; while the first half of 2023 has seen most markets stabilize and some markets have had only moderate increases reported. Homeowner Expectations Today, appraisers throughout the country are dealing with the brunt of delivering current appraised value results that do not meet the expectations of these homeowners when those opinions of market value are compared to the prior purchase price paid for the property. Clients and borrowers may point to market trends, i.e., the percentage of increased values within the various markets to prove their case for a higher appraised value. Regardless of the market trend since the property’s purchase, the underlying issue is that the purchase price paid during this escalated period of sales activity did not necessarily equal actual market value at the time of sale. With that in mind, if applicable market trends were applied to the actual market value of the property at the time of sale, rather than being applied to the accelerated purchase price, the present-day market value in most cases, where significant appraisal gaps were paid at time of purchase, still would not support the prior purchase price. However, this is not to say that the property has decreased in “value”, which is typically the rebuttal from the borrower and/or client. Their frustration lies in the belief that market trends to date do not support an overall decline in the property’s market value since the time of purchase; therefore, the subject’s current appraised value has been understated as it does not support or exceed the prior purchase price. In part, this theory is correct as there has not been an overall decline in the property’s market value. However, there has not been a large enough percentage increase in market values that would raise the property’s market value to the threshold that would now support the accelerated purchase price that was previously paid. Again, the key words to note are “price” and “value.” The difference in purchase price and market value is significant enough that combined with a stalling of market trends since time of purchase, many of those buyers are still a bit underwater. Oftentimes in these instances, when an expectation of value is not met, appraisers are experiencing pushback from clients and borrowers to further analyze market trends, additional market data, etc. in hopes that the additional data will provide the support needed for the appraiser to revise the appraisal report and appraised value in a beneficial way. “Price” and “Value” are not Interchangeable It is always the appraiser’s responsibility to communicate the appraisal and its results in such a way that it can be clearly understood by the intended users, and it is no different in these instances. The appraiser would analyze additional, relevant data presented to them by the client. However, the primary point that must be made clear to the intended users, to fully understand what may appear at first glance to be an understated appraised value, are the terms and various factors that surrounded the prior purchase, and the accelerated purchase price of the property as a result of the bullish residential real estate market during that time period. The distinction that the purchase price does not always equal market value is key. An obvious indicator of that would be when you, the buyer, agree to pay an appraisal gap as part of the purchase price. And for significant appraisal gaps
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