REI INK

Understanding New Construction Investments

A Challenge Well Worth its Rewards by Andy Bates Navigating today’s market often requires a sense of dynamism. Working between flipping properties and rental holds has helped many investors maintain and grow their business, but these are not the only kinds of investments available to the savvy investor. New construction is another lucrative investment type but its distinction from an existing property comes with significant process changes for the investor. Understanding additional factors that play into a new construction investment and the best practices for them will illustrate a path to success for investors with this strategy. Building on Purpose As with any investment, before financial commitments are made, it is always advisable to thoroughly understand the undertaking at hand. Newly constructed properties serve a primary function of adding inventory to the markets in which they are built. When acquiring funding to construct new residences as investments, it’s important to consider the structure of those loans. While conventional lending can be used for the building of a new primary residence, investment financing is, by definition, commercial in its structure. The most important distinction here being that commercial loans cannot be used for primary residences. Such a use case would result in default on the loan. Instead, private funding focuses on investments, so any newly constructed residences would need to be sold or held for cashflow. Project Scope Beyond discerning their exit strategy, investors must also be aware of the scope of their upcoming project. It is one thing to build a new, one-unit or even four-unit property where a neighborhood already exists. It is quite another to consider the building of dozens or even hundreds of units. While different lenders will focus on, and provide for, projects of all scales that fit their buy-box, development, at any scale, requires an understanding of horizontals which may or may not already be in place. Horizontals are all installations which “attach” to a property or properties in an area, outside of the structures themselves. Roads, pavement, sidewalks, water and waste lines, gas and power are all examples of infrastructure that is imperative for a new build, even if they are not directly part of the cost and construction of an investment. Some lenders will only provide for new construction projects in which horizontals like these are already established. These can look like undeveloped lots in existing neighborhoods. In urban settings, “in-fill” projects are those that position new builds between existing structures in an established neighborhood. As the establishment of horizontals in areas without such infrastructure demand significantly more time, capital, planning and resources, opting instead to build on a parcel of land where horizontals are already in place can make it easier to acquire plans and permits for the build or even access financing. All in its Proper Place While the notions of obtaining approved plans and keeping up to code are not new to any experienced real estate investor, new construction comes with more groundwork in these areas. While an investor might be able to secure funding for light or even heavy rehab projects with as little as a scope of work or line-item rehab list, for new construction, plans and permits must be in place before funding can be secured and building can begin. Fortunately, even with an increase in paperwork comparative to other investment types, these documents tend to be fairly standardized across all US housing markets. Entitlement letters, zoning verification letters, and compliance reports are all examples of common documents investors can expect to work with on a new construction project. Many lenders servicing new construction investments will want to ensure they are executed by an experienced hand. In this way, it is important for the average investor to work with experienced builders and general contractors not only to secure necessary funding but also to ensure that the structure to be is sound. These professionals have verifiable credentials like references, project history and up-to-date licensing which can indicate to both lenders and municipalities that the project will be completed in accordance with code and compliance. If acquiring plans, permits, and approvals for a standard renovation takes time, then it stands to reason they might take much more time for a fresh build. Keeping on top of documentation is its own skillset and with more moving parts on a new construction comparative to other investments, it is imperative that investors keep on top of, and plan around timelines for approval. If an investor should find themselves without plans and permits in place prior to closing, all is not necessarily lost. Investors can leverage verifications on proposed plans with third party architects working within the local municipality. Additionally, investors may acquire formal confirmation of proposed plans from a state or local council where ordinances allow for these exceptions. Nothing Ventured, Nothing Gained With private lending, it’s common for construction and renovation projects to be funded under a reimbursement structure. This means that builds are planned in phases. Once a phase of work has been completed, it is reported to the lender who then sends out a third-party inspector to verify the work and materials used. With confirmation from the inspection, the lender releases funds to reimburse investors for each phase of work as it is completed. Reimbursements, alongside plans and permits, reinforce the need for investors to have a firm understanding of the scope of work for their construction investments. This includes what may impact timelines and how delays might impact the build overall, including the investors exit strategy. Opportunity for the Tactful In a housing market in need of inventory, a build-to-sell approach may seem like the obvious path for new construction investors. However, investors should be as thorough in their investigation of an exit strategy as they were when developing plans and acquiring permits. Market area indicators like housing starts, homes sales, and employment statistics are all useful metrics when considering the most favorable course of action in a given market.

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Understanding Deed Fraud

A New Approach to Protecting Your Property by Ryan Marshall In today’s world, where identity theft and cybercrime are rampant, property owners face another growing threat: deed fraud. This under-the-radar crime can leave property owners in a legal and financial battle after discovering that their property has been fraudulently transferred, mortgaged, or even sold without their knowledge. As real estate fraud becomes more sophisticated, it is crucial for property owners to understand how to protect themselves from these threats and explore both traditional title insurance and a newly developed concept for safeguarding property ownership. What is Deed Fraud? Deed fraud, also referred to as property fraud, occurs when someone illegally transfers ownership of a property without the rightful owner’s consent or knowledge. Fraudsters often target properties that are unoccupied, have no mortgage, or belong to elderly individuals who may not monitor their property records regularly. Some of the most common tactics used by fraudsters include:  »         Seller Impersonation // Criminals assume the identity of the rightful owner, sometimes claiming squatter or trespass rights, and even listing the property for sale using fake online profiles on websites like Zillow.  »         Deed Fraud // Fraudsters obtain a copy of a deed from public records, alter the Grantor/Grantee information, and re-record the deed, effectively transferring ownership to themselves or another party.  »         Mortgage Fraud // Perpetrators take out loans against the property using false credentials, often targeting properties with low loan-to-value ratios.  »         Trustee Certifications // A fraudulent notarized trust certification is presented, falsely claiming the authority to transfer or encumber the property.  »         Corporate Fraud // Fraudsters change corporate filings with the Secretary of State to assume control of an LLC or corporation, allowing them to sell or mortgage properties owned by the company. These methods leave property owners at risk of losing their home or being saddled with debts they did not incur. Reversing the damage caused by deed fraud can be a lengthy and expensive process. Traditional Title Insurance vs. A Newly Developed Concept For many property owners, traditional title insurance has long been the first line of defense against title-related issues, including fraud. However, title insurance has its limitations, particularly when it comes to post-purchase fraud, leaving significant gaps in protection. Title Insurance History and Limitations  »         Expanded Homeowner’s Title Policy // This policy was not introduced until 1998 and did not see widespread adoption by most states until 2006. It was not until 2021 that the policy became more commonly promoted, largely in response to complaints from homeowners who discovered their title insurance did not cover fraud.  »         Coverage Limitations // Even today, expanded homeowner’s title policies only cover 1-4 family unit dwellings, leaving approximately 88 million properties in the United States — including rental properties, commercial real estate, and vacant land — without any protection against title fraud.  »         Reactive Nature // Title insurance typically covers issues that occurred before the policy was issued. It addresses problems after the fact, rather than preventing fraud in real time.  »         No Continuous Monitoring // Once the policy is issued, there is no ongoing monitoring or protection in place. Title insurance does not track changes in the title or alert property owners to suspicious activity that could indicate potential fraud. A New Approach to Property Protection Recognizing the need for a proactive solution, a new concept has emerged that offers continuous monitoring and protection against fraud in real time. Unlike traditional title insurance, this innovative product is designed to prevent fraudulent activities before they can cause irreparable harm to property owners. Key features of this new concept include:  »         Proactive Fraud Prevention // This system continuously monitors public records, title activity, and other risk factors associated with your property. If any suspicious changes or fraudulent attempts are detected, the property owner is immediately alerted and action is taken to prevent unauthorized transfers or liens.  »         Comprehensive Coverage // While traditional title insurance focuses on covering 1-4 unit residential properties, this new approach expands coverage to include various types of properties, such as rental units, vacant land, and commercial real estate — filling the gap left by title insurance.  »         Real-Time Alerts and Restrictions // One key tool is the Notice to Restrict Voluntary Conveyances, a legally recognized document that prevents unauthorized transfers of ownership by requiring additional verification and approvals. This ensures fraudsters cannot easily transfer ownership of the property without detection. Why Traditional Title Insurance Falls Short While expanded title insurance offers some protection, it was not designed with modern fraud tactics in mind. Even the homeowner’s policy, which was not widely adopted until the early 2000s, was never intended to proactively guard against evolving threats like cybercrime and identity theft. Here are some critical limitations of title insurance in today’s environment:  »         Limited to Historical Issues // Title insurance primarily protects against historical defects, such as undisclosed liens or prior fraud, and offers little coverage for fraudulent activities that happen after the property has been purchased.  »         No Real-Time Protection // Once the policy is issued, there is no further protection, leaving property owners vulnerable to fraud that can occur months or years later.  »         Property Type Exclusions // With coverage limited to specific property types (1-4 family unit dwellings), millions of properties — about 88 million across the U.S. —are left without any type of protection against deed fraud. Given these limitations, property owners are increasingly seeking more comprehensive solutions to safeguard their titles against fraud in today’s evolving landscape. Addressing the Growing Threat: High-Risk Parcels Without Coverage The reality is that millions of properties in the United States are at high risk for deed fraud and remain unprotected. These properties often include second homes, rental properties, vacant land, and commercial properties—prime targets for fraudsters because they tend to go unchecked for long periods. Without adequate protection, these owners face significant financial and emotional risks if their property is targeted by fraud. As awareness of the limitations of title insurance grows, so too does the demand

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Due Diligence Solutions for Investors

Tailored Approaches for Complex Transactions by Radian Real Estate Management In today’s dynamic investor-owned real estate market, a one-size-fits-all due diligence solution no longer suffices. Gone are the days of a manual process. Sophisticated transactions demand solutions that address the unique risks and challenges of each deal type. To stay competitive, it is important to leverage a provider that can help to create a customizable approach that meets the increased demand. In fact, a recent REI INK article, “A One Click Real Estate Transaction,” highlights how leveraging technology through a diligence provider may help “free up the professionals to focus their attention on higher level decision-making rather than time-consuming and repeatable data entry.” Let’s explore how tailored due diligence solutions are helping to reshape the industry for the following:  »         Single Family Rental // May help warehouse providers manage risk while supporting their clients’ capital needs.  »         Build-to-Rent // May facilitate collaboration between various stakeholders to assess the project.  »         Rent-to-Own // May enable investors to make more informed decisions and help mitigate risks associated with contracts.  »         i-Buyer // Helps to streamline the valuation and acquisition process.  »         Residential Transaction Lending // Helps quickly identify potential red flags and manage compliance with complex underwriting requirements. As a leader in best-in-class diligence and valuations services, Radian Real Estate Management has been helping investors stay competitive through a consultative approach since the inception of the asset class. By embracing customizable due diligence solutions, stakeholders can make more informed decisions, help mitigate risks, and look to unlock new opportunities in a complex market environment.

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Maximizing Your Retirement Strategy

The Power of Self-Directed Accounts by John “Jack” Kiley, CPA, CISP I have been working with retirement accounts for a long time. As a young CPA, at the first CPA practice I worked for, I learned about self-directed retirement accounts. The firm’s basic recipe was to provide bookkeeping services for its clients’ business activities and then prepare the business and individual tax returns. As a client’s business became more profitable and cash flowed, we would layer a retirement plan into the mix, and the business would make tax deductible contributions to the plan. Effectively, the client was moving money from his ‘taxable pocket’ to his ‘tax deferred pocket.’ Many of these clients were involved in real estate in some fashion, either as developers, brokers, or investors. These clients were familiar with self-direction and were constantly asking how they could utilize these types of plans. Being the young (and stupid) guy at the firm, I was tasked with figuring out how to do this. It was at this time I became intimately familiar with self-direction. I learned very quickly that what self-direction really meant was the ability to invest in a vast array of asset classes beyond stocks and bonds. It was about this time when I also became familiar with investing in promissory notes. As an avid real estate investor myself, and being a numbers guy, I understood the financing of real estate and took an interest in it. Even back in those days, there was a dizzying array of financing products and lenders to choose from. I learned to marry promissory note investments and retirement plans. For me this was a perfect mix; and for you, it may be as well. Playing 3D Tax Chess First, the combination of your preferred investment, lending, along with self-directed retirement plans (SDIRAs) allows you to play three dimensional ‘tax’ chess. First, because SDIRAs allow for a wider spectrum of investment options, you can lend on your terms: tax deferred or tax free (Roth). Secondarily, you can also lend as you currently do in a taxable environment. This allows you to strategically lend. For instance, for opportunities that you feel have a high likelihood of success, you may choose to invest in the tax deferred or tax-free environment to maximize return. The opportunities that you might consider to be more risky or may need a little finesse, you might choose to do in a taxable environment. Careful planning is important because if you lose money in a retirement plan, you just lose. There is no tax deduction. Self-direction allows you to use your team to identify investments and perform due diligence. The custodian does not tell you to who you must use so long as they are not identified as ‘disqualified persons’ (A classification of people and entities the SDIRA cannot transact business with). This group is made up primarily of family members and you can contact your custodian for more information. This allows you to use vendors and professionals that you know and trust. Micro vs Macro Level Self-direction gives you the flexibility to invest in notes either on a micro or macro level. On a micro level, you are able to pick and choose debtors you wish to lend to and require whatever information you feel is relevant in making that decision. You control all the inputs including the amount, term, interest rate, and form of collateral. You are able to tailor these to give you the level of comfort you feel is necessary. This also gives you the ability to build your portfolio as you see fit. On a macro level, you are able to partner your capital alongside other capital to participate in larger loans or pools of loans. This allows you to tap into the expertise of others and gain access to transactions that you may not otherwise be able to reach. In fact, many of the large lenders in our field pool capital in this fashion and a significant percentage of that comes from retirement plans. Involvement in some of these investments may require you to certify that you have a certain level of assets to participate in the transaction (accredited investor status) so be prepared to provide this data. Lastly, there are a number of retirement plan options available to you. For individuals, there are Traditional and Roth IRAs. Most people are familiar with these. Traditional IRA earnings are tax deferred and Roth IRA earnings are tax free after a seasoning period. For business owners, there are a couple other plan options; SEPs, SIMPLE IRAs and 401k plans, among others. Many of these plans may have Roth components which gives you even greater flexibility. These plans also have higher contribution limits allowing for an accelerated ability to move capital from your taxable ‘bucket’ to your tax deferred or tax free ‘bucket.’ Self-directed retirement accounts give you the opportunity to use your expertise and knowledge to invest in assets that you may feel more comfortable with than marketable securities or at a minimum, not put all your eggs in one basket. Through careful thought and planning you are able to build the retirement nest egg you desire.

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Changes to California HOBR

The “Big” Guys, “Little” Guys, and Those In Between by T. Robert Finlay, Esq. During the height of the Financial Crisis, California passed its landmark legislation intended to help homeowners facing foreclosure — the Home Owner Bill of Rights (HOBR). In short, HOBR required loan servicers to follow certain procedures when putting defaulted borrowers on notice of foreclosure prevention alternatives and prevented servicers from “dual tracking,” i.e., simultaneously proceeding with foreclosure while the homeowner is being reviewed for a loan modification. The law was limited to owner-occupied consumer loans in first position (In response to COVID’s impact on landlords, California’s Legislature amended HOBR in 2020, extending its application to certain tenant occupied properties. Those extensions have since expired). HOBR intended to put loan servicers into two buckets for compliance purposes — the “Big Guys” who annually handle 175 or more annual qualifying foreclosures and certain “Little Guys” who do not meet the 175 threshold. While servicers in both buckets are prohibited from dual tracking, the more detailed and onerous HOBR provisions only applied to the Big Guys, including, but, not limited to:  »         Civil Code § 2923.7, requiring a Single Point of Contact; and  »         Civil Code § 2923.6, mandating certain notices and procedures when the borrowersubmits a complete loan modification. The Little Guys “exception” to the more detailed requirements was limited in Civil Code § 2924.15 to: (A) A depository institution chartered under state or federal line law, a person licensed pursuant to Division 9 (commencing with 3 Section 22000) or Division 20 (commencing with Section 50000) of the Financial Code, or a person licensed pursuant to Part 1 (commencing with Section 10000) of Division 4 of the Business 6 and Professions Code, that, during its immediately preceding annual reporting period, as established with its primary regulator, foreclosed on 175 or fewer residential real properties, containing no more than four dwelling units, that are located in California. But, what if you are a retired couple who occasionally invests in Trust Deeds, but are not a “depository institution” or someone “licensed” by the Financial or Business and Professions Codes? The answer — small investors must comply with the more detailed and onerous HOBR provisions intended by the Legislature to only apply to the Big Guys doing over 175 annual foreclosures! Hard to believe, but an investor who buys one loan a year, must comply with the same HOBR provisions as the largest loan servicers in the country. Since HOBR’s enactment in 2013, the private lending industry has looked for a solution to this obvious unintended oversight by the California Legislature. Unfortunately, for years, there was no appetite in Sacramento to re-open the heated discussions over HOBR. Fortunately, enough time has finally passed, which allowed the California Mortgage Association (“CMA”) to sponsor Senate Bill 1146, which, among other things, puts a small investor “that makes and services seven or fewer loans” a year in the same compliance bucket as loan servicers who conduct less than 175 annual foreclosures. SB 1146 recently passed both houses and is waiting for Governor Newsom’s signature. If signed, the “Really Little Guys” will still have to comply with HOBR; but, starting on January 1, 2025, only its less detailed provisions. Note — The anticipated changes to HOBR do not exempt investors who make and service seven or fewer loans a year. These investors must still comply with HOBR. The new law just reduces the HOBR provisions that need to be complied with. If you have any questions about what provisions must be complied with or need help complying with HOBR, please feel free to reach out to Robert Finlay at rfinlay@wrightlegal.net.

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Texas House Committee on Business & Industry

Testimony Provided by: David Howard, National Rental Home Council by David Howard On September 12, as chief executive officer of the National Rental Home Council, I testified at a hearing of the Texas state legislature examining the impact of “institutional owners” on housing affordability in the state. I testified, in part, “Fundamentally, the expanding role of large {SFR} owners in the housing market is a direct response to the growing demand for new and innovative housing types that meet the diverse needs of today’s housing consumers, a response that is market driven and supported with private capital and private investment.” Here are some key excerpts of my testimony: “To help emphasize the important role the single-family rental home market plays in today’s housing economy, I’d like to talk briefly today about three things: context, affordability, and supply. First, it’s important to understand the context regarding the composition of the single-family rental housing market. Single-family rental homes account for approximately 14% of all the housing in the United States and roughly 40% of all the rental housing. Of the single-family rental homes in the country, the vast majority, somewhere between 85% and 90%, are owned by individuals and small local businesses. Large providers of single-family rental homes, so called “institutional owners,” account for just 3% of the market. More broadly, of all the housing in the United States, large providers of single-family rental homes own just 0.4%. To put this in perspective, this means 99.6% of the housing in this country is owned by someone other than a large provider. Finally, in terms of context, single-family rental homes play a vital role in the new home construction market, where between 10% and 15% of all new homes nationally are built expressly for the purpose of renting. In Texas, there are currently about 27,500 single-family rental homes under construction, compared to approximately 18,000 at this time last year. This investment in new home construction is a win for residents, a win for communities, and a win in the critical effort to build more housing. Turning now to the issue of housing affordability and the impact of large providers of single-family rental homes on pricing: simply stated, it’s hard to make the case that large owners of single-family rental homes have any impact on the cost of housing. There is ample research and data showing the connection between “institutional activity” and home prices just doesn’t exist. First, large owners aren’t buying with the volume and velocity that would impact local home prices; and it’s important to realize, large owners are not just buyers of homes, they are sellers as well. Second, home prices increase for a number of different reasons, most of which have nothing to do with the activities of single-family rental homeowners, large or small. Third, a 2021 market study by the National Association of Realtors found there was zero difference in the price paid by “institutions” than any other home buyer. And in a 2022 report, Freddie Mac found, “institutions heavily target under-market-value homes that need more repair than what most first-time homebuyers are willing to invest. Lastly, the real challenge facing the housing market today is lack of supply, both here in Texas and across the country, a situation particularly dire at the “affordable” end of the market. As an indication: in the 1970s, the United States routinely built over 400,000 starter homes every year. In 2020, we built 65,000. A recent report by Realtor.com estimated the United States needs 7.1 million new units of housing. We’re simply not building enough or investing enough to keep pace with demand. And the imbalance between supply and demand encompasses housing of all types — owner-occupied, multifamily, and single-family rental. Thank you again for allowing me to participate in today’s hearing.”

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