The End of Summer

Stephon Martin

August is coming to a close and although Summer isn’t officially over until September 23^rd, the end of August has an unofficial feel of transition. School will soon have begun for all children in the United States and the country will attempt to push forward out of the shadow of COVID-19. Some areas will forge ahead more successfully than others, but an attempt will be made by all. The beginning of September means that the holiday season is just around the corner. With the impending change of the season, how will the real estate market be affected?

Residential Prime Time

The first few months of the school year, be they August or September, typically trigger a time of reflection for homeowners. The start of the school year is one of the many ways that people mark the passage of time and the beginning of yet another academic year frequently prompts many homeowners to put their houses on the market. The current seller’s market should only serve to further motivate more homeowners to try to capitalize before prices drop. As Bob Vila.com points out, a few select markets have already begun the decline or, in some cases, never quite started the climb. September, October and November will be true indicators of how close to a new normal we really are, both socially and in the residential real estate market.

Commercial Watershed Moment

The current commercial real estate press is praising the bustling commercial real estate market, fueled primarily by multifamily acquisitions and refinances. This praise, however, is a bit shortsighted, as it fails to address the woes of the office market and the real issues of use and change in the retail market. With the economy so tenuous, any good news is great to hear, but commercial real estate has some real questions on the horizon. It seems that most participants in the commercial real estate market are taking a “wait and see” approach, while continuing to invest in the few small pockets where retail and office are making some headway.

Well, that is my quick take on today’s market. I couldn’t let August pass without giving a recap. Please feel free to put your comments below. 

The Ultimate Guide to Picking a New Tenant Referencing Provider

Hello TRET Readers/Followers:

Want to know more about ways to check references for residential tenants? Please read the article below from Just Move In.

The Ultimate Guide to Picking a New Tenant Referencing Provider

Improvement Options You Should Consider to Increase the Value of Your Home

Please enjoy this article from guest author Suzie Wilson of Happierhome.net

Unless you plan to sell your house “as-is,” when you’re ready to list your home, you have a lot of work to do. While there are some benefits of keeping the original fixtures and features of a home, staying up to date with the latest home trends is crucial in selling as quickly as possible. The good news is you can get the job done with some simple upgrades. Below are a few that you need to consider.

Stick With Properties—For Now

Stephon Martin

It is an interesting time in real estate—we stand on the precipice of the ending of a national foreclosure moratorium, interest rates are extremely low, the housing market is red-hot, and the commercial market is still unpredictable. What should a real estate investor do now? While there are a number of options that can lead to success, there is one caution—stay away from whole loans.

Cautioning against whole loans almost goes against the very nature of this blog, which promotes all profitable methods of real estate investment. Whole loan trading and valuation is the very reason why I started this blog and whole loan investing can be a great way to find hidden value real estate. That said, the following are various reasons why whole loan investment is not the best strategy in the current market:

Foreclosures and the Moratorium

Stephon Martin

The Biden administration has extended the COVID-19 moratorium on foreclosures to July 31, 2021. Totally avoiding the policy and ideological discussions that could be had about such a decision, one thing is apparent—the additional month extension will increase the backlog of foreclosure and eviction cases that courts around the country will face once this moratorium has ended. Absent any legislative changes, the implementation of creative government programs mitigating distressed loans or both, foreclosure filings, executed foreclosure judgments and foreclosure-related evictions are all set to see an uptick over the next year.

An increase in residential foreclosures and evictions is certainly bad news for affected homeowners and tenants, who will have to find new living arrangements, undergo costly moves in short timeframes, uproot their lifestyles and, in some instances, face long term financial effects. Increasing foreclosures will also serve as a market correction in the real estate market, which is currently driven by inventory scarcity. Amidst the market change and its social implications, many real estate investors can be left wondering which strategy to employ. The answer is simple—any or all of them.

Calculating the Cost of Delay

Stephon Martin

Happy Memorial Day to all and a heartfelt thank you to all those who serve and have served our country. Your sacrifices are truly appreciated by TRET.

Let us quickly discuss, on this last day of May, the value of Delay. Late payments, be they intentional or not, are costly, no matter how late they are. Time has a calculable value and delayed payments provide a monetary benefit to the payee and punish the lender or vendor. This value is easily observed in the world of retail, where giants like Wal-Mart, not only connect the speed with which they pay their vendors to the success of the products in their stores, but also fine retailers for late shipments. In retail, late shipments equate to lost sales. In real estate, late payments lead to increased opportunity costs and decreased value of money.

Why Most People Don't Get Rich In Real Estate

Stephon Martin

Initially, I intended this post to be a continuation of my prior post on how to get rich in real estate. I was going to address the barriers to entry that most people confront when attempting to begin a career in real estate and offer some suggestions on how to get around them. I am still going to address some of those barriers, but upon further reflection, I think that there is a common theme amongst most of the reasons why most people do not succeed in real estate when they wish to do so—motivation.

This may seem harsh, but please let me qualify my statement by saying that it is not easy to maintain consistent motivation. Having sufficient motivation to push through real estate losses, market downturns, bankruptcies or even years of unfruitful prospecting takes inner strength. During down times and after particularly difficult lessons in real estate, it can often feel like the experience was a sign to quit or move in a different direction. It takes true motivation, self-confidence and some self-delusion to look at a negative real estate experience, learn from the experience and continue on. This motivation is intrinsic and it only comes from a goal-driven approach to make it in a real estate. Quitting can never be an option. To that end, I want to share the following link to “The Strangest Secret” by Earl Nightingale, in the hopes that it is helpful to someone.

The Strangest Secret: Earl Nightingale

How To Get Rich In Real Estate: The Proven Method

Stephon Martin

Welcome the first post of the New Year! A number of years ago I wanted to start a business purchasing residential mortgages in the secondary market. This was a significant time after the Great Recession of 2009 and although the smoked had cleared from that downturn, enthusiasm in the mortgage secondary market had not yet fully recovered. I knew that if I were to market my business idea, which I was positive was sound, I would have to not only formally document it in a presentation and a business plan, but would also have to show actual positive implementation results. I realized that I would have to raise a small amount of capital to implement this strategy on a small scale, so that I could present it to larger investors upon its successful completion.

The End of 2020: Now What?

2020 has been a life-changing year for everyone, literally everyone. From the global pandemic, to the fluctuating economy, not to mention the seismic shift in the perception of "going to work," it is safe to say that the world is different place than it was 12 months ago. Now what?

Every year Bloomberg Business Week puts out its "Bloomberg 50"--a list of 50 individuals that have made their mark during the prior year. Although this year's list contains a number of impressive men and women who were able to quickly mobilize and make moving, positive contributions during this tumultuous year, it is notable that not one member of this list was mentioned for contributions to the real estate market. In fact, there are many executives on the list that are touted for reducing the size and/or the footprint of their companies, which in many instances includes real estate divestment. Furthermore, Blackrock, a private equity that is well know for its real estate investments, has made the list, not for real estate, but for its renegotiation of national debts in South America.

Change Is A Coming: How Current Economic Conditions Should Affect Real Estate Investment

Many economist and market pundits are predicting a market downturn, beginning some time in 2019 or 2020. All of the indicators of an overheated boom seem to be present--increasing margin debt, decreasing dividends, stock market price inflation and increased levels of corporate debt. Essentially, low interest rates have made credit more accessible. As a result, businesses are using credit to buy back some of their outstanding stock. In response to the relative decrease in availability of stock, stock market prices are rising, increasing household wealth across the nation. Spurred on in part by technological development, the economy seems to be booming at present, but it is important to note that mechanism that is fueling this increase in wealth is debt.

Property Maintenance Laws and Lending

The fight against property blight is a battle that has been waged for many decades. Some areas of the nation, have struggled with abandoned properties and even abandoned neighborhoods since the shrinking of the nation’s industrial sector beginning in the 1970’s. Other areas became intimately acquainted with blight as a result of the wave of foreclosures that took place at the end of the first decade of the century. However it may have arrived, the real estate finance market is certainly now affected by the palpable concern of property blight and has had to adjust to attempts to mitigate its damaging effects. 

Why Worry About Blight?

To be clear, blight is a real issue that can lead to a number of undesirable effects. Abandoned properties that are poorly maintained cause safety issues. Poorly maintained building systems and structure will eventually fail at some point, causing unsafe buildings. Overgrown landscaping leads to health concerns. These health and safety concerns become a problem for neighboring properties, as neighbors must then focus on how to curb the spread of these issues onto their properties. More generally, well-maintained properties inspire a pride of ownership that carries over to neighboring property owners. The opposite is also true—abandoned and poorly maintained properties drain the neighborhood of pride of ownership and lead to less diligent maintenance throughout the neighborhood.

Monte Carlo Mortgages

In his book Mortgage Wars, former CFO of Fannie Mae, Timothy Howard explains how Fannie's realization that mortgages behave like bonds with embedded call options revolutionized its ability to value its portfolio and manage risk. Prior to this change in thinking, Fannie Mae's methods for reserving capital were consistently shown to be inadequate. Today, the valuation of mortgages and mortgage-related securities as bonds with embedded calls is nothing new.

A call option is a type of derivative, which conveys the right (but not the obligation) to purchase another financial instrument (the underlying asset) for a specified price (the strike price) at a specified time (the expiration date). Purchasing a call option offers the right to purchase the underlying asset and selling a call options impose the obligation of delivering the underlying asset at the strike price on the execution date.

Mortgages are freely refinanceable at any point. In this way, they function as bonds in which the payments from the homeowner serve as the coupon payment and the ability to refinance serves as a call option sold to the homeowner by the mortgage holder. Typically the refinance rates increase as interest rates decrease. Although mortgage prepayment penalties are included in mortgages to discourage refinancing, a large enough drop in interest rates can make refinancing worthwhile to a property owner in spite of the prepayment penalty. For mortgage and MBS investors, prepayments are undesirable. Given that most mortgage investors look to invest anywhere between 5 and 30 years, an early decline in interest rates can leave many investors with cash from prepayments that must be invested in a market offering lower interests rates. This undesirable situation is the double-edged sword of prepayment risk for mortgages.

Why Historical Beta Does Not Always Work For Real Estate

Real estate investment is typically viewed as an essential part of any balanced portfolio. Its immutable characteristics, such as its relatively long pricing cycles and its above average returns, cause real estate to be seen as a stable asset. On the other hand, due to its sensitivity to interest rates, its lack of liquidity at the property level and its longer periods appreciation, exposure to the real estate can also serve as an inflationary hedge. Although real estate exposure may be purchased for any number of reasons, the risk profile of real estate assets is of interest to most, if not all, real estate investors.

The ways in which the risk profile of real estate has been expressed vary from the informal to the highly computational. On the most informal end of the spectrum, owner-operators of property frequently concern themselves with the tax consequences and appreciation of the property, content to face changes in the market or externalities, as they come. On the opposite end of the spectrum are portfolio managers and fixed-income investors, who seek quantifiable means to express the volatility of real estate securities. One such attempt at quantifying the volatility of real estate and its related securities is through the use of real estate's historical beta.

From Property to Liens and Back

In light of my previous post on timing the market, I thought that I would follow up with a post on one type of investment strategy that takes advantage of the cyclical nature of real estate.

There are a number of ways to invest in real estate. From property acquisition to shorting housing starts to buying equity in a REIT, each type of investment in the real estate market comes with its own idiosyncrasies, which must be understood in order to ensure maximum profitability. Specialization in one category or subcategory is often expected and praised among real estate practitioners and investors. The various entry points into real estate, however, allow for diversification. Purchasing property, notes or securitized bonds provide direct access to the real estate market, while liens, nonperforming notes and real estate derivatives can serve to counteract real estate defaults, if properly purchased. Although, given the change in the regulatory climate for derivatives, real estate derivatives have become more theoretical than piratical.

Since the real estate market has some many points of entry, one can balance a real estate portfolio by investing in different asset classes, depending on the performance of the market at any given time. In this way, an investor can capitalize on the cyclical nature of real estate. One such way to diversify is to purchase property for appreciation and purchase liens and nonperforming notes as the market declines.

Buy Low, Sell High

I am always amazed at how the real estate market seems to demonstrate a certain level of fervor during the upswings and panic during the downturns. Although the magnitude and length of each particular cycle may vary, the cyclical nature of real estate is one of its fundamental traits.  Given the illiquidity of property, however, real estate cycles typically take place over a number of years. It has been my experience that an entire real estate cycle can last 5-10 years. Given this timeframe, there is usually sufficient opportunity to prepare to take advantage of the idiosyncrasies of each section of the real estate curve.

 The old stock market adage: "buy low, sell high" can serve as a strong guiding principal when creating a real estate strategy that will yield success throughout the real estate cycle. Almost contrite in its simplicity as it applies to equities, "buy low, sell high" is a great way to describe the recommended counter-cyclical behavior of a real estate investor. Buying low essentially means that purchases should be made in a down market and sales should be made in an up market. The challenge with counter-cyclical investment however, is that it goes against market conditions. Buying in a down market can be challenging, as that is when lenders tend to be wary of additional exposure to declining price and credit becomes scarce. It is, therefore, important to have capital available for purchases in down markets. Solid valuation is also key in a down market, as purchasing too early can result in acquiring an asset at a price point at which the asset will take a substantial amount of time to recover through appreciation. The fear of overpaying, however, should not paralyze investors into inaction, but should be seen as requiring a higher level of diligence and discipline. Opportunities are generally present in the down market, but must be scrutinized.