Showing posts with label real estate industry. Show all posts
Showing posts with label real estate industry. Show all posts

Wednesday, July 14, 2021

Press ‘Home’ — Selling Properties With Smart Tech

 Image by Unsplash

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

There are many advantages to home automation: ease of use, better accessibility, and let’s face it — there’s something cool about a fireplace that starts up when you clap. What you may not have foreseen, however, are the benefits that technology provides when selling a property.

The Role of Tech

 In almost all areas of life, it’s clear that the pandemic has increased our reliance on tech. This is no less true in the housing market, where the need to actually step inside a property has been somewhat reduced by the use of 3D walkthroughs, video-chat tours, virtual open houses, and Zoom realtor consultations. This is good news for prospective sellers as, in the wake of COVID, housing sales have bounced back to levels unseen since pre-2008. If you are looking to sell your property, physical limitations need not slow you down.

Tuesday, December 29, 2020

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.

Sunday, August 16, 2020

Lesson From the Pandemic For Residential Landlords

The effects of Covid-19 on the residential rental market are apparent—many jurisdictions have enacted rent freezes, landlord/tenant courts have been shut down and moratorium on evictions and foreclosures have been set. Moreover, the accompanying downturn in the economy has left many without the ability to pay rent on time, if at all.

Considered rationally, the need for all of the social safety nets put in place for renters is obvious. The only way to truly survive a global disaster is to band together and implement a series of solutions. Radical measures had to be taken to mitigate the global pandemic. “We’re all in this together,” is not just a motto, it’s a reality. As a society, we are tasked with taking care of our most vulnerable populations, because the repercussions of not doing so are far more expensive than the costs of their protection. In this instance in particular, increased homelessness and/or a wave of relocations due to a rise in home displacement would only serve to exacerbate infection rates around the nation. That said, here are some clear lessons that residential landlords can learn in the wake of this global event.

Friday, June 26, 2020

Real Estate in the Time of Pandemic

Photo by CDC

With our country beginning to find its way to a new normal at the end of months of quarantine, we in the real estate market are all left with one nagging question—What should we expect from here? 

Like most people, I do not have definitive answer. If you are over the age of thirteen, however, this pandemic is certainly not the first market disruption that you have experienced and with each such occurrence, we all learn some valuable lessons about the real estate industry. With that said, here are a couple of lessons that we can learn from this particular time of change: 

Friday, June 12, 2020

Social Justice Real Estate


I try my best on this blog to focus on the issues effecting the real estate market and offer a perspective uninfluenced by political factors. To the extent that social factors effect the real estate market, I am happy to address them, but I work diligently to ensure that this blog does not serve the dual purpose of promoting any particular political ideology. With that said, we are all contextual creatures and I, as an African-American male, cannot ignore the current outcry regarding police brutality against my fellow brothers and sisters.

Tuesday, April 28, 2020

Back in the Saddle Again

Hello Readers/Subscribers of the Real Estate Think Tank,

I once read that it's not how many times that you fall off the horse, but how many times you get back on. With that said, I want to announce that I am back on "the horse" and will once again begin to deliver to you once again real estate content from an industry-insider's perspective. 
I have been blessed to have had the opportunity to try my hand at a few occupations and have had success in a couple of careers, but one thing remains consistent--no matter how far I try to stray, real estate is my calling. That said, I am going to begin to deliver content on a regular basis. In doing so, I will try my best to both be more technical, as well as more topical and will look to strike a balance between the two. 

It's great to be back at the Real Estate Think Tank and like a pair of well-worn jeans, it just feels right!

Yours Truly,

Stephon Martin

Wednesday, August 8, 2018

The Real Estate Sales Game (Part 2)

In Part 1 of this post, three aspects of real estate sales were addressed--lead generation, asset valuation, asset management. These real estate sales characteristics require a specific approach when applied to real estate sales. In this post, the remaining two aspects of real estate sales will be discussed--marketing and customer relations. These aspects of sales are more uniform across all sales profession, both in and out of the real estate industry.

As a reminder, the term real estate salesperson includes all real estate professionals that spend a significant portion of their time selling real estate assets, including property salespeople, real estate capital markets sales professionals and commercial and residential loan officers. 

Monday, August 6, 2018

The Real Estate Sales Game (Part 1)

Interestingly, I have over 10 years of experience as a real estate salesperson and attorney and have yet to write a post on the mechanisms of real estate sales. An understanding of real estate sales can be useful in informing the perspective of a real estate investor. Real estate salespeople have an intimate understanding of market activity, market trends and asset valuation that can prove valuable to all real estate investors.

Friday, July 27, 2018

How To Approach A Defaulting Second Mortgage


Default happens, hopefully not often, but it is a fact of lending. Upon default, however, a holder of a second mortgage must find an objective, value-driven manner in which to evaluate its options. Unfortunately, in many instances second position lienholders opt for one of two extreme approaches—accepting a nominal amount in exchange for the release of the lien or demanding an unreasonably high sum for satisfaction of the lien. Both approaches are harmful for different reasons. Despite such prevalent behavior, with proper management, a defaulting second mortgage can provide a lienholder with a number of options.

Monday, July 23, 2018

Real Estate Asset Managers


In the real estate industry, there are many different professions, each with its unique role. I have focused on different real estate professions in the past on this site, so let us take a look at more obscure and lesser known profession--the Real Estate Asset Manager.

Role of a Real Estate Asset Manager

Although the title Asset Manager has multiple meanings in the world of finance, the Real Estate Asset Manager has a specific task—to manage properties resulting from mortgage default or property acquisition on behalf of a real estate investor, whole loan investor or mortgage servicer. Typically, real estate asset managers maintain a network of vendors, such as contractors, real estate brokers, real estate marketing companies and appraisers in order to maintain, market and sell properties under their management. Resultantly, much of the role of the Real Estate Asset Manager consists of vendor management.

Most real estate asset managers work with mortgage servicers through either a client or a subsidiary relationship. For example, Altisource, the nation’s largest real estate asset manager, is an independent but related company to Ocwen Loan Servicing, one of the nation's largest mortgage servicers, whereas SingleSource, another well-known real estate asset manager, is a wholly independent company that is hired by some of the largest loan servicers. Given the size of the whole loan portfolios of the larger mortgage servicers, many find hiring a real estate asset manager more cost effective than building and managing property vendor networks and tracking sales activity.

Sunday, January 22, 2017

In the Weeds: How a Multidisciplinary Approach to Real Estate Can Lead to Increased Success

I once had a conversation with a coworker in which I expressed my frustration regarding the siloed view of real estate that many real estate professionals seem to employ as a matter of course. I complained that so few real estate professionals truly attempted to view real estate as a multifaceted asset and instead cared only to focus on their specialization within the industry. I wondered out loud how productive the industry could truly be if, in addition to their own professional perspectives, appraisers attempted to see the industry a little more like attorneys and attorneys tried to orient themselves to view the market like investors and investors like Relators, etc. 

My coworker listened politely until I was finished and wisely stated that the reason such cross-pollination of perspectives was not present in the real estate industry was that everyone was too “in the weeds” in their various roles and on their various projects to even attempt to take such a view. It was at that moment that I realized that I realized that my coworker had accurately described a condition that plagues much of the real estate industry—myopia. Indeed, many real estate professionals become so great at their specialization that cannot see the forest for trees or better yet, the weeds. 

Thursday, September 8, 2016

My How Local Lending Has Changed!

Today's banks are unabashedly international businesses which thrive on providing services and taking advantage of opportunities throughout the world. Long gone are the days of the local Savings and Loan as the provider of the community's mortgage needs. Instead, behemoths of consolidations dominate today's lending scene, thriving off of large economies of scale that make any potentially smaller competitors shutter. This change in the role of banking in the community, although the largely the product of intentional moves by the banking industry and Congress, is not without its effects on the real estate industry, particularly the residential market.

In order to explain the effect of big banks on the residential real estate market, one must understand the role of local banks prior to the expansion and consolidation of banks that led to the current situation. Until the 1980's, US mortgage lending was dominated by small local banks and Savings and Loan Associations (S&L's), local banking entities that engaged in lending and offering savings deposit accounts. Initially, S&L's were heavily regulated and restricted from offering consumer loans and investing deposits in most of the investment vehicles available in the market. The Savings and Loan model relied on a favorable treatment by the Federal Reserve to allow for an increased spread between the rate charged on mortgage lending and the rate offered on deposit accounts. S&L's also frequently managed underwriting risk with local market knowledge.

Friday, January 29, 2016

Same Mechanism, Different Crisis

I recently read William Seidman's book Full Faith and Credit, which contains a detailed explanation of the S&L crash of the early 1990's that was spurred on by a crash of the US commercial real estate market. William Seidman was head of the FDIC at the time of the crash. A day after I finished the book, I walked by my bookshelf and noticed the book Bull By Its Horns, by Shelia Bair, the chairman of the FDIC during the 2007/2008 financial crisis, when it hit me--both publications are the same book written nearly 20 years apart. Although each of the authors have their individual differences, they are both similar in that they were Republican chairmen (or is the term chairpeople?), serving during Republican presidencies, who presided over the fallout of a banking crisis that resulted in the largescale nationalization of private assets and companies.

The political affiliation of both former heads of the FDIC is tangential to my point, however, I mention it to make two observations. The first observation is that both Mr. Seidman and Ms. Bair are linked by political party. The second is that the economic climate forced them to participate in the goverment takeover of private companies and their assets, an idea that is antithetical to most Republican ideology.

Although one of the chief duties of the FDIC is to close failing institutions and liquidate their assets, under most normal economic circumstances, this duty of the FDIC is either carried out infrequently or confined to a certain sector of the market. Both the S&L crisis of early 1990's and the Great Recession of the late first decade 2000's, however, forced the FDIC and other government agencies to either take ownership an stake or fully national financial institutions in a large, systemic manner.

Friday, January 30, 2015

Second Mortgages: Why They Are Less Prevalent In Commercial Real Estate Than In Residential Real Estate

Early in my whole loan trading career, an investor once offered to fund a partnership that would purchase second position liens, also known as second mortgages, secured by commercial real estate. The investor promised to pledge a substantial amount of capital, if I was able to assemble a portfolio of target assets. Understanding the risk/reward profile of such an investment and desiring to deliver for what seemed to be a potential source of new business, I quickly began to work on finding commercial seconds to underwrite and select. After a few days on the phone with a number of commercial lenders, real estate debt funds and large financial institutions, I began to realize that commercial real estate second mortgages were not easy to find. Finally, after a few weeks of searching, I informed the investor that I was unable to find any asset worth purchasing that met his mandate.

Nearly ten years later, I now understand why the second mortgage, an established method of financing in the world of residential finance, is so infrequently used in commercial real estate. To state it plainly, the property-income focus of commercial real estate, makes commercial seconds more of a liability than an asset. It is this income focus that leads most commercial lenders to emphasize property performance over the qualifications of the borrower. As a result, most commercial financing is offered with no recourse to the buyer upon default, giving the lender as much control over a distressed asset as possible and incentivizing the owner of a distressed property to “walk away” when there are no more options. In order to maintain as much control over the property as possible, most commercial real estate lenders will insist that they be on the only creditor of the property and that the property be structured in such a way that it is remote from the bankruptcy of the borrower. These goals are typically accomplished by establishing a holding entity for the property to be financed, placing the borrower in the equity position of the entity and making the lender a creditor of the entity, secured by its largest asset.

Saturday, January 24, 2015

Who Should Value the Property: BPO's Versus Appraisals

Appraisers and brokers are frequently considered integral components of a real estate transaction. Their roles are clearly defined in residential real estate, however, in commercial real estate, both professions frequently cross into a number disciplines. It isn’t uncommon for a commercial real estate broker to manage a property, arrange financing, market mortgage notes and even raise funds. Commercial appraisers are often asked to inspect buildings, estimate repair costs, estimate the value of construction materials and determine replacement costs. Brokers not only procure parties and assist in the negotiations of transactions, they are also frequently called on to value properties from a number of perspectives.

In light of the various demands on both the real estate broker and appraiser, there may be some questions as to the differences in the valuation reports that each professional issues. It has been my experience that a broker price opinion (BPO) and a property appraisal each serve different, but useful purposes. A broker price opinion typically reflects the value for which a property will generate either a successful lease or sale. The opinion can also suggest a value at which the property will generate substantial interest on the market. An appraisal, however, is typically useful as a justification of a given price, as may arise under a purchase contract, after an assessment or upon any other instance of valuation. Better stated, a broker price opinion can be seen as a forward looking valuation and the appraisal can be seen as a justification or backward looking valuation.

Tuesday, August 30, 2011

Lender’s Fees: How Should One Account For Them?


Lender’s fees are a fact of life in real estate acquisitions. I was recently reading a chapter in a real estate handbook that outlined the justifications of a number fees commonly associated with mortgage origination and it offered a number of options for reducing their amounts. The relative negotiability of each lender fee, however, depends greatly on the lender, the credit worthiness of the borrower, the size of the asset, the size of the down-payment and market conditions. Generally, the stronger the buyer, the larger the asset and the larger the down-payment, the more negotiable lender’s fees are. Below is a discussion of some of the most common lender fees and how to account for them.

Friday, August 5, 2011

Residential Mortgage Backed Securities: How They're Supposed To Work

Residential Mortgage Backed Securities (RMBS) are the fuel that powers our country's mortgage market. Their role in mortgage lending is not complicated, despite the fact that accurately pricing them requires in-depth knowledge of stochastic processes, matrix math, as well as a solid understanding of partial differential equations. I recently found a great article on-line by American University's Peter Chinloy that explains the how RMBS functions and the many of the assumptions that undergird them.
The long and short of it is that RMBS expands the lending capacity of financial institutions by allowing them to sell the home loans that they originate to purchasers on the secondary market to other institutions, exchanging the cash flow from the loans for cash for their balance sheets. The purchasers of these loans then package them and create investment vehicles or conduits. Investors are then offered an opportunity to participate in the cash flows that comes from the payment of these loans through the purchase of bonds issued on behalf of a conduit. These bonds are categorized as RMBS. They offer the investor exposure to the returns and activity of the housing market without the idiosyncrasies of property ownership or the capital  and labor requirements of lending. Moreover, a great deal of investment grade RMBS is guaranteed and can be insured. Add in the historically low home loan default rates with the lower capital reserve requirements of for insurance companies holding RMBS and it seems like a solid investment.
By now, the story of RMBS and its function has been told in many different places since the beginning of the economic downturn, so I harbor no delusion that what I have written thus far is not already widely understood. Chinloy's article, though written 16 years ago, offers a refreshing explanation of the purpose of each component of the mortgage lending system. It also illustrates the mathematical assumptions of lending behavior, important variables and basic RMBS pricing that can be easily used in Excel.
Chinloy describes the differences in private and agency RMBS that were once key to residential loan securitization. Originally, GNMA or agency RMBS was the outlet for borrowers that had less capital or lower credit scores than was required of conventional loans. Loans that fell under the purview of GNMA, known as FHA, VA or FmHA loans, were not only insured by FHA, VA or FmHA, but they also had default premiums priced into the mortgage payment. GNMA assumed  that the lower access to credit and/or capital typical of the borrowers of these loans would sever to lessen the frequency of prepayment through early payoff or refinance. Prepayment is generally undesirable to the bond holders of RMBS products, because it lowers the interest rate carry of each prepaid mortgage, reducing the amount of cash flow from that note and thus reducing the cash flow to the bond holder. The insurance premiums built into the loans covered prepayment due to default and the entire system was guaranteed with government credit. The added risk of the borrowers of an agency loan was therefore offset by the government's guarantee and the bond holder was generally assured that loan prepayment would be low.
Conventional mortgages, on the other hand required higher down-payments and were typically given by borrowers that had more access to capital (let's remember the borrowers give mortgages and banks give loans). Prepayment risk is generally higher via early payoffs or refinances, especially as interest rates tended downward. Fannie Mae and Freddie Mac, the largest purchasers of conventional mortgages, insured all mortgage collateral and the payments on their RMBS issues, in order to reduce this risk. The money from this insurance was both built into the price of the RMBS, but was also guaranteed by both organizations' access to a $2.5 billion credit line from the government. Principal Mortgage Insurance (PMI) was also employed in cases where the borrower's loan-to-value, LTV, exceeded 80%, making the loan more of a risk for default. PMI, however, only covered the difference between market value and mortgage value.
One of the most ironic aspects of the article is its discussion of private RMBS securitization, which it describes as a highly risky and generally below investment grade for a number of reasons. We know that this view of private securitization was largely ignored during the real estate bubble and that not only did private RMBS overtake the RMBS market, but also the resultant demand for mortgage notes led to the replacement of PMI. This practice traded insurance for increased exposure to risk from the same asset. Understanding the function of PMI, default rates and down payment requirements from the perspective of RMBS issuances, allows one to see why the once widespread practice of "piggyback loans" and "no money down" financing was a recipe for disaster. Not only did such lending practices dilute the relationship of the borrower to the property, making default much more likely, but they also eroded many of the insurance fail-safes of the private home mortgage lending system that insured the private RMBS payments to the investors in case of default. Additionally, piggyback loans, created two instances of default for a property instead of one, doubling the effect of default of each similarly financed property on the secondary market and on the related securities markets.
I could write a book about my reaction to Chinloy's article. I particularly like his analysis of mortgage payments and defaults as options, which lends borrowing behavior to derivative analysis. I also appreciate his in-depth explanation of forward and backward solving models for pricing RMBS. I am not sure which one I prefer, but I must say that I am somewhat partial to the type of analysis that the backward solving model employs. Though both types of models are useful tools, forward solving models are inherently more optimistic.  There is also a key point made on page 19 of the article regarding Fannie Mae's finding that properties with more than 10% negative equity have a high likelihood of default. Chinloy's mention of the lack of accounting for borrower liquidity in most RMBS pricing models is also noteworthy.
I do want to point out that some of the references in this article are dated. Due to mortgage acceleration clauses, new FHA, VA and FmHA mortgages are no longer assumable, therefore all of the sections about the assumablity of mortgages and selling the mortgage with the house are no longer relevant. It is also clear that Chinloy had no indication of the explosion of private and conventional loan and RMBS origination that would begin to take place just 3 or 4 years after the writing of his article and thus some of his predictions seem disconnected with what actually transpired in the real estate and securities markets. Chinloy, however, offers a cogent overview of the system of RMBS issuance that existed up until the late 1990's. It is clear that had this system been more clearly understood and followed by lenders, investment banks, investors and RMBS originators much of the calamity that recently befell our financial system could have either been predicted or avoided.