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

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.

The lack of presence of real estate in this list is yet another illustration of what was obvious to all real estate professionals--2020 was not the year of the major real estate transaction. As people hunkered down during to quarantine, the economy fluctuated and work-from-home became the norm, the real estate market dramatically changed. Mortgage delinquencies rose, office spaces became more available, the cost of materials trended upward and permits for new projects trended downward. Migrations from urban areas also took place en masse in March and April as those with the means and desire to seek less crowded surroundings during the spread of the pandemic did so. Although the amount and duration of this recent migration may be disputed, the effects of this exodus have noticeably shifted the dynamic in many local real estate markets, for better or for worse.

As asked earlier, "Now what?" Anyone that has paid even a little bit of attention to this blog over the years knows that I do not "do" doom and gloom. There is always opportunity in change and if there is one thing that 2020 has done well, it is that it has exposed a number of opportunities. From the rise of Special Purpose Acquisition Companies to the consideration of rezoning in urban areas, opportunities to add value, create wealth and thrive in the real estate market are going to present themselves throughout 2021. Rather than make a brief list of some of these opportunities in this post, I will attempt to explore them more in depth in posts throughout the upcoming year. 


Instead of looking back on notable movements in the real estate market during an unprecedented time, I have decided to look forward to the apparent opportunities of the upcoming year. So, please join me as The Real Estate Think Tank.com celebrates its 10th year in existence in 2021. It has been a wild ride thus far, let's conquer next year together. 

See you in 2021.

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.

1.       Paying Tenants Are Worth Their Weight In Gold

Those who were able to enjoy relatively uninterrupted streams of cashflow during the past few months are truly ahead of the game. Finding tenants with the ability to pay rent on time and the willingness to do so is a difficult, but not impossible task. Great systems for vetting renters are key to doing so, but active, just and appropriate property management also plays a big part in the search and retention of paying tenants. Happy tenants are more likely to prioritize their rent expenses.

The compatibility of the property to its neighborhood is also key to the retention of paying tenants. Properties that effectively service the neighborhood’s population, such as those that are accommodating to the social and/or economic needs of the community tend to have renters that are more willing to pay their rent expenses. Although some of these characteristics can be relatively immutable, such as proximity to a popular bus or train line or to certain religious institutions, others are within the control of the building owner, such as providing high-speed Wi-Fi in areas that cater to the tech workforce. Whether immutable or not, these factors influence the rental experience of each tenant and can facilitate the connection that tenants have to the property, giving them further incentive to pay rent on time.

2.       Location Determines Approach

Once again the old real estate adage rings true—location, location, location. The location of a property, better stated, the laws of the jurisdiction of a property have a direct effect on the method of mitigation that a landlord can take for a loss of rent. In areas with more tenant protections, long term planning should be the order of the day. Tenant negotiations and/or buyouts, when legal, may be a viable, but time-consuming option. Analyzing and maximizing the value of one’s property in the interim will also be key. Utilization of advertising space, cosmetic upgrades of vacant units or even a higher standard of efficiency in building operations may all be necessary, as non-payments begin to resolve.

The same techniques can also be applied in jurisdictions with less tenant protections, as well, and will yield results. Their application, however, becomes more critical in areas where the law favors the tenant. Before writing off jurisdictions with strong tenant protections, please keep in mind that these areas typically boast lower cap rates, so if the price and time are right, exiting a property may be a viable option.

3.       Affordable Housing Is The Wave

Rental assistance programs, like Section 8, have been a lifeline to many landlords during this time. Some building owners have sworn by these programs prior to the pandemic and have been proven right. The government has not waivered in its consistency in rental payouts during the pandemic. Moreover, the relative scarcity of these programs makes them highly coveted by tenants, who tend to pay regularly to maintain their eligibility. The government has made it a priority to ensure housing program payments to stabilize rental housing and building owners should take advantage

By no means an exhaustive list, these three points are some of the many lessons that landlords can learn in the wake of this devastating pandemic. That is my take on this topic. Please feel free to leave your comments below.


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: 

1. COVID-19 Wasn't The End Of The World
Photo by Anna Shvets

The Corona virus pandemic is clearly a historical event and one of the most pervasive pandemics ever. Pandemics are an unfortunate part of human history and have happened a number of times in the last century. The world-wide nature of this particular pandemic, coupled with the inter-connectivity of today’s world, may make our current situation historically novel, however, despite the idyiosyncracies of this pandemic, humans have a history of overcoming pandemics and moving forward. The loss that COVID-19 has caused, in lives, wealth and production cannot be replaced. It is important to remember, however, that while the results of this destruction must be mourned, the real estate market will come back and has rebounded from worse. 


2. With Every Disruption Comes Opportunity

Large market disruptions and crises are much like forest fires--they are extremely destructive to everything effected. Also like forest fires, these events clear a path for growth that may not have been possible prior. The real estate market, like most other markets, will rebound and it is the duty of every real estate professional to be diligent in looking for ways to contribute toward the structuring of a new normal in our changing world. 

3.Things Will Not Be The Same

There are a number of lessons that the past couple of months have taught us, not the least of which are the capabilities of our remote learning and working infrastructures and the importance of residential real estate in times of crisis. Unfortunately, the pandemic has also made many of us leery of in-person interaction and created a hypersensitivity around perceived health. Some of the changes that have resulted from the pandemic may dissipate over time, but no one who has lived through the quarantine will ever forget the experience. That said, it is important that real estate professionals stay alert to changing trends as we all quickly try to determine which of the adjustments made will become a regular part of our lives. 



4. Home Will Take On A New Role

One thing that has been apparent throughout the quarantine is that there is no place like home. Residential real estate will certainly be viewed differently going forward. Consumers are bound to be much more beholden to their preferences and the sanitary status of a property may be its selling point. Newer construction may be able to demand more of a premium initially, given its modern features and shorter owner history. Additionally, working-from-home will become a continued reality for many. Homes that are best able to accommodate remote workers, may also be able to demand premiums.

Photo by August de Richelieu

5. Workplaces Will Have To Adapt

Photo by Ivan SamkovThe concept of work has definitely been redefined during this time of pandemic, as we have learned that the nation will not fall apart if most of us work remotely. This realization, coupled with the shriveling of the economy during the past few months has caused some serious adverse effects in the commercial real estate market. Although warehouse space and industrial properties may be less effected by the move to remote working, as these property types are driven by the physical needs of companies, all property classes have been effected by the slowing of the economy. Social distancing has not been kind to office and retail properties. These property types may need to undergo some significant reimagining, as they are tailored to inter-personal interaction. Further, the required increase in online-purchasing has only served to further accelerate what has been an apparent reality in retail real estate for sometime—a new normal is on the horizon. Flexibility will be key in the office and retail markets, where the spoils will go to the nimble. 

6. Sanitary And Sterile May Be Trendy

Photo by cottonbro In the wake of this national health crisis, sterile is in. As the nation continues its path toward reopening, we have already begun to see businesses retooled in order to work toward the eradication of COVID-19. The concern over this virus will inevitably lead to an increased concern for the sterility of dwellings and structures. Demonstrable sanitary feature, systems and practice can allay health concerns and are certainly welcomed, if not mandatory, additions to any property. 


7. Fundamentals Still Rein Supreme

In the end, real estate is still real estate. It will continue to be a relatively illiquid asset and it will continue to have significant market lags. It will also continue to be a valuable resource and a viable way to build and shield wealth. All of these factors are why we love real estate so much. It’s indicators will remain the same: e.g. the employment rate, housing starts, mortgage rates, local economic factors, locations of major employers, etc., although, it is wholly possible that some new indicators may arise. I will avoid trying to speculate on which indicators may be significant, but one thing is clear, change is coming and it is important to be ready to navigate toward our new way of life. 

This has been my take on the impending changes to real estate coming in the wake of the pandemic. I’d love to hear your thoughts. Please comment below.

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.

Although the issue of police brutality against black and brown people is nothing new, it is refreshing to see all of the momentum that we are generating toward a solution. I am prayerful and hopeful that the demonstrations being made, the dialogues taking place and the changes that have begun are indicative of a new direction that our country is taking, toward working on resolving the clearly apparent and lingering racial biases found in our country. Police brutality is certainly an important issue that must be resolved, but is a symptom of an American history of racially stratified policies, both formal and informal, that have lasted for centuries and preserve advantages for those not of color. Given that the “complexity” of race relations in our country has developed over centuries, it is reasonable to expect that the solution to this issue, will not be a quick fix, but it absolutely necessary that every American commit to working toward a resolution of this issues. Until we heal our racial wound and deal with our checkered past, we cannot truly move forward as a nation.

What does this have to do with real estate?

Well, I’m glad that you asked that question. Real estate, in fact, has frequent been used to either preserve a status quo or to begin drastic change. From the mortgage redlining of the 50’s, 60’s and 70’s to racially restrictive land covenants, to blockbusting, to redistricting, to urban planning, to affordable housing programs, it is abundantly clear, real estate can influence the path of a society. The issues of the oft mentioned “inner city” are the result of urban planning, which has used zoning laws, covenants, variance hearings and other land use methods to ensure that some areas thrive and others flounder. These planning decisions had lasting effects, as communities were shaped by these decision, many of which have lasted for generations. 


Few issues are more political than land use and few are more hotly contested. Proposed major changes in zoning draw large numbers of reactions on both sides. Elections are won and lost over the location of new developments or the violation of the ubiquitous NIMBY. In fact, in most cities, big and small, there is no group more powerful and wealthy than the real estate lobby, which works to ensure that either status quo is maintained or that their notification of any changes is advanced as possible.


So if real estate can garner so much focus and convey so much influence, then the importance of acquiring as much of it as possible is clear. As Master P recently said, you have own blocks to create influence. In actuality, few things speak louder than the concerns of a collective of the largest landowners. If you are skeptical, look at how many of the largest campaign contributors of most local, mayoral and gubernatorial elections are directly tied to the real estate market. Also look at the amount of tax benefits, such as PILOTs and tax credits are given to large developers or businesses that intend to open headquarters in an area. Governments have in some instances taken land from smaller private landowners through eminent domain to ensure that such developments or headquaters are able to be built.

When it comes to real estate not much has changed from the days of feudalism—land equals influence, so if people of color want to be heard in a lasting way and establish generational change, one way to do so is to own land and/or to influence land policy. Real estate has always been a powerful tool for social change. If we do not mobilize and acquire, then we will continue to be at the mercy of the planning decisions of a group that does not share our interest. Diversity has many benefits, but it is important that we do everything that we can to secure our seat at the table, so our inclusion is a necessity and not a mere act of benevolence. 

Well that’s my take on social justice real estate. I’d love to hear your thoughts. Please comment below.

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. 

Marketing

Sales professionals across industries must concern themselves with marketing. If lead generation is the bloodline of sales, then marketing is the sales lifeline. Few owners of real estate assets are well known enough to sustain consistent sales without advertising their assets or needs on the market. Even further, marketing is not merely advertising, but also the market research necessary for the sales force to conduct a successful sale. This includes market, customer and competitor research. 

Admittedly, marketing takes on a different appearance in the different types of professions that engage in real estate sales. Direct customer advertising and research are very common among property sellers, whereas marketing in the real estate secondary and capital markets may consist of networking, listing on exchanges and purchasing market data from data providers. Despite the idiosyncrasies of the industry-established method, effective marketing is absolutely necessary to the success of any sales professional and any business, as no one will seek to purchase an unknown asset. Real estate salespeople are not exempt from this essential business function.

Customer Relations

Much like marketing, proper management of customer relations is key to success in business. Sales professionals should seek to ensure that the needs of their customers are met, as satisfied customers are great for business. Research has shown that the overwhelming majority of business referrals come from customers who have had a positive experience with a company. The bottom line is that satisfied customers are one of foundations on which a successful business is built and real estate companies are not exempt to this business tenet. The profile of a customer may vary among the different types of real estate professions, but be they consumer, corporate, governmental or institutional customers or clients, their satisfaction is integral to the success of the real estate sales professional.

Bringing It All Together

Although the various sales roles present in the real estate market each have their own characteristics, they all share a concern with the five aforementioned sales concepts. The most successful real estate salespeople have implemented systems to manage these five aspects of sales in an effective manner. Real estate sales professionals that lack in any of these areas would do well to assess where they lack and address any such shortcomings. That is my take on real estate sales, please feel free to provide your prospective on the matter below.

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.

Real Estate Salespeople

Before continuing, it may be necessary for me to provide a working definition for the term “real estate salesperson.” For the purposes of this post, the term real estate salesperson will include all real estate professionals who spend a significant amount of time disposing of real estate assets in the market. This definition includes property salespeople, such as Realtors, but also includes sellers and agents in the real estate capital markets, as well. Such secondary market participants include whole loan sellers, traders of mortgage-backed securities and loan officers of the various types of residential and commercial real estate loans that exist.

It may be tempting to think that such a broad definition of real estate salesperson includes a number of disparate professions that do not have much in common, however, each of the aforementioned professionals engage in real estate sales. Remarkably, real estate asset disposition has certain immutable aspects that transcend asset class distinctions. These aspects are lead generation, asset valuation, asset management, marketing and customer relations. This post will address the first three aspects, which have very specific concerns in the real estate market. A subsequent post will address the final two, which are more uniform across all sales.

Lead Generation

Leads are the bloodline of all sales, but real estate salespeople differ from other sales professionals in that they almost always seek out their customers and clients from the market. This is especially true of properties sales, where product placement is predetermined. In fact, since a real estate purchase is most frequently not seen as an emergency, real estate salespeople are not only required to find their customers and clients, but are also often tasked with having to impart a sense of urgency into their target audience in a way that is not as necessary in other sales professions. Admittedly, the methods of lead generation vary wildly among the different real estate sales professions. Direct marketing and customer engagement is frequent among property salespeople and residential mortgage professionals, whereas more indirect approaches, such as networking and informal referrals, are prevalent among capital market professionals. Despite these differences, leads are essential to all real estate salespeople and must be actively managed.

Asset Valuation

Asset valuation is an integral part of the role of all real estate sales professionals. Real estate assets are price idiosyncratic, in that their prices are determined at arms-length and not by the market. Except in the case of some government mortgage backed securities, which have fixed bid-ask prices, the price of a real estate asset is determined after some bargaining between the buyer and seller. As such, the seller’s asking price is merely an initial offer and not a firm price. It is the responsibility of the real estate salesperson to ensure that the seller’s initial asking price is attractive enough that buyers will bid, while retaining sufficient value that the seller is able to reap an acceptable profit upon the close of the sale. These competing concerns can only be mitigated through an intimate knowledge of the market and a strong sense of the value of the asset sold. The best real estate sales professionals have an uncanny ability to determine an asset’s value and its demand in the market place. They use this ability to price assets accordingly and sell them efficiently.

Asset Management

Asset Management is a key component of real estate sales, because real estate cashflow is neither automatic nor derived solely from market factors. Income property rents and mortgage payments must be collected in order for investors realize cashflow from their real estate holdings. Furthermore, properties require maintenance and mortgages require regular compliance with various lending laws. Real estate securities are also subject to regular reporting requirements, as well. As such, there is no way for a real estate salesperson to escape asset management. Proper management of real estate assets by the salesperson will lead to seamless dispositions, whereas mismanagement of these types of assets can lead to a canceled or substantially delayed sale. Unlike other types of sales, asset management is as much a consideration to sale as timing and value. The competent real estate salesperson understands this requirement and ensures that assets are properly managed.

Lead generation, asset valuation and asset management are aspects of real estate sales that have unique concerns. Real estate sales professionals must master these aspects of sales in order to successfully bring about consistent dispositions. In our next post will deal with the remaining two aspects of real estate sales--marketing and customer relations.

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.


So, You Agreed To Be Second

Financing a second mortgage is making a conscious decision to maintain an interest in a property that is subject to the interests of the first lienholder. The most cogent concern of a second lender is that upon default of the first mortgage, all of the second lienholder's interest can be extinguished. Such subordination is not only a concern at default, but an ongoing concern, as any changes to the property or its rights that the second position lender would like to make may possibly trigger a default in the first mortgage. 

Upon default, the relationship between the first and second lienholders undergoes a slight alteration. To understand this shift, it is probably most beneficial to think of a second position lien as converting into an option or right of first refusal upon default. When either mortgage is in default, the second lien holder has to assess whether it wishes to incur the cost of litigation, in the case of the second lien’s default, or satisfaction, in the case of a default on the first mortgage. In the same manner, the money lent for the second lien can similarly be seen as the cost of the option, which bears interest for the lender. Viewing its lien from this property rights perspective will enable the second lien holder to conduct an objective risk-weighted cost-benefit analysis of the second mortgage.

Which Approach Should Be Taken Upon Default?

When it comes to defaulting second mortgages, objectivity is essential. Accepting a nominal payoff leads to lost profits. Alternatively, overly aggressive demands for a payoff will lead to either foreclosure of the first lien position and extinguishment or a longer period of nonpayment, followed by ownership of the property subject to the first mortgage. An active approach is necessary to avoid entering either situation unwillingly. Second lien holders should assess the value of the property and determine if the remaining equity after satisfaction of the first lien and additional litigation/acquisition costs makes the exercising of the lien holder’s rights worth the cost of doing so. In addition to this course of action, it is important for the second lienholder to understand the secondary market pricing for performing second mortgages, defaulting mortgages and the typical payoff discount for defaulting second mortgage in the property’s local area. The state of title of property is also an important determining factor. Armed, with this information, a second position lienholder can make an informed decision on how it will proceed upon default.

Unfortunately, second lienholders and their authorized agents are not always optimally informed at the time of default, leading to frequent instances of idiosyncratic behavior. That said, I thought it prudent to provide my take on how to approach the default of a second position mortgage. Please feel free to provide your prospective on the matter below.

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.

Local Impact of the Real Estate Asset Manager

Real estate asset managers also frequently serve as a clearinghouse for contract work for local real estate professionals. Many realtors, contractors, landscapers and appraisers use their affiliations with these asset management companies to gain access to a steady stream of contract work flowing from the real estate needs of mortgage servicers. These real estate professionals not only benefit from the attending to the substantial real estate management needs of the larger mortgage servicers, but also the flexibility of the relationship between the professional and the real estate manager involved. Typically a local real estate professional's obligation to the real estate asset manager can be terminated at any time after the accepted task has been completed.

Most often overlooked in most discussions concerning the real estate industry, the Real Estate Asset Manager serves a vital function in both the residential and commercial real estate markets. These managers of real estate facilitate market functionality and link real estate institutions with local markets.

That is my take on real estate asset managers, please feel free to provide your prospective on the matter below. 

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.