Monday, June 28, 2021

Hammering the American Dream

Owning a home has long been part of the financial stability plan of American families. Once that becomes a reality, many continue follow the advice of Will Rogers, “Don’t wait to buy real estate. Buy real estate and wait.” Some invest in raw land, but many more understand that the economy may go up and down but people always will need a place to live. Rental properties have long been the path to wealth – what a deal, your tenants make the payments and after a while you gain a substantial asset.

This value of this strategy has not been lost on major financial players. Chief among them is Blackrock, Inc. The giant has over $8 trillion in properties under their management with offices 30 countries. Additionally, they have been buying up entry level homes, and because they could, they bumped the rents up around 30%.

They are not alone. Other institutional investors, including giant KKR, private equity funds and hedge funds are reported to have spent more than $25 billion – with a “b” - to buy up over 150,000 single family houses since prices dipped in 2012.*

Five of these corporate single family landlords sold shares in public offerings and there were eleven debt offerings totaling $6 billion in the past year alone. This covers the price they paid for homes and remodeling – and more importantly, allows the real estate gobbling juggernaut to continue. Whole neighborhoods have been turned from owner-occupied into rental properties. When there weren't enough to satisfy the institutional appetite, they even bought new homes.

In spite of this, there are some not following this pattern because, they say, single family homes are generally not constructed as rentals. The maintenance costs are proportionally too high. This would indicate the institutional buyers are working under different economic thinking and expectations than traditional investors.

What Does This Do To The Market?

In some areas this took many starter homes off the market making it more difficult for families to find, let alone, buy, their own home. Anyone with an understanding of the Austrian school of economics will tell you that this puts upward pressure on home prices. It is as simple as reduced supply in a time of increasing demand, Even Keynesians will grasp this.

This was going on long before the covid fear closed down businesses and sent many people home to work remotely. The shutdown showed them two things, among others. First that they needed more room if they were to work from home and secondly, they didn't need to live so close to their employers.

Carried to its logical conclusion, those who could, began migrating from the over taxed and over regulated environs to more friendly regions, even to the point of buying properties sight unseen because of the highly competitive market. Put this together with the reduced number of homes available in some areas and you find the outrageous increase in real estate values that are only moderated by outrageously miniscule interest rates.

I might add at this point that low interest rates are not necessarily a bad thing – particularly to an industry so dependent on the availability of affordable financing. However, it is a double edged sword. For people just starting out and looking to put together a down payment for a home, a business or any other large purchase, the banksters are pretty much useless with the with their almost non-existant interest rates on savings – but then most investors already know about this.

Is This a Good Idea?

Blackrock found itself on the Forbes list of 50 Most Admired Companies in 2013. This is understandable – as an investment, the company leveraged it's commanding position to expand in the relatively safe market of single family home rentals. People need a place to live and this dominant position enabled them to rent to them for top dollar.

It is doubtful that those who would have liked to buy and could not, either because of the twin curses of limited availability and inflated prices probably didn't take part in the survey. They could not experience the increase in equity over the years as they paid down a major asset and watched their home's value grow. They did not have the privacy or security that comes with owning their own home. They did, however, have the opportunity to pay rent and live with the landlords terms.

This is not to say that rental properties are bad things. I have rental properties and people are quite happy to live in them. The point is that renting should be a choice. So should the ability buy investment property without dealing with out of town competition with almost unlimited funds. Here is where personal relationships become even more important.

We can't roll over and play dead like many mom and pop hardware stores did when the blue store and orange store came to town. I get emails every day hawking plans for different ways of working. Some of the ideas may work, but one thing is sure, we need to be aware of the environment we are working in instead of wondering where the deals went. It isn't just the dreams of home ownership that is getting hammered in some areas, but, for some, the dream of successful investing.

    *source Keefe, Bruyette & Woods


Sunday, June 13, 2021

Listening to Sellers

Many investors and home buyers have a hard time hearing anything the sellers have to say beyond the price. They dismiss talk about the property as mere puffery. Unfortunately, many of us have gotten to the point where we don't believe much of anything we hear anywhere. Then again, a lot of us don't even believe the price.

It's true and sellers try to present their property in the best possible light, but then, that is why we hire inspectors – or do a thorough job ourselves. This is fine as we tend to discount much of the things we are told, but there is a time we need to listen to the property owners. It is the answer to a simple question, and, possibly a couple of follow up questions to be sure we understand.

The Question

A friend of mine who has been in the business forever looks around a property, looks at the people and asks, “why are you selling a nice house like this”. Never mind the imperfections you've just seen, and now is the time close your mouth and wait for the answer. Unless it is someone trying hustle you, you will usually get a pretty straight answer. It could be they are facing foreclosure, or perhaps they just can't afford to stay in the property. It may be that they found employment in another city and they have to move. Perhaps they want to retire to a warmer, less expensive and safer location. There are a variety of reasons – and, to the seller, they are all valid.


You may have to poke and prod a little to understand completely, but you will learn what will move them to accept your offer – and it may not be the highest number. Summarize what they tell you to be sure you understand... and they know you understand and you can make an offer that meets their needs – this does not mean offering two hundred thousand on a one hundred thousand dollar property!

For example, I was looking at the proverbial ugliest house in the neighborhood. When the woman bought it said she didn't realize it was beyond the scope of her budget and ability to make it livable. I sat down with her and she told me about the various investors who came by with their formula driven deals and those with their creative financing plans. Some were newcomers and some old timers in the business.

Meet Their Needs

All this woman wanted to do was get enough money in hand to move up to Tennesee to be with her grown children. Creative deals didn't fly with her... even ones that gave her considerably more than I offered. I've done creative deals as well, but listening to the seller allowed me to meet her needs for less money than others had been offering.

On the other hand, if they don't need the money to buy another home and plan on putting the money away with the banksters, asking them to hold the paper on the property at many times the interest rate the institutions offer, may just be the ticket to giving them a better alternative while getting yourself a much better rate than the hard money guys are willing to offer.

How Do You Look?

Perhaps even before you get to the big question, thinking about how you approach the sellers can go a long way toward getting the deal. For instance, many of us do his business to get nice cars, But showing up with a new Corvette or Cadillac to talk to someone who can't afford the payments on a simple two bedroom house may not be the best way to open lines of communication.

Also consider there feelings. They may have contacted you because they saw it as the only way avoid foreclosure. On another property I sat down with the owner, As we were talking about her situation she explained how this big shot showed up in his fancy car along with his son. As they walked through her home, this guy made his disdain for the place quite evident as told the young man that they would tear this out and replace that. I don't know what they offered, but the lady was almost in tears thinking about the way they bullied their way around her home and she had no intention of working with them. Egos can be expensive.

A little humility can go a long way sometimes – and that is not a lack of confidence. It's understanding that sellers need to feel good about dealing with you. If you are looking to beat sellers into a win-lose deals.... good luck, I wouldn't even deal with you.

Looking at the property and making notes is fine, and, unless the owner has unrealistic expectations, you probably don't have to point out the flaws in the property – they already know. There are times when the sellers have an unrealistic idea of the value of their property, you may have to lay a little truth on them. Try not to make them angry or the deal is gone anyway. Many people would rather give their house away than sell it to someone who doesn't respect them.

So listening will get you the information you need and, most of us, myself included, tend to talk too much. They don't care how wonderful we are, who we know, or any of that stuff. All they care about is what you can do for them. They need to know enough that they believe you can follow through and solve their problem,

So as we talk to sellers, we need to listen more and talk less.