Episode Summary:
In this episode, Craig and Jack discuss current events and news that affect real estate investors. Topics include: Mortgage Industry Layoffs, the “Stop Predatory Investing Act”, Rent Control Bills, Multifamily News and more. Tune in to keep up-to-date on the latest market news.
*The following transcript is auto-generated.
Craig
00:00
You’re listening to Real Investor Radio with Craig Fuhr and Jack BeVier, where we cover advanced real estate investing topics to help you stay ahead of the curve in your real estate investing business. Hey, welcome to Real Investor Radio for episode eight. Thanks for joining us, Jack. It’s good to see you.
Jack
00:17
Absolutely. Jack
Craig
00:18
Vere at my side here. I’m Craig Feuer, man. I went out prior to the episode today and took a whole look, look at a whole bunch of news from around the industry. I wanna start, I got about five topics to jump into today. Get your comments on, I’m sure you’ll have many, man. We are seeing a bit of a shake up in the mortgage industry right now. US Bank has the fourth largest lender, mortgage lender in the country, has just announced some pretty significant layoffs. They’re having a very tough quarter right now.
Jack
00:48
Yeah, yeah.
Craig
00:49
So just give you a quick, here. It says, at US Bank, we make decisions that position us well today for today’s market and in the future. That was a spokesman obviously, but they are off 41% year over year in lending.
Jack
01:09
The mortgage space has been, you know, suffering a lot from a originations volume. Obviously no one’s selling houses as much. Real estate agents are feeling the same kind of pressure. And I was looking at some data. Mortgage originations from the peak are down something like 75%. Yes. Which is, but mortgage employment is not. Mortgage employment’s down maybe like 20%. Yeah.
Craig
01:33
There’s still quite a few people. I’ve got some, let me give you some quick facts here. So in March of 21, the mortgage industry was running, running at about 4.4 trillion annualized. That’s down 75% at an annual pace of now 1.2 to maybe 1.4 trillion in 2023. That is significant.
Jack
01:54
Yeah. And, and how
Craig
01:55
Do you survive?
Jack
01:56
Yeah, exactly. And the 2021 was certainly like very high water mark. So everyone was doing really, really well. There’s
Craig
02:03
Thinking, the thinking the gravy train would never end. Yeah,
Jack
02:06
Exactly. Right. But you know, with, with all the refinance business that was happening at that time and with volumes down 75%, but only employment in the mortgage sector down 20% there seems like there’s a, you know, one mortgage companies are, are kind of overweighted in staff right now. Yeah. So people are just doing fewer deals per capita and obviously that’s also had a negative effect on mortgage company profitability leading to situations like what you described.
Craig
02:34
Yeah. A couple more crazy facts here. So like you were saying, there’s about 345,000 loan officers in the country, which remains really elevated for the originations that are being produced. And to speaking about realtors, there are about 1.5 million realtors in the country right now competing for just about 4 million homes.
Jack
02:55
Right. And the Yeah. When you, when you extrapolate that data and say like, like, all right, so what’s, how, you know, the money that’s being made, right? Like your average loan officer, what are, how much are they making right now? The average real estate agent, how much are they making right now? It’s, it’s down, you know, you know, obviously very significantly, but that’s also not down, that doesn’t drop down on a linear basis. Right. Like the, this is the times where the best in those industries are able to continue to feed themselves and do well. And then there’s like a whole swath of have-nots that are just the walking dead who haven’t, you know, hung it up yet. But, but,
Craig
03:27
But it’s 75% off even those who are the high flyer. Look, there’s always, in that industry, there’s always in the industry, especially realtors, that’s sort of 80 20, right? 80%, yeah. Maybe do one to two deals per year, whereas the top 20 generally do 10 to 20, maybe even more deals per year. We know people like that. Right. And, but I think at 75% off in volume in the loan industry, even the high flyers have gotta be a little worried right now. Yeah.
Jack
03:55
I think that’s absolutely the case. And, and if you were working on a team before, perhaps, you know, it’s harder to, to afford that team right now, kind
Craig
04:02
Of looking around at the team going, Hmm. Yeah. I wonder who’s on the chopping block.
Jack
04:05
Yeah. Yeah, exactly. And I think that it’s gonna be interesting to see as we get to like renewal timeframes for, for licenses. So there was a big drop off in mortgage loan officers last December, for example, because those are annual, those licenses are annual renewals in December. This year is gonna be really interesting to see that data. Hold
Craig
04:23
On one second. I, I have, how did you know, how do you keep all the, how do you know that they can renew in December for loan officers? Like,
Jack
04:32
I just, I just, I just am just a nerd and a read a lot and
Craig
04:35
A wealth of knowledge ladies.
Jack
04:36
Yeah. But it’s, it’s interesting to, it’ll be interesting to watch that data. ’cause you won’t see any of the loan officers, you know, like they’re still like working. They may not be doing very much, but then, you know, that’s when you gotta pony up and reaching your pocket and be like, all right, am I doing this again for another 12 months? And, you know, some folks will do it just for the optionality. Hopefully the world’s gotten better. Sure. But at other, other folks who like have gotten to those low volumes, have realized, hey, I need to get a day job and this is just now a waste of money for me to renew my license. So it’ll be interesting to see how many folks drop off at the end of this year. It is a tough
Craig
05:06
Time in the industry. There’s a company called the Strat More group that sort of oversees mortgage lender m and a activities. And in 20 to 21 there was a total of 43 m and a deals, merger and acquisition deals involving brokers with annual origination volume of 500 grand or more, which is pretty small. Obviously that figure hit 50 deals in 2023, and they think that there’ll probably be another 60 more just this year. So 110 deals this year where there were 43, you know, mergers and acquisitions in mortgage companies last year. Yeah. Pretty insane
Jack
05:41
Between the com you know, combination of a lot of senior people at mortgage companies made a lot of money in 21 in the early part of 2022. And it’s kind of, you know, we’re seeing now, or it feels now that it’s gonna be a long slog until another, like, until volumes, you know, pick back up. So like, you know, if you’re 63, maybe it’s early retirement time, like Right. I’m not gonna make it to the next boom, you know, to the next boom cycle of this. So like, you know what, what am I gonna just, I’m gonna just gonna slog for the next six years Yeah. Until things are good again. So maybe it’s a good time to get out and, and sell and sell to another, you know, to, you know, some young buck who’s coming up and who’s gonna get another 20 year outlook in them.
Craig
06:23
You know, man, as an investor, you know, obviously that we love speaking with investors and anything that we talk about on this show, I always like to try to boil it down to like, why, you know, why do we care? Why do we care that there’s so many mergers and why that it’s a tough time in the loan industry, or that it’s a tough time for realtors? Well, you know, we like them too, but they are an integral part of, of every investor’s business. Every great investor has to have a handful of realtors bringing ’em deals, putting the houses on the market, things like that. Tell tell people why it’s important to know this, what we’re, what this, this data point that we’re giving to ’em right now. Yeah.
Jack
06:56
So the, you know, I’m sure these folks, these are folks that you’ve been working with on your team, you know, your team of people that help you get through deals and being able to get a loan to the table, particularly when deals are more scarce Yep. Is of utmost importance.
Craig
07:10
We were just talking about on the last episode, how, you know, you did 29 houses in the first quarter and what, 14 in the second, second, second. And then, and then just between the two recording our shows today, you, you picked up your first house this quarter, so congratulations.
Jack
07:23
Yeah, thank you. Thank you. It’s, Hey, the first one, ma, it matters, right? Like, it’s great. That’s great.
Craig
07:29
Absolutely. It’s a jumping off point, but the point is, is that when you have obviously a team of people bringing you deals, it’s not just your acquisitions team. It’s that realtor that you’ve had a relationship with over the course of the last 10 years, and maybe they’re no longer in the business or, you know, it’s a tough time. Yeah.
Jack
07:44
And, and the, the, this is the moment where like the best practitioners really are able to distinguish themselves and grab market share. Yeah. Whereas, you know, two years ago, if you were a li you know, if you were a realtor and you were a listing agent, you put the property on the market, it’s clean, the photos are up. Right. The thing’s got 20 showings. So like, you know, is that really selling like this, you’re not really selling anything. Right. You’re just like nav Yeah. They’re navigating the thing through the process and giving you some advice along the way. Today, however, though, supply remains low. The, there’s that, there’s that struggle against affordability. And so there are fewer showings as well. And so not, you know, not messing that up and making sure that you choose the correct offer, the one that’s gonna get to the table, which involves, you know, that understanding if that person’s working with a, a competent loan officer. You know, either of those practitioners frankly are, they’ve become more important to the success of a fix and flip deal today than they were two years ago when it was frankly just a lot easier.
Craig
08:44
And now listen, we know places in the country where they’re still getting 10, 15 showings on the first day that it’s out. So of course, you know, your mileage may vary, obviously, but, you know, we, we know investors all over the country. Jack lends to them. I coach them. So, you know, your mileage obviously will vary. Topic two, that’s a good one. I love this one. There was a bill introduced in the house this week in the United States Congress. Congress, by the way, not the Maryland House of Delegates, but the United States Congress was called the Stop, the Predatory Investing Act. And it was authored by Sherrod Brown, Congressman Sherrod Brown, Democrat from Ohio. And Jack, this is an interesting bill because it says that quickly that any entity with the exception of nonprofits and the like, owning 50 houses or more, or owning 50 or more homes will be prohibited from deducting the cost of the interest and depreciation on all owned homes.
Craig
09:45
Interesting. It says that new homes either built or bought are exempt. There is also a provision to recapture these deductions for homes sold to owner occupants. Yeah. Now, normally in a case like this, I’m not even sure that the bill is in committee, but I think he does have about eight co-signers in Congress with him. It’s preliminarily scheduled to go into committee. It’s a bit vague as you read through it. So I’m sure that there’s going to be a lot more, you know, decisive and very detailed language added to it. But this is an apple that od Brown and guys like him keep taking a bite at. And so I feel like it’s coming down the pike and we should let people know depreciation is nothing to mess around with when it comes to one of the four returns that we get on real estate.
Jack
10:32
Yeah, absolutely. And the, you know, the, it seem, it certainly seems like backlash from the idea of institutional real estate investors getting into the market and having a very advantaged cost of capital the past four or five years and buying a lot of inventory that might otherwise have gone to first time home buyers. Sure. A lot of that affordable inventory has been purchased by large investors who had a cost of capital advantage. And so it’s easy to pick on the, you know, someone who’s managing 8,000 houses, finding a situation that didn’t go well. Right. And it di I’m sure it immediately didn’t go well, but, you know, one in 8,000 frankly ain’t that bad. And, you know, they’re kind of an easy target. Right. The the larger landlords are an easy target. I was really though taken aback that they set the threshold at 50 properties. Sure. Which certainly is a, you know, it’s an obvious carve out for mom and pop landlords, but 50 ain’t that much anymore. No. There’s been a lot of consolidate or a lot of, you know, consolidation and or rather aggregation of, of houses by investors. And certainly for the folks who are listening to the here, they’re either at that level or ex hope to soon be at that level. And the idea of changing the tax codes so that, such that you can either deduct, deduct, depreciation or even the interest on your loan. Yeah.
Craig
11:51
That was a part of it that I sort of glossed over, but you were speaking to that as well. That’s a big deal.
Jack
11:56
Yeah. It’s a, it’s a huge change to the economics because as investors, you know, we’re, we’re deciding where to spend our energy, where to spend our, our ca or where to allocate capital. And, you know, if you’re doing that correctly, you’re looking at your net return, given the risk of the activity that you’re doing. If you’re really smart, you’re looking at it on an after-tax basis, taking that into consideration and that after-tax analysis is one of the reasons that real estate investing is as interesting as it is. And ultimately though, when we’re doing that analysis, all of those variables boil down to the offer price that we make on a particular investment on a particular property. Right. And so if all of a sudden you tell me that I can’t deduct interest and I’m not gonna get depreciation as a deduction, that affects that whole analysis. And as a result I have to, as somebody who owns more than 50 properties, have to offer less on the next deal. Yeah.
Craig
12:53
So who does it punish
Jack
12:54
To to accommodate that? Exactly. So what that ends up punishing is the people who might be getting offers from investors. So while I, I feel like it’s like a, it’s a j it’s a, you know, it’s, it’s a jab at larger landlords, which by the way is where you often get some of the most professional property management. Yep. Like mom and pop landlord doesn’t mean better landlord, frankly, they’re less professional. You may have a, you know, it’s, it’s, it’s sometimes nice. Right. I’ve, I’ve had landlords that were just who, who a person who owned one property and you gotta develop a personal relationship with them. But also if they’re on vacation and I’ve got a leak, a leak in the roof, like I can’t get ’em,
Craig
13:30
And they’re my property manager Yeah. And they’re my re out they out on a cruise.
Jack
13:33
Yeah. Yeah. You just can’t get ’em. And so you’re just stuck dealing with this leak and maybe you would like to have a company that you can call who’s always got people on call. So, you know, the, the judgment aside of whether it’s better to have an institutional property manager or a smaller property manager aside, it’s an easy jab to try to take. You know, it’s kind of like a taking from them, like, Hey, you don’t get the tax benefits so then it’s anymore. So you’re, they’re moving. The idea is to move the goalposts on the math for those investors who already have 50 properties. But the net effect of it is that on a going forward basis, those folks are just gonna offer less for the next house. So the houses that need work Exactly. Right. Like the, you know, it’s, it’s mom’s house that you’re trying to sell and it needs work. You’re not selling that to a homeowner. It needs to be sold to an investor. Well, that institutional investor who had a cost of capital advantage and was probably the one who was gonna give you the most money for that house, they’re just gonna offer you making up numbers here, 10 grand less, they’re
Craig
14:29
Gonna offer you less because they have to factor in now that they don’t get the interest deduction, they don’t get the depreciation deductions
Jack
14:35
Yeah. Ex Exactly. So it’s one of those like, you know, ni nice kind of headline things, but probably introduced by somebody who doesn’t, who never took economics and doesn’t understand that this stuff just all comes down in the wash,
Craig
14:45
Just looks at you like the bad guy
Jack
14:46
Through pricing. Yeah. And you’re not gonna take anything. Like,
Craig
14:50
So who’s the benefit?
Jack
14:51
The benefit, I think I, it certainly does be or could benefit those who own less than 50 properties because they will still have the advantage of just deductions and depreciation. You know, presumably anybody who’s investing full-time is, is itemizing deductions on their tax returns. They would have the advantage of, of both of those itemized deductions. So it does kind of shift the balance a little bit towards the smaller investor in terms of kind of leveling the playing field from what price they can pay.
Craig
15:19
Yeah. But ironically, and this is something you we shared between taping here, that, that it also benefits the REITs, you know, that
Jack
15:26
Yeah, yeah.
Craig
15:27
The the one who was supposed to get jabbed Yeah. You know, is, is actually getting a great benefit because they don’t pay taxes.
Jack
15:33
Yeah, that’s a great point. So the, the public REITs who don’t pay taxes, because that’s one of the benefits of being a REIT structure is to provide dividends. And so if you comply with all the REAP guidelines, you don’t have to pay corporate income tax, you have to distribute your income to your investors, 90% of your income to your investors, but you have the benefit of not paying corporate tax. And so it ironically makes them more competitive ’cause they didn’t care. Right. Like they, or they didn’t care about the depreciation side or they they didn’t, sorry. They didn’t care about the tax effect. So it benefits the really small landlords and the super huge in landlords and everybody like, you know, 50 to 2000. Yep. Which is like, you know, that’s, that’s, those are my people. That’s your
Craig
16:15
Brett butter baby.
Jack
16:17
Like, they’re the ones getting screwed by this idea. So not a, you know, not a huge fan. For, for, for, obviously I’m also talking my own book here, but not a huge fan of this idea. The, the National Rental Home Council seems to have taken up the fight if, for those that are not familiar with that, that’s the kind of the trade organization that was formed probably almost 10 years ago at this point, getting close to it anyway. And they’re a trade organization that represents institutional, mostly institutional owners of real estate. Though you can join at any level as a, as a, as a real estate investor, as an owner of real estate.
Craig
16:51
This is the one you were mentioning prior to that you, that you’ll be joining.
Jack
16:55
Yeah. We’re, I got a call with him today because I got a notification about this. And then certainly it’s something that concerns me. And most National Rental Home Council has been dominated mostly by the larger landlords and, but there also hasn’t been like a lot to fight against. Right. It’s mostly consider
Craig
17:11
PR larger landlord.
Jack
17:12
Well, it’s mostly the public REITs, private REITs, people who own, you know, a thousand units plus have been the, the so far have been the, the o the members of National Rental Home Council. I think it is coming down though, like they, they’ve set themselves up as a professional trade organization. They’re monitoring the stuff that, that that concerns us. They’ve gotten the, the, the big guys to pay dues. Sure. So they’ve got, actually got a professional organization that’s great there. And so then if we as smaller investors can ride coattails on their lobbying efforts and their PR efforts, you know, it’s, I think it’s gonna become a, a broader base trade organization for the, the, the whole industry.
Craig
17:50
Let’s bring it down to a local level of silly legislation and then talk about some of the things that you’ve done locally here. So in Montgomery County, Maryland, which is just outside of dc they just passed, if this isn’t being considered, this was passed a rent control bill with a 6% cap. And the legislation allows landlords to increase rents by the rate of inflation plus 3%, but it sets a maximum of 6%. So in most apartments around that area, it passed by a vote of seven to four, no shocker. In Montgomery County, which is one of the most liberal districts in the country, it sets up multiple exemptions for units that won’t need to comply with a cap, including apartments owned by landlords with four or fewer units in the county. Licensed assisted living facilities, nursing homes, and buildings that came into the market within the last 23 years.
Craig
18:42
So basically anything from 2000 backwards, you, you can’t go beyond 6%. You know, the reason we, we don’t like to keep the show totally local, obviously it’s a nationwide show. Jack is a nationwide lender. And so, but the reason why I thought it was interesting, Jack, is because we’re seeing a lot of this from around the country. I mean, you one only has to pick up the, do a little Google search on rent control measures or rent control legislation being proposed and or enacted around the country. And I think it’s a very significant issue for landlords to be thinking about right now. And so talk about what, what you think about that and what you’ve done about it.
Jack
19:22
Yeah. So the, it is something that’s po that’s been popping up, right. New York famously has a lot of rent control and
Craig
19:29
Have for quite some
Jack
19:29
Time. Yeah. And a lot of other jurisdictions have, you know, lo locally have en enacted those kinds of things and there’s more and more of move in that direction. Lots of pressure. Yeah. Now there’s, there’s a fair amount of organized pushback because New York’s been such a failure in that, from that, from that point of view. Like the idea that it creates certain affordable housing, but perverts like the market in, in, in other ways. So much so that there’s I think a strong argument that that, that it’s just not worth it. That’s
Craig
19:57
Ridiculous.
Jack
19:58
Far better to actually focus on increasing supply than restricting the supply that already exists. You know, if we built more houses, then we would also have affordable housing. So not letting any new houses get built is, you know, avoiding that whole idea Right. Is, is, you know, focusing on rent control is a, is really an avoidance of dealing with a supply issue, which is the longer term fundamental issue. And so we can kick the can here for a little while and by trying to restrict it, but we’re gonna continue to have an affordable housing issue until we deal with a lack of supply issue. And so for me, it’s a bit of a red herring, like an easy political thing to like, you know, shiny object for the politicians to look over here and pound their chest about Yeah. Even though they’re not fixing any of the fundamentals.
Craig
20:44
Yeah. It sounds great’s frustration. We’ve done this great thing for renters, your, your bad landlord can’t increase rents beyond, you know, this percentage when in fact it has, it has a, a far more reaching, you know, benefit or detriment I guess I should say. Right. Yeah. Talk about if you would S D C and sort of what you’ve been doing with that for the last several years.
Jack
21:08
Yeah. So we’ve been seeing, we’ve been seeing, what is it? Yeah, yeah. We, so we’ve been seeing, you know, in general over the years, I think that prior to the National Rental Home Council, there wasn’t really, there were very few trade organizations for, for landlords
Craig
21:24
Advocacy.
Jack
21:24
Yeah. And really nothing for folks who are buying houses, fixing ’em up and then reselling them to homeowners. And as a result, we’ve had in, in, on a local politics level, I’m sure folks who have listened to this, you know, seen this all across the country, that a general pressure, it’s kind of easy to pick on the landlord, easy to pick on the real estate investor politically, it’s easy to pick on ’em. And so you’ve had a trend in that direction, right? Like it’s a source of, you know, that’s, that’s a pool of capital that they can go try and tax or do rent control, you know, restrict in any political way that’s like, you know, from a populist point of view, like convenient, there’s
Craig
21:58
Any number of regulations, right? Yeah,
Jack
22:00
Exactly. And depending on your, you know, depending on your municipality, you’ve got your own flavor of that. And there’s really kind of been like very little organizing on the grassroots level. I’m sure there are certain RIAs that have an advocacy component to it. In Baltimore, we used to have the Property Owners Association in the, you know, eighties and nineties, but it kind of has fizzled out and
Craig
22:20
It felt, it, there was, it, it all felt very disjunct. You know, there was this little group over here that did their thing and maybe had, you know, an an ear down at city hall. This guy over here didn’t, you know, and it was a very, it was all very sort of small groups. And so, go
Jack
22:34
Ahead. Something that we tried to do in Baltimore, so we put this together, Alicia Corson and Andrea Campo Yes. Are actually the founders of the small developers collective in Baltimore City, probably seven or eight years ago now. They got organized and started to create a grassroots organization, run it as a nonprofit. And it’s a nonprofit trade organization for landlords and people who renovate houses and fix up, you know, doing community development through fixing up the city for-profit, nonprofit, anybody fixing up houses and who owns real estate that they don’t live in is represented by this group. And we run it as a, a nonprofit board. It’s a volunteer board, and we put on networking events, we meet with legislators, we publish, we, we do legislative monitoring to try to rally the troops when we see some something coming down the, the pipe that we are concerned about, we meet with those legislators to, you know, present a human face to landlords and real estate investors. And it was a nice experiment eight years ago. I was like, Hey, let’s play it out. See how it goes.
Craig
23:39
I, I was there when it happened and met in a restaurant and it was just sort of ideas. Yeah.
Jack
23:43
And it has been amazing. The traction, yeah. The traction that we’ve gotten off of it over the past eight years and the, you know, the, the, the engagement has been incredibly positive. There has been reception even from folks that we don’t necessarily agree with from a political point of view about that, you know, the Yes, you are part of the community. Yes. It’s necessary to work with these folks for the betterment of communities. And putting a human face to landlord investor has really kind of like helped keep what’s come down the pipe a lot more reasonable and given a voice to a group who, you know, I, my view is that is absolutely vital to the community development of Baltimore in our case. And, but that, you know, but that statement goes for, for any city or county in the country. And really kind of putting a, a human face behind that and making and giving us a voice to be part of the conversation has been, has paid a lot of dividends from a keeping things reasonable. Yeah. You know, and taking the volume down on, on the rhetoric.
Craig
24:49
What I find amazing, Jack, and you know, I’ve spoken all over the RIAs around the country. I know real estate investors around the country, country, just like you do. I’ve not ever met one who said, I want to be a drag on the community. Yeah. Every single one of them, especially the new ones, you know, I wanna bring communities up, I wanna make communities better. Yet we find that there’s this sort of very adversarial relationship between what we do and the folks at City Hall or even the folks at the state. And so, one of the things I never got a chance to ask you is it has been an amazing run for the small developers collective, you know, and what do you think the secret sauce is for the success of it? Is it the fact that it was, you know, two great, two great investors who started it with, with the help of you? Or was it, you know, what, why, why do you think it’s been such a great success? What is it just an idea that’s so badly needed? Yeah. Because I obviously, what I’m trying to get across here is that this could happen in every town that can, it could happen in your town, right? Yeah,
Jack
25:49
Absolutely. I think that, yeah, it’s an idea that is so badly needed and what is miss? And, and, and there’s not really much of a revenue or profit motive behind it. Like of course, getting small investors to pay dues is really challenging. Like, it’s not, you know, we, we, we act, we actually don’t even run a dues paying organization. It’s a just volunteer come as you are free to join organization. But we found so much interest, we’ve grown the board to really 12 people right now who are, it’s a volunteer board and there’s such an interest in folks who do, you know, believe in the, the long-term value of for-profit involvement in community development. Yep. That it wasn’t hard to, and it wasn’t hard to recruit those folks because it’s an idea that it’s just been waiting for so long. What’s been, what was missing was that spark of leadership.
Jack
26:36
You need somebody to be the first one to raise the flag and be like, Hey, these are the things that I believe, I think that we are good for Milwaukee, good for St. Louis, where, you know, pick your, pick your town and, and I’m tired of getting the shit kicked outta me in, you know, in the media. And, you know, I’m good for the city and I, and I, and I wanna be, I wanna present a face to it. And just being that, you know, being that rallying point Yep. To, for, to organize investors who are, who do have the long-term best interests of their municipality in mind, you know, that spark of leadership is the only thing that’s really missing. Like, we run it without a budget. It didn’t, doesn’t cost us anything. It costs us, you know, I probably spend five, 10 hours a month on it. And we’ve got now, you know, 12 other people who are spending five, 10 hours a month on it. And we actually have some, some impact. Have
Craig
27:26
You ever done a study on the amount of dollars via, you know, that is spent on materials at say, all of your Home Depots locally? Have you ever done a study on the amount of property taxes that have been regenerated by these houses that have been brought back up, you know, from vacancy to beautiful? Have you ever done that? Yeah. Yeah.
Jack
27:45
It’s, it’s tremendous. I pulled, in 2017, I pulled data, just all the public records stated, looked at all the non-owner or occupied purchases of properties. Yep. Extrapolated just kind of an average, average investment in each each of those properties. And in Baltimore in one year it was $60 million of incremental, not only investment, you know, half of that being materials, probably roughly half of that materials, half of that labor. So $30 million of labor dollars going into these houses. $30 million of, you know, material materials, materials plus the incremental value add from a property tax point of view of at least $60 million a year. ’cause we’re, it’s probably $60 million of hard costs plus a margin, right? Yep. In terms of value creation. So, you know, the, the, when you look at the, you know, a fiscal analysis of, of that activity, it’s overwhelmingly positive. Right?
Craig
28:30
Yet in every town in America, the investor is always persona non grata with the politicians. Yeah.
Jack
28:37
Yeah. It’s, it’s their, it’s an easy cheap shot, right? Yep.
Craig
28:40
It’s the guy with money. Yeah,
Jack
28:42
Yeah. Which is, which is rarely the case, right? Like, but it’s mo it’s most often really just a small mom and pop landlord who has one property that they used to live in, and they, and they are not somebody that you, that you can tax or should tax, right? Like they’re, they’re not, there’s no, there’s no pot of money there. Yeah. They’re just like, you know, hoping to clear 200 bucks after they make their mortgage payment.
Craig
29:03
Last question on the topic. So what would be like a typical then investor who is in the S D C here in Baltimore? What the, you know, gimme, gimme that stereotypical member of the small developers
Jack
29:15
Collective. I mean, it’s really anybody who owns property that they don’t live in and or renovates properties. If you’re, you know, buying, renovating and reselling to homeowner, these are no
Craig
29:25
Way big fat cat. You know, like, these aren’t all guys with 800 houses and you know, this is your average, you know,
Jack
29:31
Somebody who owns three houses right? Is our member, somebody who does two flips a year, is our, is our member and the community that supports them too, right? Like, and the, and, and the entire vendor community. That vendor community that isn’t participatory in that activity.
Craig
29:43
I’m telling you, if you haven’t done one in your town, or if you’ve thought about organizing a group of investors in your town and you’d like more information on it, I guarantee you that Jack would, would love to help you out. Or just, you know, drop a, drop a comment, you know, get you all the information you need on how you could start a, you know, a small developer’s collective in your town to give a voice to yourself and all of the rest investors in the community. It’s a great thing that you, you’ve done with
Jack
30:08
That. Yeah. And, and check out the website, it’s www.smalldeveloperscollective.org. And that’s just our version of it. That’s just the name that we came up with. Of course, you know, it’s not a franchise or anything, you can name it whatever you like. But the point
Craig
30:20
Is, that’s gonna be the moneymaking opportunity. Yeah. We’ll franchise it to you.
Jack
30:23
But the, the, the point is that somebody needs to step up and be the spark of leadership to rally, to, to rally the community and then put forward a positive public face to our activities. Yeah.
Craig
30:35
There’s no doubt that this was a real passion project for Alicia and Andrea when it started, and as well as you, I mean, you put a lot of work into the thing. So I think that’s exactly right. That’s the secret sauce of it, that you have to have that, that spark of passion at the beginning where people are just not, they’re, they’re tired of getting sort of beat down, you know? Yeah. Topic number three, what’s keeping bankers up at night, Jack? It’s the plight of community banks that, you know, I’m, I’m so interested in, and this particular article, I won’t go much into it as an American banker article that just said that, you know, community banks are really grappling with these surging deposit costs and increased expectations for weaker economic conditions. And as you know, community banks are truly sort of the lifeblood of what we do. What are you seeing right now in community banking?
Jack
31:22
Yeah. So that deposit increase the rate, the, the cost of deposit. Will
Craig
31:26
You explain that to folks who might the the cost of deposits, so Yeah,
Jack
31:30
Yeah, sure. Just, you know, how much, however much your bank is paying you for your savings account or for the CDs that you have in that PR or your money market sweep account,
Craig
31:40
Grandmom’s gonna take down a hundred thousand dollars to the bank and she wants to know how much they’re paying for it, basically.
Jack
31:46
Yeah, yeah, exactly. Right?
Craig
31:47
And so the cost of that is now going up, yeah,
Jack
31:49
It’s going up a couple hundred basis points, like two, you know, two, 200, 2%. And that is, from a bank’s point of view, that’s their liabilities, right? Like that’s the money that they use to go lend out. So when they lend us money, it’s 7%. If the, they’re borrowing that money from grandma at two, or they’re borrowing versus borrowing that money from grandma at four and a half, it makes a significant difference in their profit margins. And so with, you know, we continue to have high interest rates, the Fed is threatening to do another couple quarter point hikes, so interest rates haven’t come down, particularly on short-term CD rates. And so banks can expect, and now do unfortunately, expect to have those costs of liability stay up for a longer period of time, which means that they’re gonna pass it on to us, their customers, through trying to get higher, higher rates from us, you know, which makes it harder for us to make deals work, which means that we buy fewer houses or make fewer real estate investments, generally speaking.
Jack
32:53
And so there’s, you know, definitely a trickle down effect that which is the point, right? That’s why that is how the fed’s tweaking of monetary policy by raising interest rates makes it to Main Street, is they use the banks as, as the way to do that. And so if you’re a bank, if you’re a local bank, at the same time, by the way, there’s more regulation coming at the banks right now because of the exactly. The, the crisis and the fallout from that and concerns about how capital is rep, how the regulators are asleep of the wheel or not, and how banks bank management is managing their own balance sheets and are, you know, can they weather the, the storm of the next 12 months and are they stable as a, a set of institutions in the country? And so the small lo the local community bank right now is getting it from both sides, right?
Jack
33:43
They’re getting an increase in their, their deposit costs and an increase in their, in, in, in their regulatory costs, which is just straight overhead, right? And so there’s a lot of conversation about how there is expected to be over the course of the next several years. It’ll probably, and it’ll take several years for this to play itself out. Another round of bank consolidation in the wake of 2000, the Great recession we had Dodd-Frank, which was an in significant increase in the cost of regulation. And that led to a significant wave of consolidation m and a activity in the banking sector. And now, and just
Craig
34:17
A lot of them going outta the business, you know, a lot of them got shut down
Jack
34:19
As well. Yeah. Yeah. The one, yeah, it’s
Craig
34:21
About 3,500. Yeah.
Jack
34:22
The ones that that made it through. Yeah. The, the ones that didn’t just go outta business, ’cause the great recession, lots of them got, got consolidated up and now we’re kind of primed here for another round of consolidation. Yep. So it’s gonna be tough to, you know, if you’re, if you’re working with a $500 million bank, which is your prototypical local main street bank all over the, all over the country, it’s getting even tougher to stay a $500 million bank. You know, a billion plus is becoming like the new, like
Craig
34:51
The new local bank
Jack
34:52
Table stakes. Yeah, yeah, yeah, yeah, yeah. Which also means that we’re gonna have, you know, as, as institutions get bigger, the service level down to Main Street tends to suffer. That’s
Craig
35:00
The part that I just, that bothers me. You know, I, I I wanna go buy my house on, you know, Hartford Road, you know, truist Bank has no clue of what’s going on, on Harford Road. It could be a revitalization area, it could be, it doesn’t, you know, this applies to your town as well, that regional bank, that billion dollar plus bank now. Yeah. You might get slightly faster service from them because their loan committee meets once a week rather than once every other month, like the local guys used to do. However, they have no clue of what’s going on locally Yeah. Down at the street level, which is how we, where we operate, obviously.
Jack
35:34
Yeah. And that’s not, obviously, that’s an unintended consequence, but it’s an unintended consequence, but it is a consequence nonetheless. Right. They’re not trying to to, to destroy the main street service level, but they are. Yes. But it will happen.
Craig
35:46
Yeah, exactly. Next topic, this is one that, you know, honestly, I I was, you sent this one over to me, and I guess I was a little blown away by it, that the home investor, c e o steps down Jack, it says the, the number of franchises for the company has increased. I realize they were so large actually from 165, just 165 in 2009 to nearly 1,150 today. But the company has also been bought and sold multiple times during the last, the last name of the c e O is Hicks during his tenure. It’s now owned by Bayview Asset Management. They, they acquired home investors in 2022. The reason is why there’s been a lot of pressure on this guy, obviously. So talk about that.
Jack
36:30
Yeah. So Bayview, the Bayview purchase of Home Busters was super interesting in and of itself because Bayview is a massive mortgage servicer and owner of mortgages, both consumer and non qm, doesn’t
Craig
36:43
Really seem like the, the customer to purchase home best for some, you know? Yeah.
Jack
36:47
It, and it wouldn’t have been until the non-qualified mortgage space has really taken off over the past three, four years, particularly in the D S C R lending side of things. So Bayview is a big purchaser of, of D S C R loans from originators all, all over the country. And so I think as part of the growth of that business, they saw the Home Vests franchise as like, you know, the, the entrenched brand that is, has nationwide coverage, has, does have absolutely. Has some of the, be the most talented investors in the country.
Craig
37:17
I hear they buy ugly houses, they
Jack
37:18
Yeah. And there’s, yeah, they, they got a very sporty fashion sense with their caveman and, but I mean, everyone’s seen the, we buy ugly houses, billboards, and
Craig
37:28
We even know a guy that fought that. I think that’s what
Jack
37:30
Yeah. The, and and their, their, you know, their model for those who aren’t familiar, their model is generally a advertising sharing pool, right? So you buy a franchise, you get lots of systems and processes. You go through a bunch of training and you commit to a certain amount of spending each month for advertising and then home pools that advertising both regionally and nationally and gets better rates on their, their lead gen activities. Yep. And then they feed those leads into a distribution mechanism that allocates them to you, prorata, based off of your spending on a local and national be level.
Craig
38:06
That was one of the most succinct business model. What’s they do descriptions that, that was excellent, by the way.
Jack
38:12
That is the crux of what they do. Thank you. And they, and it’s worked and it’s, and it’s worked really well now. And, and you know, they, they obviously they grew to 1100 investors, the private equity company that used to own them, sold them to Bayview, Bayview saw them as a way to sell, probably saw them. I don’t, you know, I’ve never, I haven’t talked to the Bayview execs about this, but probably saw them as a way to a distribution mechanism for their mortgage products. Yep. And that’s seems like a, and you know, there’s profitability in and of itself.
Craig
38:39
1,150 investors gotta be buying a lot of homes.
Jack
38:41
Yeah. And home investors folks pay enough for their franchise that they are active. You don’t have home investors franchise and then not buy any houses. You’re
Craig
38:48
Not, you’re not kicking the tires as a, as a hobbyist No. If
Jack
38:51
You’re, no, you’re committed when you buy a home franchise. Right. So all that said, home has bitten getting the crap kicked out of it in the media because of some, what’s been accused to be predatory practices in terms of when they’re buying those houses sitting across the kitchen table, you know, with 1100 folks, you don’t know what’s being, you know, as the, as the franchise. You don’t necessarily know the, what’s being said in those conversations. Correct. And the nature of those transactions is, you know, is definitionally delicate, right? Like you’re buying a house, you’re buying a home from somebody that needs work from somebody who’s willing to sell, who needs the cash, right? Like that’s why they’re calling you, is they need the cash
Craig
39:29
And you’re buying it at a significant discount.
Jack
39:31
Yeah. And you can be buying it a significant discount. So that can be done appropriately where it’s solving problems, you know, where you’re a solution provider, but it can be done in a predatory manner if the person that you’re talking to doesn’t know what they’re doing, for example, which is one of the things that they got accused of that can be highly problem. I mean, that, you know, that’s just way unethical, you know, there’s just no, no excusing for that. And so I think it was a ProPublica
Craig
39:55
Article, it was
Jack
39:56
That got released that they just did a deep dive on ’em and it ripped them into shreds.
Craig
40:00
Yeah. I’m looking at the article right now, and it was rough. It was ProPublica, if you wanna check out the show notes for today, as always, you can go to real investor radio.com/notes where we provide links to the stories that I find for, and Jack finds for research for the show. But this story, this is brutal, the ugly truth behind, we buy Ugly Houses and they did a fairly significant investigation on this. But go ahead.
Jack
40:30
Yeah, so the, you know, it, the, the allegations were generally that there was some unethical stuff happening at some of the franchises, and in the wake of all of that, the, the c e o of Home Busters stepped down and kind of alluded even in his public statement, that that press had really taken a personal toll on him. Yeah, he did. And so it’s interesting to see what the franchise will do on a going forward basis, right? Like home investors is part of the real estate investing like fabric in the country. Like it really is, everyone knows a real, a Home Buster’s franchisee. If you don’t, whether you know it or not, you know, you, you don’t, you know, one and who’s operates in your local market. And so it’s interesting to see, you know, being a, having a very national prominent brand and having, you know, you’re susceptible right. To these kinds of attacks, you know, in the same way that an invitation homes is more susceptible to attacks about bad landlording practices than a local mom and pop landlord might be.
Craig
41:31
Yeah. So, just, just quickly on this one, this ProPublica investigation based on court documents, property records, the company training materials and interviews with 48 former franchise owners and dozens of homeowners have sold to its franchisees, they found that home franchisees that they used deception and targeted the elderly infirmed and those close to poverty, that they feared that homelessness would be a consequence of selling. I don’t know how that actually worked, but I mean, look, we’ve all done wholesale deals and you know, we know that there are ways that you can, that there, there’s ways that you can do it above board and there’s ways that you can do it very deceptively, you know, I think some of the, you can’t have 1,150 franchisees and everybody’s gonna be always operating above board. It’s just, it’s hard to say that, that that would happen. Yeah.
Jack
42:23
ProPublic would probably say you have to, especially if you’re gonna have 1,150 franchisees, you, that the quality control necessary to, to make that so we can avoid this, you know, it, it, you know, it wasn’t enough. Right. Whatever they did wasn’t enough would be the criticism, right? Correct. And it’s tough to scale. It’s the, you know, it, it, it gets hard to scale, especially, you know, as you get more public, the spotlight gets, gets brighter. So
Craig
42:47
71,000 transactions, the company’s done since 2016. There’s gonna be a bad one amongst the group. Yeah. You know, or two, right?
Jack
42:55
Yeah.
Craig
42:56
Let’s see what else I have for today. That might be it. No multi, a little bit of multi-family news, Shaq, multi-family news. You know, we, we, we like to cover all things residential, both single family and malti. And it looked, it looks like there’s a, a report here where F H F A extends forbearance for rental property. So Fannie and Freddie extend forbearance for owners with caveats through the end of September. Those forbearance agreements were scheduled to end this month. And it looks like that Fannie and Freddie have extended those forbearances for owners through the end of September. Those options put off debt payments for federally backed multi-family properties that have been slated to expire. As I said at the end of June, the regulator also extended protections. Look, if you’re gonna get as a landlord Jack, then your tenants have to get protections as well. And that’s really what this is all about, obviously. So maybe you could speak to that. So by the way, lemme quickly though, it says here, as of the most recent report, there are 1,154 securitized loans with forbearance, which is actually only about 2.1% of the entire G S C portfolio. For those where the forbearance has ended, more than 82% have actually are, are currently making payments or have fully repaid those, you know, what was owed via the forbearance. So maybe you could speak to that. Do
Jack
44:19
You know the reason for why the forbearance, why the properties were in the forbearance plans to begin with?
Craig
44:24
If you read the article, it’s covid, covid covid.
Jack
44:27
Oh, okay. Gotcha. Yeah. So yeah, it’s, yeah, it’s impressive that this, that, that this far along. We’ve still got some covid hangover, though I’ll say that the court systems do, or at least our court system does still have significant covid hangover that you have Not yet. You know, we’re, we’re still months and months behind on eviction cycles and as a result, the, you know, the aging on our properties, like we’re, we’re getting, we’re collecting those rents eventually because people don’t want to be evicted. And they have been fine for a while as it relates to the disruptions that may have happened during, during covid, obviously there was a lot of rental assistance that was handed out in the wake of covid as well. Yep. And it is, it’s interesting to that there are still enough anecdotes out there that F H F A is allowing those forbearance plans to, you know, to continue to kick those plans. Probably as, you know, the court systems continue to catch up and try to get back to a place where we’re enforcing property rights on a consistent, timely basis. Yeah. I
Craig
45:27
Don’t, I think this is clearly a, a, you know, it, it, it talks about the, the article really talks about from the standpoint of the owner, but it’s really all about the renter. It’s all about the tenant at this point. So as you look across your portfolio of 800 plus houses, you know, did you have to do a lot of forbearance on rent payments or
Jack
45:46
We, it was far f not nearly as as bad as we expected. Like we were freaking out. Right. Like everyone was freaking out that it was gonna be horrible. And
Craig
45:55
You remember what percentage it was from those late, those who couldn’t pay those you had to work out deals with? Well, yeah, it
Jack
46:01
Was, it was ironically we had, it was we actually collected more rent than we usually did, which was like the shocker, right? Yeah. Right. I think
Craig
46:11
Or Covid please.
Jack
46:12
Yeah. God, at the time though, I think the, the sentiment was generally that like no one wants to get evicted during covid. So like they prioriti and also they weren’t doing anything else, right? So they had, right. If, if you didn’t lose your job, you know, which many people were affected of course by, you know, losing their jobs and having income disruption. But for those that didn’t, you prioritize your rental payment because no one wanted to get evicted during covid. That was like a horrifying idea, you know, to be vulnerable in a period of vulnerability. So we actually didn’t have as bad of, we actually had better rent collections than we usually did, but we had this like small minority of folks who abused the system. I was concerned it was gonna be like a solid chunk. Yep. But it ended up being a, a very small minority of like, you know, which turned into like, you know, just disaster scenarios where someone hasn’t paid for like 15 months and it wasn’t because they were affected, it was because they’re game in the system right Now that was a very small minority, but it did happen still
Craig
47:09
A few percent.
Jack
47:10
Yeah. So if you’re, and we were fortunate enough to have enough properties that as a portfolio it was fine. Like we could handle that. But if you were an un, you know, if you were a landlord that had one of those situations and got unlucky and that was in, that was, you know, and that was one of three that you own. Well that was a massive problem. Yeah. And so I, I think you know, that we, so we kicked the can for a long time then there was some covid assistance that came in and, you know, depending on your municipality or county or state, those were that that covid assistance to renters for rental payment catch up was dolled out on a somewhat successful basis. Yeah. And then now it’s been more of a story of the court systems catching up and they’re, ours is still not, you know, really fully caught up.
Craig
47:56
It’s amazing how we’re still working off from that hangover, you know, just, yeah. It really, really is something I, you know, hear it all over the country, you know, but strangely enough, I, I haven’t heard many horror stories. Yeah. You know, it’s, it’s, it really, I quite frankly in, in a lot of these states that had really strict lockdowns where people were losing jobs, losing businesses, it’s amazing that we, we hear you lend to guys all over the country. It’s amazing how we just haven’t heard a lot of the horror stories that you would’ve expected. Yeah, no. And so, so which makes this story a little odd in the sense that we’re still dealing with it, right?
Jack
48:30
Yeah, I agree. Through September. Yeah, I agree. I agree.
Craig
48:33
Hey, listen man, that’s all I have for today’s podcast. You got anything else you wanna add?
Jack
48:36
No, I’m great. Well
Craig
48:38
That was a solid 51 minutes. Alright. Hey listen, hey, thanks for checking us out again at Real Investor Radio. I hope you enjoy this episode. We’ve got a ton more coming for you guys in the upcoming episodes. We’re gonna start having some really great guests that are coming on that can add to the flavor of the show. Excited about that, that’s coming up real soon and just can’t thank you guys enough for checking it out. I’d love to hear your comments. Please leave ’em below and we’ll talk to you soon. Thanks Jack. Thanks Craig.
