\n
Dave:
Hey, what\u2019s going on everyone? Welcome to On The Market. I\u2019m Dave Meyer and today, I am not going to be your host. We have a special host today, Mr. Jamil Damji. What\u2019s going on man?<\/p>\n
Jamil:
Hello. I am happy to host On The Market today because of a bet that you lost. For those of you that were at the Bigger Pockets convention, we, James Dainard and I, won a bet where we dominated at a debate. And so, therefore, I am your host today. And because I am your host today, I have chosen a great topic and it is called The Depressing Show.
Yes guys, I plan to depress everybody today but actually, not depressed, because if you look at what we\u2019re going to talk about, we\u2019re going to show you how you can gain, how you can make a tremendous amount of money and find big opportunities in a down market. So don\u2019t get depressed because everything that we\u2019re going to talk about today will be an opportunity for you to gain. But before we get into that, we\u2019re going to take a quick break.
Hey everybody, welcome back. Let\u2019s hear from our panelists first. Henry Washington, how are you today brother?<\/p>\n
Henry:
I am doing well sir. Thank you. Thank you for doing this. I wouldn\u2019t say you dominated the debate. I would say you eked out a slight victory on a technicality, but I mean you won, so we\u2019re here. But thanks for having me.<\/p>\n
Jamil:
Well, I appreciate the fact that you\u2019re a very sore loser, but we did dominate and it was a fantastic debate. I mean, look, you showed up, you did your best, but it just wasn\u2019t enough. Kathy, so good to hear from you today. How are you?<\/p>\n
Kathy:
Well, I think we should have another live debate on On The Market at some point so that we can redeem ourselves.<\/p>\n
Jamil:
Well, redemption is always good, but it\u2019s not for you today. The only person that I actually have a tremendous amount of respect for on the panel today, is Mr. James Dainard because he was my partner and helped us win. How are you, James?<\/p>\n
James:
I\u2019m doing good. We did dominate then, didn\u2019t we? Did we get a standing ovation, if I remember it?<\/p>\n
Jamil:
We absolutely got a standing ovation. In fact\u2026<\/p>\n
Henry:
It\u2019s cause you were leaving.<\/p>\n
Jamil:
Wow.<\/p>\n
Kathy:
I remember there was some cheating, some guessing\u2026<\/p>\n
James:
Me and Jamil just have good synergy. It just is what it is. But I happily accept Kathy\u2019s challenge for another live debate on the On The Market.<\/p>\n
Jamil:
I\u2019m with it. I\u2019m with it, but you know what? They can\u2019t have a round two for another 12 months because you don\u2019t just get another at bat. You got to earn the at bat. And so for now, we\u2019re going to hold onto that belt. Dave Meyer, how does it feel to be demoted?<\/p>\n
Dave:
Honestly, I\u2019m terrified right now because you\u2019re going to find out how easy my job is.<\/p>\n
Jamil:
Oh.<\/p>\n
Dave:
The ruse is up.<\/p>\n
Jamil:
Well Dave, I\u2019m sure that the entire audience is going to be looking forward to you taking control of On The Market again. Everybody loves you, myself included. But today\u2019s topic is really important because this is a down market, guys. We are seeing the market completely shift. Interest rates and the Fed have engineered one of, I would say, the fastest slowdowns that I\u2019ve ever seen in the real estate market. It was the dramatic halt. And for anybody investing in real estate right now, there has to be an opportunity. I\u2019ll tell you guys a little story.
Back in 2010, I reentered the real estate market after losing millions of dollars in the financial crisis of 2008. And I built a fortune in that down market. In fact, most millionaires will tell you that you will find the best opportunities in down markets. So what are they talking about? What strategies can we implement? What things can we do right now, to put ourselves in a position to win when the market is cooled off? Because as you might know, when people are zigging, the rich zag, wouldn\u2019t you all agree?<\/p>\n
Dave:
I a 100% agree. This is my favorite time.<\/p>\n
James:
Yeah, absolutely.<\/p>\n
Jamil:
It\u2019s my favorite time too. So let\u2019s share with the audience some of the strategies that we can put into practice right now, while the market is down. And I have five specific ones that I have been personally using to generate opportunity for me. And I will share those five. And I would love if each of you would speak to your experience with one or some of these strategies so that we can share with the audience how they can participate when the market has cooled off.
The first strategy is buying deeper. The second strategy is getting creative. The third is finding new ways to hold property. The fourth is going after foreclosures because they are up. And the fifth is short sales. Guys, do you find any resemblance to what happened in 2008? I know we have to be careful because we have a completely different market than 2008, but some of these things came back up. What are your thoughts. Henry?<\/p>\n
Henry:
Yeah, I totally agree with you. There is tons of opportunity out there. I\u2019m seeing more opportunity on the purchase side than I ever have before. And you\u2019re right, foreclosures, short sales, those are all\u2026 You know what, a lot of people don\u2019t know this. I bought my first property, to live in, back in 2007 and so, I paid a pretty decent price and then everything went crashing and I was in a tough financial spot. I had to short sell my property. So, I know the not so fun side, what that\u2019s like, but there is absolutely opportunity out there and I think we\u2019re 100% looking at more of those strategies.
And I think the catch or what a lot of people are going to have to figure out is, yes, the opportunity is there, but how do you find the money or the funding to buy those opportunities? And I think that\u2019s getting a little trickier but not impossible and not hard. And I\u2019d love to be able to expand on places where people can\u2026 It\u2019s a double edged sword, right? Opportunities are there, find the financing and then, if you can hold through the downturn, then you make yourself a substantial amount of money as things come back up.<\/p>\n
Jamil:
So, what Henry is talking about is buying deep. When the market starts to slow down, sellers still need to sell and real motivation is going to move people. Now because there\u2019s so little money in the market right now, so few people are actually taking action and people are fearful to enter the market. A lot of the retail buyers are standing on the sidelines, just waiting for things to cool off. They\u2019re trying to see, \u201cAre interest rates going to come down? Are prices going to come down? Do we have more of an opportunity? When will the bottom actually hit?\u201d
So buying deep is actually, right now, one of the biggest opportunities that we have. But you have to look at it from the point of view of, \u201cHow deep do you buy,\u201d Right? That\u2019s a big question because, what if you don\u2019t buy deep enough? What if the market depreciates even further? Kathy, James, Dave, what do you guys think about buying deep? And I know Kathy, for you specifically, you are an expert at raising capital. Just like Henry had described, where do you find the money? If there\u2019s anybody on this panel that I think has a real insight into where the money is hiding\u2026<\/p>\n
James:
It\u2019s hiding in Malibu.<\/p>\n
Kathy:
There\u2019s a lot of money out there. There\u2019s still a lot of money out there. Lenders are getting more cautious but that\u2019s mainly because, and this is way off topic and we\u2019ll do another show on it, but it\u2019s because there is a belief that mortgages will come back down. And so, it\u2019s not a great time for lenders to be lending. So it\u2019s a little bit harder to get money right now, from a traditional place, although it\u2019s still out there. Again, topic for another show, I\u2019ve got a great guest for that. But at times like this, this is where doing partnerships, JVs, syndicating, working with people who don\u2019t know what to do with their money. Maybe they have a self-directed IRA and they\u2019re just frozen, they don\u2019t want to lose any money in the stock market. There are people who want to invest and know that there\u2019s opportunity but don\u2019t really know how to take advantage of that opportunity.
They don\u2019t have the experience but they have the money. Maybe they don\u2019t have the time. So, it\u2019s times like this, that private money, talking to people who just want their money secured to something because you could\u2026 What are they getting elsewhere? What kind of return are they getting elsewhere? They could lend to you. Be in first lean position at\u2026 I mean, what are interest rates today? What seven, 8% return that they could get being secured in first lean position on your deal? I mean, private lending is a wonderful opportunity for people to be able to participate with you. You bring in the experience and they bring the money.
I started syndicating in 2009, before I even knew what that word meant. Which was, basically, collecting money from lots of people. Lots of people invest together. It\u2019s regulated by the Securities Exchange, is the SEC. So it\u2019s different than the Department of Real Estate. There are lots of rules about how to use other people\u2019s money. If you have just one partner, you still have to be very aware of security law because if the person bringing the money isn\u2019t doing any work, then it\u2019s considered a security. So, you need to know the laws and regulations. There\u2019s lots of ways to learn that. We could do a show on it sometime, but this is an opportunity. If you could do that, you can acquire so many great deals.
So that\u2019s why we have a fund started right now. We\u2019re going deep, as you say, we\u2019re getting discounts. Discounts on property that we could not even bid on before, there was a wait list for these properties. Now we\u2019re getting discounts. It\u2019s incredible.<\/p>\n
Jamil:
Incredible. That\u2019s the feeding frenzy. And of course, there are a lot of people right now who have taken big hits in the stock market and are looking for alternative opportunities to invest. And real estate is always a great option for folks, especially in times like this when you can get incredible deals. And James, I\u2019ve been following your social medias, been watching you walk properties and you are one of the most talented renovators that I\u2019ve ever seen. But I also know you to be an extremely talented acquisitions person. And so, tell us how are you and your team pivoting right now? Because if there\u2019s anybody who can navigate the waters that we\u2019re in right now with great grace, it\u2019s you Mr. Dainard.<\/p>\n
James:
I appreciate that. I always try to be graceful. I think this is a great topic. Like, buying deep, what does that mean, right? Everyone\u2019s like, \u201cOh, the market\u2019s getting unsteady. What do you need to do to get into a safe deal?\u201d And everybody\u2019s answer should be different, right? And going into what Kathy was just talking about, cost of money.
The first thing you got to figure out if you want to define how you want to buy is, what is your cost of money? You have to know what that financing debt\u2019s going to be, what the worst case scenario is and then you put that into your performa at that point. So for us buying deep right now, we bought hundreds of homes in 2008 and nine, when the market was crashing down rapidly and we were flipping properties on the regular. So it\u2019s a business model that works, but you have to be really good at implementing the right plan and knowing what your buy box is, based on your own costs.
So buying deep for us, based on that is\u2026 What we\u2019re doing is, we\u2019re packing our performa. Is where we\u2019re taking right now because we see that the treasury yield\u2019s higher, the economy\u2019s not loosening up and the Fed\u2019s going to keep increasing rates. And so, we think that the market is going to keep coming backwards a little bit. And that\u2019s okay, as long as we build that into our metrics. So buying deep for us, we\u2019re using our ARV values at comps that are only 30 to 45 day sold and pendings, at this point. So it\u2019s very current, recent data. In addition to, because we think rates are going to increase, we\u2019re knocking 5% off that number because if we think that there\u2019s an annual 6% slide coming, if we are in and out of our flips in six to seven months, we\u2019re going to knock 5% off that value at that point.
In addition to cost of money, we\u2019re running this with extension fees already built into our performa because it could take longer to sell these things. We\u2019re adding two months of debt cost, of whatever our debt cost is going to be. And that\u2019s why it\u2019s so important for you to understand what the actual expense is. If it\u2019s 12% money, that\u2019s fine. In 2008 we were borrowing 18% money from a loan shark, essentially. And that was okay. I always talk about this guy because he really did\u2026<\/p>\n
Henry:
Was it Jamil?<\/p>\n
Jamil:
It wasn\u2019t me.<\/p>\n
Kathy:
It was me.<\/p>\n
James:
Yeah, Kathy. Should have known. Well, speaking of sharks, Jamil, I still have our Snuggie shark outfits, by the way. So, those have to come out. But it doesn\u2019t matter what your interest rate is, as long as you build it into the deal. Even when it was 18%, I wasn\u2019t sweating the 18%, I just had to put it in my performa. And then, as we think the market\u2019s going to slide down, we\u2019re adding two months to our whole times and we\u2019re adding in extension fees because usually, we\u2019re getting a six month term. And we\u2019re just accounting for that upfront. So that goes into our deep buying process. In addition to, we\u2019ve increased our margin expectations by 10% than what we were buying nine months ago. So if we were targeting to make 30 to 40% with leverage on a deal, we\u2019re now targeting 50 to 55%. So we\u2019ve increased our margin expectation, we\u2019ve taken the juice out of our ARBs with actual logical information to us, that we think there could be another 5% slide.
And then we\u2019re over budgeting for a financing and debt cost, because it could go longer right now. As the market slows down, transaction slow down. And lastly, we\u2019re putting 10 to 20% contingencies on our construction, just to pad that deal a little bit more. Even though we have seen a sudden drop in construction costs over the last 30 days, I\u2019ve already clipped down my budgets by 10%. And so for me, defining what buying deep is, yes, buying deep is buying cheap, but you really want to think about what are all your expenses, pack those expenses and then that will give you the defined buy box of what you should pull the trigger on.
And that\u2019s really what we\u2019re focusing on, is just putting the metrics in, padding it and as long as it clicks out that way, we\u2019ll buy that deal. We just bought three homes in the last two weeks. There is good buys out there but you really need to define it. They just don\u2019t gut check them anymore. The last couple years, you could kind of gut check a deal, buy it and make some money.<\/p>\n
Jamil:
Yeah.<\/p>\n
James:
Not going to happen anymore.<\/p>\n
Jamil:
I love what you\u2019re saying right now. In fact, you gave me insights that I haven\u2019t been using either. Like baking in the extension fee, that\u2019s something that I completely missed on all of the flips that we\u2019ve been purchasing recently. Now, I feel like I need to be texting my team and letting them know, \u201cHey guys, bake in an extension fee as well.\u201d I think what you just said right now was magical. Everybody needs to be taking notes. He is baking in added construction costs, he is increasing his profit margins, he is baking in a slide of 5%. He\u2019s only using data that\u2019s 90 days or newer and checking pendings.
All of the things that James is saying to you right now, are as good as of a crystal ball as you could possibly get. The data is the crystal ball, guys. And if there\u2019s anybody on this panel and a panelist used to be a host, but a panelist that is tied to data and understands data better than anybody else that I\u2019ve ever met in my life, Dave, what the heck is happening out there and what do the numbers say is going to happen?
I mean, if there\u2019s anyone that I know is studying the trends, I feel you have an insight beyond any of us on this entire episode. So, what do you see as going to be coming around the corner Dave?<\/p>\n
Dave:
Well, I was going to just sit here and not talk because this is kind of my day off but you flattered me enough so I\u2019ll respond to this.<\/p>\n
Jamil:
I love it.<\/p>\n
Dave:
Thank you. I think this point about buying deep is excellent and it\u2019s kind of just returning to being what an investor is. When I started investing back in 2010, you never paid what people were asking for. That\u2019s just what investing is. You try and get a deal every single time. And so, I think that there is a lot of downside risk in the market that property prices are going to drop in a lot of markets. And my advice and what I\u2019m trying to do is to head that off by basically saying, \u201cOkay, my market might decline five to 10%. So that\u2019s what I would offer, under the asking price so that if it does go down five to 10%, that you are protected.
You\u2019re not going to get it exactly. And honestly if you\u2019re off by a few percentage points and it goes down on paper, if you\u2019re a buy and hold investor, it\u2019s not a huge deal. So the question is, how much is your market going to go down and no one really knows. I think the best way I\u2019ve heard it described is, we had John Burns on the show recently, and he said that he expects all of 2021\u2019s appreciation to be wiped off the board.<\/p>\n
James:
That\u2019s what I been saying for the last year. I think we\u2019re going back 2020 pricing.<\/p>\n
Dave:
Which is still up from pre-pandemic. So I think that\u2019s still important for people to know, depending on how you define a crash. But you look at markets that popped 20% last year, they\u2019re probably going down 10 to 20%. But if it went up five to 7%, that\u2019s probably the ballpark, at least, you should be considering for how much below current values they might go. But I mean, again, Kathy mentioned this, so this is a whole different story, but if mortgage rates do come down and a lot of people are forecasting that, the downside might not be as bad as I think a lot of the more bearish forecasters are calling for right now.<\/p>\n
Jamil:
So, that\u2019s really great news because that means that if you essentially, just for back of the napkin math, if we erase the insane appreciation that happened for that little short period of time, if we take that off the table and we get back to fundamentals of underwriting and really get out there and use the negotiation techniques and leverage what\u2019s happening in the market right now, if things don\u2019t turn out as bad as we might think they might get, we\u2019ll be actually doing really well.
And so, guys, there\u2019s an opportunity here for you to continue to participate by being hopeful and knowing that the market could rebound or could come back to a normality here, sooner than later. But even if it doesn\u2019t and we lose the gains of 2022, there\u2019s still a massive opportunity for you to take advantage of motivation. Guys, when people need to sell, they need to sell.
I\u2019m in a deal right now, where an appraised value on a property was 1.7 million and I\u2019m under contract at 1 million dollars. The seller needs to sell, there\u2019s nothing that they can do. I\u2019m the only person that\u2019s willing to come in and take the deal. And so, this is the opportunity that I get to take advantage of and I\u2019m seeing this day after day after day. Guys, the next strategy that I want to dive into is being more creative. When we find ourselves in situations like the market now, where rates are seven, maybe even 8%, we want to take advantage of the cheap money that trailed into this market. And again, there are so many people that have motivation, that are ready to trade their property and have incredible financing attached.
So for those of you that are not familiar with creative financing or subject to, that\u2019s when we are leveraging existing financing. Where we are having a seller provide us their existing financing on a property and we take over that property or control of that property, with the existing financing in place. Now, if we look at the rates that trailed into the current market, we had rates at 2%, 3%. So there\u2019s thousands of homes out there right now, that have incredible financing attached to it and we can leverage that financing as an asset. Henry, are you taking advantage of any creative solutions right now? Are you buying any properties subject to? And how can people participate with that strategy?<\/p>\n
Henry:
Yeah, man. Creative finance is super fun. I\u2019ve actually been spending a lot of time educating and re-educating myself on different creative financing strategies just to have that additional tool in my tool belt, to not only use it to make money, but you use it to provide your sellers another solution to their problem. You\u2019re right. People still need to sell and the problem or the opportunity is that, there\u2019s less people that are willing to buy these deals that need to sell. And there\u2019s less real estate agents who are willing to take on tough listings because it\u2019s harder to sell properties right now. And so, if they\u2019re going to spend their time, they want to spend their time on the deals that they feel like are going to be easier to get over the finish line. So that creates this opportunity. Yes, we\u2019re absolutely looking at creative finance, I am looking at any deals that I am offering on.
I\u2019m also looking at what would the terms be on an owner finance and offering an owner finance solution as well, because if that deal needs to sell, I can typically pay a little more on an owner finance and it creates this win-win situation cause I don\u2019t have to go get expensive money from a bank or a hard money lender.
Also, we are taking a look at deals that we looked at 3, 4, 5 months ago. Specifically, commercial deals that we\u2019ve looked at 3, 4, 5 months ago and maybe the numbers didn\u2019t work, maybe the seller wasn\u2019t quite ready to work a deal yet. And what we\u2019ve done is, we\u2019re looking at who\u2019s got the debt on these deals, we\u2019re calling those banks and asking them, \u201cAre you good with us assuming the loan, or taking on the loan with the current debt in place? And then, what would you need from us to bring to the table additionally, for us to do that?\u201d And we\u2019re reworking the numbers on deals that have still been sitting there and the sellers are now a little more desperate, a little more willing to negotiate and now, we can work a deal because we\u2019re taking over a loan at a lower interest rate, we\u2019re getting the deal done or sold and we know there\u2019s some motivation because these are things we\u2019ve looked at several months ago.
So, that\u2019s two of the strategies we\u2019re using to look at creative financing.<\/p>\n
Jamil:
Guys, to highlight something here that Henry just said. A lot of people have this irrational fear of the due on sale clause being evoked when somebody takes over a subject to property, and Henry is running in front of that situation, by calling the institution and getting permission. Understand that you will never get what you don\u2019t ask for. And there are lots of institutions out there who do not want to lose the loans if it can be a performing note, and if they can find somebody to come in and take control of the property and do better with the asset than the current seller, they would love to have that person.
Now, that might mean that you have to re-qualify or add additional security or something, for that institution, in order for them to allow that assumption to take place but guys, that money is so cheap, we\u2019re talking low, low, low. One, 2%, 3% loans. You guys could really get and take advantage of those opportunities. Dave, what are you seeing there?<\/p>\n
Dave:
Jamil, I\u2019ve seen, in the last week, two deals for commercial, like 12 to 20 plus units in Colorado, where the seller has arranged that with their financier. Because they\u2019re motivated to sell, and they know how difficult it is for you to find a loan, they are going to the banks and advertising that the loans are assumable by the buyer, which is just incredible. One of them I was looking at was at 3.2%. So they\u2019re going and doing the work for you right now because they know how hard it is and they\u2019re offering these incredible financing deals that\u2026 I mean, this is just unheard of over the last couple of years.<\/p>\n
Jamil:
So people would actually be crazy not to take advantage of this, right? I mean, when would you ever be able to\u2026 Again, I don\u2019t see rates coming down to 3%. I don\u2019t. Even with the market rebounding and turning around again, I do not think we\u2019ll find ourselves in money that cheap again. So these opportunities guys, if you look at an amortization table and you see how much you spend in interest, how much you pay in interest. If you can take advantage of this cheap financing, it doesn\u2019t matter if you\u2019re paying a little bit more for the building. Over time, you are going to win. And I see that smile Kathy, and I know that that just tickles your fancy. How are you guys taking advantage of creative opportunities right now, in your business model?<\/p>\n
Kathy:
Well, it really is important to have banking relationships because there are a lot of commercial properties that are in trouble right now. I don\u2019t see that so much with residential, but we\u2019re obviously seeing an uptick there. But with commercial, a lot of people got into bridge loans or they didn\u2019t do proper underwriting and having those banking relationships, I have banks contacting me all the time saying, \u201cHey, do you like this deal? Do you want this deal? Will you look at this one,\u201d Because banks are not real estate investors. That was how we did our first syndication.
We were able to just take over the bank loan. It was 26 town homes, riverfront, waterfront in Portland, that were 70% complete but not finished, and the bank failed. There was a 3 million dollar loan on it, the value was about 20 million. We just took over the note. And we were able to finish out those properties because a bank\u2019s not going to do that. They\u2019re not going to finish out a 70%, almost finished, product. So banking relationships are a great way. And I mean, mostly with the portfolio lenders, the private lenders because they\u2019re maybe stuck with some stuff they want to get rid of and don\u2019t know what to do with. So that\u2019s one way, for sure. It\u2019s a good time for that.<\/p>\n
Jamil:
I couldn\u2019t agree more. Relationships are incredibly important. And when we\u2019re talking about getting stuck with and holding property, I mean, holding and being creative and expanding our thought process on how we can hold property if we end up having to wait out a market cycle.
And James, I\u2019m fixing and flipping right now and I\u2019m holding some of these luxury flips that I have to be creative on how I can refinance these properties and cash flow to hold them until the market takes some kind of rebound. I know you to be one of the most incredible fix and flippers in the entire country. How are you holding property that you got stuck with? And are there any creative solutions? Like possibly, corporate rentals or nursing homes or sober living? Are there any things that you are doing to hold property more creatively, to generate increased cash flow for some of the stuff that you might get stuck with?<\/p>\n
James:
A lot of people aren\u2019t going to like what I\u2019m going to say, but I\u2019m a firm believer, if I bought that inventory to sell it, it\u2019s getting sold. And I\u2019m not afraid to lose money if I need to lose money because one thing I don\u2019t like to do is force an investment into something that it\u2019s not supposed to be in. I would rather take a clip. I just lost 300 grand on a house and it was just, the deal went sideways every different\u2026 It just went wrong on all avenues and breaking even in a good market would\u2019ve been okay. And that happens. If you buy a lot of property, you\u2019re going to get clipped on a minimum one out of 10 properties. That\u2019s just the way it goes. You can\u2019t hit every stock, you can\u2019t hit every investment.
There is no magic crystal ball where you\u2019re a hundred percent accurate. So, there is going to be those times you get clipped. So for me, a lot of times, I\u2019m looking at how much am I going to bleed on it or how much can I break even on it, is there the equity position. I\u2019m looking at the core metrics. I\u2019m okay to keep some properties and take a little bit of a hit every month and ride out a bad market, and I can look at doing things like short term rentals. We can do corporate housing, we can just do a straight traditional rental or we can add a kitchen in the basement and maybe just add a couple more units in the building to kind of subsidize down the cost. But majority of the time, when we\u2019re doing luxury stuff, it\u2019s not going to pencil well.
I\u2019m going to have to put that up at a high end Airbnb. Like where you got to [inaudible 00:29:25] two flips that we\u2019re listing that are going to be four and four and a half million dollars in the next 60 days. Those are expensive properties, we\u2019re into them for 2 million. My debt cost on that\u2019s going to be 15 to 16,000 a month on a traditional rate, if I refinance that deal in. That\u2019s not healthy. That is not good to do. I would rather sell that money, get the cash back out and I could rent those out probably, for four to five grand a week, actually more than that. I could probably get seven to 8,000 a week for these properties, but that\u2019s not what I\u2019m doing. And if there\u2019s a vacancy and if we\u2019re going into a recession, people are spending less disposable income. Those pricing could come down, and at the end of the day, I have a substantial amount of cash in each one of these deals.
Seven to $800,000, sometimes a million bucks. I would rather get 400 grand back and lose the four, and go buy a smart investment with a big kicker down the road. That\u2019s just short term paying, long term game. If I got to take the clip, I want to get my cash back and then go buy something better because the buys out there now, are unbelievable. We are ripping deals right now. Large multis, small multis, single family, development sites, we are getting really good buys. So I\u2019d rather just take the loss now and reload, and keep to my same basic principles. I don\u2019t like to force a plan. And if it needs to be sold, it needs to be sold. And I know that\u2019s a hard thing for a lot of people to hear because on these luxury flips, when the market compresses 15%, it hurts. No matter what you do, it\u2019s going to hurt.<\/p>\n
Jamil:
A hundred percent.<\/p>\n
James:
And so, I\u2019d rather just take one in the teeth and move on to the next one.<\/p>\n
Jamil:
Well, I mean James, that is very astute and I agree with you. There\u2019s going to be some deals that we\u2019re going to have to just lose money and write a check on. And forcing a business model that\u2019s not your core competency, is also problematic, right? Because you take your eyes off of what you do, to generate capital. When you do that, when you pivot and you do other things, you take your focus away. But I still believe that there\u2019s a way that we can, at least not lose the entire bank. We don\u2019t all have your jaw line, so we can\u2019t all take it on the chin. Henry, what would you do creatively, to hold any of the stuff that you get stuck with?<\/p>\n
Henry:
I run a much smaller operation than James, right? And so, that means I need to manage my risk a little differently. Partially, I do that by, I\u2019m not in million dollar flips because A, my market doesn\u2019t have a ton of them. I\u2019m in a whole different area of the country, and B, my margins are slimmer. And so, what I am doing when I need to pivot is, I am planning in my underwriting, for buying it at a price point that I know I can cashflow as a long term rental, if I have to pivot. So my strategy typically and still is, I market heavily direct to seller. I buy everything that\u2019s a deal. I sell the singles, I keep the multis. But I am also a believer in, you know, \u201cYou take what the defense gives you.\u201d And in 2020 and 2021, 2022, the market was saying, \u201cHey, you can take a lot of your cash flow in the form of a sale right now and then reinvest that money into better cash flowing assets.\u201d
And now the market\u2019s telling you, \u201cHey, it makes a lot of sense to buy some of these properties that you\u2019re getting great deals on, and just sit on them and hold them.\u201d And so now, when I\u2019m making offers on my single families, I\u2019m writing in to my underwriting.
In other words, I\u2019m not going to offer at a price point that\u2019s only going to work if I flip it, I\u2019m offering at a price point that\u2019s going to cash flow very well, and will make me a good amount of money if I sell it, so that when, and if, I have to pivot, I\u2019m totally okay with it because the numbers say I\u2019m going to cash flow well. So it\u2019s just a matter of understanding where your properties are, what they\u2019re going to be able to rent for, and then what you\u2019re going to have to put into it. And I won\u2019t buy a property that doesn\u2019t have one exit strategy right now.<\/p>\n
Jamil:
Smart. And that takes a substantial amount of confidence and level of sophistication to pivot exit strategies. But guys, what Henry\u2019s saying is really important. Look at every deal before you get into it and see what are the different exit strategies that I could put into place here, if things go wrong. And Kathy, I seen you do that at a project in Park City. Tell us a little bit about what happened there.<\/p>\n
Kathy:
Well, first I wanted to make a comment on what James was saying because I see a lot of the comments that people make and people do DM me and tell me that they\u2019re really struggling with trying to sell a property. And I think knowing that you can take a loss on one property but take all the knowledge you learned and go make more money on the next, is really what makes you a professional investor.
You just have to be able to cut the ties and walk away if it\u2019s not going to work. So I think that\u2019s just really, really important advice. I know there\u2019s a lot of pain out there. I know that we hear talk about how exciting it is to be investing right now because there\u2019s deals out there, but it is not good if you\u2019re trying to sell. This is a hard time to sell and you\u2019re just going to have to either find a creative way to hold and wait, or you\u2019re just going to have to take a cut, in most cases. I know there\u2019s pain out there and I just wanted to address that and let you know, you\u2019re not alone. It\u2019s just part of being an investor. You\u2019re going to be the one who gets the great deal on the next deal if you have to take a loss this time around.
So, with discovery, with our properties in Park City, I\u2019m actually going there this weekend. We\u2019ve had to pivot in so many ways because this is 20, well was a hundred homes that we\u2019re building and selling. We\u2019re down to 20. And the 20, are the ones we\u2019re supposed to make all the profit on. So this is a painful time to be a builder because all your costs are usually upfront, all the infrastructure, the roads, the utilities, and you make your money at the end and if you don\u2019t time it well, it stinks. It means you might have just spent the last five years not making money when the profit\u2019s supposed to be there.
So we\u2019re just working to hold, not build spec homes. Banks don\u2019t even want to build spec anymore. So we\u2019re just holding tight. And I have a very different perspective than a lot of people. I really believe that mortgage rates follow inflation and we\u2019re going to start to see it go in a better direction because we\u2019re just simply comparing year over year and the average of the year. So we know that inflation was really low in the summer of last year. So when we\u2019re comparing, it\u2019s terrible numbers and we knew that, we knew it was going to look bad. But starting in October, that\u2019s going to change but we\u2019re not going to get the results of that till November or even December.
So there\u2019s still going to be pain but right around the corner, unless we have major problems with diesel and energy and gas and that [inaudible 00:36:38], that\u2019s another issue, we\u2019re we\u2019re going to see inflation go down, most likely, and that would bring mortgage rates down and I just think that there\u2019s going to be another housing boom. I know I might be alone here on the panel thinking this, but spring summer of next year, when we\u2019re down to like 5% rates, there\u2019s just not inventory and there\u2019s demand and when we get down to a five or a low six, it\u2019s going to be a boom again. So I don\u2019t think this opportunity\u2019s going to last very long, honestly. So if you can just hold for a bit, that\u2019s great.
Or create a financing. And answer to your question, some of the ways that we\u2019re selling what we will build or that people want to build, is shared vacation rentals. There\u2019s technology that\u2019s bringing in more options. I know people who are using technology to just rent by the room. That\u2019s really cool. The medium term rentals, there\u2019s options to just be able to hold a little bit and not buy into the fear.<\/p>\n
Jamil:
I love that.<\/p>\n
Kathy:
That\u2019s my [inaudible 00:37:43]<\/p>\n
Jamil:
No, that\u2019s a great perspective Kathy. And I think anytime that we allow ourselves to succumb to fear, the result is just more fear. So I think your perspective is astute. I think it\u2019s really good for everybody listening. You\u2019ve got to be able to take the pain. And you spoke about pain and I want to take these last two topics and kind of put them together because they address the pain.
And Dave, I\u2019m looking at foreclosures, I\u2019m looking at short sales and I\u2019m seeing that there is definitely increases in both of those. Have you done any studying to find out how much they have been increasing and where they might be leading or what indicators they\u2019re showing us the market to do or where the market is going in the coming 90 days, with respect to the pain that we\u2019re feeling as sellers?<\/p>\n
Dave:
Yeah, so it does. You will see a lot of dramatic headlines about foreclosures right now, because they\u2019re going up on a relative basis, at a very high rate. So you might see, \u201cHey, foreclosures went up 200% since last year,\u201d And that is true, but it\u2019s going from one to three. The relative amount of foreclosures compared to even a normal year, not even 2008 to 2018, is still relatively low. And we actually had Rick Sargon on the show recently, who was explaining to us that a lot of the foreclosures we\u2019re seeing now, are actually people who were just defaulting back in 2018 and they just got into the forbearance program. They sort of caught a break with COVID, were able to defer their foreclosure for several years. But I do think it will tick up.
A lot of what Kathy was saying about rates going down, that theory that rates are going to go down is predicated on a recession, right? Because if there\u2019s a recession, bond yields will go down. So, if that happens, there probably will be a slight uptick in foreclosure but I don\u2019t think it\u2019s the point where we\u2019re going to see anything like what was going on in 2018. Generally speaking, Americans are in one of the strongest cash positions they\u2019ve ever been in, and are very well positioned to service their debt. If you just look at credit scores, you look at foreclosure rates, default rates, they\u2019re really low. And that one I\u2019m talking about here, is mostly residential. I think James actually had a really interesting point about defaults in a recent show, in a commercial space.
I don\u2019t really know that much about that data wise, but I think there will be an uptick, but I don\u2019t think it\u2019s going to be this feeding frenzy. And I think one of the things that we talked about, I forget who the other guest was who said this but, someone was saying that they don\u2019t expect the foreclosures to really even reach the auctions because banks are much smarter and they learn to hold onto these assets or not to sell them at such a steep discount as they did last time. I think there will be slightly more opportunity, but it\u2019s not the strategy I would count on.<\/p>\n
Jamil:
I love that. But I also really want to highlight that one position where there could be some opportunities in the commercial space. And James, I know that if there\u2019s anybody on this panel that would be able to deploy the capital to take advantage of a possible foreclosure or a short sale situation in commercial real estate, you\u2019d be the man to do it. What are you seeing and are you making any purchases in that realm right now, with what you\u2019ve been seeing in the market? Commercial wise?<\/p>\n
James:
Yeah, we come from\u2026 I mean, that\u2019s where I grew up when real estate was banging on foreclosure doors and working short sales back in 2006, seven and eight and nine. And I will say about short sales, it\u2019s a miserable process for me. We used to do 300 short sales at a time for servicing. I will never do that business again. It was just not enjoyable. It was very much a pain. But where I do, do short sales is, I like negotiating and targeting foreclosures and short sales with paper that wants to move things. This is not traditional Fannie, Freddie Mac paper. That\u2019s a slow process. It goes into a box, you can\u2019t negotiate, is fluidly with them. And so what we have been doing is, I\u2019ve been calling over the last 30 days and my phone is ringing off the hook. Construction lenders, hard money lenders, private lenders and people that were underwriting deals very\u2026 These hard money lenders were asking for so little down on these investments, they were asking for 10% down, funding a hundred percent of rehab.
And now the market has came down 20% in some of these sectors and their paper is overvalued at that point. And they are bankers, they are not rehabers, right? We actually own a lending business in Seattle and we are actually rehabers. So if someone goes wrong, we\u2019re going to come in, fix it, stabilize it, get rid of it. The most operators are not in the lending space and what they want to do is, they want to move paper. That\u2019s how they make money. What they don\u2019t make money on, is sitting on assets that are just compounding and dilapidating as it goes. A lot of these things are half built, they\u2019re not moving forward and they\u2019re going down in value as it speaks. And so, a lot of times, I\u2019m actually targeting more of the business sector\u2026 Like a B2B foreclosure situation rather than the homeowner. The homeowners, I do think there is going to be some opportunity there in people that overpaid, that did very little money down, they\u2019re going to walk away.
I think that does happen. I also do think we are going into a recession and I think people, yes, locked in great rates, they worked on their DTI in the now, but I think people\u2019s income are going down right now. People\u2019s income is going to be the [inaudible 00:43:19] over the next two years, or at least that\u2019s what I think. If they were stretched to a 50% DTI, and their income goes down 20%, that\u2019s a problem. I don\u2019t care what your rate is. And so, those are the sectors that I do think there\u2019s some opportunity. And actually, that\u2019s where I think the sub two financing\u2019s going to come into play. If it\u2019s a nice cookie cutter house and they\u2019re at default and you can take it, assume their loan, pay it current and then take over, that\u2019s a great rental for you down the road.
But the short sales and foreclosure, we are targeting B2B opportunities. People moved a lot of money over the last 12 to 24 months. They want to get the paper off their books. A lot of these lenders have\u2026 I call them daddy lenders. They\u2019re not the people financing the deals. Their daddy is going to call their notes due and they\u2019re going to have to pay off these lenders that they sold notes to. And I want to step in the middle of that and buy those deals. And for me, it\u2019s a great opportunity. There\u2019s going to be half-built things, a lot of the stuff\u2019s already going to be permitted, which is nine to 10, 12 months of hold times that I can cut right through, and I can go directly to the source, take over the project and usually buy that paper. That was where we were buying our best deals in 2008.
Wasn\u2019t buying property, it was buying paper in distress. They were selling it to us at like 20 cents on the dollar back then. And if you could buy that paper that cheap\u2026 It was like, we would buy the paper, take it to foreclosure and a lot of times, it would get bit up to 40 cents on the dollar and we would rack a hundred percent return in a very short amount of time, or we got it back and we got to stabilize it and we would rip those deals. So working with people that don\u2019t want to deal with assets, bankers will get rid of a property a lot quicker than a homeowner will. So that\u2019s actually what we\u2019re targeting right now. Foreclosures in the business and commercial space.<\/p>\n
Jamil:
Incredible. Guys, I brought to the table five ways that I believe we could all benefit or at least pivot in this down market, but just listening to you guys talk for the last 40 minutes, I can tell that I\u2019m definitely not the smartest guy in the room. So I\u2019d love to turn it over to you guys and ask, where you are personally making changes. Henry, I know that you\u2019ve got a lot of great opportunities for you up there in northwest Arkansas. What do you got going on?<\/p>\n
Henry:
Yeah, I think a great thing for people to be doing in this down market is, working your network hard. Shooters shoot, right? Investors invest, it doesn\u2019t matter the market, they find opportunity. So there are people that are buying, we\u2019re all actively buying. There are investors in every single market right now, that are actively buying. I think there\u2019s a great opportunity to find really, really good deals and sell those deals or assign those contracts to the shooters, the buyers.
I think your competition is going to be less because as things get more difficult, economic times get harder, I think you\u2019re going to see less wholesalers active, less deal finders active. Especially the ones who haven\u2019t developed a strong buyers list, because that\u2019s the part that\u2019s going to be hard to find. Now the deals are going to be out there, but if you don\u2019t have a strong buyer\u2019s list or a strong way to dispo your deals, you\u2019re going to be stuck with telling people you\u2019re going to put their property under contract and know where to take it.
So, if you can develop that strong list of buyers, I mean, you can make money hand over fist right now because the buyers are still buying. If you find that right network\u2026 I think it was Kathy who alluded to it earlier, about finding private money, talking to your network, find the people who are still investing regardless of what\u2019s happening. Let them know, \u201cI\u2019ve got deals coming for you.\u201d And then you can take advantage of buying deep and then assigning those contracts to the buyers who are out there, active in these markets, looking for those deals.<\/p>\n
Jamil:
Great. Great advice. Kathy, what do you got going on that\u2019s different?<\/p>\n
Kathy:
Ooh, I mean it\u2019s not different, it\u2019s what we\u2019ve been talking about. We\u2019re syndicating. We\u2019re back into syndicating heavily and that means, again, raising money to raise cash to go be a cash buyer without competition and not having to pay high interest rates to a bank. I\u2019d rather just give that to an investor and part of the profits.
So it\u2019s where we\u2019ve got a 20 million dollar, single family rental fund. It\u2019s actually one to four units and we\u2019re doing exactly what James just said, finding builders who couldn\u2019t complete. My partner has operations in Dallas, so she\u2019s got property management, she\u2019s got all the repair teams, she\u2019s got the acquisition people. So we\u2019re able to just go in where somebody just got a little too aggressive, didn\u2019t understand how to build or how to do a reno and we\u2019re able to pick it up for cheap, finish it off, but we\u2019re keeping it, we\u2019re not selling because this to me, is not a seller\u2019s market.
I mean, yeah, it\u2019s just a time to be buying and holding, in my opinion. When it\u2019s time to sell, we\u2019ll sell. But these cash flow. So it\u2019s a little bit different than what James is doing because he is actually cash flow really well. So we\u2019re just going to hold. We\u2019re sharing the cash flow with the investors and sharing the profits with the investors.<\/p>\n
Jamil:
That\u2019s great. Relationships win all the time. James, what do you have going on?<\/p>\n
James:
It\u2019s all about restructuring deals for us right now. As the market, one thing I\u2019ve learned is\u2026 We\u2019ve been through five different little market cycles since I\u2019ve been doing this in\u2026 We started in 2005 and we\u2019ve seen all sorts of things go on. And one thing I have learned is, you have to pivot and change your whole\u2026 Structure your business and how you operate with every market change. And one thing that I like to do in transitionary market is, we\u2019re actually engaging\u2026 We can find the deals right now. Finding the deals isn\u2019t a problem. I have lots of properties coming in, they\u2019re large multis. We\u2019ve done a couple syndication deals recently. Small multis for development [inaudible 00:49:07], we\u2019re looking at fix and flip, we\u2019re still buying development, we\u2019re buying with only permitted sites now, to cut the cost down. So we kind of know that strategy.
But how we reduce risk and what we\u2019re doing right now is, we\u2019re actually meeting with our strategic partners that we\u2019ve known for a long time. And a lot of these people, we\u2019re looking at different ways to joint venture deals. Because half it is, we know that time is a killer right now. There\u2019s two things that are killer on deals, time and debt cost. And so what we\u2019re trying to do is address those two items. The first thing is time, is we started engaging. We know that our contractors are actually low on work right now and pricing\u2019s coming down, they need work and they need a better kickers on them. So we\u2019ve actually met our best three contractors and we have proposed joint venture deals with them to where I can operate, focus on my business, focus on getting the deal flow and then we are giving them 30% of each deal but they are getting these projects done 25% below budget and it\u2019s moving extremely quick and that\u2019s going to reduce my exposure to a bad market.
I\u2019m happy to give money away to make sure that I\u2019m staying in and out and fluid in the market. That\u2019s the first thing is they\u2019re doing. Finding joint venture deals with operators that can reduce our risk through professionalism and good strategies. The second thing we\u2019re doing is, instead of looking at the same way that we always look at it, \u201cHey, find a deal, get whatever debt cost we can get,\u201d Right now, short term bridge cost has gone up three to four points in the last 90 to 120 days. You used to be able to get money at seven, 8%, now it\u2019s 11 to 12. And that is going to consistently keep going up for a little bit. So what we\u2019ve done now is, how do we reduce that risk? Well, we can go find bigger money partners that are not great operators because what we\u2019ve seen over the last two years is, a lot of people bought assets, they made a bunch of money but they didn\u2019t really have the right plan but they still made money anyways.
And these people know that they went a hundred percent over budget. They got a little bit lucky but they\u2019re cash liquid at that point. So what we\u2019re doing is, we\u2019re proposing and looking at deals and bringing in JV partners, where we\u2019re giving them a pref return and an equity split because it reduces our carry cost. No matter what, it mitigates the risk down. So we\u2019re focusing more on the strategic partnerships and how can we operate and mitigate risk during transitionary time, rather than just trying to buy cheaper and do those things.
And so, really lean into your partners, figure out where the synergies are, figure out what everybody\u2019s good at, and then put the puzzle together. And then we\u2019re buying based on what puzzle pieces we put together. It\u2019s all about the resources and the bench. And by doing this, by having this, it gives us like\u2026 I can go still do luxury flips if we\u2019re very liquid on cash because, what kills us on a luxury flip is, our payments 10 to 15 grand a month to carry that house, it\u2019s expensive. And if we can reduce that, wipe that off, we can still get in those deals and we\u2019re buying them for substantially cheaper, mitigate the risk and still rack the good returns. So we\u2019re just looking at deals differently.<\/p>\n
Jamil:
That\u2019s mind blowing, James. I had not renegotiated with my contractors yet, either. So again, another insight that I\u2019m going to take back to my team and implement immediately. Dave, what are you doing differently out in Amsterdam right now, to help your investing over here stateside?<\/p>\n
Dave:
Well actually, this is the first time since I\u2019ve moved to Europe that I\u2019ve actually been pretty seriously considering buying individual properties. I\u2019ve been just doing syndications and funds over the last couple years because I couldn\u2019t play the game when you had to bid and respond to a seller in like four hours, because I\u2019m asleep when you guys are all doing that stuff.
But now, since things are sitting on the market and you have time to actually consider some deals, I\u2019ve actually been\u2026 In addition, I\u2019m still doing syndication investing, but actually looking at buying in Colorado again, it\u2019s starting to make sense for the first time in two or three years for me. So I\u2019m super excited about that.<\/p>\n
Jamil:
That extra time also just gives the seller a little bit more anxiety because you\u2019re sleeping and there\u2019s\u2026<\/p>\n
Dave:
Like, \u201cWhat is he doing? Why isn\u2019t he signed yet?\u201d<\/p>\n
Jamil:
\u201cWhy is he taking so long? How aloof.\u201d<\/p>\n
Dave:
Yeah.<\/p>\n
Jamil:
Guys, this was really fun. Dave, thank you so much for letting me win that bet. I know it happened guys. You guys felt sorry for me and you wanted to give me a win, so you\u2019re like, \u201cHey, let\u2019s just let Jamil win the debate and let him have a takeover show.\u201d I know it was all a conspiracy behind the scenes to love on me a little bit, but thank you so much for giving me the chance to take over the On The Market show today. Dave, how did I do?<\/p>\n
Dave:
Oh, you did great, man. Now I get to go on vacation. I\u2019m going to call you and you can do all the planning and research too. This would be great.<\/p>\n
Jamil:
This is a lot of fun. Guys, again, if you have not yet subscribed to this channel, please like and subscribe and leave us a review on whatever platform you\u2019re listening to this podcast on. It\u2019s really important and it helps our numbers. And from myself and the rest of the panelists here and our old host, Dave Meyer, we will see you On The Market on the next show.<\/p>\n
Dave:
On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media. Research by Pooja Jindal and a big thanks to the entire Bigger Pockets team.
The content on the show, On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.<\/p>\n
\u00a0<\/p>\n<\/div>\n
Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
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