The Real Estate Espresso Podcast

Welcome to the Christmas Day edition of the podcast. Lawmakers in Washington were hard at work earlier this week passing a whole bucketload of gifts this holiday season. Governments around the world are grappling with the economic impact of the pandemic. The last financial aid spending was passed on March 27, just a couple of weeks into the pandemic. Legislative gridlock resulted in nearly 9 months to the day of time between the two bills. Back in March, the expectation was that the economic impact, while deep would last only a few weeks. Many of those provisions had a horizon of only a few weeks. The PPP program was only designed to provide 8 weeks of financial assistance. Now, nearly 9 months later, the businesses that are still left standing are hoping they’ll survive this next wave. In the latest bill, money is being handed out. But, it’s not a level playing field. Money is being printed and handed out like candy to the myriad of special interest groups. Every time there is an appropriation of funds, the various special interest groups advance their pet project into the legislation. The results are evident in the latest $900 billion spending bill. If you read the 5593 page document, you’ll find that there are all kinds of holiday gifts buried in those pages. Let’s be clear, this bill was sold as a stimulus bill to help a population hemorrhaging from the economic damage of the pandemic. As you might hope, there is $284B allocated to a second phase of the PPP. This second phase will allow you to get 2.5 months of payroll in the form of a forgivable loan as long as 60% of the money is spent on salaries. You need to have a reduction of 25% in revenue compared with the comparable quarter in 2019 in order to qualify. If you are in the food or accommodation business which have been particularly hard hit, then you might be eligible for 3.5 months of payroll in the form of a forgivable loan. This is directly in the line with what we would expect this legislation to be all about. Needless to say, I was surprised to see $85,505,000 earmarked for Cambodia to strengthen regional security and stability, particularly regarding territorial disputes in the South China Sea and the enforcement of international sanctions against North Korea. It’s also to assert its sovereignty against interference by the PRC. It’s also to cease violence and harassment against civil society and political opposition in Cambodia. Under the banner of International Narcotics Control and Law Enforcement, there is a provision for 134,950,000 to four states in Burma. These funds are not actually for International Narcotics Control and law enforcement. They’re available for programs to promote ethnic and religious tolerance and to combat gender based violence in 4 states in Burma. Why they have singled out ethnic and religious tolerance in 4 states, and not all 14 states in Burma, under the banner of Narcotics control in a Covid-19 assistance bill is a little confusing to me. Another $45 million of taxpayer money (page 1,491) will be awarded to key government officials in Central America-- places like El Salvador, Honduras, and Guatemala-- in order to “combat corruption”. You can’t make this stuff up-- they are giving money to corrupt officials to fund anti-corruption programs. It’s brilliant! We have $10 million on page 1,486 going to the government of Pakistan SPECIFICALLY for gender studies programs. The authors of the bill are pretty crafty. By bundling all kinds of unrelated spending under an emergency spending bill, it’s virtually impossible for lawmakers to vote against these provisions that have nothing to do with the main core of the intent for the spending.

On today’s show we’re talking about a technology company that looks to upend the back office work associated with real estate transactions. Real Estate closings haven’t changed very much in the past 20 years. In fact, I can say that a large percentage of real estate transactions don’t close on time. Sometimes it’s the fault of the lender who request additional information at the last minute. But often it’s the result of missing items or mistakes in the preparation of closing documents. I can also tell you that I know of several instances when a corrective deed needed to be recorded because of mistakes in the closing process. In addition to improving productivity, these back office automations also improve quality and compliance with county recorder processes and rules. Real estate transactions are still completed at title companies using a paper process that hasn’t changed much in decades. There are a number of companies looking to disrupt the real estate closing table. In truth, there’s no reason that real estate closings can’t be modernized. The leader in this space is a company called Qualia. As of earlier this week, the company is the latest unicorn. The term unicorn is used to describe a company that has grown from startup to a valuation of $1B. The digital real estate startup, Qualia, raised $65 million in a Series D financing round, increasing its total funding to $160 million and valuing the five-year-old company at over $1 billion. Qualia's aim is to digitize the home buying and selling process so that it is easier for everyone. The company's platform acts as a virtual deal room, allowing consumers to review and sign paperwork remotely from the safety of their own homes or on their phones. The pandemic has been a "tailwind" for Qualia, as all real estate parties involved needed a way to conduct the transactions remotely. The pandemic has been a bit of a forcing function to break past the legislative barriers that have prevented electronic closings up until now. Documents that are recorded are generally required to be notarized. The slow movement has been legislative and at the state level. The United States truly is a union of 50 states each with their own rules as to how real estate closings are to be performed. I would ask your title company if they’ve implemented electronic closing for their closings, and if not, what is preventing them from implementing a fully electronic closing table solution.

On today’s show we’re talking about one of the drivers for new housing. I was speaking with an appraiser this week. That conversation led to an insight that you will rarely stumble across in the news. It seems that 2020 has been a difficult year in more ways than one. We know that it has been difficult for the healthcare sector. We also know that 2020 has been difficult economically. We’ve heard that 2020 has been difficult from a mental health perspective. My wife runs a clinical family therapy practice with a number of practitioners in her office. I can tell you that most of the therapists have a pretty full case load. 2020 has also been difficult on relationships. Contrary to popular urban legends, we’ve seen consumption of alcohol actually decrease by 8% compared with 2019. Many couples are spending extended periods of time together in tight quarters, with no breaks from each other. The appraisers have seen a massive increase in volume for appraisals for homes that are not actually being sold. These are cases where a couple is splitting up and the separation process requires a valuation for the matrimonial home. Some of these houses will end up on the market for sale, and some will not. But division of households for divorce is increasing demand for rental housing. There may not be a large supply of rental housing in some areas. Bedroom communities are often designed around residential subdivisions of single family homes. You don’t typically find rental housing in these same neighborhoods. In some cases, a member of a couple is forced to find housing many miles from the original family home. This is often in a different school district making it complicated for families looking to minimize disruption to children who might be at school. When a family separates, there is often a need for a larger rental property so that each child has a bedroom even though they might occupy that bedroom only part time. If no children are involved, then the person moving out is probably looking for a 1 bedroom apartment. I’ve recently seen new construction rental buildings being built in areas that traditionally I would have considered would not be candidates for rental housing. They’re far from public transit. They’re deep in a residential area. I would have predicted that those buildings would have performed poorly in those locations. Fast forward a year later and those buildings are full and renting at strong rental rates. What’s the reason? You guessed it. Families that have split need a second rental residence nearby. There is a natural seasonal cycle for housing. We know from past history that the busiest moving days of the year are July 1 and August 1. You would not expect people to be moving in February. But some do. It’s often because a couple is splitting apart. If you want to get a unique insight into what’s happening in your local market, have a conversation with an appraiser and ask them about the valuation work they’re doing for properties that are not selling. These properties are not going to be listed for sale anytime soon. We’re going into a second wave of the pandemic right now. There will be healthcare stress, economic stress, and yes marital stress. If you have a product that meets the needs of this segment of the market, you can market to that specific client. The needs of that client might be different than just your average tenant. You could specify in your rental listing, for example,  which school bus routes are near your property.

On today’s show we’re talking about the impact of the next wave of the pandemic. I have to say, this is proving to be an emotional roller coaster. While our business has survived the pandemic surprisingly well, the signs of permanent economic damage are starting to show in the broad economy. As I drive down the street, the number of permanently closed stores is growing by the week. The news of businesses being forced to close again for an extended period of time is heartbreaking. Unless these businesses are given sufficient financial aid, the economic damage will be permanent. When the lockdown occurred in the Spring, it was done as a preemptive measure, long before the numbers of infections, hospitalizations and deaths increased. It took a solid 12 weeks for the curve to begin to flatten and for the numbers to decrease. It’s hard to tell whether the reduction in numbers was a result of the lockdown or if it was a seasonal effect the would have happened regardless. This time it’s different. We are just going into winter. The numbers have already surpassed the highs we experienced in the spring. We have a vaccine rollout that is in process. Despite the early data looking promising, it is still very early data. It will take many months before a sufficient percentage of the population has been inoculated to stop the spread of the disease. Even when someone has received the vaccine, they need to continue to take care and not get infected for a period of up to 30 days before the vaccine provides maximum protection. But we don’t know how much the vaccine will stop the spread of the disease. Until that is know, the physical measures to stop the spread of the disease will still be required. That means that the impact to the economy will continue for a period of time. Governments the world over are telling the population that we can expect a lockdown of 28 days. I don’t personally believe that it’s even possible for governments to have enough data with which to make a decision to ease lockdowns on such a short time span. I reviewed several studies that looked at the average length of stay in hospital. The average length of hospital stay since the start of the pandemic has been very close to 20 days. The average incubation period is 5.8 days. So it would take a minimum of 6 days, plus another 20 days for a decision made today to even begin to affect the outcome 28 days from now. In fact, I would argue that the effect would be so small that it would be virtually impossible to measure. There is no way that anyone could make that decision. There simply isn’t enough data with which to make a decision. The numbers won’t have changed in that time period. So where does 28 days come from? I believe that governments are choosing a time period that is long enough to make a dent, but not so long as to create a revolt in the population. If government came forward and said we need a 4 month lockdown, I have no doubt that we would see protests in the streets. They chose 4 weeks simply to appease the population into compliance. I’m going back to my original prediction in March of 2020 in which I forecast that this disease would take 18 months to work its way through the medical system and the economy. I’m going to stand by that original prediction. We are going into a second wave. The second wave is more serious than the first. That’s all pretty clear. The vaccine won’t be deployed in sufficient numbers to have a lasting impact until late summer or early fall. So as you plan your cash flow, your hiring, your travel, and your revenue, remember that we are in the middle of an extremely fluid situation that is likely to change from one week to the next.

I’m often asked by both friends and listeners to the show how we decide to take on a specific project versus passing on an opportunity. The fact is, there is no exact science. But we are looking for certain characteristics. It starts with the people. Are the right people involved? If not, there is no sense starting on the project. Then we need to look at the market and then finally the specific deal. I want to be in an area of strong demand. We want to see population growth. We want to see a shortage of supply and we want to see resistance to development. That sounds paradoxical. Why would a developer want to work in an area that is pushing back on development? It’s a balance. We don’t want so much resistance that it becomes impossible. Simply buying a property that has no distinguishing features is not interesting to me. I believe that we are on a mission. That mission is to create communities that people feel at home in. They need to feel connected. The community has to exist for a reason, not just cheap housing. Let me give you a an example. Our latest project is the design of a new residential subdivision in the outskirts of Boise Idaho. Boise is a city that seems to be attracting people from higher density communities on the west coast. They’re moving for access to the outdoors, for the lower cost of living. The city is #4 in the country in terms of growth. There is a massive mismatch between demand and supply. A recent survey of the home listings found only 154 homes for sale of any description. The average days on market was 5.5 days. Prices were up on average 13.5% in 2020. When we found 45 acres across the street from a brand new high school, with new infrastructure including roads, a water treatment plant across the street and ample electric supply we saw a lot of potential. We are not fans of auction situations because we always end up paying more in those situations. In some cases we will engage in the auction if the numbers make sense. This was one of those rare cases. The property is located on the edge of the suburb of Middleton. Middleton has grown by nearly 50% in the past few years. Future growth will require the annexation of more land from the county into the city. Even with the tremendous growth, there is nothing for sale. Any development land has sold out very quickly. We saw this project as an opportunity to participate in community building. We had direct talks with the planning department and with the Mayor. We understood what the sentiment was within city council. We felt that we could develop a winning concept for the area, that would truly add value to the community. I know what you’re thinking. How is it that some guy up in Ottawa Canada is having conversations over zoom with the Mayor in Idaho about developing a new neighborhood thousands of miles away? Middleton has another problem. 85% of the people who live in the community, don’t work there. How could we be part of the solution? We are not talking about necessarily building lots of commercial property. The work from home phenomenon is not just a temporary pandemic solution. Even once the pandemic is over, there will be a residual and substantial portion of the population who will want to work from home. When you consider the design of most homes, even recently designed homes, the question of work space has been largely ignored. This particular project represents a unique opportunity to create a live work play community. We held our first community meeting last week with local residents where we shared many of the design concepts. It was an opportunity to hear first hand from local residents how they felt about development in the area. Finally, is this going to be an isolated project or does it form part of an ongoing stream of investment projects?

On today's show we're talking with George Ross about some of the structural changes underway in the world of retail. If you own retail space, or you are looking to acquire a retail property at a bargain, you'll want to listen to George's perspective. I'm not saying he has it 100% right in all cases. It's a perspective worth considering. 

Chris Funk is based in Jacksonville Floria and develops new construction build to rent in multiple markets across the Southern US. You can learn more or connect with Chris at SouthernImpressionHomes.com.

On today’s show we’re talking about the help that comes with many well intentioned government initiatives. Today’s show just makes you go Hmmm. I wonder what they were thinking. Today we’re taking a closer look at a number of pandemic help programs that seem to have veered off their originally advertised objectives. There are so many of these stories, I’m just going to give you a sampling. There’s simply too many to cover in 5 minutes. Back in the Spring, the Federal reserve announced with much fanfare that it would take $75 billion dollars appropriated by Congress and through the magic of its printing press turn it into $600 billion dollars in assistance for mid-sized businesses through its main street lending program. Now 8 months into the program, and the banks have written less than $6B in loans. This is 1% of the funds that were promised under the program. The Fed doesn’t have the ability to give away money, but they can lend it.  The banks would still have to absorb 5% of the loan losses and the fed would absorb 95% of the loan losses. Banks don’t like to lose any money, so they underwrote the loans very conservatively. If a borrower qualified as a good credit risk, then the banks loaned money through their commercial loan desks without help from the Fed. If they didn’t qualify, then the banks generally declined to fund the loans, despite the Fed assurance of backing 95% of the loan losses. The sliver that actually qualified was less than 1% and it wasn’t because the businesses don’t need the help this year.  The pandemic has put enormous burden on healthcare systems around the World. Canada welcomes about 49,000 refugees or asylum seekers into the country each year. While they’re waiting for their refugee claim to be assessed, they have the right to get a job. Many end up working in numerous low paying jobs like call centres, or as personal support workers in long term care facilities and nursing homes. During the peak of the pandemic in the Spring, Canada’s Federal Government announced with much fanfare that it would allow personal support workers to shortcut being accepted as permanent residents in Canada if they commit to continuing to work as personal support workers for a minimum six month period. It took 7 months following the announcement for the government to publish their 60 page guide on how to apply and the 25 page application form. Within a week of the forms and the guide being available, a new guide was published with new qualification regulations. The Small Business Administration department of the US government was tasked with administering two different programs to assist small businesses. The first was the pay check protection program which would provide up to 12 weeks of salary in the form of a loan provided you kept your employees on payroll for a minimum of 8 weeks. But the problem is that 12 weeks of payroll assistance is not enough to support businesses that are now in month 9 of a pandemic. Very few businesses are sitting on enough cash to survive 9 months of economic collapse. The second SBA program was the Economic Injury Disaster Loan. The EIDL is not a grant, although the first $10,000 could be a grant under certain circumstances. It’s a loan at 3.75% for up to 30 years. Governments all over are scrambling to try and figure out how to help save the economy. I don’t envy the job of government. They have a nearly impossible job. Even the assistance that some businesses are receiving will not be enough to save them. So if your business has been impacted by the pandemic, don’t just sit back and wait for government to save you. You have the agency to act and be responsible for your own business success.

Demographics can be used to predict the future of real estate markets. Nowhere is this more true than in the hundreds of small towns and villages all over the world. Younger people have been moving out of the small towns in search of fame and fortune in the big city. Some countries have been experiencing very low birth rates resulting in rapidly aging populations. In the US, birth rates were at 1.77 in 2017 and have fallen another 2% in since 2017. That’s not high enough to sustain the population at a constant level. Demographers will tell you that you need a birth rate of 2.2 in order to hold population constant. Some countries have increased immigration in order to offset the drop in fertility. In Spain, the number of deaths have exceeded the number of births for years and shows no sign of changing. Bulgaria’s population is shrinking faster than any nation on earth. Despite having a growing expat population, Bulgarians are leaving the country in droves looking for more lucrative employment elsewhere in Europe. Combined with a birth rate of 1.46, the country is expected to lose 23% of its population over the next 30 years if current trends continue. A similar trend has been reported in Latvia. In Italy, the birth rate sits a 1.34, one of the lowest in the Europe. Cost of living, low wages, and difficulty in finding steady employment is the #1 factor that most Italians cite in their decision not to have more than one child. Dying towns exist all over the country. Italy has been running an experiment to bring new investment into small towns. The most visible was the small town name Sambuca which started offering abandoned houses for auctions starting at 1E. The houses come with strings attached. They have to be redeveloped and a minimum amount of investment in renovation needs to be made. These auctions have been highly publicized and have attracted thousands of bidders from all over the world. Some of these centuries old houses in historic medieval villages have sold for 1E. But most have been bid up in price. Some sell for $5,000, 10,000, 20,000 euros. Still, that’s a reasonable deal. After renovation, some owners report total investments of around 140,000 USD for a newly rebuilt home in a slice of paradise in the Italian countryside. These are small towns where everyone in town knows your name. The owner needs to commit to spend a certain minimum amount of time there each year. Ultimately, the towns want these residents to start businesses and to bring economic activity back to these smaller centers. Some have been purchased and owner occupied for part of the year, and then put up as short term rentals for a portion of the year. About 16 towns have initially participated in similar projects 1E home projects. These programs give you a house and Italian residency. Now you will need to pay a 5,000E deposit to make sure you don’t walk away from your obligation to complete the purchase and the renovations. If you don’t complete the renovations within the contract term, then you will lose your deposit that might be more than your purchase price for the property. Many of them are in the poorest provinces like Sicily, Puglia, Calabria and Sardinia. But in today’s environment when you can be connected to the rest of the world through the internet, the actual physical location of your home matters less than it might have mattered in the past. There are so many people operating location independent businesses. Their clients are in one location, and they choose where to live based on a lifestyle choice.

Aaron asks, I’ve been listening to your podcast for several months now and really like it. Thank you for all your insight into real estate investing. I was curious do you have an episode where you discuss further about whether or not someone should get their real estate license if they are getting serious about personal real estate investing. If you haven’t answered that question what are your thoughts? Aaron, this is a great question. Real estate agents and brokers have access to a lot of tools that regular folks don’t easily access. If you go back 30 years, before so much of the real estate world became accessible online, it seemed like realtors had a monopoly on access to the information. However, as technology has progressed, we find increasingly that the tools realtors used can also be accessed by the general public, sometimes for a modest fee. Some jurisdictions have stricter privacy policies than others. The other benefit of having a realtor on your team is that you can collect a commission on your transactions if you represent yourself. That can amount to a 2-3% saving on the gross purchase and a 2-3% saving on the sale. That’s significant and can improve your profit margins quite a bit. Not only that, you can often market yourself as an investor friendly broker and many investment colleagues may throw business your way. That steady flow of transactions can smooth out your income stream. The life of a real estate investor can often be pretty inconsistent from a cash flow perspective. That income roller coaster can be great one month and swing to negative the next month. In many real estate boards, new listings go out to the realtor community a few days before being published to the public Multiple Listing Service website. That two day head start in front of the buying public can be a real competitive advantage. On the other side of the coin, there are responsibilities that come with being a realtor that you carry with you everywhere you go. If you are at a cocktail party and you hand someone your business card, your real estate licensing board will probably require that you disclose that you are a licensed realtor at the same time. You will have to hand out two business cards, one for your investment firm, and one for your real estate firm. The biggest issue you have with being a realtor is that you have a duty to fully disclose. You might be selling a property that has a historic problem. It might have been a past water damage that was repaired, or perhaps asbestos that was remediated. It might even be an existing risk item that you would expect the buyer to examine in their own due diligence. As a seller, you can allow the buyer to conduct their own due diligence and you have no duty to disclose. But as a realtor, you have a duty to disclose no matter what. If the buyer finds a problem after closing, your risk of litigation is much much higher. Everyone knows that realtors carry errors and omissions insurance. So even if the realtor has no money, the plaintiff in a lawsuit knows that there is a good chance of collecting from the insurance policy if they sue the realtor. For that reason, realtors attract more than their share of litigation. Failure to disclose is enough to trigger a lawsuit and a sanction by the regulator for your real estate license. The thinking is that when you are in a conflict of interest position, you have a fiduciary duty to protect the public and your clients ahead of your own self interest. When you’re a realtor and a principal in a transaction, you are in a conflict of interest position. I can’t advise you on which way to go on this question. There are pros and cons that you will need to weigh. I know investors that carry a real estate license. I also know many investors that have tight relationships with brokers who are not direct owners in their projects.