Leg/Reg/Fin
No, this is not a biology update, rather those 3-letter abbreviations reflect a host of issues that are confronting the modern housing provider. Macro issues ranging from global inflation and pandemic related logistics concerns are reluctant to give way to brighter days. Interest rates and clamp down on cash liquidity by the Fed has impacted housing in a couple of different ways. First, the climbing interest rate has a dampening effect on valuation increases and the willingness of buyers to step into the market. While this can be offset by price decreases as in the case of many of the early high-flying cities like Denver and Phoenix, the sheer need for housing by the “Millennial Bump” demographic is creating a scenario different from the 2008 housing crisis. An additional factor that is starting to be acknowledged is the solidifying effect of rising rates. Homeowners locked into 30-year rates in the 3% range are very unlikely to make a jump to 6%+ rates. Additionally, the value increase they may have been counting on has also been diminished by higher rates. In this way higher rates tend to impact the housing market by reducing supply as existing owners sit tight, fewer properties are available for sale, and there is less value available in the market for the buyers driven to purchase.
If you are remodeling properties, what can you do to get an edge on the competition? First and foremost, don’t get HGTV glammed up! Make sure the property is in the right area – built for the appropriately-priced customer. Beyond that basic, many communities incentivize renovation by creating Community Reinvestment Acts which allows for the tax valuation to be locked in at the current rate for seven to fifteen years. This can be a solid attraction in a world of increasing values and tax rates! Most municipalities keep this a simple process – but it typically needs to be filed for BEFORE the work starts. Additionally, there CRA requirements for banks and occasionally a bank will get sideways with the regulators for not investing enough in low-income areas – knowing when this happens can provide an opportunity for sales in those areas, as well as an opportunity for refinancing at discounted rates. A local bank (unnamed publicly) for example is offering 5.75% at 85% LTV for 20-year amortization on residential/commercial buildings, and 30-year amortization on owner-occupied rentals. That extra percent or two saved in the downpayment and interest can help make a deal – or a better deal!
The commercial property discount
As noted above, the potential recession (some say current recession) is really focused on commercial property and most specifically office space, not on single family housing. This is good for the overall housing market, at least until the Millennial Bump moves through somewhere around 2027 or 2028. In the meantime, there will be an ongoing shakeup in the commercial market. As A space becomes more available and companies consolidate office space, there will be two key impacts: B & C grade spaces will drop in price as some companies upgrade space or at the very least reduce their footprint. This will have a rolling impact on a variety of commercial properties that were sold between 2017-2020 on interest only loans that need to be refinanced. The decreasing square foot costs will mandate the sale of the property as it will not meet financing debt service. Additionally, with reduced liquidity in the primary capital markets there will be even larger devaluation potentials – for those with cash and available for a quick closing. Market size and culture will determine if this is prime space just outside of a downtown area or smaller suburban sites. This year and next could be a good time to pick up some nice smaller office space.
Introduced! Meet HR 3464
The freshly prepared and introduced bipartisan Affordable Homeownership Access Act was made public on May 18th by Rep. Andy Barr (R-KY) and Rep. Vincente Gonzalez (D-TX). Both Congressman stating: “The Affordable Homeownership Access Act is a critical step towards providing a pathway to homeownership for hardworking Americans. By reducing barriers and streamlining processes, we empower individuals and families to achieve their dreams of owning a home.” Congressman Barr said “This legislation not only addresses the housing and credit challenges faced by many, but also ensures that vital consumer protections are upheld. I am proud to champion this initiative, as it promotes economic mobility and strengthens our communities.”
“Homeownership is a vital pillar to building strong communities and generational wealth. I am proud to join Congressman Barr to re-introduce the bipartisan Affordable Homeownership Act, which will increase opportunities for South Texans to achieve the American dream,” said Congressman Gonzalez. “This bill offers another path to homeownership through seller financing, a flexible option that can meet the needs of working-class families without forfeiting critical consumer protections.”
National REIA is proud to work with the Seller Finance Coalition (www.sellerfinancecoalition.org) on this latest version of the bill that appears to be headed to committee hearings – and quite possibly a first ever bicameral introduction as the Senate has taken an interest in this work as well. Special thanks go to Jeff Watson, General Counsel for National REIA and Bob Repass of Note School. These two fine gentlemen have worked with numerous individuals over the years and wrangled the legislative cats to the point where legislative traction is digging in!
S 1212 Electronic approvals
While it may be a bit amusing watching octogenarians debating the electronic signatures verification, it is in fact making its way through in the Senate with S.1212. Having already passed in the House, the formal process is expected to be approved in the Senate – at least as much as a bipartisan no-brainer bill can! The bipartisan Securing and Enabling Commerce Using Remote and Electronic (SECURE) Notarization Act is especially helpful for investors as this bill would allow for interstate commerce of electronic notarization! If you have ever bought property out of state, you know this is a big deal! Remote Online Notarization (RON) would become standardized for all notaries and allow for a quick and convenient option in a variety of real estate related transactions including lien releases! National REIA strongly supports the passage of S 1212 the SECURE Notarization Act!
The Sky is Falling
Numerous articles on politics are often about the sky falling and the excessive use of the word “dramatic.” Hold on for more. As the split House/Senate leadership que up for a final run on debt ceilings, in preparation for the Constitutionally required 12 budget bills, the world will resonate with calls of the sky falling. The potential claw back of Covid funds from local and state bureaucracies unable to spend the money fast enough(!) could lay the ground work for local calls for tax increases – so be prepared to address those demands locally. The real concern, as has been written about over the past couple years now, is the likelihood of increased regulatory efforts.
One key area of confusion is the difference between arrest records and a criminal record. In America, we pride ourselves on the principle of innocent until proven guilty. And while our media may jump the gun in the court of public opinion, it must remain clear that by actual court process, that is due process, is due to every citizen. Arrest records have been utilized by some background searches and while arguments are made that they may reflect a pattern and practice, they are NOT to be used. A conviction in a court of law is very different than an arrest. As such criminal records have been a gold standard for the industry to review to determine the likelihood of risk from a potential tenant. This is very different from the current push by the administration as noted in the White House Blueprint for a Renters Bill of Rights, page 11 paragraph 1(!) that opposes background checks and screening for tenant applications alleging disparate impacts, and is seeking through regulatory changes at CFPB to strictly limit access to background checks and threatening Fair Credit Reporting Act violations for screening companies. Please make sure you are using a verified and legitimate screening process.
For more information on this issue be sure to check out Dave Pickron’s Rent Perfect podcast episodes 90-94 with his General Counsel Denny Dobbins! These episodes can be found online at www.RealEstateInvestingToday.com.
Much ado about FHFA
Having received grief from a reader who conflated arrests with convictions, confused proposed regulations with existing rules, and contestation over the truth of the matter related to FHFA mortgage insurance rates – please understand that media headlines are often written to draw attention. However, when the truth of the story is consistent with the purported headlines, such as in the case of the recent FHFA restructuring of fees, such that even pro-administration “fact checkers” have to go to great lengths to excuse the behavior of the department, which has a history of underestimating the risk pricing of its insurance product such that previous administrations had to raise rates in order fiscally stabilize the program, it begs the question of reduction offsets. For example, if someone with a 740 credit score sees an increase in their fees by almost 60% and someone with a 640 credit score sees a 25% reduction in their fee, even if the actual percentage charged is higher for the 640 credit score – there is a perceived and real increase in cost for the 740 credit score and perceived and real decrease in cost for the 640 credit score. To say that one is not truly subsidizing the other may be accurate – but without the actuarial charts to prove otherwise, the perception and the reality are one and the same: bad credit scores got a break and good credit scores are paying more than before!
Be sure to check out National REIA’s Action Center on NationalREIA.com to weigh in on legislation and rules before they impact you! Likewise, Stay up to date with current industry news and updates by visiting RealEstateInvestingToday.com.
