What Will Each of the Candidates Do For the Real Estate Market If They Are Elected President?

The 2024 presidential election is coming up in four months and on July 21, 2024, President Joe Biden formally announced that he was withdrawing from the presidential race. This left the Democratic party with a decision which was ultimately made July 30^th, when they name Vice President Kamala Harris as their endorsed candidate for president. With both candidates for president unequivocally named, let’s look at what both Donald Trump and Kamala Harris might do to or for the real estate market if elected as president.

The Origin of the 6% Commission Standard

The recent National Association of Realtors (NAR) Settlement is in the process of changing how many real estate brokers and salespeople conduct business. The terms of the settlement all but abolish cooperative compensation amongst brokers. Although this may not be a substantial change for markets in which every buyer offers through a Buyer's Broker and every seller is automatically represented by a Seller’s Broker, the effects will be greatly felt in other markets. Some of the larger real estate markets have developed complex systems of agency that will now be simplified by one premise--in a residential real estate transaction, a buyer will now have to pay a Buyer’s Broker and seller will have to pay a Seller’s Broker.

Blockchain Real Estate: Some Things to Consider

There has been a recent movement toward marrying blockchain technology with real estate transactions. As a result, tokenization has been offered as the solution for everything real estate from investment to document execution. Companies like RealT, ManageGo, Republic, Blocksquare and others now offer a variety of different real estate services based on blockchain technology. Although this wave of innovation is seemingly ubiquitous in today’s real estate market, there are still a number of legal and logistical issues that must be considered before fully integrating blockchain technology into your real estate endeavors.

Stick With Properties—For Now

Stephon Martin

It is an interesting time in real estate—we stand on the precipice of the ending of a national foreclosure moratorium, interest rates are extremely low, the housing market is red-hot, and the commercial market is still unpredictable. What should a real estate investor do now? While there are a number of options that can lead to success, there is one caution—stay away from whole loans.

Cautioning against whole loans almost goes against the very nature of this blog, which promotes all profitable methods of real estate investment. Whole loan trading and valuation is the very reason why I started this blog and whole loan investing can be a great way to find hidden value real estate. That said, the following are various reasons why whole loan investment is not the best strategy in the current market:

Foreclosures and the Moratorium

Stephon Martin

The Biden administration has extended the COVID-19 moratorium on foreclosures to July 31, 2021. Totally avoiding the policy and ideological discussions that could be had about such a decision, one thing is apparent—the additional month extension will increase the backlog of foreclosure and eviction cases that courts around the country will face once this moratorium has ended. Absent any legislative changes, the implementation of creative government programs mitigating distressed loans or both, foreclosure filings, executed foreclosure judgments and foreclosure-related evictions are all set to see an uptick over the next year.

An increase in residential foreclosures and evictions is certainly bad news for affected homeowners and tenants, who will have to find new living arrangements, undergo costly moves in short timeframes, uproot their lifestyles and, in some instances, face long term financial effects. Increasing foreclosures will also serve as a market correction in the real estate market, which is currently driven by inventory scarcity. Amidst the market change and its social implications, many real estate investors can be left wondering which strategy to employ. The answer is simple—any or all of them.

How to Navigate Legal Structures in Real Estate

Stephon Martin

As the real estate market attempts to move past the COVID-19 pandemic and progress toward a “New Normal,” federal moratoriums have become a way of life in real estate. Navigating the legal landscape of a local market has always been part of creating wealth in real estate. Every real estate marketplace is subject to its own local laws, as well as its state law and federal law. At the highest level, real estate investment and development is a game of understanding the rules—the applicable laws, ordinances, building codes, etc., and knowing when you can bend them in your favor through variances, court cases and lobbying. Although much of this may seem a little nefarious, it need not be, as our legal system was designed to establish a certain set of default rules for real estate, with a mechanism to allow for change in the event that either some rules are inapplicable generally or inadequate for a given situation. That stated, below are some ways to capitalize, navigate or at least survive the laws of any real estate market:

Social Justice Real Estate

I try my best on this blog to focus on the issues effecting the real estate market and offer a perspective uninfluenced by political factors. To the extent that social factors effect the real estate market, I am happy to address them, but I work diligently to ensure that this blog does not serve the dual purpose of promoting any particular political ideology. With that said, we are all contextual creatures and I, as an African-American male, cannot ignore the current outcry regarding police brutality against my fellow brothers and sisters.

Property Maintenance Laws and Lending

The fight against property blight is a battle that has been waged for many decades. Some areas of the nation, have struggled with abandoned properties and even abandoned neighborhoods since the shrinking of the nation’s industrial sector beginning in the 1970’s. Other areas became intimately acquainted with blight as a result of the wave of foreclosures that took place at the end of the first decade of the century. However it may have arrived, the real estate finance market is certainly now affected by the palpable concern of property blight and has had to adjust to attempts to mitigate its damaging effects. 

Why Worry About Blight?

To be clear, blight is a real issue that can lead to a number of undesirable effects. Abandoned properties that are poorly maintained cause safety issues. Poorly maintained building systems and structure will eventually fail at some point, causing unsafe buildings. Overgrown landscaping leads to health concerns. These health and safety concerns become a problem for neighboring properties, as neighbors must then focus on how to curb the spread of these issues onto their properties. More generally, well-maintained properties inspire a pride of ownership that carries over to neighboring property owners. The opposite is also true—abandoned and poorly maintained properties drain the neighborhood of pride of ownership and lead to less diligent maintenance throughout the neighborhood.

Cooperatives

Welcome to another year at the Real Estate Think Tank. I enjoy writing about real estate and am thankful that I have this forum to share my thoughts on the subject. With that said, let’s get into Cooperatives.

A Cooperative, also known as a Real Estate Cooperative or Co-op, is a form of real estate ownership in which owners purchase shares in a corporate entity that owns a building. This entity is usually called an Apartment Corporation. Despite the name “Apartment Corporation,” a co-op can be both residential and commercial. Although residential co-ops, known as Housing Cooperatives, are more prevalent, commercial co-ops are not uncommon. 

In exchange for the purchase of shares in a co-op, each owner is given both an ownership interest in the Apartment Corporation, usually in the form of shares of stock, and a proprietary lease. The proprietary lease entitles each owner to occupy a certain portion of the building exclusively and confers most, if not all, of the rights of property ownership over the designated space, called an apartment.

Since the Apartment Corporation owns the building and not the owners, owners in a co-op are referred to as shareholders. Furthermore, shareholders do not technically own real estate or real property, but instead own shares, which are considered personal property. This distinction has certain legal ramifications that are noteworthy, but beyond the scope of this post. The ownership characteristics of a co-op, however, are also very interesting.

Condominiums

Condominium ownership is a form of real estate ownership that has unique characteristics. For those not well-versed in condominiums, here is a quick overview of their definition and purpose:

A condominium or condo allows a property, typically a multistory building, but not infrequently a large parcel of land, to be split into sections and owned by multiple owners. The unique aspect of condominium ownership is that it entitles an owner to ownership of a specific portion of a property and the space or “air” bounded by that portion. For example, through condominium ownership, one can convey the first floor of a three story building to one party, the second to another party and the third to yet another party. Interestingly, the units are frequently not required to be the same size, so one could create a two-unit condominium out of a three story building and convey the first floor to one party and the second and third floors to another party. A condominium is formed by recording a document, typically called a declaration in most jurisdictions, but also referred to by other names, such as a master deed, against the property. This document informs the public that the property is now a condominium, outlines the sizes of the units and common areas and provides other relevant information about the condominium.  Once a condominium is formed the property can no longer be sold as an undivided whole, unless the condominium regime is abandoned. The condominium regime will remain in effect until either the unit owners decide to abandon the condominium, the government dissolves the condominium, the property somehow loses the condominium status through the violation of local laws or the government condemns the property.

Easements

Easements are a common occurrence in real estate, but what are they really?

Essentially, an easement is the right to use a property granted by the owner of the property to a non-owner or class of non-owners. An easement is by no means the only way for a property owner to confer use to a non-owner, but unlike other forms used to grant usage rights, such as licenses and permits, easements are recorded against the title of the property over which they are granted and remain in effect despite the transfer of the land. The ability of an easement to survive the transfer of title is called “running with the land.”

Easements differ from leases, which also confer the usage rights of a property to non-owners and also run with the land, in that easements exist in perpetuity, whereas leases have a term with a termination date. As a result, in order to terminate or “extinguish” an easement, an affirmative action must be taken like merger or abandonment. A lease, however, automatically terminates upon the end of its term, without any further action by the parties to it.

There are different types of easements and easements are generally categorized in different ways. The first way that an easement can be categorized is based on to whom or what the rights of usage are granted. If the easement grants rights of usage to the owner or occupant of another property, it is called an easement appurtenant. In this instance, the property on which the easement is established is called the servient estate and the property that receives the right of usage is called the dominant estate.

My How Local Lending Has Changed!

Today's banks are unabashedly international businesses which thrive on providing services and taking advantage of opportunities throughout the world. Long gone are the days of the local Savings and Loan as the provider of the community's mortgage needs. Instead, behemoths of consolidations dominate today's lending scene, thriving off of large economies of scale that make any potentially smaller competitors shutter. This change in the role of banking in the community, although the largely the product of intentional moves by the banking industry and Congress, is not without its effects on the real estate industry, particularly the residential market.

In order to explain the effect of big banks on the residential real estate market, one must understand the role of local banks prior to the expansion and consolidation of banks that led to the current situation. Until the 1980's, US mortgage lending was dominated by small local banks and Savings and Loan Associations (S&L's), local banking entities that engaged in lending and offering savings deposit accounts. Initially, S&L's were heavily regulated and restricted from offering consumer loans and investing deposits in most of the investment vehicles available in the market. The Savings and Loan model relied on a favorable treatment by the Federal Reserve to allow for an increased spread between the rate charged on mortgage lending and the rate offered on deposit accounts. S&L's also frequently managed underwriting risk with local market knowledge.

My Take On Tax Liens

Tax liens have always been of interest to me. As a teen, I would remember the infomercials advertising tax lien investments as the way to own tons of property for pennies on the dollar. Since my father was a contractor and property manager, I was introduced to real estate ownership at a young age and read my first book on tax liens in my late teens. At the time, I could not figure out why more people were not investing in tax liens. As an adult, real estate professional and attorney, I can now appreciate the risks/reward trade off that comes with this asset class. So, here is my take on tax liens.

Tax liens are a low cost way to obtain exposure to the real estate market. Although the supply and demand of tax liens is very much influenced by local events, tax liens will be around as long as there are municipalities in need of money and property owners who do not pay their taxes. Although cheap and available, investments in tax liens propose some unique risks and benefits.

One of the unique benefits of tax liens is that they initially offer passive income at high rates of return. Most tax liens are purchased via auction and most auctions employ one of two bidding methods--bidding up price or bidding down interest. Whether the price of the lien is bid up or the interest rate is bid down, the amount of back taxes owed does not increase and statutory penalty rates of interest typically offer an attractive return to purchasers that do not overbid. Moreover, upon the purchase of a tax lien, the municipality continues to serve as the collection agency for a statutorily mandated length of time, in most cases. This allows investors to collect on the purchased lien with minimal effort, for a period of time.

Mortgage Backed Securities and Personal Bankruptcy

At long last, the end of the series!

Personal bankruptcy is usually filed by an individual for very different reasons than corporate bankruptcies. Whereas the primary motivation behind filing a business bankruptcy may be protection of the business or satisfaction of debts, personal bankruptcies are frequently filed for asset protection, in addition to satisfaction of debts.

The two sections of the bankruptcy code that apply to personal bankruptcies are chapter 7 and chapter 13. As with business bankruptcies, chapter 7 for personal bankruptcies is a process of liquidation and seeks include all non-exempt assets of the petitioner in the bankruptcy estate in order to liquidate them to pay off debts. Chapter 13, on the other hand, seeks to reorganize the debt of a petitioner pursuant to a payment plan, which typically last from 3 to 5 years.

Special Purpose Entity Bankruptcy Concerns for Mortgage-Backed Securities

Let us continue the bankruptcy theme begun in my last post and discuss the effects of Special Purpose Entity (SPE) bankruptcies and their effect on mortgage-backed securities. Obviously, most bond covenants designate the bankruptcy of a SPE an event of default and restrict the likelihood of its happening. In the unlikely event that such a bankruptcy does happen however, here is an overview of the process.

As a quick review, I would like to restate that mortgage-backed securities are the result of a process of securitization that takes place when a real estate lender sells a package of its loans to an entity, called and SPE. The SPE receives the money to purchase the loans from the sale of either securities, beneficial interests in the entity or trust certificates from a trust set-up to hold the loans. If securities or trust certificates are sold, they are called mortgage-backed securities (MBS). Through the securitization process, real estate lenders are provided with cash to originate more loans and investors are able to purchase MBS and invest in the real estate market without having to hold real property. If you question why one would want to invest in the real estate market at all, please see my earlier post, “Why I Choose Real Estate.”

Lender Bankruptcy and Mortgage-Backed Securitization

Mortgage-backed securitization is an essential part of the mortgage secondary market, as it provides both liquidity and expanded sources of funding for real estate lender. Securitization also allows for more widespread participation in the real estate market, since MBS bonds are an asset class that can be held by classes of investors that are restricted by law from retaining extended ownership in real property. More participation in the real estate secondary market, of course, translates to a more robust market with more available real estate funding and more real estate activity.

Despite its role in the market down-turn of 2007/2008, securitization of real estate assets has been and continues to be an important part of the U.S. real estate finance market. Securitization, however, heavily depends on a bankruptcy remote structure.