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.

Calculating the Cost of Delay

Stephon Martin

Happy Memorial Day to all and a heartfelt thank you to all those who serve and have served our country. Your sacrifices are truly appreciated by TRET.

Let us quickly discuss, on this last day of May, the value of Delay. Late payments, be they intentional or not, are costly, no matter how late they are. Time has a calculable value and delayed payments provide a monetary benefit to the payee and punish the lender or vendor. This value is easily observed in the world of retail, where giants like Wal-Mart, not only connect the speed with which they pay their vendors to the success of the products in their stores, but also fine retailers for late shipments. In retail, late shipments equate to lost sales. In real estate, late payments lead to increased opportunity costs and decreased value of money.

ARMs: A Quick Look

Stephon Martin

Adjustable-Rate Mortgages (ARMs) are a viable financing option for both single, multifamily and owner-occupied commercial property owners. Ever since their formal establishment by Title VII of the Garn–St Germain Depository Institutions Act of 1982, ARMs have offered the opportunity to link mortgage payments to marketplace activity. Coupled with the rate collars, ceilings and floors, these financial instruments have the potential to lock in the conditions of a favorable interest rate market, at interest rates that are typically lower than a fixed-rate mortgage. In the world of retail real estate, lower rates can translate into increased purchasing power. For the real estate investor, however, rate fluctuations and potential for sustained above market-rates usually tends to also lead to an early refinance. With the January 3, 2022 deadline for ARMs to decouple from the LIBOR index imposed by Fannie and Freddie, now is an opportune time to take a look at ARMs and their role in the mortgage market.

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:

Why Most People Don't Get Rich In Real Estate

Stephon Martin

Initially, I intended this post to be a continuation of my prior post on how to get rich in real estate. I was going to address the barriers to entry that most people confront when attempting to begin a career in real estate and offer some suggestions on how to get around them. I am still going to address some of those barriers, but upon further reflection, I think that there is a common theme amongst most of the reasons why most people do not succeed in real estate when they wish to do so—motivation.

This may seem harsh, but please let me qualify my statement by saying that it is not easy to maintain consistent motivation. Having sufficient motivation to push through real estate losses, market downturns, bankruptcies or even years of unfruitful prospecting takes inner strength. During down times and after particularly difficult lessons in real estate, it can often feel like the experience was a sign to quit or move in a different direction. It takes true motivation, self-confidence and some self-delusion to look at a negative real estate experience, learn from the experience and continue on. This motivation is intrinsic and it only comes from a goal-driven approach to make it in a real estate. Quitting can never be an option. To that end, I want to share the following link to “The Strangest Secret” by Earl Nightingale, in the hopes that it is helpful to someone.

The Strangest Secret: Earl Nightingale

How To Get Rich In Real Estate: The Proven Method

Stephon Martin

Welcome the first post of the New Year! A number of years ago I wanted to start a business purchasing residential mortgages in the secondary market. This was a significant time after the Great Recession of 2009 and although the smoked had cleared from that downturn, enthusiasm in the mortgage secondary market had not yet fully recovered. I knew that if I were to market my business idea, which I was positive was sound, I would have to not only formally document it in a presentation and a business plan, but would also have to show actual positive implementation results. I realized that I would have to raise a small amount of capital to implement this strategy on a small scale, so that I could present it to larger investors upon its successful completion.

The End of 2020: Now What?

2020 has been a life-changing year for everyone, literally everyone. From the global pandemic, to the fluctuating economy, not to mention the seismic shift in the perception of "going to work," it is safe to say that the world is different place than it was 12 months ago. Now what?

Every year Bloomberg Business Week puts out its "Bloomberg 50"--a list of 50 individuals that have made their mark during the prior year. Although this year's list contains a number of impressive men and women who were able to quickly mobilize and make moving, positive contributions during this tumultuous year, it is notable that not one member of this list was mentioned for contributions to the real estate market. In fact, there are many executives on the list that are touted for reducing the size and/or the footprint of their companies, which in many instances includes real estate divestment. Furthermore, Blackrock, a private equity that is well know for its real estate investments, has made the list, not for real estate, but for its renegotiation of national debts in South America.

Let’s Not Forget the Expenses

When either forecasting, underwriting or simply checking the figures on a deal, it is important to account for expenses. The mere mention of the word expenses immediately brings certain images to the mind of most real estate professionals, such as taxes, labor and materials. Proper accounting for such expenses, however, can make or break a financial model and skew underwriting assumptions. That said, it is important to employ the following practices to ensure that your expense estimates are accurate and reflective of the market.

Adverse Possession: Why It Makes More Sense Than You May Think

Photo by Louis from Pexels

As we wrap up the months of October, many images of the month come to mind—Fall, Halloween, pumpkin season, apple season and Columbus Day. Nearly two weeks ago, we all experienced the ever-evolving view of both Christopher Columbus and the celebration of his holiday. In contemplating my thoughts on Columbus’s role in American history and his appropriation of land, I couldn’t help but make a connection to the real estate concept of adverse possession

Adverse possession is the legal ability to take over the land of another person by openly and notoriously acting like you are the owner over a number of years. The ways that a person in adverse possession can demonstrate open and notorious occupation of land differ from locale to locale. Some examples of open and notorious possession have been constructing a fence, maintaining the lawn, receiving mail and, the most open and notorious of all, paying property taxes.

Lesson From the Pandemic For Residential Landlords

The effects of Covid-19 on the residential rental market are apparent—many jurisdictions have enacted rent freezes, landlord/tenant courts have been shut down and moratorium on evictions and foreclosures have been set. Moreover, the accompanying downturn in the economy has left many without the ability to pay rent on time, if at all.

Considered rationally, the need for all of the social safety nets put in place for renters is obvious. The only way to truly survive a global disaster is to band together and implement a series of solutions. Radical measures had to be taken to mitigate the global pandemic. “We’re all in this together,” is not just a motto, it’s a reality. As a society, we are tasked with taking care of our most vulnerable populations, because the repercussions of not doing so are far more expensive than the costs of their protection. In this instance in particular, increased homelessness and/or a wave of relocations due to a rise in home displacement would only serve to exacerbate infection rates around the nation. That said, here are some clear lessons that residential landlords can learn in the wake of this global event.

Real Estate in the Time of Pandemic

Photo by CDC

With our country beginning to find its way to a new normal at the end of months of quarantine, we in the real estate market are all left with one nagging question—What should we expect from here? 

Like most people, I do not have definitive answer. If you are over the age of thirteen, however, this pandemic is certainly not the first market disruption that you have experienced and with each such occurrence, we all learn some valuable lessons about the real estate industry. With that said, here are a couple of lessons that we can learn from this particular time of change: 

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.

Back in the Saddle Again

Hello Readers/Subscribers of the Real Estate Think Tank,

I once read that it's not how many times that you fall off the horse, but how many times you get back on. With that said, I want to announce that I am back on "the horse" and will once again begin to deliver to you once again real estate content from an industry-insider's perspective. 

I have been blessed to have had the opportunity to try my hand at a few occupations and have had success in a couple of careers, but one thing remains consistent--no matter how far I try to stray, real estate is my calling. That said, I am going to begin to deliver content on a regular basis. In doing so, I will try my best to both be more technical, as well as more topical and will look to strike a balance between the two. 

It's great to be back at the Real Estate Think Tank and like a pair of well-worn jeans, it just feels right!

Yours Truly,

Stephon Martin

The Real Estate Sales Game (Part 2)

In Part 1 of this post, three aspects of real estate sales were addressed--lead generation, asset valuation, asset management. These real estate sales characteristics require a specific approach when applied to real estate sales. In this post, the remaining two aspects of real estate sales will be discussed--marketing and customer relations. These aspects of sales are more uniform across all sales profession, both in and out of the real estate industry.

As a reminder, the term real estate salesperson includes all real estate professionals that spend a significant portion of their time selling real estate assets, including property salespeople, real estate capital markets sales professionals and commercial and residential loan officers. 

The Real Estate Sales Game (Part 1)

Interestingly, I have over 10 years of experience as a real estate salesperson and attorney and have yet to write a post on the mechanisms of real estate sales. An understanding of real estate sales can be useful in informing the perspective of a real estate investor. Real estate salespeople have an intimate understanding of market activity, market trends and asset valuation that can prove valuable to all real estate investors.

Change Is A Coming: How Current Economic Conditions Should Affect Real Estate Investment

Many economist and market pundits are predicting a market downturn, beginning some time in 2019 or 2020. All of the indicators of an overheated boom seem to be present--increasing margin debt, decreasing dividends, stock market price inflation and increased levels of corporate debt. Essentially, low interest rates have made credit more accessible. As a result, businesses are using credit to buy back some of their outstanding stock. In response to the relative decrease in availability of stock, stock market prices are rising, increasing household wealth across the nation. Spurred on in part by technological development, the economy seems to be booming at present, but it is important to note that mechanism that is fueling this increase in wealth is debt.

How To Approach A Defaulting Second Mortgage

Default happens, hopefully not often, but it is a fact of lending. Upon default, however, a holder of a second mortgage must find an objective, value-driven manner in which to evaluate its options. Unfortunately, in many instances second position lienholders opt for one of two extreme approaches—accepting a nominal amount in exchange for the release of the lien or demanding an unreasonably high sum for satisfaction of the lien. Both approaches are harmful for different reasons. Despite such prevalent behavior, with proper management, a defaulting second mortgage can provide a lienholder with a number of options.

Real Estate Crowdfunding

Real estate crowdfunding has been a hot topic for the past few years and continues to gain notoriety. Praised for its flexibility and low barrier to entry, crowdfunding enables investors to directly invest in real estate properties without having to amass the funds necessary for a mortgage down-payment. For an amount as low as $500, in some instances, investors can contribute to a pool of investor capital that will enable a real estate entity to acquire a property. Open to both accredited investors and the public at large, crowdfunding offers access to the risks and rewards of direct real estate ownership in a passive manner with relatively little out-of-pocket costs.

Real Estate Asset Managers

In the real estate industry, there are many different professions, each with its unique role. I have focused on different real estate professions in the past on this site, so let us take a look at more obscure and lesser known profession--the Real Estate Asset Manager.

Role of a Real Estate Asset Manager

Although the title Asset Manager has multiple meanings in the world of finance, the Real Estate Asset Manager has a specific task—to manage properties resulting from mortgage default or property acquisition on behalf of a real estate investor, whole loan investor or mortgage servicer. Typically, real estate asset managers maintain a network of vendors, such as contractors, real estate brokers, real estate marketing companies and appraisers in order to maintain, market and sell properties under their management. Resultantly, much of the role of the Real Estate Asset Manager consists of vendor management.

Most real estate asset managers work with mortgage servicers through either a client or a subsidiary relationship. For example, Altisource, the nation’s largest real estate asset manager, is an independent but related company to Ocwen Loan Servicing, one of the nation's largest mortgage servicers, whereas SingleSource, another well-known real estate asset manager, is a wholly independent company that is hired by some of the largest loan servicers. Given the size of the whole loan portfolios of the larger mortgage servicers, many find hiring a real estate asset manager more cost effective than building and managing property vendor networks and tracking sales activity.

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.

In the Weeds: How a Multidisciplinary Approach to Real Estate Can Lead to Increased Success

I once had a conversation with a coworker in which I expressed my frustration regarding the siloed view of real estate that many real estate professionals seem to employ as a matter of course. I complained that so few real estate professionals truly attempted to view real estate as a multifaceted asset and instead cared only to focus on their specialization within the industry. I wondered out loud how productive the industry could truly be if, in addition to their own professional perspectives, appraisers attempted to see the industry a little more like attorneys and attorneys tried to orient themselves to view the market like investors and investors like Relators, etc. 

My coworker listened politely until I was finished and wisely stated that the reason such cross-pollination of perspectives was not present in the real estate industry was that everyone was too “in the weeds” in their various roles and on their various projects to even attempt to take such a view. It was at that moment that I realized that I realized that my coworker had accurately described a condition that plagues much of the real estate industry—myopia. Indeed, many real estate professionals become so great at their specialization that cannot see the forest for trees or better yet, the weeds. 

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.