As part of the CARES ACT, you saw a lot of homeowners take advantage of the 3 month… and now 6, and potentially 9 month…. forbearances, that their mortgage companies offered. A forbearance is a loss mitigation option that a lender uses, to temporarily postpone mortgage payments on a loan, to help the borrower get back on their feet and with the anticipation of them being able to afford the payments again later on.
This was MY definition. And you’ll notice – the 2nd piece.
“With the anticipation of them being able to afford the payments again later on.”
This becomes KEY.
In a traditional forbearance, there is a loss of income temporarily due to an event (medical, death in the family, hospitalization, disease, etc) and the anticipation is that the borrower will get back to their payments within a certain amount of time, when the sickness / tragedy / temporary situation is resolved and they are able to return to their jobs at the same salaries.
In comes COVID-19.
And the base thesis here, is that businesses have learned to do MORE, with LESS.
Less office space, less dues and subscriptions, less monthly obligations, and LESS STAFF.
This is a normal path during any market event, such as say, a global pandemic.
The challenge was, the government, in their quest for immediate relief and not having anyone really think about the consequences of their actions, pushed a lot of these options out onto borrowers along with $600/month added incentives for being unemployed (that alone pushed a LOT of people to file and quit their jobs – especially in the hospitality and medical fields, where they could make MORE by being at home, and subjecting themselves to less risk!), along with the PPP loans and the SBA EDIL Loans (where there was rampant fraud that went relatively unchecked by the governing agencies).
So, in essence, they may have helped temporarily, but here’s how the can looks as it rolls down the road.
We just hosted a webinar where we highlighted the risks of this strategy with my partner Maryann, who runs the Short Sale Mitigation team, where we assist struggling borrowers with getting out from underneath their debt they cannot service. Check out the webinar recording and take a look at the statistics at the beginning, of the unemployment rates, coupled with the forbearances coming due (and then falling away, without being cured), and ultimately the GAP of the borrowers who, despite their attempts, still will either no longer have a job or will have drastically reduced income when these forbearances finally are coming due.
And they’ll have a few options:
1. Mr. Borrower, it’s been about 6 months now, and so we wanted to reach out and find out how you’d like to bring your loan current? (I assume you have some fantastic job now and have escrowed all 6 months of payments and can just pay it all now in one lump sum?)
“Of course not – my income still isn’t the same as when COVID-19 hit!”
2. OK then Mr. Borrower – then in that case, we’ll take the 6 months of payments you owe, and amortize them over the next 24 months, which should only increase your monthly payments by about $400-500 a month. How does that sound?
“I can’t even afford my regular monthly payment – and you’re asking me to come up with an extra $400-500? No can do!”
3. I see, Mr. Borrower – so in that case, we can amortize what you owe into the 26 years (or 28) years left in your amortization schedule, so it will only increase your payment by $100-200/month – that sounding better?
“You’re not listening – I can’t even come up with my original mortgage payment! Are you deaf or just not listening??”
4. Well then you’re in luck, Mr. Borrower, since you can prove a hardship and cannot amortize your payments over 12 or 24 months, and you have a house in MA, you may qualify under Ch. 65 to get these payments lopped on to the back of your loan, and you don’t have to pay any of it now! You just have to fill out this 5 lbs of paperwork to show you qualify, and then you can go back to paying your monthly mortgage payment as before….
“Sounds like good news, for someone who has their job back. That’s not me. I can’t afford my monthly obligation. So – not sure what to tell you, Mr. Lender.”
5. Mr. Borrower, the only other option I see, is that we’ll have to call the loan due and you will be forced to refinance or sell the asset.
“No shit! Thanks for the revelation, Sherlock!” or “That’s sad to hear – I’ll call an agent, I don’t want to have to deal with you ever again.”
…or, something that’s not as nice as EITHER of those, above.
You see the issue is lack of income. Which is still SUPER prevalent in this market. At the beginning of October, we were at 7.9% unemployment rate. And, in first week of October, the unemployment claims ROSE 9.5% from the previous week (again – see the stats in the presentation link above). None of these people can afford to pay their normal monthly obligations, nevermind with any extra tacked onto it.
This will lead to eventual forced sale of these homes. Now, at first, because demand is still at an all time high in most communities – that first wave? Should be no problem. The homeowners make money with a ton of equity, and a bunch of homes are pushed onto the market and helps eat up a lot of the demand that has been festering since the summer.
The problem comes from the 2nd and 3rd waves – those who got extensions on their forbearances, OR those who were waiting for their lenders to take actions to foreclose.
The 2nd wave might even be OK, and come out at what they owe. But see, now more and more homes have been hitting the market. And less and less maintenance on these homes, push some below the equity line.
So days on market starts to finally go back up to 30, and then 60 days for supply/demand stabilization. THEN once homes start to go on the market for less than what the seller owes, due to inability to keep up with maintenance, or just to get offers in before foreclosure auction dates are set… the market doesn’t just start to correct with price declines. INVESTORS then come out of the woodwork, who’ve been patiently waiting for values to stabilize, and when they see listings “Subject to 3rd Party Approval” and “Sold AS IS” – their offers drop faster than a lady’s purse on prom night. (Kid friendly blog!).
THIS is when we start to see the massive correction we’ve been waiting for. And … since once again I’m putting my thesis out there for all to see, I would guess we’ll start to see these effects finally in early 2022, when waves start to finally come out and equalize the supply / demand curve.
Am I right? Who knows? But we are preparing, and will take a serious look at our buying criteria come to Q3 and Q4 of 2021.
Other side effects – availability of capital to buy – just like in 2008 -2010, expect it to be a lot harder to get bank financing. So those with access to cash, will have the opportunities to help. Another proud venture we are starting, with more to come in the Q1 update of 2021… but just to let you know, we wouldn’t leave you in the dark with how to prepare, and then how to PROFIT from the market changes! Announcement coming soon…
“But Nick – what about the elections?”
Funny you should ask – Wall Street’s reactions said it all. On the day prior, and day of the election – typically when Americans are the LEAST certain about policies and what was to come, the market was stable and even RALLIED. This means – and this is not necessarily a political statement – that the American people didn’t CARE one way or another about the outcome. Interesting, right?? This was my major in school, so as an observer to the process, it seemed that voters and the American investors, felt that moving forward DESPITE our President, was more important and they had faith in the economy. I guess we’ll see!
“But Nick – I wanted to know about COMMERCIAL Real Estate.”
Oh – you’re asking about commercial? That’s a whole separate article! Keep on reading – and thanks for staying connected as we adapt and help bring you and us through this incredibly fun roller coaster ride.
Here we are. In this strange place.
For those that read our last post, “Get Low” was one of our themes for Q2 – we reduced our buying criteria actively, while not knowing what the residential or commercial markets were going to do – but we did see a lot of commercial capital markets fall out, and their criteria also got way more conservative. We like to think we were ahead of this curve by modifying our max allowable buying criteria for our residential fix & flip division down to 63-67% from 75% of ARV – a similar move that banks took.
The challenge?
Inventory was already SO LOW pre-COVID – and with the introduction of the stay in place orders, many sellers who were thinking about selling in the spring, chose NOT to.
But the BUYERS still needed and wanted to BUY!
The supply / demand curve went nuts. Pent up demand was at an all-time high and with a lack of inventory, we will have a LOT of inventory to go through before we see the demand spent back down to normal levels.
What does that do?
Well – even during a virus that can shut most of the country down,
SELLERS are still getting HUGE bidding wars on their homes. And get this – many of the buyers AREN’T even physically touring their homes.
Our agents at AA Premier Properties have become masters at “selling from their couch” while using safety practices – namely, having sellers take their own photos and photoshop specialists dressing them up, OR professional photography with virtual staging, Matterport 3D floorplans, drone flyovers, floorplans, the WORKS, and allowing prospective buyers the opportunity to walk through the house VIRTUALLY, with no stress of catching anything!
Case in point – one property in Billerica that we listed, had 14 offers – listed for $585K and sold for $625K. No contingencies. THAT’S PENT UP DEMAND.
What does that do to a fix and flip firm like ourselves? Well – we call it “the gap.”
Sellers can still get ridiculous money for their homes on the open market – even if they are motivated. But our buying criteria has LOWERED – so we’re even further apart on price. This is called “the gap”. So the trick is to filter out the ones who REALLY need our “no-hassle” buying services from the ones who are willing to get a bunch more money, but sit through the showings, offers, negotiations, inspections, finance contingencies, and HOPE the lenders continue to lend in the COVID environment. They are still out there – but fewer and far between.
This means we are working double hard on our best lead sources to try and generate our purchases, but we’re not too concerned.
You see – this gives us an opportunity to refresh, take a breather, work on our systems and our team, and PREPARE.
Prepare for WHAT?
Prepare for what is about to happen.
The CARES ACT stimulus packages – the extra weekly unemployment money, the PPP funds, the stimulus checks, the numerous abilities to magically stop paying your rent and your mortgage if you’ve had a reduction in income or lost your job….
It’s all going to go away.
This may sound harsh, but it’s what government programs do and are supposed to do – they are good in the moment, but they can’t last forever.
So what will happen?
At Short Sale Mitigation, we understand many lenders are NOT even adding the deferred mortgage payments onto the back side of the loan – instead, they will need homeowners to COME UP WITH ALL 3, 4 or 6 months of mortgage payments at ONE TIME, or they’ll be in default.
Others, are re-terming the loan, and the payment will go up to reflect these missed payments.
My question is – if they couldn’t afford the mortgage or rent with the extra $600 in unemployment, or their stimulus money,
AND if NOW their employer has learned to DO MORE WITH LESS, and will most likely not have their job again when they go back from unemployment to reclaim it –
How will they get caught up?
And landlords. The poor, poor landlords of Massachusetts specifically. As I type this, August 18th marks the end of the eviction moratorium – but they are approving another 12 MONTHS – and did they give the landlord any relief if the tenants refuse to pay?
Nope. They have to remain current on their mortgage, taxes, insurance, utilities, maintenance and upkeep, and … get this ….can’t even try and work out a payment arrangement with them, since that’s against the progressive legislation.
Do you think they will be in a position to cover this for 18 months??
This doesn’t even address what is happening to the commercial real estate markets.
So all this said – it’s our crystal ball that says while we’re in “the gap” now – the next 4-6 months will be rough on any fix and flip company, but then we’ll start seeing inventory again.
Some retail inventory – but then, will come the distressed, short sale inventory, with sellers who can’t make up the back mortgage payments, landlords who can’t deal with their tenants who haven’t paid the rent in 12 months (some of these, of course, are legitimate – but again, what about the landlord’s obligations??), of sellers who have run out of unemployment funds and their former employers no longer have work for them…
Slowly, but surely, the shadow inventory will build. Until it releases, either by itself or through another “event.” (Could it be a 2nd wave? An election? More riots?)
So all we can do is keep trimming the fat, working on our systems and processes, and getting the right people in place to be in a position to assist what we know is coming.
We are doing what we can to stay as liquid as possible for the next few months – and while we know it won’t be easy, we know it WILL be worth it. And we won’t be upping our criteria anytime soon – we will let the other “We Buy” companies buy the deals now, since, when the rubber meets the road, the ones who have never been through a correction – dare I say a deleveraging – we will be the last man standing, in a position to impact and help as many as we can.
For now – stay calm, confident, and be CERTAIN in what you can control! We’re here with you. And if you ever want to see what we are preparing for, take a peek at our AA Real Estate Group Facebook page where we have the recorded webinars that we started hosting for all self-employed individuals once the new guidelines and changes started coming out hot and heavy.
That was the message we heard loud and clear in early March, when we saw our friends in Wall Street go belly up. Capital markets shutting down left and right, not having any faith or confidence in what was going to happen in the real estate markets. We were on the phone with our commercial lenders, when they said “we’re taking a pause” or worse, they didn’t answer their phones, since they were backed by a Wall Street hedge fund that just closed its doors.
COVID-19 was much more than a virus. It became a virus in our minds, keeping people in lockdown, screwing with our businesses, and driving fear and uncertainty into our heads.
We were affected by this, no doubt. We had to halt construction on several projects, municipal boards all canceled their meetings and delayed our mixed-use and commercial projects, and a couple of buyers had to back out of solid deals due to their funding drying up. All in all, it left us in a place where we knew we needed to act.
Our new motto became “Go Low, Get Lean, and Get Liquid.”
“Go Low” meant our buying criteria had to change. Lenders were changing theirs drastically (those that didn’t stop lending altogether), and we had to follow suit, to still be loanable but also to account for an uncertain market. We still needed to do deals to keep our lights on, and there were still sellers who needed our help. But what was potentially a deal on March 18th, was no longer a deal on March 23rd. We modified our buying criteria down to a maximum of 65% of ARV (formerly 75%), to account for these economic circumstances.
“Get Lean” meant we needed to take a hard look at our overhead, and scrutinize every penny going out. Especially tools, and subscription services we had gotten accustomed to. All expenses were on the chopping block – including payroll. That said, we were fortunate enough to have a solid business that was able to keep all of our staff in place through the crisis, and with the added help of the PPP funds and EIDL loans, we could weather the storm for at least 6 months in the worst case, if we had no deals closing. We also made a decision not to upgrade our office space to the 5000 Sq. Ft. facility we were looking at, and instead, wait out to see how the market plays out.
“Get Liquid” – this was the hardest part but a great lesson for us. No deals were “too hot” to not consider letting go of in favor of getting CASH RICH in this crazy market. Single families, development deals, commercial opportunities, everything was looked at as “can we take a quick nickel NOW (or break even) to get the cash to use when the market turns?”
This was our strategy. And while we absolutely felt for the numerous people and their loved ones who had a bout with this disease, we also knew that this was a huge market catalyst – one that was a long time coming.
And in COVID’s wake – we also saw the opportunity. The opportunity to help and impact many residential homeowners, residential landlords, and especially commercial property owners that will ultimately feel the overwhelming burden of tenants not being able to pay their rents. Of their jobs NOT coming back after their unemployment stimulus runs out, and office vacancies no longer being filled as people do not return to work, as companies have now learned how to do more with less (see “Get Lean” above!).
THIS is the reason we’ve been readying our debt negotiation firm, that we’ve had since 2010.
THIS is the reason we are getting as liquid as possible, to have the cash when no one else does, or the capital markets once again fall out due to COVID, politics, or another “event”.
THIS is the reason we have been tweaking and building our team exactly where it needs to be, so we can be in a position of power and ACTION when the time is right.
So – through all the challenges the world is facing (and we continue to face, being in “the gap” of sellers demanding a ton of money, and the pent up demand that is still out there… see “The Gap” article!), we are seeing the LIGHT and what is making our purpose even more clear through this pandemic.
We will be coming out with some big news for our network in the upcoming weeks – we want as many people to not only get out unscathed, but to benefit from the changes in the marketplace, and we feel we have a huge role to play.
Reach out and set up a conversation if you haven’t connected in a while – I’d love to chat with you, even for a 15-minute zoom or phone chat, on what you’re seeing, and your own goals.
For now – stay the course, focus ONLY on what you can control (hint – it’s NOT social media, news, governor’s guidelines, or what your neighbor believes is or is not the case), and REMAIN POSITIVE.
This too shall pass.
Join us as we move into a position of power to help people who need our services, while being in a position to change your and our balance sheets forever.
And if you ever want to see what we are preparing for, take a peek at our AA Real Estate Group Facebook page where we have the recorded webinars that we started hosting for all the self-employed individuals once the new guidelines and changes started coming out hot and heavy.
~ Nick AA