The Gap

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.