TR_nov-dec_2023-lr

TM INFORM. INSPIRE. EDUCATE. EMPOWER.

INVESTMENT STRATEGY Warehouses

MARKET & TRENDS Overlooked Markets

Mechanic’s Liens OPERATIONS

A Restart, Not a Startup

LIKE A PHOENIX, BILL TESSAR’S CV3 RISES FROM THE ASHES OF A GUTTED BUSINESS.

PAGE 14

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Online Reporting Owners maintain control of their property and keep tabs from afar using their own online account, with easy access to updates on property activity, including vacancies, leasing, maintenance, property evaluations and financial reports. Cost-Effective, Reliable Maintenance Relationships with preferred vendors result in discounted equipment and services. Maintenance staff is available 24/7 to handle emergencies and to make sure maintenance is timely, cost-effective and done in a professional manner. Timely Rent Collection Nothing affects cash flow more than late or missing rent payments. In addition to offering incentives for paying rent on time, our collection processes are professional but tough, and we are extremely diligent in collecting rent through a systematic, timely process. Strict and Compliant Evictions Even with careful placement there is occasionally a tenant who needs to be evicted. Our offices are knowledgeable in state and local landlord and tenant laws. If rents are not paid on time, we strive to minimize costs by following the legal steps quickly and efficiently to get the property leased again.

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Thorough Tenant Screening and Selection

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PUBLISHER & CEO Eddie Wilson

MANAGING DIRECTOR Linda Hyde

MANAGING EDITOR Carmen Fields

SALES MANAGER Kurt Power kpower@thinkrealty.com

FULFILLMENT COORDINATOR Blair Pierce

DESIGNER David Rodriguez

CONTRIBUTORS Luke Babich Katie Bean Best Ever Conference Daren Blomquist Merrill Chandler Kurt Coleman Connected Investors

HEY! LET’S BE FRIENDS! GET SOCIAL. STAY CONNECTED.

David Jacobs Bruce Kellogg Zach Lemaster Chris Moschener Paul Mueller Chris Ragland

Like, Follow & Share for the Latest Real Estate News, Trends and Insights from Think Realty

Susan Reilly Damon Riehl Jeff Roth

Are you following Think Realty on social media? Things move pretty fast in real estate. Don’t miss out on the latest trends, tips, insights and news from your trusted resource for all things real estate investing! Follow. Like. Love. Share. Comment. You can do it all with Think Realty’s social media channels. Join the conversations in Think Realty social communities and connect with like-minded members who range from first-time to seasoned investors. Check out all of our social media channels and connect with us - and other investors - today!

John Santilli Jamie Talley Jim Tannehill Neil Timmins Michele Van Der Veen Ingo Winzer

SUBSCRIPTIONS :: The annual subscription for Think Realty Magazine is $39.99 in the U.S. Order online at www.ThinkRealty.com or call 816-398-4130. Provide your full name, address and telephone number. DISCLAIMER :: Think Realty Magazine , its owners, contractors, distributors and their respective representatives do not provide tax, accounting, investment or legal advice and make no guarantee as to the effectiveness or success of any investment or tax strategies discussed herein. Please consult your own independent adviser as to any questions you have or decision you are contemplating. ABOUT THIS MAGAZINE :: Think Realty Magazine is a publication of Affinity Real Estate Media LLC. Reproduction or use of any editorial or graphic, without permission, is prohibited. We are not responsible for the content of any paid advertisements. For reprint rights; to ob- tain a detailed statement of our privacy policy; and for all single-copy requests, address changes and other subscription inquiries:

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4 | think realty magazine :: november – december 2023

Thinking Strategically for a Successful 2024

s the year-end approaches, it is

one well versed in real estate, to understand how your investments will impact your overall tax

imperative for businesses to analyze their performance, make informed decisions to maximize profitability, and create a strategic plan for the year ahead. Here are some

situation. This is one area to pay close attention to and can make you or break you if you are not informed on the best tax strategy.

4 Portfolio Diversification. Year-end is a good time to take a close look at your real estate portfolio. Analyze whether you are too heavily invested in a single property or market. Diversification can be key to helping mitigate risk and rebalance your portfolio. 5 Legal and Compliance Check. As with all businesses, it is crucial to ensure you are following all local and federal regulations. This is also a good time to review current lease agreements and address any potential issues. 6 Long-term Goals and Planning. Based on your analysis, set your financial goals for the upcoming year. Ascertain how your real estate investments fit into your comprehensive financial plan. Here is where you will set new objectives and establish new strategies for the upcoming year. By taking a close look at your business performance for the current year, you are positioning yourself for a smooth transition into the new year. The real estate market is everchanging. Investing the time to analyze what is working and where you may need

end-of-year strategies to assist with your successful preparation for 2024. 1 Property Performance Evaluation.

Calculate your ROI, which includes property appreciation, rental income, and any tax benefits. This is also an important time to assess rental and vacancy rates, compare your actual to your projected income, and adjust for the upcoming year accordingly. Pay close attention to all property expenses, including management fees (if applicable), maintenance costs, taxes, insurance, etc., and look for areas to reduce costs to increase profitability. In some situations, you may find that updates and renovations could increase the value of your property and/or rental income. 2 Conduct a Market Analysis , Pay attention to your local market and the rates that accom- pany it. How does your property compare to others? Look for key factors that may affect the local market (e.g., job growth, population trends, and economic conditions). Based on these factors, revisit your long-term investing goals. Are you looking to hold the property for years to come or sell in the near future? 3 Look for Potential Tax Implications. Consult with a tax professional, preferably

to pivot can set you up for success and take advantage of opportunities where others are not focused. End the year strong—and best of luck in 2024. •

CARMEN FIELDS, MANAGING EDITOR

thinkrealty . com | 5

CONTENTS

INSIDE THIS ISSUE

COVER FEATURE

A RESTART, NOT A STARTUP

LIKE A PHOENIX, BILL TESSAR’S CV3 RISES FROM THE ASHES OF A GUTTED BUSINESS.

6 | think realty magazine :: november – december 2023

LEGISLATION

34 Is 100% Financing an Actual Product? The answer is “yes,” but is it for you? By John Santilli 36 The Secret Weapon of Alternative Investing Bank unsecured business lines of credit offer investors many advantages in today’s dynamic marketplace. By Merrill Chandler

54 How I Achieved a Million Dollars in Cash Flow

I followed five steps to realize $1 million in cash flow in less than 10 years. By Zach Lemaster

8 Sometimes Legislation Is “Signaling” Legislation is sometimes used to send a message. by Chris Ragland

OPERATIONS 58 Understanding Mechanic’s Liens

DESIGN 10 Top It Off!

Understanding how lien rights work and how to accurately track lien documentation is essential for developers. By David Jacobs

Countertops can make a statement in any kitchen or bathroom remodel, but remember to balance looks with functionality. By Michele Van Der Veen

INVESTMENT STRATEGY 40 Is Warehouse Investing Sexy?

60 Why Being an Affordability Advocate Matters

MARKET & TRENDS 16 Investing Opportunities in Overlooked Markets

Warehouse space can be a highly lucrative and long-lasting investment vehicle. By Susan Reilly

Being an advocate is good for clients and also for the long-term success of our businesses. By Jeff Roth

42 The Basics of Leases and Options The market for leases and options is

62 A Guide to Advocacy

improving, attracting investor interest. It’s also an opportunity for you to earn revenue by coaching investors on the how-tos. By Bruce Kellogg

Solid returns await investors if they consider looking outside their comfort zone. By Daren Blomquist

Understanding the importance of advocacy and how to harness its power for your benefit while also using the Empire Operating System is key to a successful real estate business. By Jim Tannehill

20 East Meets West

44 Making the Most of Home Equity Investors and homeowners can maximize equity to meet life goals. By Chris Moschener 46 4 Regulatory Changes Investigators Must Understand The evolving regulatory environment demands that investors pay attention. By Luke Babich 48 How High-Earning Real Estate Agents Can Become “Agent-Optional” Restore balance and sanity to your career without sacrificing income. By Neil Timmins 52 The Advantages of Investing in Commercial Real Estate

Will prices level off this year? By Ingo Winzer 22 Top 5 Recession-Proof Markets in 2023

64 Who’s in Your Corner?

Being able to tap into a network of people who have more experience and knowledge than you can boost your success. By Kurt Coleman

Investments in these markets are likely to see increases the longer you hold the property. By Zach Lemaster

66 A Real Estate Investor’s Guide to a Changing Market

FUNDING 26 Real Estate Investment for Retirement: Securing Your Financial Future An articles series on navigating the private lending world By Damon Riehl 32 Unlocking Real Estate Success with Easy Street Capital Easy Street Capital provides a path to real estate prosperity. By Jamie Talley

Consider these four strategies for real estate investors thriving in a volatile market. By Connected Investors 70 The Art of Passive Real Estate Investing Learn how to evaluate sponsors for success. By Best Ever Conference

Whether you’re a seasoned single-family investor or new to real estate, there are several benefits to investing in commercial assets rather than single-family real estate. By Paul Mueller

thinkrealty . com | 7

LEGISLATION

PREDATORY INVESTING

Sometimes Legislation Is “Signaling” LEGISLATION IS SOMETIMES USED TO SEND A MESSAGE.

by Chris Ragland

arlier this year it was brought to the attention of Think

significant number of unintended consequences. After speaking with our contacts on Capitol Hill, our concerns were leveled quickly. It appears this bill was more about signaling to constituents and other members of Congress across the aisle than a serious attempt at pass- ing legislation. For now, we can rest a little easier knowing that Congress wasn’t serious about passing a bill into law that would make it difficult for REITs, funds, and larger housing providers to own more than 50 residential units. If you’re interested in staying up to date about legislative issues that can affect us all, stay tuned. That’s exactly what the GRC is here for. If

you become aware of federal, state, or local governmental legislation that may have a negative impact on real estate professionals, please don’t hesitate to reach out. You can always find out more about the GRC on the Think Realty website. •

Realty’s Government Relations Committee (GRC) that a bill—Stop Predatory Investing Act—was making its way through the Senate. Members of our committee found it odd there was no bill summary, and we could not find any substantive material on it. However, when the bill was posted online, we saw it would prohibit business entities with 50 or more single-family homes from deducting interest or depreciation on those properties. So, we jumped into action. The bill was fraught with poorly

Chris Ragland has managed real estate-related businesses for the past 20 years, including brokerage, disposition, insurance, management,

finance, development. His favorite role to play, however, is investment mentor. An active investor and principal in several real estate-related ventures, Ragland continues to grow his portfolio of properties while he builds up those around him. In addition to real estate, Ragland serves on several nonprofit boards and is active in the start- up community in Austin, Texas.

constructed language, several contradictory provisions, and a

8 | think realty magazine :: november – december 2023

thinkrealty . com | 9

DESIGN

COUNTERTOPS

Top It Off! COUNTERTOPS CAN MAKE A STATEMENT IN ANY KITCHEN OR BATHROOM REMODEL, BUT REMEMBER TO BALANCE LOOKS WITH FUNCTIONALITY.

By Michele Van Der Veen

ith so many solid stone slabs on the market to choose

on budget and keeping the overall look consistent. Although the overall look is always an important factor in the decision-making process, the durability of the product also should be taken into consideration. Some stone slabs are more durable than others. Keep in mind that

man-made products are far less durable than natural stone slabs. With most buyers gravitating toward solid countertops, using a stone slab is a great way to go. Stones such as granite, marble, and man-made quartz are all great options to finish off the look of any kitchen or bathroom remodel. Since the countertops in the kitchen get so much wear and tear, some solid stones hold up better than others. From an investment standpoint, your selection may come down to overall durability rather than the look. A durable countertop will better protect your investment since you cannot control how a potential buyer or renter will use the countertop. Let’s take a look at a few of the options. GRANITE Granite kitchen countertops are al - ways a solid choice because they are considered the best stone slab on the market. Granite is durable and dependable in terms of usage. It also provides beauty. Many homebuyers seek it out when looking for their next home to purchase. The natural beauty of granite is expressed in a wide range of colors. Each slab has its own unique look, due to the stone’s speckling and the veins running through it. Because it is a natural material that comes from deep within the earth, after you

from, making your countertop selection for a kitchen or bathroom remodel can be overwhelming. Countertops can be expensive and can make or break the overall look of any renovation.Making the right decision is important for staying

10 | think realty magazine :: november – december 2023

make a selection, ask your repre- sentative at the granite warehouse to line your slab selections side by side so you can see how the stone’s col- ors will look when they are installed side by side. All too often, this step gets passed over and the end result can be mismatched stone colors and patterns that are not appealing. Being the most durable stone on the market, granite can withstand high heat, is scratch resistant, and holds up well to staining because it is less porous than other stones on the market. Periodic sealing is required to help retain its beauty. The sealing process provides extra protection against stains. Overall, granite costs more, but the benefit of such a durable product for a kitchen can outweigh the cost factor. Installing a less expensive, less durable product can cost you more down the road. A countertop with deep scratches from sharp knives or melted sections from hot pots are a beautifully renovated kitchen’s kiss of death.

MARBLE You can’t help but love the

look of marble countertops! The elegance, richness, and character deliver a look of pure beauty. With its unique veining and clean, crisp color, marble gives any kitchen or bathroom a feel of sophistication and luxury. In recent years, marble has been used a lot in kitchens and bathrooms, a trend driven by popular home reno- vation shows. Marble can complete a number of design styles within a wide range, from mid-century modern to shabby chic. It’s also a favorite for a country farmhouse finish. Marble is at the top of the list in terms of cost. The cost for the marble itself is higher, and it is also

thinkrealty . com | 11

often more costly to install. Because it is more porous, it has a higher chance of cracking during the instal- lation process. And, because marble is so heavy, it often requires more installers just to move it . Considered a “luxury stone,” marble can run anywhere from $20 to $50 a square foot more than granite. Marble has its pros and cons. It is a natural stone, so it stays cool, making it a great surface for baking. It is also a solid surface, which today’s buyers prefer.

However, it is not as resistant to high heat as granite is. Marble is also more porous, which opens the doors to concerns about staining. Additionally, marble is composed of calcium carbonate, just like antacids, so it is known to react to acids. Liquids like lemon juice and vinegar can etch marble, leaving a dull white mark where it gets eaten away by these liquids. Still, with a lot of maintenance and regular sealing, marble can be another solid countertop selection.

QUARTZ In today’s market, quartz is coming out on top for all-around popularly. Although it may not be strong in certain categories for countertop selection, it has a consistently even likability in the categories of price, looks, and durability. Most people are not aware that quartz countertops are man-made. Comprised of loose quartz particles bound by a resin, it is an “engineered man-made stone surface.” Because of this, its color and overall look stay

12 | think realty magazine :: november – december 2023

straight edges to half bevel, full bullnose, and half bullnose to quarter round and mitered, the sky’s the limit for the finished look of your quartz countertop. Quartz has a very well-rounded rating for durability. With it being a “nonporous” product, its care and maintenance is minimal, requiring no sealing. Quartz is highly resistant to scratching, chipping, and staining. However, it has a higher chance of melting at high heat from resting pots and pans compared to granite or marble. Quartz countertops are less difficult and less time consuming to produce, and quartz is easier to transport to market, which helps keep the cost down. Because of these factors, the cost of quartz lands below granite and marble, making it appealing to a lot of budgets. Balancing the appeal of a product versus its functionality will determine your countertop decision. Selecting countertops is but one of the many decisions you will make during any kitchen or bathroom

renovation, but it’s one you should not rush through. Your decision not only has budget implications but also aesthetic ramifications because countertops cover a good amount of surface in a bathroom or kitchen. In the end, topping off any kitchen or bathroom renovation with a perfect countertop selection inevitably makes those rooms much more memorable. •

Michele Van Der Veen is host of Good Day segments, including Flip It, Decorate Like a Designer, and Stage to Sell. She started her career in real

consistent, making its purchase much easier compared to natural stone. Because quartz is a man-made product, the range of color choices offered is much wider than for natural stones. This also allows for more unique and creative designs. Quartz manufacturers can add metal flecks and chips of recycled glass during the processing of some of their more contemporary-looking slabs. Quartz countertops are available with all the same edges as solid stone countertops. From

estate investing more than 30 years ago. A published author, Van Der Veen has been recognized and featured in international magazines for her unique approach to interior design. Acquiring a formal education from the Interior Designers Institute of California, her experience stems from building custom homes to flipping more than 100 homes and working in commercial real estate development alongside her father at a young age. Not afraid to push the limit on her own designs and investments, Van Der Veen will often be heard reassuring her team about her decisions by saying “Don’t worry, we are the comps!” For more on Van Der Veen’s work or to contact her, visit iHeartHomescorp.com.

thinkrealty . com | 13

COVER FEATURE

CV3

A Restart, Not a Startup LIKE A PHOENIX, BILL TESSAR’S CV3 RISES FROM THE ASHES OF A GUTTED BUSINESS.

By Katie Bean

s he watched the team he built get dismantled, William

reached a milestone $3 billion in loan production in 2022. But its success couldn’t offset investors’ uncertainty surrounding Pacific Western after the failures of other troubled regional banks, including Silicon Valley Bank. At the end of 2022, Tessar said the bank approached him about spinning off Civic, which he was willing to do. However, as the bank’s situation changed over the first few weeks of

2023, the deal fell apart, Tessar said. His position was eliminated, and the bank said it would restructure. But after two rounds of layoffs and ceasing loan origination, it was clear that everything that had gone into making Civic a success was becoming completely undone. “I’m a father of three, a grandfa- ther of three, and a surrogate father of 500 that were at Civic. A lot of these relationships go back over two

Tessar couldn’t just sit on the sidelines. He had to act.

“It was devastating for me to see so many capable human beings, that did nothing but what they were asked, end up unemployed,” he said. Tessar joined private lender Civic Financial Group in 2017 as president, and the company was acquired by Pacific Western Bank in 2021. Civic

14 | think realty magazine :: november – december 2023

decades,” Tessar said. “I just felt like, you know, this story wasn’t done being written, and I care an awful lot about the folks that were underneath that banner. “Once (Pacific Western) made it really known that they were out of the business and it was a shutdown and people were losing their jobs, it was really the kick in the pants for me to get going,” he said. In August, Tessar announced the launch of a new private lender, CV3 Financial Services LLC, based in El Segundo, California. CV3 will provide business-purpose loans for non-owner-occupied properties to experienced real estate investors. For the new venture, Tessar was able to onboard most of his executive team and about 150 employees from Civic, “among the best of the best,” he said. “There’s not one person with CV3 right now that I don’t know intimately, like intimately, and trust intimately,” he said. “And I think most people underneath our umbrella would say that about one another.” Tessar said it’s been humbling that so many former employees were willing to come together to start something new, and to turn down other offers in the meantime. “I think our power is our people,” he said. “For me, probably the greatest compliment I’ve ever gotten in this space is the patience of the people and the cooperation of standing something up together. It’s just been amazing, honestly.”

“It’s all the lessons learned, both positive and negative, applied to one new business,” he said. “I think that has also allowed us to hopscotch over what would be normal mistakes if somebody was doing a startup versus a restart.” One practice CV3 retains is what Tessar called “Keep-Stop-Starts,” where the team regularly discusses what is working, what is not working, and new ideas to try. “When we decided that we were going to move forward and create something special, we started our very first meeting with a Keep-Stop- Start,” he said. “You have to be ugly honest with each other about the things that didn’t work.” That resulted in a big shift for CV3 from the previous venture. Before, Tessar said, he was adamant about developing proprietary technology from scratch. “That was the stupidest thing I could have ever done,” he said. “I’m not doing that this time.” Instead, he said, CV3 will rely on proven software in the mortgage lending sphere. Tessar said his past failures make him confident about going in a different direction this time. As employees learn the ropes of the new systems, it’s been “heart- warming” to see the collaboration among longtime teammates, said CMO Elizabeth Hillestad. “Here we are, doing it over again. (There are) a lot of laughs, a lot of smiles, a lot of patting each other on the back and a lot of that camaraderie that comes from the good times and the bad. When you go through that as a group, it really does bring you closer. So, we’re very grateful that all of those individuals, whether they’re in ops or

accounting or marketing or technol- ogy, everybody is working together.”

”TREMENDOUS AMOUNT OF OPPORTUNITY”

Tessar is bullish on the opportu- nity for CV3 to make a big splash in private lending. In its first week of business, its pipeline was already filling up with a rush, thanks to rela - tionships producers had maintained during their gap in employment, Hillestad said. More importantly, Tessar said, the market is ripe for the real estate investors CV3 serves. “My father told me at a very young age: ”There’s always a need for money,’ and I believe that to be true. I believe that’s true more now than ever,” he said. “Our space is about beautifying dinged-up real estate and providing financing for that. And I still think there’s a tremendous amount of opportunity in the market- place, and we’re going to be one of those that fills that void for sure.” Even with such financial opportunity, Tessar’s goals for CV3 aren’t numerical. He does want to be the No. 1 choice for business- purpose lending, but he also wants to make his company a great place to work—one that employees don’t want to leave and one that gives back to the community. “We want to create an example of what an organization should be and needs to be from all corners of our space. And I think we’re going to do that sooner than folks might think we’re going to do it.” •

VERSION 3.0 CV3 stands for “core group version three,” Tessar said. He considers the company a restart rather than a startup.

Katie Bean is a former newspaper and magazine editor who loves telling the stories of businesses and great leaders. She is based in Kansas City.

thinkrealty . com | 15

MARKET & TRENDS

OVERLOOKED MARKETS

Investing Opportunities in Overlooked Markets SOLID RETURNS AWAIT INVESTORS IF THEY CONSIDER LOOKING OUTSIDE THEIR COMFORT ZONE.

By Daren Blomquist

ising mortgage rates and slow- ing home price appreciation

“The news for Salt Lake City for real estate is not the same as Davenport, Iowa,” said Jared Garfield, a real estate investor who has shifted his focus in recent years to smaller markets that have experienced steady and sustainable home price growth rather than

rapid and likely unsustainable home price growth. “Some of the markets that have gone up 25% a year for five years, of course there’s room for a correction,” he said, noting that smaller markets like Davenport are more attractive to him because

have compressed returns for real estate investors, but solid returns are still available in often-overlooked markets across the country for investors willing to step outside of their comfort zone.

16 | think realty magazine :: november – december 2023

Estimated Gross Rental Yield: Properties Purchased on Auction.com in 2023 Renovate-and-Rent Returns by Market

6.0%

20.0%

30.0%

40.0%

50.0%

62.4%

DISTRESSED PROPERTY PURCHASE DISCOUNT (BELOW AFTER-REPAIR VALUE)

-2%

-67%

other investors often overlook them. “Most people are not willing to go to these types of markets.”

homes flipped in the second quarter of 2023 was 27.5%, up from a recent low of 22.3% in fourth quarter 2022 but less than half the 61% peak in second quarter 2021. Local community developers like Garfield who typically purchase distressed properties at a discount are shielded somewhat from slowing home price appreciation. Still, data from Auction.com shows that even these distressed

ressed properties purchased in 2021. The average gross return for distressed properties purchased so far in 2023 has rebounded to 53.9% but is still below the 2021 level. The average gross renovate-and-resell return is the gross profit as a percent - age of the original purchase price. The gross profit is simply the resale price minus the purchase price and does not include any rehab costs, holding costs or sales costs. “We’re doing less high-end flips,” said Garfield. “I’m not sure how many $400,000 houses I want to do, because with rising interest rates there are a lot fewer people who can afford that.”

COMPRESSED RETURNS The sharp slowdown in price appre- ciation and even price correction in many of the larger and more popular markets for investors are compress- ing potential returns nationwide. Potential profits on home flips ticked slightly higher in the second quarter of 2023, but they were still down by more than half from the recent peak in 2021, according to ATTOM Data Solutions. The gross flipping return on investment for

property buyers experienced compressed returns in 2022.

The average gross renovate-and-resell return was 49.4% for distressed pro- perties purchased on Auction.com in 2022, down from 61.7% for dist-

thinkrealty . com | 17

prices and values over the last three years in many major markets means even distressed property buyers will have more difficulty finding deals that generate healthy returns in those inflated markets. OVERLOOKED RENOVATE- AND-RENT MARKETS An analysis of potential rental yields for distressed property purchases on Auction.com in the first half of 2023 in more than 200 metro areas nationwide reveals that many of the best renovate-and-rent returns come in smaller markets that are often overlooked by investors. The top five markets with the highest potential gross rental yields for distressed properties purchased in 2023 were Terre Haute, Indiana; Wheeling, West Virginia; Duluth, Minnesota; Houma-Thibodaux, Louisiana; and Decatur, Illinois. “(These) are markets that have not had massive appreciation,” Garfield said. “No one is going to convince me that Rock Island, Illinois, is overinflated.” Rounding out the top 10 were a similar group of markets: Water- town, New York; Topeka, Kansas; Niles-Benton Harbor, Michigan; Texarkana, Texas-Arkansas; and Lansing, Michigan. AN AUSSIE FALLS IN LOVE WITH SMALLTOWN ALABAMA Local community developer Kerry Wojtala has fallen in love with smalltown Alabama since moving there six years ago from Australia. “If you had asked me … where would you like to live in the U.S. … Alabama would not have been in the top 49 states,” she said. “However,

I absolutely love it. I love the people here. I love the south, even the heat.” Wojtala buys and renovates distressed properties in Coffee County, Alabama, a market too small to show up in the 200 mar- kets analyzed for this article. The closest market ranked on the list is Mobile, Alabama, about 150 miles away. Mobile ranked 22 on the list in terms of highest potential gross rental yields. Although Wojtala primarily purchases single-family homes in her own town of Enterprise, she recently purchased a commercial property in nearby Elba, the county seat of Coffee County, in hopes of being part of a downtown revival there. “Four-thousand, five-hundred square feet of problem to be solved,” said Wojtala, describing the property. “But I’m determined, and there are a few other people in Elba who feel the same passion for the town. … When I first saw it, I just thought, wouldn’t this be cool if it could have new life breathed into it? Wouldn’t it be cool if it was me?” Wojtala, who recently attended a foreclosure auction in Dallas County, Texas, said her smalltown market is often overlooked by the larger investors who show up in places like Dallas. That allows her and other “mum-and-dad inves- tors” like her to compete and win. “Dallas is chaotic and frenetic compared to little old Enterprise,” she said. “I think there are a lot of people that are very put off by fore- closures … It really isn’t that hard. It isn’t something to be daunted by. And there are people that will help … we spoke to an Auction.com rep- resentative recently and needed her advice on how to do remote bidding. So, there’s always someone who can answer questions for you.”

SHIFT TO RENTALS The compression of fix-and-flip profits has pushed more local com - munity developers like Garfield to shift their investing strategy toward renovate-and-rent. A March 2023 survey of nearly 450 Auction.com buyers found that 39% identified renovate-and-rent as their primary investing strategy, up from 32% in a 2022 survey. Furthermore, an analysis of public record data for properties sold on Auction.com shows a dip in those being resold within a year, implying that more are being held as rentals after renovation. The data shows that 37% of those purchased on Auction.com in the first six months of 2022 had been resold a year later, down from 43% for those purchased in 2021 and down from a recent peak of 47% for those purchased in 2018. “We’re trying to stick to turnkey properties,” Garfield said, referring to properties he purchases, renovates, and resells to other in- vestors, typically passive part-time investors who are holding down a day job while looking for an invest- ment vehicle that will help them build generational wealth and save for retirement. “We know we can sell it to investors who are wanting to get out of the stock market.” The shift toward renovate-and-rent is one strategy that real estate investors can employ in a high interest rate environment. That shift aligns them with the shift away from buying and toward renting that is occurring in the retail market as more prospective buyers are priced out of purchasing a home. But not all local markets repre- sent the same opportunity when it comes to the renovate-and-rent strategy. The rapid rise in home

18 | think realty magazine :: november – december 2023

Although slowing home price appreciation driven by rising mort- gage rates has compressed poten- tial returns for renovate-and-resell investors nationwide, the returns are still solid in many markets, particularly those where investors haven’t had the luxury of relying on rapidly rising home prices to pad their profits in the past. OVERLOOKED RENOVATE- AND-RESELL MARKETS An analysis of homes renovated and resold after being purchased on Auction.com in 2022 in nearly 150 metro areas nationwide shows the top markets for reno- vate-and-resell returns are also mostly in smaller, often overlooked areas—with a few exceptions.

The top five markets for highest gross flipping returns—not including rehab, holding, and resale costs—were Scranton, Pennsylvania; Memphis, Tennessee; Tuscaloosa, Alabama; Albany, New York; and Evansville, Indiana. Rounding out the top 10 markets with the highest gross home-flip - ping profits on distressed property purchases were Houma-Thibodaux, Louisiana; the Quad Cities strad- dling the Iowa and Illinois border; Shreveport, Louisiana; Flint, Michi- gan; and Hartford, Connecticut. “PART OF THE SOLUTION“ IN UNDERSERVED NEIGHBORHOODS In exchange for the potentially heady returns in these markets,

local community developers are often taking a risk on highly dis- tressed properties in underserved neighborhoods that other homebuy- ers are avoiding. “I remember being at the courthouse steps, a couple guys they were telling me how I made a big mistake: That homes won’t ap- praise over there. That homes are not going to sell because distressed properties or buying foreclosed properties diminishes the value,” said local community developer Jermaine Morgan of a recent foreclosure auction purchase in his hometown of Columbus, Georgia. “The risk was could I get this property to appraise based on the amount of work that I was going to put into that property. So, I took the risk. After I finished renovating it, not only did I get it under contract, it had multiple offers.” Morgan has been rewarded financially for the risks he’s taken in underserved neighborhoods, but he’s also been rewarded with the satisfaction that comes from being part of the solution rather than part of the problem in these communities. “Those areas that I’m now devel- oping, I grew up in,” he said. “And I remember being in those areas without hot water. I remember what it’s like to have slumlords … I can’t just be a part of that problem. I want to be a part of the solution.” •

Renovate-and-Resell Returns by Market

Avg. Gross Flip Return: Properties Purchased on Auction. com in 2022 and Subsequently Resold

14.9% 50.0% 100.0% 156.2%

Daren Blomquist is vice president of market economics at Auction.com. In this role, Blomquist analyzes and forecasts complex macro and micro-

DISTRESSED PROPERTY PURCHASE DISCOUNT (BELOW AFTER-REPAIR VALUE)

17%

56%

economic data trends within the marketplace and industry to provide value to both buyers and sellers using the Auction.com platform.

thinkrealty . com | 19

MARKET & TRENDS

PRICING TRENDS

East Meets West WILL PRICES LEVEL OFF THIS YEAR?

By Ingo Winzer

ata from the FHFA show the average home price in the

But will they come down after that? And if so, how soon? I think the answers are “yes” and “very soon,” because that’s already happening in some major markets. Although the pandemic created special conditions under which prices began to soar, the underlying

force that pushed them higher is the flow of population. As that flow ebbs, the justification for super-high prices dissipates and markets will slowly (in real estate, price adjustments always happen slowly) return to the typical balance between prices and income. Our table shows that the West leads the way in this readjustment process, largely because the pres- sure of population flow happened there first. The flow toward the South was more recent, but that just delays the process. Note that the lower prices in the Western markets are not the result of any economic slowdown; recent job growth in these markets pretty much matches that of the Eastern markets. Strong population and job growth still provide support for home prices, but not at the current super-high levels. The readjustment process will take a while, but the Western markets make clear that it’s already started. •

second quarter was up 5% from last year. Prices were up 8% in the first quarter and 12% in the fourth quarter of 2022, so there’s a definite slowing trend, and we can expect prices to level off this year.

Job Growth

Home Price Change

2023 Q2

2022

2023 Q2

2.4%

23%

Atlanta, GA

3.9%

Charlotte, NC

24%

3.5%

Indianapolis, IN

18%

5.7%

Charleston, SC

23%

4.0%

Tampa, FL

28%

4.0%

Miami, FL

12%

25%

2.3%

Los Angeles, CA

15%

Ingo Winzer is president of Local Market Monitor. The company’s Investors Metro

3.2%

Seattle, WA

-3%

13%

Analysis shows the opportunity and risk in 200 local real estate markets at www.LocalMarketMonitor.com, including strategic analysis of all local Zip Codes. Winzer has analyzed real estate markets for more than 30 years, and his views on real estate markets are often quoted in the national press. Previously, Winzer was a founder and executive vice president of First Research, an industry research company acquired by Dun and Bradstreet in 2007. Winzer is a graduate of the Massachusetts Institute of Technology and holds a master’s degree in finance from Boston University.

2.1%

Phoenix, AZ

-3%

22%

3.7%

Salt Lake City, UT

-3%

15%

4.0%

Boise, ID

-6%

10%

3.8%

Austin, TX

-8%

17%

LOCAL MARKET MONITOR, CARY NC

20 | think realty magazine :: november – december 2023

PHOENIX MARCH 28 - 29

Experience what Think Realty Conference & Expos have to offer Network with professionals in our packed vendor hall and at the cocktail reception. Meet vendors specializing in REI tools, products, and services. Attend sessions and specialty workshops on a variety of investment strategies. Level up your deal flow and partnerships with the biggest names in the business.

MARKET & TRENDS

RECESSION- PROOF MARKETS