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IN PARTNERSHIP WITH ATTOM DATA SOLUTIONS
Why Mortgage Applications Have to Change
Why Mortgage Applications
Have to Change
STRATEGY GSE REFORM: HOUSING FINANCE SAVIOR OR LOOMING DISASTER? STRATEGY GSE REFORM: HOUSING FINANCE SAVIOR OR LOOMING DISASTER?
BUSINESS FUNDAMENTALS SHIFTING FROM BUSINESS FUNDAMENTALS SHIFTING FROM
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INSIDE THIS ISSUE
THINK REALTY 8 News & Events
Updates from around the industry.
10 Think Realty Supplier: Motili Expand Your Contractor Network Three powerful investor tricks to know this summer. by Motili INVESTOR STORIES 12 Loan Turned to Own Starting with a VA loan, Eric Upchurch built a real estate portfolio with zero equity. by Jeff Edwards
BUSINESS FUNDAMENTALS 24 How Wholesaling Can Work for You
The first steps to actively invest in real estate in a less active way. by Abhi Golhar
26 Operation Safety
ON THE COVER
Build profit and reduce potential construction injuries this summer. by BreAnn Stephenson
WHYMORTGAGEAPPLICATIONS HAVETO CHANGE
28 Mind the Gap When shifting from selling to renting, be mindful of a completely different beast — property management. by Chris Ragland 30 "It Depends" Why it's bad policy to say these two scary words in the property management business. Sponsored content provided by Todd J. Ortscheid, National Association of Residential Property Managers ® (NARPM)
33 A Legal View
THE RED & BLUE OF TAXES
Tips from an attorney to protect yourself and your investment. by Michael Johnston
States with the highest effective property tax rate.
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STRATEGY 34 The Trillion Dollar Question
GSE reform: a housing finance savior or a looming disaster? by Peter G. Miller
43 Top 10 Metros with the Lowest Property Tax Rate by ATTOM Data Solutions
44 Protect Yourself Best practices for showing a property safely. Sponsored content provided by Stacy Brown, Real Property Management
48 Comfort Zones Influencing your own risk tolerance. by Deborah Razo
SPONSORED SUPPLEMENT 51 Information Management Network
RealTECH 2019: A Technology Forum for Residential & Multifamily Real Estate
Bigger issues lurk behind costly processing methods.
DESIGN POINT 68 Design Guide: Traditional Textured Bathroom featured designer: Lorraine Beato
by Peter G. Miller
MARKET & TRENDS 72 Spotlight: Florida Is Florida at risk for another real estate crisis? by Joel Cone
MARKET & TRENDS
AN ECONOMIC OUTLOOK
78 Panning for Gold Finding hidden market opportunities for investing. by Ingo Winzer
Mortgage rates and multi-generational homeowners are affecting the housing market.
thinkrealty . com / hnr | 5
PUBLISHER & CEO Eddie Wilson
EDITOR-IN-CHIEF Kelli White
PRODUCTION MANAGER Katie West
SALES MANAGER Rodney Halford RHalford@ThinkRealty.com 816-398-4111 x86122
FULFILLMENT COORDINATOR Blair Pierce
DESIGN CONSULTANTS Rivet | www.WeAreRivet.com
ART DIRECTOR Emily Bowers
CONTRIBUTING WRITERS ATTOM Data Solutions Stacy Brown Joel Cone Jeff Edwards
Rich Fettke Abhi Golhar Michael Johnston Len Kiefer Peter G. Miller Todd J. Ortscheid Chris Ragland Deborah Razo BreAnn Stephenson Ingo Winzer
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Think Realty 7509 NW Tiffany Springs Parkway, Suite 200 Kansas City, Missouri 64153 816-398-4130 ThinkRealty.com Copyright ©2019 Think Realty ABOUT THIS MAGAZINE :: ThinkRealtyMagazine isapublicationof AffinityRealEstateMediaLLC.Reproductionoruseofanyeditorial orgraphic,withoutpermission, isprohibited.Wearenotresponsible for thecontentofanypaidadvertisements.Forreprintrights; toob- tainadetailedstatementofourprivacypolicy;and forallsingle-copy requests,addresschangesandothersubscription inquiries: FOR ARTICLE REPRINTS :: Contact Jeremy Ellis at Reprint Pros, 949-702-5390. www.reprintpros.com. SUBSCRIPTIONS :: The annual subscription for Think Realty Magazine is $36/month in the U.S. Order online at www.ThinkRealty.com or call 816-398-4085. 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.
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FROM THE CEO
Real Estate Can Be a Risky Business
s CEO of Think Realty, I want to welcome you to another
and growth, one thing remains — Think Realty’s passionate commitment to be a trusted resource for you. The second half of 2019 will be exciting as Think Realty is
issue of Think Realty’s Housing News Report . The theme this month is Risk Management. How can we continue to mitigate risk in the ever-evolving real estate mar- ket? How can we, as real estate inves- tors, navigate success amongst an inherently up-and-down industry? That’s what Think Realty is all about — giving you tools to nav- igate your own real estate investment jour- ney. And although economists have painted a dismal picture, the market is staying steady. Stay positive. Good investors make money in any market – amidst many risks. Think Realty has undergone some major changes but is poised for additional growth and a more focused direction. I am excit- ed for the many positive changes to come! And yet, at the heart of all this change
preparing for our inspirational, ed- ucational events in Irvine and Atlanta! Be sure to register online soon to save your spot and get ready to learn and leverage that knowledge to expand your portfolio. And, stay tuned for Think Realty Honors winners to be announced later this summer. I hope you enjoy and benefit from Think Realty’s platform of trusted content as you continue your journey. We are excited to grow along with you and help you manage risks as they come along. Because they always do. But one thing is for certain: arm- ing yourself with industry knowledge is the safest bet to success. •
EDDIE WILSON, CHIEF EXECUTIVE OFFICER
thinkrealty . com / hnr | 7
Think Realty's Core Focus is to be the trusted source in the Real Estate Investment Industry by providing products and services focused on serving the Real Estate Investor.
NEWS & EVENTS
Think Realty's Supplier Program
that can put more profit in your portfolio! Think Realty’s Supplier Program saves members time and money. Suppliers provide Think Realty Members a discount or benefit that they would typically not be able to receive on their own. Only those who actually join Think Realty, including the FREE level of membership, are eligible to participate in the program. Think savings? Think Realty!
ooking to save money on your next REI deal? Let Think Realty help you make more from your in- vestments with one of the most-valued benefits for our members: The Think Realty Supplier Program. The purpose of our Supplier Program is to connect with Suppliers who bring unique value to our Members. We seek Suppliers with a nationwide footprint that provide a product or service to help real estate investors do busi- ness more effectively and put more profit into their deals. In many cases this also includes introducing a Member to a product or solution that they were not previously aware of. Sometimes it’s not what you make, it’s what you save
Read more about this month’s featured supplier, Motili, on page 10.
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f you consider yourself a real estate entrepreneur, this event is for you. Learn about tools, tips and resources, and how to manage your real estate business. Meanwhile, you will also connect with pros, exhibitors, and educators that will help you earn more return on your real estate investments. Space is limited and we expect to sell out! On Saturday, there will be more than 40 exhibitors who can provide Think Realty Conference and Expo Returns to Irvine IT’S THE BEST OPPORTUNITY TO INVEST IN YOURSELF! I
you with various tools and services strictly focused on helping you achieve the most you can as a real estate en- trepreneur. Saturday will also feature presentations from keynote speakers, educational sessions including a local market panel, and lunch. Sunday we give prominence to the Think Realty Resident Experts, who will deliver educational sessions on topics such as Wealth Building, Establishing Your Business and Brand, Residential Investing, Risk Management, and Com- mercial Investing. There will also be educational workshops hosted by valued partners. Your event ticket includes:
Melissa Martorella Geraci Law Firm Private Lending Panel Moderator Scott Mednick OCRE Forum Local Market Panelist Shawn Tiberio ShawnTiberio.com and Top Results Coaching Panelist
Carrie Cook Ignite Funding Private Lending Panelist Kaaren Hall OCREIA and uDirect IRA Services Local Market Panelist Jon Lee Outback REIA Local Market Panelist Ben Donel, Esq. Sunset Equity Private Lending Panelist Shawn Woedl National Real Estate Insurance Group Speaker Aaron Norris The Norris Group Local Market Panelist
Bruce Norris The Norris Group Keynote Speaker
Brent Kesler The Money Multiplier Keynote Speaker
Jasmine Willois The Note Assistance Program Speaker Emmanuel Guarino Residential Assisted Living Academy Keynote Speaker
To learn more about our Irvine event and to buy tickets, go to ThinkRealty.com. The exhibit hall will be filled with more than 40 vendors from 8:30 a.m. - 5:00 p.m. on Saturday and there will be a plethora of tools, resources, and ser- vices directed at helping you achieve your real estate investment goals.
Kelly Soto Finance of America Commercial Speaker
Clint Coons Anderson Business Advisors Speaker
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ExpandYour Contractor Network THREE POWERFUL INVESTOR TRICKS TO KNOW THIS SUMMER.
ust like you wouldn't put all your capital into one prop- erty, you shouldn't rely on just one contractor. Smaller investors often have a "guy" for doing HVAC, hot water heaters, and other maintenance proj- ects, but relying on just one contrac- tor can bottleneck projects and put investors in a precarious position. A likely scenario: you're investing in several properties over the summer that you hope to turn around quickly. One or more properties have serious HVAC or other "behind-the-wall" is- sues, and you need your guy, but he's booked solid for two months. Enlisting several contractors you can trust can streamline your maintenance needs and remove unnecessary roadblocks for smooth transactions. You can also save by leveraging manufacturers. One contractor sim- ply can't offer the bargaining power of a network. A contractor may have a good relationship with a distribu- tor, but you're still paying wholesale price and the contractor's mark-up on top of it. Leveraging a relationship with a contractor network that's linked
directly to an equipment manufac- turer can provide some significant savings, to the tune of 20-30 per- cent, on equipment. The less you spend on equipment, the bigger your bottom line. SIMPLIFY THINGS YOU DON'T NEED TO MANAGE Most investors know that dealing with multiple contractors can be challenging. Now you're not just focusing on the financials, but also scheduling inspections, maintenance appointments, billing, and invoices. It can get overwhelming fast. The fewer points of contact, and the less management of those points of contact you have, the more time you have to dedicate to evaluat- ing your assets, looking for the best deal, and focusing on the next task, instead of getting bogged down with one property. This is especially is true for larger investors with 10 or more proper- ties, some of which are in different markets. Simplifying the manage- ment of contractors and other minor management tasks can free up significant time.
PLAN AHEAD One of the least exciting challeng- es in investing is finding out, after an acquisition, that you have an unexpected expense hidden behind the walls. Building systems such as HVAC, plumbing, and electrical can become very costly, very quickly. If you're just working on one or two properties, it's typically fairly easy to keep track of what needs to be done, but when you start to scale to upwards of 10 properties, suddenly you can get bogged down with multiple expenses you simply did not anticipate. Planning ahead with pre-invest- ment asset inspections can be a small added cost that could produce savings down the road. •
Motili is a Think Realty Supplier providing turnkey HVAC and Plumbing services to real estate investors nationwide. Learn more at thinkrealty.com/motili.
10 | think realty housing news report :: june / july 2019
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thinkrealty . com / hnr | 11 National Real Estate Insurance Group is the nation’s leading agency offering coverage options for real estate investors across the country. Our lineup of products includes: REIGuard™, LandlordGuard, PMGuard, TurnkeyGuard, LenderGuard, and CommercialGuard.
VETERANS BUY AMERICA
Loan Turned to Own STARTING WITH A VA LOAN, ERIC UPCHURCH BUILT A REAL ESTATE PORTFOLIO WITH ZERO EQUITY.
by Jeff Edwards
aking it clear that the United States would care for its vet- erans, Abraham Lincoln coined what would later become the Veterans Administration motto by saying, “To care for him who shall have borne the battle, and for his widow, and for his orphan.” With these words in mind, veterans who serve honor- ably find themselves with a variety of benefits before them when they discharge. Some will take advantage of the G.I. Bill and advance their ca- reers through education. Meanwhile, others will make good use of the VA home loan program and build an ever-growing real estate empire. Army veteran Eric Upchurch (pic- tured above) chose the latter path. Stumbling into real estate through the purchase of his first home in 2006 with a VA loan, Upchurch took that first purchase with zero eq- uity and turned it into hundreds of thousands of dollars in less than ten years. Some 13 years after he took his first VA loan, Upchurch is invest- ing in multimillion-dollar real estate ventures with no end in sight. Taking
This content is brought to you by Recon Realty and AndyWilliams
the way, he eventually graduated from the University of California San- ta Barbara in 2004. Unsure of what path to take next, his family’s lineage of patriotic service weighed heavily on him in the post 9-11 era. In possession of a college degree, the Army allowed him to enlist at the initial rank of E-4 with MOS of 15 Golf, Aircraft Structural Repairman. Eric graduated boot camp and was heading to his initial training school with one date in mind — his wedding in the summer of 2005. With the date and location already set, if Upchurch were to fail a test or suffer an injury requiring him to be rolled back to a later class, he would miss his wed- ding. Motivated to let nothing stand in the way of his upcoming nuptials,
a path available to all veterans, but misunderstood by most, Upchurch has shown just what is possible when “Veterans Buy America.”
THE LONG AND WINDING ROAD Despite having a strong family lineage of military service, Upchurch took the long and winding road to the uniform. Graduating high school in 1998, he and a friend moved from the cornfields of Iowa to sunny California to live the dream. Their initial goal was to break into the culinary world and make it as chefs. While he was met with some success in that arena, it turns out this wouldn’t be his path to riches. Working various jobs along
12 | think realty housing news report :: june / july 2019
he trained intensely and became the Distinguished Honor Grad for his class. Consequently, Special Operations picked him up and he was on his way to the 160th Special Operations Aviation Regiment. With multiple deployments to Iraq and Af- ghanistan, Upchurch served faithfully until his active separation in 2011. It was then that a fortuitous home purchase in 2006 with his VA loan started to give rise to a growing real estate empire. With the equity he now had in the home as the real estate market rebounded and the rental income to fuel him, in 2012 Upchurch bought another piece of America using a VA loan. Two years later and with a $180,000 profit, Upchurch sold that house to make way for another purchase. Again, using a VA loan, he bought and eventually sold another property for a profit of $250,000. It was clear Upchurch was onto some- thing as he continued to build capital through one real estate venture after another. After years of dedicated mili- tary service, his family would now see a future without precedent. In 2017, he began the investing phase of his real estate career as he became a partner in several multimillion-dollar real estate ventures while continuing to purchase homes on his own. As BUILDING CAPITAL TO BUYAMERICA
a piece of the land they fought
to defend. Moreover,
they get the opportunity to build real wealth and financial freedom. What Upchurch demonstrated was the heart and soul behind Marine veteran Andy Williams’ Veterans Buy America initiative. Both Up- church and Williams share a passion for educating their fellow veterans about the po- tential power of real estate. With that in mind, Williams con- tinues to scan the country for veterans follow- ing the path that he once took. Veterans Buy America serves as a rally point and beacon for all veterans
it stands today, the kid from Iowa who made his first home purchase with a VA loan is now looking at a portfolio worth millions. When veterans invest in real estate, they have the opportunity to own
to realize the potential within them. Upchurch continues to serve this mission as he serves as the COO for Active Duty Passive Income. What remains clear is that Wil- liams is onto something as evidenced by Upchurch’s suc- cess and many like him. Through the Veterans Buy America
initiative, those who served gain their own financial freedom. That’s some- thing worth fighting for and a mission Williams refuses to abandon. •
Jeff Edwards is a Marine veteran and contributing writer for Veterans Buy America. Find out more about the initiative and stories of transition at
thinkrealty . com / hnr | 13
WhyMortgage Applications Have to Change
BIGGER ISSUES LURK BEHIND COSTLY PROCESSING METHODS.
by Peter G. Miller
h, the continued plight of the American mortgage system.
keep up with a number of outside factors and trends. Without change, the system would increasingly be impacted by risk, fraud, and loss- es — factors which would result in fewer originations and higher rates. And so, the lending industry needs to be ready for anything.
It may seem difficult to be- lieve that the mortgage system is stressed in any significant way. All of the traditional fundamentals appear to be positive. For instance, foreclosures — the most obvious measure of industry issues — were at a 13-year low in 2018 according
While each year millions of home- owners finance and refinance real estate with few problems, the sys- tem is increasingly fraught with new complexities and potential pitfalls. Updates are constantly needed to
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U.S. FORECLOSURE FILINGS
$- 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
to figures from ATTOM Data Solu- tions. ATTOM reports there were foreclosure filings — default notic- es, scheduled auctions, and bank repossessions — on 624,753 U.S. properties last year. And, despite all of the paperwork, many of these distressed properties were never actually foreclosed on. The reason is that home values have been rising in most markets. The National Association of Real- tors (NAR) says median existing home values reached $249,500 in February — the 84th straight month of year-over-year gains. With rising prices, some distressed owners can simply sell in the open market for enough to cover the debt — and many do! In 2018, says ATTOM, only 230,305 properties were actually foreclosed on. Interest rates are also looking very positive for homebuyers right now, averaging 4.54 percent in 2018 according to Freddie Mac, well below
are likely to impact the way lenders do business moving forward? Let’s take a look.
the long-term average of 8.08 percent going back to 1971. By late March 2019, the big GSE said weekly rates for 30-year fixed-rate financing had fallen to 4.06 percent, down almost half a percent from the 2018 average. In effect, it’s very difficult to see the growing stresses in the under- writing process because the system is now so successful. However, suc- cess masks the reality that low rates and rising prices are not guaranteed. They can come and go as the econo- my evolves. And the economy, as we all know, always evolves. “The U.S. economy has reached an inflection point, with the consensus forecasting real GDP growth to slow from 2.9% in 2018 to 2.4% in 2019, and to 2.0% in 2020,” said Kevin Swift in March. Swift is president of the National Association for Business Economics (NABE). So, what are some of the factors and trends currently happening that
ABILITY TO REPAY Federal rules as well as common sense tell us that lenders must verify the ability of borrowers to repay res- idential mortgages. While there are exceptions for such things as open- end credit plans, timeshare plans, reverse mortgages, and temporary loans (a loan for 12 months or less), the ability-to-repay rule is still the compliance gold standard. Lenders take this stuff seriously, which may explain why the typical loan application vies with “Gone With The Wind” in terms of length and heft. “With the size of an average mort- gage loan at more than 500 pages — and hundreds of different document types — the labor-intensive and costly processing methods used in
thinkrealty . com / hnr | 15
the past are no longer possible for banks that want to compete,” says ZIA Consulting. What file size reflects is a serious effort to verify borrower claims. This added bulk, while necessary, is cer- tainly an application problem. But big- ger issues lurk beneath the surface. All lenders generally treat income the same way. They check how much you earn each month before taxes. They can then see if it’s possible to “gross up” income for qualification purposes. While the expression “gross up” may not sound especially alluring, it can be a huge benefit to mort- gage applicants. It means that such things as child support, tax-exempt interest, and business depreciation can be added to taxable earnings to create a larger qualifying income. For example, if you report $90,000 in yearly income before taxes and receive $1,000 in child support, the lender will review your mortgage application as if you earned $102,000 a year ($1,000 x 12 = $12,000 plus $90,000). Grossing up can make a big difference for mortgage borrowers. The reason involves the debt-to-in- come ratio (DTI), a measure used to see if applicants qualify for financ- ing. Lenders don’t want to provide mortgage financing to borrowers with big debts and excessive month- ly payments. For example, lender Smith might be okay with borrowers who devote no more than 43 percent of their gross monthly income for recurring monthly debts such as housing costs, auto payments, stu- dent loans, and credit card bills. Using the 43 percent standard, if you earn $90,000 a year, you there- fore have an average household income of $7,500 a month before taxes. Allowable debt payments amount to $3,225 ($7,500 x 43%). However, if you earn $102,000, the WHAT IS GROSS INCOME, REALLY?
picture changes. Now you have a gross monthly income of $8,500 and 43 percent of that is $3,655. A bigger income allows you to have larger monthly debt payments and still satisfy lenders. This has become an increasingly important issue as consumer debt levels have soared. The Federal Reserve Bank of New York reports that total household debt reached $13.54 trillion in the fourth quarter. “The total,” said the New York Fed, “is now $869 billion higher than the previous peak of $12.68 trillion in the third quarter of 2008 and 21.4 per- cent above the post-financial-crisis trough reached in the second quarter of 2013.” One result of growing debt loads is that the HUD recently announced new and tougher FHA standards. Here’s why: • Almost 25 percent of all FHA-in- sured forward mortgage pur- chase transactions in fiscal year (FY) 2018 involved mortgages where the borrower had a DTI ra- tio above 50 percent, the highest percentage since 2000. • The average FHA borrower had a 670 credit score for FY 2018, the lowest average since 2008. • There have been a growing number of applications with credit scores of less than 640 combined with DTI ratios greater than 50 percent. • In FY 2018, 60 percent of all refi- nances were cash-out financing, meaning less equity is available to offset losses in a foreclosure situation. To reduce risk, the Federal Hous- ing Administration (FHA) is going back to a rule abandoned in 2013. For borrowers with credit scores below 620 and DTIs above 43 percent, the government will now require
manual underwriting. The likely result will be fewer FHA originations and that will translate into reduced home sales. In the wider market, we may also see an increasing use of dual-ap- proach mortgage underwriting, the use of both automated systems as well as manual underwriting. “One of the primary beneficiaries of non-agency, aka ‘non-QM’ lend- ing, is borrowers whose income is not ‘typical or customary,’” Ray Brousseau, President at Carrington Mortgage Services, told the “Housing News Report.” “These borrowers of- ten have good credit and assets, but their income is considered non-tra- ditional. They’re often self-employed,
16 | think realty housing news report :: june / july 2019
and although their bank statements support positive cash flow and the ability to repay, it’s hard to document using traditional approaches (1040s, W2s, etc.). Hence the advent of ‘bank statement’ non-agency programs that allow these borrowers access to financing through non-agency bank statement programs. These have proven to be extremely popular, and they’re manually underwritten.”
These borrowers often have good credit and assets, but their income is considered non-traditional. They’re often self-employed, and although their bank statements support positive cash flow and the ability to repay, it’s hard to document using traditional approaches (1040s, W2s, etc.). Hence the advent of ‘bank statement’ non-agency programs that allow these borrowers access to financing through non- agency bank statement programs. These have proven to be extremely popular, and they’re manually underwritten.”
IS GROSS INCOME THE RIGHT MEASURE?
Gross income has always been the main application standard but that’s likely to change as a result of tax reform.
Under tax reform, there were sev- eral major changes to the system.
• The standard deduction for those married and filing jointly went from $12,700 in 2017 to $24,000 in 2018. • Mortgage interest remains de- ductible for as much as $750,000 in new first and second-home real estate debt, down from $1 million. • State and local taxes (SALT) remain deductible, but there is now a $10,000 limit on combined property taxes and state and local taxes. How do these changes impact the lending process? Two results stand out: First, most borrowers will elect not to write off mortgage interest and property tax costs. Only four percent of households will claim itemized deductions, down from 21 percent under old rules according to the Tax Policy Center. Effectively, the cost of homeownership will rise in most cases while the distinctions between owning and renting will narrow.
thinkrealty . com / hnr | 17
Second, the value of income will change, depending on where you live. This very much impacts the concept of qualifying borrowers on the basis of gross income. Prior to tax reform, such things as mortgage interest, property taxes, and state income taxes were com- monly deductable, but now — with a larger standard deduction — the value of itemizing for most borrow- ers has fallen to zero. Imagine that two married couples each have a gross annual income of $120,000. They're alike in every way except for where they live. Living in Los Angeles, the couple will pay $8,004 in California state income taxes whereas in Florida, Texas, Wyoming, Washington, South Dakota, Nevada, and Alaska, the tax bill is zero. There is no state income tax in these jurisdictions. The couple in the no-tax states has an additional after-tax, income. Why is that money – which is both real and spendable – not used to gross up the income for borrowers in Florida,
Texas, etc? How is it any different from child support or business de- preciation? There is, in fact, a way to capture the blessings of lower tax costs. The Department of Veterans Affairs (VA) requires lenders to look at residual income (the cash left over after ex- penses) when qualifying borrowers. "The VA’s residual income guide- line offers a powerful and realistic way to look at affordability and whether new homeowners have enough income to cover living expenses and stay current on their mortgage," says Chris Birk with Veterans United. "Residual income is a major reason why VA loans have such a low foreclosure rate, despite the fact that about 9 in 10 people purchase without a down payment.” “In the end,” says Carrington’s Ray Brousseau, “residual income is critical. It’s what’s left that the family is expected to be able to live on. Residual income is an important characteristic when measuring abili- ty to repay.”
The VA approach works extremely well. In the fourth quarter, ac- cording to the Mortgage Bankers Association (MBA), the non-season- ally-adjusted foreclosure starts rate stood at .19 percent for conventional loans with either 20 percent down or backing with private mortgage insurance, .55 percent for FHA- backed financing with as little as 3.5 percent down, and .28 percent for VA loans which are readily available with zero percent down. We’re going to see the wider use of residual income. But that does not mean the gross income stan- dard will melt away. Instead, it will increasingly make sense to reduce origination risk and qualify appli- cants on the basis of both gross income and residual income.
WHAT DEFINES EMPLOYMENT?
A key measure of borrower financ- es is very simply the fact that they have a job. Lenders generally like
18 | think realty housing news report :: june / july 2019
Project, “is the latest iteration of a 50-year-old pattern of workplace fissuring – the rise of ‘non-stan- dard’ or ‘contingent’ work that is subcontracted, franchised, tempo- rary, on-demand, or freelance. Gig companies are simply using newfan- gled methods of labor mediation to extract rents from workers, and shift risks and costs onto workers, con- sumers, and the general public.” “By 2023,” says MBO Partners, “over half (52 percent) of the private workforce is forecast to have spent time as independent workers at some point in their work lives.” We have long had independent contractors such as accountants and lawyers who are sole practitioners. What’s new and different is that the concept is spreading to fields where workers have traditionally been cor- porate employees. The growing gig economy disrupts the old definition of employment. The problem is that, at this point, we can’t be sure that gig employment means steady and reliable future income. Case in point: a 2018 study by the JPMorgan Chase Institute found that between 2013 and 2017, earnings for freelance drivers fell 53 percent. One can argue that much contin- gent freelance income — and thus the ability of such workers to borrow and repay — will face big challenges in future years. Here’s why: First, there are few barriers to entry. Lots of people can become dog walkers or freelance drivers. You don’t need a license or a degree for many gig positions. The result is that increasing supply pushes down wages. Freelance drivers, according to the JPMorgan Chase Institute, saw monthly incomes fall from $1,469 to $763 between 2013 and 2017. Second, in the longer term, new jobs will be added as a result of marketplace change while others will largely disappear. While the secretari- al pool was killed off with the intro-
to see a two-year history of employ- ment at the same job or in the same field. But, how can this standard apply in an era when more and more of us are becoming gig workers? “Broadly defined,” said Gallup in a 2018 study, “the gig economy includes multiple types of alternative work arrangements such as inde- pendent contractors, online platform workers, contract firm workers, on- call workers and temporary workers. Using this broad definition, Gallup estimates that 29 percent of all workers in the U.S. have an alter- native work arrangement as their primary job. This includes a quarter of all full-time workers (24 percent) and half of all part-time workers (49 percent). Including multiple job holders, 36 percent have a gig work arrangement in some capacity.” The common understanding of employment — 40 hours a week plus benefits — is giving way to the gig economy. We are increasingly a nation of freelancers, where more and more of us work independently,
share jobs, or have multiple occu- pations. Corporations, in turn, love the new economy. With gig workers, businesses do not have to underwrite payroll taxes, or offer health insur- ance, paid vacations, or retirement plans to non-employees. Gig work allows companies to tai- lor work schedules to avoid idle time. This also means many part-time workers are “on call” even if they are not actually working. Without a defined schedule, it’s difficult if not impossible to have a second job even though the hours are available. Gallup says we now have two gig economies and that “indepen- dent gig workers (freelancers and online platform workers) often enjoy the advantages of non-traditional arrangements, while contingent gig workers (on-call, contract, and temp workers) are treated more like employees without the benefits, pay, and stability that come with tradi- tional employment.” “Tech-mediated gig work,” accord- ing to the National Law Employment
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duction of personal computers and milkmen were done in by supermar- kets, a huge number of service jobs have been added to the economy. Lyft, for example, may create more opportunities for programmers over time while reducing the need for driv- ers. As it explained in its recent IPO, “In the next five years, our goal is to deploy an autonomous vehicle network that is capable of delivering a portion of rides on the Lyft platform. Within 10 years, our goal is to have deployed a low-cost, scaled autonomous vehicle network that is capable of delivering a majority of the rides on the Lyft platform. And, within 15 years, we aim to deploy autonomous vehicles that are purpose-built for a broad range of ride-sharing and transportation sce- narios, including short- and long-haul travel, shared commute, and other transportation services.” Third, the practical reality is that in a slow down, the first workers to be released will be contingent employees. Full-time workers will be expected to pick up the slack. So, what to do when a contingent gig worker applies for a mortgage? How should such income be count- ed? Should gig income be grossed down in the same way that non-tax- able income can be grossed up? There’s certainly work for lenders to do. Automated systems will need to be refined to incorporate new work patterns. Manual underwriting will become more common, not less. The need for job experience is likely to grow with gig workers, requiring at least a look back at three or four years of past earnings and not just one or two. IS IT REALLYA PRIME RESIDENCE? Across America, the nature of residential real estate is changing. For many homeowners, it’s not so residential anymore. Several million
travelers stay with homeowners on any given night. Empty bedrooms as well as unused attics and base- ments are increasingly seen as income opportunities. The hospitality industry is fight- ing back, demanding that local governments enforce ordinances which limit the competition faced by tax-paying hotels and motels. But the die have been cast: there are simply more homeowners than hotel magnates. Rather than fight short-term rentals, local govern- ments are increasingly coming to terms with the big rental platforms. They’re taxing the revenue received by property owners. More and more, it’s okay to rent a room as long as “Home sharing is making it possible to take what is typically one of their greatest expenses — their home — to make additional income that helps them pay the bills. Policymakers are taking notice and acting to support home sharing and the middle class.” While the connection between rental rates and tax collections is direct and obvious, there’s also evi- dence that, at least in some markets, short-term rentals are forcing up real estate prices and rental rates. This is good for owners, though not so good for buyers and tenants. For lenders, the growth of home sharing raises two questions: what is being financed and should the borrower’s income be bumped up on the basis of potential short-term rental income? Francois (Frank) K. Gregoire, an appraiser based in St. Petersburg and the four-time chairman of the Florida Real Estate Appraisal Board, told The Mortgage Reports in 2017 that, “a room rental situ- ation, depending on the number of rooms, may shift the use of the property from single or multifamily to a business use, such as a hotel or you pay the local government. According to Airbnb in 2015,
rooming house.” This new world of short-term rentals raises a number of questions for lenders:
• Is the property a prime residence or a riskier investment property?
• If the property is used for short- term rentals, has the income been declared for tax purposes? • If the home has not been used for short-term rentals, can an appraiser use short-term rental data from nearby and like prop- erties to create a valuation? • If local ordinances or HOA rules ban short-term rentals, can the owners repay the debt if rent- al income stops because of a complaining neighbor or code violation crack-downs? There are already efforts to create financing options for short-term rental properties. “Hosts in the U.S.,” says Airbnb about its financing initia- tive, “will be able to work with partic- ipating lenders to recognize Airbnb A room rental situation, depending on the number of rooms, may shift the use of the property from single or multifamily to a business use, such as a hotel or rooming house.” • Is the property insured for use as a short-term rental?
20 | think realty housing news report :: june / july 2019
home sharing income from their primary residence as part of their mortgage refinancing application. The three mortgage lenders in the initiative are Quicken Loans, Citizens Bank, and Better Mortgage.” No doubt short-term rental income will be increasingly accepted for mortgage applications, along with a proper accounting of the costs required to operate such facilities. THE QUESTION OF SHARED EQUITY No doubt other loan programs for short-term rentals will become available if only because the mar- ket for shared-income properties is large and growing. But, while the market is attractive, it will require careful underwriting to ensure that residential financing is not being provided for investment properties or for borrowers who cannot afford to
finance without rental income. Or, maybe we need to look at this differently. Affordability is a big issue for many borrowers, especially first-timers. Research by ATTOM Data Solutions found in March that median-priced homes are not affordable for average wage earners in 71 percent of US housing markets. Many would-be buyers are being frozen out of the marketplace. But, if you can’t buy a home out- right, perhaps it makes sense to buy part of a home. Looking forward, we are likely to see an increase in shared equity arrangements: • A property will have both a res- ident owner and a non-resident investor. • Each owner will be able to potentially deduct their portion of the mortgage interest and
property taxes. In addition, the investor will be able to deduct a portion of the depreciation and repairs. In practice, the resident owner will be unlikely to item- ize real estate write-offs while the investor will have business deductions.
• The property will offer short- term rentals.
• The resident owner will essen- tially act as an on-site manager.
• The income from the short-term rentals will offset ownership costs for both the resident and investor owners. • If property values rise, the resi- dent owner will gain equity that’s unavailable to renters. If property values fall, some of the loss will be absorbed by the investor.
HISTORICAL HOME AFFORDABILITY
MEDIAN HOMES PRICES
PCT OF AVERAGE WAGES NEEDED TO BUY MEDIAN-PRICED HOME
35% 35% 34%
29% 30% 30%
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THE CHANGING CLIMATE Climate change is a big issue today. Is it caused by nature, human activity, or both? Regardless of the answer, the reality is that climate change is here. Melting glaciers, ris- ing seas, stronger hurricanes, “king tides” in Miami, flooded cherry trees along DC’s Tidal Basin, floods in Nebraska, massive hurricane dam- age in Puerto Rico, and huge fires in California are all real. Does climate change impact lend- ing? You bet it does! The most immediate climate-re- lated challenge faced by lenders is on Capitol Hill. Lenders will origi- nate mortgages in high-risk flood zones on the condition that borrow- ers maintain proper insurance. For most borrowers, this means partic- ipating in the National Flood Insur- ance Program (NFIP). Unfortunately, the program is so broke that in 2017 Congress forgave $16 billion in NFIP debt owed to the Treasury. As this article is written, the program has been re-authorized, but only until May 31st. “Congress must now reauthorize the NFIP by no later than 11:59 pm on May 31, 2019,” explains the Federal Emergency Management Agency (FEMA). While it would make sense for the program to be extend- ed until September 30th, the end of the government’s fiscal year, there’s
no requirement that Congress “must” do so.
climate change. “This,” says Gibbas, “has happened a bit, mostly due to the influence from the insurance side. What has happened is insurance companies are, in some cases, refusing to in- sure a property after multiple claims have occurred. The lack of insurance then stalls the mortgage process. I have not seen any cases where mort- gage companies refuse to underwrite the loan on their own.” He adds, “I’m also aware of new technologies coming to market that will provide insurance and/or mort- gage companies the ability to drill down on to a property to get details of past weather events and weather event probabilities. With these new tools, mortgage companies will gain insight into how to prioritize their lending opportunities.” Institutional investors are already considering climate change when evaluating financing and purchase op- tions. No doubt the same is true, less formally, among residential buyers. “Climate change and, more partic- ularly, rising sea levels are espe- cially urgent issues along American coastlines,” according to the law firm of Hinshaw & Culbertson LLP., which in April organized the Third Annual Sea Level Rise & Climate Change Conference. “In the next twenty-five years, absent radical remediation and technical breakthroughs, the sea level along the coasts is an- ticipated to rise by up to three feet (0.91 meters), inundating major portions of the cities of New York, Miami, and coastal areas worldwide. Rising sea levels will result in major changes not only to developments and infrastructure (privately-owned structures, roads, utilities, etc.) but
The NFIP is riddled with problems. The most basic is that, with changing weather patterns, we’re not so sure which areas flood and which don’t. “Even if you live outside a high-risk flood zone, called a Special Flood Hazard Area, it’s a wise decision to buy flood insurance,” according to FEMA. “In fact, statistics show that people who live outside high-risk ar- eas file more than 25 percent of flood claims nationwide.” As much as anything, this is an indictment of the federal flood map- ping system, a system which appears to miss a lot of potential flood zones. Mark Gibbas, President and CEO of WeatherSource.com, notes that changing weather patterns are a matter of concern both for mortgage lenders and insurance providers. According to Gibbas, a Task Force on Climate-Related Financial Disclo- sures (TCDF) has been formed. “The TCDF is working to provide a framework for how lenders and borrowers will develop safeguards for doing business in a changing climate,” Gibbas told the “Housing News Report.” “This work is being done mostly at the big banking level, but it will trickle down to mortgages.” We’re now beginning to see loan applications falling through in cer- tain geographic areas because of
What has happened is insurance companies are, in some cases, refusing to insure a property after multiple claims have occurred. The lack of insurance then stalls the mortgage process. I have not seen any cases where mortgage companies refuse to underwrite the loan on their own.”
> Continued on :: PG 80
Peter G. Miller is a nationally syndicated newspaper columnist, the author of seven books published orig- inally by Harper & Row (one with a co-author), and for many years a Washington-based journalist.
22 | think realty housing news report :: june / july 2019
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HowWholesaling CanWork forYou THE FIRST STEPS TO ACTIVELY INVEST IN REAL ESTATE IN A LESS ACTIVE WAY.
by Abhi Golhar
they're doing it. Other TV shows, seminars, and books lay out the excellent cash-flow opportunities and long-term profits available from rental-home invest- ing. You watch an investor shop for bargains, possibly bidding at a tax auction, or maybe negotiating with
a home seller to get a rock-bottom deal. You see the numbers all laid out for you, with a nice monthly posi- tive cashflow to take to the bank. While it can be exciting to watch these shows or attend the seminars, these active real estate investment strategies are not for everyone. The
f you're interested in real estate as an investment, it's
certainly fun to watch those TV shows with the fix-and-flip inves- tors turning a beat-up old house into someone's dream home. And of course, it's entertaining to see them raking in five-figure profits while
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