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TABLE OF CONTENTS
INSIDE THIS ISSUE
THINK REALTY 8 News & Events
BUSINESS FUNDAMENTALS 56 If Real Estate is a Hobby, You’re Set Up for Failure
Updates from around the industry.
Three keys to finding success in real estate after it stops being a hobby. by Editorial Staff
10 Office Depot Pilots New Coworking Space The office supply chain embraces a growing commercial real estate trend. by Editorial Staff
58 Attracting Quality Tenants Through Online Reviews [ Sponsored Content ] Capitalize on positive experiences to increase your company’s ratings online. by Lukas Krause
SPECIAL SECTION: TECHNOLOGY& DISRUPTION 22 Billions of Dollars are Heading toward ‘Proptech’ Innovation is changing real estate whether we like it or not. What’s it mean for your investing? by Bobby Burch 26 The Next Generation of Renters are Knocking at Your Door —Are You Prepared? Attracting today’s tech-savvy tenants requires new, innovative tools. by Megan Booe STRATEGY 30 Dig Deep with Data to Find Your Next Investment Market A practical primer on leveraging data to pinpoint the most profitable housing markets. by Jared Garfield Where to find tax-incentivized investment properties near Amazon’s new facilities. by ATTOM Data Solutions 36 Investing in the Land of Oz [ Infographic ] How opportunity zones can provide prime real estate investing prospects. by ATTOM Data Solutions SPONSORED SUPPLEMENT 39 Information Management Network Middle-Market Multifamily Forum (Northeast) 34 Opportunity Zones: Prime Investing Opportunities in Amazon HQ2 Markets
62 Design Guide: Modern Chic Bathroom Inspiration and detailed specs
for your next high-end flip. Featured designer: Rebecca Mager
INVESTOR STORIES 66 Firm Commits 100,000 Hours of Community
Service to Hurricane-Ravaged New Bern MetroRealEstate aims for community impact through rehab expertise. by Bobby Burch
ON THE COVER
How mortgage industry innovators are preparing for success through up and down market cycles. by Daren Blomquist
68 Probate Properties are a Growing Opportunity for Investors [ Sponsored Content ]
Data-FedDisruptionBringing Balance to theMortgageMarketplace
As the baby boomer population ages, properties in probate are increasing. by Kristine Gentry, Ph.D
MARKET & TRENDS 70 Taste of Texas
Real estate investing opportunities in the state’s five largest metros. by Joel Cone
FIVE STEPS TO SMART MULTIFAMILY INVESTMENTS
VETERAN PLOTS RALLY POINT TO HELP SOLDIERS TRANSITION INTO CIVILIAN LIFE
78 Second Thoughts
Investing in these second-string markets may be your best bet in 2019. by Ingo Winzer
The continued rise of renters make multifamily properties excellent investments.
Fame and fortune have only fueled this humanitarian's desire to help others.
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PUBLISHER & CEO Eddie Wilson
EDITOR-IN-CHIEF & CONTENT DIRECTOR Abby Tillman
FROM THE CEO
SALES MANAGER Rodney Halford RHalford@ThinkRealty.com 816-398-4111 x86122 NATIONAL SALES MANAGER Teresa Stanton TStanton@ThinkRealty.com 816-398-4111 x86224
Disrupting our World
n our technology-driven world, we’d be remiss not
derstanding markets and trends will ultimately allow us to better support you on your invest- ment journey. After all, that’s what Think Realty has always been about. We want you to be successful and grow and enjoy all the benefits real estate investing can bring to your life. So, no matter where you are in the world, I hope you dive into our inaugural print issue of Think Realty’s Housing News Report with excitement. There’s tons of our regular con- tent in this issue like our Local Market Mon- itor and our Investor Stories feature—this time about a veteran helping other veterans invest in real estate. But, this issue also includes more in-depth, data-driven articles that represent the content more traditionally found in Housing News Report . From month to month, we hope the combination of this content gives you a holistic set of resources to make informed investment decisions, be inspired and do more deals. •
FULFILLMENT COORDINATOR Blair Pierce
to turn an issue of Think Real- ty Magazine toward disruption and innovation in the real estate investment industry. And, honest- ly, I can’t think of a better issue in which to do so than this particular one, our very first print edition of Think Realty’s Housing News Report . For those of you who have been following Think Realty for a while, you know we recently announced a partner- ship with ATTOM Data Solutions, the former publisher of Housing News Report . As part of that partnership, Think Realty has official- ly absorbed H ousing News Report and folded its content into our regular offering, which is why you’re receiving it today. As the CEO of Think Realty, I am partic- ularly excited about this evolution of our content, as it allows us to bring you, our reader, even more data-driven analysis and insight into the world of real estate invest- ing. We believe this approach to better un-
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ART DIRECTOR Emily Bowers
CHECK OUT OUR NEW UPGRADES!
CONTRIBUTING WRITERS Swapnil Agarwal Daren Blomquist
Megan Booe Bobby Burch Joel Cone
Big things are happening for us and you at Think Realty! We’re updating how we deliver our content to better serve you as the go-to provider of resources for investors in an evolving industry.
Jeff Edwards Jared Garfield Kristine Gentry Lukas Krause Rebecca Mager Ingo Winzer
1. We’re changing the name of our Think Realty Coaches to Resident Experts. This change better defines what they do and their role at Think Realty: providing expert-level content to you! They’ve walked the walk — they talk the talk — and this new name shows it. 2. All Resident Expert videos on ThinkRealty.com are now readily available to view, free of charge! You must create an account at ThinkRealty.com, but hey, that’s completely free. To access these features, simply create a free account (it only takes a minute) at ThinkRealty.com. Then read, learn, watch videos, and most importantly — grow your REI expertise.
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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LOCAL MARKET PANEL
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MARCH 3-4, 2019 Pitbull 48th National Private Lending Conference The Ritz-Carlton, Fort Lauderdale PitbullConference.com
KRISTIN GERST Capricorn Mortgage Investments, LLC
THINK REALTY’S HOUSING NEWS REPORT In our quest to provide you with the most useful resources for your real estate investing journey, we're expanding our content to include Think Realty’s Housing News Report . Top investors around the globe rely on this publication to provide crucial market data, expert insights and trends to watch!
MARCH 11-13, 2019 Five Star Single-Family Rental Summit
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MARCH 19-20, 2019 IMN Middle-Market Multifamily Forum The Statler Dallas IMN.org
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LEARN FROM OUR RESIDENT EXPERTS Formerly known as Coaches, our team of Resident Experts provides a wealth of knowledge and insight in their individual real estate investment niches via Think Realty’s
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FULL-CIRCLE INVESTOR RENOVATIONS START TO FINISH Your Partner for Results-Driven Rehab & Repair Services. At Radius Renovation Group, we partner with investors- like you-to provide services that meet your renovation and repair needs. We manage the entire process for single- and small multi-family properties ranging from quick tenant turns to full rehabs, coordinating contractors and trades — keeping your project on time, on budget and inspected for quality workmanship.
Office Depot Pilots NewCoworking Space THE OFFICE SUPPLY CHAIN EMBRACES A GROWING COMMERCIAL REAL ESTATE TREND
by Editorial Staff
n an effort to expand their offerings and tap into an emerging commercial real estate trend, Office Depot may soon become an easy spot for real estate investors to get work done on the go (and print some postcards and yard signs at the same time!). In partnership with Proximity, Office Depot just launched its first coworking space and program— Workonomy Hub—inside the Los Gatos, California, retail store. This expansion comes on the heels of positive growth for the office supply chain, who repositioned itself from an office products retailer to a pro- vider of both products and services in 2018. And this repositioning is reso- nating well, with 16 percent of the company's total revenue now coming from new tech services they now pro-
vide their customers. Second quarter sales were also up over 11 percent compared to the previous year. This shift in traditional brick- and-mortar commercial properties now offering small business ser- vices is being felt industry-wide. In 2016, Staples partnered with the workspace startup Workbar to create remote office spaces in three Manhattan stores. Though Office Depot is a few years behind their competitor on this trend, their pric- es are significantly more affordable. Staples currently only offers one $130 per month plan versus Office Depot’s more accessible $40 per day price tag. Office Depot’s Workonomy Hub includes tech service kiosks with on-demand access to experts who offer installation and consultation support. “The Hub” also includes
high-speed Internet, free refresh- ments, services like DIY printing, shipping and mail and package handling and easy access to office supplies, of course. The company plans to continue em- bracing this commercial real estate trend by bringing Workonomy Hub ki- osks to 141 stores in Florida, Georgia and Texas as well as more than 1,000 self-service printing and copying kiosks by the end of the year. •
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U.S. RESIDENTIAL MORTGAGE ORIGINATIONS
Data-Fed Disruption Bringing Balance to the Mortgage Marketplace
AS THE MARKET TURNS Lilly said that Phoenix recognizes the shifting market and in response is advocating a dual strategy com- bining data-driven efficiencies with strategically applied insight from subject matter experts. “As the mortgage environment aggressively adjusts from scaling to meet customer needs to capturing margin in a severely contracting market, it will be important for all participants to get the most out of each asset,” he said, referring spe- cifically to the MSR space. “A combi- nation of data tools and specialized knowledge will be applied to retained portfolios and trading strategy to ensure that tailored organizational objectives are met and the maximum value of portfolios are realized.”
As the mortgage environment aggressively adjusts from scaling to meet customer needs to capturing margin in a severely contracting market, it will be important for all participants to get the most out of each asset.
by Daren Blomquist
n the 10 years since the last housing downturn, mortgage
do-based company that provides a variety of services for mortgage servicers and companies trading mortgage servicing rights (MSR). The market appears poised to test this hypothesis as rising mortgage rates weaken demand, particularly for refinance home loans. Refinance originations decreased 21 percent year-over- year in the third quarter of 2018
to a new record low as far back as data is available — Q1 2000. The third quarter drop marked the sixth consecutive quarter with an annual decrease in refinance originations. Although not down as sharply, purchase originations in Q3 2018 decreased 2 percent from a year ago — also the sixth consecutive quarter with a year-over-year decrease.
industry innovators have been lay- ing the groundwork for success in both feast and famine. “We’ve set up a suite of services that is somewhat recession-proof, as long as we are capturing market share in those core functions,” said Ryan Lilly SVP of mortgage services with Phoenix, a Denver, Colora-
Demand for mortgages is cooling even as interest in data- and ma- chine-driven innovation continues to heat up, and that combination is a potential recipe for excessive risk if not handled delicately, according to Kevin Marshall, president and co-founder of Clear Capital, a Reno, Nevada-based company that pro-
vides real estate valuations to the mortgage industry. “There is an appetite for analyt- ics. At the same time we have rising interest rates, and the potential softening of the economy,” he said, cautioning that analytics should be rigorously tested to ensure they stand up in a more volatile hous-
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to look at the products available to them to make the right decision,” he said. “It doesn’t mean that these lenders are going to cut corners and say ‘woo-hoo’ let me go from a $500 appraisal to a $10 AVM.” Lenders shouldn’t think of AVMs as a wholesale replacement of apprais- als, but rather as just another option on a spectrum of property valuation tools that can be plugged into their decision-making process depend- ing on the type of property, type of loan and other factors, according to Cliff Lipscomb, vice-chairman and co-managing director at Greenfield Advisors, a Seattle-based firm that provides litigation and data analytics services to the mortgage industry. “AVMs have their place, just like appraisals completed by humans
have their place, and like appraisal reviews have their place,” said Lip- scomb, whose 42-year-old company recently introduced a new lend- er-grade AVM developed in part- nership with ATTOM Data Solutions. “Each of these tools has a role in mitigating the risk involved in a real estate transaction.” INNOVATION GRAVITY Since it was founded 17 years ago, Clear Capital has been operating in the tension between risk mitigation and optimized efficiency, according to Marshall, who noted that the company unsuccessfully tried to launch a prop- erty valuation Software as a Service (SaaS) soon after opening its doors. “We actually couldn’t sell it,” he
ing market. “We all have to be very mindful not to blindly accept analyt- ics that will negatively shine light on these progressive methods.” Marshall is an unabashed advocate for industry innovation — “What used to take weeks to do, we can now do in hours; it’s pretty cool,” he said — but argued that introducing untested innovation into the marketplace could backfire. “We are really big fans of keeping humans in the loop to make sure our methods are sound and be aware that any untested analytics could shine a very bad light and set back innovation in the industry for years,” he said. “We want the mortgage marketplace to be better and more efficient but we have to be really careful to pair analytics with humans as the market turns.” FLAG THE FRAUD Increasing fraud is also driving inno- vation in the mortgage space, accord- ing to Mark Richard, president with Foresight Information Services, a Co- lumbus, Ohio-based technology firm that provides data-driven products to the mortgage sector to help reduce the cost associated with application verification and fraud detection. “A recent study found one out of every 120 mortgage applications contained signs of fraud,” said Rich- ard, whose company was founded in 2011. “And this fraud rate is increas- ing. At the same time, the mar- gins on loan applications are being squeezed. So, you have this situation where deeper and more thorough ex- amination and verification of applica- tions is necessary, but the economics dictate less time being spent.” Echoing both Lilly and Marshall, Richard believes a smart combina- tion of data-driven automation and human expertise will be needed to successfully combat rising fraud in a tight mortgage market. “I’m convinced the reliance upon
I’m convinced the reliance upon data-driven automated verification solutions will continue to expand so that manual examination can focus on the areas which are most suspect and prevent bad actors from walking away with a fraudulent loan. At the end of the day, we all pay for mortgage fraud through increased rates or even government-funded bailouts. Foresight’s mission in the mortgage space is simple: flag the fraud.
AVMs have their place, just like
appraisals completed by humans have their place, and like appraisal reviews have their place. Each of these tools has a role in mitigating the risk involved in a real estate transaction.
data-driven automated verification solutions will continue to expand so that manual examination can focus on the areas which are most suspect and prevent bad actors from walking away with a fraudulent loan,” he said. “At the end of the day, we all pay for mortgage fraud through increased rates or even government-funded bailouts. Fore- sight’s mission in the mortgage space is simple: flag the fraud.” A sustained tension between risk mitigation and optimized efficiency is a hallmark of a healthy mortgage industry, according to Marshall with Clear Capital. He explained that a market too heavily weighted toward efficiency will be extremely bor- rower-friendly but could result in a housing bubble — exhibit A being the easy mortgage available in the run- up to the 2008 financial crash. On the other hand, a market too heavily weighted toward risk mitigation — which often comes in the form of heavy-handed regulation — can have a chilling effect on the market by introducing excessive friction in the loan origination process. “We always live in a tension of making sure we are pioneering for what the customer expects and THE RISK-EFFICIENCY TENSION
needs and wants, while also making sure we are not introducing systemic risk,” he said. “As long as we live in that tension we are pretty good.” The risk-efficiency tension is be- ing tested with a recent regulatory push away from full appraisals and toward automated valuation models (AVMs). A November 2018 proposal from the Office of the Comptroller of the Currency, the Federal Depos- it Insurance Corporation and the Federal Reserve calls for increasing the minimum home value for which a full appraisal is required as part of the mortgage origination process, from $250,000 to $400,000. Even if the proposal is adopted, it will be a bit of a non-issue for the industry in the short term given that Fannie Mae and Freddie Mac — which back the majority of U.S. mortgages — will still require ap- praisals in most instances, accord- ing to Marshall. “It’s not a mandate that you can’t get an appraisal, but it gives you op- tions for valuation, and maybe that’s an AVM,” he said. Even if appraisals are not required by regulatory agencies, lenders should carefully consider the prop- erty valuation options available and appropriate for a given situation, according to Marshall. “The lenders are going to continue
TOP 10 MORTGAGE ORIGINATORS: CHANGE IN MARKET SHARE
2018 MARKET SHARE
2017 MARKET SHARE
PCT CHANGE IN MARKET SHARE
JP Morgan Chase
United Wholesale Mortgage
Bank of America
Caliber Home Loans
Fairway Independent Mortgage
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“Evangelize these ideas early and allow people to vet them out before adopting them,” he said, noting that the Silicon Valley startup culture of quickly throwing untested innovation into the market place and failing fast does not work as well in the mortgage space where so much is at risk — particularly for the mammoth government-sponsored enterprises like Fannie Mae and Freddie Mac and big bank lenders. “You can’t just apply technology and analytics … you have to apply things with rigor and do a lot of back-testing ... (or) it can result in billions of dollars in losses for these big organizations.” Marshall said nonbanks have been more open to leveraging data and technology in the mortgage origina- tion space.
market share and traditional banks losing market share compared to the first three quarters of 2017. Among the top 10 mortgage origi- nators in terms of origination counts in the first three quarters of 2018, the five with the biggest increase in market share were all nonbanks: United Wholesale Mortgage, Fairway Independent Mortgage, Guaranteed traditional banks among the top 10 originators saw a decrease in mar- ket share compared to a year ago: Wells Fargo, Bank of America and US Bank. The exception to this was JPMorgan Chase, which posted a 5 percent increase in market share. While most of the top 10 origina- tors posted a year-over-year de- Rate, LoanDepot and Quicken. Meanwhile, three of the four
said, noting that the industry was not yet ready for such a tech-heavy solution, both in terms of psychology and availability of data. “The valua- tion data was stuck in a PDF form, so it was really hard to have high-level understanding of valuation condition and change over time.” While Clear Capital pulled back from the ahead-of-its-time SaaS product, the company continued to push the envelope when it came to leveraging technology for its valuation services, according to Marshall. In the wake of the Great Recession, the industry began to recognize the need for more data- and tech-driven solutions. “Once Freddie and Fannie intro- duced the uniform collateral data portal (in 2011) and other types of data, and started getting data in XML that’s when we started viewing the valuation industry as a data industry and not a PDF industry,” he said, adding that Clear Capital clients no- ticed the company’s internal analyt- ics were better than anything else in the marketplace and began to invest in those types of analytics for their own businesses. The push for innovation paired with patience for the industry to catch up is what Marshall refers to as “inno- vation gravity.” “We’ve always wanted to innovate just ahead of what the industry is will- ing to adopt,” he said. “Let’s do some really cool things today but let’s look ahead and think about what can be done because what can be done is a lot easier than what should be done.” The drive toward a digital mortgage is one example of where the concept of innovation gravity can be employed, according to Marshall. In the context of the digital mortgage, there is a gap between what can be done in terms of efficiency and transparency for borrowers, and what should be done in terms of introducing too much risk to the marketplace. That gap can be bridged by innovation gravity, Mar- shall said.
TOP 10 ORIGINATORS: PURCHASE MORTGAGE ORIGINATIONS
Q1 TO Q3 2018
Q1 TO Q3 2017
JP Morgan Chase
United Wholesale Mortgage
Bank of America
Caliber Home Loans
Fairway Independent Mortgage
We’ve always wanted to innovate just ahead of what the industry is willing to adopt. Let’s do some really cool things today but let’s look ahead and think about what can be done because what can be done is a lot easier than what should be done.
a 9 percent decrease in purchase originations. Again, the exception for traditional banks was JPMorgan Chase, which posted a 20 percent increase in purchase originations. STOP THROWING PEOPLE AT THE PROBLEM LendingHome is the epitome of a nonbank startup with tech roots that’s set out to disrupt the mortgage indus- try through data-driven innovation. “We saw the space as way too brick-and-mortar driven, way too paper-driven and just throwing peo- ple, people, people at the problem, and we thought we could do better,” said Matt Humphrey, co-founder and CEO of the Pittsburgh-based compa-
ny, which launched in 2013 and has since generated more than $3 billion in loans, primarily in the form of short-term bridge loans to fix-and- flip real estate investors. Although Humphrey initially had the broader mortgage marketplace with its average cost of more than $8,000 per mortgage origination in his sights, he decided to start with the low-hanging fruit of the fragmented fix-and-flip lending space, which his- torically has been the domain of local “hard-money” lenders charging dou- ble-digit rates on short-term loans. “These real estate operators are not being forced to go to the predatory local lender; they can have certainty of capital with us,” said Humphrey, noting that the typical hard money
loan charges 3 to 5 points upfront and comes with a 12 to 15 percent interest rate while the typical LendingHome bridge loan is 1 to 2.5 points upfront with an 8 to 10 percent interest rate.
“The nonbanks are really inter- ested in grabbing market share, and they are all about the user experi- ence,” he said, noting that user expe- rience focus is good for the big banks as well because if they frustrate the borrower during the mortgage origination process it could put other business that consumer does with the bank at risk. “We and our lender clients are absolutely in the business of not frustrating the borrower.” An ATTOM Data Solutions analysis of publicly recorded mortgage origi- nation data in the first three quarters of 2018 shows nonbanks gaining
crease in total mortgages originated, driven by a sharp drop in refinance originations, the majority of non- banks posted double-digit gains in purchase mortgage originations. United Wholesale Mortgage led the way with a 51 percent increase in purchase originations followed by LoanDepot (30 percent increase), Guaranteed Rate (25 percent in- crease), Fairway Independent Mortgage (19 percent increase) and Quicken (12 percent increase). Meanwhile Wells Fargo posted a 24 percent decrease in purchase origi- nations, and Bank of America posted
We saw the space as way too brick-and- mortar driven, way too paper-driven and just throwing people, people, people at the problem.
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“That's both because of the credit performance we've proven, and also the tech just stripped out so much cost of manually underwriting loans that we don't have to pass through to make those expenses back.” LendingHome’s origination plat- form eliminates traditional loan origination costs by leveraging data, including data on the property itself as well as on the prospective bor- rower and that borrower’s past per- formance with previous fix-and-flip projects. The data allows Lending- Home to “automate huge pieces of the underwriting process” while also constantly testing the accuracy of its upfront property value assumptions once the home flip project is com- plete, according to Humphrey. “We can oftentimes project very accurately what that after-repair value is going to be,” he said, adding that the data-driven efficiencies in the underwriting process can also help reduce approval timelines, which is especially critical in an industry oper- ating on extremely tight deadlines. “Borrowers in this space have to act fast; they're finding a property — it might be off-market — they have to find it, bring it to us and we have to be ready to give them an answer almost the same day, and ultimately close in let's say three, four, five, six days,” said Humphrey. “To give that level of service, to fully underwrite the loan with 20, 30, 40 different data points and the core credit attributes that we're looking at — that's hard to do without tech — certainly as you scale to the billions per year that we're now at.” LendingHome originated more than $844 million in loans in the first three quarters of 2018, up 35 percent from the first three quarters of 2017 and on pace for more than $1.125 billion in originations for the year, according to an ATTOM Data Solu- tions analysis of public record mort- gage data. Although LendingHome’s share of the overall mortgage orig- ination market stands at one-tenth
of a percent—in part because it's only focused on the niche fix-and-flip market segment—that market share has grown 48 percent compared to a year ago. DATA-FUELED DISRUPTION AND DISCOVERY Roc Capital is another recent en- trant to the fix-and-flip lending space that has experienced rapid growth since launching in 2014. “We add value by leveraging our deep Wall Street heritage, high-touch service, a custom end-to-end platform that makes lending fast, efficient and transparent,” said COO Maksim Stavin- sky, who noted that the company’s use of data-powered technology can be applied to many facets of the business. “We are using data and combining or- thogonal sources of data to help in the areas of risk, lead mitigation, fraud pre- vention, verification and sanity-check- ing of borrower-provided info.” Roc’s platform is driving disruption even in traditionally sacrosanct parts of the mortgage origination process.
“Our underwriters are now able to get preliminary title runs for submitted loans even before we get the report
from the title company,” he said, noting that these preliminary title checks are not used to close a loan but are useful as an initial check. Roc has also discovered additional opportunities within the space that can be supported by its data-driven approach, according to Stavinsky. “In addition to using data to support all aspects of our existing business, we also recently used data to get into a new business — insur- ance,” he said, referring to insurance for borrowers. “We worked with an A-rated insurance carrier to create an automated process for providing policies. Whereas our borrowers previously had to contend with a long application and days of waiting for a quote, today we are able to quote a policy in minutes, with minimal infor- mation required from the borrower.” The automated insurance approval process is fueled largely by the same property data Roc uses in other facets of its business, Stavinsky explained. “We have sufficient property-level data so as to obviate the need for the customer to provide any information,” he said. “Since most of our clients don’t love talking about insurance, this has led to great customer satisfaction. Insurance has never been this quick, easy and painless for customers.” tech-fueled startups such as Lend- ingHome and Roc begs the question: will the highly automated underwriting process these two companies and others employ open up a back door into the mortgage marketplace for the loose lending practices that ultimately led to the market’s downfall a decade ago? Both Humphrey and Stavinsky ar- gued that well-performing loans with low delinquency and default rates are critical for the continued growth of their businesses. That’s because both companies are selling the loans that LOAN PERFORMANCE LONG GAME The rapid growth of data- and
As we started to become an operating business and we started scaling, we were still always raising capital and so then we could actually point and say that data and very algorithmic approaches to underwriting this credit means that we can close loans in five days, not 20, but at the same time have two or three times as good loan performance.
We add value by leveraging our deep Wall Street heritage, high-touch service, a custom end-to- end platform that makes lending fast, efficient and transparent. We are using data and combining orthogonal sources of data to help in the areas of risk, lead mitigation, fraud prevention, verification and sanity-checking of borrower-provided info.
they originate, and investors buying those loans won’t keep buying if the loans don’t perform as expected. “We transparently open up a really complete set of data to the end loan investor who buys that loan, whether that's a massive asset manager with hundreds of billions of assets or it's an individual peer-to-peer inves- tor with maybe 50 or 100K on our platform,” Humphrey said. “They get to the full historical platform perfor- mance of LendingHome’s now well over $3 billion in loans.” Loan performance also comes into play when startups like Roc and LendingHome raise venture capital, both Stavinsky and Humphrey noted. “As we started to become an oper- ating business and we started scaling, we were still always raising capital and so then we could actually point and say that data and very algorithmic approaches to underwriting this credit means that we can close loans in five days, not 20, but at the same time have two or three times as good loan performance,” Humphrey said. “That's where I think investors start to see the true value of the tech and data and un- derstand it's not just (we’re) doing well as a lender. That's a real sustainable, competitive advantage.” Humphrey noted that, before origi- nating any loans, LendingHome spent nearly a year building its lending plat- form from the ground up. He said that
was an intentional choice the company made to ensure the loans originated by its platform performed well, position- ing the company for long-term growth. “We wanted to play the long game, not the short game,” he said. “I think when you look at a space like fix-and- flip that a lot of investors had thought of as these are localized country club loans, these are kind of a weird dark corner of mortgage. We brought that transparency and that clean look to the space, and we've really brought broad, large-scale capital to bear.” BETTER THAN GUT INTUITION The quality of a loan’s performance depends heavily on the quality of its underwriting during origination, but that performance can also be impacted by how the loan is serviced, particularly in the event of delin- quency or a problem the borrower is facing that may lead to delinquency. The importance of smart, data-driv- en servicing is a lesson LendingHome and Roc have both learned in the laboratory of fix-and-flip lending. “Internally, data is useful in risk management to monitor delinquen- cy,” said Stavinsky of Roc, which services the loans it originates. LendingHome did not start out servicing its loans when it began orig- inating in 2014, but it soon discovered it could boost loan performance by ap-
LENDINGHOME LOAN GROWTH
ESTIMATED MORTGAGE ORIGINATION DOLLAR VOLUME
Q1 to Q3 2017
Q1 to Q3 2018
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plying its technology to that aspect of the business, according to Humphrey. “I can tell you that within one year of taking servicing back in-house, run over our platform, just about every single metric, whether it was reso- lutions, timelines for disposition of assets, recovery rates and even costs, we excelled against anyone that we had assessed externally,” he said, not- ing that the company’s wealth of data allows them to work more intelligently with a borrower facing a problem. While the investor that owns the loan ultimately makes the decision on how to proceed in the event of a default, Humphrey said that investors have come to rely heavily on the rec- ommendations given by LendingHome “because our data platform performs a lot better than just gut intuition.” Companies like Phoenix are taking a more data-driven approach to servicing in the larger mortgage marketplace, according to Lilly, who noted that the servicing response to delinquency may be different de- pending on the investor. “For many banks, the objective has been mitigation of risk and speed in which assets can be liquidated from the portfolio,” he said, noting that much of the nonperforming loan vol- ume lingering from the last housing crash has shifted from banks to pri- vate equity investors who purchased those loans at a discount. “Investors and private equity firms work to maximize the achieved value through a reduction in processing leakage and identifying the optimal balance between condition, timing and value.”
troducing risk into our client’s shops. That’s something we’ve earned the right to do because we have shown that we care about client risk.” Stavinsky of Roc and Humphrey of LendingHome both believe the success their companies are experi- encing in the fix-and-flip lending lab- oratory can eventually be replicated
in the larger mortgage marketplace. “I would say that we've built a gen- eral purpose residential mortgage platform,” said Humphrey. “While we have our technology and risk model today pointed towards the space of fix-and-flip, we're constantly look- ing at data and (considering) new products and new opportunities. So
those new products, new opportuni- ties could be really close adjacencies to bridge — more on the construction side, rental side, things like that. Or they could, someday in the future, be 30-year consumer mortgages.” “We’re just getting started; we feel there are endless opportunities to improve on current industry gold standard systems and processes,” Stavinsky said. “We can envision disruption in nearly every facet of the business including appraisal, closing, draw disbursement, insur- ance, just to name a few.” •
noting that Phoenix has been investing in data-driven tools for dealing with nonperforming loans even though de- linquencies have been down in recent years. “Unlike most participants in this space, Phoenix has allocated capital earned during the crisis to reinvest it in REO through the application of auto- mation, machine learning and business intelligence. In the same way, we have been applying this logic to servicing oversight. Our goal is to ready a new approach and technology-enabled plat- form to play offense in the next cycle.” The servicing of loans backed by Ginnie Mae is a focus for Phoenix, said Lilly. That’s because owners of MSR portfolios with Ginnie Mae- backed loans are required to shoul- der the costs of processing defaults in advance of foreclosure, with those advances not recoverable until post-foreclosure — if at all. “Understanding the true cost of Gin- nie servicing will help organizations more clearly strategize efforts to attain the targeted ROI and more accurately define loss reserves,” he said. “Under- standing what corporate advance rates are at various delinquency levels is key to developing a strategy for retained portfolios. It is also important to understand what advances will be re- coverable versus non-recoverable and what time looks like for recoverability. “For advances that are not recov- erable it is important to understand what events may have been control- lable or uncontrollable and who had the ability to impact those events — sub-servicers, vendors, etc.,” Lilly continued. “Many times, errors or incomplete tasks can lead to indem- nification for events that resulted in curtailment and eventual loss.” SERVICING SCAR TISSUE Marshall with Clear Capital noted that servicers learned the hard way how not to handle a surge in defaults during the last housing downturn. “If you look at the speed at which
Our goal is to ready a new approach and technology-enabled platform to play offense to the next cycle.
We're just getting started; we feel there are endless opportunities to improve on current industry gold standard systems and processes. We can envision disruption in nearly every facet of the business including appraisal, closing, draw disbursement, insurance, just to name a few.
servicers had to ramp up in 2009, 2010, as a result we saw a lot of blow- back on those processes,” he said. “Whether it was robo-signing scan- dals or unfairly evicting borrowers — all the junk that we dealt with.” The wounds from that experi- ence have forced servicers to adopt platforms and processes that should perform better in a high-default en- vironment, according to Marshall. “The scar tissue from those years will really pay dividends the next time around,” he said. “(It) forced us all to act with more rigor as we manage the next default boom. If we go through this next cycle, my goal is that the industry can do it with more empathy so that borrowers are not as soured on homebuying as they were in 2008, 2009.” JUST GETTING STARTED Marshall and other experts inter- viewed are optimistic that, if imple- mented properly, data-fed innova- tion can ultimately improve both the user experience and reduce risk in the mortgage marketplace. “We are trying to very thoughtfully apply machine learning, AI. We are trying to artfully use some of these analytic tools to understand collateral change,” Marshall said. “Rather than our innovation used just to generate investment, (we are) keeping humans in the loop and iterating forward in a measured approach so we are intro- ducing true progress and not just in-
Daren Blomquist is vice president of market economics at Auction.com, the nation’s leading online marketplace for residential bank-owned and foreclosure
properties. Learn more at www.auction.com.
INFINITE FUNDING | RESOURCES | EXPERTISE
Pr ivate Loans for Texas Real Estate Developers and Investors
PLAYING OFFENSE IN THE NEXT CYCLE
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Investing in data and technology to drive decision-making for servicers is key, according to Lilly. “Assembling a complete dataset in combination with third-party tools can help clearly identify the right path to meet these objectives,” he said,
20 | think realty housing news report :: february / march 2019
thinkrealty . com / hnr | 21
TECHNOLOGY & DISRUPTION
also comes more sophisticated and informed competition for you to face.
That amount of funding for prop- tech surged in 2016 to $2.66 billion, according to CB Insights. And the growth trend doesn’t seem to be slowing. Global venture capital investment in real estate innovation skyrocketed to $12.6 bil- lion in 2017, according to real estate tech research and marketing agency Re:Tech. There are many examples of prop- tech startups attracting significant portions of this VC funding pie, in- cluding most recently Opendoor. The San Francisco-based startup flips homes in 14 cities through its online tool that aims to remove stress from the buying and selling process. As it’s gained traction, Opendoor snagged a $325 million investment in June 2018, followed by a September investment of $400 million, bringing the company’s total equity raised to
$1.045 billion. New York City-based startup Com- pass is also among the firms hoping to flip the traditional market of real estate. Compass is a tech-fueled brokerage that employs 7,000 agents who focus on high-margin, luxury homes in mostly coastal markets. The company says it is on pace to control 20 percent of residential property sales in the United States’ top 20 markets. Founded in 2012, Compass has surged in value to $4.4 billion, hav- ing raised a total of $1.2 billion in equity to date. The attention on proptech has also led some venture capital firms to specialize in the field. Los Ange- les-based Fifth Wall Ventures raised $212 million for its first fund and is en route to raising a second, $400 million vault.
THE GROWTH OF PROPTECH You’re probably already familiar with big players in proptech, and the financial bonanzas they’ve enjoyed. Companies like Zillow, Compass, Homelink, SMS Assist and Open- door have drawn multi-billion-dollar valuations as they vie to provide new software and hardware products to landlords, builders, property manag- ers and real estate investors. And as these proptech startups have grown more successful in developing solutions to improve the real estate market, venture capital- ists have keenly taken an interest. In 2013, proptech firms attracted $459 million in global venture capital funding, according to CB Insights.
Billions of Dollars are Heading Toward ‘Proptech’ INNOVATION IS CHANGING REAL ESTATE WHETHER WE LIKE IT OR NOT. WHAT'S IT MEAN FOR YOUR INVESTING?
QUARTERLY ANALYSIS: VENTURE CAPITAL DOLLAR VOLUME IN REAL ESTATE TECH
2015 2016 2017
While 2017 was filled with record highs, it also caused a moment of unrest. With rare exception, Q2 2017 caused pause for many in real estate tech. Compared to the same period last year, Q2 2016, dollar volume declined by nearly 37.6 percent, the first underperforming in three years.
by Bobby Burch
here’s a phrase in journalism to verify reporting and find the
capital dollars rushing toward real estate tech firms offering “proptech,” short for property technology. The buzzword is a relatively new term referring to the sector of startups that create new products or business models for the real estate market. While a broad field, proptech can include products or services for homebuyers and sellers, smart- home devices, office administration, building management, marketing, construction and even city-planning. Such venture capital activity is bringing a new level of legitima-
cy — and attention — to real estate investing. While it’s existed for de- cades in different forms, real estate investing has rarely been viewed as an industry in itself, but rather lumped into a broader bucket along- side other investment channels or seen as a hobby. With more well-heeled tech start- ups keen to serve an untapped mar- ket, real estate investors, funds and property management groups have more tools at their disposal than ever. But with the growing plethora of tech platforms focused on real estate
truth: “Follow the money.” The motto also applies to venture capital funding to determine what innovations are poised to emerge and wreak havoc on stagnant industries beholden to their status quos. So when you look at real estate, see its historical void of innovation and notice the deluge of venture capital heading to startups whose mission is disrupting business as usual, you’d be wise to pay heed. There are billions of venture
Source :: Real Estate Tech Annual Report, 2017
22 | think realty housing news report :: february / march 2019
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