JULY 2019 VOL 13 ISSUE 7 THINKREALTY.COM/HNR
IN PARTNERSHIP WITH ATTOM DATA SOLUTIONS
Will Opportunity Zones Boost America’s Distressed Neighborhoods?
MY TAKE Even Real Estate Transactions Can be Done from the Comfort of Your Own Home 16 DATA IN ACTION The U.S. Housing Markets Seriously Underwater vs Equity Rich 20 MARKET SPOTLIGHT Investors Still Finding Success in the Middle 24
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WILL OPPORTUNITY ZONES BOOST AMERICA’S DISTRESSED NEIGHBORHOODS?
Based on the assumption that money is the magic ingredient for community success, we’re seeing an uptick in “opportunity zones” where investors can infuse cash into an area in exchange for tax breaks. Across the country, some 8,700 “opportunity zones” have been created, bringing in billions of dollars in new investment. Housing News Report takes a look at the emerging rules, risks and rewards associated with the O-Zone trend.
16 MY TAKE
24 MARKET SPOTLIGHT Investors Still Finding Success in the Middle While the foreclosure crisis hit the periphery of the nation hard, many markets in the middle of the country experienced far less volatility. Middle markets such as Chicago, Denver, Kansas City, Oklahoma City and Saint Louis are still profiting from greater stability, creating a favorable business
Designed for the Conveniences of Today: Even Real Estate Transactions Can Be Done From Home As consumer trends around the world are evolving to more of an on-demand model, so is the way real estate is bought and sold. In this issue, Guest Contributor Brian Blair, CEO and Founder of Offerpad, talks about how it’s now easier than ever for consumers to buy or sell a house from their favorite spot on the couch.
Where are the ZIPs that are Drowning vs. Those that are Bouyant? In the first quarter of 2019, there were more than 5.2 million seriously underwater properties in the U.S. according to ATTOM Data Solutions. In this issue, we highlight the ZIPs that are drowning vs those where equity is saturated. 23 BIG DATA SANDBOX
climate for investors. Housing News Report talks with veteran investors in these five markets about how they have continued to thrive by tweaking their business models as market demands have changed.
The U.S. Housing Markets Seriously Underwater vs. Equity Rich According to ATTOM Data Solutions’ most recent Home Equity & Underwater Report, more than 5.2 million U.S. properties were seriously underwater (where the combined balance of loans secured by the property was at least 25 percent higher than the property’s estimated market value) at the end of Q1 2019, down up more than 17,078 properties from a year ago. This analysis looks at which markets had the highest share of seriously underwater properties as well as the highest share of equity rich properties. 20 DATA IN ACTION
july 2019 3
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july 2019 5
Will Opportunity Zones Boost America’s Distressed Neighborhoods?
BY PETER G. MILLER
Verizon has just named the 50 best small cities to start a small busi- ness and it’s a great list. A lot of small communities are expanding their job base, but what’s happen- ing in these leading towns with between 50,000 and 75,000 people is not true everywhere.
We increasingly have a divided economy. At one end are world cities such as San Francisco, Los Angeles, San Jose, Seattle, Wash- ington, New York and Boston as well as some small-but-success- ful towns such as those named by Verizon. At the same time, we also
have thousands of census tracts that haven’t kept up: neighbor- hoods where jobs are leaving, tax collections are down and people are moving away. It is in these areas where newly-minted op- portunity zones – also known as “O-zones” or “OZ” – can hopefully
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spark development, create jobs, and yield investor profits. For many investors the next big financial happening is just about everywhere. Across the country some 8,700 “opportunity zones” have been created – areas where need and tax breaks are bring- ing in billions of dollars in new investment. More remarkably, such sums have been raised even though opportunity zone regula- tions from the Treasury Depart- ment have not even been finalized. NEWTAX RULES Our story begins on page 355 of the Tax Cuts And Jobs Act, the 2017 legislation which updated the federal tax code for the first time since 1986. Under tax reform, “a population census tract that is a low-income community” can be designated as a qualified oppor- tunity zone. In fact, as many as 25 percent of the census tracts in any state can be certified with this new and special status. It may seem odd that so many census tracts are down-and-out given low unemployment and rising average incomes. But, for many workers and in many areas, the economy has not delivered. The ex- planation, it turns out, is that with the shift from factories and smelt- ers to electrons and job-sharing, many workers have seen no real wage increases in decades. “Despite some ups and downs over the past several decades,” says the Pew Research Center, “today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. And what wage gains there have been have mostly flowed to the highest-paid tier of workers.” (parenthesis theirs)
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FEATURED ARTICLE: Will Opportunity Zones Boost America's Distressed Neighborhoods?
“The onrush of technology,” says the Central Intelligence Agency, “has been a driving factor in the gradual development of a ‘two- tier’ labor market in which those at the bottom lack the education and the professional/technical skills of those at the top and, more and more, fail to get comparable pay raises, health insurance coverage, and other benefits.” GAPS IN THEWORKPLACE HAVE LED TO GAPS IN OUR NEIGHBORHOODS. “The uneven recovery is leaving too many communities behind,” reports the Economic Innovation
Group. Its research shows that “50 million Americans live in econom- ically distressed communities -- places struggling to attract capital and sustain economic opportunity for their residents. The country’s distressed ZIP codes contained 1.4 million fewer jobs in 2016 than they did in 2007.” The two-tier jobs market is reflected in how we value our homes. The National Association of Realtors (NAR) reported that the median price for an existing home was $259,400 in March. “March’s price increase,” said NAR, “marks the 85th straight month of year-over-year gains.” That seven-year string of rising
prices has not been shared evenly. Research from ATTOM Data Solu- tions shows that in the fourth quarter at least five million US homes were “seriously” underwater, homes where loan balances were at least 25% great- er than market values. And yet, even in tough times the areas which have increasingly been left behind still have much to offer. “I have personally been raised in one of those distressed commu- nities,” said Sen. Tim Scott (R- SC), who, with Sen. Cory Booker (D-NJ), is one of the two leading backers of the O-zone concept on Capitol Hill, “and I will tell you that the potential in those Opportunity Zones is incredibly high.”
Q4 2018 UNDERWATER PROPERTIES BY ZIP
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OPPORTUNITY ZONE TAX BENEFITS
I have personally been raised in one of those distressed communities and I will tell you that the potential in those Opportunity Zones is incredibly high.”
Opportunity zones are designed to encourage economic develop- ment in places where it’s lacking. The usual attractions are insuffi- cient to lure investors and entre- preneurs; as a result communities wither and become less attractive. To break the cycle, more capital and jobs are needed. And, how do you generate more O-zone invest- ment? With tax benefits. You can’t just plop money into an Opportunity Zone and get a juicy write-off. The proposed rules – which are subject to change with publication of the final Treasury regulations as soon as early sum- mer – carve out a specific process. In basic terms, an O-zone invest- ment works like this. You have capital gains from in- vestments in stock, real estate, etc. You can pay the tax or – within 180 days from the date of a sale – you can put the gain into a Qualified Opportunity Fund (QOF). With a QOF, you can defer the tax. Better yet, in some cases you may be able to avoid capital gains taxes altogether. Brett Theodos, who directs the Community Economic Develop- ment Hub with the Urban Institute, divides potential O-zone tax bene- fits into three categories. “Permanent exclusion of tax- able income on new gains. For investments held for at least 10 years, investors pay no taxes on capital gains produced through their investment in Opportunity Funds (the investment vehicles that make investments in Op- portunity Zones). “Basis step-up of capital gains invested. For capital gains placed in Opportunity Funds for
SEN. TIM SCOTT
ment is increased 10 percent. If invested for at least seven years, investors’ basis on the original investment is increased 15 percent. “Temporary deferral of cap- ital gains. Investors can place existing assets with accumulated capital gains into Opportunity Funds. Those capital gains are not taxed until the end of 2026 or when the asset is disposed of.” Steve Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center and a tax attorney, says Opportunity Zone investments offer three advantages when com- pared with past efforts such as Empowerment Zones and Renewal Communities. First, says Rosenthal, “a tax- payer need only reinvest gains, not the entire proceeds from a sale of assets. The capital gains provisions of the earlier programs required a taxpayer to reinvest all sales proceeds, not just profits.” Second, “the other programs permitted a taxpayer to defer gains from the sale of assets within a qualified zone, but not defer gains from the sale of assets outside the zone.” Third, “syndicators may organize and market the opportunity funds, which can invest more expansive- ly than earlier programs could.” Rosenthal explains that while there are 8,700 Opportunity Zones there
were only 40 empowerment zones as well as just 40 renewal communities.
OPPORTUNITY FUNDS Even if you have capital gains that you want to drop into an Opportunity Zone, you can’t simply go out and buy a building or start a project in a particular census tract. Instead, you must invest through a Qualified Opportunity Fund (QOF). According to the IRS, a quali- fied opportunity fund (QOF) “is an investment vehicle organized as a corporation or a partnership for the purpose of investing in qual- ified opportunity zone property (other than another QOF).” A QOF must maintain a number of stan- dards to be within the regulations. • At least 90% of QOF assets must be represented by qualified opportunity zone properties. A billion-dollar fund armed with expansive tax breaks can invest $100 million anywhere, including far from designated census tracts. • “Substantially all” of the tangi- ble property owned or leased by a qualified opportunity trade or business must be within an Opportunity Zone. “Substantial- ly all” means 70% according to the interim regulations.
at least five years, investors’ basis on the original invest-
• Based on all the facts and
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FEATURED ARTICLE: Will Opportunity Zones Boost America's Distressed Neighborhoods?
A caution: The rules for qual- ified opportunity funds have not been finalized as of this writing. Investors should work with attor- neys, investment advisors and tax professionals to assure they fully understand how Opportunity Zones work and the pros and cons asso- ciated with them before investing. “property” can be stock, a part- nership interest, real estate, or a business (a QOZB). However, a QOF cannot own “debt, stock, partner- ship interests, options, futures con- tracts, forward contracts, warrants, notional principal contracts, annu- ities, and other similar property.” Also on the banned list are in- vestments in golf courses, country clubs, massage parlors, hot tub facilities, and suntan parlors. Racetracks, gambling dens, and take-out liquor stores are similar- ly prohibited. QOF INVESTMENT OPTIONS A qualified opportunity zone While it is difficult at this early stage of Opportunity Zone capital raising to estimate the potential size of the market, the Treasury Department estimates approximately $100 billion in private capital could be invested in Opportunity Zones.”
circumstances, at least 50% of the gross income of a qual- ified opportunity zone busi- ness must be derived from the active conduct of a trade or business in the qualified opportunity zone. state can adjoin an Opportunity Zone and have a median family income not greater than 125% of the neighboring low-income community. In other words, in- vestors under the program are able to put money into census tracts with a stronger econom- ic profile than the prototype O-zone. • A QOF, says Toni Nitti, an Aspen-based CPA writing on Forbes.com, may sell its as- sets “at any time before 2048 and the taxpayer (can) exclude • Up to 5% of the Qualified Opportunity Zones in each
WHERE TO FIND QUALIFIED OPPORTUNITY FUNDS Neither the Treasury Depart- ment nor IRS publish lists of QOFs. However, it’s clear that in a short time a large number of opportunity funds have emerged. Novogradac, a tax, audit and con- sulting firm, has a free Opportunity Zone Resource Center with more than 100 QOFs. As of mid-April, the Novogradac list included funds with $26 billion in investing capacity. The National Council of State Housing Agencies (NCSHA) pub- lishes a free Opportunity Zone Fund directory which, as of March, in- cluded more than 100 funds rang- ing in size from $1 million to $3 billion with an average size of $224 million. In total, more than $24 bil- lion has been raised by Opportunity Funds according to NCSHA. James Tassos, Deputy Direc- tor of Tax Policy and Strategic Initiatives with NCSHA, tells the Housing News Report that “ap- proximately 36 percent of the 117
the gain resulting from the sale.” (parenthesis added)
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funds plan to invest nationwide, while the remaining 64 percent target specific states or regions. The West/Southwest region is the target of 19 percent of the funds (22 of 117), followed by the North- east/Mid-Atlantic region with 15 percent (18 of 117), the Southeast region with 13 percent (15 of 117), and the Midwest region with 7 percent (8 of 117). The remaining funds target multiple states and/ or regions.” Tassos adds that “while it is difficult at this early stage of Opportunity Zone capital raising to estimate the potential size of the market, the Treasury Department estimates approximately $100 billion in private capital could be invested in Opportunity Zones.” THE NEED FOR SPEED Roughly $25 billion has already been committed to the Opportunity Zone concept even without final regulations. We don’t know what
forgiveness on appreciation in op- portunity zone investments if they invest after 2019, as long as they do so by December 31, 2026.” It may be that such deadlines are at least in part responsible for the rush to invest as well as the sudden price rises seen designat- ed areas. “In the months immediately following the final selection of Opportunity Zones,” Zillow reported in March, “the price trajectories diverged. Sale prices in eligible but not selected tracts began growing more slowly and by single digits, whereas sale prices in Opportuni- ty Zones started growing by more than 20 percent year-over-year.” THE CASE FOR OPPORTUNITY ZONES While tax breaks are attrac- tive, the real question is whether O-zone investments will produce good returns after inflation. We don’t have enough experience to
the rules will ultimately say and it’s possible that, in the end, the regu- lations might have some nasty sur- prises. For this reason, it might be expected that investors would wait until more is known. That hasn’t been the case and here’s why. The Economic Innovation Group (EIG) points out that the deferred gain must be recognized when an O-zone investment has been sold or by December 31, 2026, whichev- er comes first. That’s a little more than seven years from now, a very tight deadline for investors as the program is currently designed. The Center on Budget and Policy Priorities explains that “an in- vestor must invest in opportunity zones by December 31, 2019 to obtain the full benefit of the tax break, because opportunity zone investments must be held for seven years to qualify for the full 15 percent cut in capital gains taxes and investors must realize their deferred capital gain by 2027. Investors can still benefit from tax
In the months immediately following the final selection of Opportunity Zones, the price trajectories diverged. Sale prices in eligible but not selected tracts began growing more slowly and by single digits, whereas sale prices in Opportunity Zones started growing by more than 20 percent year-over-year.”
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say what works and what doesn’t. Some strategies and some loca- tions are no doubt riskier than others. But, which ones? The best parallel is likely our experience with Superfund sites. Long written off as impossible to develop, it turns out that some of the nation’s 4,000 Superfund and Formerly Used Defense Sites (FUDS) have enormous potential. As an example, Camp Leach was a 660-acre parcel where the govern- ment tested chemical weapons, bombs and incendiary munitions. Toxic gases from the site once drifted over nearby homes and “slightly gassed” a US senator and his family. Today the property includes much of Spring Valley, a neighborhood just a few miles from the White House and one of the most-exclusive residential areas in Washington, DC. So far, more than 400 once-
Third, Opportunity Zone invest- ments are certain to benefit from expansive and positive media coverage, especially if local job counts increase. Fourth, Opportunity Zone census tracts, like Superfund sites, are often strategically located in the heart of major metro areas. Long Island City, in the borough of Queens and just one subway stop from mid-town Manhattan, is one of the two areas initially selected by Amazon to develop a massive HQ2 property with some 25,000 jobs. Where Amazon wanted to build is also a designated Oppor- tunity Zone. Unfortunately, in this particular case, the Amazon deal fell through. Still, the location will no doubt attract other investors.
spurned Superfund and FUDS sites have been returned to commercial use with more in the pipeline. The elements which made the federal environmental program successful apply to Opportunity Zones. First, there is real government money in the O-zone effort. The Joint Committee on Taxation estimates that between 2018 and 2027 federal revenues will decline by $1.6 billion annually because of Opportunity Zone write-offs. This is effectively money “spent” on the program. Second, there is a political consensus which supports Oppor- tunity Zones. Senators Scott and Booker are from different political parties, yet they have come to- gether for this effort. What politi- cian is going to oppose new money going into local areas? The O-zone concept is certain to develop a following that will seek to continue – if not expand – the program.
OPPORTUNITY ZONE RISKS Money is the magic ingredient
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have the same goals. For instance, are we targeting the right areas? The New York Times has reported that the Long Island City census tract consid- ered by Amazon is actually do- ing pretty well. Residents there have a median annual income of $138,000. “Unlike some other economic de- velopment incentives, however, this tax break does not include rules or tests requiring its direct bene- ficiaries to make specific invest- ments that actually produce public benefits or requiring that opportu- nity zone businesses hire workers from, or provide services to, the local community,” says the Center on Budget and Policy Priorities. “If anything, its incentives push in the opposite direction: the tax break is worth the most with respect to investments whose value rises the fastest. As a result, investors will likely select investments — such as luxury hotels rather than affordable housing — based mainly on their expected financial return, not their social impact.” Additional risk factors include, but are not limited to, such issues as:
Investors should have three central concerns: (1) Loss of their investment, (2) failure to make a profit on their investment in the funds, and (3) a change in the tax laws. For example, tax rates may increase in the future, so an investor may defer gains, but face a
higher tax rate on those gains later.”
Steve Rosenthal, with the Ur- ban-Brookings Tax Policy Center and a tax attorney, tells the Hous- ing News Report that investors should have three central con- cerns: “(1) Loss of their invest- ment, (2) failure to make a profit on their investment in the funds, and (3) a change in the tax laws. For example, tax rates may increase in the future, so an investor may defer gains, but face a higher tax rate on those gains later.” Investors are interested in cap- ital gains tax relief. But, if their investments have weak returns or actual losses, it may be cheap- er to pay the tax. Each Qualified Opportunity Fund will represent a different investment profile. As with stocks and bonds, investment results will vary. No doubt there will be services and online sites to rank QOF results. Besides investors, who or what else could be impacted – and should therefore be considered?
that often creates community suc- cess and the O-zone program is all about moving dollars from inves- tor accounts into local projects. But what is OZ success? And what are the risks? The answers are surprisingly complicated, in part because the program is new and little information is available. That information deficit, howev- er, is likely to end. In April, the IRS sent out a proposal “to measure the effectiveness of the policy” in terms of such factors as job cre- ation, economic development, and investment activity. If the proposal is approved, QOFs will have to an- swer a variety of questions when filing their annual Form 8996s. Even with more information, the question of “success” and how to define it remains elusive. The problem is that the Opportunity Zone concept involves a variety of stakeholders and not all of them
What is the fee structure for an individual fund?
Where will the money be invested? Is it better to invest in a few census tracts or to broadly diversify? Each ap- proach has risks.
What types of projects will be undertaken?
How and when will investors recover their money?
Must investors have a mini- mum net worth? How much?
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FEATURED ARTICLE: Will Opportunity Zones Boost America's Distressed Neighborhoods?
helped some once-undeveloped sites evolve into valuable commer- cial and residential properties, but not all of them. The same is likely to be true with census tracts. It’s very possible that a relatively-small number of census tracts will ab- sorb a majority of all fund activity – and cash. TAX COLLECTIONS The federal government estimates that tax collections will drop by $1.6 billion per year because of the Opportunity Zone program. Given that many jurisdictions base their tax collections on income reported to the IRS, it can be expected that state tax collections will also fall as a result of the OZ program. This may or may not be a bad result, de- pending on how the money furthers development and job growth within a jurisdiction.
employment in the county dropped from 5.3 percent to 3.2 percent in that time, and typical monthly rents rose 44% to $858.” Is a 44% increase over six years unreasonable? That’s an average gain of roughly 6% compounded annually. According to the Institute on Taxation and Economic Policy (ITEP), “the idea behind the new tax break is to provide an incentive for wealthy individuals to invest in the economies of struggling commu- nities. Despite alleged intentions, it appears opportunity zones are turning into yet another windfall for wealthy investors and may en- courage displacement of people in low-income areas, working against the provision’s intended goal.” And yet, better economic times in small areas do not necessarily lead to gentrification. Writing in The Washington Post, Jesse Van Tol, chief executive officer of the National Community Reinvestment Coalition, argues that localities can have both increased invest- ment and minimal gentrification by adopting protections for long-time residents. Such strategies can include homestead exemptions to offset rising property taxes, homestead tax credits for elderly or disabled homeowners, more density for developers in exchange for more affordable housing units, and funding to help local busi- nesses buy their buildings. Opportunity zones are here, they’re real, and they have begun to attract big money. Whatev- er problems growth represents in selected census tracts, such expansion will likely be seen as better than the population de- clines, falling home prices, and underfunded government services which now plague thousands of local communities.
LOCAL RESIDENTS Census tract residents could be major O-Zone beneficiaries if invest- ments result in more local employ- ment. But, who will get the new jobs? It’s very possible that newly-funded Opportunity Zone investments will create jobs that are actually held by residents from other census tracts. Think of Long Island City. Lots of job seekers could be residents from other areas, individuals who live just a few minutes away by subway. The assumption is that local res- idents will welcome outside invest- ment. But, they might not. Amazon was prepared to spend several billion dollars to build out the HQ2 project in Long Island City and prom- ised to do so without Opportunity Zone benefits. Then, in February, the company decided to end the project in the face of local oppo-
sition. City and state officials had offered
huge subsidies to capture the
One goal of the Opportunity Zone effort should be to improve the
widely-de- sired Ama- zon project and those subsidies themselves became a matter of dispute.
financial stand- ing of residents in given census tracts. This can be tricky be- cause economic growth leads to more real estate demand, meaning that home prices go up, property
“Amazon is a billion-dollar company,” tweeted newly-elected Repre-
taxes increase, and residents are often displaced, especially those with fixed incomes. In Irion County, TX, with a popu- lation of 1,516, The Pew Charitable Trusts report that “the county’s energy jobs tripled to 187 between 2010 and 2016, the latest federal data available, at average annual wages of more than $63,000. Un-
sentative Alexandria Ocasio-Cor- tez. “The idea that it will receive hundreds of millions of dollars in tax breaks at a time when our sub- way is crumbling and our commu- nities need MORE investment, not less, is extremely concerning to residents here.” (emphasis hers) CENSUS TRACTS The Superfund program has
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Designed for the Conveniences of Today: Even Real Estate Transactions Can Be Done from Home
BY BRIAN BAIR, OFFERPAD CEO & FOUNDER
H aving been in the real estate world for almost 15 years, working as a real estate agent and eventually founding leading real estate tech company Offerpad, I have learned that customers have specific needs that are evolving as consumerism all around the world
is moving to an on-demand model. Similar to how a family’s house is meant to be a space centered on design that best fits the lifestyle of those living there, Offerpad’s real estate solutions are specifi- cally meant to provide the highest satisfaction in real estate transac-
tions that fit in with our customers’ schedules and priorities. Today we are seeing some fresh home designs in building, land- scaping, interior, and technology that are tailoring homes to the owner and families for some of the most exciting at-home experiences.
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It’s hard to say whether this consumer demand or the more customized home living came first, but we see today that consumers’ favorite companies are more and more allowing home while enjoying experiences that used to only be accessible by going out. day than ever before. Since consumers in 2019 ex- pect so many of their needs to be compatible with fast, online, streamlined processes that they can control and monitor from home, like most other industries, real estate is adapting. Offerpad is one of the leading iBuyers making it possible for consumers to enjoy a custom experience in home selling and buying. – and expecting – people to stay at
When I consider the big picture of how people are living and consum- ing, it’s not a surprise that on-de- mand services in all industries are booming right now. It’s hard to say whether this consumer demand or the more customized home living came first, but we see today that consumers’ favorite companies are more and more allowing – and expecting – people to stay at home while enjoy- ing experiences that used to only be accessible by going out. We can now do literally all our shopping online, some with simpli- fied processes like one-touch mo- tions or voice commands. We can enjoy top-of-the-line entertainment from our phones, tablets, smart TVs, and connected smart speak- ers. Thanks to connectivity and new tech services like real-time
documents and video chats, we can conveniently do business, includ- ing teamwork, from home. We can even get our favorite restaurant foods delivered to our doorstep or have a car dealership come to our house to make a deal. And yes, consumers can now sell and buy a house from their favorite spot on the couch. As these services pop up to meet our desire for fast and intuitive processes, we find it increasing- ly important that our houses are designed to be as comfortable as possible in aesthetics and utili- ty. Maybe due to, or perhaps as a result, home design is growing in significance to the real estate consumer today. While homeown- ers have always taken pride in their houses, now these homes might be in active use for more hours of the
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MY TAKE: Designed for the Conveniences of Today
Today’s buyers in all industries want information without persuasion, and accessibility without overwhelming commitment. Offerpad is designed to meet those needs.
On the home selling side, tech-enabled real estate allows homeowners to sell directly and more quickly than before. They can request an offer on their house from Offerpad online and receive one in as fast as 24 hours. They get to choose their closing date and get moved in as fast as a few weeks, if they want—and for free if it’s within 50 miles of their previous home. Most importantly for the modern consumer, it lets them plan the whole transaction on their own timeline and avoid the parts of the process that made traditional real estate frustrating and confusing for consumers. In home buying, we help fami- lies search, find, and tour houses with high convenience and very low pressure. Using the Offerpad app, buyers can let themselves in to view homes they think they might like using our Instant Access feature. Today’s buyers in all industries want information without persuasion, and accessibility without overwhelming commitment. Offerpad is designed to meet those needs. For people who find themselves enjoying more of the services that are heightening at-home con- veniences, we’re here to offer a similar experience in helping them attain their dream house. Offerpad closes the gap for those who enjoy the on-demand services designed to allow them to stay home, to get a home they want to stay in. From the inside out, homeowners want a place they can enjoy to the fullest. We at Offerpad are proud to help people get into a house
Inman, and the Wall Street Journal named him the second highest-performing real estate agent in 2014 and 2017. He has been credited for selling the most existing homes in the United States since 2010, and he attributes his success to simplifying the process for owners and buyers. Brian previously served as co-founder and managing partner of Lexington Financial, LLC and Bridgeport Financial Services LLC, one of the largest acquisition and sales companies in the Southwest.
designed for their lifestyle and provide the certainty that they can always move freely.
Brian Bair, Offerpad founder and chief executive officer, is one of the most successful residential
real estate agents in the United States. He’s spent the last decade helping solve his clients’ problems, by providing them with a concierge approach to real estate. In 2017, Brian was awarded the Most Innovative Real Estate Agent of the Year by
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july 2019 19
DATA IN ACTION
The U.S. Housing Markets Seriously Underwater vs. Equity Rich
M ore than 5.2 million (5,223,524) U.S. properties were seriously underwater (where the combined balance of loans secured by the property was at least 25 percent higher than the property’s estimated BY ATTOM DATA SOLUTIONS
market value) at the end of Q1 2019, down up more than 17,078 proper- ties from a year ago —according to the ATTOM Data Solutions U.S. Home Equity & Underwater Report. The 5.2 million seriously underwa-
ter properties at the end of Q1 2019 represented 9.1 percent of all U.S. properties with a mortgage, up from 8.8 percent in the previous quarter but down from 9.5 percent in Q1 2018. “With home prices increasing at a
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were Louisiana (20.7 percent); Mississippi (17.1 percent); Arkansas (16.3 percent); West Virginia (16.2 percent); and Illinois (16.2 percent). Among 99 metropolitan statis- tical areas analyzed in the report, those with the highest share of seriously underwater properties were Baton Rouge, Louisiana (21.3 percent); Scranton, Pennsylvania (20.0 percent); Youngstown, Ohio (19.2 percent); Toledo, Ohio (19.2 percent); and New Orleans, Louisi- ana (17.8 percent). SERIOUSLYUNDERWATER COUNTIES RESIDE IN MIDWEST AND SOUTHERN REGIONS Among those counties with at least 5,000 properties with mort- gages, there were 54 counties where more than 25 percent of all properties with a mortgage were seriously underwater. The top five counties with the highest share of seriously under- water properties were Scotts Bluff county in Nebraska (63.7 percent seriously underwater); Jackson county in Florida (50.7 percent); Halifax county in North Carolina (45.4 percent); Carlton county in Minnesota (43.3 percent); and Henry county in Illinois (39.5 percent). a market slowdown, which will be good for buyers, but not so good for sellers. If the latest trend continues, it will raise another clear signal of
slower pace in 2018 than in previ- ous years, the potential for people to climb out from mortgages that are underwater or advance into equity-rich territory tends to be re- duced,” said Todd Teta, chief product officer at ATTOM Data Solutions. “However, only one in 11 mortgag- es are seriously underwater today, compared to nearly one in three during the depths of the recession. Although, if the latest trend contin- ues, it will raise another clear signal of a market slowdown, which will be good for buyers, but not so good for
sellers. But if the pattern of the past few years takes hold – with levels of underwater and equity rich mortgag- es turning around - it will mean the market remains strong for sellers, with fewer needing to get out from under financial distress.” HIGHEST SERIOUSLY UNDERWATER SHARE IN LOUISIANA, MISSISSIPPI, ARKANSAS, WEST VIRGINIA States with the highest share of seriously underwater properties
july 2019 21
DATA IN ACTION: The U.S. Housing Markets Seriously Underwater vs. Equity Rich
HISTORICAL U.S. UNDERWATER & EQUITY RICH TRENDS
U.S. Properties Seriously Underwater
% Seriously Underwater
U.S. Properties Equity Rich
% Equity Rich
Q1 2012 Q2 2012 Q3 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019
12,533,155 12,824,279 12,472,262 10,894,743 11,336,033 10,714,924 9,274,126 9,065,741 9,074,449 8,135,648 7,052,570 7,341,922 7,443,580 6,917,673 6,436,381 6,703,857 6,666,622 6,063,326 5,408,323 5,497,771 5,433,684 4,628,408 5,032,185 5,206,446 5,181,467 4,940,724 5,001,482 5,223,524
27.8% 28.6% 27.6% 25.8% 25.7% 23.2% 18.8% 17.5% 17.2% 15.0% 12.7% 13.2% 13.3% 12.7% 11.5% 12.0% 11.9% 10.8%
9,097,325 9,935,939 9,945,646 10,812,968 11,249,646 11,053,055 10,963,041 10,476,259 12,621,274 12,335,651 12,383,345 13,125,367 13,877,315 13,718,473 14,038,372 14,030,394 13,731,767 13,841,082 13,907,758 14,464,379 14,566,363 14,401,555
18.5% 19.1% 18.9% 20.1% 20.3% 19.8% 19.6% 19.2% 22.5% 22.0% 22.1% 23.4% 24.6% 24.3% 24.6% 26.4% 25.4% 25.3% 24.9% 25.7% 25.6% 25.1%
9.6% 9.7% 9.5% 8.7% 9.3% 9.5% 9.3% 8.8% 8.8% 9.1%
with the highest share of equity rich properties were San Jose, California (68.3 percent); San Francisco, Cal- ifornia (58.4 percent); Los Angeles, California (48.1 percent); Santa Rosa, California (47.6 percent); and San Diego, California (39.3 percent). TOP 4 EQUITY RICH COUNTIES ALL IN CALIFORNIA Among those counties with at least 5,000 properties with mortgag-
es, there were 252 counties where more 25 percent of all properties with a mortgage were equity rich. The top four counties with the highest share of equity rich proper- ties were all located in in California: San Mateo county (73.9 percent equity rich); Santa Clara county (69.3 percent); San Francisco county (68.9 percent); and Alameda county (59.4 percent).
HIGHEST EQUITY RICH SHARE IN CALIFORNIA, HAWAII, NEWYORK, WASHINGTON, VERMONT States with the highest share of equity rich properties were Cali- fornia (43.0 percent); Hawaii (38.1 percent); New York (34.2 percent); Washington (33.2 percent); and Ver- mont (32.8 percent). Among 99 metropolitan statistical areas analyzed in the report, those
22 think realty housing news report
There were more than 5.2 million seriously underwater properties representing 9.1 percent of all U.S. properties with a mortgage, according to the ATTOM Data Solutions Q1 2019 U.S. Home Equity & Underwater Report. The percent of properties underwater is down from 9.5 percent a year ago. There were over 14.4 million equity rich properties in the U.S., representing 25.1 percent with a mortgage, down slightly from 25.3 percent a year ago. In looking at the largest metro areas in the U.S., we found the top ZIPs that are drowning vs. those ZIPs where equity is saturated. Zips with the highest share of underwater homes and highest share of equity rich homes in the nation’s top 10 largest metros SINK or SWIM BIG DATA SANDBOX
Big Data Analysis: Where are the ZIPs that are drowning vs. those that are buoyant?
ZIP Equity Rich (LTV 50 or lower) 01220 90212 46373 75224 77023 19148 20015 33146 30312 94116
ZIP Seriously Underwater (LTV 125+)
07111 90210 60426 7523 1 77036 08104 20032 33401 30223 94115
Irvington, NJ 40.9%
Brooklyn, NY 76.9% Culver City, CA 77.8%
New York-Newark- Jersey City, NY-NJ-PA Los Angeles-Long Beach- Anaheim, CA Chicago-Naperville-Elgin, IL-IN-WI Philadelphia-Camden- Wilmington, PA-NJ-DE-MD Houston-The Woodlands- Sugar Land, TX Washington-Arlington- Alexandria, DC-VA-MD-WV Miami-Fort Lauderdale- West Palm Beach, FL Atlanta-Sandy Springs- Roswell, GA San Francisco-Oakland- Hayward, CA Dallas-Fort Worth- Arlington, TX
Beverly Hills, CA 25.2%
Dallas, TX 16.0% Harvey, IL 63.1%
St. John, IL 25.1% Dallas, TX 62.8% Houston, TX 61.2%
Camden, PA 58.0% Houston, TX 17.4%
Philadelphia, PA 29.6% Washington, DC 37.3%
Washington, DC 21.1%
West Palm Beach, FL 28.7%
Miami, FL 43.1% Atlanta, GA 30.8%
Griffin, GA 32.6%
San Francisco, CA 6.5%
San Francisco, CA 81.7%
*Includes ZIPs with 2,500 or more total loans in Q1 2019
METHODOLOGY The ATTOM Data Solutions U.S. Home Equity & Underwater report provides counts of residential properties based on several categories of equity — or loan to value (LTV) — at the state, metro, county and zip code level, along with the percentage of total residential properties with a mortgage that each equity category represents. The equity/LTV is calculated based on record-level loan model estimating position and balance of loans secured by a property and a record-level automated valuation model (AVM) derived from publicly recorded mortgage and deed of trust data collected and licensed by ATTOM Data Solutions nationwide for more than 155 million U.S. properties.
july 2019 23
24 think realty housing news report
Investors Still Finding Success in the Middle BY JOEL CONE, STAFF WRITER
W hen the foreclosure crisis hit the nation in 2007, the greatest impact was reported around the pe- riphery of the nation – from Ohio and Florida, to Texas, Arizona, California and Nevada – home prices plunged as jobs were lost and foreclosure levels went through the roof. And investors walked away. However some parts of the country – especially mar- kets in the middle – experienced much less volatility back then. Investors who hung around after the Great Recession stood to benefit from the quicker recovery of those markets and are still profiting from greater market stability.
The economic indicators that make for a good stable business climate for investors are currently present in many of these markets, including population and job growth, lower unemployment, fewer foreclosures and distressed sales overall along with slower, more grad- ual rates of appreciation. In those markets in particular, veteran investors have continued to thrive by tweaking their business model as the demands of the market have changed. Housing News Report interviewed investors in five of those markets in the middle – Chicago, Denver, Kansas City, Oklahoma City and Saint Louis.
MEDIAN SALES PRICES
Denver-Aurora- Lakewood, CO
Kansas City, MO-KS
Oklahoma City, OK
St. Louis, MO-IL
july 2019 25
MARKET SPOTLIGHT: Investors Still Finding Success in the Middle
In addition to rising median home sales prices, these markets have seen marked declines in the level of both distressed sales (REOs, short sales, and third party foreclosure auction sales) and flips since their height during the Great Recession. Still, as these investors attest to, their markets continue to attract both local and out-of-state investors looking for buy and hold and flipping opportunities. CHICAGO: WINDS OF CHANGE IN THE AIR Real estate broker and investor Scot Howat, who works primarily with local investors who buy and hold properties, sees a shift in the breeze as local inventory in the Windy City is starting to loosen up a bit. Between properties listed on the MLS and those for sale at fore- closure auctions, opportunities do exist for investors looking for potential rentals. On the retail side, ATTOM Data Solutions reported a median sales price of $210,000 for the first quarter of 2019, up 3.4 percent on a yearly basis, and a 56 percent increase from the market’s post-recession bottom of $135,000 reported for the first quarter of 2012.
At the end of last year we didn’t see as much appreciation as we should have, so I think over the next four to six months we’re going to see a rubber band effect. The market’s going to catch up really quick so properties are going to fly off the shelf here. It’s going to be the fastest, highest appreciation we’ve seen in a long time.”
SCOTT HOWAT ON CHICAGO
ATTOM also reported that total distressed sales in the metro decreased 1.9 percent between the first quarter of 2019 and the same period last year. Like- wise the number of properties with foreclosure filings
PROPERTIES WITH FORECLOSURE FILINGS IN 2018
Chicago- Naperville-Elgin, IL-IN-WI 32,453
Kansas City, MO-KS 2,996
Denver-Aurora- Lakeland, CO 2,505
St. Louis, MO-IL 6,882
Oklahoma City, OK 3,153
26 think realty housing news report
dropped 14.7 percent year over year to a rate of one in every 432 housing units having a foreclosure filing. “At the end of last year we didn’t see as much appre- ciation as we should have, so I think over the next four to six months we’re going to see a rubber band effect,” said Howat. “The market’s going to catch up really quick so properties are going to fly off the shelf here. It’s going to be the fastest, highest appreciation we’ve seen in a long time.” With current market conditions, Howat said the bulk of his business is buying and renting out properties for his investor clients – particularly condos – selling for under $150,000. “I don’t take on a lot of flips. They’re too risky and too volatile,” he said. “I prefer to do single family houses when flipping. Flipping is really tough right now.” According to ATTOM, flips accounted for 4.5 percent of total home sales in the Chicago metro in the fourth quarter of 2018, up 11 percent from the quarter before but down 13 percent from the same quarter of 2017. “I focus on the quality of the tenant. I want long-term tenants and I prefer to sign a two year lease off the bat,” he explained. “My goal is to get the right property in the right area and market it and pick someone in the top 10 percent of the available tenants.”
In terms of rehabbing properties, Howat said it de- pends on where he buys them. If on the MLS he prefers to buy them ready to rent so that he can turn around and rent them out the day he buys them. “I don’t buy gut job rehabs for rentals. I want some- thing that’s livable and somewhat desirable right away. If I have to drop the rent a bit, that’s okay,” Howat said. DENVER: ROCKYMOUNTAIN MARKET HITS THE HIGH NOTES As markets go, the Denver metro area is holding its own quite well on all accounts when it comes to invest- ing in real estate. “Denver is still one of the best markets in the coun- try,” said attorney and best-selling real estate author William Bronchick. “It’s very pro-landlord and we’re seeing such low vacancy rates.” As of the first quarter of 2019, ATTOM reported that the median sales price for the metro area was $382,000, a 1.9 percent increase over the same quarter of 2018, and a 128 percent surge over the post-reces- sion bottom price of $167,500 reported for the first quarter of 2009.
july 2019 27
MARKET SPOTLIGHT: Investors Still Finding Success in the Middle
Denver is still one of the best markets in the country. It’s very pro-landlord and we’re seeing such low vacancy rates.”
The number of total distressed sales as a percentage of total home sales in the first quarter were down 7.6 percent on an annual basis. Properties with foreclo- sure filings were down 16.37 percent from the previous quarter, down little more than one percent on a yearly basis as of the first quarter. Bronchick said that local investors working with either a buy-and-hold or flipping business model are finding deals. However, they are also facing competi- tion from investors coming in from other states, and other countries such as Canada. “Buy-and-hold is definitely a good game still. Rents have no end in sight,” he said. “On the flipping side, it’s tougher to move homes on the high end as fast. It’s a matter of buying right and selling at the right price.” Inventory levels, which fell with the market crash, are now back to around half of their norm, Bronchick estimated. From an investor’s perspective, he looks for properties needing some work. “Usually the ones we’re looking at are not in salable shape. We’re not competing with retail buyers because they’re looking for properties that are fixed up. It’s also taking longer to flip because finding contractors is tough,” he said. For the fourth quarter of 2018, ATTOM reported that total flips in the Denver metro area accounted for 6.2 percent of all home sales, a 19 percent increase from the previous quarter but down three percent from the same quarter in 2017. KANSAS CITY: ADJUSTING TO THE MARKET Both continued population growth and low unem- ployment in Kansas City has been a draw for investor John Wiley, a principal at TheNotePartners.com., over the last 15 years. Even so, he believes now is time to change his investment strategy. Wiley, who considers himself first and foremost a buy-
and-hold investor, has also done flips. But as in many other markets around the country, inventory is tight. So, what worked for him three years ago will not work today. “You have to keep making adjustments,” he said. “It’s a little tough to be flipping right now. There’s very little inventory left on the MLS. As for buying at trustee sales on the courthouse steps, I’ve watched the market tight- en where trustees are raising the minimum bid.” As a result Wiley has decided to stop flipping proper- ties at least for the remainder of 2019. “There’s a lack of good inventory. In order to be suc- cessful you have to start adding little artisan touches that make the house unique. If I’m going to flip, I will do a good quality flip,” he said. “Investors are overbuy- ing right now. Margins are too thin for me. You can’t get discount pricing.”
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