A Supply-Starved Market and How Investors Taking Advantage

Dave:
Hey, everyone, and welcome to On The Market. Today, we have a great episode in store for you where I am joined by the full cast of On The Market. We’ve got Henry, James, Jamil and Kathy to talk about the state of the market. Basically, if you have been paying attention, the market is starting to shift and we thought that it would be a great idea to have everyone from the cast join us to just talk about what they’re seeing in the market, what data are they tracking and how they are finding deals. And just a quick spoiler, they are finding deals. They’re finding more deals. So if you are curious about how to get into this market, you definitely want to listen to this episode, and we have an extra good data drop so definitely stick around to the end. Hey, everyone. Welcome to On The Market. Today, it’s like a family reunion. We have everyone here. We’ve got Kathy, Jamil, Henry and James. The entire crew. It’s been a while since we all were together. I missed you guys.

Kathy:
It’s a podcast party.

Henry:
Yeah.

Jamil:
The pajama jam-a-jam.

Dave:
Pajama jam.

Henry:
We could have worn pajamas.

Dave:
Wait, we got to do an episode where we’re all in our jamies.

Kathy:
Well, I have my pajama bottoms on, of course.

Dave:
Yes.

Henry:
I don’t have any bottoms on.

Dave:
All right. Henry, would you like to add to that?

Henry:
No, I think I’m good.

Dave:
Okay.

Henry:
Appropriately clothed for this podcast.

Jamil:
Just trying to wade past all the mental images right now, probably just move on.

Dave:
Awesome. Well, as much fun as it is to just get you all together for fun, we decided that because maybe you think differently, but to me it seems like the market has really started to shift. We had the first half of the year, we all knew or sort of were thinking that the market was starting to shift, and a lot of the data, a lot of the anecdotal stories we’re all hearing is that the market is changing. And so I wanted to get the entire crew together, the full force of On The Market to talk about how the market is shifting and how investors, people who are listening to this, can adapt.
So what we’re going to do is I’m going to first read through some market data and we’ll hear from everyone about what data you all feel is the most important. Then we’ll go into just some stories. I’d love to hear from you all about what’s happening in your individual businesses. And then we’ll talk about different strategies and how they’re impacted by the market shifts. Y’all ready?

Jamil:
Let’s do it.

Kathy:
Yeah.

Henry:
I’m ready.

Kathy:
Let’s go.

Dave:
All right. Sweet. So June data came back. This is going to air at the end of July, but as everyone knows, data comes about a month in arrears. And so we were talking about June data and the headline numbers haven’t changed all that much. Media and sales price still up an enormous amount, but it did drop. It’s down to 11.2% year-over-year. It was at 15% in May, so that represents a slowdown. And for anyone who is listening to this, if you saw 11% year-over-year growth in any pre pandemic time, you would be flipping out and extremely excited or concerned. I don’t even know, but it would be very anomalous. So just seeing it go down to 11% does represent that things are cooling, but it’s certainly not any sort of time to panic. So that’s what’s going on with sales price.
We’re also seeing that inventory, which I believe is one of the most important metrics, are starting to change. So inventory, for anyone who isn’t aware, dropped dramatically over the last couple of years and when inventory is low and demand is high, like it’s been, that can push up prices. So we see that inventory is starting to recover and it’s going up and up and up. In May, we started to see the trend of year-over-year growth. It was at 9%, now it’s at 15%. So that sounds great, but inventory, just if you look at it in absolute levels, is just a complete joke. It’s at 913,000 houses on the market in June. Just for the record, in June of 2019, pre pandemic, it was 1.6 million. So we’re still down 44% over pre pandemic level. So changing, but still really crazy.
Two of my other favorite things are month’s supply at 1.7 months. Up from a low of 1.3, but less than half of where we were in June of 2019. Days on market, only at 23 days. Normal is considered about 45, 50, depending on who you believe. So all of this data suggests that we’re still super low. We haven’t gotten anywhere near to what’s normal, but things are starting to change. So Henry, let’s start with you. What do you think of all this data that’s coming in? What are the things that you think are the most important and that you’re going to be paying attention to through the rest of this year?

Henry:
So the thing that I’m watching the most is really, one of the things I’m watching the most is days on market. So we have a lot of property right now in our business that we’re putting on the market, literally actively as we speak. And to take the numbers that you said and bring them down to a micro level in my market, we’re adding about a hundred homes a week. And so each week our competition for other homes on the market is rising. And so getting homes on the market sooner is of more of a benefit because there’s a little less competition each week that it’s out there. And so we are kind of in a push to get everything listed as quickly as possible. And we also have the expectation that those properties are going to sit on the market a little longer than they were than even six months ago.
But that’s not really doom and gloom, because things are still selling because of exactly what you said. The numbers have come down, but they’ve come down for these such extreme highs that even the numbers they’ve come down to, if those were just a blip and none of the other things that happened before that, and we saw that, like you said, 11%, we’d be like, oh man, things are crazy, 11%, that’s nuts. And so houses are still selling. They’re taking a little longer to sell, but it’s the last couple of homes I sold, I would say we got… I think the last home I sold, we got two offers and it took us about three weeks to get both those offers. And then one of them was at asking price.
And so what does that mean? We still priced that house at what we thought we would get pre pandemic. So I probably priced it higher than what it typically should go for in a normal market, because I was betting on things we’re still selling at premiums. And I didn’t get pre pandemic… I mean, I didn’t get offers like in the last six months where we would’ve got seven offers in the first hour it was on the market. It took two weeks to get two offers and I still got an asking price offer, which is higher than what I anticipated selling the house for. And so the market is still strong for someone like me, who’s an investor who’s buying, rehabbing, and then selling. But yes, things are shifting and to me, all that’s equated to is it’s just slowing down a little bit.

Dave:
You’re selling flips, right, or things you were already planning to sell or are you selling now because of market conditions things that you were originally intending to buy and hold?

Henry:
No, we’re only selling things we were planning to sell regardless of the market conditions. I mean, that’s just, that’s how we operate anyway. Even in the peak months where things were going for top dollar, we were still only selling things we were planning to sell. I’m always going to be a buy and hold investor. Now I did trim a little bit of the fat on my portfolio during that time. Meaning, there were some properties that were a little more maintenance intensive than I anticipated, and we were able to sell those at a premium and then take that money and redeploy it into other buy and holds.
But right now all the market is telling me is that there’s two things, I just need to plan for a little bit longer time and I didn’t really adjust my plan when things were crazy. It was just super cool to sell a house in a day. But things are going to take a little longer and I just want to keep an eye on that supply. That how much competition is there going to be for me? But the benefit to me now is because market conditions are changing, more deals are coming my way that I didn’t have to go market for and so I’m actually able to buy properties cheaper.

Dave:
All right. Great. I do want to hear more about how you’re getting properties cheaper in just a little bit. But Kathy, what do you make of this data? What are you tracking right now?

Kathy:
Supply and demand of course is a really important thing to look at, but it can change. It can change pretty quickly. And it surprises me when people are surprised at the changes or when these headlines acting as if this was some kind of shock. It reminds me of that scene in Austin Powers where the roller’s like a hundred feet away and he’s freaking out, all the other. The Fed had gave us warning and gave us warning a long time ago that there were going to be seven rate hikes this year, about, and that meant that their intent was to slow down the economy and that means the economy’s going to slow down. So the economy’s doing what the Fed wants it to do, which is to slow down. And honestly, it’s what most people want the housing market to slow down because it was getting out of control.
So this is what we’re getting, a slower market, and people had time to prepare for it. I would hope. I would hope people paid attention to that. So we know that there’s going to be two more rate hikes, one maybe, well, we think anyway, we don’t know, but they’re saying, and so it’s going to continue to slow of course, because inflation was high. So we do need to prepare for more, more of a slow down. And at the same time we have all the elements are still in place that were there last year, which is this massive group of people who want to buy and not enough inventory, as you said. With all these rate hikes, it still hasn’t really made that much of a difference in inventory. I just looked up where my daughter bought because I really encouraged her to buy a property just near me because she had a baby and I needed to be near that baby.
So she’s about 30 minutes away and she paid a lot. She paid probably too much for that house, but with the low rate she’s able to stay there. So I was a little worried and I looked at comps just to see, oh boy, is her house under water now? Not at all. It’s still up $75,000 from when she bought it six months ago. And this is in the LA area where they’re saying that things are slowing down, but there were only three properties in her price range on the market and they were an awful condition. So that’s just kind of an example of there’s just not houses available and if you want a place to live, you’re either going to pay high rent or you’re going to pay high mortgage, which one are you going to choose?
And if you’re able to buy, people might choose that because at least the rent, at least the monthly payment is going towards paying down that loan and not paying somebody else. So what do I look like? Look like? This is what I look like. What do I look at is definitely supply and demand. And we know it’s changing, but currently there’s still just not enough supply and still massive demand. With that said, we’re in the rental business. So we’re seeing multiple offers on rental properties because the same problem exists in rental properties. That’s why I’m so glad even though my daughter paid so much, she’s locked in and her mortgage is lower than the rents. And that’s happening a lot of places. People aren’t going to leave their homes because their current payment is much lower than the rents out there, unless they’re in a really distressed situation.
So supply, demand, that’s what we’re focused on. We’re having a hard time finding cash flow, although it’s starting to ease up and we’re starting to be able to buy properties at auctions again, and find properties we can renovate, and we’re starting to see price cuts. So from my vantage point, it’s a wonderful thing. We’re seeing more opportunity. I’m extremely excited about this market and the next six months, because there is so much fear that people who are looking for something other than not just focused on pricing or price cuts, but are really looking at a long term investment, for cash flow in a market that’s rental starved this is an incredible opportunity.

Dave:
That’s a great point. And I actually, I read it. I don’t know if you saw this article as well. I think it was in the Wall Street Journal that bidding wars are now happening for rentals.

Kathy:
Yes.

Dave:
It’s shifted from the housing market where you put a house on the market, they were seeing multiple offers. Now landlords and property managers who are just putting a normal rental, people are bidding up the price of rent where, I mean, you guys do this more than me, but I’ve been a landlord for 12 years, I’ve never had that happen in my life.

James:
It’s definitely been a trend the last 24 though. The last 12, 24 months, we’ve definitely been getting a lot more aggressive rental applications. You just have to watch out for the city you’re in because some cities don’t let you do it.

Kathy:
Yeah. For the last two years, we actually have been seeing that in the certain markets that we’ve been in, because they just couldn’t bring on supply fast enough in parts of Florida and these areas that are growing so fast and it’s been so hard to build. Now, we also have a business of syndications where we’re building single family homes and that is affected. That’s been hard for us because we’ve gone through a time where prices have gone up so much, just the cost to build a home has increased so much that in many cases builders are just hoping to break even, and if they have to lower prices now, it’s going to hurt a lot of builders. I know we’re starting to feel it. Most of our projects are already sold, so we’re getting out of them, but there will be opportunity with new homes. It’s just unfortunate for the builders. Some of our projects where we thought projects like that were hitting a 16% to 20% IRR, hit 8%. So still not horrible, but definitely not close to what we expected because of how expensive everything got and now with prices softening.

Dave:
James, I wanted to turn to you because I know you’ve been relatively, I don’t want to say bearish, but you’ve been warning and thinking that prices were going to decline for a few months now, do you see this recent data as a reflection of that, and do you think prices are going down, I guess you could say nationally, but also in your market in the Seattle area?

James:
Yeah, I think we’re definitely seeing a trend where things are coming off peak. I mean the data that you just talked about is almost identical for what’s going on in our market or nationally that’s about 35% less on the median home price down. What I’ve been tracking is I’m tracking median sale prices in specific neighborhoods from March. I want to see what was happening in February, March. And then what I’m seeing in all these markets that were jumping, the red hot markets, Boise, Scottsdale, Seattle, Austin, they skyrocketed about 20% to 25% in one single month in February. And what we’re seeing is right now pricing’s down about 10% to 11% on median home pricing on the ones that hockey sticked up, so that’s a little bit more aggressive.
The ones that over accelerated are actually down more like 50%. And so those are data trends that we’re really watching right now because we write about 30 to 40 offers a month or a week and then we’re also listing about five to seven properties a week as well. And so we have constant inventory coming on the market and so those are things that we’re trying to track. What is going on in each specific neighborhood on that median home price and then also what’s the inventory levels? For me, I can’t just use one stat, one fact. I got to take it all and put it into this, I got to mix it all up and then kind of come up with my own analysis, because what we’re seeing here is we’re seeing a trend coming down and it’s a slower trend, which is a great sign for real estate.
They jacked up the cost of money by 35% to 40% and we’ve only seen like a 10% pullback off peak, not even off of really what the median home price is. And so these rates have slowed everything down, but we are seeing homes take longer to sell. We sold five homes this weekend. Five went pending. One went pending in the first week, the other four took anywhere between 20 and 35 days and we sold those homes for about 2% to 3% off list just because we’re giving some concessions. The biggest key stat that I watch and it’s hard because the only way to do it is to make phone calls is actually traffic on listings right now. As we’re going to dispositions for fix and flip, as we’re going for development projects in new construction, we are spending a ton of time calling every broker to see how many bodies are coming through because what some of the stats aren’t telling people, besides the mortgage app request stat, is there’s a very few amount of people looking right now.
It’s not just that the transactions are down. The bodies are down by about 90% at least in our local market and so it’s very key for anything that you’re selling that you have to price well. You can’t price off what your proforma is, you have to price off the now. And what we’re doing to move properties is we’re calling through all the brokers, we’re seeing where the traffic is, we want to know where the most amount of bodies are because that will click that sale, and then we’re pricing in the cluster of all the comps. And you can do that by checking median home price, you want to check inventory levels, days on market and then making that right phone call. And you can kind of get all these magical numbers in, but as you put it together that’s how we’re writing these offers out is based on each city, whatever that trend is, we’re baking into our proforma.
So if Seattle came down, a specific neighborhood in Seattle came down 10% and we have a couple listings in the market that the brokers are saying that the showings are still one to two a week, we’re going to actually proforma in a little bit more depreciation because that’s just naturally what’s happening with the cost of money increasing so rapidly. And the good thing is we’ve seen the Fed, the banks have already kind of baked in a lot of these rates into the current cost, and so these next couple hikes shouldn’t raise rates too much more so you can kind of get these little sweet spots in the market around the median home price where the action is and then price accordingly. But we’re still selling a lot of property on market right now. Things are definitely slow, but you just have to put the right plan on it and things sell. They always sell.

Dave:
That’s great advice. That’s a data point that is not easily attainable just by Googling around, trying to figure out what the foot traffic is in a door. I’ve never heard of someone really calling around and trying to get that. That’s a really good tip. Just in absolute terms, what numbers are they giving you? Is it like a hundred people a week were touring and now it’s 10 or what are the numbers you’re seeing?

James:
We’re seeing about a 95% drop off. So if we were seeing 25 to 30 showings in a weekend, which is pretty common especially these markets that jumped 10% to 20% in a single month, it was about 25 to 30 showings on average through those properties. We are seeing about two to three showings now on those properties and it’s steady. And the only stuff that we’re seeing high traffic on is what was referenced is these bidding wars on rental cheap product. People are trying to place money, they want to beat inflation, the cheap stuff you can still cash flow with the high interest rates right now. That stuff’s still crazy on that side. We’re writing a lot of offers on the other side and it’s almost like we’re seeing the margins just get more and more compressed or people don’t want to look at the data downstream because on the buy side, if it’s cheap, it’s getting bid up.
Now the expensive opportunities there’s nobody playing. At least in our market no one is playing in that zone because what the biggest fear is a 10% drop, let’s say the mark comes down another 10% and decompresses another 10%. On 300 grand that’s 30 grand. That’s not good, but that’s doable. On a $3 million property that’s $300,000. And so I think we’re seeing the multiple offers on the rental properties because it’s safe. You can play with a flip, you can play with a rental and you can kind of put together a really bulletproof strategy for that property. So people are chasing safeness and they’re just being cautious. Those 10%, 15% swings are detrimental and that’s why those markets just aren’t moving right now.

Dave:
Yeah, that’s really good insight. Jamil, are you seeing the same sort of thing? Because Phoenix is also a pretty high price market like Seattle and I guess, one, if you were just looking at it on the face value of how rapidly it increased could be at risk for some sort of correction. What are you seeing?

Jamil:
So I’m listening to everybody talk and it feels like they’ve been just staring at the market that I live in and reporting it exactly as it’s been going. So super accurate representations of what they’re seeing. I’m actually living in that as well. For us, I have two businesses, it’s wholesale and fix and flip. For my wholesale business what we found has happened is there was an absolute pause. So just as you saw, people were kind of like looking, oh, what’s going to happen in the market, are my flips going to sell, are they going to go under contract, how long am I going to have to hold this? Well, those investors they paused for about two weeks. They weren’t really bullish on pulling the trigger on getting any other inventory because they wanted to see what was happening.
Well, all of those, if they were priced well, went under contract and those buyers have all come back to the wholesale business and they’re ready to deploy and ready to go again. So just as James has said, just as Henry said, just as Kathy said, if you are in that median home price range, if you’re in the affordability area, you are absolutely fine. The luxury. So we do some luxury flips and the luxury flips have absolutely, just as James has said, the traffic has gone down significantly. We would get multiple calls a day. Right now we’re getting maybe one or two a week. And I think it has a lot to do with the psychology of the type of buyer. So you guys know I’m on a television show, I have a production crew that’s following us around, and a lot of the people in the production crew it’s like regular jobs.
So they go and they wanted to participate in the housing market because they were seeing what we’re doing. Well, all that time when inventory was just flying off the shelves, they couldn’t even compete. They couldn’t write offers, they just couldn’t make it work. Everything was cash and these guys are financed. And so what we saw happen is as prices or as rates went up, the really, really sophisticated buyer or the wealthy person, they kind of stepped back and said, I’m going to wait a moment. I’m just going to wait a moment and I’m not going to make my move right now. I’m going to wait for things to sort of settle down. But it left a huge opportunity for other people who had been frustrated because they couldn’t participate in the market to step in. And so now they’re taking advantage of their turn at property that’s in the median home price.
Now with respect to pricing, what we found is what you and I discussed with Rick, where I had categorized this spike in value, which I called emotional equity, that’s the money that people overpaid for property that wasn’t backed by a lender appraisal. So this is stuff where if the appraisal came in at one price and people bid up another $100,000, I call that emotional equity because it’s not lender backed. It’s not appraised. That stuff has disappeared. Whatever that run up was, so you might have a couple of high comps in a neighborhood, whatever that extra 150,000, 25,000 that sold above list, that pricing is gone. So people are just coming back to normality. They’re just coming back to, and it’s still high, but they’re coming back and now the flippers are pricing in at where that number should actually be. They’re not overpricing the way that they might have been a couple of months ago.
And so as you just heard Henry say, we’re rushing, rushing, rushing to get everything on the market right now. My prediction is we’re going to see something really interesting happen because that mentality, that sentiment is what many investors are doing, they’re rushing. And even homeowners that need to sell, that need to move, they’re rushing, rushing, rushing. But guys, look at inventory. Right now, even with that rush inventory at a month and a half. It’s still a seller’s market up to three months of supply. So we are seeing this huge rush of all these sophisticated people trying to get the top dollar for their property. That’s like squeezing the end of a toothpaste tube.
Guys, we’re just getting the last bits of it right now and I think that the result that we’re going to see here is going to be something we really won’t understand until we’re in it. Because we’re literally pushing out all of these homes, all of this inventory right now, and this rush to capitalize on the high price and whatever buyer activity is still there, and you’re going to find that inventory, just because what Kathy said, the builders are being killed right now because of cost going up and rates going up, they’re slowing down. I feel another perfect storm coming. That’s my opinion. I think that I’m tracking right now to see if this storm is actually going to hit. Days on market, months supply, and I’m watching it like a hawk.

Dave:
Are you saying a perfect storm for prices to go up again?

Jamil:
To increase again, again, again. I know this sounds nutty and maybe I’m contrarian here, but I think what you’re going to see coming out the other side of that, and yes, it’s going to have a momentary dip, just like when the pandemic happened houses pricing started to go down, but from where? We were at ridiculously high prices, of course, it’s going to come down from the psychosis. But there’s still no inventory. It’s a joke. And you’ve got all these people rushing to put inventory on the market right now. I think the result of that, we’re going to feel it.

James:
One thing about the inventory that I think there is very little supply right now, but people do need to follow this trend. It is increasing every month and the bodies are low. And as you’re doing development, as you’re doing fix and flip, you are performing out your deals 6 to 12 months down the road, by the time you get there and that’s where you want to hedge a little bit. The short term investments are riskier. Wholesaling is a great thing to be in right now. You get in and out of a deal.
Speed is key in a market that’s a little bit transitioning. But I do hear a lot from people, it’s like, oh, well, there’s no inventory. There’s no inventory, but you have to track the trend because by the time you get into the… You’re going to be drowning by the time you realize what’s going on. And we are seeing that steady increase, we are seeing a limited amount of bodies, and we know that the Fed is saying that rates are going to increase. I think the inventory levels are going to be up to three to four months in the next three. It’s just, that is what the trend is.

Jamil:
It gets there, James, and I’m in an agreement that we’re going to see that bump, we’re going to see that bump in inventory, but I don’t know that the inventory’s actually there to support that bump. That’s my worry. My worry is that we still haven’t built enough houses to satisfy demand in a normal market. And I think what’s happening is as you’re saying right now we have fewer bodies, but those bodies are only going to sit on the sideline for so long. There’s going to be a point where they’re just going to say, I got to get back into it. Look at rent. They’re bidding up. Rent is going up and up and up and up. And just to rent a house in Phoenix right now to have a decent home, you’re talking $4,000 to $5,000 a month.
I mean, that’s a lot of money, right? So people are going to say that, they’re going to look at that, they’re going to be like, I’m not renting. This is trash. I’m going to go buy a house, even though the rate’s 6.5% right now makes way more sense for me to go buy a house. And I know I’m going to sound crazy to a lot of people, this guy just said, housing prices are going to go up again. I don’t think it’s going to happen right now, but I think that coming around the bend, that’s a definite risk. The way that we’re seeing activity right now, it’s a definite risk.

Kathy:
It makes so much sense when you describe it that way, because as people see that maybe those headlines aren’t correct and maybe there’s not going to be a housing crash, and then they realize that 5% is maybe a normal mortgage rate. It was there just a couple of years ago. So people will adjust. It’s scary to buy a house if you think the prices are going to go down, but when people start to see that’s not happening, you’re right, they could come flooding in again.

Dave:
So then what’s happening? Are you seeing the same thing in the luxury market, Kathy and Jamil, that James is seeing? And do you think what you’re saying about prices continuing to increase is going to happen across the spectrum of asset classes or housing classes?

Kathy:
I can just speak from what I see in Park City where inventory has increased dramatically. So there is opportunity in Park City right now, in fact, in our own development we’ve reduced prices. So it’s a great opportunity because areas like that always come back. There’s very few places that have the kind of snow that Park City has. It’s like gold. It’s so fluffy. So that doesn’t go out of style and so this is a great opportunity to get into luxury because there is an increased inventory, whereas literally a few months ago there was nothing to buy. There was nothing. Now there’s something to buy.

Dave:
Well, I’m going to do my best Kathy imitation and say that there is no national housing market and it depends on where you are. And as such, we actually have another data drop for you this week. This one is really good. I’m very excited about this. We put together lead indicator data for pretty much every market in the US, and it shows two things or it shows a bunch of things. So I put a bunch of metrics on there. It has median sales price, days on market, new listings, active listings, and price drops. All super important. And then what we did was compare it year-over-year, which normally in normal market conditions, I don’t know about you guys, year-over-year is sort of the reliable thing that you look at because there’s a lot of seasonality in the housing market and you want to see how, for example, June 2022 compared to June 2021.
There’s this thing called base effect in data analysis where if last years data was really crazy for some reason, you can’t really look at year-over-year data. And so that’s another factor that’s going on here and why you see these things in some markets price drops went up 400% this last year. It’s because they were at nothing and so proportionally it looks really high. And so in this data drop, not only do we give you year-over-year data, but we give you pre pandemic comparison. So you can look at data from 2019 to 2022. And of course, no analysis is perfect, but this should help you looking at those two things combined, in my opinion, help you understand, okay, what’s the recent trend and what is it compared to normal times? How does this track?
And so you’ll see it’s really different. It’s really different depending on where you are in the market. So you can download that. I should probably give you the URL. It’s biggerpockets.com/datadrop5. So you can check that out. I’m going to go on record and say, I think Boise is the riskiest housing market in the entire country right now, because not only are active listings up like 200%, they’re higher than they were pre pandemic, and so that to me is a huge shift in what’s going on. But meanwhile, places in Florida and North Carolina look great. They look completely great. So as an investor, as we always say here, you have to be a market expert and this data drop should help you become a local expert.
All right. Let’s switch gears a little bit because I do want to talk about deals. It sounds like you guys are finding deals and I want to know how you’re finding those deals and what kind of deals are working for you. Henry, you mentioned you’re finding cheaper deals. Can you tell us a little bit more about what you’re into right now?

Henry:
Yeah, that’s a great question. So deal flow for us has always been about finding off market deals. And off market deals essentially means that we’re buying things that aren’t listed from people who need to sell more than they want to sell. So there’s usually some type of distress involved and that distress is leading them to have to, or to want to, or need to cash out of their home to either go handle some situation or whatever the case may be. And so when you have this perfect storm of the economic environment is uncertain, inflation is super high, people are starting to maybe lose jobs, or get laid off, or can’t find work that they want, and then you have also interest rates rising in the housing market and you’ve got some volatility there, or from the retail buyer may not fully understand what’s happening in the real estate market and that creates some uncertainty.
You’ve got this perfect storm of people just saying, you know what? I got to get out of this house. I got to get out of it quick. I had thought about selling it six months ago, but I didn’t want to do it and now I’ve got to get rid of it. And what’s happening now is typically I’m in the business of marketing or sending out information to people and then they can reach out to me if they’re interested in an offer I might have. And I’m seeing a whole lot more of people just reaching out to me based on word of mouth. One of the last deals I bought was my title company literally called me and said, Hey, I got a lady who just wants to sell her house, she needs it gone right now, can you call her? And that’s happened twice in the past six months where people have just reached out to me and said, Hey, I heard you buy houses, can you come by my house?
And I’ve ended up buying those properties and so I’m getting a whole lot more people looking for me than me looking for people, and I think that’s due to both the real estate market uncertainty and the economy uncertainty. And so the last one I bought, it was in great shape. I told the lady to sell it with the real estate agent and she’d probably be okay. She didn’t want to take that risk. She needed it gone now. And she felt like she would get more money from me than if she listed it. And so we went ahead and we bought that property. But I try to educate everybody that I come into contact with and let them know, Hey, these are your options. And these two options here are probably going to net you more money, they just won’t be with me, but I’m happy to connect you with them. And people still even knowing that are like, well, just tell me what you can do. And to me that says that there’s uncertainty for them and they want to go with something that’s certain and quick.

Dave:
Jamil, are you seeing the same thing? Because I know in the wholesaling business you’re typically looking for these types of distress selling situations.

Jamil:
Yeah. So interesting, one of our primary lead generation techniques is actually direct to seller through agent. So we really leverage agent relationships to get a lot of opportunities. What we’ve seen is realtors six months ago were basically all on ecstasy. They were out of their mind. They’re like, oh my God, it feels so good. Wow, the housing market is crazy I don’t even have to work and give some water. That’s what was happening and they were out of their mind and totally just off their rockers with pricing. They were like, oh, price? A billion dollars. Let’s try it. And so that’s kind of what happened. And so that has absolutely shifted. The thing that we notice is that the regular home owner isn’t as up to date on market trends and stats and data as we are and we want them to be. Because they’re not really paying attention. They’re in their own bubbles, they’re in their own worlds, and until it affects them, they’re not going to read about a headline about this and that with the market.
Agents, however, absolutely have their finger on it. And they’re right now suffering the hangover from their really, really interesting party nights that they had for the last six months. And so right now, they’re in a depressed state. When we talk to them, they’re like, oh my God, everything is so bad. I can’t. I’m like, what are we going to do? So they’re so open to hearing from us what number we want to pay and they’re going and selling that price to their sellers, because they’re fearful. They’re like, look, I have no idea what’s happening right now. The rates are high, there’s no buyers, my phone’s not ringing, you should take their offer. And so we’ve been actually cleaning up because there is so many opportunities.
I feel like we literally can name our price and it’s happening. I had an agent who we have a great relationship with, but she had a property listed on the market, it was an original condition and happens sometimes, because the market was so hot, she listed it at what should be ARV, which didn’t make any sense to us because you’re looking at it and you’re like, how would you do that? This house needs a full renovation to justify that price. And she’s like, well, this is what the seller wants. And so it sat for 30 days and then she reached out to us and said, Hey, where would you guys be? And it was legitimately $250,000 below what her list price was. Done. She would’ve not had that conversation with us 60 days ago. So guys, if you have not taken advantage of the agent finder program here at BiggerPockets do so, because they will help you connect the dots on some incredible deals, work with the realtors. I’m telling you right now, they know better than anybody and they are the most fearful pack that exists right now.

Dave:
And if you want to check out what Jamil’s talking about, we have this tool on biggerpockets.com. You can go to biggerpockets.com/af and you can get matched with a investor friendly agent. It’s completely free. There’s tons of great agents on there. So you should definitely go check that out. Kathy, so you said earlier that your buying patterns are changing a little bit, right? You even mentioned that some things were coming up on auction. Is that how you’re pursuing deals right now?

Kathy:
Yeah. We weren’t able to really find cash flow properties over the last six months in some of the markets we were in and in the cash flowing markets there just wasn’t the inventory. So it was a little bit hard to find that and now it’s coming back again. So we’re back in sort of those Midwest markets, which I think you mentioned those are kind of hot right now because it’s the one place that’s affordable still. So we’re looking at that. We are also about to start… I’ve been looking at multifamily, I’ve been looking at commercial properties, and single family and it’s kind of interesting when I’ve looked that multifamily hasn’t quite come down yet. I don’t think the way it might and I could be wrong. I was wrong two years ago. I should have bought every single multifamily I could get my hands on, but in 2020 I really wasn’t too sure how that was going to go, but some people really made out well.
Now we’re looking at some of those properties and people are still really, a lot of proformas are still betting on rents going up quite dramatically and they might, but they also might not and it just makes me a little bit nervous. And even so, even with these really high rents that are being projected, the returns are just okay. But when we were looking at another single family fund, we had a single family rental fund for the last five years, the numbers were actually pretty good and better than the multifamily that we had been looking at. So we’re looking at parts of Texas for that fund and then parts of the Central Florida area for single family. And it’s just exciting to be able to negotiate again. That was just not something you could do before for a while. Maybe Jamil and James and Henry could, but we didn’t know how to do it over the last six months.

Dave:
It’s interesting that you said about the Midwest. I was looking something this morning on realtor.com. They have this thing called the hotness ranking, which sounds like it should be on a dating app and not on real estate.

Jamil:
It’s so good. I love that. They call it hotness. Oh my gosh. Look at Wisconsin, it has a duck face.

Dave:
Well, unfortunately it’s just actually housing market data, but I think your app might take off, Jamil. And what it’s showing is that the hottest markets, and again, every one of these websites that does this has their own methodologies so you should go look at what they’re actually doing to rank these markets, but the hottest markets right now are in the Midwest and in the Northeast. It’s been years since I’ve seen hot markets in Massachusetts, in Connecticut, New Hampshire, Vermont, Maine. Central Florida is still very hot, Kathy, don’t worry. So we’re still seeing a lot of that, but it’s just, I think it’s the impact of the migration over the last few years. People have been moving out of those places or the markets have gone up, but not 40% or 50% in the last two years. And so relatively speaking, the Midwest and the Northeast are becoming more affordable and probably at least have less competition than in Florida and Texas and you might be able as a buyer to look around and actually pick a house you like, which sounds crazy given what’s happened over the last two years.

Kathy:
It’s kind of normal. It’s cyclical where the super hot markets that are where people really want to live, they’ll go up and up and up in price until they hit a peak, and then that’s as high as they can go. They hit an affordability ceiling and then we start to see the more linear markets take off. So it seems to be kind of the same as when we were buying in Texas in 2005 where that was the place to be. That’s where it was about to take off again. But if you’re starting a family and maybe you do have the ability to work from home or you could get a job, there’s so many job openings, and you’re looking around and just getting really depressed at rent and home prices, you might just start looking in markets that you hadn’t thought of before, so that could be what the trends are.

Henry:
So the super hot states are dying off and the dad bod states are starting to win, huh? There’s a chance for me yet.

Dave:
Is that a dad bod state? I’ve ever heard of that. Is that real?

James:
There’s always a trickle down effect. In 2008, the hot markets, the ones that appreciate the fastest, the hockey stick up, are the first ones that hit the brakes. The other ones keep limping along and then eventually they follow the same trends, to be honest. In 2008, every market trended with the expensive markets after about six months. And so it’s just, the expensive markets are the leaders, they kind of show you what’s going to happen. They forecast the rest of the markets six months down the road.

Dave:
I think what you’re saying too is right, Kathy, and is interesting that unfortunately for a lot of people housing in their city, whether you rent or buy, is becoming unaffordable. And if these trends continue at least there’s likely going to see some reversal in migration patterns, or maybe just some migration to some of these cheaper places like the Midwest. You look at cities like Chicago, it’s the third largest city in the United States, it’s way, way below average in terms of housing market appreciation over the last couple years, but still has a really great economy. So you could imagine places like that starting to see a revival again or at least I can.

Kathy:
Yeah. And it’s funny, I’ll just say that we mostly did our events in California and I would ask the room with hundreds of people, Hey, how many of you have been to say Indianapolis, or Birmingham, or Cincinnati or Cleveland? And maybe a couple hands would go up. So it was really funny so many Californians don’t really go east of I don’t know, Nevada. And so I would take just busloads of people from California to go see these areas and they still had this idea that it was like wheat fields or something in these cities.

James:
I just have this vision of all these Californian tourists wearing Hawaiian shirts with cameras looking like, wow, look at how they live where there’s corn.

Henry:
What’s the Piggly Wiggly?

Kathy:
I swear if we blindfolded them, they wouldn’t know they weren’t in San Francisco. And in fact, some of the areas like Cleveland their downtown has been revitalized, it’s beautiful, it’s a medical leader with the Cleveland Clinic, and it’s nicer in some ways than some of the areas that they’re living in California that haven’t been updated or upgraded. So a lot of people were shocked and we saw a lot of people actually move. So I’m sorry for being part of the California migration issue.

Dave:
Oh my gosh.

Kathy:
It was like-

Dave:
Apologize on behalf of all Californians who moved, Kathy. It’s your responsibility.

Kathy:
… but it’s like they really didn’t know that there was really nice places to live outside of California that it’s just kind of funny. Now, maybe after living a winter they might change their mind.

Dave:
That’s a Rick and Morty episode. I got to call Dan Harmon. James, I did want to ask you about the flipping market because I think that’s the only one we haven’t really touched on here. And just curious how you’re finding deals in flip? Sounds like you’re probably staying away from the luxury market or what are you targeting right now?

James:
No, we don’t stay away from any market. We just buy differently and adjust the proformas. So with our luxury stuff, we’re definitely going for much higher returns, 25% or to 30%. Or with leverage we’re targeting 50% to 60%, because we need that extra padding if the market does correct more. And also we’re just not using peak comps. We only use comps within 30 days or pendings and we’re talking to every broker. And if the comps are higher 30 days ago, than we’re using the pendings. But the best way that we are getting deals done, we’re definitely seeing sellers are adjusting their numbers, there is a slight panic going on I can tell with brokers and sellers, and so what we’re doing is we’re making mass contacts, getting in front of people, talking to as many people as possible.
As you grow your network, you’re going to get more deal flow. But the biggest thing to do is as we’re trying to get more deals done is because we have to put on a new pair of glasses. How we were flipping homes or developing or buying rental properties for the last 24 months is an old strategy. You have to switch your strategy up. We just bought a home and we closed on it about 60 days ago. It was an expensive property. We’re going to be targeting 1.9 million as the exit. We had a $250,000 budget on it to go a lot more higher end. I just re snapped my budget and we are now at $65,000 because we are going for a different thing. We saw what is trading, what is not trading.
As flippers, people got a little bit spoiled. They’re like, we can have as much fun with this, spend as much money as we want on this, and we are going to crush it and I’m going to look like a genius. Those days are over. Investors responsibilities or my responsibility is if there’s a tight market, I have to invent that return. I have to come up with the right plan that is going to make me money or rack me a return. And so that’s all we’re doing is we’re getting more deals done because everyone else is still looking at these deals the same way like, oh, well it costs 200 grand to do it that way. Yes, if you’re going to go for peak pricing, but in a market that’s not affordable, I’m not going for peak pricing anymore. We are getting back down and dirty, shopping at clearance stores, keeping what we can keep, not changing out floor plans, keeping things moving quicker and we are just making them less nice, because that’s what the market is asking for.
They want more affordability but livable product. And so again, we are just putting on a new pair of glasses, we’re hitting mass amounts of contacts and we’re just looking at deals differently. And if you don’t look at them differently and you buy on the old, it’s going to be hard to get a deal done because your rehab costs are going to be high, you’re going to be cautious on your exit price because you were using peak comps before, and you just have to change things up. So everything that we’re doing, buy and hold, we’re buying cheaper or differently, doing less work on them. Our rental properties, we’re targeting ones that we have that if the margins are still tight, we’re going for ones that have upside, development upside.
One thing we have seen is builders… Multi-family we’ve increased our buying because builders have pulled back a lot. And so the multi-family with development upside is this no man’s land to where we can buy and still get a decent cash flow, but it has a major kicker on it. And then with our syndication and development stuff, we’re just closing on permit only. And syndicating, we are not waving feasibility or large multi-family if we’re buying ourself, unless we have that secondary loan locked in. We do a lot of value add where we’re setting up a two step loan. If it is not a hundred percent commitment, we’re walking from the deal. We won’t even ask for a haircut. We need that commitment on the financing, because that can be detrimental. So we’re just changing how we look at things, how we structure our deals, and we’re doing just as many properties, if not more, than we were doing the 90 days ago.

Dave:
That’s great. I think I just want to summarize for people who are listening to this everything we’ve talked about today. The market is shifting, but none of you seem scared. None of you seem like you’re stopping or are concerned really about your own businesses performance.

Jamil:
No.

James:
I mean, there’s always the painful transition time where everyone’s like, what’s going on? And as long as you prepare for that, but at the end of the day we’re buying off math. The math’s going to work one way or the other. You just have to put the right math on it and submit accordingly. Just create your buy box, put your math on it and you’ll keep buying. You will still make money. We’ve made money 2008, or 2005 to now we’ve always made money.

Kathy:
Yeah. And I would say, I am concerned about some of the projects that we’ve been in for the last few years. It’s been difficult with the new home builds, but it’s forcing me to look at other options like what can we do with these high end homes in Park City? And I kind of put a post on Facebook and said, Hey, is there anyone out there that would want to share a vacation home in Park City and kind of do a Picasso type thing where there’s four or five or six owners and everybody kind of picks their weeks and then you short term rental it otherwise. And if we had three or four of those, then people in the industry who are doing masterminds and they want a place where there’s a bunch of homes next to each other, it’s just different kinds of ways to deal with struggle. When things don’t turn out the way you think then kind of there’s other ways to look at it and other opportunities. So that’s what we’re doing now and we had a huge response. We had like 250 people respond that they wanted that. So now I’m going to learn how to do that, how to do shared vacation rentals.

Dave:
Yeah. It’s just about being creative in any market. Over the last few years it was just so easy. You could just sort of throw a dart at the dart board and that, like James said, it’s over. But that does not mean that there are not opportunities. You just have to be a little more cautious or a little bit more creative. And thank you all for giving such good input onto some of the ways that you are adjusting your strategies and thinking about how to benefit and still grow your businesses during this transitionary time.
All right, guys, this was very fun. It’s always fun having all of you here. So for Jamil, Henry, Kathy, and James, I’m Dave Meyer, and we will see you all next week. On The Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel [inaudible 00:54:23] and Onyx Media, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.