The Good Stewards Real Estate Podcast

How Covid-19 is Similar and Different to 2008

Episode Summary

How similar was the environment leading up to 2008 and after to what the market is showing now? What does 2020 look like so far in the near future? Bottom line is that we don’t know but we will have a much better picture in 30-60 days.

Episode Notes

Pre-2008 Similarities:

3:21: Everyone wanted to be in real estate in 2005-2006.

5:15: instead of being a “buy and hold” investment company, we had to flip our mindset and say, we're going to start flipping properties and that evolved into a short-sale segment as well.

9:25: By April of 2010, the $8,000 home-buyer credit program ran out and that’s when homesales really stopped. By that point short sale deals were taking 3, 6, 8, even 10 months to close and that’s no longer a lucrative deal.

11:00: Normally you don’t want to make a major shift in your business, but in a recession you may have to.

13:50: Prices had gone down significantly in the country, which meant that there were lots of cashflow opportunities.

Going Forward in 2020:

16:10: We don't know where these types of opportunities are going to pop up from this and from this particular crisis. It could be in commercial real estate.

19:13: We are still figuring things out because I do feel like we're not even quite two weeks into this, but one of the things is we have some deals under contract.

21:15: as business owners, we really have to make the best decisions we can make today based off the data that we have today. Typical closing periods last 30-60 days, so we don’t really know what the ARV of those properties will be.

26:20: Brandon Turner, of BiggerPockets, about what he's doing to kind of lay the groundwork of what is likely coming our way.

28:30: One of the other big things I see happening in the real estate market is you can’t get away with subpar product anymore.

29:42: Amanda made a huge pivot after going through a foreclosure first hand in 2008. In this time, people will make decisions based on past experiences, so I built a house with an accessory dwelling unit that cuts my mortgage by a 1/3rd.

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Episode Transcription

Andrew: (00:00) Be prepared to pivot. Things change. Recessions can be one of those things where there are opportunities to radically shift or there's just necessities to radically shift. Normally, you don't want to make a major shift. You want to move slowly and carefully and you should still not just jump into something new, but there are opportunities that recessions, they change the way you need to think a little bit.

INTRO: (00:27) Welcome to The Good Stewards podcast, the only podcast dedicated to seasoned real estate investors who want to maximize the cashflow potential in their business. We are “buy and hold” investors with a thousand plus properties and markets across the U.S. who bring an insider's view into the nitty gritty details of real estate investing. If you're looking to develop the mindset teams and systems that can dramatically build your real estate business and network, you're in the right place.

Ryan: (00:59) Welcome to this episode of The Good Stewards podcast. I'm Ryan Dossey.

Amanda: (01:03) I’m Amanda Perkins.

Bill: (01:04) I'm Bill Syrios.

Andrew: (01:06) And I'm Andrew Syrios.

Bill: (01:07) Hello, welcome to our podcast. We're the Good Stewards and we'd appreciate it if you would check us out on our website, subscribe to our podcast, let your friends know about it. We are living in uncertain times. I think that is an understatement. Obviously, everything has changed around us in terms of what's happening in the global situation, what's happening in our country, and we're all just trying to figure it out together. As business people, boy, we're on the front lines of trying to work our way through. So many people are headed towards great uncertainty, others towards unemployment, others towards, gosh, what do I do? Because I didn't hedge my bets.

(01:50) Others are looking for tremendous opportunity because as so many people who have become wealthy know that it's in the downtimes that you want to strike out and find your opportunities. If you just to follow Warren Buffet, he basically says you need to be fearful when people are not and you need to jump on opportunities when people are fearful. So that is kind of counterintuitive to your feelings. You almost have to act that way. I think back to Stewardship, last about with a recession, which was 2007-2008, we had been a “buy and hold” investment company up until now focused particularly on acquiring campus rental properties around the University of Oregon in Eugene. And that was going quite well for us. We had a niche market. We were finding undervalued properties or properties that we could add bedrooms to and increase the rental value. It was great. Andrew, who is on this podcast with us, he was going to business school at the time and he and I put together an idea, and this was in 2006 of having an internship during the summer of 2007 and we ended up doing… Andrew, correct me, what year that was? It was 2005-2006.

Andrew: (03:11) It was 2005-2006. Yeah.

Bill: (03:13) So back up a….

Amanda: (03:14) So, pre recession because it was kind of when everything started exploding around 2004. And then it went up.

Bill: (03:21) So, everybody wanted to be a real estate investor when we were putting this together, okay? Because real estate was hot. And students in business school at University of Oregon and also Oregon State were very interested in this topic. I was invited on campus to some business classes to give talks as a matter of fact. And, Andrew, was there before he graduated from business school at UO. And he said, why don't we put together an internship? And so, we did that and had 10 students working for Stewardship during the summer of 2005. And they did all kinds of things. They were involved in our acquisition, in the construction, the property management. It was a pretty good thing. I don't want to dive too far into that, but we were all… My thought… And we did another one in 2006.

(04:20) So, we had 16 students go through a full time during the summer through this experience and they were paid. And my thought, this is a long-term job interview because I'd like some of them to become partners with Stewardship going forward, particularly focused on the state of Oregon. So, we took the cream of the crop after those two summers and in 2007 January 1st reformed two partnerships of five of us, and there was a partnership in Salem and Portland up north and then a partnership in the Eugene area. And we thought we'll just continue to do the same thing, but all of a sudden, the recession hit and we had to rethink our entire business model.

(05:05) And it didn't hit us all at once. Like this thing has like a freight train. Within one month think about where you were March 1st and where you're going to be April 1st. This one was a little bit more slow moving. So, we were kind of coming to grips with the fact that, оh yeah, the economy is going down, real estate has hit its high peak. People are starting to lose their jobs. This is not looking good. So, instead of being a “buy and hold” investment company, we had to flip our mindset and say, we're going to start flipping properties and we have to figure out how to get good at that. We really weren't good. To flip properties, you have to be good on the acquisition side and you also have to be good on the sales side, figure out how you're going to dispose of the property. So, we had a lot to learn and Amanda became a part of that towards the tail end of it. And maybe she could pick this up from here.

Amanda: (05:59) So, it was initially just flipping properties and then, I want to say probably around… probably the end of 2008-2009 we sort of formed our own short sale division. So, we had our own short sale negotiators.

Bill: (06:15) You might have to describe what short sales are Amanda.

Amanda: (06:17) So, I mean a lot of people were going into foreclosure. And so, an option that they had to save themselves from foreclosure was to negotiate with their bank. Oftentimes there was a first and a second position loan and then oftentimes other liens behind that that had been attached to their property to negotiate for a short payoff of all of those. So, basically people could walk away from their property, maybe they owed $300,000 and we could negotiate that it was worth $200,000 because the market had come down. So, the banks were willing to forgive that $100,000. And at the time, and I think it might still… I don't know if it's still in play, but there was tax law passed so that people didn't have to recognize that income that basically was forgiven because if a bank forgives you $100,000 debt, technically it’s sort of an income piece. But there was tax law that if you could prove insolvency to a certain point, you didn't have to worry about dealing with the tax consequences of walking away from that. And what the upside was for people that we could negotiate a short sale of their property for, was in two to four years, they could maybe be looking at buying a house again. They would be financeable. It maybe didn't ruin them. Like a foreclosure is on your record for seven years and you're not a good candidate for a conventional loan for seven years after you hit foreclosure.

Andrew: (07:51) It's a long time.

Amanda: (07:52) It’s a long time.

Bill: (07:53) Yeah, it was about two years for a short sale. So, a short sale basically is on your credit report as satisfied kind of thing. It's a satisfied loan, but it's not fully paid. So, it does come out on your credit report and it's a ding, but it's not a mega ding like a foreclosure. So, we were offering a service to sellers so they can avoid foreclosure and many of them were in financial distress and they didn't want to go through foreclosure and all the uncertainty of that as well. And have their property sold at the courthouse steps. We could step in and acquire. And it took us a while to acquire the skills of how do we negotiate with lenders. And Bank of America had a way and Wells Fargo had a different way and US Bank had a different way. I mean, all the lenders were scrambling too to figure out the process of how they're going to dispose of the properties. And then they have investors in institutions behind them who are pulling the strings and saying, you can do this and you can't this. So, it was a difficult time to figure things out, but it was the niche that became our focus.

Amanda: (09:01) And it was a pretty good pivot. We were doing really well with that. And at the same time, the government was offering a first-time buyer credit of $8,000 to…

Bill: (09:15) It was during the cash for clunkers era, if you remember that.

Amanda: (09:19) Right. And so that was helping buyers in the market because there's basically $8,000 of tax credit that could help get them to close a home. And I want to say it was April of 2010 that well dried up as far as the $8,000 first time by her home credit. And at that point, that's when things got really bad. So, we were still at that. Then with our short sales, it would take us 4 months, 6 months, 8 months, 10 months to try to get a short sale closed. By the time you get 10 months down the line and you're negotiating on a price with the bank that you had put out 10 months previous, you weren't necessarily, that wasn't maybe a lucrative deal for you.

Andrew: (10:02) The other issue that was going on there is right when the home buyer tax credit went away, which I think was approximately April 2010. And by the way, that the home buyer tax credit makes some sense. So, it should never be referred to as during the cash for clunkers era, which if anyone remembers that was the dumbest government policy has ever existed. But anyways, that went away and at about the exact same time the banks got really, really tightened up on things. They really said like, they were at one point just basically giving away. Like make an offer and we'll sell it to you as long as it's not absurd. And then they started, really it was like 91% of its market value based off of appraisal and it was… And when you're dealing with, when you lose the buy side, you're not getting the good deals and then there's no one to sell it to because the properties we were flipping were in that market.


 

(10:53) That's kind of when we had to pivot. And I think that kind of relates to the main point with regards to how to think in terms of recessions. I mean the first thing which it's too late to do if you haven't, is to make yourself recession proof. We talked to Bill about that the other episode, previous episode with regards to keeping high cash reserves, lots of backup private lenders, solid equity positions, not overextending yourself. The next thing is be prepared to pivot. Things change. Recessions can be one of those things where it's like you need to really, there are opportunities to radically shift or there's just necessities to radically shift. Normally you don't want to make a major shift. You want to move slowly and carefully and you should still not just jump into something new, but there are opportunities that might… Recessions, they change the way you need to think a little bit versus normal times. There are different opportunities. It's also sometimes you need to make a bit of a more bolder play, just to keep your company or yourself solvent.

Bill: (11:55) Yeah. And other people were making pivots around us too. A pivot I did not see at this time, which I wish I would have, was the only place that new construction was going on virtually in the country. Remember, the country is shutting down in terms of this recession and there's excess inventory on the market. There's hardly any demand and lots of supply. But there was one place in the entire country, one major place that builders saw tremendous opportunity developers. And that was around the college campuses.

(12:31) So, there were many, many student rental units that were built because everybody went back to school. Now, I was already there but I didn't see this happening really. And our group was now focused more on foreclosures and short sales. So, we turned our attention away from student rental properties, but other people had saw that as an opportunity. So, these developers came in and they said, I can't, I can't get a loan anywhere else to build, but I can get a loan around the campuses. So, they started taking down houses and building fairly substantial, apartment complexes. And this happened in many, many cities where there were major college campuses, including the University of Oregon.

(13:12) It was just somebody saw that opportunity and I didn't. And I was right in the middle of it and I didn't see that opportunity. Now I will give myself a small out of I had never done new construction before, so that felt like a bridge too far for me to step over and start thinking of myself as a guy who was going to do new construction even though I knew that niche market of the campus properties very well. So, people are going to see niche areas and they're going to be able to pivot. And that's where you got to keep your eyes open.

Amanda: (13:42) Okay. So, as we were chasing this down market in 2010 with the short sale businesses, it just became really obvious to us that we needed to change directions. This wasn't the future of Stewardship. It was really hard to be chasing a down market. And that is actually what led us into looking outside of the state of Oregon for “buy and hold” investment opportunities. Prices had gone down significantly in the country, which meant that there were lots of cashflow opportunities, but not necessarily in the state that we were in. September of 2010 is actually when we purchased the first apartment complex in Kansas City, Missouri. And you Bill actually, you post, you didn't purchase that in our Stewardship investments, Kansas City partnership. You push purchase that with a different partner. Sandor and you own that building together. And at that point when you purchased that, Andrew was figuring out how to close out life in Oregon and move and start up operations in Kansas City in 2011. And so, I'll let Andrew kind of tell his story of going to Kansas City, kind of starting over in this new… Well, we were looking for “buy and hold” opportunities and prices had dove hugely in Kansas City, specifically Jackson County, Missouri. They were right in the throes of a recession. So, it was…

Ryan: (15:13) I think the big thing that drew him out there was Tech N9ne.

Andrew: (15:16) Pretty much. I mean, Kansas City, we can go into more detail on another podcast about what got us here, but I mean a lot of it was just cheaper real estate with easier, higher cash flow, easier “buy and hold”. We started looking at apartments, but the houses really just seemed like the way to go. We could move our private lenders onto them fairly easily. They all said “no” for a while and then said “yes” about a month later. And it was just, the properties here were so inexpensive and many markets that were blue color or lower middle class or even middle class that were normally, had a vibrant homeowner buyer market too, didn’t. And so, it was just foreclosures and it was really picking them off the MLS, which is something that's almost impossible to do. Occasionally you find one that falls to you, but very, very rarely.

(16:10) And so, I think we don't know where these types of opportunities are going to pop up from this and from this particular crisis. It could be in commercial real estate. I mean the restaurant industry is being hammered. And other industries are being hit hard and so commercial real estate might be an opportunity too in the same way that residential houses and apartments were a huge opportunity in 2010. But it's really hard to say, it's kind of one of those things where you need to have kind of a dual mindset, one of surviving, but also saying what's the next play? What's the next thing to move toward? Because every crisis is both a crisis and usually an opportunity as well.

Ryan: (16:54) One of the things that I'm looking at as a potential pivot pretty seriously, a friend of mine focuses on purchasing lower and like blue collar type properties. And then raises private money typically about 8% and then sells them. This isn't like a lease option like we're going to just be like a down payment farm, but actually sells the property on contract, fully amortized out over 30 years at a higher interest rate. So, what they're able to do is built in cash flow, but they're also getting a pretty significant down typically like $10,000 to $15,000. So, I know in Indianapolis, that's one of the things we're starting to look at as some of these lower end properties that aren't in terrible shape - Can we help somebody become a homeowner in this time where banks are tightening up, still keep our private lender capital working, but also build in some cash flow on a property where we already got it at a good deal. So, that's one thing we're looking at as a potential pivot is not really doing like lease options but more getting people into homes that maybe they don't have good credit or maybe they don't have any credit at all. Maybe they're kind of a cash employee or something like that. So, I know that's one thing we are looking at.

Bill: (18:13) Just say one thing about that, Ryan? If you go that direction, I really would encourage you to not sell the property via a warranty deed to somebody in that situation. I would go with a land sales contract.

Ryan: (18:28) Correct, a land contract.

Bill: (18:28) Which protects you a lot more so you don't have to foreclose on the property if they stop making the payments. What you do is what's called a forfeiture, which is kind of like an enhanced eviction process. And this will protect you if something additional happens bad to them financially, that they're not going to drag you down with it by having to go through the entire foreclosure process, which can be quite lengthy depending on what state you're in. So, know your laws, go to an attorney before you start selling properties to people, where you're still on the hook or your private lenders ultimately are still on the hook.

Ryan: (19:07) Yeah, I know, they don't… There's no deed transference until the property is effectively paid off.

Amanda: (19:13) We are still figuring things out because I do feel like we're not even quite two weeks into this, but one of the things is we have some deals under contract. One of the deals was okay deal, but it was by no means a home run. And we have a little bit of time while the titles weren't doing their work and stuff, but we're kind of deciding like, was this a good enough deal for us to keep close on or are we getting to continue to close on this deal or are we going to maybe talk to the sellers and see if we pivot into some sort of like lease option, make them our partners and try to flip it? Because really there could be no margin. We don't know what property values are going to do. We don't know where we're at. We're just trying to limit our exposure especially on a deal like this. We have other deals that we're going to close on because we feel like…

Ryan: (20:09) Is that the flip in Eugene?

Amanda: (20:11) Yeah.

Bill: (20:12) Well, this is another one. We have two of them, Ryan, that is… Yes, there's two of them.

Amanda: (20:17) Right. This is one actually. I think it's under contract to close today, but it's not going to. But there's not enough margin there for us to really confidently say, “Yeah, we want to buy this property. We feel really good about where it's going to go” because there's so much unknown. We're trying not to panic. We're trying not to make decisions that cripple other people. But we're also just trying to make careful decisions to keep ourselves afloat.

Ryan: (20:46) I heard a great sermon actually by Steven Furtick this weekend and he was talking about basically just focusing on today. You have to look at making the best decision you can make based off the data that you have today. And that where people are getting in trouble is “What about tomorrow? What's going to happen tomorrow? Is this a recession? Is this a depression? Is this virus ever going to go away?” His thing that I've actually taken to heart is like, maybe you don't need to check the news every day or five times every day. If you checked it in the morning, there's probably not going to be anything new that they're going to tell you that night other than more people are sick and more people have died. So, his big thing was, obviously trusting God in it, but the big takeaway I took from it is as business owners, we really have to make the best decisions we can make today based off the data that we have today. And talking about, we don't know where we're at, if you look at a typical real estate transaction, this is a 30 to 60 day closing process. So just because a deal closed yesterday for X does not mean that's the ARV for that area anymore. So, really what we're looking at is what are comps going to look like 30-45-60 days from now? That's where I think we are really going to start to see, is the market going down, is it staying the same. The National Association of Realtors pulled something like 15,000 realtors and like a flash survey that I got an email about. Half of them said their business had slowed down, 40% said it hadn't changed and 10% had said it increased. Nobody knows what's going on because we've never been through this. But we're looking at things like - What are the sold comps today? What are the pended properties today? In what areas are new properties pending? That's where I want to be. And then from there I think it's just looking at that data. But day by day in 60 days from now we're going to have a much better idea of what's going on real estate market wise. So, I think that's just kind of something to keep in mind is that you're not going to know what's going to happen tomorrow or today, unfortunately.

Amanda: (22:58) Nobody knows, right? Yeah, nobody knows.

Ryan: (22:59) Yeah. But looking at like, we're still focused on getting good deals. Now I was using the “75%” rule. We're now down to 70%. I may decide in 30-45 days that I'm down to 65%. It's really on a daily basis making those judgment calls of where things at based off of the data and what makes the most sense today. I think we have to be careful because of the industry we're in that we're operating based off of the facts, not our feelings.

(23:37) Like you want to know how I'm feeling right now? I think this sucks, right? One of my businesses is in St. Louis, Missouri and we got a state order that we cannot be open. Well it doesn't, that's not convenient for me. That's not convenient for my staff. Like okay, but what are the best decisions we can make today? Now, fortunately we thought a little bit ahead and we actually moved that operation into somebody's finished basement who works for us and they're running it as like a work from home operation. Is our production down? Absolutely. But at least it's not dead in the water. But how I feel about it, I feel like it sucks. I feel like I'd really like to know when this is going to end, but we need to look at what's going on today.

(24:25) I mean it's kind of like an upcoming rent collection. I have no clue what it's going to look like in April. I'm hopeful. I don't know that I would say I'm optimistic, but at the same time, like I have to look at what's going on with projects today. We have projects that we've decided, you know what? It doesn't make sense to drop another $50,000 on that thing right now. Our holding costs are $1,000 a month. We're just going to go ahead and let that thing sit for the time being because it makes more sense to have that in reserves or more sense to have that cash working in other places. So, I don’t know, that's my take on it. I'll hop off my soap box.

Bill: (25:07) What do you guys thinking about it in Kansas City? Andrew? I'm curious.

Andrew: (25:11) I mean we’ve got a few people saying that they'll need accommodations. We've sent out two messages so far and not a lot have come back. We don't really know what to expect. We're kind of bracing forward. We're prepairing some contingencies and things like that, that we kind of discussed in the last episode. But it's one of those things where we know there's going to be a lot of people who have to work with, the government just passed a $2 trillion stimulus, so it may very well maybe people who lost their jobs or had their employment disrupted can make the payment but not… make pay rent but not pay it immediately. And so, for those cases we're looking to waive late fees, have a free payment plan. You usually only have one payment plan per lease. We will get opened up for extra payment plans. And so, I mean we're optimistic, but again, we're kind of moving into uncharted territories.

Bill: (26:04) Yeah. I would plug BiggerPockets here. There you go. The Good Stewards podcast is plugging BiggerPockets. And Brandon Turner, who I'm sure all of you know…

Andrew: (26:14) It's nice of us to help the little podcast.

Bill: (26:15) Yeah. We do what we can.

Bill: (26:20) Brandon Turner said just a few days ago, probably a couple of weeks ago now, sent a really good video out. It's - Tenants unable to pay rent due to the coronavirus. And I would encourage you to look that up. And he has five points in that video presentation about what he's doing to kind of lay the groundwork of what is likely coming our way. And that is there's going to be people who won't be able to meet their rent obligation so, how do we prepare ourselves. Another pivot really, and that's what we're kind of talking about, how to pivot our business, trying to survive the onslaught of wherever we're at now, but also start thinking about where we need to move and a plan for the future.

Ryan: (27:06) I think one thing that'll be interesting that I think is going to come out of this, I think this is exposed for a lot of people, for a lot of businesses, things they were trying to ignore, right? Like, as a family, if you were paycheck to paycheck and just maybe you weren't taking action to make yourself a more desirable job candidate, maybe you weren't taking night classes, maybe you weren't learning new skills, you were just kind of, “Well, maybe my boss will promote me”. I think a lot of people are going to look at this as like, “Okay, I don't want to be in that position again”.

(27:47) I know as investors, I run a community of guys that are primarily “buy and hold” investors going direct to sale and looking for deals. And we've got people that are like, “Okay, I've got private money out that I wish I would have refinanced because this isn't long-term private money. This is like six-month private money”. We have other guys that, “Well, I only had one private lender and they're gone. I should have more than one private lender for next time”. Or “Man, I just tied up all of my personal cash in this one deal and I'd really like to have my cash back now”.

(28:23) So, I think for the general public, the general investor, the general business owner, the other side of this, hopefully you're going to have people that are going to try to recession proof themselves a little bit better next time. One of the other big things I see happening in the real estate market is you can't get away with subpar product anymore. You could lipstick a pig and throw it on the MLS a year ago, and if it was the only property in that part of town, you're in like downtown Nashville and have just a total like turd, that's still a turd when you're done with it, somebody would buy it from you. That's really not the case when you're in a market like this because people are going to be picky or they're going to be choosier and honestly demand's probably going to go down.

(29:14) We've had guys in our group that have had awesome products, awesome projects that have sold for over asking like this week, even with all this uncertainty and stuff going on. But I think making sure that renovations and things you're doing are being done right, especially if you're trying to flip them, is important. And I know like for us in Indianapolis, that's something that if we're going to flip, absolutely, we've got to have a higher attention to detail than we've had on some of our rental stuff in the past.

Andrew: (29:41) Absolutely.

Amanda: (29:42) And I will just say like a pivot I made during the last recession. I lost a house. I went through foreclosure. I went through bankruptcy. I lived through all of that and had to make some big changes. And one of the things that I knew, like I wanted to own a house again, but I also wanted that house to help me. And so, when I went about that, this time I built my house with an accessory dwelling and people would be like, “Oh, well, don't you feel weird having like a duplex?” It's not really a duplex, but no. It feels great. I have more than a third of my mortgage payment covered by a tenant who's paying a resident living next door and works great for me. People will make decisions based on what they've gone through. And I made a decision this time around I didn't want to be paying a mortgage that was above my means. So, what could I do to make that happen?

Bill: (30:42) So, we all know that cash is king in a recession and cash flow is queen in a recession. So, on that note, we will continue to talk about these uncertain times obviously in our upcoming podcasts that we definitely invite you to join us. Please check us out at thegoodstewards.com and subscribe. We've got a free eBook there and we'll see you soon. Till that.