Who is Closing Deals Through COVID-19?

Question

What challenges have you faced or are you facing while closing an acquisition during the pandemic?

We encountered some lender challenges regarding onsite inspections and state wide shelter in place orders. It's been interesting to say the least but everyone is working together to figure out options and or solutions. Agency lenders (Freddie and Fannie) have allowed some virtual site inspections where the onsite manager can video chat the lender's inspector to view the property if it's approved. I've also heard of some lenders allowing properties to close with a post closing inspection, again if it's approved. Typically approvals are given to newer assets with good historical occupancy and minimal deferred maintenance where the lender can make a determination using virtual methods.

Stay safe, stay healthy and keep focused.

Brian Burke · Answer

The biggest challenge I'm facing is knowing what assumptions are reasonable.  Zero rent growth for two years?  Negative rent growth for a year?  How high will concessions go?  How high will the bad debt loss go?  Will occupancy suffer?  How hard will the likelihood of many future job losses hit performance and impact all of the above variables?  And for how long?  How much will exit cap rates decompress?  There are a lot of unknowns and it's just too early to know what makes sense.

So my biggest challenge will be getting a seller to agree on the price that results from a number of very pessimistic assumptions.  It'll take time for either sellers to see the light and compress the bid/ask spread, or for buyers (or at least this buyer) to have the confidence in the near term performance to underwrite to more optimistic assumptions.  My wounds have healed from 2008-2009, but the scars are still there--so I've learned it's better to be a few months too late than a month too early.

Jay Hinrichs · Answer

very common cycle for real estate agents..  although to lose 25% in 30 days thats something normally the dues are paid annually so you see realtors leave when its time to re up.

Erik Hatch · Answer

Many challenges out there for sure. I spoke with Dan at your firm at length the other day as well. Looks like the well oiled operators should fare ok but not immune to the current situation. The uncertainty is enormous.

Caleb Brown · Answer

For realtors I have noticed many getting out of the business. A few zip codes that you can pay for through Zillow has been vacated. The top teams and agents still are doing okay but it's weeding out the weaker players. Before the virus we had 14K-15K Realtors in KC(Not all are active in selling) now we are just below 11K. Market wise the key investors are doing okay. There isn't as much competition with bidding since it's weeding out the weaker investors. Prices are still higher than last year and rent hasn't been falling. Appraisals are drive by and inspections only the inspector can show up. Signing docs is now mobile notary or esign. Still going great for more but people are struggling. April/May will be interesting to see the dynamics.

Account Closed · Answer

We've been scaling in Saint Louis and are under contract for 5 homes to purchase. 3 are flips and 2 are rentals. Looking good for us so far!

Caleb Brown · Answer

@Adam Engle-Sorrell

It is a good time to start connecting. No one knows how acquisitions will be effected from the virus. End of this year and next year we will see the effect. It’ll also depend on market. Midwest is typically a linear market during recessions prices don’t drop as drastic as the coastal cities since we don’t have crazy appreciations. There is less investors buying currently and that’ll continue til the lock downs end. For the next 12-18 months it’ll be more of a buyers market but that’ll depend on how long lock down is.

Adam E. · Answer

@Caleb Brown

I don't work anywhere near acquisitions, but I've heard now is a good time to build relationships with brokers and from what you're saying it seems like brokers might be needing some help keeping confidence in the market's long term health. What do you think? Is now a good time to be reaching out or are we in too much trouble?

Elbert D. · Answer

Well. I think everyone is adjusting to not being able to go inside a tenants property as most people are refusing to let anyone in. As far as realtors. I have noticed many realtors not returning my phone calls. Not sure if it’s due to laziness. Or because this is the time period many people are running from real estate. As far as wholesalers. I have seen many not having much of anything. Fix and flippers that I know are scared and trying to “time” the market and choosing to wait as they think anyday the crash may come and in their mind. Picture buying a property and while rehabbing it you find out your not getting anywhere close to the sale price the comps for were at during the time of purchase. Landlords are of course waiting to see what’s happening due to rents stalling. But several others I have talk to have inform me they are waiting to buy something else. Sitting on the sidelines watching. Lastly. It’s the inspectors. Appraisers. General contractors. Lawyers. Title companies..etc. Everything Is connected and apart of the real estate Cog. Literally  everyone has been affected ..So COVID plus how tight the real estate market is everywhere has created difficulties. Slowing down things for everyone.

I look at this as opportunity. Being opportunistic and showing grit. Resilience that further builds character. COVID will pass and the entire real estate market will loosen up. The market will correct itself.  To everyone, continue doing what you’ve been doing if you’ve seen success. Any newbies. Keep researching and improving.

Caleb Brown · Answer

@Jay Hinrichs

Yeah agreed. Most active agents will be fins

Adam E. · Answer

The syndication company I work for just a couple days ago raised $9m for a $3m raise for a new construction in Houston. It's really appealing because, with the new construction, there won't be cashflow for at least 8 months anyway, so the fears of the pandemic are mitigated, plus it's located fantastically in Houston. If you're focused on the fundamentals and you're underwriting conservatively, a good deal can still be a good deal in times of uncertainty. Your projects will be affected no matter what, but if they can make even a little money in bad times, you'll be better off than having your money sit in the bank or stock market.

For anyone interested, make sure the project's location fits your metrics for:

1. Population growth

2. Median Household Income

3. Median House or Condo Value

4. Change in Crime Levels

5. 12-Month Job Growth

Then make sure the neighborhood is exactly what you're looking for, and THEN you should start underwriting conservatively.

Who is Closing Deals Through COVID-19?

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