All Forum Posts by: Chris Mason

There are a sufficient number of billionaires that say to be bullish when everyone is being bearish that they can't all be wrong. 

For most of California (I simply can't comment either way on the rest of the country, so I'm limiting my commentary to what I know), it's a buyer's market now. But everyone is scared to buy. Meanwhile, for sellers, the party has ended, and they're frustrated, making 'wasted' mortgage payments as it sits on the market for longer (especially true of vacant/staged homes, 90 days on market means they've "wasted" 3 mortgage payments on a house they aren't even using any more!). The top appraisal blogger in the nation happens to be in Sacramento, in California, here's how he puts it in part:

"In a short period of time, we went from having three weeks of supply in the Sacramento region to ten weeks. What is causing this change? It’s easy to pin this on sellers rushing to list, but that’s NOT the case. This is actually about fewer buyers getting into contract. We’ve seen close to two thousand fewer sales since May, which means listings that normally would’ve sold are still on the market. In other words, the spike in supply came from weakening demand rather than more listings hitting the market."

10 weeks is 2.5 months. "They" say that 6 months is a balanced market. But we used to be at 0.5 months. So the situation feels a lot worse than it actually is. According to that metric, it's still a seller's market. But everyone's psychology, and the way they are behaving, says it's a buyer's market. It's a mighty elephant that's scared of a teeny tiny harmless mouse. Good time to be a mouse. 

Random quotes:

“The intelligent investor is a realist who sells to optimists and buys from pessimists.” - lots of pessimists out there right now trying to sell. If you read the /r/realestate subreddit, sellers are LOSING THEIR MINDS because it's been on the market for 3 days and they don't have 20 offers in-hand yet. This is their first time selling, they have zero context but what their friends/colleagues who sold in 2016 and 2021 told them, it's absolutely normal to not have 20 offers in 3 days, but they are completely unaware of that, they think the world is ending, they're pessimistic and think "it's 2008 all over again"!

“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” - OK Warren Buffett, you got it.

“You make most of your money in a bear market, you just don’t realize it at the time.” - Real estate obviously isn't going to jump 20%/yr again this year, maybe that's ok, I think this is a form of the long-forgotten saying that people used to repeat all the time right here on biggerpockets, but that's fallen into disuse over the last couple years: "you make your money when you buy."

On the buy-side, everyone still thinks it's an epic 9 month journey with 15 rejected offers, bidding wars all over the place, bla bla bla, to buy a house. It's not. Right now it's more like 1) get preapproved, 2) look at 5 houses, 3) pick one, 4) buy it, and 5) keep an eye on inflation, because rates will follow inflation down like they followed it up, and you will want to refi at that point. That's it. The most drama free market (at least if you're a buyer, the story we just told includes 4 sellers frustrated with their listing agent -- but as a buyer, that's not my/your problem) I've seen in California in my limited time on this planet. 

I certainly am not selling squat right now.

No crystal balls, but this is how it may pan out for those sitting on the sidelines because rates are scary:

- wait for rates to drop

- rates drop

- everything is a multiple offer situation again

- whoops

 The seller, if they're a match for what you are looking for (& they may not be), wants regular passive no-hassle monthly income. And that amount can be less than what they or you "could" get from fixing up that property and turning it over, and we know that's true, because if they were interested in doing that work for the largest monthly income, they'd have already done it. They didn't do that work, they don't want to do work (that's the One Big Thing that jumped out at me from your post, and what the rest of this basically feeds into), they just want to cash a check every month. That's where you come in. You're going to make this easy on them, the most hassle free decision or thing they've ever done, certainly easier than dealing with placing tenants and fixing a broken oven!

So, you're going to offer them what they want. You're going to do the work, to make it easy for them (recurring theme alert!). You're going to pick some number greater than what they're currently getting from the property, but less than what you expect you will be getting (factoring in of course risk, effort, expenses, and so on), and you're going to take out a financial calculator (I'm fond of the HP-12C) to turn that into a menu of terms, fees, and interest rates. And just like any good restaurant, you're going to do the work up front, to promulgate a menu that makes it easy for the customer to shop between options, all of which look excellent (don't put stupid overpriced low quality things on your menu), without having any menu items that don't also work for you as the restaurant. 30 year term at this rate, 25 at that one, maybe some with higher upfront fees and others with lower, and so on, we have a wide variety of excellent wines, you could also present that entire menu, but advise on which 2 or 3 might be the most appealing to go with their steak (we took something confusing, and did the work to make it easy). But the entire menu needs to be things that work well for you and your goals, while also looking appealing to your restaurant's 'customer.' 

The fact that the monthly check you write is less than the monthly checks you deposit, in exchange for you doing some "work," is where you stand to make a profit. Arbitrage. 

Amazon dot com does not care what I buy on amazon dot com, they care that I'm buying it on amazon dot com. Go be amazon. Give them their menu. Insert some random 3rd metaphor here.

Good luck. 

BTW: realtors do not like seller financing because it often winds up translating into them not getting paid at the closing table. Set aside 6% to address that. 

 1. The loan officer can simply not "document" or "claim" income that they don't want to use, if that'll get you below the applicable income limits.

2. If you have good credit, the conventional programs (Home Ready and Home Possible) will likely be better financing overall. On top of that, relators discriminate against FHA loans, so you dodge that bullet, in the event of a multiple offer situation.

I'd find a new loan officer. 

If it's cashflow positive with the 75% of rents offsetting PITI, your DTI should actually go down with each purchase. If they think it's "difficult" because of the "increasingly negative income," I'm guessing they aren't doing the math right (which could/would jam you up down the road). The most common error here is that they add the rent to the income column of DTI, and add the PITI to the debt column. For investment properties, that's wrong (that arithmetic is correct for owner occupied real estate, which is where the common error arises from). For a rental property, you subtract the PITI from 75% of gross rents, and what's left goes into the income column if positive, debts column if negative. Assuming cashflow positive real estate, the subtraction (correct math) will yield increasing income as additional properties are acquired, but the division (incorrect math) will produce "increasingly negative income every time" (which is what they said).

Here's some example math. 

Rent is $2k/mo, PITI is $1200/mo.

75% of $2k is $1500.

Incorrect math for a rental property: 

$1200 / $1500 = 80% DTI = loan denied

Correct math for a rental property:

$1500 - $1200 = $300. Add the $300 to income. $0 / $300 = 0% DTI. DTI goes down. Loan approved.

Obviously your car payments and day-job income and personal housing expense also goes into the math, I'm using a silly example producing an 80% and 0% DTI to highlight the difference - one makes your DTI go down (good thing), one makes your DTI skyrocket (bad thing).

Your existing 401k typically takes care of the reserves. 

EDIT:

Just noticed --> "We have a mortgage specialist in my brokerage (NJ) who explained..."

Yeah, watch out for that, and for who you refer to them. That loan officer is there because he's giving kickbacks ("desk rent" or "shared marketing" or whatever, to make it legal) to your broker, not because they're good at doing math correctly. As a Realtor, nothing will make you worse than referring clients to someone doing math leading to them telling people "no" when it should be a "yes," or "yes" when it should be a "no."

If your intent when you took out that mortgage was to do with that property what you said your intent was for the 12 months that followed when you signed that paperwork, you're fine. Please reference paragraph 6 of the deed of trust you signed. 

If your intent was otherwise at the time you signed that paperwork, then you committed mortgage fraud and could go to prison. 

If you upheld your end of that deal, the lender cannot call the note due. 

It would not hypothetically be me (or anyone else here) that you have to justify your "intent" to as being true, it would be a judge appointed by someone elected by the voters, so there's no point in engaging in a series of "but what about if..." with me (or other posters), since I'm not (and I assume this is true of most others, as well) a judge. :)

"If i don't refinance that loan or anything to cause the lender to know the property is a long term rental, would it not matter?"

Assuming you believe in the value of insurance, that's not actually an option, rendering the question moot. Your insurance carrier will notify the lender when you switch up your insurance type/coverage/etc.

Keep in mind, DSCR is a subset of non-QM. Non-QM is only 2-4% of market. Do DSCR is some % of that 2-4%. Only in the bigger pockets context does "DSCR = non-QM." People calling me from this website talk about DSCR, DSCR, DSCR, but for my other sources of business, non-QM almost always means (they are never this direct, I'll cut through the chitter chatter) "I'm self employed and lie to the IRS about my income, so I need a non-QM loan that'll look at my business bank statements instead of my tax returns to calculate my income for the purchase of a primary residence." And those bank statements tell a story that would trigger an IRS audit if the IRS saw it, not because they're broke, but because they're good earners, but comingling biz and personal finances, presumably to write everything off and look broke to the IRS.

From CoreLogic -- "The non-QM share of total mortgage counts declined during the pandemic and reached its lowest level in 2020, at 2% of the market. However, the non-QM share has almost doubled in 2022, representing about 4% of the first mortgage market."


https://www.corelogic.com/inte...

Conventional loans (Fannie/Freddie) are the gold standards with the lowest default rates.

Then you've got Gov't loans (FHA / VA / USDA) and non-QM (DSCR, "alternative documentation," modern subprime, etc). Each implicitly tests a theory. Gov't loans on average are higher DTI and lower FICO scores (for example 3.5% down and 660 FICO with a 53% DTI is a totally doable FHA loan). Non-QM pairs "uncalculated" DTI with higher FICO scores and larger down payments (we don't know DTI [lots of these folks are self employed and get 'creative' when reporting income to to the IRS, so the tax forms are unreliable {that's why they need non-QM to begin with!}, credit scores are great, and they have big fat down payments (which could hint at their "real" income that you won't see on tax returns).

All the data that I've read says that non-QM is outperforming FHA. In 2019 for example (just to use the Core Logic article since you may also have it open), we're talking about FHA loans having delinquency of 13%, while non-QM has about 2.5% for same.

No crystal balls, but I don't see non-QM/DSCR being the harbinger of doom. 1) It's a small number of loans, and 2) it outperforms the FHA loans that haven't had major changes since well before 2008 (the 2005-2008 loans were far riskier even than today's FHA, no one blames FHA for 2008, and FHA at any point in the last 20 years is higher risk than today's DSCR/non-QM).

"But but but everything is 2008 v2.0!"

Getting causality backwards, that quoted person did. The 2008 recession did not cause the real estate crash, the real estate crash caused the recession. 

Since America was taken off of the gold standard, the only recession that caused real estate values to decline was the end of Cold War recession. I wasn't around then, you graybeards tell me if my understanding is correct, but what I'm given to understand is that values plummeted in military base towns, and in towns where a big military contractor (Boeing, Lockeed Martin, etc) had a big factory that everyone worked at, in both cases due to the broad expectation that the one base or industry propping the town up was about to go away (I grew up in one such town, the Air Force base became a ghost town [on base housing all boarded up, etc], then a superfund site, then a new home community years and years later, heh). So you had "normal" homes go up a modest amount, these few military towns plummet a lot, and the overall number was like -2% or something. 

Detroit has gone from Motor City to Mortgage City. Quicken/Rocket, United Wholesale, Homepoint, and so on, all being major wholesale mortgage players, all headquartered in/around metro Detroit (good place for cost effective hard-working workers, call it the Motor City work ethos of their parents still being around if you want, but good luck having good rates, low costs, and smooth operations, if your 8k or 20k workers are in San Francisco making San Francisco salaries, it's not like this is bread or chocolate where the wonderful Pacific ocean air is going to infuse into the mortgages and make them "taste" any better...). The mortgage industry has shed tens of thousands of jobs, including 5k just yesterday, and mass layoffs (either official, or unofficial by making working conditions more onerous so folks quit on their own) for each one of those companies I just named too. 2020/2021 mortgage companies that IPOd/SPACd at $16 or $20 a share are now selling for $4 or $7 (talk about a fire sale!). Mortgages aren't the Titans of Detroit that cars once were, and I have no personal material or financial interest in Detroit aside from (obviously) lots of telephone-only colleagues there, but it is one area I will be watching for a "repeat" of what can  happen when too much business in a metro area is concentrated in a single industry. 

 The academic literature I've read said says that, of all the players in the real estate ecosphere, builders are the most rate sensitive. Quickest to break ground when rates are low, first to flee when rates are up. Some are bulls on overall home values, some are overall bears, but all agree that builders are skittish AF when it comes to getting spooked by rates (they build on borrowed adjustable rate debt, and they don't get the 7 or 10 year fixed intro period consumers get, it's typically adjustable right away, so rising rates makes it impossible to build out a spreadsheet projecting your costs, telling your investors what to expect and when, etc). 

The inventory of new construction homes hitting the market 12 months from now will ("should") be dismal. 

Nah.

- Real estate will be less liquid. The number of transactions will decrease. When rates are sexy, it's no big deal to sell your house with a crummy kitchen in order to buy a house with a nicer kitchen, but one fewer bedroom, as a lateral move (sell a $500k home you don't like any more, to buy a $500k home you do like, equity from one is down payment on another, monthly payment ballpark unchanged). Now, in mid/late 2022, that would mean swapping out your 2.75% rate for a 5.XX% rate, the payment will be $1200/mo higher. Suddenly you don't hate your kitchen so much after all. Supply and demand are unimpacted by this, since it's 1 fewer seller AND 1 fewer buyer, but there are 2 fewer transactions (times however many million). So, as stated, liquidity will be down. Less houses will swap hands. People will do more staying put.

- Rent will be going up faster than real estate for the next couple years. All the would-be FTHB deterred by the higher rates still gotta live somewhere. That would-be FTHB isn't leaving the rent treadmill, but young people are still aging out of college and their parents house, they need to hop on that treadmill too, so the treadmill is about to be more crowded. Rent bidding wars wouldn't shock me, basically rent in 2023 doing what real estate did in 2021 (go bonkers).

- Because of the lack of liquidity in bullet point 1, demand for home renovations will be up. To any general contractor out there worried about the lack of flippers hiring you moving forward, worry not, that person in paragraph 1 needs to redo their kitchen, and as long as the cost (amortized either in a personal loan or credit card) is less than the $1200/mo bump she was otherwise looking at, she will conclude that the new kitchen renovation is a good deal. Rates follow inflation up, and will follow it back down, but in the meantime y'all should have some good solid years (Bonus: that homeowner in paragraph 1 isn't a cheapskate like the flippers are).

- For my fellow mortgage and real estate professionals concerned about the liquidity, worry not. Everyone you don't sell a house to, or do a mortgage for, today, will be back next year. Everyone always said "don't live commission check to commission check," now we find out who was paying attention (which, in turn, means less competition on the other side of the tunnel -- whoop whoop!). The rate shock will be over, the impact of the inflation will not be. They'd probably get a better deal today than a year or two from now, but whatever, that's on them for trying to time the market. 

 I'm an S-Corp myself.

How much you pay yourself a salary will not make a difference. You are self-employed. If you pay yourself $100k/yr salary instead of $60k/yr, then the biz will have $40k less profit than it otherwise would have. The calculated income will not change. 

In some cases the AUS will approve with 1 year of tax returns, in come cases 2 years will be needed, for a self employed person. The only way to find the answer is to apply, ideally with someone that's familiar with the "tricks" that can turn a 2 year requirement into a 1 year requirement. As an example of that, the little 401k from 3 jobs ago with only $14k in it that you kind of forgot about and didn't otherwise plan to think about for another few decades? Including that account could make the difference. Or maybe at 5% down they want the 2 years, but at 15% down it'll go for 1 year. And so on.

Note: 

When you apply for preapproval, it's assumed that you are not attempting to commit fraud. So you could very easily provide your paystubs and W2s, not disclose that you own the business, and if someone doesn't look carefully, you could probably get preapproved with the paystubs being treated as a base salary rather than self employment, without 2 years of biz tax returns being requested. Especially if it's an internet or call center type lender (and listing agents know this, which is why those offers go to the bottom of the pile, all else being equal).

When you're in escrow, it's assumed that you (and everyone else) are attempting to commit fraud. Greater scrutiny here. So this is when it would come out, and it would be an 11th hour loan denial, potentially costing you not only the house, but your earnest money deposit as well. 

This is why we should always take the anecdotes of "I got approved for $2m! I just did XYZ!" without the person specifying if it was a preapproval, or if they own the home with keys in-hand, with a grain of salt.