What to watch for in real estate.
Deal chasing, industry consolidation, survival mode.
There are a lot of people with a lot of money sitting looking for deals. While transaction counts in both the residential and commercial sectors have come to a screeching halt, people are becoming impatient. If you have to justify why a deal is a good deal, and the deal at face value doesn’t pencil out to be a good deal, you don’t do the deal.
Last night I got a call from a friend who is selling a listing in NJ, a mix-use building. The current rent roll only supports a $535,000 loan amount, and the “pro-forma” rent which is the future rents based on market conditions supports a $585,000 loan amount. The purchase price is being negotiated between $810k-$840k. Banks are only lending on current income and expenses as many losses and problems are brewing for “pro-forma” underwritten investment real estate as rent values are not being met and/or once a property sells, taxes and insurances are going up or coming in much higher. Many buyers are looking to gobble up properties locally but I believe many are over paying, and while that is my opinion, the cash flow analysis underwriting tool proves to confirm the same.
Industry consolidation, the real estate and mortgage world saw “top producers” or “Sales people” leave and start their own companies, as the amount of deals they were closing made up for the improperly run businesses, and now that deals are done, the same heavy hitters can’t afford the office rent, admin, receptionist, etc., and are being sold or merging with larger players that have larger bank accounts. One of the biggest mistakes top closers or producers make is / are going out on their own, as I learned early on in my career, just because you can make money, doesn’t mean your a good business person, and usually running a business, takes away from you being able to earn a lot of money.
Every lender and real estate agent I have spoken to, with the exception of one, in the last 45 days, expressed the last 4 months may be their worst 4 months of their career. Many people are taking side jobs or going back to their career prior to real estate as it appears “the run is over.” While I do believe the transactional run is over, I don’t believe the game is over by any means. Now more than ever individuals and professionals need to lean in on their local immediate market, bring value, show up, and be the true expert.
There will be plenty of movement in the next 18 months due to divorce, death, job layoffs, and re-locating for cheaper, affordable living. The days of homes selling themselves and mortgages refinancing themselves are over, and now the power goes back to the people. While the fight isn’t easy, it’ll be worth it.
Rates are going higher after this recent drop off and homes are going to be selling less and less as the problem “well even if we sell, where do we go?” sets in.
