Latest / Real Investor Radio Podcast / Episode 5 | iBuyers
Transcript
- Craig 00:00 You're listening to Real Investor Radio with Craig Fuhr and Jack BeVier, where we cover advanced real estate investing topics to help you stay ahead of the curve in your real estate investing business. Hey, welcome to another episode of Real Investor Radio. I'm Craig Fuhr with my awesome co-host, Jack BeVier. Hey, hey, man, I, we got a lot to talk about today, so why don't we just jump in. I've been doing quite a bit of research over the last few days on iBuyers, and we'll talk about what that is. I'm sure most of the people listening know what iBuyers are, but we'll discuss that quickly. But man, that's an interesting business model. Jack 00:39 Yeah, I'm, I'm biased. I've been a, I'm a, I've been an iBuyer hater for, for quite some time, even before they went public, so I'm looking forward to, to talking about that and, and kind of giving an update on where they're at. Craig 00:52 We're gonna have some fun with this one. So, briefly, what is an iyer? Do you want to go into that real quick, or, I have a, I have a sort of a packed Yeah, go for it. The small definition here for, for those of you listening who don't know what an Iyer is, it's basically a real estate company that's been funded by, you know, hedge fund capital, wall Street Capital. Yeah. That they use algorithms and technology to buy and sell real estate quickly on a very large scale basis. The model was first introduced to the US market in 2014 by Opendoor. They happened to be the largest IY company by far. And it's all basically very fast, easy offers for sellers based on what they call an A V m, an automated valuation model. These people, these companies are basically institutional flippers. They are, for lack of a better word, big wholesalers, and that comes from Green Residential. Craig 01:57 So how do they make their money? What's the business model for these guys? They, they basically make money in three ways. Service fees, they're generally paid by the seller, much like an agent's commission where there's really no agent here. So those service fees from the Iyer companies can range anywhere between five and 10%. They also, the second way they make money is on their closing fees, essentially title insurance, loan fees, and other ancillary services that they might provide, if any. But generally those fees are around two point half percent, plus or minus. And then, and then finally, they're, the biggest way that they, they try to make money is on the resale margin. And that's the difference between obviously what they pay the fix up of the house, if there's any generally fairly light. And that could be anywhere between four and 12% if you add all of those up. Doesn't look like a bad business model. Right. What they don't talk about a lot is sort of all of the baked in costs that they have to run the business. And so wanna talk about that today and what are your thoughts, Jack, on, on the business model in general? Jack 03:05 Yeah, so I think on, you know, on paper it sounds like, you know, a very conceivable business model, especially when the idea was first, you know, pitched back in 2015, there was a lot of home price appreciation. There were a lot of sellers who were interested in selling. The prices were good. And I think that those, I think that the, the folks who funded those models did so in the right markets, which tend to be the sunbelt, tend to be houses that are built of newer vintage, because the rehabs are frankly, easier to do with scale. But the thing that I've always, you know, the, the, the, the core thing that I've always struggled with is that my experience has been that scaling a flipping business gets harder and harder and harder as you scale. The further that the entrepreneur gets from the street, the more difficult it is. Jack 03:56 And the, the harder it is to institutionalize the acquisition side, the harder it is to institutionalize the, the rehab side. And if you, if, if an entrepreneur can't, who is making all the business decisions, right? The business owner, right? Is, is having a difficult, or the further you get from the, from that owner of the, of the business to the street, the more slack, you know, goes into the system, the more mistakes are made. And so my experience has been that, you know, we, we've, and we've tried Sure you have. Yeah. You know, I think we probably got up to flipping, you know, a hundred houses a year, and we know a bunch of other peers, particularly in our, in our mastermind Yep. That, that do flip at higher volumes than that in a lot of the markets where the iBuyers exist. But it's, it's, it's real, it's really tough to, to institutionalize and create a business model out of that that is fluid the whole way through. So Craig 04:57 Companies that we're talking about here obviously are like the open door, OfferPad, Zillow, Redfin knock companies like that. You, you mentioned the markets that they're in. So top, top 10 markets for IY right now. No surprise. Atlanta, Georgia, San Antonio, Texas, Charlotte, North Carolina, Jacksonville, Phoenix, Dallas-Fort Worth, Orlando, Las Vegas, Houston, and Tampa. I would assume that, you know those markets well because you guys do a lot of lending in those markets, correct? Yeah. Jack 05:29 They, they've been fantastic markets. Again, a lot of like newer vintage houses, a lot of home price appreciation from 2012 to, to today, especially in the past couple years. Yeah. Craig 05:38 Anybody can make money in those markets, right? Jack 05:40 Right. You one would, one would think, right. And yet, and yet we have seen that iBuyers have cons. The one thing that they all have in common is that they have always, they all have always lost money every quarter. Well, Craig 05:52 Let's talk about that real quick. So from 2017 to 2021, let's just talk about Zillow. Total revenue went from anywhere between about 1 billion all the way up to about $2.2 billion. Yet in the, all of the iBuyers posted major losses in, in 2022, open doors sold more homes than Zillow and OfferPad combined in 2019 to 2022. Yet they've, all, every one of them has reported significant losses on, you know, billions of dollars of revenue. Jack 06:34 Yeah. So, so like on an individual transaction, they've made money. But the problem is that when you overlay, and, and by the way, and I would argue in large part due to the home price appreciation, not necessarily due to them like buying extremely well, right? Like they're, they're, their pitch is not, Hey, we're gonna buy it a deep discount, right? Right. Their pitches, were gonna buy pretty close to retail, add a little bit of value, but, but the kitchen and bath paint and carpet rehabs that we're gonna do are gonna be very value add relative to the, to the money that we're spending on the rehab. And so we're gonna create, we're gonna create a spread there that, that idea just flies in the face of everything that I've experienced over the past five years, which is that kitchen and bath paint and carpet rehabs don't have any margin. Jack 07:15 And so that the, this, this idea that like the main street entrepreneur can't make those deals work, and yet at volume Wall Street's gonna figure it out. I just, I, it just doesn't make any sense. It doesn't make any, it doesn't make common sense to me. Like the, the, you know, the main street entrepreneur who's looking to do three, four deals a year, who's not paying himself for his, for, for his acquisition side, who's networking with real estate agents, literally maybe even doing door knocking, direct mail. These are things where you may be able to produce a cost of acquisition of a deal, you know, as low, you know, in the, in the five to seven grand range, you know, kind of your primary markets, maybe that's close to 10 to 15 grand. Your tertiary market's a little bit less than that with maybe like bespoke direct mail lists like probate and a estate. Jack 08:02 You can get that down to just a couple grand, but they're not scalable. So like, you're gonna make it up in volume, but you've only got, you know, it only costs me five grand to do a deal, and I'm gonna go GC the thing myself. I'm probably also the real estate agent. If I'm a, if I'm a, if I'm a full-time flipper, I've got a real estate agent on staff, like, and you're gonna make, you're gonna beat me because how, like, how are you gonna beat me? Like, the arrogance of it is really kind of what, like, gets me fired up about it that I just don't see where in that, where in that equation, you're gonna spend so much money on marketing that your cost of acquisition is gonna be, is gonna come down from my five grand to what, you know, for, you know, and, and that's gonna be the difference in your business model. Craig 08:44 We often like to talk about the large institutional companies that are in the space as sort of the dumbest guys in the room. We've talked about that on previous episodes where, you know, you, you roll up to the courthouse and you see guys with, with massive envelopes of cashier's checks ready to buy. And these are the, obviously the hedge fund buyers, and they're not the dumbest guys in the room. They're actually the smartest guys. Right? They are very, very smart at what they do. So what is it, where's the big miss here? Where, why are they, why are they keep, why, why do we see them continue to double down, double down, double down on this model? Jack 09:21 So in, you know, when, when the idea came out in 2015, I thought it was a good idea. Flipping was great. There were mar there was margin in flipping at that time. And I think that perhaps may, maybe, maybe it's the case that the, the invest early investors had not experienced the cyclicality of the flipping business that, that we've experienced. And so that an institutional platform that relies on transactions and relies on transactions at scale is gonna be able to make it through cycles and find margin when, when the most, you know, gritty main street entrepreneurs are struggling to do. So maybe they didn't, you know, maybe, maybe they didn't appreciate that idea, by the way. Maybe it's just they were riding the venture capital wave that really was a significant wave. Yeah. And then became a bubble, you know, by 20 20, 20 21, which is, by the way, when these companies IPO'ed, right? Jack 10:15 Well, so like, if the early money gets in at a good valuation, and then you can go, you know, you can exit and do an I P O at a, at a greater valuation. They didn't, you know, maybe they made money, right? Like they didn't, you know, the business model isn't viable over a long period of time, but that doesn't mean that there's not a trade to make. Right. Taking an idea and bringing it to the public market for the first time off of a lot of like, enthusiasm and hype. So maybe they did make money. It's just the public market real, the the public market investors, you know, the, you know, my mom who, you know, who's, you know, who's, you know, re reads an article and thinks that, hey, that's, that's neat. Maybe she's just the sucker, right? Yeah. But that idea has never sat well with me. So I've always been a, you know, hater. Craig 11:00 Yeah, yeah. You're not a big fan of the, I was shocked to see that in 2021, the Iyer national market share was only at about 1.3%. So we're not talking about, you know, these guys aren't capturing some massive amount of market share here, but that was about 70,000 houses. Now let's talk about 2021, because we were talking before we started rolling here, and in 2021, everyone made money in this business. If you could fog a mirror and find a deal, chances are you were going to make money on it. Really great chance of making it. Yet, for whatever reason, the Iyer model, they were, they were still hemorrhaging money at that point. Yeah. Jack 11:42 There's, there's tremendous home price appreciation. And yet they, even with that huge tailwind behind them, that that idea that that huge home price appreciation couldn't overcome their general and administrative expenses associated with, you know, with running the platform. And so, like, I'm like, you know, every flipper who's listening to this knows that in 2021, if you just bought a house and just waited six months, and the longer, the longer it took you to do the rehab, the worse flipper you were in 2021, the more money you made because the market was going up so quickly, and yet the iBuyers couldn't, couldn't pull out a profitable quarter during that period of time. It's, you know, it's some, it's some shameful stuff right there. I Craig 12:21 Was speaking to a banker who will go unnamed, but we were talking about sort of the, the difference between the 2006, you know, 2006, five really felt a lot like 2021, right. Markets going up like a rocket. And he said, Craig, I'll, I'll, I'll never forget it. I rolled up to a few of the houses that we had loans on, and it was, they were all owned by the same guy. The guy was sitting up on the roof of the house. It was here in Baltimore, by the way, sitting on the roof of the house in a lawn chair, six pack of beer, sunning himself. And the banker says, there's no one working in the house right now. And he says, yeah, what do I care? I'll just wait another 5, 6, 8 weeks, and the price of this thing is going up, like, you know, 5% a month. Craig 13:07 What do I care? You know? And so I, the reason why I I bring it up is I spoke to him again, the same banker, and he feels like we're sort of in that, that 2021 period was sort of very similar, where he just had a lot of lazy guys that were just sitting around waiting for the appreciation play. And as many of you may know, already appreciation is really the icing on the cake in this business. It's the cherry on top. You, if you're, if that's all you're betting on as a business model, chances are you'll, you'll at some point be in for a very rude awakening when the market shifts. And I think that these iBuyers, you know, they want to, they want to say that it's covid. They wanna say it's just people just aren't selling their homes. It's the high interest rates. But I would sur I would, my my supposition is here is that they've bet on the wrong, the wrong return. They're betting on appreciation here, right? Jack 14:08 Yeah. I mean, even with appreciation, they weren't able to make it work. And so, you know, they're, I've heard arguments that, hey, we're gonna make it up with adding title services, mortgage services, and these ancillary, ancillary sources of additional revenue are gonna help, you know, really grab an increased, increased margin and as a percentage of the flipping margin that actually is material. I just think that those are in and of themself tough businesses. They are also competitive businesses. Titles tends to be a, you know, a very low margin business. Mortgage is probably the most mature industry, one of the most mature industries in, in America. Yeah. And so that, that there's much outsized return to grab there is, is a little tough. Like I get, I, I I accept it on some level. Is it enough to overcome the challenges of scale? No, I, I don't like it just, I feel that, you know, the, the answer to that is no way, not, not a chance. Jack 15:02 Okay. You know, an an interesting thing that, that also happened during the period you were talking about, is that, I mean, we were talking to, to guys in our masterminds who are active in those, in the markets that you're talking about and doing and, and do a lot of volume there, right? Open door OfferPad, Zillow became primarily the fir the first two became actually even a source of, of, you know, an exit strategy for wholesalers, right? We were, they were se selling not only to the public and private REITs, but even the iBuyers, you could get a deal and sell it to 'em if it fit, fit in their box. And it was also like, you, you can send them, you, you know, you go to their website, you type in the address, they give you a number. If they screw up to the high side, give 'em a shot. Jack 15:43 You know, give 'em 30 days and see if they can, you know, see if they can close this thing at the number on the high side. If, if their offer's too low, then you just, you know, move on and you sell it to one of the public REITs. So even, even the nature of the, the nature of the model, I feel like it, it like is ripe for adverse selection, right? Like they're, they're using automated, explain that. Yeah. Like they're, they're, they're using automated valuation models to come up with offers. They have a lot, you know, they'll tell you ad nauseum about all the data that they're using to predict what's going on in the market. Jack 16:13 All that stuff's untested. Frankly, none of it bailed any of 'em out in 2022. Right. And everyone, you know, they had the best data in the world and 20 in, you know, in Powell decides to, to move the country in a different direction. And none of the models had, were reading C n n or had any idea that like, that this was, you know, going on and took that into consideration. 'cause clearly they've lost a tremendous amount of money. So data's a wonderful idea. I'm a, I'm actually big data guy. I think use of data in the industry is, is a humongous competitive advantage and differentiator here, though, I think that there was an over-reliance on the models will save us, and they were ignoring, ignoring the or, or they just didn't have as part of their platform, the the local entrepreneur on the street. Jack 16:57 And so, yeah, so you can go on since you can go on their website and get an offer immediately, and the employees of the company will take you through the system and close you. If, if the, if the automated valuation model number is too high, well, that deal may close, right? Like, so every, every time that the a v m gets it wrong, they lose margin or don't make as much money as they thought they were going to do. And every time that it gets it right or is too conservative on the downside, you as the local real estate entrepreneur, just go another direction. So I just think that that is, you know, that there's an opportunity for that to be game. I I, I saw it gamed, right? Like anecdotally, a lot of the folks that we, that we consider peers are, we're, we're doing, you know, exactly that and, and kinda laughing all the way to the bank. So it's, you know, the, the, the I flipping is a very, very competitive business, right? Like it's, and it, and it's become even more so tremendously, more so over the past 15 years, Craig 17:59 Extremely talk about flipping as a model for the local guy. Historically, it's always been about a 20% margin business. And so, yeah, yeah, Jack 18:11 20% annualized, I'd say, like, you know, in good times it gets as high as 30. And what I consider like really lean times you get down to the 10, 15%. And in a, in, at that, at those levels, I think that it's difficult. It's a, it's a tough risk adjusted return just to only get 10, 15% annualized for all the work and inherent risk that goes into to doing a, a flip transaction, 20 to 25 feels like a good annualized margin. And so, you know, there, there's room in there for, for a good operator who's adding value to the property, right? And of course, that also varies by geography, right? So if you're doing a, if you're doing a, a lighter rehab on a newer vintage property, you're, it's not gonna take you a full year. So maybe you're only got a 10% margin Sure. Jack 18:59 But it's only gonna take you six months. So that's actually a 20% annualized margin. There you go. Whereas if you're doing a larger rehab project, a full gut, maybe even new construction, that 2020 5% number, because it's gonna be 10, 12 months to exit between when you break ground to when you exit, that number still holds true. But for the, for the activity of flipping that, that, you know, that's, that's kind of the back of the envelope that I use to, to kind of judge whether there, it's, there's an appropriate risk adjusted return. And when you see, if you, you look through the public re I'm big public records nerd, so I'll go like, you know, poking around in public records and see what offer pad and open door and or, you know, are buying houses at and where they're actually exiting in an up in the up market. Jack 19:42 They were looking for that, you know, 10, 15% margin, which was tight, right? They were buying houses because they were paying more than the flippers were sure than the, than the local guys were. Right? That's how they got volume in the first place. And then they got bailed out through home price appreciation. So they still exited at 20 to 25, but it was because of the home price appreciation, not because of the core business model. At a core business model, they're skinny margin flippers. And so what we saw in 2022, when the market is not going up, and actually in a lot of the markets that they, that they were very active in, were have been down five, 10, maybe even 15% in, in some of the west coast markets and high dollar per square foot markets, all of that margin is eroded. And then some, so they're, they're right now they're selling houses at an absolute loss at a, at a, at a nominal loss. Yeah. In addition to the general administrative expenses that they are also still carrying, I'm sure they've done some cost cutting measures, but right now, you know, they're really kind of bleeding and bleeding hard. So there's a question right now as to whether they're, and they're trading at a, some of, I mean, OfferPad six months ago was trading at a discount to cash on the balance sheet. Craig 20:51 In, in fact, in fact, they were warned by the New York Stock Exchange that they would be delisted. Yeah. Saw it, it went below a dollar. Jack 20:59 Yeah. Yeah. And then they, so they, the equity investors doubled down on offer. Yeah, let's talk about Craig 21:03 That real quick. So yeah, venture capital, by the way, has been the fuel of this business, but it's, they've put in well over $6 billion in the last several years. And to your point of losing money on each transaction, I'm looking at a graph here, and while the graph is a little dated in 2019, iyer net loss per home, over $60,000 in 2020, that number got a little bit better at exactly 60, do $60,000 per home. Jack 21:38 Yeah. Craig 21:39 So, and, and so op I'm sorry, Zillow was the worst, lost the most money, Jack 21:46 And they got out, they eventually got out, Craig 21:47 They got outta the business, the open door was losing about $20,000 per house, per house. So this idea that we can make it up in volume, never really seen that work on, on a loss. Jack 22:04 But, and, and now we're in kind of this like, you know, for at least the, the next, you know, the short to medium term, lower transaction volume environment, you know, if we're gonna make it up in volume and all of a sudden transaction volume is down 50% nationwide, like, ouch. You know, that's, that, that's tough. You know, if you, if you didn't sell to an Iyer, you refied at three, 3% and now you're definitely not gonna sell right. For a long time. So like, at what point is this going to, is this like we, are we gonna hit this magical inflection point of profitability? I'm just, I'm just a big skeptic, clearly, Craig 22:35 Right? So I came across quite a bit of content in researching for this episode, and a lot of it, Jack was, it's that content that you get that's just, you, you wonder if the person who put their name on it is even wrote it. And it's just, it's that fluff that we hate. It's that, it's that it's, this sounds really good. And I can't imagine that pe that some, you know, average investors, the guys that do 1, 2, 3 real estate transactions a year, don't look at this and go, well wait a minute, this was written by a guy who is the business director. Can I say it? No, I won't. But the person who wrote this article, we won't put 'em on, on Spotlight. The person who wrote this article should really know better, and they should maybe go a little bit deeper in their analysis before they put it out there. Craig 23:26 But I'll just read quickly. It says here that in terms of using the iBuyers and their inventory as potential investments for say, like buy and hold for you, and this gentleman says, IY is another tool for investors, Jack, to add to their toolbox. Real estate investors, especially single family rental, real estate investors, like many people listening and fix and flip, investors like myself, can benefit from the IY trend Jack in three major ways. They can quickly find available investment properties across the country that's one, two open. It allows them to open doors to invest in other geographical areas. And by working with iBuyers and just simply going to their sites and looking at their inventory, you can buy properties in bulk with portfolio purchases. In a perfect world, real estate investors would have enough time during the day to drive around and search for, for potential investment properties, do their marketing fly from city, city to city to check out these listings. Craig 24:35 But that's in a perfect world, Jack, you, we can't expect real estate investors to do those kinds of things to find deals. So I just looked at this Jack as sort of like this crazy fluff piece again, it's, it's that 70 miles wide and a half inch deep giving people supposedly good information. How do you feel about that, Ken? Is that a viable strategy to go to say, you know, open doors websites, see there a thousand houses that they have strewn across the United States and say to yourself, well, I'm really gonna pick up a sweet deal here. Jack 25:07 Yeah, so, you know, not surprisingly, I, I struggle with that a lot, right? So I mean, the, the eye buying model is to buy a property off market, add some value to it, and then sell it for a hundred percent of retail to a homeowner on the M L Ss. And so if you're looking at that inventory, there's no, there's no discounts to investors. You know, they're looking to, maybe you could save the commission, right? If you, if you toss the commission in there. But you could also do that buying straight off of the m l s. So, you know, if you've got an opinion on a market and you say, Hey, a hundred percent of value today is still a good deal, and I want a turnkey finished property, and I'm just gonna go buy it with a, you know, buy it with a D S C R loan and put a tenant in there, I think you're gonna struggle. You're really gonna struggle to, to make the numbers work today with, with today's interest rates. But hey, maybe you're just parking cash, right? And you want to just, you want some exposure to the Phoenix market and you're parking cash that holds this true, that advice holds us true for buying from iBuyers as it is for going on the M L Ss. And you'll have more to choose from going on the M l Ss. So it doesn't seem like good investment advice, so to speak. Look, Craig 26:21 I still think it's a business where, yeah, there's, I think there are a lot of people out here that are looking at, you know, the, the market and they're saying, Hmm, I wanna pull my money out of the market and maybe put it into some hard assets. I'll park some cash in a decent house, put a tenant in it, make a, maybe a little bit of cash flow if you're lucky, buying at retail. But it's still a business where we're finding deals that have decent margin in them. And I've yet to see any deals listed on the M l Ss that aren't full retail. Yeah. You know, I'm sure they're out there. It's always a needle in a haystack. That's what the, the, the game is all about mostly. But this, this whole piece here, man, I just really find it to be so disingenuous and just sort of like, you know, so indicative of what we see out there from people who should know way better, you Jack 27:13 Know? Yeah. I think, I think that there's just, like in general investors, one of the reasons we created this podcast, right? Yeah. Was in general, investors can, if you Google something, you'll come across a lot of content, but it's a lot of very fluffy content, very surface level. Not a lot of well thought out, you know, from a practitioner's point of view, Hey, I'm looking to like, not just place cash, right? Like it's no, I'm, I'm an, I'm an entrepreneur. I'm looking to like, get a deal, right? Like, that's what's fun about the business. That's what makes the business sustainable, is the ability to do that. And then, you know, maybe you can even, like, as you scale your business, like build systems around doing that at some scale, that's how you make money, right? In a very competitive real estate investing business, which is what the, you know, what America's become and it's, and, but the, you know, but the marketing departments of a lot of these, you know, a lot of vendors, a lot of, you know, companies who are trying to attract eyeballs are just spewing words to, for, for ss e o purposes, not caring at all about is it actually actionable good content, right? Jack 28:18 Exactly. And I think that, that, that ends up, like for the, for the newer investors, that ends up being a real challenge, right? Because you read and read and read your hour, your dozens and hundreds of hours into your research, and yet in your stomach, you know, I don't know shit about this business because I've been reading this fluffy crap. I've got, I've got dozens of hours of fluffy crap and I don't know how to do stuff. I don't know what the difference makers are gonna be. And as a result, you know, you shouldn't pull the trigger, right? Because you know, you're not prepared. And that's like, always Craig 28:45 Follow your gut. That's Jack 28:47 A, that's like a pro that is a inherent problem to getting started in the business. You can cons, if you consume everything that you read on the internet, you're, you know, there's this, you just top out and there's a, a real lack of actionable content and, you know, opinions from people who have done it and know what works and what doesn't work from, from their own pain and lost money. And so that's something that we're trying to bring here in this podcast. So feel free to call us out. By the way, if you ever see us departing from that idea, we're, you know, no egos here. It's just about like, good content and getting people, you know, information they need to make their bu businesses better and stronger. Craig 29:25 I'm not sure about the no ego thing, but we try to take the ego out of it as much as possible. Look, man, I I think one of the, a couple more points that I really wanna make here first is the industry, even though there's been a couple of large players that have gotten out of the business, it is not a business that appears to be going away anytime soon. In fact, it's evolving. And if you sort of look at the four quadrants, I didn't bring that graph with me here, but there's basically four quadrants that started off this whole thing. And it, it started with Zillow and sort of search where sellers would be buyers and sellers would go onto Zillow to search. In fact, I think Zillow reported that they get like 70% of all traffic from buyers and sellers will go to Zillow at some point during the transaction to do a little research and figure out where they are. Craig 30:16 So Zillow is obvious. Yeah, exactly. It's, it's still a, a, a site to find decent information. However, there are these new players that are sort of coming in, not from a search standpoint, but from sort of the buyer seller and then putting the entire, all the pieces of the transaction together to try to make incremental margin on the business. And what I'm, what I mean by that is, so you've got companies like Orchard Knock and Homeward who are now, they're not new, but they've, they're, they're in the market and they're trying to take Title Mortgage and some of the other ancillary services that come along with the transaction and put the, and make that part of what they do. And so if you look at builders, for instance, builders get about 70% attach on mortgages. If you go buy a house, the builder says, Hey, if you use this mortgage company, they get a small incentive. And obviously the builder gets a piece of that that's, I'm sorry, 75% of the time, a home buyer or, or someone who's buying a brand new home will choose the builder's mortgage company 75% of the time. Which obviously makes a little bit of bump for the builder. That's what these companies are thinking. If we can just, Jack, if we can just take all of those extra pieces of action that we're not getting now we've got a real business model here. Jack 31:41 Yeah. I like not to speak about those specific three companies. 'cause I don't know enough about each of their business models to say that I dislike them as a fundamental idea as much as I dislike OfferPad and Opendoor. And I think that, I think that each my, what little I do know about those company is I think they're going after niche year ideas and saying, Hey, we're gonna narrow this down to just a particular niche. And there's some real margin in that niche. And so, you know, and I, I hope that they're successful with it. Yeah. Craig 32:07 Well, unfortunately, I'll tell you quickly, I'm sorry. Homeward laid off about 40% of their staff that sucks late last year, knock laid off an additional 40% of their staff, and Orchard has laid off about 23% of its employees in 2022. So not sure exactly, yeah. How the model's going. Jack 32:24 Venture capital has been really brutal. You know, venture capital funded companies have been really brutal the past, you know, 18 months, right? As, as that bubble has really kind of popped, everyone's looking to raise money, they're gonna raise money at lower valuations this time that they did. And I think there's still a lot of conversation about how venture capital fund funded companies that are not gonna make it through many, many, many are not going to make it through the next, you know, 12, 12 to 18 months. Oh Craig 32:52 My gosh. Tell me quickly about who was it, Genesis that was funding a company? Jack 32:58 Yeah, so one, I, one of my, in my nerdy rabbit holes of, of doing public record research, I was looking at offer pads transactions and noticed that actually I was No, no, no, that's not true. I was looking at one of our competitors, Genesis Capital, who funds a lot of like builders. They do a lot of West Coast lending as well. Craig 33:16 Is it essentially hard money? Yeah, Jack 33:18 It's, yeah. It's, it's like, it's the, it's the lower end of, I mean, you know, from a cost to capital point of view, it's like the cheaper side of hard money, but they, they're like big accounts, low, relatively lower L t c Craig 33:29 Fairly short term loans. Yeah, yeah. Jack 33:31 Just fix and flip money. And Genesis did a, a tremendous amount of transactions, a lot of transactions with, with OfferPad in third quarter, fourth quarter, first of, of 2022 and first quarter of 2023. And this is when, when you mentioned when, when their stock was down below, you know, right at that dollar level and cash, it seemed like they were, you know, they, they were willing to pay, you know, probably low teens a p r for, for cash just to like have cash on hand. And this was right after they had raised that $90 million of equity in this, you know, in this kind of like, you know, to, to, to, to bolster the company and get it through the, the, the end of 2022. So that was interesting to see, right? Like even the, even the biggest guys are borrowing hard money to fund their flipping businesses. It was that brutal, you know, in the third, fourth quarter, Craig 34:24 Which had to compress margins significantly. Yeah, Jack 34:27 Yeah. Yeah. I mean, you know, with, in that if you've, if you've got a good, if you've got that 20% margin annualized margin model, you know, whether you borrow money at eight or 10 or 12 doesn't make or break a deal. Sure. Certainly you'd like to keep more of that in your pocket as the flipper, right? I think in this case it was almost kind of like insult to injury, right? Like they're selling these houses at a loss and your cost of capital's higher. Like that's, it's just, you know, it's just insult to injury. And they were only lending, Genesis was only lending on finished properties. Like the, the renovations were done, the houses were all listed, so it was very short term. So the a p r was actually probably quite a bit higher than that even because they were only taking the, they weren't taking any construction risk, it was just pure, you could see it was purely about liquidity, that they needed to raise some cash real quick. And Genesis said, well, if you gimme, you know, real estate security, I can get you cash real Craig 35:19 Yeah. We'll lend you up to maybe 65% of the actual value of the house, not sort of the inflated hopeful value. Yeah, exactly. It's a fairly safe loan for them. Yeah. Jack 35:27 The loans seem all seemed fine. They seemed like good loans and they're, I'm sure they're in the process of all being paid off right now. I didn't see any recent originations in the past couple months, but, but it was, you know, interesting to see that even even these la you know, the largest companies, you know, have cashflow crunches and need to go access liquidity and the private lending, we're gonna talk about this in a, in a segment in here soon is, and the private lending space is, is that backstop to the banks right now, right? Like the, the banks are not active in that space right now. And so certainly it's the case that OfferPad has ex excellent banking relationships, but Genesis was the right answer for them at that point in time. So it was interesting to see that even at the institutional level. Craig 36:07 Well, one of the things that we, the, the question I always love to ask here at the end is why should you care? What do you care? You know, these, these companies are here, they've been here since 2014. They don't appear to be going away in, in fact, when you take a look at sort of all of the other, not, look, it's one thing to look at the open doors, the, the large companies, the iBuyers, but it's all of the other companies sort of in the I space now, the, the mortgage lenders, the title companies, all of them, all of them migrating to that, that, you know, I feel like the whole, you know, real estate transaction is changing drastically, right? The way we, the way we transact real estate. But, and so maybe that's one reason why you should care and you should always keep your eye out to what, you know, the, the larger money, the the big money is doing, right? Craig 36:59 But one thing that we mentioned before we turned on the mics was this, this diversification, the diversification of revenue streams. Why, why these companies were very myopic in, in, in their approach to what they wanted to do. They were basically institutional wholesalers and they rode the market up and now they're riding it down, right? And so speak to that Jack about how the average investor who's listening can maybe start to think about their business in a more diverse way. Can I just be a wholesaler, Jack? Can I just be a rehab or can I just be a landlord? Right? Right. We've always been told, Hey, look, focus on one thing and really be great at it. And that's a great thing, don't get me wrong, but don't be surprised when that model doesn't work in a sideways market. Right. So go ahead. Jack 37:52 Yeah, sure. So real, everyone knows that real everyone is, you know, common parlance to say that real estate's a very cyclical business. And generally when people referring to that, they're talking about values, you know, cap rates go up, cap rates go down over time in the flipping business, there's this kind of like sub trend that happens where like, we don't really care as much where if housing prices are going up as, or housing prices are going down. I mean, if they're going down, we care. Yeah. As long Craig 38:26 As I'm buying a great price and I can sell it at a better price, right? Yeah. And Jack 38:29 Yeah, we're, we're in for 70, 75% of value. So like, my, my, but my margin, you know, if in the, if the market's coming down, it's not falling so quickly that like, I'm gonna lose money on that deal, I just might make a little bit less, right? So the way I think about the flipping margin, I'm sorry, flipping market cyclicality is about margins. So in, you know, in, there are different points in time where flipping margins expand and then flipping margins contract. And so in a down market, your flipping margins are likely contracting. But then as real estate values are coming down, sellers get scared because they see, you know, prices coming down and they start to capitulate and they start to let properties go. Now there's a, there's an adjustment process for the seller, right? Like a, a very human like stages of grief process to capitulating and finally deciding to just let the property go that you know, that you need to sell. Jack 39:22 And then, so it's often right in, like, in the wake of a down market is when the flipping margins are actually the best. Yep. Because the seller psychology has shifted and has the seller has capitulated, and then you can go find a deal that's got those wider margins and then margins will be good for a while. But then as real estate values increase, then, you know, people start talking at the cocktail parties about how I made money in real estate and other people start getting into the business. And now you've got more competition. And though the top line properties may, you know, top line real estate values are still increasing the as is prices, the price of as is houses goes up even faster because there's more competition, there's more demand for that as is real estate, you know, look, looking to make money off of it. Jack 40:11 And so you start to see those margins compress as we get to the top of a market. And so that kind of like SubT trend line is the one that I'm much more interested in even because it's, it's, it tends to be a little slightly counter-cyclical or at least like, you know, has a a maybe a 12 month lag Yeah. To the overall real estate values. And, and I think what we're probably about, we're, we're, I think that we're entering a, a phase of that where money is more expensive right now. Real estate values have been down, now they're stabilizing a bit. Houses are still quite unaffordable that we haven't seen much in the past three, or, you know, three or four months. We haven't seen much additional home price depreciation. Haven't really Craig 40:53 Seen that seller capitulation. Jack 40:54 Yeah. And, and I think that that seller capitulation has really just started there was, we, we experienced a little wave of it right at the beginning of the year and then, and then mortgage rates ticked up over the past 30 days. And that's kind of cooled things a little bit, but we see, we see the top line, you know, the, the, the, the buyer market being extremely mortgage rate sensitive, but sellers starting to capitulate and realize, hey, this isn't getting better soon if mortgage rates are gonna stay at this 7% level for a long time, you know, what's the difference between selling today and selling six months from now or a year from now? I can't wait three years to get to, to the other side of this market I need to sell in the next 12 months, so I might as well sell today. And so we're starting to see that seller capitulation come into the market, which is great for flippers. Craig 41:44 Yeah, I was, and and I think, you know, we, we we're speaking a lot about the residential market here, but I think the same thing could be said in, in most asset classes right now, multifamily, I've been looking at mobile home parks. There just hasn't been a tremendous amount of seller capitulation on price commensurate with the, you know, twice, twice the interest rate of what we would see about from, about, you know, two years ago. And so you've got a lot of money that wants to be thrown at an asset, yet the buyers are still saying, well, wait a minute here, you know, like, Jack 42:21 I still have to make money. Yeah. Craig 42:22 I still gotta make money on this thing and I'm now paying twice for my money of what I would've paid a year ago. Wait a minute here, I can't buy it at two years ago price. Right? Yep. And so I real, and so I was speaking with, you know, a guy who does a lot of financing for one of the larger lenders in the mobile home park space just last week. And he mentioned, yeah, you know, I think we might, the, the sellers are starting to get a little bit more realistic, whereas before you put your asset out on the market, you know, some, some guy comes along with a big bag of money and then another guy comes right behind him with a bigger bag of money, they're starting to see, wait a minute here, my stuff's sitting on the market a little bit longer. There's not just, there's not as many people interested. And I think that's what we're, the dam is breaking just a little bit, Jack 43:15 Right? Yeah, yeah, yeah. So like, you know, for example, like going back in time a little bit, the 2013, 14, 15, 16 timeframe, like 2013 to 16, that timeframe was phenomenal for flipping, right? Right. It was, there was home price appreciation, but it was phenomenal because the room wasn't that crowded. Right. Like there was, there, there was, you could still get deals. Craig 43:39 Yeah. There people were still had P T S D from 2012, you know. Jack 43:43 Yeah. Yeah, exactly. And, and so like, it was a great time to flip and we were doing a ton of flipping at that time because the margins were still great. Craig 43:51 Let me ask you this, and we, we, this diversification of sort of what we do, what our bag of tricks could your business, could dominion have survived solely as a landlord? You know, would, would, would you have wanted to be just a landlord? Jack 44:08 We could never have become a landlord, but for the other business models, like we could, we could never have gotten to 800 properties. But for flipping and lending, why? Craig 44:19 Just Jack 44:19 Cashflow and wholesaling? Just, just cashflow. Craig 44:22 The, because the, even even with the cashflow coming off of 800 houses, which should be substantial. Well, Jack 44:29 800 it is, but at a hundred, at a hundred, it's not, yeah. At a hundred, it's nothing. At 150 it's okay. Like, it's like you, you can, you know, you don't have to work, but you know, until your mortgages are paid off though, it's like there's some cash flow, but we could never have paid for a platform to get to 800 houses. But for flipping and wholesaling and, and lending, and those are those other, those other three activities are, are tax inefficient. Right? You get taxed ordinary, ordinary income, but they produce cash on a current basis and you gotta pay the bills. And you, and if you're gonna do a refi and you get like an okay deal, or you get screwed on an appraisal, you gotta refi and maybe you have to come to the refi table with, with some money that money's gotta come from somewhere, right? Jack 45:13 And so we always have, we always integrated, we've always wholesale, we have always flipped, we have always tried to add rentals, we've always lent, and we have dialed those up and down based off of the dynamics that I'm talking about, right? Like if there's a bunch of margin and flipping, we'll be dialed that up and started flipping more houses as more players got in, in the 2017, 18 timeframe. By 2018, I was like, dude, this is a freaking competitive, or 2018 and 19. I was like, this is a competitive freaking flipping market right now. It is hard to find a deal that's got margin. We were seeing our borrowers doing much larger rehabs. We ourselves started doing some ground up construction on infill lots, which by Craig 45:59 The way, in 2016, I remember distinctly sitting in your office and you said, we'll never be home. We'll never build from ground up. Yeah, yeah. I remember it distinctly. Yeah. Jack 46:08 Yeah. And yeah, and four years later, that's exactly what we were doing because I couldn't do any kit kitchen. I couldn't make any money doing any kitchen and kitchen and bath paint and carpet rehabs, but somehow the iBuyers are right. Right. I couldn't figure it out. Yeah. Craig 46:21 The local guy on the ground who was buying houses in the market couldn't figure it out. Jack 46:26 So the, so, you know, 2018 and 19, it becomes a much lower margin flipping business. And so we dialed up wholesaling and then Covid hit 2020 and 2021. And though it was also a good time to flip, the money was so cheap, right? Like the, the debt you could borrow was so cheap. We were like, Hey, yes, we could make some money flipping houses right now, but we are never gonna see this. The debt levels of these levels, we were borrowing money below 4%, like 30 year fixed with a D S C R product. It was phenomenal. And so we just said keep everything as a rental. 'cause you know, yes, I'm, I'm a own, I'm buying it a seven cap, six and a half cap. It's like a little, you know, it's not getting me super excited, but I've, you know, relative to what we're used to seeing in terms of cap rates, but I've never, I've also never borrowed money at 4% before. Jack 47:18 Sure. It's always been six and 7%. So, you know, we, we we're trying to follow not only the top line housing prices, but what's going on in, hey, what's the wholesaling margins look, what do wholesaling margins look like right now? Are there a bunch of newbies coming into the market that we can wholesale to? And so it's, you know, we can make 40 on the, I can, you know, and this was the math, we could make 40 flipping it, but we can make 20 wholesaling, it wholesaling the same house to like that, to that guy who we've never seen before at the steps. Let's just take the easy 20, Craig 47:48 The quick nickel over the slow dime. Yeah, yeah. With no brain damage. So Jack 47:52 We're, we're much more interested in following, you know, the, the margins of each of those business models as opposed to just what, hey, what are real estate values doing? Like, that's a much less interesting conversation than wholesale margins are widening out, flipping margins are tightening. And, and what we're seeing right now is a little bit of the o the opposite. So whole, the past couple years, wholesaling was great, adding rentals was great. Right now, because of the higher cost of capital there are relatively, there are still, it's still very competitive, but there are relatively fewer people that you're competing with. So the wholesaling margins have gotten a little bit tighter, and we're starting to shift more. And the, and on the rental side, our cost of capital is much higher. So the, the, the the, you know, the debt service coverage ratio isn't as good. Jack 48:38 The margins on owning the rental aren't as good. And so we're going from, we're shifting properties out of the rental business plan into the flipping business plan because that top line, you know, we are seeing some seller capitulation and that top line price hasn't moved all that much in the affordable price points. And so we're, we're kind of, and we always do this every, every year, we're so, so year 18 months we'll kind of readjust our pipeline and say, Hey, let's wholes, you know, we, we, we would, we would say, Hey, let's wholesale more and flip less and add a bit more rentals. And now we're ch we're moving those dials and we are wholesaling a bit less, flipping a bit more and adding a lot less rentals. That's what we're seeing. We're where, where we think the easier money is right now. Yeah. Craig 49:23 I don't wanna break that down into something so simplistic as, as you being opportunistic, because I think you're, I think the thinking behind what you do when you sort sort of move those levers is a lot deeper than, oh, this is the opportunity, right? Like, but, but, but I mean, be honest, that's, that's, you're, you're taking a look at what the, what the market is giving you, which, what which we should all be doing. And you're building a model around that. Yeah, Jack 49:49 Yeah, yeah. Absolutely. And but you have to have, you have to have sys you have to have, like, you know, you have to have all those tools in your bag, right? Exactly. And if you're just one thing, well, then if you're a flipper, then you know, then every, you know, if you're a hammer, then everything's a nail, right? Yeah. Like, then you gotta flip every single thing, but you live or die by that cycle. And if it's a low margin cycle, you might die by it. And when I say die, I mean, I mean go, you know, go outta business. Like literally run outta cash and have to shut, shut down. Craig 50:14 And we know plenty of guys who that has happened to, who were some really smart guys. So, you know, I was talking with a, with an old friend just yesterday, as a matter of of fact, Gary Boomer Shine and his whole philosophy, love Gar. His whole philosophy has always been when he takes a look at a real estate deal, super creative guy, very smart. But he says, look, is it a cash now? Is it a cash flow? Is it a cash later? I don't necessarily need to wholesale everything if I've got the cash now, I might want to take this and make it a rental. I might wanna take this property and rehab it and sell it. And I think that, man, I just, I just think we are living in a time, Jack, where we need to take a look at the four returns that real estate provides. Craig 51:07 Cashflow, you know, amortization, tax advantages, and sort of appreciation and always make appreciation. Like I said, the fourth one, not the first one I'm gonna buy because I know the market is going up. No, no, you, no, you don't know that. It's always going up. You should really take a look at those other things and put it into sort of the holistic, what do I need now? And train yourselves like Jack has and the best operators in the business has of putting that tool into your quiver, right? Like, I'm not just going to relegate myself to ordinary income. I'm gonna sell something, make 20,000 on it and have to pay some massive tax hit. No, this time I'm going to hold onto this property and I'm going to learn how to be a great operator as a landlord, right? Or as a, as a rehab or, or as a multifamily guy. Yeah. Jack 51:59 Yeah. Absolutely. Absolutely. Craig 52:00 So yeah, it, it's, how do we tie a bow up with the iBuyers here, Jack and sort of, yeah, Jack 52:08 Yeah. I think that, you know, it, it's going back to that having different understanding that there, that the different, Craig 52:16 That Jack 52:18 The real estate cyclicality applies to different business models and there are different ways to monetize single family real estate. You can, you can wholesale, you can flip, you can add rental properties. You could lend, I'm sure you have people listening to this have, you know, a, a nest egg built up lend, sometimes the debt is being, it's better to be the debt than the equity, right? In a tight, in a, in a, in a competitive flipping environment, for example, where your, your, where your, your margin get on the flipping gets squeezed down to 10, 15% and you can put out debt at 10, 15%. Why wouldn't you rather be the debt than the equity? Like the guy, the equity's doing a lot of work and taking a lot of risk for not whole, not a whole lot of margin there. Craig 52:59 It's so funny. As you, as we've, as this episode has gone on, I, I keep hearing the words of my mentors, including you, Fred, and others, that, you know, it's always good to be the bank. Always good to be the bank. Jack 53:11 Sometimes in 2021, it wasn't that great to be the bank because money was so cheap. But, but now we're entering a phase of the business where liquid, there's a liquidity premium, right? It's, it's, it's literally, and that's the way, the way we would talk about it, right? Like there's the, there's a, the underlying index of like the baseline, you know, what's the five year, you know, what's the, what's the 30 day S O F R at right now? Right? Craig 53:33 Okay. Alright. Slow down 30 day S O F R. Have you ever heard of the 30 day s o r Rachel? Yeah. Jack 53:39 Everyone who's, yeah. Craig 53:40 All right, come on. Jack 53:41 So, so that's just, that's just the index that replaced L I B O R. So if you wanna borrow money for 30 days, that's, that's the, that's the index that you follow. Couldn't Craig 53:48 Have said libor r we all know libor, but, but Jack 53:50 Now they phased out L I B O R. I had no idea. You're not gonna see LIBOR anymore and, and no more of your loan documents. Will you see l i bor r It's Craig 53:55 All, and 99% of the audience learn something new today. It's Jack 53:58 The secured overnight funding rate. Got it. Or, yeah, secured over ary Craig 54:02 Liquidity. Jack 54:03 And so anyway, so you've got that underlying index and then you have a, a risk premium, right? And those are usually the two components of, of your cost to capital. Sure. You know more. And, you know, the riskier stuff that you're doing, the more that the lender is gonna charge you for that. Well, today, because there's, because cash is at such a premium right now, there's now also a liquidity premium on top of that. Just, you know, and, and when there are fewer lenders in the room, you see that liquidity, liquidity premium pop into the math too. And that's a chunk, that's a chunk right now of why we're seeing higher rates. It's not just because lenders are perceiving more risk, it's also because they're like, 'cause I got cash and you don't, and there's not a whole lot of folks in the room right now who do. Jack 54:45 And so I'm just gonna charge a premium just 'cause I can. And that's a thing that's absolutely going on right now. We're gonna talk about opportunism, opportunism in the private lending space, reemerging, and there's a lot of trends or there's a lot of like indications of that right now in the next episode. But, so that, but that's something to take into consideration when you're, as a real estate investor, are deciding what to do. You know, over the course of the next couple years, you got a lot of skills, right? If you know how to operate single family real estate, you can wholesale, you can flip, you can add rentals, you can lend on it short term, you can lend on it long term. You can sell turnkey rentals, you can buy turnkey rentals and every, you should think about all of those things and decide at any given time which combination you think the sweet spot is right now, and set your platform up, set your systems and processes up to be able to pivot between those. Jack 55:37 Otherwise, you find yourself being a one trick pony and you're riding the cycle, you're riding the wave of wherever that cycle is right now. And those on, on those six things I just said, they do not run in lockstep. They all run kind of countercyclical to each other. So it is absolutely our belief that there are the best business models to be in at a given time and they change every 18 to 24 months. Sure. What combo you should be spending, your energy and your, your, your resources, you know, where you should be allocating your energy and your time and your money. Craig 56:10 That sounds like a great topic for an upcoming episode. Let's do that on how to sort of pivot in bet in between different tools in your, in your quiver, right? Yeah. So look, iy here to stay obviously a business maybe. Yeah. Mostly run outta cash, right? It's, and and I think the point of all of this was, you know, probably not the most sound business model when it was launched with a lot of capital and a very myopic one at that, in that they sort of got caught in a bad business model in a sideways market. And the same thing could happen to anyone listening to this podcast. And so that's, that's where the rubber meets the road from me, Jack, is that, you know, how do we not get caught in a market by having more tools in the toolbox, right? Yep. Absolutely. All right, everybody. Well, I hope you enjoy the episode. If you wanna check out the show notes, go to real investor radio.com/notes. We'll wrap it up here. I'm Craig Fuhr. I'm Jack BeVier. Alright. And we'll see you soon. Take care. (Generated by Podcast Show Notes at podcastshownotes.ai)