Latest / Real Investor Radio Podcast / Episode 11 | Operators Adapting to Changing Market Conditions

Transcript

Episode 11 | Operators Adapting to Changing Market Conditions · Real Investor Radio Podcast

• Craig Fuhr: Hey, welcome everybody to Real Investor Radio. I'm Craig Fuhr. As you can see, we are fully remote this week, really testing the limits of what this thing can do. We've got Jack Pavir here with us today. Jack, good to see you. Jack BeVier: Absolutely. Thanks, Craig. Craig Fuhr: Fred Lewis joining us again. Fred, so nice to have you again in the center square, at least on my screen. Fred Lewis: Great to see you guys. Craig Fuhr: You are the Paul Lind of our podcast this week, Fred. Center Square, just a little old Hollywood Square's reference for you. Fred Lewis: I Craig Fuhr: So Fred Lewis: see Craig Fuhr: guys, Fred Lewis: myself Craig Fuhr: got Fred Lewis: to Craig Fuhr: a little. Fred Lewis: the left, but always like to be in the middle. That works. Craig Fuhr: middle square baby. Hey listen I got a lot to talk about this week and go around the horn on some news on mortgage rates what we're seeing in the market and really what I wanted to break it down for this week for the listeners this week guys is. What are you seeing right now in terms of the market. How is it. Being. Operations on sort of the day to day basis these days in terms of the mortgage rates. What's working in marketing? You know what's working? What's not? What are you concerned about? Sort of Jack, you said mentioned a great thing right before the show today. It was you know we feel like we're sort of at this operational crossroads. Where shops are sort of. You know, in between that in the decision tree of. Do I get rid of some of my staff, these people that are helping me with acquisitions and dispositions and marketing and all those things, or do I keep it, sort of ride this thing out? Let's just jump in there if you would. So Jack BeVier: Yeah, Craig Fuhr: what are you Jack BeVier: yeah. Craig Fuhr: guys saying? Jack BeVier: Yeah. So like last, you know, it was probably a year ago now that interest rates really started to tick up. And, and that's the point when, you know, the phone stopped ringing, right? The seller, the, and there was a disconnect between what buyers were willing to buy at and what sellers were willing, what sellers expected for their properties. And so I think a lot of operators noticed this. It's been just about a year now since they, since they've noticed, they, they noticed that change operationally. And, but there's been a wide spectrum of kind of reactions among operators to what they did as a result of that. And some folks, you know, cut, cut bait and, and let some folks go downsized immediately said, Hey, I'm going to hunker down. Um, whether they thought that was the right strategic decision or their margins were too thin and they really just couldn't ride it out. Um, some folks got out, you know, kind of right sized early to lower transaction volumes. Other folks are, everyone else is kind of along the spectrum of thinking that, hey, there's, you know, there's another side to this and I don't want to dismantle the platform that I've built. And so even though we're not making as much money, we're losing some money, we're going to hold on and keep the team together to get to the other side when transaction volumes are going to pick back up. And everybody who cut bait early is going to wish they hadn't. and we're going to get outsized margins because we're going to be the only guy left standing. There's been a spectrum between those two attitudes. It's a year now that the folks who held on have been hanging on. With those lower transaction volumes, higher operating costs, means that their businesses have not been as profitable or have even lost money over that period of time. And as a result, that means that cashflow gets tighter and tighter each month. They can, you know, the money that people made in 2020 and 2021, early 2022, it's sitting in the bank account, but you're spending it, right? And we've been spending it for the past year. And that's a long time to hold on, you know, your arms get tired after a while. And at some point, you get yourself to a point where you've got a where cash flow will force your hand, right? And you won't have a choice, but to right size the shop or pivot and go do something else. And kind of here we are at the anniversary, roughly of that first opportunity to make that decision. And we're still talking about this maybe recession that's gonna happen later in the year. There's still a big debate about where mortgage interest rates are gonna go. Real estate investors still really don't have clarity as to where the market's going six months from now. And so that makes it very difficult to continue to hold on with that lack of clarity and a dwindling bank account, frankly. Craig Fuhr: Jack, with the increased competition over the years and seeing a lot less inventory to take a shot at out there, what kind of compression have you seen in wholesale fees and some of the deals that you're doing? I feel like you're just hitting singles, not really hitting any balls over the fence these days. Jack BeVier: Yeah, sure. So I would say, you know, third quarter, fourth quarter last year were the worst from a from a metrics point of view. The you know, the key performance indicators, the KPIs that we monitor for what it costs us to buy a house, you know, the cost of acquisition. They were good in twenty two in the first half of twenty two. And then they really by good, I mean, low. Right. Like we were in the kind of three to five thousand dollars per deal range. By the end of the year, the yearly average was above $10,000, which means the third and fourth quarters were probably in the 15 grand range, which is not sustainable. We're making 15 grand wholesale fees and spending 15 grand to do it, and then making payroll on top of that, that just doesn't work. So I would say the worst of it was third and fourth quarter of last year. First quarter got noticeably better. And then, but it's been really tracking very closely with mortgage rates. As we've seen a downtick in mortgage rates, we've seen an uptick in activity. And so kind of the, right now we're hitting singles, but a double and a triple is super hard to come by. Transaction volumes are still very low. I would say our cost of acquisition has come down to a reasonable, I would say a sustainable level, but maybe in like the seven grand range, but not an exciting level. And so I've been one of the things that we've been then as a result, very focused on is where mortgage rates are going to go. Because if it's the case, and we're seeing this a lot, I monitor a lot of the mortgage industry publications. And there is a definitely a school of thought that mortgage interest rates are going to start to come down slowly here in the third and fourth quarter. And that will lead to a significant uptick in homebuyer interest. which is good for flippers, it's good for wholesale activity. But then there's another camp, you know, in the finance rags that might suggest that we're going to be higher for longer. And and there's a bunch of things that are happening outside of the housing industry that are going to keep long term interest rates up or even push long term interest rates higher, which may suggest that, you know, push the tenure higher. which would suggest that mortgage interest rates are going to stay at these levels and could even climb. And I think that would be a very, and that's a real possibility, very smart. I don't know which way it's going to go, but I think there's some, there's very smart people on both sides of that debate. If that's the case though, it's got significant operational implications and suggests that folks should start to prepare for that. There's not, you know, we're not going to get to the end of the rainbow here anytime, you know, in the next. you know, three to six months. And when you're looking at the pattern of what's going on in your bank account and you project that out, that you're gonna have trouble before spring comes. And so I think that's a scary but real possibility right now, unfortunately. Craig Fuhr: Yeah, you know there's always that inevitable you know false slowdown. In in sales certainly with the wild ride that the mortgage rates have been on. I don't see that getting any better there was a report in housing wire early this week where mortgage rates are headed. Fred maybe you can jump in here that said they mentioned I couldn't find the. The actual meeting notes but there they said that the bond auction for the 10 year. was not a very good day. And the 10-year yield rose pretty sharply. Active listings rose by only about 4,000 listings. Mortgage rates to an average of about 7.19%. Purchase apps are down. So a lot of headwinds right now, Fred. Fred Lewis: Well, I think that there was an expectation when rates started to spike in third and fourth quarter that we're going to see a lot of pain short term and then sometime in 20, at the end of 23, maybe the 24 rates were going to come back down. Not to where they were, but they were going to come back down. There was a built in expectation. And then there was, as a result. a certain level of comfort in an expectation. And what we're seeing is we're seeing an erosion of that, where perhaps we're really not, that narrative wasn't right, that we're going to see sustained higher rates for a longer period of time. And so when you're planning your shop around, hey, I could take pain for six months, maybe a year, maybe 18 months. And perhaps we see a higher rate environment for two or three years. That's a very different dynamic. And I think what we're seeing is, what's interesting is just more recently, very recently, we're seeing the market react to that. The five year hit 441 yesterday. If you look back on the chart, the five year was at, I think the last time the five year broke 440 was in October. So if you look at the kind of the trend analysis on the kind of the, you know, where the five years been, we're kind of back to that, wait a minute, maybe the optimism isn't quite what we thought it was going to be. Uh, Fitch came out this morning or last night and said, they're considering downgrading the banking sector and they're, and they're working through the downgrading language right now as we speak. Now, just the commentary of that. is because they see sustained, there's, as Jack said, the other side, there's people on the other side that are very vocal right now saying, I think we actually are going to see some sustained pain. And as a result, we're going to downgrade the banks because their net interest margins will be tighter, their volume, their pipelines will be smaller, their core customer base of quality, borrowers will be a little bit challenged. And And we even sold on mortgage rates more in the last two weeks. Mortgage rate origination volume actually reversed, dropped. It had been, it had been improving for most of the last 60 days up until about three or four weeks ago. And now we're seeing, you know, we're seeing a little bit of a reversal there too. Craig Fuhr: I was taking a look at it last night. It's sort of core CPI, and that continues to rise slowly. But even with all of the tightening that the Fed is trying to do right now to get inflation under wraps, it's clear that the CPI is still heading up. And then if you add the food and energy sector in there, well, I think by and large, Americans are feeling it. And then when you add the fact that we've got the high interest rate high mortgage rate environments and a massive reluctance of existing home buyers to be putting their stuff on the market right now. Just a tough time, but you know I hate to be sort of doom and gloom and I don't think that's what you guys are suggesting here what's the opportunity and all this bread. Is there one. Jack BeVier: Yeah, let's talk about Fred Lewis: Well, Jack BeVier: who are the winners and who are the losers there. Fred Lewis: I think there's always winners and losers. I, you Craig Fuhr: Right. Fred Lewis: know, it really, people are impatient and investors. So I heard this term the other day, FOMO, which is the fear Craig Fuhr: Yeah, yeah. Fred Lewis: of missing Craig Fuhr: Missing Fred Lewis: out. Craig Fuhr: out. Fred Lewis: And it creates this investor sentiment that they got to be in the game every day. Whereas as you see, you know, money, money is like water. It just moves directions based on where it needs to find itself. And if you look at anything that's interest rate sensitive, REIT stocks are being hammered right now. They're very interest rate sensitive. Bank stocks are being hammered right now again for the same reason. And then my commentary about, about Fitch, there are times where you need to kind of take a step back, prepare yourself for the opportunity as opposed to using the liquidity or the cash you have on hand. And I think this is one of those times where Craig Fuhr: Well, how so can Fred Lewis: you Craig Fuhr: you Fred Lewis: play Craig Fuhr: speak Fred Lewis: defense Craig Fuhr: to that Fred Fred Lewis: right Craig Fuhr: like? Fred Lewis: now. Craig Fuhr: Yeah, so if I'm if I'm an operator and I'm trying to prepare right now, what am I doing? Fred Lewis: If you're an operator and you have four properties on the market to sell, sell some of them. The market's not likely to be better 30 days from now than it is today and certainly worse today than it was 30 days ago. So if the liquidity is tight, you know, you got to put your ego aside as a real estate investor entrepreneur and say, hey, it's more important that I got some cash in the bank. and I have less units on the market so that I have that cash to take advantage of the opportunities that will come. There's no doubt opportunities are coming. Banks are going to be, I believe, in a position to come some point, whether it's end of this year into next year, where they're going to have to move some assets. We're going to see some distress. There's going Craig Fuhr: Let Fred Lewis: to Craig Fuhr: me, Fred Lewis: be opportunities. Craig Fuhr: so let me, so I got a call a few days ago from a guy in my mastermind and he, and this guy is a entrepreneur who likes real estate. So he owns one of the chimney companies in Maryland and he's got some cash and he really is itching to put that cash into hard assets. And my whole conjecture is, It's very difficult right now for an operator to find a deal, much less a non-operator. Jack BeVier: Thanks for watching! Craig Fuhr: So he's out there looking at houses, retail, trying to make the numbers work. But let's talk about that. So what do you say to a guy like that who wants to put money in real estate right now? Do you hold that on the sidelines? Are you really still looking for that needle in a haystack? Jack, you want to jump in? Jack BeVier: Yeah, like I don't have a I don't I'm not negative on America, the American housing market overall. I'm very bullish on the American housing market over the long term. So for somebody who is Craig Fuhr: talked Jack BeVier: allocating Craig Fuhr: about that. Jack BeVier: cash from a different operational business into an alternative to the stock market makes a ton of sense to me. And I think that and the idea of that person trying to time the market is next to impossible. And sure. So if they've got a bunch of cash burning, they're burning a hole in their pocket and they want to get a current return and they're not super sensitive between whether it's a six and a half or seven or seven and a half cap. They just want exposure to American real estate. That's fine. What I'm more what I'm concerned about is more the operator who this is their full time business and they're riding this wave like its core to them. That you know how this wave breaks. when and if this wave breaks. And those folks I feel like are in a much more precarious position. Something that we're doing, Ray, like if you had asked me a month ago, I'd have said, hey, yeah, I think mortgage rates are gonna come down towards the end of the year. Now I would say I'm not so sure. And so something that we're doing operationally is that we are, and the thing is, and I'm not exactly sure. Like I, you know, on any given day, I could go back and forth on it. But I do know that what will kill me is if I'm wrong and mortgage rates stay high and I start trailing the market down for the houses that I have on the market where I'm paying the carry on a vacant property. It's not income producing. And so I'm losing, right? I'm losing 10% a year of, you know, whether that's paying a hard money lender or at least opportunity cost of capital. So I know I'm losing a point a month in carry on that property. And if mortgage rates stay high and I've got and I start to trail the market down, I'm going to rack up days on market, kind of cast a negative shadow that the property doesn't even deserve because the days on market stays high. We're being aggressive about price drops right now. So every two weeks I'm dropping. I kind of don't unless there's like an active negotiation happening on happening with a buyer right now. We're moving pricing every two weeks to keep that property at the front of the. of buyers agents mind so that the thin buyers market that is out there, the folks who are still looking still. And by the way, you know, spring's over. We're about to school's about to start. We're about to hit Labor Day. And that is seasonally bad for showing activity and also for pricing. And what I don't want to be doing is carrying this six months through the winter. carrying these properties six months through the winter with that additional cash flow pressure. And if that's the case, the not having my cash in my pocket to be able to deploy into the opportunities that present themselves in January and February, that I'll be really kicking myself about. Right. So I just don't think the upside of holding out for that, you know, for top of market pricing right now. is worth the downside risk if you're wrong. And right now I think you could flip a coin on that. And so, there's an asymmetry there. And so when that's the case, the business decision makes itself, right? Don't take a ton of downside with limited upside. Don't expose yourself to a ton of downside with limited upside. Take your chips off the table, keep liquid, keep moving. And I think that that's the better play right now for folks who are flipping and. don't want to catch that falling, who don't want to be exposed to catching that falling knife. Craig Fuhr: Fred, anything there? Fred Lewis: Well, I think your question is very, it's the ultimate depends. You know, if you're, if you're investing, if you're actually going to put money into real estate, I agree that you can't time the market. I think the point is that buying improvements today are more important than they've been in a long time. So the cost of turnovers, the cost of renovating is higher. Cost of labor is higher right now. one of the strong parts of the market for sure. So if you're able to buy well or decently, you don't have to time the market. If you like the asset and you're buying into some improvements and you're investing, then I agree with Jack's point. But from the standpoint of cash is king, equity is important. If you're putting equity and cash from another area into kind of redeploying into investment real estate, I think it's a good call. I think you'll get slightly better deals in the fall for that, but directionally speaking. So if I had cash and I wanted to time it from a swing investor perspective, I'd probably wait a little bit. But that's only my conjecture there. I think as a trader, which is what we kind of mix investing and trading in the same sentence, if you are in the business of buying, renovating, and selling. be in the business of wholesaling. If it involves a lot of debt, then that factor is more important right now. That carry cost is much higher. And with a prolonged higher rate environment and a slippage of values, you can get caught. That's what I look out for. Jack BeVier: Something that I think that investors misunderstand in their forecasting, and it's a human thing, like we do it as well, of course, is this idea that when we're talking about, hey, the banks are, you know, there's gonna be more opportunities in six months from now because liquidity is drying up. And so there's gonna be folks who are just forced to sell at that point. The, we, We do this bias in our head where we think about what our liquidity is today and the options that we have today. But then we transport ourselves into the future and we say, hey, with the money that I have today, I'll be in great shape at that point eight months from now. But the cognitive disconnect is that we don't realize that, but we're going to go through that eight months too. And we're not going to be in this position in eight months. We're going to have fewer options. We're going to be looking at a less profitable P&L for the year. The banking relationships that we have today, we're going to get some phone calls in between now and then, and they're going to tell us no, or we're out, or our LTC is 15 points lower on the loan that we want to get. And the reason those opportunities are going to exist is because we're not going to be able to do that. to take advantage of them is because the landscape is going to look different for not just everybody else but also for ourselves. And then we get there and we're like, ah, I did see this coming, but I didn't exactly think that through the right way and didn't set myself up to take advantage of it in quite the way that didn't quite play out the way I pictured in my head. And that's often because we don't put ourselves. put ourselves through the same trials and tribulations as we project upon what everybody else in the world is going to do. For example, your liquidity is good today, but eight months from now, there's going to be opportunities. At the four-month mark, your bank's going to call you out of the blue and say, hey, I need you to pay that line of credit down. We're not renewing your line of credit, or we're going to renew it at half, half the exposure. And you never thought, you know, and you don't prepare for that. Um, and so you're running your business based off of today's variables, not based off of this, you know, this, the super stress test that you're putting, uh, the whole rest of the world in, in your, in your mental forecasting, uh, and, and then, and then as a result, there are just a lot fewer people who are able to, who actually have properly prepared for when those opportunities come. Um, You know, there's a balancing act, of course, between just like hoarding cash and like, you know, to be super prepared for something. You know, I'm not suggesting that you need to like stockpile and hoard cash to take advantage of these opportunities because it could go the other way too. But it's never as, it's never as like just simple as, oh, I'll be the last man standing. Everyone thinks they're going to be the last man standing. And that's just not the way it goes. Craig Fuhr: up. Well let's Jack BeVier: Let's Craig Fuhr: talk Jack BeVier: fuck. Craig Fuhr: about the market a little bit guys it was looking at this. Altos report. The housing report for July great video it's in the show notes for today. The story of some of the bullet points from this one are inventory is up available inventory is up by about one percent. Ten percent fewer homes on the market year over year. there was a little bit of that extra boost that we saw in demand between January to June appears to be fully diminished at this point. New contracts we were talking about this on prior to the call Fred, new contracts are down 11% year over year. And while I know Jack that going back 12 months seems like a different time in history these days, I think it's still relevant. And then the one that kind of blew me away was 35% of homes are taking price reductions. It's about 50 basis points a week. And that's weaker than this time last year. Fred, we were talking about the DC condo market. And I know we have listeners all over the country. But DC has traditionally been a very strong market over the last several years. You can't ride around in DC without throwing a rock at a crane somewhere that's building some sort of housing. What do you so you were talking about the DC market prior to Fred what are your thoughts there. Just sort of overall it as it pertains to sort of the overall market as well. Fred Lewis: Well, I mean, I think there are certain markets that are weaker than others. I think DC's had, I think markets that have had substantial change in office occupancy and in DC, you have a lot of government workers who can work at home. There's a weakness in certain markets, but what kind of struck me is the That a Q1 of 2022, DC had 123 condo sales. And in Jack BeVier: Thanks for watching! Fred Lewis: the second quarter of 2023 was 14. 83% drop in condo sales. I'm Jack BeVier: And Fred Lewis: looking at it right now. Jack BeVier: we Fred Lewis: And Jack BeVier: will Fred Lewis: it's, Jack BeVier: see Fred Lewis: I'm just looking Jack BeVier: you Fred Lewis: at this Jack BeVier: next Fred Lewis: overall Jack BeVier: week. Fred Lewis: stats. I won't read them all, but they're just so substantially off. And what's interesting Craig Fuhr: Fred, Fred Lewis: is Jack BeVier: Thank you. Craig Fuhr: go ahead, go ahead. Fred Lewis: to that point. I mean, that will vary around the country. I mean, condo sales particularly, if you're a developer that's gonna develop into a condo market, you kind of really have to understand, and that's usually in major metros or gateway cities, you have to be really careful what those stats actually look like. And understating the data today on a forward basis and really kind of looking at the trends now is just. It's more important that you understand where things are headed than Jack BeVier: Thank you. Fred Lewis: kind of the bravado of where things were and how much money people made last Jack BeVier: Thank Fred Lewis: year Jack BeVier: you. Fred Lewis: at this time. 12 months is a very, not a long period of time in the course of most things, but man, it feels like five years, the last 12 Craig Fuhr: universe. Fred Lewis: months. Craig Fuhr: Yeah, you know, as I travel around the country, I see no lack of luxury apartments, uh, class A condos in Jack BeVier: Thank you. Craig Fuhr: almost every major city that I'm in. And I've got to be thinking that all of those guys that they've got coming online got to be quaking in their boots right now. Jack BeVier: Yeah, the Fred Lewis: Yeah. Jack BeVier: condo markets, you know, boom and bust. But generally speaking, it's more of a boom and bust kind of segment of the market. And certainly not in the affordable segment, generally speaking, especially not in D.C. The and people make a lot of money in 2019, 20 and 21 selling condos. The the problem is that they in 2021 were, you know, kept building condos and putting stuff into the pipeline. And those aren't six month duration deals. Those are 18, 24 month duration deals. And so the stuff that they put into the pipeline in 2021 and early 2022 even is still in the pipeline. And now they're looking at this and they know it. Right. Like if you're in that local market and you know, you're like, hey, I got to just get out of this condo deal. But you're telling yourself a story that it's going to be OK when we get to you and oh, and like the market may have recovered. By then, we'll see. You know, like there's a lot of stories being told in people's heads right now about how it's gonna be okay when we finally get to UNO. And, but the reality is what Fred just illustrated that, you know, in certain segments of the market, the activity is down 80%. And so like, that's not gonna go well. Now those people are also current on their mortgages and are not in foreclosure. They're continuing to move projects forward. We don't hear about them, right? Like... There's a lot of stuff happening still operationally where people know that they're going to take a bath on something or hope that they, or just maybe even they hope that they won't take a bath on something, but the reality is that they might or they will. But they're current on their mortgage because they're spending the money that they made in 2020 and 2021. So they're having an unprofitable year, but they haven't run out of cash, dot, dot yet. And the question is... You know, what is what our mortgage rate is going to look like in March of 2024 when this project hits the market? If it's still 7%, 7.5%, well, it's going to be a freaking problem. And that's the piece. And but what are you supposed to do? Right. Like you can't not pay the lender. You can't you don't have the cash to take the lender out. You don't have enough equity to actually own this thing in 100% equity. So you're forced to just continue and frankly, pray. that everything is a little bit better. And that's the stuff that I'm concerned about is going to start, you know, now that the spring market here is over, we're going into this winter with a great deal of uncertainty and the pressure hasn't been really relieved anywhere. Here's where I think we're going to start to hear more situations and scenarios pop up of people falling down and tripping and falling down. And then we just haven't heard them before. The fundamental, you know, nothing changed. And that's the problem is that nothing changed. And eventually, like Fred said, people are not patient in their thinking. They always want to be, you know, what am I doing exactly right now? Um, but they don't, don't realize that the, the effects take time. Uh, and so making short-term decisions before some of these other factors have fully played themselves out, sometimes you just need to wait and be patient until you see these, uh, situations play themselves out and that's when the opportunities present themselves. I think there's going to be a lot of recapitalizations. I think there's going to be a lot of guys raising equity over the winter Fred Lewis: Yeah. Jack BeVier: because they're in trouble. Fred Lewis: But let me add two thoughts to that because I think they like the falling down comment because I think a lot of a lot of investors think to a trigger of a foreclosure increase in inventory at the courthouses people that need to sell for whatever reason they think that's the issue here. And right now we haven't seen it for a lot of reasons whether that's just a lot of cash in the system and profits. They're feeding off of. But also you have to look at it this way. There's two interesting headwinds here I wanna put out there. What is just a year ago, the cost of financing was 30% less. In some cases even more than that, 40% less. And if you are to get whether it's a bank loan or a private loan from a private lender, 8% loans from a private lender a year ago, which is very common, maybe even seven, seven and a half. if it's a larger loan, is now 11, 12, 12 and a half. So what happens is on renewals, when if you aren't getting out of one of your deals, if you aren't being defensive to some degree, what you may not be looking at or understanding is that, is that loan renews, it's a very expensive renewal and the cost to carry starts to gravitate much higher, which is just happening now. So really, it's really been the last six months, but particularly the last few months, it's escalated. And that's just from the private lending side. On the bank side, it's interestingly actually a little different. It's the same, but different. What's different is that banks a year ago could not print enough CRE loans, you know, really real estate loans. Happy to do it. If you were a good borrower that could breathe the right direction, you got a real estate loan from a community bank at some rate that was reasonable. just a year ago. Now banks are looking at renewals and saying, I have to reduce, forget about who they don't renew, they have to reduce their real estate book. They have to. Most banks have to shrink their exposure to rental real estate. Some of it's regulatory because their buckets are too full. Some are from a risk exposure perspective. Jack BeVier: Yeah. Fred Lewis: And so they're going to choose Jack BeVier: And by the way, Fred Lewis: who. Jack BeVier: Fred, to your point, and extend and write like, you know, lots of people don't file their taxes on March 15, or their you know, their LLC returns on March 15. Fred Lewis: Yeah. Jack BeVier: They'd kick the can until September. But that's September 15 deadline, October 15 extension deadlines coming up, and then your banks not asking, right? They're like, No, I need your tax returns. And then they give it to the analyst, the analyst starts crunching the numbers and they see that you actually didn't do that great in 2022. Because the second half of the year was tough. And then they ask you for interim financials. And now and now they have a bunch more questions, right? We could I think we could absolutely Fred Lewis: Absolutely. Jack BeVier: start to see like banks over the winter are like dialing into these issues and starting to tighten the screws. Whereas you haven't heard from them ever. Right. They never they never did this before. But. The thing is before the sales guy at the bank was the run in the show in loan committee and now it's the CFO or the chief risk officer who's run on the show in loan committee. They're asking a completely different set of questions and reevaluating the entire book of loans through a completely different lens, that of risk management and with a much more conservative bent. That amazing loan officer relationship that you have, you think about friendly bill, well, bill ain't in charge anymore. Susan's coming in and she doesn't give a shit about you other than you didn't make money in 2022 and you haven't made any money in the first six months of 2023 and you actually lost some and you were, you know, we're, we're actually just trying to get out of that segment now and that's when those uncomfortable situations are going to happen with a much higher frequency over the course of the next six months. They haven't happened at all and now they're going to start happening and they're happy with a much greater frequency. Fred Lewis: Yeah, that was my Craig Fuhr: You know Fred Lewis: point Craig Fuhr: that? Fred Lewis: is that naturally speaking, we haven't seen it because it wouldn't have happened yet. It's happening now. I'll give you one more statement, Craig, is that I was looking at a couple of bank loans that I saw go through recently in the marketplace. SOFR plus 375 is commonly now the low end of what a bank will want to originate right now. Well, think about what that number is. So first 5.3, 375 gets you to 9.05. That's what a bank wants to lend money at on the low end. If you're a high quality borrower with a 10% deposit requirement and a lot going for yourself and a lot of experience. Craig Fuhr: I was, go ahead, Fred. Fred Lewis: Conversely, I saw the first time I saw a loan print from a bank at 10.10 this week. 10% from the bank with a deposit requirement, with an interest reserve for, on a development loan of 12 months, plus plus. You start applying that to renewals because that's what's happening as well. I'm just talking about new loans. It's the same criteria for a renewal of a 6% loan issued one year ago that's renewing right now. So I say all that as a corollary to the point of thinking about opportunity, but you've got to be defensive enough to take some cash to put it in the other bucket so that you're not, so you're not get, you don't get chewed up by the renewals Craig Fuhr: What do Fred Lewis: and Craig Fuhr: you Fred Lewis: the Craig Fuhr: mean Fred Lewis: cost. Craig Fuhr: by that? What do you mean by cash in the other bucket? What does that Fred Lewis: Well, Craig Fuhr: mean? Fred Lewis: if you don't sell the property today that you think you can, you trail the market down and you force yourself to stay with the financing that's in place and then you wake up one day and it has to be renewed because your banker is not your partner. That's also a misnomer when things go bad. The first thing that the investor wants to say is, Hey partner, guess what? I'm having a bad day. Things aren't selling. could you add the interest payments to the back of the loan? Could you, you know, do the following? And, you know, we're a private lender and I sit on the board of a bank and the answers are typically the same. We're your lender. And there's a reason that we required to have a lot of equity in this deal. So Craig Fuhr: Mm-hmm. Fred Lewis: it's helping to be very wary about that you don't wanna trail the market and find yourself in that position and that conversation. Craig Fuhr: tell you what guys there was a great story in the National Association of Home Builders entitled Lending Standards Can Due to Titan. Just sort of tying this up with a bow and it's a very short one so I'll kind of read some of the highlights here. It says according to the Federal Reserve's board senior loan officer opinion survey for the second quarter of 23 bank lending activity. That's what the report was. Banks reported that lending standards and commercial real estate loan categories. It says a majority, 71% of the banks tighten standards for construction and land development loans, while 63% tighten standards on loans secured by multifamily properties in the second quarter. In addition, Jack BeVier: you Craig Fuhr: roughly half of the respondents indicated weaker demand for these loans in the second quarter relative to the first quarter. They've got, it says here that the net share of banks reporting weaker demand averaged about 40%, Jack BeVier: Thanks for watching! Craig Fuhr: In residential, which was actually an improvement over the fourth quarter of last year. I mean, everything was an improvement, so no shocker there. It you know, I think we've lived through this before. We've seen this before. This this increasing ratcheting up of tightening criteria, and I think you Jack BeVier: Thank Craig Fuhr: guys Jack BeVier: you. Craig Fuhr: have spoken to that. Anything you add to that Fred? Jack BeVier: Actually, let me add something. By the way, Craig Fuhr: Good, Jack. Jack BeVier: this is how the Fed works, right? Like this is all by design. Like, the Fed printed a bunch of money, injected a bunch of cash into the system, right, which created inflation. Now they need to get that cash and they need to pull it back off the table, right? They need to unprint it. The way they do that is by increasing the cost of banks cost of capital, so that the banks then pass it through to us. And we're now so all that money that we got in 2021. We're now handing it back to the bank through a 10% interest rate. And the bank is then sending it to the Fed through a five plus percent interest rate that the Fed is charging the bank. And then the bank doesn't reprint it, right? Like, so this is the physical mechanism of the bank raising interest rates. This is how the money gets unprinted, is that we now have to give it back to them. So like, and he told us he was gonna do it. Right? Like he never like he's been saying this for a year. You know, for a year and a half solid now. And it's just that we've never witnessed the physical mechanism of printing and unprinting money so quickly, so violently. Right. In such a short period of time. But like this is the physical mechanism of how the how the Fred, how the Fed pulls liquidity back out of the system. They are we're about to start cutting those checks to the banks at 10 percent plus. And. And that's it, it's back out of the system, right? It will then disappear from the system. And that's just, you know, that's how it works. It's actually very effective, right? It doesn't happen very quickly. It took a while, but it's a very effective system. It does work. Craig Fuhr: bit painful. Jack BeVier: and a bit painful. Fred Lewis: Well, and that was my point about the patience aspect is that when you're when the fire is burning and you've always kind of kind of been around the fire, sometimes you got to just step out of it. Not to say you should shut your shop down. We love the real estate business long term. We think there's phenomenal opportunity ultimately, but you can you can crash and burn though in the heart of the fire if you're not patient. And I think we got some headwinds we've got to be very concerned about to that extent. Craig Fuhr: the Icarus effect, yes. Time for patience, time to be operationally. I think we've run the gamut on this one. Appreciate the conversation. I hope those who are listening got a lot out of it. Don't forget we have show notes at realinvestorradio.com forward slash notes. You can check out the articles and news reports that we cite here. Jack. Thank you very much for the time, Fred. Thank you for your time as well. Great conversation. Fred Lewis: Thank you. Jack BeVier: Absolutely enjoyed it. Craig Fuhr: I will see y'all Jack BeVier: Have a Craig Fuhr: on Jack BeVier: good Craig Fuhr: the Jack BeVier: week. Craig Fuhr: next one.