Real estate just got a BIG boost …

Something BIG is happening for real estate … and while it’s not a surprise, it’s a development every real estate investor should be aware of.

Here’s some context …

First, remember real estate investing is essentially a business of managing debt, equity, and cashflow.  

That’s YOUR job.  You can get your property managers and team to handle most everything else.

Equity (the difference between the value and the debt) comes from savings (down payment), the market (value increase), or amortization (pay down of loan).

Cashflow is a function of rental income, operating expenses, debt service, and taxes.

Debt is like the air in a jump house.  When it’s flowing in, it props everything up.  When it stops, everything deflates pretty fast.

That’s why real estate investors (should) pay close attention to debt markets.

The 2008 financial crisis devastated the supply chain of debt into real estate. Mortgage companies failed in droves. We know. We owned one.

Real estate went from too-easy-to-finance to nearly impossible.  Lack of lending crashed real estate prices and created a big mess.  The air came out.

It’s why we became such outspoken advocates for syndication.  There was (and still is) a huge need and opportunity to aggregate capital for real estate.

Banks and Wall Street had been the primary channels for capital aggregation and distribution.  But they were broken.  Main Street needed to be empowered.

The government agreed.

So in 2012, the JOBS Act passed. And since September 2013, regulations are in place which make raising private capital MUCH easier.  We like it.

But while the JOBS Act helps investors raise EQUITY …

… earlier legislation (the Dodd-Frank Wall Street Reform and Consumer Protection Act) actually impedes lending … especially at the local level.

But now that’s changing … and it’s an EXCITING development!

You may have seen this headline …

Trump signs bipartisan bill rolling back some Dodd-Frank bank regulations – Los Angeles Times, 5/24/18

“ … with the key support of some Senate Democrats, the legislation focuses relief on small and medium-sized banks …

 “‘This is a great day for Main Street in rural America, and a big testament to what’s possible when members of Congress put partisanship aside and work together to help our communities grow and thrive,’ [Sen. Heidi Heitkamp (D-N.D.)] said in a statement after the signing.” 

Community banks, which enjoy broad support among Republicans and Democrats, will be freed from Dodd-Frank’s mortgage rules if they make fewer than 500 mortgages a year.”

Even in today’s highly charged political environment, this bipartisan effort shows Main Street real estate is very important to politicians.

The Dodd-Frank rollback aims to improve the flow of money into real estate, which is awesome for real estate investors.

Of course, just because politicians aim at something, doesn’t mean they hit it.  Politicians are notoriously bad shots.

So what do LENDERS think of the Dodd-Frank rollback?

Local bankers say reforms to Dodd-Frank are welcome – Herald-Whig, 6/5/18

“Mark Field, president and chairman of Liberty Bank, said most of the benefits from the recent reforms … involve mortgages.”

“… allows banks to give automatic qualified mortgage status to customers they know if the banks are using their own money for loans.”

“‘Character and knowing people counts for something again,’ Field said.”

This is GREAT news … and although time will tell (after all, this is very recent) … we think it will open up capital flows into real estate.

Of course, as we’ve said before, we think more money will be finding its way into real estate lending.  It’s both inevitable and reassuring.

For individual investors and syndicators alike, this new playing field promises to open up new sources of lending … and terms.

Because even though lending has loosened since the depths of the recession …

… it’s remained tight for borrowers and projects that didn’t fit into the tightly-regulated box created by Dodd-Frank.

Not to get too far in the weeds, but the 2008 credit crisis had its roots in Wall Street’s casino mentality.

In its zeal to create more poker chips, Wall Street cast aside sound lending practices because they could bury the risk in complex securities and sell them to unsuspecting investors.

Wall Street didn’t really care if loans went bad … because they wouldn’t be holding them when it happened.

So Dodd-Frank created strict rules attempting to prevent the bad behavior of Wall Street and big banks.  (Good luck with that.)

We could go on … but the point is that Dodd-Frank took professional judgment out of lending … from EVERYONE … including community banks, credit unions, and other portfolio lenders (those who hold loans instead of flip them).

Even though the financial crisis had its roots in Wall Street, not Main Street … Dodd-Frank took many Main Street lenders off-line.

The Dodd-Frank rollback intends to take the shackles off local lenders.

There’s a HUGE difference dealing with a local lender on a PERSONAL basis … one who’s going to hold the loan … and can consider the many factors which don’t fit into some bureaucratic one-size-fits-all checklist.

And while we need to do more research, a side-benefit for syndicators may be that setting up lending funds might get easier too.

In any case, now that local lending laws are loosening, let’s take a look at moves you can make to take advantage of the changes …

Build relationships with community bankers.  If you’ve only been investing since 2008, this is a funding source you’ve probably ignored.  It’s time to fix that.

Open accounts with community banks in markets where you invest. Establish a personal relationship with the bankers.  It’s a VERY different experience than doing business with a too-big-to-jail bank.  You’ll like it.

Use professional selling skills to find out what the banker’s goals and objectives are.  What makes the relationship a win for the banker?

Present yourself as the IDEAL client for the banker.  Do some deals … even if you don’t really need the money.  SHOW the banker you’re a person of character and capability.  Build TRUST.

It’s even BETTER if you’re a syndicator because you can bring bigger deposits, bigger loans, more transaction volume, and maybe even more referrals.

In fact, one of the secrets of successful syndication is having your individual investors make deposits in the community bank you’re borrowing from.

Go with the flow …

When the rules change, so does the flow of money.  Sometimes it works against you.  Sometimes it works FOR you.

And while there are certainly some long term economic trends every investor … real estate or otherwise … should be concerned about …

… this is a development which should have real estate investors smiling.

We think these updates to Dodd-Frank will work FOR real estate investors … at least those careful to pay attention and take effective action.

Of course, you’ve read all the way to the bottom, so you’re already ahead of the game.

Until next time … good investing!

More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

12/22/13: Who Moved the Door? How Dodd-Frank Affects Your Exit Strategy

Dodd-Frank just made real estate investing more confusing“Dodd only knows.  Dodd makes his plans.  The information’s unavailable to the mortal man.”Slip Sliding Away by Paul Simon…slightly modified by The Real Estate Guys™ 😉

And quite Frankly, my dear, Dodd doesn’t give a damn.” – Rhett Butler in Gone With The Wind…again, slightly modified by yours truly.

Yes, we’re old media guys.  Plus, we’re just plain old.  So we have all these old song and movie references.  Classic stuff, and the lead-in for this blog about another edition of The Real Estate Guys™ radio show.

You may have heard that 2013 is coming to end.  And right around the corner is a brand new year.  And, like a holiday tradition, Uncle Sam is handing out brand new laws for everyone to figure out. Fun.

In this case, we’re taking about Dodd-Frank, which is a big piece of…….

…legislation…that was written by bankers to protect consumers from…bankers.  Hmmm….we guess that makes sense. (Not really).

Nonetheless, there’s stuff buried in the bill that affects real estate investors, so we thought it would be a nice public service if we told you about it.  We don’t think Dodd or Frank will be sending you an alert.

In the studio for this edition of legislation mitigation:

  • Quite Frankly, the finest real estate investment talk show host there, Robert Helms
  • His Doddly Do-Right co-host, Russell Gray

Like a holiday fruit cake, there are some strange things in the Dodd-Frank bill.  And one of the most concerning items is a provision which places substantial burdens on owners of real estate who want to exit by offering residential owner-occupants seller financing.

Of course, we think this is a stupid law.  Oops.  We’re sorry, is our not-so-humble opinion showing?  We’ll put it away and let you decide for yourself…

Here’s the deal:

If you want to sell more than 3 properties per year by offering seller financing to owner-occupants, you will now be required to obtain a national mortgage lender’s license.  This means passing a test, learning a whole new set of rules and regulations, falling under the jurisdiction of yet another federal bureaucracy, and keeping up on continuing education.


Think about the ways investors use carry-back financing:

  • Buy an apartment and convert it to condos.  Sell the individual condos to high paying owner occupants and carry the financing to a) get a better price, b) get a higher rate of interest on the loan, c) attract a wider market (people who don’t qualify for conventional financing).  Except if you sell more than three in a year, you need to be licensed.
  • Same as above, except you build a little in-fill project with 5 or houses.  You want to offer it to owner-occupants and carry back financing, except you can’t because you built the homes.
  • Buy a nice piece of land and sub-divide it into custom home sites.  Convert your equity into cash flow by carrying back financing. Except now you can only sell three.

You get the idea.

But it gets “better”…

Not only can you NOT do more than three seller-financings in a year, you can’t offer terms of less than 30 years!  And no balloon payments!

Now, imagine you have a collection of properties that have lots of equity, but are in bad shape.  You don’t have the time, money or energy to fix them up.

So you decide to sell them to owner-occupants who want the opportunity to fix the house up the way they want it, and earn a little “sweat equity” along the way.

You take a tiny down payment so the buyer can use most of their cash to fix up the property.  You offer them an interest only loan, so they have minimal payments (all profit it to you), while fixing up the property.

They give you a higher than market price (but still well below what it will be worth when they fix it up), so you’re happy to wait for the money.

Of course, you don’t want to wait for every, so you give them a 3 year loan, with a 2 year option.  That way, you collect interest for 3-5 years and then either get paid, or get the now fixed up property back.

So the buyer gets to buy the property, with enough time and money to fix it up just they way they like it.  When they’re done, they think it will be worth more than they paid.  They’re happy.

The neighbors are happy because your ugly property gets a facelift and proud new owner to keep it up.

You’re happy because you get to sell a property for higher than market even though conventional lenders wouldn’t touch it.  Of course, once fixed up, a conventional lender will be happy to lend on it, which is how you’ll eventually get paid off.


Oops.  Except that under Dodd-Frank, you can’t have an interest only loan, you can’t have a balloon payment, and you can’t have a 3-5 year loan.


So what’s the good news?

Doff-Frank doesn’t (currently) apply to sales made to INVESTORS.

That means as a BUYER, you just got a lot more attractive to providers of seller financing, because all of the owner-occupants you used to compete with for deals are now at a big disadvantage when bidding on seller financed properties.

That’s right!  The law that’s supposed to help owner-occupied buyers, just put them at a disadvantage…even though they might be willing to pay more.  Brilliant.

But we don’t make the rules.  We just try to figure out how to adapt.  And heading int0 2014, we need to think carefully about how we would use seller-financing as an exit strategy.  But we also see a lot more opportunity to use seller-financing as an acquisition strategy.

So listen in to this episode and consider how Dodd-Frank affects your entrance and exit plans for 2014 and beyond.

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8/29/10: Public or Private Pool? The New Rules for Accredited Investing

Honey, they shrunk my net worth!

In case you haven’t heard, the financial reform bill redefines who qualifies as an accredited investor.  So, if you like to pool your money with other people’s money so you can get in on bigger deals, there are some new rules to play by.

And if you’re syndicating deals now, then you REALLY need to listen up – because the new rules are effective IMMEDIATELY!

Diving into the deep end of The Real Estate Guys™ pool to discuss the ramifications for real estate investors:

  • Your host and lifeguard, Robert Helms
  • Your co-host and wading pool watcher, Russell Gray
  • Cannonball champion, the Godfather of Real Estate, Bob Helms

OMG!  OPM is r BFF.  TDM rulz!

Sorry.  Too much time at the teen pool.  Back to the topic at hand…

Our friend and real estate attorney Jeff Lerman sent us an important update about something buried in the 2,300 pages of the financial reform bill:  Congress decided to change the definition of “accredited investor” so that you can’t count your home equity in your net worth.  Maybe it’s a good time to do it since so few people have any home equity any way.

Public pools can get crowded. It's sometimes hard to find a unique opportunity.

But for those of us who like to invest in private placements – and even more importantly, those who like to have people invest in our private placements – the new definition just demoted a lot of investors.  They’ve effectively been kicked out of the private pool and are now only allowed to swim in public securities.  You know, the ones run by the fine folks on Wall Street and “supervised” by the SEC.  We’re feeling safer already.

What’s really amazing is the new rules went into effect immediately. That means if you were in the middle of getting into a deal or putting one together, nothing is grandfathered.  So you could have good faith money in a deal based on capital pledges from people who were qualified to invest and poof!  Now those people are unqualified and you’re scrambling to find replacement money before you lose your opportunity – or worse, your earnest money.

We’re guessing the folks who decided to do this have never put a deal together.  But, perhaps just a little too much of our opinion is showing.  Sorry, we’ll throw a towel around ourselves.

A big thanks for Jeff for bringing this to our attention.  It’s changes like this that keep us subscribed to all of our newsletters, podcasts and blogs.  You never know (especially now) when the winds of change are going to blow across the game board and shuffle things around.  But when they do, you can count on The Real Estate Guys™ and our network of experts to let you know – and to help you adjust and adapt.  So be sure you’re subscribed to everything and keep your eyes and ears open!

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