If you are blessed with 2020 vision it means you see things as clearly as they can be seen. You have no filters, biases or stigmas.
With that as my goal, I attended Inman Connect in NYC to see what the real estate world was focusing on and where they see the future of ALL things real estate going. I wanted to see how it matched up with my own views and biases.
Similar to the mortgage noise in conferences and industry rags about how hard money and Non-GM is doubling or tripling daily, the realtors our focused on iBuyers and corporate/investor cash offer approach. Now it is frequently coming from the franchise parent themselves or by one of the new creative finance companies.
Typically when people wanted to get into lending they acquired existing larger players to create a platform and grew from there. Or, a Realtor would acquire an existing firm and make it their finance arm. Sure you still have existing JVs like G-Rate Affinity that replaced PHH, creating an upgrade but still it trended towards traditional.
But the new blood firms all were purposely acquiring new blood loan origination platforms, so they “fix” the broken businesses that are currently ruling the business. Many of these firms are small and buying even smaller lending platforms; so the new Realtor-Lending story is far from being written. But either way these bright young minds have fixed all that is wrong with lending and loans are being done cheaper, faster and better with less commission and cost in the middle…or at least that’s the intent.
The market is still driving the need for one-stop shop and mortgage and insurance are seen as the most obvious ones to take on because they are seen as the easiest to replicate and improve. Doesn’t that feel nice? Knowing that everyone looks at us as dumbest people running the weakest businesses? When you understand why they think that, it drives you to prove them wrong by adapting and driving a better model every day.
These young creative minds were driven to solve the issues they saw their parents go through as foreign-born entrepreneurs trying to get established and trying to buy real estate. So they solved for their issues of; no down payment, gig income, can’t buy if can’t sell, etc. These are the next generation of disruptors who are getting the funding. Why invest like the last twenty/thirty years when Wall St Firms have invested in traditional mortgage bankers? So the investors eliminated the middle access to the securities they lived to trade and maybe made some money before they flipped the entity maybe for a small gain.
After the crisis those usual suspects have stayed on the sideline on the finance side and instead poured money into buying hundreds of thousands of single family homes and multifamily complexes at distressed prices. Now, as they start to unload these homes near a top, they see the complexity in getting their renters to become buyers. Thus they would prefer to put smaller bets with less capital requirements on these future looking firms hoping one of them gets 10x return….technology is seen to be the answer to the $9500 cost per loan question and the 6% realtor fee question.
It was quoted at the conference that $10B (yes that’s a B) was invested in Prop-Tech in 2019. That’s a lot of money that can make a lot of models look good for many years as they figure it out and eat the traditional margins. Meaning they don’t have to make money, but we do, so disadvantage to us.
But a lot of this money is pouring into the tech that facilitates, and not the actual lending. But with the ATR Regs, the chain extends pretty far and contingent liability might lie to some unsuspecting investors. Maybe they think Trump will be reelected and the ATR rules will be dismantled or maybe they are ignorant to the long term liabilities that we live under.
So it’s not one big threat to worry about, it’s the little by little starvation of new blood customers back into your business.
The servicers are mastering the note modification process eliminating the easy rate and term refi from our given business. They eliminated their expensive telemarketing retention teams and just use trigger tech to send out perfectly timed modification offers that crush us after we have spent money mid-process.
Seller funding is back in the form of iBuyer homes who offer their own funding or rent to own scenarios. They never hit the open market.
Creative bridge scenarios from realtors tie up old home and new purchase, and then they grab the end financing.
In all these deals they aren’t competing, they are literally disrupting the process by getting to the buyers and sellers at different points in the process. Redfin is disrupting the MLS right from first search. iBuyers come in at CMA with cash offer. Corporate owners are providing own financing to occupants. Realtors are offering third party products that make their house liquid so they can buy the next home.
It’s not Rocket loan that we can all offer with the right tech spends; it’s just the disappearance of potential customers so that we all fight over less which causes right sizing or margin shrinkage. So the attention of efficiencies and new models that adapt to the new reality is essential.
There is one thing that veteran lenders can’t do. They can’t shake the fear and PTSD of decades of history. We “know” too much. These new guys aren’t burdened by fear or concern. You can see it also in the firms that have grown the most post 2008. They have a different view of compliance and quality control. It allows them to take less risk and make bigger faster bets. There are some screaming red flags especially on the major wholesalers right now, who feed higher risk products to those with no skin in the game and no infrastructure or incentive to monitor.
The assumptions on all the bridge loan and iBuyer models are based on appreciation growing. On average they are buying the home at 98.5% of market…that’s not a lot of margin and mistakes will happen. Maybe they are using the same models we used in mid 2000s when we did 80-20 lending?
Under the guise of lowering costs of homeownership, the big wholesalers wanted to lower Escrow waivers to 95%ltv at no cost and structure no money down deals based on higher rates. Sounds like when Angelo would say our goal is to put everyone in a home and bring barriers down….no one wants to disagree with that thinking on the outside. But once you understand the why you see the short-sightedness.
Hey maybe I’m wrong. I mean maybe it is really different this time….
But I do love this fresh approach to our old world that went backwards after 2008. Breaking these barriers and creating new solutions with a filter of credit performance history will liberate us all to make smart business moves that will benefit all parties in the real estate transaction.
BTW five years now this conference will all be about how Blockchain is the only way to handle real estate transactions…now I just have to figure out what that means…