Current Challenges in the Real Estate Market

In this episode EarlToms talks about the current challenges in the Real Estate market and how to prepare your deals to overcome these challenges. 

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https://earltoms.com/earltoms_blog/episode-34-current-challenges-in-the-real-estate-market/

Transcript

0:00  
Welcome to another episode of EarlToms podcast. Today, we're gonna kind of go over some challenges that I'm seeing in the market right now, as far as getting getting deals under contract, I still don't really have any issues with, with my buyers, still wanting wanting deals, but I am starting to see a struggle to be able to get get these properties under contract. 

0:31  
I had an interesting conversation with with an investor that there are still a good a good bit of business, too. He sat for a meeting yesterday with a conglomerate of banks that it was a mixture of small local banks, and some of the larger banks that were there were in his area. But he, his report, after he left the meeting yesterday was basically that 35% of houses nationwide that have mortgages on them are underwater, whether that be the value is lower than what they owe, or they're in forbearance, that, you know, delayed, they didn't have to make payments, or they're behind in their payments. And he said that the 15% of the 35%, were actually some of your smaller banks that were holding, you know, these these underwater loans. But he said everybody in the meeting was basically expecting the government to bail the banks out again, which no one really knows whether, you know, that will happen again, like it did in the foreclosure crisis. But if you're, you know, at the beginning of May, and you've got 35% of houses with mortgages nationwide underwater, that seems to have some sort of foreclosure crisis riding on it. He said what some were doing and what they were talking about in the meeting, where they were expecting some of the smaller banks to basically flood the market sometime in July or August with these houses that are underwater, whether they're, you know, they're going ahead and starting to foreclose on them. So instead of keeping them on their books, he expects them to flood the market. So what kind of impact that'll have, with them being smaller banks, you know, no one, no one really knows the amount of, of loans that these these houses have, whether it be a million houses, whether it be 10 million houses, or whether it be 50 million houses, and even possibly more than that, nationwide that that they could possibly flood the market with and in, say, July or August. But one thing that I think we all agree on is that we need more supply regardless. Because pretty much everywhere, deals are are starting to kind of draw because the supply is not is not actually out there. But if that winds up being being true, we'll just kind of have to wait to see if you know if the smaller banks start flooding the market to get these these loans off of their books. But either way, 35% of houses that have mortgages on them being underwater is a cause for concern. 

4:11  
And that's, you know, kind of going to be a factor of a lot of things, whether it be the virus inflation that's going through the roof right now. people losing their jobs. One thing that I have actually, in the back of my mind and thinking about are these people that, you know, basically we're collecting unemployment, but we're making more money, being unemployed than they were being employed, and what kind of impact that would have once that unemployment stopped, and these people had to go back to work. So let's let's take it as if you have, you know, 35% of houses underwater. You have inflation. You know, I think lumber is 400% Higher now than it was in February. So in two months lumber has jumped 400%. Which is crazy if you ask me, but will the jobs be available for those people that have been collecting unemployment? When it gets cut off? So if they were out there collecting unemployment making more, and then when it gets cut off, they say, Okay, well, I have to go find a job. If you take all of these economic factors are these companies going to be hiring, to be able to for those people to actually go and get a job? Or is it going to be say, the next step in the ladder, that takes us further down economically, you know, you never want to see a down economy, you don't want to see people struggle. But when you look at how policies work, you know, in government, I had somebody years ago, tell me, the government creates a problem so that the government can create a solution. At seems to be true. But I've never actually seen the government create a solution that helped Main Street, America, the solutions, they tend to come up with, you know, a bailing out banks, or helping some company, the, you know, the auto industry all these years ago, but they don't actually really help every day, people in this country to get ahead to stay ahead, things like that, it always seems that the government helps the people that, you know, say donate a lot of money to their campaigns. And then just kind of forget about the people, you know, that actually keep this country going. So that's something that I've had in the back of my mind, and I hope, I hope it doesn't happen. But, you know, are the jobs gonna be there? for these people wants them unemployment benefits run out? Or they cut it off? Are they going to be able to actually go and get a job? Or are we going to have, like I said, another step in this ladder that, you know, pushes the economy down that much further, because one thing that you have to see is that you go through, you know, if you lose a if you lose your unemployment benefit, or you already have a job, but you're having to go pay $6, $7, $8 dollars for a gallon of milk, your your monthly bills are starting to get squeezed as it is. So it just seems like they're they're putting a recipe for disaster together. 

8:03  
While it is I'm not smart enough to figure that out. I don't even pretend to try to know. But if you're just paying attention, that's what it seems like. So what I'm actually seeing right now is a combination of a couple of things in the in the real estate market. The first is, is the inflation when you go when you and you're looking at houses, like I said the buyers are still trying to buy but and there's not really a difference in what they're willing to pay right now that I've seen. But you go when you try to get these houses under contract, especially for me when I go and try to get one that I'm that I want to buy, or I want to flip or I want to you know, hold on to as a rental, but I have to do renovations on it. And it gets to the point to where the only thing that will fix the cost of materials and the cost of the renovation is the price. So you're kind of working backwards into figuring out, okay, by the time I get this house, by the time I get it renovated, what's it going to be worth then and I'm not going to have a market to be able to exit whether I'm flipping it or renting it based on what's going on in the world. So when I when I'm when I'm talking to sellers now, you know, I had an argument with a guy the other day, I mean, he bought a house March. I mean he was doing a little bit of work, he thought he was gonna turn around and you know, flip it to somebody make a quick little $5,000 to $10,000 on it. And you know, they were bought to rent it. And I was just sitting there having a conversation with him because he wasn't completely finished with it. And you know, I just made the comment that you know what cost $5,000 to do in January for renovation is now between $10,000 and $15,000 Because just the prices of materials. And then he got, you know, I don't think he really was wanting to sell to be honest with you. So he just started nitpicking everything. And then wound up, I just made the comment I said, you know, just to be honest with you, I went to the grocery store on Saturday. And I paid $7 for a gallon of milk. And he literally went to the grocery store and sent me a text and said, I was just at the grocery store, and a gallon of milk was only $3.79. I know what I paid for it, I have the receipt. So if you want to argue with me all day long, that's fine. I know what I can pay either you want my money or you don't, it's that simple. So what you're running into right now is a lot of people that are that are angry, they're, they're not coming to terms with what's actually going on. 

11:00  
So coming out of this virus, a lot of people, you know, they just have this built up, frustration was built up, anger, whatever you want to call it upset. But it's starting to come out. Because when you come to the realization that the good terms are effectively over. You have a hard time coming to terms with it. It's almost like when when somebody passes, and then they come to the realization that, you know, hey, I'm gonna sell the house. But then when they go to actually close on the house, they have all these mixed emotions, because they know they're leaving something that had a lot of sentimental value to them, that they'll not, they're not going to be able to go back to anymore. And it in some ways, it's similar to that right now, as far as the sellers go, because they're, I don't know if they're in denial, if they're not paying attention to what's going on in the world, what it what it may be, but whenever I buy something, I have to look at it. Of it's not necessarily just today, it's by the time I buy, let's say two weeks, 30 days, then how is the economy going to be then how are the building materials gonna be then? But then when I actually go in and do a renovation? You know, do I have a 10 day renovation? Or do I have a 30 day renovation? So there's a chance that I could possibly be two months into the future, by the time I get this market ready, whether to rent or to sale? And I have to factor that in? So if I'm no, we're, you know, we're kind of going in a in a downward trend right now, then, I have to look at it that says, Okay, well, it might be worth this today. But let's say that it's worth $200,000 today, but it's worth $190,000. And in two months, by the time I get to it, and get it market ready. But at the same time and those two months, what am I building materials going to do? And how much is this renovation going to cost me by the time I get finished with it, because it's not going to what you think it's going to cost you today is not what it's going to cost you. So you have to look at it and kind of a forecasting way to figure out okay, well, if it was going to be $10,000 today is it going to be $15,000 by the time I start or $20,000 by the time that I finish, and be able to predict it that way because a lot of your investors are starting to talk about things like that, even though they're what they're paying forward is not necessarily changing a whole lot. It's it's in their mind because they're paying attention. So I'm running into denial, frustration, anger, whatever it may be that you know, the gravy train is pretty much coming to an end right now. 

13:57  
If you ever want to know what the shape of the economy is in, then really all you have to ever do is check precious metals, whether it be silver gold, just check them. I mean there's there's plenty of websites that will give you up to date information on the metals. And whenever you see metals go up, that means the economy is going down. When the economy goes up, the precious metals come down for the last year, year and a half. I haven't even been able to buy any I typically buy 10 ounces of silver every single month. That's just what I've done over the over the course of my career. But I hadn't even been able to do it because when I was able to go in, you know, say January, February, March of last year, and I think I was paying him somewhere $12 to $15 an ounce for silver If you go check it today, it's $26 to $28 an ounce. So I'm based on effectively paying double what I was a year, year and a half ago. So you always watch that. And like I said, one thing, one of the reasons that I do it that way, is because let's say that the economy does go down, well, I know my precious metal is gonna go up. So if I ever actually needed money, then I go sell my silver. For double the price, I basically paid for it. And, you know, I'm good for a month, two months, whatever it may be. Because it's you're basically hedging your bet. Good Times versus bad times. So you still have money in a savings account, the ability to survive if you ever needed it.

15:53  
But the other the other aspect that I'm that I'm seeing right now, that is really cause for concern is up, we've already talked about the inflation part of it. But the other part that is that is just really concerning, is just the simple fact of the lack of available materials. When you go to Home Depot, or Lowe's or a supply house. Now a lot of times you're having to order the actual material, they're not keeping it in stock anymore. Instead, they'll call you know, let's say that you need some flooring, or you need a refrigerator, whatever it may be, you're having to go in the stores now and say, This is what I need. So you have to let the Home Depot, you know, punch it in the computer. And then it basically, you know, signals to GE for example, hey, we need this refrigerator. So GE goes and says takes the order and says okay, we'll get it to you, and they start making it. So in two, three weeks a month, they, you actually get that, that refrigerator, instead of them having an inventory in the store, like you did six months ago, a year ago, pretty much your entire career, you could just walk into a store and say this is what I want and leave with it. And a lot of cases now you can't even do that. I mean, I've got people that have called me. Um, you know, when I say hey, I need to redo my roof, because the storm hit. But I can't find the shingles, do you think you can, you know, find me this type of shingle for me. So I start calling around this and that and they're like, No, we hadn't, we don't have those. We're having to basically call the manufacturer, because what I'm being told is for singles go is they're only making the lower end singles. They're not making the higher end singles, because a lot of people are not buying the higher end singles right now. So whenever you actually need the hiring singles, like a dimensional shingle, something like that, they're actually having to place a bulk order, just to be able to get that company to run enough shingles to where it becomes cost effective for them to run it. So you may need 50 squares, but they tell that company, let's say they tell Home Depot, that I mean 500 squares, that may be what it takes for them to actually run that shingle and produce that shingle, and then they send it over to Home Depot, but you have to wait a month just to be able to get that single. So when you're looking at things right now, you have a construction happening without any real easing going on, because when you take the sellers that are kind of in denial, they're frustrated, they still think that they should be able to get what they what they have in their mind out of their houses. Then you take the the inflation part of it into account, and then you actually put the lack of materials out there. It's it like I said before, it's a recipe for disaster. So you try I mean, what we've done is when we find something, we've gone and gotten a storage, a storage unit. So when we find something that we know we're going to need in a month, two months, three months, we actually just bought the entire thing. And it kind of upset me a little while back, because I actually found some flooring that I use in most of my houses. And they had a pallet in Home Depot. And when I was sitting I told him I said I'll take this pallet because that's what a lot of people are doing. They're just buying everything that they have in stock. So the I mean, because it's hard to get the materials. So when I'm sitting there leaving and going to check out the, they sit there and say that'll be $15 for the pallet. And I was sitting there thinking to myself, after all these years of me being in real estate, investing, things like that I have never once at any store, anywhere been charged for the actual wood pallet that all of this material sits on, you made your profit inside all that material that you just did, you just sold me, you don't have to charge me for the wood. That makes up the pallet. But the Home Depot charged me $15 for that actual pallet. And when that happened, it triggered something inside me that said, Wow, they must be hurting if they have to, to pay get somebody to pay $15. Now you think about the pallet is a one by four for the most part. So you might have 30 feet worth of a one by four. On a pallet. If you take the the top pieces, the sound pieces and the bottom pieces, you might have 30 feet. And they charge you $15 for the pallet. So it just it's stuck in me something's happening, something's going wrong. They're not making enough money selling this pallet of flooring to me that they have to actually towards me $15 for this pallet. And ever since and every time I've gone in, because this is just how I am. If I find something I asked him if I'm being charged for the pallet, and they say yes, so I actually get my contractor to come over, bring his trailer, and we manually load every single thing that I get onto that trailer and take it to the storage facility. Because I understand that the Home Depot was may be hurting, lack of lack of material. So they're not having, you know, indoor sales numbers that are typical for them. But I'm not paying $15 for a pallet. That's just that's ludicrous to me Be happy that you sold this pallet worth of materials, or you know, don't sell a meat or raise the price to cover it something but don't sit there and tell somebody that has spent hundreds of thousands of dollars in your store over the years that you're going to charge them $15 for a pallet. That's that's just not, that's not good business. To me, that's not good ethics. So I refuse to do it now. Now granted, I'm spending more money with my contractor coming to pick it up on the on the trailer. But it's just a principle thing with me. I mean, I you know, you kind of look at it in this in this business as far as the pay the closing cost, things like that. So when you have an attorney that says, you know, I'm going to charge you $150 to record this deed, you might take that one time, that's the only time you're gonna take it because you're gonna find another attorney the next time that's going to charge you $20 or $30 to go record that deed instead of $150. It's a supply and demand thing. So if you want to charge me for the $150 for a deed, then you better give me a service that is fully worth that $150. But there's not many attorneys that are fully worth $150 day reporting fee. 

23:47  
So when you look at just just step back for a minute, and look at what's going on. Um, you know, one thing that I would suggest that I've done is I actually just downloaded the Home Depot app probably six months ago, and I went through that store. And I started just scanning all of the materials that were in the store that I use, and I made different lists on them. So when I'm sitting there trying to come up with a with a price to pay for a house or something like that. I can pull that list up and I can see okay, well you have this many in stock. This is the price of it. So I'm not sitting there thinking in my own mind that the price of materials is the same that it was a month ago. I'm checking up today prices. And then because I do this enough, I know what it was a month ago so I can sit there and kind of go Okay, well it went up $2 or it went up $10 whatever it may be. So I can predict in a month or two. What it could possibly wind up being what it could what it could cost me so that helps me as far as going And getting these houses under contract for the right price. But it's not a good situation to be in right now. We're almost, you know, standing on the edge of the cliff. So we're either going to walk back from the cliff, or, unfortunately, we're just pretty much going to get pushed off. I hope that we get walked back off that cliff. But my instincts and my years in real estate tell me that we're about to just get pushed off of that cliff. 

25:33  
So I want everybody to kind of be aware of it. Now, one good thing about about a negative economy and a negative real estate market is all of those investors that that won't buy, when the times are good, they'll come out and start buying when the economy and the real estate market is down. So you essentially double your potential buyers. And because you're going to have more supply, the better investors, the more savvy investors wait until you have a downturn and a bottom in the market. And then they come out and buy everything, because it's basically that old, that old proverb, buy low, sell high. That's how you, you know, you're making money. So these investors that are that are savvy, or have been sitting on the sidelines for the last three, four or five years, now, you're gonna start seeing them come back into the market, and start buying again, start, you know, going and flipping houses, buying houses to rent, things like that, because the entry price is what they can make a lot of money on. Instead of going and paying top dollar when you have an inflated market, like we've had for the last three, four or five years. So make sure right now that that you know you're keeping, you're keeping your knowledge about what's going on in the market up to date, that you're and make sure you're checking for potential new buyers entering the market, whether you're running your courthouse record search, or whether you use a program to you know, find buyers in the market, things like that, you need to pay attention, because you're gonna have a lot this when sitting on the sidelines, start to re enter the market. 

27:26  
So right now is a good time to start checking on that and start building relationships. Because when you can get those relationships built before everyone else, you become in the driver's seat, and they're going to, you know, you're going to be able to sell more deals, because you're effectively going to have more buyers to choose from. So you know, one person might say, I'll give you $200,000 another person might say, I'll give you $220,000 another person may say I'll give you $225,000. Because you have more buyers in you're going to be able to actually get different offers and be able to take the highest one. So pay attention to what's going on right now. And if you do, you should be able to make a lot of money. Because anytime in real estate, when you have a negative economy and a down market, you always make more money if you play it right, if you it because it's hard to get deals when the market is good, because they go so fast, everybody's jumping on them trying to ride the wave. But when the market goes down, you have an excess supply. So you can get them you know, for a lower price. But you also can turn around and sell them at a price where you can make a lot of money. So if you're sitting there now doing 30 deals a month, when you have a down economy and a down market, you might be able to turn in and start doing 10 deals a month. So you should make more in the coming months towards the end of the year. We'll see how it all plays out. But right now everything I'm hearing is the problem prognosis for the market and the economy is not good. But that in turn if you play it right, the prognosis for an investor or a wholesaler the prognosis is good because you're going to have more deals and you're going to be able to sell more deals because you're going to have more buyers in the market because the prices become low again. 

29:29  
With that we're gonna we're going to bring this episode to a close. If you've got any questions or want to know how to grow your business, we'll just the aspects of the business. You know, feel free to visit EarlToms.com. Just a free resource gives you certain things to to help grow your business to get you a solid foundation. But again, I hope I hope you enjoyed listening to this episode. 

29:59  
We'll be back in again. Couple of weeks with a with a new episode. 

30:03  
Go close some deals.