Real Estate Impacts from CoronaVirus

We’ve been talking about the eventual downturn for a few years now, saying “It’s Coming”. We didn’t know when, and CoronaVirus, or any pandemic, was certainly was not in any of our speculation about what might happen.

We’ve been talking about the eventual downturn for a few years now, saying “It’s Coming”. We didn’t know when, and CoronaVirus, or any pandemic, was certainly was not in any of our speculation about what might happen. There’s a lot of wild speculation going on about what might happen over the next few days/weeks/months. Nobody really knows yet. Don’t believe the Internet rumors. Always go back to reliable sources for accurate information.

I don’t see this as a housing bubble like there was in 2007. There’s not a slew of “Stupid Loans” that have been done in the past few years. So I don’t expect a crash, however, prices may decline or stop increasing.

It has happened, very unexpectedly, and very rapidly. Now that’s happened, if you weren’t prepared, you need to Get in front of this Now!

There are Four critical things you need to do immediately.

  1. Analyze your Cash Reserves
  2. Analyze your Cashflow
  3. Communicate with your entire team
  4. Build contingency plans and options

Reserves just got real.

As a lender, borrowers constantly want to know why I require them to have cash leftover after closing. This is why. Stuff happens that you can’t control.

CoronaVirus is impacting real estate in various unexpected ways. Some sales are being cancelled, contractors aren’t all working, ongoing evictions are at a standstill, and good people/investors/tenants have lost their income.

Investors have always known they should have reserves, however, too many investors have put it off for “later”, when there was more cashflow. The temptation to invest every last dollar for a return is a greater siren call than setting some aside for vacancies, repairs, and other income interruptions. When I started out, I had EXACTLY that mindset. Everything will be fine, it’ll go just like I’ve projected, and if something happens, I’ll figure it out. That mindset bit me a few times before I finally got the message and set aside my reserves.  Now, some of you are about to get bit just like I did.

It’s time to take a hard look at where you are financially, and what can happen in the upcoming months. Then you NEED to make a PLAN and take ACTION.

If you are short reserves, it may be time to sell an asset before any fire sale prices begin. I don’t know if they will go fire sale, but it is one possible scenario.

Having six months of personal reserves + six months of all property costs as reserves may not be unreasonable all of a sudden. I’d make sure I had at least three or four months of each.

      What to do:

  1. If you don’t have at least three month’s personal and business cash reserves, consider selling an asset to get the cash reserves.

Cashflow will be interrupted.

Depending on your sources of income, you may not see a change, or you may go straight to zero. Most of us will be somewhere in between.

Despite the media outcry, many people will continue to work and have employment. Some will have a short-term job interruption, then will go back to work. Some will need to find new jobs, because the business they worked for won’t survive. Many small business owners will struggle financially for an extended period of time.

It may be harder to predict income, but you CAN control expenses. Look at your business and personal spending. Get rid of expenses/subscriptions, etc. that you don’t use, or don’t really need. Take a good look at all your income and expenses. It’s a good time to be lean.

      What to do:

  1. Reduce unneeded expenses, even if it’s only for the short term
  2. If you can’t survive at least 90 days with zero real estate income, consider selling an asset to get cash reserves.

Landlords – Tenants

Many of your mid to higher end rentals will be less affected. Many of those people will telecommute or take appropriate precautions at work. At least at this stage. It may change down the road.

It’s the low to low-middle income rentals that will be most impacted. Obviously, people in the restaurant and bar industry, and then the trickle down from those shutdowns are already impacted. Unemployment Insurance in Ohio is only about 50% of normal income, and I promise many are paycheck to paycheck.

Landlords, especially newer ones, who depend on that rent check to make their mortgage payment each month are at high risk. They need to start figuring it out NOW, not after the first of the month.

Section 8 payments will go on as normal for the gov’t side. But the tenant side may be impacted.

For tenants who are impacted, currently, we can send people to the usual agencies that help when tenants can’t make a rent payment, but I expect those agencies to be overwhelmed soon. Locally, the phone number is “211”, but I don’t know if it’s the same number everywhere.

I’ve already had impacted tenants that have called me (Restaurant workers) and let me know they’ve been impacted. They’ve asked if some help will be available if they need it. I’ve put together this plan using some of my reserves to help cover the short-term impacts.

What I did

  1. Tenant requests help
  2. Is currently in good standing
  3. Shows they are impacted involuntarily
  4. Accept 50% of rent (Unemployment in Ohio is 50% of wages)
  5. Waive late fee
  6. Defer 50% of rent until re-employed
    • Setup payment plan for the deferred rent
    • Maybe 10% of the normal monthly rent each month until caught up.

Your situation or your tenant’s situation may be different. You’ll have to use your judgment.

The Internet is now flooded with rumors of rent moratoriums, calls for rent strikes, and more. Like everything else, some people will believe them, and they may be YOUR tenants. If your screening process is weak or non-existent, or you’re more likely to be impacted.

Many courts have shut down hearings for 30-60 days, so evictions will be delayed. However, most are still accepting filings, so if you need to do an eviction, get in line early. When the courts open again, there will be backlogs and everything will take longer.

We haven’t heard anything on gov’t bailouts for the “rich” landlords who are being forced to house non-paying tenants while evictions aren’t happening. And I wouldn’t count on any help coming.

      What to do:

  1. Work with your tenants who are impacted, where you can
  2. Work with your lenders if you are going to be short cashflow
  3. File eviction now if you should have already. Monitor.

Flippers – Sales

People will still buy houses. Most people will not be impacted, or they will be minimally impacted. Rates are low, so there is still going to be demand. It’s possible prices may stall, or even decline a bit, but I don’t think they will crash. You should make sure your margin is adequate. If you’ve been counting on rising pricing to make your profit, you may be in trouble.

We use construction materials manufactured from all over the world (especially China). Supply chain interruptions are likely.

In the short term, more good contractors are becoming available, as homeowners will be doing less remodeling. Take advantage of it and add a couple more to the team.

If your exit strategy First Time Home Buyers, you are the most likely to be impacted. A lot of these buyers don’t have established reserves to absorb an income hiccup. You may encounter:

  1. Your buyer just got laid off and doesn’t qualify right now.
  2. Your buyer used their down payment money to make ends meet.
  3. Your buyer no longer qualifies due to the short-term job/income interruption
  4. Down the road: Your buyer no longer qualifies due to a late payment during this period or shortly after.

Potential future assistance: Fannie/Freddie/FHA/Lenders may allow an exception for borrowers who were laid off or had an income interruption due to COVID-19, and otherwise qualify.

You may have to get creative on the sale side. Land Contracts and Lease Options may need to be considered.

      What to do:

  1. Get new good contractors working for you
  2. Sell houses; Have multiple exit strategies if you can’t
  3. Work with your lenders if you are going to be short cashflow
  4. Plan for a price decline

Wholesalers

Properties will always be bought and sold. There are going to be good deals to be had, and there will be buyers.

Your marketing may get a hiccup if you can’t get supplies for mailings, or your list or mailing services slow down or shut down. Find alternative sources and use different avenues for marketing, etc.

Crisis changes motivations and answers. I’d be following up on “dead” leads from the past few months.

Check with your buyers. See where they are in this and what they will be doing. Touch base with your buyers that stopped buying a couple years ago as deals got harder to find. Remember, cash is still king, and Private Lenders and Hard Money Lenders will still be funding deals, although requirements will remain fluid.

As this goes on look to ramping up some serious marketing for the near future.

      What to do:

  1. Work recent “dead” leads
  2. Touch base with existing buyers
  3. Plan a marketing blitz for the near future

Borrowers

You know should have cash reserves, if you’ve done that you’re probably good to go, at least for a few months.

If you don’t have reserves, it’s time for some hard conversations with yourself, your team and most importantly, your lender. Remember, your lender is not in this mess, YOU are. YOU promised to pay them back as scheduled. You need to do everything you can to first meet your obligations. If there is even a chance you’re going to run into trouble within the next two-three months, make that hard call NOW.

In the last recession, I was the borrower making those hard calls. It sucks. It’s embarrassing and it’s painful. However, every private lender appreciated the calls, and they worked with me to get through it. I’m happy to say that every private lender was paid in full even though it was later than planned. The banks weren’t so helpful and didn’t get fully paid back.

Now that I’m a lender, I expect my borrowers to act just as professionally as I did. Call me, even if it’s just to say “Hi” and let me know all is well. If you have concerns, or just want to bounce ideas, let’s talk about them. If you’re really in a bad spot let’s see what we can work out. I really don’t want your property; I only take them when there is no other alternative. Whatever you do, don’t be that person who puts their head in the sand, ignores the problem and keeps dragging it out. It doesn’t get easier.

If you can’t meet your full obligations with cash, then you need to consider alternatives. Many, Private Lenders would prefer to be creative instead of taking your property. Here are some options to explore with them.

  1. Deferred Payments
  2. Temporarily lower Payments
  3. Equity Kickers
  4. Change to a JV agreement
  5. Preferred rate of return
  6. Sell to a landlord
  7. Sell to your lender
  8. Wholesale the property to another investor
  9. Land Contract instead of sell.
  10. Rent instead of sell
  11. When all else fails — Deed-in-lieu

From a lender’s perspective, if you put your head in the sand, or force me to go through foreclosure, you’ll become a permanent entry on the “Do Not Lend” list. If you act like a pro, even if we have to work out an alternate plan, or you give the property up, you’ll still be eligible for future loans.

      What to do:

  1. Analyze your cash reserves
  2. Look at your cashflow under various circumstances
  3. Touch base with your Private Lenders and local Hard Money Lenders
  4. Build contingency plans and discuss options as required

Lenders to Landlords and Flippers.

As a lender, if you did your part right, your borrower should have cash reserves and equity in the property. They will weather a short storm.

For the Private Lenders who did 100% financing and/or gave borrowers the rehab money before the rehab was done, you were already at high risk, now it’s REALLY high. The temptation to “temporarily” use rehab funds if other income is interrupted will be high.

If this goes long, or develops into a full recession, which is certainly possible, maybe likely, even good borrowers could start having problems.

If your borrowers haven’t contacted you over the next week or so, reach out to them. See how they are doing, and how they are positioned.

If you are depending on the Note Income to pay your monthly bills, you need to take a hard look at your reserves and cashflow too.

      What to do:

  1. Analyze your cash reserves
  2. Look at your cashflow, under various “what if” scenarios
  3. Touch base with your Borrowers
  4. Discuss options as required

Lending Going Forward

Lending certainly won’t stop, but uncertainty makes people cautious. Expect lending to change and adapt. It will likely change multiple times as we move through this and see where it is going.

Expect closer scrutiny on your deals and you as a borrower. LTVs will get lower. Some of the really high LTVs will disappear altogether. The loose qualifications for low credit scores will become more limited and/or more expensive. Even Hard Money Lenders will start looking at your cashflow.

Cashflow and Cash Reserves are suddenly far more important than they have been. They will be heavily looked at.

We fund all our loans internally. However, we do sell the Notes to other Investors who want to collect the interest. Right now, there are no significant impacts to those programs. As long as we can, we’ll still be Lending.

The institutional buyers we use for the Lower Priced Hard Money Loans, BRRRR Rental Loans, and other Rental Loans have been put their Note Buying on “Pause”. So there are none of those at the moment. We do expect them to start up again, but I’m not going to try to predict when.

Real Estate Looking Forward

Every crisis creates opportunity. A slowdown is an opportunity to focus on making your business better and stronger. Document processes, plan ahead. Do all those things you’ve been wanting to do to make your business better.

The Deals and Opportunities will change and there will be more available. Be ready to snap up distressed properties. They’ll be showing up in the coming months. Depending on how long this lasts there could be massive opportunities for those who survive.

Cash matters. If you can’t survive 90 days with zero RE income, or your other income is impacted, consider selling an asset to get the cash. In the last downturn, many investors were equity rich and cash poor. You can’t buy groceries with Equity.

What to do:

  1. Take some time to work on systems and processes to make your business better
  2. Look at your cashflow, under various “what if” scenarios
  3. Touch base with your Team Members
  4. Take a day or three off. Too many of us are working 7 days a week.

Communicate, Communicate, Communicate.

This is a must

Just to reiterate, there are Four critical things you need to do immediately.

  1. Analyze your Cash Reserves
  2. Analyze your Cashflow
  3. Communicate with your entire team
  4. Build contingency plans and options

Hope this helps.

Darrin Carey

Dayton Capital Partners LLC

www.DaytonCapitalPartners.com

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