Epic Real Estate Investing - When is the Housing Market Going to Crash | 1209

Episode Date: June 7, 2022

So, is the housing market going to crash? If you think it will, you are maybe right, but definitely not for the reason you think you are! Unexpected answers to that question are waiting for you in today’s episode! BUT BEFORE THAT, learn what you always want to include in your deal and how to get a copy of Matt’s Seller Financing Contract. Are you ready?  Let’s go! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Looking for a seller finance contract for your deals? I mean, you're not the only one. I don't know why it's such a mystery, but it's all good. I got you covered. You're ready for it? Let's go. Welcome to the all-new, epic real estate investing show.

The longest running real estate investing podcast on the interwebs, your source for housing market updates, creative investing strategies, and everything else you need to retire early. Some audio may be pulled from our weekly videos. and may require visual support. To get the full premium experience, check out Epic Real Estate's YouTube channel, epic rei.tv.

If you want to make money in real estate, sit tight and stay tuned. If you want to go far, share this with a friend. If you want to go fast, go to reiase.com. Here's Matt. All right, so by the time we're done,

you'll know what paperwork you need for seller financing, and if you hang out until the end, I'll give you my seller finance contract that I and my students used to pull up these seller finance deals. You know, I didn't have much of a choice when I got started because I didn't have enough money or a decent credit score to buy real estate the traditional way. And here I am almost 15 years later with a few bucks in the bank and the credit score is

looking much better now, but I still prefer my creative ways, seller financing specifically. You know, I learned how to do this without money. I don't see any reason to start using it now. What contract do you use for seller financing? So we'll answer that question. And it's never what anyone thinks it's going to be. The contract that I use for seller financing, it's the same one that I use for all of my deals.

It's just a basic real estate purchase contract. But I'll show you what to do to turn it into a seller financing contract. Here you've got your basic real estate purchase agreement. And every agreement will have a place for the purchase price and it'll have a place for the terms. Oh, it looks like here I was actually giving a subject to example. But you can see here even with this, that with the subject two strategy, all you've got to do is just write it in the term section of your contract. You know, the price is $120,000.

And then in the term section, just write subject to existing financing, buyer to pay seller, $15,000 cash your clothes and $15,000 payable as follows, $17,000 a month for $17,000 from closing date balance due on the 13th month. So there's that. But that's not really what we're trying to talk about. But just show you how you can do it that way, right? But it's a little more complicated. Let's get rid of this. And I'll show you what straight seller finance. terms would look like something much more simple. So I'll leave the price as it is, and then buyer to pay

$20,000 to seller at closing, seller to carry back the financing on $100,000 at 5% interest amortized over 30 years. Balloon payment due in 10 years. And that's it. Your sales contract is now a seller financing contract, but you're not quite done. You do need the promissory note and the mortgage because, I don't know, they say so. And because there's more money to be made in this paperwork. And I'll give you a copy of mine when we're done here. But what most creative real estate investors don't understand is that selling on terms like this, it comes in three parts. There's terms of the sale, terms of the loan, and terms of the documents, specifically

the terms of the promissory note document. Because when done right, you can really set yourself up nicely. You can set yourself up for the deal after the deal. So what's that? Here, look at this. And you don't have to write this down or anything. I'll go ahead and I'll give you a free copy in a minute. but right here, number five, write a first refusal to purchase notes.

And here's why this is important. Investors like you and I go out and look for motivated sellers, whether that's absentee owners, we look for vacant properties, probates, stuff like that. You understand how that works. Well, there are other investors out there looking for motivated lenders, like owners who sold their properties with seller financing. And if you happen to negotiate a seller financing term of 12 years or longer, It's an almost 100% certainty that your seller will receive solicitations in the mail,

you know, little yellow letters and postcards like the ones that we send, offering to buy your note from the seller at a discount. And most sellers at some point, because, you know, they're tired of the little monthly payments that you're sending. They will settle with someone else for a lump sum, a discounted lump sum. And if your seller is going to discount your note to someone else, you know, don't you want a piece of that action? You want to have the first right of refusal to buy it.

yourself. Yes, you buy your own debt at a discount. I mean, it's the same as, you know, if you got a bigger price reduction originally when you made the purchase. It just came a little bit later. That's all. Or you could resell your debt for a profit. Let me show you. The seller is carrying back $100,000. Some other investor contacts your seller and negotiates it down to $60,000. And because you had the first write of refusal in your documents, you buy it at $60,000, and then resell it for $75,000. So you put $15,000 in your pocket. And now you have you, you had the first write of refusal in your documents. And you owe $25,000 less on your note. And now instead of making payments to the original seller, you're making payments to the person that you just sold the note too. We call this the deal after the

deal. And if you're doing seller finance deals with 12-year terms or longer, it will play out like this about 70% of the time, as long as you have this right of first refusal clause in your promissory note. Number seven, substitution of collateral clause. And what this says in plain English is that You can move the debt from one of your properties to another, as long as there is enough equity to support it. So this is how this came in really handy for me last year. You know, I've got these three properties in Montgomery, Alabama. And this one on Fitzpatrick Boulevard is valued around $105,000 bucks with a $75,000 note on it, and the one on Eldington Drive is valued around $140,000 with a $50,000 note on it.

And then this one here on Calhoun Road valued around $165,000 that I own free and clear. Now, Elvington had a balloon payment coming due at the end of the year, and I didn't want to use my cash to pay it off, nor did I want to sell it. So, I mean, I could have refinanced it, but instead, I have Fitzpatrick, of which I've been thinking about getting rid of for a while. I just haven't been able to keep a decent tenant in there. But if I sold it, it didn't have a bunch of equity, like 30 grand. And so after commissions and closing costs, you know, I might clear 20 grand or so, not enough to pay off the balloon payment on Eldington. So because of my substitution of collateral clause, I moved the $75,000 debt on Fitzpatrick over to Calhoun Road making Fitzpatrick free and clear, of which freed up the equity for me to sell it now and pay off the balloon payment on Eldington. Then number nine, the subordination clause.

There's some really creative uses for that too, but look at number 10, extension of note. So I fight hard for this in every deal that I do that has a balloon payment. In that last example I showed you, the seller wasn't down for it, or are all. I would have used it. So let me show you how it works real quick, and then I'll tell you how to get a copy of my note so you can use it in your deals. It works like this. If the term of your loan with the seller is coming up, this clause allows you to extend

the term by paying a lump sum toward the principal. So, for example, in that last deal where I had the $50,000 balloon payment coming due, if the seller had agreed to this originally, I could have extended the term by 12 or 24 months, whatever we agreed to, in exchange for, say, I don't know, $10,000 or $5,000 lump sum payment, you know, whatever you can negotiate. And I usually get some form of an extension like this in every seller finance note, but I didn't get it in this last one, you know, can't win them all. So to put together your seller finance deals, you need a standard purchase agreement and you need a promissory note. And you could hire an attorney to put everything together for you, but it's

not necessary. I just give my title officer, a copy of the purchase agreement, a copy of my note with some basic instructions and she does it for me. So if you'd like a copy of this promissory note that I used for these deals, you can grab it for free at epic promissory note.com. We'll be back with more right after this. Boarding for flight 246 to Toronto is delayed 50 minutes. Ugh, what? Sounds like Ojo time.

Play Ojo, great idea. Feel the fun with all the latest slots in live casino games and with no wagering requirements. What you win is yours to keep groovy. Hey, I won! Boating will begin when passenger Fisher is done celebrating. 19 plus Ontario only. Please play responsibly concerned by your gambling or that if someone close you, call 1-8665-3-3-1-2-6-0 or visit ComexOntario.ca. Hope is not a financial strategy. Let's get back to work. When is the housing market going to crash? I mean, everybody wants to know, and I've got the answer.

And it's not what you're thinking. The housing market appears to be operating without brink. as home prices continue to climb. The median listing price shot up last month to a record high of $405,000. The mortgage rates continue to tick up and buyers are not backing down. The madness, it's got to stop at some point though, right? Well, by the time we're done here, you'll understand when the housing market is likely to crash and why it will look very differently than it did in 2008. Oh, by the way, if you're still looking to get that first deal under your belt,

I put together a free training just for you to get that first one done. on how to earn $5,000 a month flipping contracts and properties working as little as one hour a day. And you can access it for free at matsfreetraining.com. I know, it feels like we're in a bubble, doesn't it? I don't know, maybe it is. But this is not the 2008 housing bubble all over again. And there is a little known metric that can tell us when the next crash is coming. Most of all, what's new about today's housing market is the freedom to work from virtually anywhere that you'd like to live and can afford a house. The home office economy has unshackled families to leave high-cost metros on the coast and flock to super affordable sunbelt cities greatly boosting their markets.

Outsized gains are practically guaranteed for the rest of 2022, with prices in March of 2003 to be 15 to 17 percent higher than today's for the nation as a whole. But even after that escalation, the monthly costs in owning and such hot metros like Jacksonville and Charlotte and Northport, Florida, It's all going to remain modest by national standards. Though it will inevitably slow, the appreciation in those cities should both preserve their gains and keep national prices increasing modestly once the current spikes subsides.

Still, it's clear that a number of metros such as San Francisco, Denver, and Washington, D.C., which were always pricey, got even more expensive. And since these cities don't benefit from the huge influx to America's southern tier, they are unsustainably expensive. So I look for their prices to lag in today's raging inflation or even fall, but I doubt that they'll crash.

Now, I'm aware that these are dangerous words that this time it's different, and I'm reluctant to use them because when traditionally reliable metrics point to a crash, it usually happens. Today, your typical housing market indicators that measure the health of a market seem to be approaching similarly inflated levels of those just prior to 2008's crash. But let's look at them more closely and examine why these metrics that look so dangerous then are now pointing in a different direction. You know, in November of 2007, the market appeared to have crested and was retreating just a bit. Nationwide, U.S. homeowners were still sitting on average gains of 70% over the previous eight years, and in such hot metros as Miami,

Jacksonville, Phoenix, and Las Vegas, the values of homes had far more than doubled. The cost for such growth was predominantly due to the Fed's easy money policies, of which had unleashed a wave of reckless speculation, augmented by exotic home loans starting at super low rates that spiked after a year or two. People had bought homes they couldn't afford, and investors had purchased a bunch of new houses they now couldn't rent. And then they ended up throwing their properties on the market, causing a spread of for-sale signs that would send prices falling. The market had ignored the basics, as it was the expectations of future and never-ending gains, the fear of missing out on those gains, all of that was driving prices far beyond the property's underlying values.

And the evidence? Although it might not have been clear then to most people, but it's crystal clear in hindsight. The extraordinary disconnect between home prices and rents. So if you want to know where housing prices are headed, keep your eye on the rents. Rents are the key metric to watch that few people discuss. Many factors, they come together to establish the value of a house. They include the number of bedrooms, whether it's in a prestigious neighborhood, convenient to commerce or recreation, and the quality of the school district. Low mortgage rates, such as the three to four percent bargains we've mostly witnessed in early 2019, and even today's mark of around five percent, can give prices a big lift also, just as low treasury yields boost stocks. But the overriding force

governing home prices, its rents. People won't pay much more per month to buy a house as they wood to lease a house that's similar. Americans have lots of choices in renting freestanding dwellings with the yard. I mean, I alone have 50-ish of those to offer. Hence, home prices make sense so long as they reflect the future trend in rents. In markets boasting potent job and population growth and little new construction, I mean, think San Francisco or San Jose, rents tend to rise fast. By contrast, in a market like Pittsburgh or Detroit where job growth is dim, the price to rent ratios are usually lump. The The problem comes when prices get out of line with rents, jumping so high that families can lease similar properties at monthly payments much lower than what they'd take on as owners.

In 2007, prices were appreciating so quickly and rents weren't keeping up. In fact, properties were sitting vacant generating zero rent at all. Today, like 2007, prices are appreciating just as quickly, perhaps even quicker. But what are rents doing? First, it's getting as tough to find a property to rent as it is to find one to buy. you don't have the vacancy problem that you did in 2007. Second, mortgage payments are 34% higher today than they were a year ago, and that has been heavily skewed in just the last few months.

Nationally, rents for two-bedroom or more properties are on the rise, too, up 23% more than they were a year ago. Rents are moving up really fast, though with a lag. However, if you look at the top markets like Las Vegas, Nevada, Durham, North Carolina, Nashville, Austin, Tampa, Little Rock, Arkansas, Richmond, Virginia, they're all above 40%, comfortably higher and faster than the increase in national mortgage payments. While rents do change more slowly than sales prices due to lease agreements often set for a year or more, and here's what I mean. If we go back to April of last year,

rents were rising at 3% annually, and in July it was 9%, both much slower than the increase in home prices. But when leases expire, we are seeing them renewed at far higher rates. For example, in February, rents rose 17% from the previous year, matching almost perfectly the rise in home prices and their payments. So why is it different this time? Simply put, the basic concept of supply and demand. That's what's lifting rents and prices in tandem in many hot markets. And in the not as hot markets, rents and prices are still both rising, even if not at the exact same rate. During the bubble, speculation drove the market.

That's far from the case today. Families are buying houses to live in, not to flip. Buying now and in the foreseeable future should remain strong for two reasons. First, 30-year home loans are still great deals, despite the uptick and rates. The year-over-year consumer price index reading of 8.5% means buyers are paying real or inflation-adjusted rates of less than zero. It would take a mortgage rate of over 7% to significantly slow demand, and it'd have to hit over 9% to tempt a bubble.

When you see mortgage rates start to tease that 8% level, then that might be a signal of a coming crash. But then, second, the work-from-home economy is allowing people who've been stuck in San Jose or the New York suburbs because they work there to relocate to now Jacksonville and Boise or Austin, where housing prices are much lower. By making the move, they can trade their smaller house for a much bigger one and still pocket hundreds of thousands of dollars in cash. That migration is pushing up prices in secondary and tertiary markets. Another demand driver that no one was really expecting, you see, as inflation increases, it's becoming more. and more common knowledge that owning a house has traditionally proved one of the best hedges in periods of rampant inflation.

We're in right now. So you've got smart, forward-thinking people continuing to buy real estate, whether it be their primary residence or investments. Demand summed up, there's enough to support the market for a while, but there's another side of this that will help us determine when the housing market will crash next. Now for the other side of the housing market equation, supply. As for where it stands, the volume of homes for sale today is actually sitting at its lowest levels in half a century. New construction is behind sales by a wide margin nationwide.

Housing starts dropped sharply in 2008, and they've been slow to rebound. Very slow. Land use laws are highly restrictive, red tape and bureaucracy and all, and so the increase in supply of new homes can only go up so fast. New construction, it's not keeping pace with demand, and it shows no signs of doing. And seniors, their staying put instead of the old pattern of selling and moving to rentals or condos is exerting further pressure on supply. In a balanced market, the months of supply would be around six months, the time it would take to deplete all homes for sale at the current sales pace. But today's market has only 1.7 months of supply showing a drastic imbalance in favor of sellers. Now, it is a helpful sign that new home construction climbed that an annual rate of 6.8% in February.

the fastest growth since 2006, but the nearly 1.8 million new home starts are unlikely to put even a dent in home prices. After not building nearly enough houses for the last decade, home builders will take several years at least to add enough new supply to balance the market. This imbalance is going to continue to put upward pressure on housing prices, but it's got to stop at some point, right? There's got to be a bubble somewhere. Prices, they can't go up forever, right? If you're thinking that, you're not irrational in any sense of the imagination. and you're probably right. It just won't be for the reasons why you think you're right,

meaning what caused bubbles of the past to pop won't be the same causes this time around. But you'll want to consider these as possible causes. The first thing for me that's the top of mind are the murmurs of a recession. They have breached the surface of what's otherwise been described by many, our president and his administration included, as a strengthening economy. Contrary to the popular narrative of the day, inflation started rising last year, well before Putin invaded Ukraine, setting off alarm bells as consumer prices began to climb. In response to the inflation hike, the Federal Reserve raised its federal

funds rate in March, the first Fed rate hike in three years, and as close as a guarantee as you can get that there are more rate increases to come. While the federal funds rate does not directly impact long-term mortgage rates, it does have an effect on short-term rates like credit cards and adjustable-rate mortgages. Higher interest rates could trigger a slowdown in consumer spending. Second thing, Russia's war on Ukraine, that's certainly not going to help the economy. Energy prices, which were already on the rise, are facing more upward pressure as the U.S. and Eurozone has banned Russian oil after its invasion of Ukraine. Higher energy prices will continue to fan the flames of inflation, which, along with higher

interest rates, could cause people to pull back on spending. This means consumers could lose some appetite for home buying as well. Consumer confidence has already dropped to a 10-year low in March as a result, a recent survey showed. The ripple effect of the U.S. oil embargo on Russia can lead to even more problems with supply chain issues, which will contribute to already heightened inflation. As the cost of goods increases, consumers tend to be less comfortable making purchases like buying a home. Geopolitical conflict seem to be the wildcard right now and maybe even lead to a black swan type of event. I'm thinking the real thing to watch, though, is how the Federal Reserve acts in its attempt to suburb.

due inflation. They've all but told us that we can expect them to start removing their accommodating policies. If they choose a more aggressive approach than they've already demonstrated, that could bring about more softening, particularly in the housing markets if mortgage rates spike. Even with these realistic party crashers in play, the housing market will likely stay hot and not crash due to a couple of other reasons in addition to the supply and demand of balance. The millennial demand for housing is up, with Gen Z and even bigger generation right behind them. And then, borrowers are less likely to default on their mortgages this time around. They're solvent, they're creditworthy, and their properties are replete with equity.

So, what should home buyers do? Because they are faced with some tough choices in today's market. Most predictions indicate that home prices will continue to rise and new home construction will continue to lag behind, putting buyers in tight housing situations for the foreseeable future. For some buyers, that means moving away from big cities into more affordable metros. For others, it means stretching their budget or compromising. on size or other amenities. And then there are buyers willing to roll the dice and forego important

contingencies like the home inspection in order to sweeten their offer. This could end up costing them more in the long run if the house ends up having major problems not detected and fixed by the seller upon the inspection. On the other hand, snagging a house right now, even if means sacrificing other purchases could mean saving money down the road if home prices and equity continue to rise. There's a chance they could also save by getting a house and locking in a rate before both rates and home prices increase even further. Then again, the opposite can be true when there's the risk that limited supply, coupled with rising inflation, could get so extreme that it hurts the housing market and prices fall, particularly if the economy goes into a recession. That is a risk, but it's really

only a losing proposition when you sell. Meaning, if home prices were to drop suddenly, buyers could be stuck with underwater mortgages, which means they would have to stay in their house until the market recovers, or they sell and lose money. While housing and experts predict this scenario is unlikely, still, it should not be ignored. It is possible, but I'll leave you with three key points as to why it's not probable. One, the majority of the most common age groups for the next decade and a half will be people in their 30s and 40s. The baby boomers have dominated demographics in this country for decades, but now millennials have taken their seat on the throne and they're ready, able, and eager to buy. Two, no one wants to

sell their home. And we pulled back on building new homes for a decade. New building is now moving in right direction. But years of underbuilding has taken us toll. A massive flood of new homes is what's required to catch up to current demand. And that will not happen overnight. It's going to be years before we catch up. And three, consumer balance sheets remain strong. Mortgage debt as a percentage of disposable income is near its lowest levels on a record from a combination of low interest rates and rising home prices. In other words, homeowners are rich and comfortable. It's also true that the finances of those buying their first home are better than ever. If you're hoping for a major downturn to snag a cheaper home, think again, most housing experts are predicting the market to remain strong for a while for the several reasons that I just shared.

So it may be a challenge for on-market shopping, but there's plenty of opportunity off-market. And that's what we do here at Epic. We show aspiring real estate investors how to find discounted off-market real estate so they can avoid retail competition and build their wealth. Head over to RIAeats.com, answer a few short questions about yourself and what you want to accomplish, and then pick a time that's convenient for you. you for us to talk about it. And that wraps up the epic show. If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone else who would.

And when their name comes to mind, please share it with them and ask them to click the subscribe button when they get here and I'll take great care of them. God loves you and so do I. Health, peace, blessings and success to you. I'm Matt Terrio. Living the dream. Yeah, yeah, we got the cash flow. You didn't know home for us.

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