Motley Fool Money - iBuying, Real Estate Investing, Home Inventory

Episode Date: February 18, 2023

When Zillow and Opendoor stopped their iBuying programs, home buyers didn’t find any deals. So, where did those homes go? Jamil Damji is the co-founder of KeyGlee, a real estate investment and wholesale company with more than 75 franchises. He’s also the star of “Triple Digit Flip” on A&E. Deidre Woollard caught up with Damji to discuss: - Why housing supply remains low, and its implications for homebuilders - How rents have stayed relatively stable - One player that’s fundamentally changed real estate investing -The changing role of the landlord Companies discussed: ZG, OPEN Host: Deidre Woollard Guest: Jamil Damji Producer: Ricky Mulvey Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

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which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. We heard that Zillow and Open Door, they kind of messed up the algorithm and they overpaid for a lot of the property that they were flipping, right? And yet we didn't see that inventory find its way onto the MLS where the regular retail home buyer could have just come in and made them a lower offer and got into a good deal. No, what happened? They sold tranches and packages of those properties off to other private equity. companies. I'm Chris Hill and that's Jamil Damjee, co-founder of a real estate investment company

called Kigli. He's also the star of A&E's reality series Triple Digit Flip. Diedra Woolard caught up with Damji to get a look at real estate from a wholesaler's point of view. They discuss how private equity groups changed home buying if high cancellation rates are here to stay and the short-term challenge and a long-term tailwind for home builders. The thing that I'm seeing, the most is people trying to call the bottom. We've had some good numbers. So everybody is trying to figure out, is this the bottom? Is, are we already on the rebound? What are you looking at when it comes to trying to figure out where that bottom is? So that's a great question. And for me, the most key metric, the most important metrics that I'm paying attention to are pendings.

Days on market and pendings really give you the temperature of the market. Right. So days on market, oddly enough, really never spiked to a crazy level, even when interest rates started to really escalate and we saw the market kind of come to a standstill, we still had nationally really low days on market because we have an inventory situation. And I call it a situation because, you know, leading up into this market slowdown, we had or were roughly four to five million, on who you talk to, four to five million homes short for what we need to have available for growing households or new households that are being formed. And what this has kind of created is this interesting vacuum because you've got sellers who are locked into these low rates that

will very likely not see again. So that home is unlikely to find its way back onto the retail real estate market. In fact, you see more. new first-time landlords now than we've ever seen in the history of that type of investing. So you've got, you know, Mon Pa homeowners that are saying, you know what, I've got really cheap debt on this house. We want to buy another home or we want to buy a second home or we want to upgrade. Let's not sell our home that we have our, you know, 2.5% mortgage on. Why don't we keep this and rent it out so that our, you know, debt to income becomes, you know, qualifiable to get another property and let's go get another property. And so what I'm seeing, and again, this was a little

bit of a longer response, but what I'm seeing is pendings are dramatically raised. Days on market right now are 30 days or less. So we are seeing, in my opinion, especially since the holidays, some of the greatest activity that we've seen prior to the market shift, what I would call July. July is when we really started seeing things slow down and it's starting to get exciting. So all of the fix and flips that I had on the market are all pending right now. Thankfully, I'm so grateful that they're under contract and ready to be sold. And we are actively buying because I'm in the wholesale business as well, I have really key insight into the investment activity of rehabers and people who fix and flip properties because I sell them the raw materials.

So I sell them the hoarder houses or the really distressed properties that they then go and renovate. Now, when we saw the market start to shift, we did see a dip in investor activity. Some of them were getting scared and they thought, okay, maybe I'm going to wait a few months before I go and buy some new inventory to renovate and reposition and continue my flipping business. So we saw a lot of people pause. That pause has stopped.

So we've got people actively buying, they're buying, you know, entranches of five, ten houses at a time right now. So, you know, I actually am one of those that believe that we have already hit the bottom and we're actually starting to rebound the other direction. Interesting. Okay. So as a wholesaler, you're focused a lot on trying to flush out some of that inventory that may not, that hasn't hit the public market yet.

What are you thinking about inventory? Because it's been below what they call historic lows for over a decade. now, do you think that there's, are you seeing any signs that that's going to shift and we might get back to a normal amount of housing inventory? No. No, I think we have completely different players at the table now. And those players have dramatically changed the way that we live. They changed the way that the market cycles are operating. And that's why we really didn't see prices crash. So when you've got the amount of private equity and Wall Street money. And when the single family home became an asset class, we invited a 900 pound gorilla to sit at the table of the housing market. And that 900 pound

gorilla is starving. And all it wants to do is eat up single family homes. And so what we've seen, and again, really interesting behavior because I am not only wholesaling properties to rehabbers, I'm selling homes to hedge funds. And I also am sensitive to the fact that when we fix and flip a house, we normally want a family to buy that property. I'd way prefer a family to buy the house. But I've seen some really interesting behavior from private equity. I will put a renovated property on the market. And this is before the market slow down and hedge funds and private equity kind of slowed down for a bit.

But what we would see is they would, they would over. bid to such a monstrous degree that it really didn't make sense, right? They're they're coming in cash. They're overpaying by, you know, $100,000 in some instances. And you wonder, why, you know, why would some, why would anyone do this? Why would a business do this? And then we started to like, peel back the curtain a little bit. And I started to look at, well, who owns a lot of the property or what LLC's own property in the market or in the neighborhoods where I'm flipping these homes. And guess what? It's the same company that overpaid by $100,000 for my flipped house. So them overpaying $100,000 for that flipped house, do you know what that did to their balance sheets

for all of the inventory that they were holding in the rest of that neighborhood? It increased the value of every one of those properties. And none of that product is ever going to find its way back onto the retail market. And builders now, again, because rates did, what they did, they slow down. So we have an even greater situation right now where I think demand is going to skyrocket again. And I don't know how we're going to manage it. Because when the builders slow down again, when the market or when the rate started to go up, what ended up happening was we created an even deeper inventory glut. Add to that all of these new landlords, but people who just aren't willing to get rid of their cheap debt who will hang on to these

houses now and hang on to these notes because they know they're never going to see another 2% mortgage again, that inventory isn't going to find its way back onto the retail cycle. You've got the 900-pound gorilla sitting at the table still eating away. How? How will we see inventory come back to normal? Well, let's talk a little bit about the 900-pound gorilla because it's, It's a whole bunch of gorillas, right? Yes, yes.

I put them all together and call them one big 900-pound gorilla, but there's a lot of gorillas there. But one of them I want to talk about is eye buying in particular, because you work in Arizona and in Phoenix. Phoenix has been one of the locuses for eye buying in particular, and it's also been in the news a lot with Open Door. You know, we've heard that they paid way more than they should have for some homes there. Do you think that part of it is fading?

And the gorillas that are mostly in the single family rental portfolio business are the ones that are now taking more and more. So interesting. We heard that Zillow and Open Door, they kind of messed up the algorithm and they overpaid for a lot of the property that they were flipping, right? And yet we didn't see that inventory find its way onto the MLS where the regular retail home buyer could have just come in and made them a lower offer and got into a good deal. No, what happened? They sold tranches and packages of those properties off to other private equity

companies. And so, again, even though the eye buyers made mistakes, the little guy didn't get to profit off of that. Your householder didn't get to go and get a better deal from open door because that situation happened. No, they packaged all those mistakes up and they sold that big package of mistakes to another company who was going to keep that inventory as rentals. And so, will eye buying stop? Absolutely not. I think the exit strategy of the eye buyer will shift. I think what will end up happening is the eye buyer will become more of a wholesaler than it will be a flipper because what open door and Zillow didn't do well was, was renovate homes. If you ever walk into an open door, and I actually did a video on my YouTube channel where I

caused this, oh my God, I caused like a whole firestorm of conversation and people were mad at me and I was getting phone calls from executives and people, because I have a social media presence. they, you know, it was, they wanted me to take the video down and, and I didn't. And the reason I didn't take it down was because I truly believe it, that when you try to flip houses from the sky, which is what I call the algorithm flip, that's when you don't have somebody's livelihood, when you don't have heart and soul in the project, when you're, every house has the exact same paint color because you want to cut costs at such a high degree that, and it's funny, I even know the shade of color that they use is called Dolphin Fin Gray. Okay. Every house is

dolphin fin gray. There is no soul in that flip. And so that's the problem. The reason why they lost money is because if you look at an open door or a Zillow flip versus a Ma'an Paw investor who come in and think about the way an American family lives, how we move in our homes, where we sit to eat, where we congregate to watch television, where we have conversations, how we live in our bedrooms, the way that we move and operate just in our day-to-day lives in our houses. When you keep that in mind, you're going to create a product that people are going to want to live in. They're going to feel the energy.

They're going to feel the soul of the person who did the project. when you're doing it from the sky and you have uniform colors and you have absolutely no spirit in the flip, I don't think you can make money that way. So here's what I think's going to happen. Eye buying is going to shift. Exit strategy is going to go from fixing and flipping to wholesaling. They will let the people who renovate houses for a living do the thing that they do best. they'll take smaller profits, but I think that they're ultimately going to just pivot and continue to continue to crush it. But that's still going to just have deeper and deeper ramifications for inventory. And we're going to see the American family transition to renters. It's coming

if it's not already here. Interesting. Yeah, I've been watching the homeownership rate too. So transition to transition to renters and really transition to single family renters because single family renters tend to stay, tend to stay in houses for longer. But we've also seen some flattening in rental prices recently. I mean, they've been since the pandemic. I mean, you've been watching this. It's been a roller coaster ride in a lot of markets. Do you think that's going to shift? And are you factoring in rental prices into the way that you consider your investments now? You always have to think about it, right? Because for for me and my business, I'm selling to households.

I'm selling to investors. My client is a number of different avatars. So, of course, I'm paying attention to rental rates. And I think rent got too high. Truly. We went up 40% in some markets. Wages didn't do that anywhere. How are we supposed to justify that?

So I think what ends up happening is you are going to see a flattening in rental rates, but we're also seeing changes in how people live. We are seeing multiple families living in single family homes. We're now seeing people rent out more frequently rooms in their homes for added income. The ancillary dwelling unit has become one of the most popular renovation or additions that people are making in their investments that they're making into their properties because it allows them to generate more income to offset their really, really high mortgages. And so I think the flattening of rent is good. I don't foresee rents dipping very much because even in the

Great Recession of 2008, rents were relatively stable. Even though we saw housing prices crash, rents didn't crash. Rents dipped, but rents didn't crash. And so historically, we haven't seen a situation happen where all of a sudden we woke up and two years later our rent was half. But we have seen situations where we wake up two years later and our houses were worth half. Or worth double sometimes.

Or worth double. So it's not always bad news. But yeah, I think, you know, I am paying attention to. rent, but keeping in mind the fact that it is less likely to fluctuate the way that equity will. Interesting. So you mentioned home builders earlier, and one of the things that I've been watching, it sounds like you've been watching too, is the sort of funneling of communities into the single family rental space before being sold.

You know, the cancellation rates been high for home builders. Do you think that is going to start being a bigger business? because it seemed in the beginning it was just maybe a secondary thing for home builders to have just in case. And now it seems to be more of a core business. What are you watching with regard to that? So we're talking about where the home builders are just selling off big chunks of their inventory to private equity or property management companies where they're using them as rentals. I think that's here to stay. I think that not only is it here to stay, I think that we're going to continue to see that increase more.

In fact, there's entire communities in Phoenix, Arizona that I'm watching get built where there is no homes for sale. Every home in that community will be a home that will be a rental. And so, you know, I think that that's a business model that people can rely on with home builders, especially with the way that, you know, we've, home builders have had it a little bit, a little rougher than even the, the, the, the, the, the, the fix and flip community has had it because they're so rate sensitive and dirt has gotten so expensive. And with all the supply chain situations and all of the, all of the ways with inflation that their costs have skyrocketed and their profit margins in new home construction aren't huge. It's really not huge. They need to bet and they need to have a buyer that they can have in place where they can guarantee at least a minimum profit margin. So if I'm a home build,

that's doing a large community. And I want to make sure that I'm going to get out of it. Because the cycle of new construction is a lot longer than fixing and flipping homes. The cycle of new construction, I've been involved in land development. I've been through the process and the amount of time that it takes to take a piece of dirt, have it rezoned, have it entitled, and then come in, build all the infrastructure, and then come in and build all the homes. and that cycle of time can last you, in some cases, half a decade or longer.

And what can happen to an economy in that amount of time? And so it makes sense that home builders hedge against fluctuations in the economy by having an end buyer in waiting so that their profit margins can be guaranteed, barring some mishap or another supply chain situation or an inflationary spike like we saw recently, they can bet on the fact that they can be profitable. And I can't see why any business wouldn't want to continue doing that. So if you're an individual real estate investor and you're looking at the landscape and you see these 900 pound guerrillas, do you see that as competition, or do you feel there's still a space in which those smaller real estate investors can thrive?

I have see, I see smaller real estate investors thrive every single day. In fact, for, for, for our company Kigli, we focus mainly on the small real estate investor. Our business model, in fact, a lot of people in the wholesale space, they shifted where they would primarily sell to private equity, these larger eye buyers or the even more heavily financed institutional buyers. we always catered to the Monpa investor and we continue to cater to the Monpa investor. And so for us, seeing that success and seeing that activity actually increase has been just a beautiful thing for us to be able to be a part of because we can see that we can be the part

of an investor or family investing operations success story. And I see it every single day. I mean, I'm watching the flips and we're tracking the number. they continue to buy from us. And, you know, there's no better compliment than repeat business. And so when we can continue to sell homes that need to be repositioned to an investor over and over and over and over and over again, and we see them succeed and we track their numbers and we talk to them and we ask some questions, how did you do on the last flips?

And they tell us where their struggles were and where they gained. It's really, it's really heartwarming and also eye-opening to. to see just how resilient the smaller investor has been and how that actually adding heart and soul into your renovation is going to be what wins. Because look, the 900 pound gorillas, they tried and they sucked at it. But the people who actually care about design, who care about the way that we live, who care about the way that we function in our homes, they've remained and they continue to remain. I love that.

Well, thank you so much for your time, Jamil. How can people get a hold of you? You can find me on my Instagram at J Damji. That's at J-D-A-M-J-I. Also, I put out a lot of content on my YouTube channel where I teach people how to wholesale. So if what I talked about today at all interested you, you go to YouTube.com slash Jamil Damji.

My full name again is just spelled J-A-M-I-L-L-D-A-A-A-A. M.J.I. Fantastic. Thank you. Thank you. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So, don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.