September 22, 2023
The DAO of Real Estate
Joseph Bizub and I posted The DAO of Real Estate to SSRN (and BePress). The abstract reads,
Real Estate Investment Trusts (REITs) have long proven their worth as liquid securities that give investors access to many real estate asset classes. Decentralized Autonomous Organizations (“DAOs”) are one of several blockchain real estate innovations seeking to provide a new path to those searching to invest in real estate. While the success of the DAO model of real estate investment is far from assured, these new investment options could offer real competition to REITs one day.
September 22, 2023 | Permalink | No Comments
September 6, 2023
Temporary Interest Rate Buydowns
I was quoted in This Strategy to Cut Mortgage Rates is Becoming Popular in Bay Area — but There are Pitfalls in the San Francisco Chronicle (paywall). It opens,
When first-time buyers Rachel Shatto and Randy Nelson purchased a home in Oakland in May, they negotiated an interest rate buydown that effectively lowered their mortgage rate, and thus their monthly payment, for the first two years.
Although the seller made a lump-sum payment for the short-term rate decrease at closing, they increased their purchase price to compensate for it. This temporary rate buydown left them with more cash to pay for repairs and improvements the first couple of years, Shatto said.
Both temporary buydowns, which effectively lower the rate for one to three years, and permanent ones, which reduce it for the life of the loan, have become more popular since interest rates started soaring last year.
In June, 2.8% of 30-year fixed-rate loans funded by Freddie Mac had temporary buydowns, up from near zero a year ago but down from a peak of 7.6% in December 2022, shortly after rates spiked above 7% for the first time in more than two decades. After dipping as low as 6.14% in February, they surged above 7% again in August and now stand at 7.18%.
Buydowns are most common on new homes. When rates rise, builders frequently offer temporary or permanent buydowns as one of several incentives buyers can choose from.
A survey of builders in August asked what has been the most effective way to get buyers off the sidelines. The No. 1 answer, cited by 69% of respondents, was mortgage-rate buydowns, said Ali Wolf, chief economist with Zonda, a new-home data and consulting firm that did the survey. Only 22% said price cuts.
“When they lower prices, buyers already under contract at a higher price tend to cancel their contracts and it becomes a vicious cycle,” Wolf said.
Landsea Homes is offering buydowns on select homes in select communities including the newly opened Alameda Marina. “We are only able to offer them on homes that we can deliver within 30 to 60 days,” said Josh Santos, Landsea’s Northern California division president. “I’d say 75% of our buyers in the last 60 days” chose buydowns in lieu of other incentives such as options, upgrades or homeowners association dues.
Some sellers are also offering them on existing homes that have been sitting for a while.
Whether they make sense for buyers depends on myriad factors including their overall finances, the cost versus savings, how long they plan to stay in the home, whether they spend or invest their monthly savings, who’s actually paying for them, and future interest rates, the last of which is unknowable.
Borrowers should make sure they understand how buydowns work, the potential pitfalls and other ways to save money on a mortgage.
A permanent rate buydown is fairly straightforward. The buyer pays fees, called discount points, to reduce the interest rate — and therefore the monthly payment — forever.
One discount point equals 1% of the loan amount. To lower the note rate by 1 percentage point, a buyer today might pay around three points to four points. This cost can vary widely depending on the day, the lender and other factors, said Westin Miller, branch manager with Pinnacle Home Loans in Santa Rosa.
To figure out how long it would take for your monthly savings to equal the points paid, divide the total upfront fee by your monthly mortgage payment (or plug the numbers into an online mortgage discount points calculator).
Suppose a buyer can permanently lower the rate on a $700,000 mortgage to 6.5% from 7.5% by paying three points, or $21,000. That would lower the monthly payment by about $470 a month.
Divide $21,000 by $470 you get 36 months, which is the breakeven point. A borrower who kept the loan for more than three years would come out ahead. The longer it was kept, the bigger the benefit.
If a buyer knew for sure that rates were coming down soon, it might be better to take the higher rate with no points and refinance when rates drop, although refinancers will generally have to pay some closing costs again.
“If you are going to sell or refinance in a few years, paying points doesn’t make sense,” said Jeff Ostrowski, a Bankrate analyst.
Some buyers get permanent buydowns because they need a lower rate to qualify for a loan, said Jason Barnes, mortgage sales supervisor with U.S. Bank in Campbell.
Buyers pay for permanent buydowns, but in a slow market they might be able to negotiate a credit from the seller at closing to help pay for it.
With a temporary buydown, the borrower typically takes out a 30-year fixed-rate loan but makes payments based on a lower interest rate during the first one, two or three years in exchange for a one-time payment that is deposited into an escrow account at closing.
The upfront payment is about equal to the interest savings during the discount period.
During this period, the borrower makes payments at the lower rate and the mortgage servicer draws from the account to make up the difference. At the end of the discount period, the borrower makes the full payment.
Suppose the note rate is 7.5%. With a 1/0 buydown, the buyer makes payments based on a 6.5% rate the first year and 7.5% in years two through 30.
With a 2/1 buydown the borrower pays at 5.5% the first year, 6.5% the second year and 7.5% in all remaining years.
Three-year buydowns are available but not too popular because of the steep price.
The borrower generally must qualify for the loan based on the note rate stated in the loan agreement, in this case 7.5%.
Most lenders require sellers to pay for temporary buydowns, meaning the cost comes out of their proceeds at closing. If the buyer has no choice between a true seller-paid buydown and a lower price, there’s little reason not to take the buydown.
In competitive situations, buyers might need to increase their purchase price to cover some or all of the buydown payment, in which case they’re paying for it indirectly. Here the cost/benefit analysis gets more complicated.
When Shatto and Nelson bought their “cute little 1927 Tudor revival” in Oakland, they took out a 30-year loan with a 2/1 buydown from LaSalle Mortgage, Shatto said. They’re paying based on a rate of 4.125% for the first year, 5.125% the second and 6.125% thereafter.
Over the first two years, the buydown will save them $15,470 in interest, which was the cost of the buydown.
Although the seller paid for the buydown, the buyers paid a higher price to compensate, said their agent Lindsay Ferlin of Red Oak Realty.
Did they make a good deal? Here’s one way to look at it.
They paid $866,000 and, with a 20% down payment, and borrowed $692,800. Had they not used a buydown and paid $15,470 less, they would have borrowed $680,424 with 20% down.
With the higher loan amount, they’d repay an extra $27,071 over 30 years — consisting of $14,695 in interest and $12,376 in principal. But during the first two years, they’d save a total of $15,470, and most people don’t keep a mortgage for 30 years.
“Outside of a few cases, this does not have a significant economic benefit for borrowers,” said David Reiss, a professor of real estate law at Brooklyn Law School. “It’s a little bit of smoke and mirrors. I don’t think it improves their financial condition other than in a few cases where you have a low income in the present and expect it to grow significantly after a couple of years.”
September 6, 2023 | Permalink | No Comments
July 14, 2023
Housing Supply and The Housing Crisis
Opportunity Now interviewed me about how limited housing construction impacts the housing crisis:
Dynamic metropolitan areas like the Bay Area, LA, and New York City suffer from longstanding mismatches between the supply of housing and demand for it. Local communities control the zoning, and local voters (typically existing homeowners) have little incentive to increase the supply of housing. After all, more supply will likely increase the tax burden as new residents increase the demand for services (more schools, more infrastructure, more public safety). Homeowners are already in the market and generally like the way things are, notwithstanding their political views about the high cost of living for others and the epidemic of desperate homelessness that plagues all of these areas. The result of all of these local land use decisions is that very few units of housing are built in these communities, given the size and growth of the population.
Many coastal cities are high-opportunity areas, offering jobs to immigrants, young adults, and strivers of all stripes. They drive up the demand for housing even hours from urban centers, living in overcrowded units in many cases.
When demand outpaces supply, prices rise. Government can try to limit the effect of this pressure through a variety of means: rent controls, housing subsidies, right-to-shelter legislation. All of these interventions can assist certain segments of the housing burdened — current renters, new renters, homeless people — but to a large extent, they just reallocate scarce housing from one burdened group to another. That is not necessarily bad public policy given the current political realities, but it does not address the fundamental problem these communities face: There is not enough housing for all of the people who live in them. A broad coalition of decision-makers needs to face this reality and develop long-term strategies to build a lot more housing where all of these people want to live — for access to economic opportunity, for proximity to family, for all of the reasons that people want to relocate and build a life for themselves and their loved ones.
July 14, 2023 | Permalink | No Comments
July 12, 2023
Rent-to-Ow!
Insider quoted me in Private Equity Sold Them a Dream of Home Ownership. They Got Evicted Instead. It reads, in part,
Erica Hines-Denson had no idea how bad the odds against her were.
Student loans and a recent divorce had dinged her credit score. But she and her new husband, Elquinton Denson, were building a blended family and they dreamed of buying a home in the greater Atlanta area. After lenders turned them down for a traditional mortgage, a realtor told her there might be another way. Something called a lease-purchase, or rent-to-own, agreement.
“This was our way to own a home finally,” Hines-Denson said. “It was like we found a loophole.”
It took just a weekend of house hunting to find a house they loved: a stately four-bedroom, 30 miles southeast of Atlanta, with a built-in bar in the basement where they pictured hosting family and friends. Listed at $275,000, it was in their price range.
There was a catch. The couple wouldn’t be buying. Instead, a Chicago-based company called Home Partners of America would make a cash offer and rent the house back to them, with an option to buy within five years.
Home Partners supplied a lengthy agreement detailing the terms, including built-in annual increases to their rent and to the eventual purchase price. The document was more than 50 pages long; Hines-Denson said the company gave them just 24 hours to review it and sign. But the opportunity seemed too good to pass up. “You’re like, ‘Oh Lord, this is my chance,'” she said. “So you’re moving quick.”
The deal quickly turned sour. The company locked her out of the online payment portal after she missed a single month’s rent, adding hefty fees that made it impossible to catch up. After she missed a second month, the company swiftly filed for an eviction.
While a judge stayed her legal case under the federal COVID-19 eviction moratorium, the company’s management agency continued to call, Hines-Denson said, threatening to remove her belongings. In a final insult, the company kept their two-month security deposit when she and her family finally moved out.
Private Equity Moves In
Home Partners, which launched in 2012, now owns more than 28,000 homes nationwide. It is the largest of a handful of new companies promising “a clear path to homeownership” for families not yet ready or able to buy.
The company’s success has inspired startup competitors such as the New York-based company Landis, which boasts of investments from entertainers Will Smith and Jay-Z. Once dominated by fly-by-night operators, rent-to-own is now attracting some of the biggest players from Wall Street and Silicon Valley. Andreessen Horowitz led a Series A funding round for a rent-to-own competitor, Divvy Homes, in 2018. BlackRock and KKR purchased a majority stake in Home Partners by 2014, before private-equity giant Blackstone Group bought the company in 2021 for $6 billion.
In its marketing, Home Partners emphasizes that it offers “flexibility, choice and transparency,” providing the opportunity to “rent your dream home” without making a long-term commitment. “Home Partners has created a path to home ownership for tens of thousands of people who may not otherwise have had one,” a company spokesperson told Insider. “We are tremendously proud of our business.”
Yet Home Partners tenants, in interviews and court documents, say they got stuck in barely livable dwellings, with leaking sewage, broken air conditioners, filthy carpets, or nonworking electrical outlets. They describe being blocked from seeing home-inspection reports and facing swift eviction filings for a single late payment. One tenant filed a lawsuit claiming she suffered injuries when the ceiling of her home collapsed.
Hines-Denson said she felt like she’d been “set up to fail.”
More than 4,000 Home Partners tenants have purchased their homes over the past decade, according to a July 2022 paper from Moody’s Analytics, coauthored by an advisor to the company. But over the same time, nearly four times as many tenants — roughly 15,000 — moved out without buying.
An analysis of contracts and sales and eviction data shows that rent-to-own tenants are often left with the worst of all worlds. They have to shoulder many of the costs and responsibilities of homeownership, and the financial odds are stacked against them to end up as owners. Meanwhile, many are paying above-market rent.
“I’m very sympathetic when someone says they’ve identified a large segment of the population not being served by the current housing and mortgage landscape,” said David Reiss, the research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School.
“What you don’t want to hear next is, ‘Therefore, we can do whatever we want to them.'”
*. *. *
“Rent-to-own has this really sordid history,” said Reiss. “It’s an area of the housing market that remains underregulated. That’s part of the attraction for many operators.”
July 12, 2023 | Permalink | No Comments
June 29, 2023
Suffolk Law Hiring A Tenure-Track Real Estate Professor
Sargent Hall, Suffolk Law School
John Infranca of Suffolk University Law School asked that I post this because one of the positions is focused on Real Estate Transactions:
Suffolk University Law School in Boston expects to fill up to three tenure-track or tenured doctrinal faculty positions, starting in 2024-2025. We seek candidates with a strong record or promise of significant scholarship and a demonstrated commitment to excellence in teaching. Our search will focus on Property; Constitutional Law; and a third position open to a range of teaching and scholarly interests. Our needs in the area of Property include the first-year course plus advanced courses in Trusts and Estates and Real Estate Transactions. Our needs in the area of Constitutional Law include the first-year course plus advanced courses in First Amendment and Civil Rights (including the intersection of law and race, gender, and sexual orientation). Our additional needs include Family Law, Business Law, Technology Law, Professional Responsibility and Health Law.
Interested candidates should include in their application a curriculum vitae with a cover letter and scholarly agenda addressed to Professors John Infranca and Linda Sandstrom Simard, co-chairs of the Appointments Committee. Candidates are invited to share in their cover letter how they would advance the law school’s commitment to diversity and inclusion through their teaching, scholarship or service. When you post materials on Jobvite, do not send duplicate materials to the Chairs of the Appointments Committee via email.
Suffolk University does not discriminate against any person on the basis of race, color, national origin, ancestry, religious creed, sex, gender identity, sexual orientation, marital status, disability, age, genetic information, or status as a veteran in admission to, access to, treatment in, or employment in its programs, activities, or employment. Suffolk University is an affirmative action, equal opportunity employer. The University is dedicated to the goal of building a diverse and inclusive faculty and staff that reflect the broad range of human experience who contribute to the robust exchange of ideas on campus, and who are committed to teaching and working in a diverse environment. We strongly encourage applications from groups historically marginalized or underrepresented because of race/color, gender, religious creed, disability, national origin, veteran status or LGBTQ status. Suffolk University is especially interested in candidates who, through their training, service and experience, will contribute to the diversity and excellence of the University community.
June 29, 2023 | Permalink | No Comments
May 9, 2023
Paying off Mortgages before Retirement
I was quoted in Should You Pay off Your Mortgage before Retirement? It opens,
Getting rid of what may be your largest monthly expense and unburdening yourself of debt are great benefits of becoming mortgage free at any age. But it may be particularly attractive as you approach retirement.
“Back in the 20th century, people used to burn their mortgage documents once they had paid the loan off,” said David Reiss, a law professor who specializes in real estate and consumer financial services at Brooklyn Law School in New York. “That practice reflected the freedom that many felt from no longer having to borrow to own their family home.”
Indeed, that emotional freedom helped make the idea of paying off your mortgage before retirement conventional wisdom for financial planning.
And there are still good reasons to consider it.
“It’s always helpful to pay attention to rules of thumb like, ‘You should pay off your mortgage before retirement,’” said Reiss. Those rules are often true under typical circumstances. But you want to understand the assumptions behind the rules and see how they compare with your situation.
Traditionally, the main reasons to pay off your mortgage before retirement are to get rid of the monthly payment (perhaps allowing for a better balance of income with expenses) and to gain the emotional benefit of having your home paid off, said Casey Fleming, a California-based mortgage advisor and the author of Buying and Financing Your New Home.
But there can be other considerations as well. These can include:
Each of these areas can provide good reasons to sunset a mortgage, but also good reasons not to. It all depends on personal circumstances, so it’s important to take a closer look.
Balancing income and expenses
For some people, retirement means shifting to a fixed income that may be lower than what they brought in during their working years. Eliminating a significant bill ahead of time — like a mortgage payment — may make living on a fixed income a little more affordable.
But that may not be the case for everyone.
“For instance, most people see a significant drop in income when they retire,” Reiss said. “If that is not the case for you — you have a great pension, your spouse is still working, etc. — then you have more flexibility when it comes to your mortgage.”
When matching income and expenses in retirement, it’s important also to take a long-term view. For example, if your spouse will retire a few years after you do, you may want to increase your mortgage payments to time their retirement with your loan payoff date.
Emotional benefits
When you carry a mortgage, someone else has a powerful legal hold on your home. Forget to pay your homeowner’s insurance bill? Your lender can buy coverage — very expensive coverage — on your behalf. Miss too many loan payments? Your lender can foreclose.
As noted earlier, taking back that power made paying off the mortgage a celebratory event. Not only did people burn mortgage documents, but some also hung eagles over their doorways, using the symbol of American freedom to herald their freedom from mortgage debt to visitors.
Yet you’re never truly free of foreclosure risk — you’ll still have to pay your property taxes even after you’ve extinguished your mortgage. And most people should still carry homeowner’s insurance, even when a lender doesn’t require it — which means you’ll have to answer to your insurance carrier. If they don’t like the wood-burning stove in your garage, you’ll have to take it out unless you can find another company that approves having it.
Still, many people feel differently about their homes once the mortgage is paid in full.
Liquidity
Paying off your mortgage before you retire — assuming that you’re not already on schedule to do so — means using assets you might otherwise allocate elsewhere.
Generally, if you have enough money in your retirement fund to handle your living expenses comfortably, plus a cushion for extraordinary expenses (like medical bills as you get older), then it’s safe to pay off your mortgage, Fleming said.
But it may be unwise to use liquid assets, such as stocks, bonds, and cash, to pay down your mortgage as you approach retirement because home equity is far less liquid. If, after you retire, you wish you had that money back, you may have to look at options for selling your home, refinancing it, or getting a reverse mortgage, all of which require time and fees.
Return on investment
Paying off any sort of debt gives you a guaranteed return on investment. If you’re carrying a mortgage at 7 percent, paying it off may be attractive because you typically would have difficulty earning a guaranteed 7 percent long term anywhere else.
Of course, with a lower mortgage rate or a higher risk tolerance, early mortgage repayment becomes less attractive from an ROI perspective. So, it becomes a personal choice about risk and lifestyle.
Taxes
Another argument in favor of paying off your mortgage before retirement is if you won’t lose a tax deduction by doing so.
“The standard deduction is pretty high now, and many seniors don’t benefit anymore from the mortgage interest tax deduction,” Fleming said.
If your standard deduction is greater than your itemized deductions — and for the vast majority of Americans, it is — you can’t reduce your tax obligations by deducting your mortgage interest.
However, the standard deduction in effect today could halve in 2026. The doubling of the standard deduction that became effective in 2018 is one of many tax code provisions that’s set to expire at the end of 2025.
And even if your mortgage interest by itself doesn’t get you over the standard deduction threshold — in 2023, that’s $13,850 for single taxpayers, $27,700 for married taxpayers who file jointly, and $20,800 for heads of household — when combined with other itemizable deductions such as charitable donations and state and local income taxes, paying off your mortgage early might increase your tax bill.
“If you pay off a mortgage early, you are saving on mortgage interest, but you may also be giving up the mortgage interest deduction,” Reiss said. “If you do not pay it off early, you can earn interest in a bank account, but you will be paying taxes on that interest. You want to think through the consequences of your choice to see which is the most financially attractive, including the tax consequences.”
May 9, 2023 | Permalink | No Comments
May 8, 2023
Blockchain Coming To Your Block
Joseph Bizub, Justin Peralta and I wrote the lead story for latest issue of N.Y. Real Property Law Journal, Blockchain Coming to a Block Near You: How FinTech is Changing Real Estate Investing. You can find it on page 5: bit.ly/BlockchainStory. It argues,
Until recently, real estate with a small footprint – one-to-four-family homes as well as small retail, office, and industrial buildings – were generally within the purview of small investors who invested locally. Today, because of technological advances, these owner-occupants and investors face competition from an emerging class of decentralized finance (DeFi) investors. Fintech companies are presenting DeFi investors with new approaches to the challenges that real estate investing traditionally poses: illiquidity, high capital requirements, lack of diversification, and opaque markets. This article focuses on how fintech companies are meeting those challenges and suggests that while much of their vaunted innovation is simply old wine in new bottles, there is good reason to think that they will be driving a lot of investment in small real estate transactions in the future, in no small part because people like shiny new bottles.
You can also find the draft on SSRN and BePress.
May 8, 2023 | Permalink | No Comments
