The black swan has arrived in our economy, the Corona Virus has taken an unprecedented, unanticipated curve in our economy, what will the impacts be in the real estate market? I searched for people who could provide great insights based on their experience navigating downturns in their careers. Today we are learning from a few of them: George H. Ross, Neal Bawa and Kathy Fettke. George Ross has done more real estate deals in New York City than virtually anyone else alive today. He has taught negotiation at the law school at New York University for 20 years. He has written two best-selling books on Real Estate and Negotiation. He has been featured as Donald Trump’s right hand man on The Apprentice TV show and in real life for most of the past 40 years.
What are the potential effects of the corona virus in the real estate market and in our economy? One of the things that real estate experts are agreeing on is that we don't know how things will go, we have no idea when it will end and what the impacts of it will be in the economy. We don't know the extent of this problem.
George Ross
George said that whatever money will be required to get the American people back on their feet will be spent. And what will this look like when it settles down? It really depends on how long it lasts and the effects that it will have. The monetary effects will be mitigated and resolved. People that have mortgages and rents won't be evicted and lose their places. As a matter of fact, people that own real estate might have to stop paying their mortgage. George said that right now it's a great time to buy, especially from people that are panicking. You just have to have the courage to do that. Also, if you have an opportunity to refinance, you should buy and/or refinance for as long as you can get the money out.
You can also negotiate all kinds of seller financing in terms of negotiation. It really depends how badly people want to do the deal. In some instances, you will be able to buy with no cash, with some agreement to pay something down or to pay them in the future. He reiterated the fact that this is an unforeseen calamity and that wherever we are in any situation, we're either in a peak or a valley, and we are currently in an unknown valley. And whatever it takes for the U.S. to get its people back on their feet, that's what they will do.
Neal Bawa
He said that some of the top investors think that we are already in a recession, that this is something that we have never seen anything like it, and we cannot predict the outcome because we have no idea how much of a percentage we are going to lose per day in the economy. For example, 90 percent of the airline, hotel and restaurant businesses are all gone - in a matter of weeks! This could be the sharpest recession and it could also be the shortest recession ever. We really just don't know. He also said that he already reached out to one of their banks and negotiated a three month mortgage deferral.
What to do if I own rental properties or multi-family properties?
Some people in our community own rental properties. So I think it is really important to share this with them. A really good tip that he gave was that, if you own multi-family, let people not pay rent in April and then you sign a new lease with them that includes that April payment which will be prorated for the remaining time of the lease. So, for example, they don't pay $1,000 in rent in April. However, you're going to put that $1,000 into the next twelve payments. So you're going to have them sign a new lease for $1,083 dollars for the next twelve months after April. And at this moment in time, this really does not matter because these people are either not going to have a job and not going to pay rent anyway April and potentially in May and June, for example, or they will get their jobs back and they will start paying their new rent because that's the lease that they have signed. I thought that was a really good strategy for people that own rental units.
Kathy Fettke
She has been predicting a potential downturn for a while. She actually lost everything in 2008 and she has been raising 100% cash for their investments, which I think was very wise. She said that she has been doing that because when the downturn came, and if they had to pause things and put things on hold for a while and sell later, having raised 100% cash is a really good strategy because you're not desperate to sell. You don't have loans that you owe the banks. And you can pause things for a couple of years until things come back to normal.
Another point that was made was that this time is just like the stock market. Some people are selling right now and some people are buying. And one of them will be right.
Lastly, Neil said that he doesn't think anyone should be buying right now. So there you are, a few contradictory opinions by successful investors.
What do I think will happen? I think that it will take at least three months for this to be resolved. And we have no idea what the trickle down effects could be in the economy. And I will have to agree with George that now is a good time to find people that want to sell, negotiate, get seller financing and buy some properties. And of course, you need to be mindful. You need to do your due diligence and you really need to pick a good asset class.
If you have been listening to this podcast, we have already been sharing the asset classes that we think are important to focus on and that are recession resistant.
Commercial Lending
A friend who is a lender basically said that the people that bought investments on a pro-forma basis and now have projects that are unfinished and tenants who cannot pay rent, and they don't have enough reserves to make it through the summer are going to have big problems.
I have been saying that some multi-family investors are so thin with their margin, they have barely any reserves and they're being very aggressive on their projections of future rent growth. A lot of these people could be in big trouble in the next few months. He also said that short term bridge lenders will be exiting the marketplace rapidly. What this means is that there will be less money available and banks could be tightening up commercial lines of credits. And I believe that banks will definitely get tighter in their underwriting because if they don't think you'll be able to pay your mortgage, they're not going to be lending to you. As a result, multi-family is going to be hurting, retail, and potentially offices.
Here's the excerpt of George Ross's Mastermind
What are specific steps that we can take to prepare ourselves? If we currently own commercial properties, should we start talking to banks, or any other ideas?
No, wait. Banks will talk to you, because they don't know what to do either. Imagine, for example, that a bank has so many millions of dollars in mortgages in houses and all the people stopped paying. Now, what does the bank do? Well, they're not going to be solvent. This is money that they anticipated coming in. And they don't have it. So what do you do? The banks don't know what to do. That's where they come to the government and say, hey, here's my problem. I don't know what the end result is, but I do feel that, and I feel very strongly about it, that ultimately the government will come in and step in and help the banks if they have a need. They'll pump a tremendous amount of money in. And we're talking about trillions if necessary. We only know it's necessary once the effect has become critical. It's not a big problem if somebody misses a payment for a month on a mortgage. What happens if they miss it for a year? Now you're talking about an entirely different situation. What happens if they never have the money to repay it?
And then you've got all these debts, all the loans which go bad, and that's not only in real estate. What about the debt, the bonds and so forth by all these major corporations? Now they haven't got the money to pay it.
What about the dividends that people were relying on when they bought the stock and now all of a sudden the dividends dry up? What happens if you bought airline stocks? These are real questions. We don't have an answer because it's too soon to come up with an answer. There are too many indefiniteness. So what I would say in answer to your question, I would not talk to the banks.
I would just see what happens over the period of time and you will be able to do things with banks you would never believe you could have done.
And the reason is that behind the banks will be the government making sure that the financial system works, and that the banks have money to lend, and they are going to be protected, and they're going to have to give the full faith and credit to the government and whatever it's going to cost, so you have government guarantees. This is not not something that hasn't been done before. You just don't know the scope. But that's what you're going to have.
Ultimately, it's going to wash out as to how, when, how difficult it's going to be. I don't know the answer to that. Nobody does. But I would say just sit tight. If there's a payment you can't make. Don't make it. Don't worry about being foreclosed, don't worry about the bank's foreclosure. Just look out for yourself on how you can survive, and those people who depend upon you. This is no time to negotiate from panic. You don't know how bad it's going to be. Anyone that [owns real estate], in my estimation, will have a very good negotiating position in the next few months.
Do you also think we should wait if we think now is the right time to buy real estate?
Where are you going to get the money? If you went out to buy a piece of property, it could be a good piece of property, but you'll want to get a bank loan. They're going to be very hesitant because they're not going to want to make loans. They should, they have plenty of money. But they don't want to make loans. I don't know the answer to it. But if you had some money sitting there, or you can raise the money yourself from savings, or from refinancing debt that you have, and you have excess money - that's your down payment. So don't put up a lot of cash. Just put a down payment, take an option to buy. I wouldn't go haywire. But if a deal comes up that you think is really good, you'll get unbelievable negotiating position because they'll panic.
And those who panic, just overreact. And I can see overreaction in certain instances, but I can't see overreaction when it comes to real estate. It has a long history with ups and downs. If the seller is very nervous and wants to do the deal, you'll get some fantastic deals. You'll be able to buy property with no cash. But you will have some kind of agreement to pay with something down. People will want to get out of it because it's not money making. I'm not getting the rents. I'm not getting the income from the stores that I was anticipating. And therefore, they don't like that and they say let that be somebody else's headache.
Somebody buys and says, okay, I'll take the headache. But they're not going to pay cash dollars upfront because they have the headache. Somehow they're going to have to solve that problem. But would it be a good time? Absolutely.
But you have to have courage. I've been around a long time with a lot of ups and downs and real estate in various countries, in various markets and various types of residential, single family houses, new construction and real estate runs in cycles. And you get a peak and you get a valley. And this is a valley which is just unknown because it couldn't have been foreseen or hadn't been foreseen.
And that makes it the more difficult to come up with the solution. But I do feel very strongly that the federal government will come up with what's necessary to solve the problem. And that's a major infusion of cash one way or another. In a World War Two, they had war bonds, which the people bought to support the effort. They would give money to the government to build planes, build tanks and everything.
And it was a catastrophe and they sold bonds. Now who knew whether those bonds were good, but it had the government behind it. That's what you're going to have now. We don't know if we're going to have the government behind a tremendous lending package for small businesses, supply chains, airlines, any group, or anything that's affected. If you follow what's going on, everybody is in the same boat and everybody is treating it as very important.
This is not a question of Democrats or Republicans, senators, congressmen. It's not a question of whether is it Italy, or is it Canada, or the United States. Everybody has the same problem and is in one way or another affected by this virus. And the effect of it on each individual country or each individual group is going to be different.
But how different? The question is how long will it lasts? It's too much up in the air right now. It's too much of an unknown. When that becomes a little more known, you can make better decisions.
To join Victor Menasce's mastermind go to: http://www.victorjm.com/mastermind-series/