Chris is the Co-Founder and CEO of FlipOut Academy with 257 RE deals completed since 2006 and 15+ years financial advisory experience.
When the markets seized up during the spring of 2020, it became quite difficult to get real estate deals done. Even though investors were able to buy assets in some kind of distressed state, banks weren’t physically open to be able to finance them. Now many banks are back open for business, but they have also become more selective in their loan process.
The big fallout last March caused the real estate community to start thinking about upcoming opportunities. But then the stimulus checks kicked in, unemployment numbers rose and PPP loans were issued. This stimulated the market, which gave a false sense of reality about what was really going on. The short-term market stimulation made it difficult to for real estate buyers to find opportunities to make the right trade at the right price point.
Then, institutional investors like hedge funds and larger private funds had cash to deploy into real estate. If you watched what happened in March, you saw the stock market crash rapidly, sending shock waves of fear across institutional investors who said, “Maybe this is our exit.” Those who pulled out of the stock market were left with a lot of money — money they needed to put in a safer place. They deployed that money to buy real estate at prices that, for most smaller, private investors, is extremely high. But large institutions use other people’s money to take advantage of these opportunities. And if that money sits, they have to pay for it. So sometimes it’s better for them to take a chance and invest in real estate — at least then they’ve got the asset producing something.
This was good news for real estate investors: The competition was spending its funds. But now, those institutions are in a wait-and-see mode after giving a forbearance to many of their borrowers; they’re waiting to see who emerges viable. As the noise clears up, we’ll start seeing more write-off opportunities present themselves as some investors will cut their losses and exit their assets — sometimes without the profit they were hoping for. This will allow for more opportunities for more buyers.
If there is a fallout in the pricing, then some smaller investors can take advantage of it because they’re more nimble. So it’s almost an advantage for smaller investors to watch that kind of thing happen. When a lot of this “big money” has already been used up and spent in settling assets, then six or nine months down the line the real opportunities can emerge. That’s when smaller investors can really take advantage of what’s going on.
When you look at a lot of the larger institutional investors, particularly public ones that have to report quarterly, if they come out with something that underperformed or even was a loss, they usually get dinged on value or share price. But in 2020, banks were looking at their assets as a free pass from the perspective of, “Can we cut our losses and count this as a wash?” No one is going to be critical of that perspective, which can lead to opportunities being created. In this situation, the seller just wants to get out of a deal. And if you can deliver the exit with certainty, you could end up getting a fantastic buy. This trend may continue well into 2021.
Now, though, we’re too Zoomed-in to really understand what the long-term effects and changes to the real estate market are going to be. On a personal investment level, particularly within the scope of real estate, everything moves on such a massive scale, both to the positive and negative side. And right now, there’s quite a bit of negativity associated with the investment side of things. But there are still a number of different opportunities to be slotted in. As long as you can be really mindful of each deal and execute on a deal-by-deal basis, that’s how you win.
Money doesn’t just evaporate into thin air. It changes direction and changes where it goes. So when I can’t make money over here, I’ll need to find a safer place for it over there. They call it a flight to safety. And then it’s just a matter of figuring out who’s the smartest on the street and has that safe place for the money. Having that ability to look and find those opportunities will really determine whether you sink or swim in today’s market.
Don’t get me wrong, it’s still a great time to be a seller. If you can build up that cash war chest, you’ll be positioned really well for the opportunities to come. It just might be harder to exit in the near-term. That’s why it’s an even better time to be a buyer. When everybody else is greedy, you need to become fearful. When the deals become harder and harder to find, that’s when you know to keep a sharp eye on what’s going on in the market.
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