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Mike Simonsen

A true data geek, Mike founded Altos Research in 2006 to bring data and insight on the U.S. housing market to those who need it most. The company now serves the largest Wall Street investment firms, banks, and tens of thousands of real estate professionals around the country.

In this episode of the Top of Mind Podcast, Mike Simonsen sits down with Charles McKinney, Co-founder and CEO of Vontive, to talk about the landscape for real estate investors in this volatile market. Vontive sees loan data from thousands of real estate investors, which gives them unique and real-time insight into how investors act in this market.

Charles gives his outlook for real estate investment in 2023 and beyond, discusses some of the risks and opportunities for investors in the current market, and highlights technology trends he’s excited about. He also shares some eye-opening findings about investor sentiment from Vontive’s recent nationwide housing and economic survey.

About Charles McKinney

Charles McKinney

Charles McKinney is the Co-founder and CEO of Vontive, a new digital way to finance investment properties, with a white-label solution that empowers any business serving real estate investors to launch its own investment-property mortgage business in 1-2 weeks.

Charles is a real estate and mortgage analytics pioneer. He started his work with Freddie Mac, led analytics at the real estate investor portal Auction.com, and is a pretty prolific real estate investor in his own right.

 
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Here’s a glimpse of what you’ll learn: 

  • Whether investors are optimistic or pessimistic about real estate in 2023
  • What happens to real estate investor business models when the Fed’s policy shifts from easy money to tighter policy
  • What the future looks like for small real estate investors as big Wall Street money is gaining market share
  • How landlords are getting creative with rental business models, and how business models may have to shift in the future with more expensive capital
  • Trends in short-term rentals and other innovations in real estate
  • How technology innovations remove cost and friction from loan transactions

Resources mentioned in this episode:

About Altos Research

The Top of Mind Podcast is produced by Altos Research.

Each week, Altos tracks every home for sale in the country - all the pricing, and all the changes in pricing - and synthesizes those analytics to make them available before becoming visible through traditional channels.

Schedule a demo to see Altos in action. You can also get a copy of our free eBook: How To Use Market Data to Build Your Real Estate Business.

Episode Transcript

Intro 0:02

Welcome to Top of Mind. The show where we talk to real estate industry insiders and experts about the biggest trends impacting the market today. Enjoy the show.

Mike Simonsen 0:13

Mike Simonsen here. Thanks for joining me today. Welcome to the Top of Mind Podcast. This is where I talk to the smartest leaders thinkers, doers in the real estate and related economies. For for a few years now we've been sharing the latest market data the latest Altos Research market data every week in our weekly video series with the Top of Mind Podcast, we're looking to add context to the discussion more than just today go beyond the data and and learn about what's happening in the market from the the leaders in the industry. Every week, Altos Research tracks every home for sale in the country, all the pricing all the supply and demand all the changes in that data and we make it available to you. Before you see it in the traditional channels. People desperately need to know what's happening in the housing market right now. The market was so crazy, so competitive, and now suddenly the landscape has changed dramatically. So if you need to communicate about this market to your clients, go to AltosResearch.com for a free consultation and and how you can use market data in your business. So without further ado, though, allow me to introduce my guest today, Charles McKinney. Charles is the founder, CEO of Vantis. Charles is a a real estate and mortgage analytics pioneer, he started his work with Freddie Mac where we actually met probably 12 years ago, 10 or 12 years ago, he led Charles lead in analytics at real estate investor portal Auction.com, and is actually a pretty prolific real estate investor in his own right, Charles McKinney launched Vontive. Vontive is a new digital way to finance investment properties. So it's a white label solution that that empowers businesses serving real estate investors to launch their own investment property, mortgage business in like one to two weeks. So very cool. So I'm interested in learning about that technology and that process, and actually the financing behind that, but also learning today about what we can see investors doing in this market, what technology changes mean for this cycle of boom and bust. Lots to talk about with Charles, today. Charles, welcome.

Charles McKinney 2:37

Thanks, Mike. It's nice to be here.

Mike Simonsen 2:39

All right. Well, let's get let's get started telling me Tell me a little tell us a little bit about Vontive and how the company came about.

Charles McKinney 2:47

Sure. So we've known each other as you mentioned, a long time the idea for Vontive was born about 12 years ago, the story really starts with how my co founder of the company is trace, Vijay Kumar, and I'm not. As he mentioned, I worked at Freddie Mac from 2006. For about six of those years, I was one of the leaders that thought over loss mitigation for the single family mortgage portfolio, Freddie Mac, so

Mike Simonsen 3:11

that's quite a, quite a quite a tenure to be doing that job.

Charles McKinney 3:15

It was it was quite a fun period of time. You know, we we were looking at a $70 billion loan loss reserve. You know, unfortunately, we were, I think it was 2010. We sent 140,000 REO properties through the home substandard a Freddie Mac, which was like an our worst year ever prior to that, you know, we had never done more than like, I want to think about 15,000 homes a massive increase. So we brought a company called Palantir technologies into Freddie Mac, to build a lot of the data analytics and technology infrastructure that we needed for loss mitigation. traceless counters deployments. So we met and we became friends. And one of the strategies that we rolled out early it was data science, or algorithmic what we now call AI based pricing of real estate that was going to short sale, foreclosure or real estate owned properties being sold to resolve mortgage defaults. Were Freddie Mac can guarantee the mortgage. And we sold about 450,000 homes to real estate investors while I sat over the strategy. And that was when I first learned about the real estate investors that Vaughn have works with today. So what is Vontive? So we focus on an investment property mortgages. The folks the consumers that we work with are not homeowners but they're going to be homebuilders, folks who purchase and fix up properties for resale folks who buy fix and rent properties or folks who just you know own rentals. So you're small, kind of DIY landlords, more real estate investors. Very, very big market. So over the last five years real estate investors financed about $1.7 trillion of loans winds. And they did that with about 12,000 lenders. And for this ecosystem, there's really no capital markets infrastructure similar to what you have with conventional mortgage with Fannie Mae and Freddie Mac. There's really no mature technology ecosystem that lenders can tap to automate their business and manage their risks. So we're, what we've done is we've built what we like to describe as the first embedded mortgage platform. So what does that mean? So we've built technology, a loan application, underwriting, one origination system mortgage servicing, all on top of a very comprehensive data foundation that allows us to digitize from start to finish originating mortgage. And the way we're going to market with our company is we don't want to be a Quicken Loans, we don't want to be a b2c brand that every real estate investor turns to when they want to get a loan. Instead, what we're doing is we're taking our technology. And we're deploying it to brands that already work with real estate investors, brands they trust, and we're enabling these brands to bolt a mortgage company onto their business. The setup is about a day, and we get them in the market and a couple of weeks, and they can create a whole an entirely new revenue stream for their company. So that's what we're up to. And I guess one thing that might just you know, illustrate the example of who we work with, so you can think of these b2c You know what we don't work with them today, you can think of Airbnb, in the future, they might want to build a mortgage company, onto their business, they have, you know, hundreds of 1000s of Airbnb property owners, you can think of a community bank, the real estate investors, or you can think of Prop techs that facilitate the acquisition of homes, like regal technologies, as a partner or pad split. There's a lot of brands that real estate investors trust. And we think that mortgage finance will start to converge back where we bundle into these technology platforms really facilitating that with our technology. 

Mike Simonsen 7:04

All right, so there's a lot there. Let's let me dive in. So because the investor mortgage doesn't have the government backed secondary stuff prior to Vontive, if it was a lot more scattered? Is that is that the right way to look at it?

Charles McKinney 7:22

Absolutely. Yeah, absolutely. very fragmented, low liquidity.

Mike Simonsen 7:26

Yeah. And low liquidity. And then so the way so then the technology like makes sense, like the technology is the integration point to bring those to standardize to break some of that fragmentation down, then what happens on the back end? Who's whose capital is it? 

Charles McKinney 7:43

So it's a variety of financial institutions. So you, we really look at capital as fungible as a commodity? Well, we want to do is take the production of the mortgage and reduce at the code. And we want the best capital for the real estate investor to be able to integrate and fund the loans. So we actually function as a lender of record. So we're not just a broker or a matchmaker, but we commit capital. So when a real estate investor comes through one of our partners to get a Vontive mortgage, we're saying, Okay, we are the capital two, we are the capital, but what we're doing is you can take what traditional mortgage lender as they'll come at the capital, and then they might hold the mortgage until it pays off. So they would hold to maturity. Or they might go through a like a loan sale to a conventional lender, you're selling mortgages to Fannie or Freddie, if you're an investment property lender, you might be selling to hedge funds, or to banks or life insurance companies, we operate the same model, but we make it incredibly more efficient, because we're digitizing everything. And so on the capital side, we're integrating banks. So one of our bank Partners is a top 13 global bank. We have hedge fund partners, we have asset management partners, we have, you know, life insurance company, sources of funds that we can integrate. And really again, what we're doing is we're removing friction. So when we think about putting the best capital in front of a real estate investor, what that primarily means is being able to tell the real estate investor when they come and say, Hey, I need a loan for this investment. We're when we're quoting them, we're quoting with a very high degree of certainty, that if the information they give us proves out to be true, we will close that loan. And not only will we close it, but we'll close it much faster than traditional processes. So if you think about going to a bank and getting a mortgage and it's taking like four, six or eight or 10 weeks to close, we're going to close that mortgage as quickly as four or five days.

Mike Simonsen 9:51

That's amazing. So those there's a there's a generation of technology that are in real estate, it is working to remove a lot of that the friction of home buying. And you can think of like, the whole point of open door is like how do I do this with as little friction as possible to the consumer, that's a really exciting prospect to a consumer who's afraid of all the things that I gotta go through. And if you want to give me a check, and, you know, I mean, I pay, I pay for that, that convenience, but sometimes I want to pay for that convenience. So like, there's a lot of that innovation that seems to be happening out there. So on the investor side, so it's really on the, for the investors, where you're, you're aiming to reduce that friction. 

Charles McKinney 10:43

Correct. 

Mike Simonsen 10:43

Yeah. So that's, that's cool. So, so let's give me one of the one of the things that happens when we reduce friction is that more players get into the game, or more like we allow more players to get in we, we allow different kinds of deals to happen. And some of the times, that means that we're creating new risks that we haven't seen before. So like, you know, subprime was like these are getting, making it easier to get mortgages to people who didn't previously qualify. And so on the one hand, that is a real optimistic good for humanity thing. On the other hand, it creates a whole bunch of new risks that we're not like, there's a reason that friction existed before market reasons. How do you look at that with investors right now?

Charles McKinney 11:35

So I'll answer the question in two parts. So first, let me talk about how, through our technology, we manage risk. And then I'll give you some commentary on the state of credit quality, and an investment mortgage. And I can, I can give you some comparisons about so like, you know, what we see on the consumer, the conventional mortgage side now is helpful, I can talk about it during the great financial crisis. So so how we manage risk in our technology. And our process is very straightforward, we have a general point of view, about what will drive the likelihood of a loan defaulting. So probability of default, and if a loan does default, how much we will recover from, you know, the sale of the property or some other work out of the mortgage or loss given default. And it really rests on classic principles of good credit. So we always talk about in the industry, the five C's of credit, so we tailor that to real estate investors. So when we look at a sponsor, somebody who's investing in real estate, we want to understand that they have a track record of experience. Very importantly, we want to understand that they have liquidity. So that goes beyond the downpayment and the ability to service the mortgage. But it also goes to things like if you own a portfolio of rentals, you have working capital to service your debt, maintain the properties market the properties during periods of vacancy, if you're a home builder, you have working capital to fund renovations until you can make a construction draw on your loan and be reimbursed. If you're selling a property, you have plenty of capital to hold it. For a more ordinary expectation of days on market, a lot of people were conditioned over the last few years that wow, it's 14 problems to sell in two weeks. Now, you know, this walk because you have the data, if you look back 20 30 years, normal market selling times are like 90 to 120 days on market, plus the time that it takes for that to close the transaction. So we put a lot of emphasis on on liquidity. And we also put a lot of emphasis on credit character. So not just looking at the FICO score, but we really go with our data science with our algorithms, we go down into the details and we want to understand, do you make your payments on time, you know, like, like one signal we look at with our own lines as somebody we get an ACH on every on every loan, and if somebody cancels or ACH, that's a big signal of somebody is likely to miss a payment and potentially default. So we're really getting into the details of the data and understanding like like what does somebody who's pattern of making payments utilizing that doesn't show responsibility? So that's on the sponsor side. And then on the property side, the way we're looking at risk really depends on the type of investment so if it's a rental property, we want to understand that the or model out and determined that the cashflow from the rental, I collect rent, I subtract from that expenses. I get to a net operating income is that net operating income going to be more than sufficient to cover the debt service costs, and we've a cash on cash return or net profit to the investor. Okay, so that's like on a rental property as an example, if we're looking at a non traditional rental, we're going to want to either understand that it works as a long term rental, which might bring down loan proceeds. Or alternatively, we can look at the business income and expenses of the sponsor. Compute, you know, something very much like a debt to income ratio. And if they, as a business can afford the loan, you know, we'll give them the loan and pay less attention to the rents on an individual property. But again, what we're really looking at is on the long term level, looking at cash flows, does the cash flow work out for you know, for what they're doing? And then if we're looking at like building a home, or if we're looking at purchasing and fixing up a property, we want to understand, what's the exit strategy is so what is the work somebody is going to do on the property? Will that work create return on the investment of the property be saleable at the value they expect to get? Will it be refinanced, or if they're going to hold it as a rental? And what we found is that when we apply these principles to managing risk, and we do it in a very quantitative fashion, it works well. So we've had as a as a lender, we've had no mortgage defaults. And you know, we've we've lived around a billion dollars since inception. And that includes during the period of COVID, we've originated a number of long term or permanent loans for rental properties. And we didn't have missed payments, even though tenants were needing forbearance because they lost jobs and things like that. So the model seems to work now, will it continue to work? I think we're gonna go into a recession over the next year. And we'll see how this will be another task of our model. I think it will be a stress test. We'll see. But we feel very optimistic. Okay.

Mike Simonsen 16:48

Yeah, that's actually gets into a couple of things. So before we dive into coming economic challenges, well, I have a couple of questions on on the technology wise, so some of the things like property cash flow or exit strategy or for the experience of the the investor, the sponsor, those are the types of things that typically a loan officer a good underwriter would have analyzed personally and made real decisions about personally in in the past, they seem to me that they would be hard to actually quantify, to automate, you know, like, how do I know that Charles has experience like, Oh, that was a good, that was a good project you just did. Let's do another one like that. How do you How does the technology and the data capture that stuff?

Charles McKinney 17:42

So the data science is never perfect, because the deal here that. And a lot of it has to do with integrating third party data, some of which isn't clean, you're very familiar with public records data as an example. So when we've heard when we verify experience, we're going out to public records data. So we're, you know, like, I'm Mike Simonson, I'm just gonna make this up. I own Altos Properties, LLC, we're going to the public records, and we're saying, Okay, let's look up all this properties, LLC. Here are all of the properties that Mike owns. So that gives us a way to construct a schedule of real estate that you own certain facts, like if it's a rental portfolio, we can't get from third parties, we're adjusting a rent roll from you, or t 12. You know, we might be, you know, adjusting leases from you. But it's that combination, and the, the value of the technology, again, isn't to replace what the loan officer or the underwriter has traditionally done. Instead, what we're doing is making it more efficient for them. Making the determination more authoritative, more confident, because we're layering in additional data. And third, we're building in a direction and this is very much like how Palantir builds their technology. We're building in a direction where the software can augment the intelligence of the human and say, hey, look, I'll give you an example. Okay, so we'll see investors who like homebuilders who might like we have one, there's one humbler that we financed in the past who built in Portland and moved to Florida and want to want to financing in Florida. We're able to glean things about the Florida market that this homebuilder entered the goddess very comfortable with the equivalence of that market with Portland you know, like looking at neighborhoods looking at trends looking at statistics and and that got us very comfortable that like this homebuilder could take the model they employed in Portland, transpose it to Florida and it was made much easier scenario to get comfortable with in terms of so yeah, well, we'll consider financing in a new market. What the what the data is doing is it's really allowing the human to just be more informed, you know, develop better intuition, better insight, and ultimately make make,

Mike Simonsen 20:16

make it more robust. And I suppose if I'm a community bank in Florida, I don't know anything about what this guy has been doing in Portland. And so now I do. 

Charles McKinney 20:24

Exactly, yeah.

Mike Simonsen 20:29

Yeah, I get that. Okay. That's great. Let's, let's switch gears a little bit. So the you mentioned, you know, you expecting coming recession? Sure. Seems like, like all the signals are there. I have a couple of questions about that, like one is, is like, I'm interested in your view of investors in general, in in over 2023. And, like, you know, what your gut says about like, are they going to pull back faster? Is that going to? Is that going to exacerbate a downturn? Or like, I'm interested what your gut says about what investors are going to do. And I'm also interested in if you have signal in your data, that already tells you something, maybe that the world doesn't know. Let's start with what your gut says, What do you think investors are going to do in 2023?

Charles McKinney 21:20

So let me let me start by just relating what I'm about to say to the 2008 housing crisis, and what we've seen since then, because it's important context. So when when home prices collapse in 2008, to 2010, a lot of real estate investors, Mike, as you know, Well, got got wiped out, they were part of that frenzy, crowd buying and flipping homes. On the other side of that, beginning of nine, there were real estate investors who profited from home prices. but rents remaining stable and actually appreciating from and on and on. And these investors, many of them became wealthy, some of them became public companies, they rolled up into, for example, invitation homes. Since then, the Feds era of loose monetary policy has been incredibly favorable to real estate investors. So home flippers on the exit that could count on home price appreciation, supply was limited. But if you could get supply, it was very easy to sell. We did see some headwinds in 2018 to 2019, when the Fed raised interest rates to 2.5% funds federal funds rate before COVID started, we were seeing then signs of the market cooling. So I think there's some signals that you can look at and the data from 2018 2019. That'll give us some intuition about what's going to happen in 2023. In addition to that, you can look at what happened in the great financial crisis to get some sense of what's going to happen in 2023. Okay, now, my view of 2023 starts was markets are cooling, we expect prices to decline, nationally, let's call it 10%, maybe 15%. I don't think prices are going to collapse like they did in 2000. After 2008, when nationally peak to trough was about 30%. And you'll certainly certainly see a differences but by market. Okay. Now what that's going to mean for homeowners, you've talked with other folks on your podcast about the story of like, if people lose jobs, or if they lose wealth, because of stock prices declining, there's going to be fewer people who want to buy homes or who can are going to be in the market for buying homes, downpayment wealth is going to be who has shrunk. And obviously affordability with rates being close to or I think they're just below 7%. This week, we'll call it you know, race out 7%. Just affordability is a big challenge. So people who would like to be homeowners will remain renters. And I think that's what that's going to mean for real estate investors, we'll come back to the throw in a moment, if you have a strategy of buying, fixing and renting I think that's going to be I think the next year to two years is going to be an excellent time to be in the market. So

Mike Simonsen 24:18

because that’s gonna be excellent because prices are going to adjust down and it'll be the first time we've had that in a long time?

Charles McKinney 24:26

Prices will adjust down, we're certainly seeing rents soften. But rents are coming off annualized appreciation close to over 10%. So when we talk about softening, they're not turning negative, they're approaching zero. And if you look historically, during periods of inflation, rents don't go negative on a on a real or nominal basis. Rather, you know runs correlate with the rate of inflation. So if you can buy a property at a lower cost basis because of prices, cooling there being fewer buyers, and you can still get a favorable runs. That's a great, that's a good sign over the long term. Exactly. does. So

Mike Simonsen 25:07

does that change? Sorry to interrupt? But does that change that equation change if we've shifted from the last decade of being a decade of super loose monetary policy? And now we're in a, what if we're in a decade of significantly tighter monetary policy? Does that change some of those assumptions about that? The cash flow there those that does that tamp? Like, what if this, like mortgage rates are seven now? What if they stay? So what do they go to eight? And what if they stay higher for the next decade? does that how does that change the whole flow?

Charles McKinney 25:43

Well, it certainly changes the inputs to the to the bioflex run pro forma. So if you're, as a lender, we look at that service coverage ratio. And so clearly, higher rents will have to be charged to have positive cash flow after servicing debt with a higher interest rate. So in turn will change as the inputs to the to the rental pro forma. But if you can raise rents over time, or and or if you can buy at a lower cost basis that offsets the, you know, the higher done at first cost. Okay. You know, the other thing that I'll add is, we're seeing this in our data. So we get this real time when when people you know, when people submit loans for financing, we're seeing real estate investors start to get creative around the type of rental model they employ. Oh, clearly, yes. Clearly, Airbnb has been a craze over the last several years. We're not seeing Airbnb, as a as a as a strategy as much now and the loan application data and then the underwriting. We're seeing things like one example run by the room. And you see businesses like pod spotting homerun coming out to, you know, build, talk and facilitate the acquisition and management of those properties. When we look at the data rent by the room can yield for the same property, a cash flow that in some cases is two or two and a half X, long term rent. Another example would be midterm rental strategies. So we see real estate investors looking at certain markets, where you have retirees and traveling nurses, and they're buying homes near hospitals to cater to those professionals. And so you're seeing, you know, I don't, I don't see these strategies, becoming the dominant model, long term rent will always be the dominant form of occupancy, but they're certainly becoming more frequent. And, again, what that's doing for the investor is it's allowing them to unlock additional economics. What it's doing for certain demographics that need affordable housing is it's increasing the supply, which is great.

Mike Simonsen 28:09

Yeah, I see that with with some of the rent by the room stuff. It's really fascinating. You know, one of the, the solutions to a housing crisis is density. And by by renting by the room, like that created density, I hadn't thought about things like the the the homestay the hospital as it's like a an investment. Rental strategy. That's really fascinating. Really cool. So So you're seeing that in the data, that's really neat. So you're seeing a shift in the business models of the of what the investors are proposing?

Charles McKinney 28:44

Yeah, we are. Now let me let me also just broaden my answer. And to just talk more, more generally about some things that we expect to see play out. We do believe there are a number of real estate investors who are holding properties right now. That they purchase in 2020 2021 or early 2022. expecting to flip them. You know, high home price appreciation supported by low interest rates, we're also seeing an equivalent situation with home builders, all the way from your national large home builders down to local spec builders like like, for example. We think right now over the next handful of months, there will be at least several 100 homes in the Tucson market, that would that are new construction that would want to sell at, you know, peak prices, but they won't be able to. And so what does that mean? You're going to have these investors who are currently under stress. So they have properties that they counted on selling for profit, they will either sell at a loss or they'll convert to rentals, but some of these folks are like, like luxury home flippers is a great example. We don't finance that, that segment. And the reason being a lot of these home flippers, you know, okay, well I buy a property, you know, it's very expensive, really my only outlet is to sell it. Or maybe Airbnb is in a great economy because it's on the beach in Santa Monica or whatever. But those, you know, those long term rental strategies may not work out as well as people would expect. Because like, occupancy rates are going to be lower, you know, you're renting it fewer nights, because fewer people are traveling, they want to get on planes or whatever. So we think there's a lot of we're stealing the data, there's a lot of real estate investors who are going to have to sell for a loss or, you know, they're going to consume liquidity, they have to kick the can down the road. And some of them eventually will either sell or become forced sellers in the future, either on their own or through defaults. So that'll be an unfortunate circumstance. But again, you're gonna have other investors sitting on the sidelines, to pick up those homes at a discount and do something with them. So like, like new homes in Tucson, and Phoenix, for example, that you know, might sell at like a 15 20% discount big value, I expect you'll have real estate investors coming in and saying, hey, I'll buy this from you, because I can turn it into a rental. And I can make a very attractive cap rate off that investment. 

Mike Simonsen 31:28

Yeah so, let me ask you this. So we have this, we have these sort of two constituents of, of investment, real estate investors that own these properties, some of them are gonna get squeezed on the economy, their business model of the house no longer makes sense, they're gonna have to either sell or maybe read, but the rent might not like it. So that, you know, in a in the big downturn, that becomes added inventory, that becomes investors, who are who are, you know, like, exacerbating a downturn, right. Like, that was certainly part of 2008. And especially the hardest hits the Vegas, you know, like, the my friend, that high school teacher that had five homes in Vegas and walked away from five mortgages at the same time. Right. And, and but kept the BMW and, you know, like I said, so. So that's, that's, there's a factor there coming in what I what I tried to get I don't like I tried to get the sense of is, there's also the factor. There's a bunch of people on the sidelines with a ton of cash, who had been waiting for 17 years for the next real estate crash, to deploy that cash. And and what's your sense of the balance? There?

Charles McKinney 32:48

It's hard to say quantitatively what what the balance is what I what I will say is the the distressed inventory that I described, and you spoke to, I think it'll be a fraction of what we saw in 2009. Part of it is we just haven't had the frenzy of people, you know, new investors buying, you know, their first second or third property, like you saw with the subprime crisis, and, you know, subprime lending. So I would, I would say, if it's, if it gets to be more than, like, you know, the distressed inventory, if it gets to be more than, like, let's call it like, you know, 10% or 15% of homes available for sale, maybe 20%. I'd be surprised. I think it's gonna be well, sub 10%. Just from, you know, the initial data, we're on the other side over here. There's a lot of capital, wanting to come into the market. So you have large single family rental owners, that, you know, the public folks like invitation homes, you know, the Amherst of the world who right now or, you know, sitting out the market relative to acquisition models they were doing earlier this year in 2021. They can certainly come back in at the right price point. And I'm absolutely what they're sitting on dry capital. And we also have this phenomenon of real estate investors who own rental portfolios, a lot of them did cash out refinances and 2020 2021 to take advantage of lower rates, with billions of dollars of cash out refinances were done. And you know, that money is is presumably investable. So, you have again, it's hard to quantify I haven't attempted to do that. But what I will say we just did a big survey of real estate investors we launched about two weeks ago and real estate investors generally think it's gonna be a much better time to buy an investment property and a year. And we think the sentiment is there and we think the capitals there for you know, for Ralston investors to come in and consume distressed properties that will hit the market.

Mike Simonsen 34:55

So that's interesting finding. So in your survey, you did a national survey recently. So, in that survey, the investors are actually optimistic for opportunities that are coming their way. Yes, yes. Fascinating because presumably because this so many of that class are cash heavy cash heavy post pandemic?

Charles McKinney 35:17

Yeah, that's correct. Let me put this in context. Maybe I could just take 30 seconds and describe the survey just to give. Yes, let's talk about the survey. Sure. So if you want to read it, it's on our blog@Vontive.com. So we will do this quarterly, we ran a survey of more than 1000 Real spin investors and a national, nationally representative sample of consumers. We wanted to ask the same questions of real estate, investors and consumers to be able to compare their opinions about the economy, inflation jobs, new housing market. Yes, we yeah, we actually aren't aware of another survey like this that's publicly available. So the general findings are that a recession is imminent. Interestingly, a majority of consumers that we surveyed believe that we are already in a recession. Both groups believe that unemployment will be around 5.6 to 5.7% in a year, which would indicate recession level. And actually, when you when you look at the distribution of the responses, like more than 10% of consumers think the unemployment rate is going to hit 10%, which would be like, that was great financial crisis level unemployment. Real Estate Investors are not as pessimistic about unemployment. Real estate investors think home prices will fall about 7% Over the next year, our own house via the vonhaus views. It'll be a little more severe than that afternoon, like I said, we think 10% There's distrust scenario, we used to go into 15. Consumers interestingly, think home prices will rise about a percent. We just from looking at the data think that real estate investors are more reliable gauge of future HPI. Yeah,

Mike Simonsen 37:03

that's right. So so so the investors thought what was the the appreciation of the investors?

Charles McKinney 37:07

So they think the median view is that the prices will contract nationally about 7% 7%.

Mike Simonsen 37:11

Okay, you think a little more than that, and consumers don't have any idea what they're talking about?

Charles McKinney 37:17

Well, they have an idea. We just we're not sure it's as reliable as real estate investors, because they're not looking at

Mike Simonsen 37:25

those same consumer secret half 10% unemployment rate and 8%. home price appreciation. Something's not right, in that in that expectation, probably both. 

Charles McKinney 37:35

Yeah, but but again, real estate investors generally think it'd be much better time to buy a property in a year. And when we cut the data down, we think that reflects an intention to really get back in the market when prices are favorable. And coincidentally, again, both real estate investors and consumers believe that rents will continue to appreciate real estate investors a little closer to zero than consumers. But both groups believe appreciation or next year will be seen for rents.

Mike Simonsen 38:04

So that's a really interesting finding that the that the investors are generally pretty optimistic in terms of ability to deploy their capital that argues to me, that that the that the investors are more likely to be a backstop to a downturn, like the arbitrage goes away very quickly, rather than exacerbate a downturn because they are distressed or afraid or out of cash. That sort of that's, that's what it sounds like to me. Do you agree with that?

Charles McKinney 38:35

I do. I do. First of all, the size of coming distressed inventory, you know, from homeowners or from consumers will not be nearly as large as it was, in a way. That's That's our best current thinking. And exactly, there's a lot of, you know, from, you know, from institutional players down at wealthy individuals, there's a lot of capital to deploy, and I think then it just becomes a pricing story.

Mike Simonsen 39:04

Yeah, for sure. Okay. Are there other things in your survey that that jumped out at you? That's a really neat finding.

Charles McKinney 39:11

Yes. The other the other thing that really struck us which, you know, I think when we look at some of the widely read monthly surveys, like University of Michigan consumer sentiment survey, we asked real estate investors and consumers is, is inflation. What is the trajectory or momentum of inflation? Is it accelerating or decelerating both groups think it's accelerating, and both groups think it will be high, like sevenish percent a year from now. So the, the view of the people we surveyed is that inflation right now is not transitory. It's accelerating, and it is going to be sticky for a while. So that was, I was hopeful that we would capture the view that Oh, inflation will be much better in a year. We didn't see that on our data? And related to that both groups feel like it's hard to get a mortgage. So we asked consumers, you know, how difficult is it to get a mortgage for a property you'll occupy as an owner? We asked real estate investors the same question but just swapped on how we use your hardest to get a mortgage for an investment property. Both groups like it's hard now and it'll it'll get more difficult. So that was that was not a surprising observation, but it does align with their view of inflation. 

Mike Simonsen 40:34

And, it has it aligned with your view this do you expect it to be harder to get a mortgage next year? For either group?

Charles McKinney 40:39

You know, my personal view? It's hard to say. So we we've taken the approach internally, and this is very important to us, when we manage our our capital partner relationships. We've taken the view of not saying there's, there's there's one outcome for like, what interest rates liquidity available with mortgage capital mortgage, that will look like in a year, but we will look at scenarios. Okay, so we believe there's a scenario where the Fed is going to take the funds rate up to somewhere around five, maybe a little higher, and they're going to quickly react, because the economy is we're going to see early next year, the consequences of sudden sequential 75 basis point rate hikes. So that would have you seen a peak, and then, you know, we see the Fed funds rate accelerating, and we see them reversing course, the market obviously, is described that as a Fed pivot, and would like that to happen. That's not our base case, though, our base case is that the Fed funds rate, we won't see 75 basis point hikes after what was announced this week, but we'll see hikes. And you will see the Fed funds rate peak somewhere around five to 6%, depending on what the data show and the you know, in particular, and PCI, I'm sorry, PC PCE. And so we think it'll, it'll, you know, it'll, it'll go up there and hold it there for a while. And that's our base case. So that's like our 50% probability case, we think the Fed pivot is maybe 20 to 30%. And we think there's called a 20% likelihood case, where the Fed has take the funds rate much higher, and you know, that can see it peeking some around seven or eight, now, it may not be a straight shot up, it might be it goes up, it peaks for a while, maybe it goes down a little bit, and then goes up, or it just flattens and goes up some more. Again, a lot of uncertainty, you know, we've had some, some decent data over the last couple of months on, you know, on the CPI, and you know, the core numbers, stripping out inflation and stripping out food energy, you know, flattening and coming down a little bit. But if you look at services, you know, inflation of services that's going up, you know, if the price of oil jumps all of a sudden, or if we have another systemic shock to the world economy, you know, who knows? 

Mike Simonsen 43:11

Yeah, so yeah, there really isn't any, I mean, it's some disinflationary signal, maybe some of those if you're looking at them, you know, with your confirm with my confirmation bias lenses on but in a in a world like that, where inflation continues next year, and rates stay high, or even go higher mortgage rates go higher. Does that like what does that mean for you lending your customers it? Like, does it get harder? Do you have to tighten it down? Do you have? Are you holding these? Are you securitizing these mortgages at the end?

Charles McKinney 43:43

So, we're a conduit. So we're, we're not holding substantial portion of mortgages on our balance sheet or distributing out through partners and a securitization, you know, what we're counseling, you know, what we're counseling our loan partners, and asking them to pass along to their customers is a student rates will be high, and liquidity will be tight, and there will be a transitional period where, you know, we get back to, you know, rates and liquidity that really mimic we think like 1999 to 2001 2002 2003. There's some there's some parallels there. You can also look at, you know, rate trends, liquidity trends, and, you know, economic cycles and like the 1990s. So, we think the market is going to normalize around a higher cost of debt. And while we're counseling is planned for that, but also position yourself where if rates come down, you can take advantage. So for example, if somebody is taking out long term debt on rental properties, typically those loans have a prepayment penalty, it's not that expensive to you know, avoid or step down for like a three year prepayment penalty to a one year prepayment penalty, or to hurt or encouraging people to seriously consider that so there's some tactical that you can do in your in your financing terms to have flexibility.

Mike Simonsen 45:05

Yeah. All right. That's really fascinating. So, so let's let's switch gears into longer term future. What let's talk about your vision of, you know, 5 10 years, what do we think about investment properties in the US to state a lending? Like, where does Where do things go in the next five to 10 years?

Charles McKinney 45:27

Yeah, that's a great, that's a great question. So the big trends that I'm focusing on, first of all, our technology, both simplifying the mortgage, eliminating manual intermediary activities, or reducing the costs of those intermediaries, and also upgrading the scope and precision of underwriting and risk management. And I'll give you an example that we deal with today, you had mentioned securitization. Whenever an investment mortgage lender or an aggregator of those loans, like like a bank, or a hedge fund wants to do a securitization, they will hire a third party firm, like CMC as an example, to perform manual due diligence. And that due diligence involves taking an Excel file typically, of all of the loan data, or somebody can compare it to the loan documents for consistency and accuracy. It involves a human, manually re performing a partial or full scope of the underwriting done by the lender. It may involve getting a drive by or exterior broker's price opinion or desktop review of the value of the property to confirm the appraisal, like, that's typically done on 50 to 100% of loans at a cost of like 350 to 450 or $500 per loan. Imagine you're a homeowner, or a real estate investor will focus on real estate investors. And that's a $400,000 loan, I've just tied up point 1%. That's costs, it ultimately has to go to the borrower. Everything I just described technology can do. Like if you want to if you want the human involvement, great. Do it on a sampling basis, which the GSEs do to us, but they're not sampling 50% of the ones that have other sampling, much, much smaller size. That's one example. So I think tech will simplify the mortgage.

Mike Simonsen 47:47

And do you think that also that will then pass on costs, maybe pass on efficiencies, certainly the efficiencies that you're working on the frictionless environment to the end, the end consumer, the investor,

Charles McKinney 48:00

It will either allow lenders to make more mind capital providers to realize higher yield or borrowers can realize savings. I personally believe a lot of that will flow to the to the borrower. Real estate investors or small businesses that are entrepreneurs are very savvy. They know the right questions to ask and how to negotiate. So I think you'll ultimately see not all but some of those economic go to a to ultimately cheaper costs for real estate investors were very supportive of the second innovation. The you know, I'm really interested in is homeownership and home occupancy. So, one example, we work with some prop talks who are doing fractional ownership of investment properties we work with, you know, we're working with another one who is doing a model where it's rent to own but they're doing it at scale. And going back to what we talked about earlier, younger households, millennials, Gen Z is better off having less money for downpayment, you know, homes being, you know, expensive relative to like, you know what they would have cost 10 20 30 years ago, models to homeownership home occupancy in ways that we haven't seen before the midterm rental play, things like that. I think that's going to be not beneficial, especially on the affordable housing projects. I'm really interested to see how those are those modal models evolve over time. And very excited about the VC interest and those innovations and things like that.

Mike Simonsen 49:38

Yeah, I'm very interested in the housing affordability challenges this country has and and the innovations that we can go to make that in some ways an innovation like Airbnb, is is creating more ad use in the world where we can have more density and more and more livability now and it's Some ways, Airbnb is, is increasing the, the revenue, the rent revenue on houses and therefore there's more of them that are investment properties and fewer of them that are resale. And that's taking away inventory availability. So but but so I'm definitely I'm with you on that I am interested to seeing, can we solve that and you know, that

Charles McKinney 50:24

I was gonna, I was gonna say it definitely cuts both. So fundamentally, real estate investors are entrepreneurial commercial risk takers. And so if an air b&b is their best execution, they'll gravitate in that direction. But given the number of people who both want to own investment, real estate, and have the capital to do so, and really want to diversify away from, you know, the 60/40 rule of 60%, your money to bond stocks, 40% bonds, given bond market volatility, stock market volatility, I think there's just a huge amount of on top demand people who want to participate in investment, real estate, but can't do it, because the infrastructure is not there. So when we think about like, more dense housing, that, you know, those barriers are local zoning regulations, you know, the whole NIMBY phenomenon that we need to solve on the financing side, what we're working on, it's, you know, it's it's really unlocking liquidity by standardizing products. And the other thing, you know, this gets back to the third innovation that I'm really interested in is, Are we finally getting to a place where we're going to, you know, we're going to reduce or eliminate antiquated methods of construction. It amazes me that we still primarily do stick built construction of homes today. It's like we're building homes today at scale the same way we did 100 225 150 years ago. Yeah, like, it's, it's incredible to me, and when you think about the ability to innovate, and the use of recycled materials, reduce carbon footprint, carbon output, produce negative output into the environment, the ability to reduce cost by doing things in the factory, getting economies of learning economies of scale, that's another area that I feel like modular and analyze construction in a factory construction of homes has had its fits and starts, but I think we're at an inflection point there. And, you know, we'll see, you know, obviously, we've had it, we've had a couple of big corporate failures in that space. But But in spite of that, I think that that's a third area where I'm really interesting to see how it plays out. Because again, like it goes to your point about people want to live in cities, people don't want to live 50 miles from where they work, even if they're only going to the office two days a week. And a lot of new construction increasingly will focus on established urban and suburban neighborhoods. And if we can make that more efficient if we can get the permitting process to be more efficient, if we can get zoning regulations to get those projects to happen faster, and especially the soft costs of construction of the loss. That's really how you break down barriers and you get more affordable housing. It might it might be apartments, but I think increasingly, like you said, it's going to be maybe not a 400 square foot adu. Maybe it's a 1200 square foot, like a large adu or second home in the backyard. But it's I think there's a lot of things that you can do by looking at backyards, and, you know, tear downs and rebuilds. I'm really excited about how those things will converge on Linux.

Mike Simonsen 53:40

That's great. I love that I love the view of the technology, the construction technology that it does feel to me, like we're on the cusp. There's some really great, there's some really great 3d printed stuff happening. There's a lot of neat things going on in that space. So that's super, that's super I love thinking about the future that way. Here's a question I have about the future for you in invest with investors. We know that almost all the the investment in this country is by individuals with like one to four units or a handful of units. We've had of course the headlines talk about Wall Street buying homes and and the big money the big Wall Street money has grown market share especially in a lot of you know the the handful of those the same cities that everybody's interested in. They've grown a lot of market share there but you know, overall, maybe four or 5% or 6% of the whole investor pool is Wall Street money. Where does that go in the future? Do the mom and pop investors get squeezed out? Do do do that does Wall Street like does it peek at this space? What what happens? What's your view there? Does it consolidate and like you know and your real estate investment grow into the hands of really only a few players?

Charles McKinney 55:02

So I would expect the large institutional ownership of one to four unit single family homes, their market share to increase. But even if their market share, doubles, small investors still are the vast majority, you know, as owners are the vast majority of the market, yep. And so I don't see small investors getting squeezed out. The other thing, too, is like large, single family REITs work while when they can buy homogenous assets concentrated in certain areas. Like even though they're scattered sites, there's still an efficiency of managing a more homogenous set of assets equivalent to managing apartments. And that's why you've seen the operating efficiency ratios of the SFR REITs. improve over time. But when you think about innovative rental models, when you think about redevelopment of properties, like adding value to properties to get a higher yield, scale is not your front, small as your front, like the unit economics, the success for is going to really be with the small guys, like the DIY landlord versus invitation homes coming in and saying I'm going to do 50 homes here. That's so I think that there are some, I think there are a lot of factors in the favor of small investors, knowing their markets. having relationships with the best general contractors and subcontractors, understanding the consumer dynamic, like, I think it would be very hard even with the best data for a large SFR player to say, Oh, this is where I'm gonna go to a mid Reynolds prodigy I'm gonna do on 30 homes for traveling nurses. Like in a neighborhood, it's gonna be three homes, not 30. And like, you know, you can't tell what data which is the best block, like where do people want to live, you can tell it an area, but there's a certain granularity, where you really need that local knowledge. And I can't see computers and data and software completely replacing local knowledge, what I see it doing is enhancing the insights that real estate investors can get when they make decisions smarter, like enhancing our decision making as a lender. So I think there's a lot of things even as even as the world becomes more digital, I think with real estate, it's a local model. And I think, I think that small real estate investors, the folks that Vaughn have served are going to be in prime or pole position to take advantage. And really, again, what we need to do is we need to unlock liquidity for them. The main advantage that a large, like public REIT will have over small real estate investors cost for dogs are cost of equity. Right.

Mike Simonsen 58:21

And that's interesting. So in a world where in the past 10 years, equities have been so cheap, everybody's had cheap equity in the next 10 years. That may be it may be significantly different for a smaller folks, huh?

Charles McKinney 58:35

Yeah, maybe more expensive for them. Or if we can prove the business case that they're a great product. And we can use technology to disintermediate like all those manual activities that I made mention of we can we can hopefully either not see that differential rise, or we can extend it How's Rosen we can we can, we can bring it back.

Mike Simonsen 59:02

Amazing. I love that. That's a really great optimistic way to end the conversation. I appreciate that. I appreciate those insights very much. We're at we're at our hour. Let me see you mentioned the blog. So on vontive.com You've got you publish the blog, you publish the latest survey if people want to see the results of the survey, they can go there other places that people can find you or you want to direct them to to know more about the company and you are you you're working.

Charles McKinney 59:30

Sure vontive.com describes or if you're a real estate investor and you're interested in obtaining a loan, I'll give you some appointments to a few places. So if you're sourcing real estate rebuilt.com great business, one of our partners. If you're looking for if you're looking for a se or frankly even an optional lender, there's a guy named Ken Corsini who's on HGTVs Flip or Flop Atlanta is one of because one of our lender partners goes search for him and Red Capital Lending were his infrastructure. So to two things there, there's a third group Certain Lending that was actually a company we started, we set up our indirect blunder when we founded the company to build our technology. We thought we'd throw the brand away, but it's, it's actually a great business for us. So we kept that around. So you can go to certainlending.com If you're not, we have about 40 partners. So if you if you want to connect and understand who some of these partners are, and more about our business, you can also find me on LinkedIn, Charles McKinney, and I'm always excited to connect with people in the real estate community.

Mike Simonsen 1:00:33

Amazing, Charles, it's been a really, really great hour appreciate your time and your expertise, the unique vision that you brought, so but let's wrap it up there. And so everybody, this has been the Top of Mind Podcast. And if you need the your real estate data, you know where to get it. AltosResearch.com Go there, have a free consult with our team talking about the data, go find Charles and Vontive and the lenders, especially if you're an investor, it really it's exciting that the technology innovations are really, really terrific to me. I love watching that part of the cycle for us. And it's going to be quite a 2023 in front of us to see what happens. Lots of lots of things to keep watching. So Alright, everybody. Thanks so much. Thanks, Charles.

Charles McKinney 1:01:22

Thanks, Mike for your great service. I appreciate the opportunity to be on your blog. I'm sorry on your podcast.

Outro 1:01:28

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