All Forum Posts by: Brian J Allen

@Nathan Gesner. I tried to tell that to my Brother in Law when he bought 3 properties in Worcester County, MA in cash.  Then didn't take his money out at 3% interest, and 8 years later he still knows all the answers!

We are all aware that the GSE’s Fannie Mae and Freddie Mac buy a large share of mortgages. This is believed to help put liquidity into the home buying process by taking these loans off the books of banks and mtg companies.

Now Freddie has started to purchase 2nd mortgages. There are some guidelines in place that limit the total exposure to 80% LTV which is good. This probably provides an adequate level of protection for Freddie.

It’s a concept that is hard to swallow. Basically, Americans are still using their houses as piggy banks, and this just gives them another way of doing that.

The argument is that it is too expensive to do a cash-out refinance if you have a 3% fixed primary loan, and this will provide options.

What we fail to realize is that equity in one’s home is a hedge against many things like a downturn in the economy, or inflation. Taking that money out and anything that leads to more people using the equity from their homes and reduces the friction to that process is not good in the long run.

@Gino Barbaro. I do not let my clients do that.  I just ask the buyers what they are doing and why they purchase negative cash flow properties and that is their response.  And a lot of this is fueled by the money they saw others make when rates are low, and the thought that inflation will continue and they will never be able to own a house.  I agree, it is hard to pay the taxes in MA, and now our insurance costs are going up as well, so it is very difficult to make things work

@Gino Barbaro it is great to see you weighing in on this discussion.  I went to your event in Orlando a couple years ago and it was eye opening for me.  Worcester MA has been a hot market for the last 4 years or so, a lot because Boston is so expensive and the uptick of Work From Home.  The only "investors" that are buying are a) current investors who are growing their portfolios with "dollar cost averaging" and b) High Earning W2 buyers who want the depreciation and are able to just break even on a 15 yr mtg with 25% down.  The rest of the buyers are owner occupants or first time home buyers.  But with rents rising so fast, buying multifamily is the only way they can even touch a house.  As you said, " a 1920's home generating 6k a month is overpriced at 720k" but a 1920's SF home that is smaller than one of the 3 apartments in the multifamily on a similar size lot for $450k makes that $720k option more realistic.  The 5% down buyers are driving all types of property prices up.  The difference here is we are a secondary market and the overflow buyers from the primary market (Boston) see these prices as a STEAL since they can Work From Home.

You hear these numbers about cash home purchases. This one jumped out to me. In April of 2024, 64% of homes sold in Manhattan were paid for entirely in cash.

We know that cash is king, but that is a big kingdom.

Where does all the money come from?

Yes, there are a lot of people who spend less than they make and have a surplus.

There are others who are inheriting wealth from others

But there is another subset that we often forget: those who have equity in their homes.

Much of the equity has built up due to a runup in home values since 2020, which allows these people to use a HELOC to purchase a home for cash.

When rates were low there was a group of people who were using Hard money to purchase and rehab buildings and then refinancing at the end this was the BRRR strategy.

Hard Money is not an option these days since the cost of refinancing at the end of the project is too expensive.

So when we see people paying cash, it is often pent-up savings and HELOC money that people use, and not as often Hard Money.

@Clayton Silva and @Henry Lazerow @Johnny McKeon

Thank you for chiming in here. I also took advantage of a 3.5% FHA loan in 1999 when I was recently divorced and could only afford the 3 family that I bought. But sadly times are different. I do about 40 multifamily transactions a year and speak to most of the agents in my area(Worcester,MA) who do multifamily as well. What we are seeing is high rents making multifamily homeowners out of people who have no business owning a home. Due to the bias against low down payment loans from sellers and sellers agents these buyers end up getting the worst of the houses. 75% of the multifamily market in Worcester was built between 1890 and 1920 and have major issues. The 5% down loan allows them to go the conventional route and most are skipping home inspections and have agents who are unfamiliar with the issues they can run into with Knob and Tube wiring, lead paint and older windows/roofs. The banks are originating these loans and selling them off and not explaining to people they are buying a ticking time bomb. At least with FHA the appraiser has a little control over the house. I look forward to future comments.

@Sarita Scherpereel I am in total agreement with you on this concept of neighborhoods.  In Worcester MA we have the same thing.  We have 33 public elementary schools which create neighborhood groups, and some are buying for neighborhood, and others are buying to rent to section 8.  You just have to enter into any discussion on a property with what you are trying to accomplish.  One of the biggest issues with 5% down loans is they are so attractive and change the value proposition for the building.  And for many of these buyers, if one of the tenants stops paying, they don't have the reserves to make their payments.  As we know, it happens all the time.

In November 2023, Fannie Mae introduced a new policy allowing owner-occupant loans on 2-4 family homes with just 5% down, a significant change from the previous requirement of a minimum 15% down payment. One might think this would help first-time owner-occupant homebuyers enter the housing market. Unfortunately, it has also served to prop up the housing market just when it was about to slow down.

Before this, the only multifamily low-down payment program available was the FHA loan, which required as little as 3.5% down. One of the key features of the FHA loan was the Self-Sufficiency Test, which helped keep prices in check. This test ensured that 75% of the total monthly rent for the building would cover the mortgage, taxes, and insurance on the property.

For example, consider a three-family property generating $2,000 per floor, totaling $6,000 in rent. The Self-Sufficiency Test would allow 75% of that, or $4,500, to cover monthly expenses. If the property costs $600,000 with a 3.5% down payment at a 7% mortgage rate, along with typical taxes and insurance, the monthly expenses could be around $4,700. In this case, the FHA would not approve the loan, serving as a good check on prices.

However, with the new 5% down Fannie Mae loan, this check and balance is no longer in place. Motivated buyers are now bidding up houses to prices they cannot realistically afford. This has had the dual negative effect of artificially inflating prices and putting buyers in precarious financial positions.

In Worcester, we have seen properties with $6k a month in rent sell for as much as $720k which has directly contributed to a run-up in prices which has priced out most first-time buyers.

While the intention behind the Fannie Mae 5% down program may have been to help first-time homebuyers, it’s essential to consider the broader impact on the housing market and buyer stability. Careful regulation and oversight are needed to ensure that such programs truly benefit those they aim to help without unintended negative consequences.

i am woking on it in Worcester as there are large homes that could be purposed for this.  And Worcester needs housing and leaders look kindly on seniors and any deed restricted housing.  Just looking for investors.