COVID-19: Updates Per County #691

This week’s radio show and video guests are people from all over the real estate industry sharing what is happening in particular cities.  Featured are Kaaren Hall of uDirect IRA, Amanda Han and Matthew MacFarland of Keystone CPA, Iris Veneracion of InvestClub, Derek Harms of NSDREI, Lenksa Bracknell of SDCIA, Lisa Hoegler of LA South REIA, Christina Suter of Pasadena FIBI, Paul Herrera of IVAR, Kathleen Kramer of OCREIA, and David Granzella of NorcalREIA.  See below for full video and resources.   

Episode Highlights

• What are the latest unemployment numbers?
• What are the latest tax law changes, and where can those who don’t file go to get their information?
• What programs are available under a self-directed IRA?
• Could this lead to more propositions under Prop 13?
• What’s happening in the Northern California and LA County markets?
• What does GDP look like, and how much could we see it decline?
• If your Airbnb properties are out of state, which state would you request to file for relief? 

Episode Notes

Aaron Norris: Hey everybody, it’s Aaron Norris with the Norris Group. Thanks for being here today. We’re recording this on Monday, April 13th. The Investor Town Hall. We sort of came up with it about a month ago before everything was locked down, thinking that things in April might be locked down. And this would be an interesting way to get some feedback by all of our friends all over the state as we know a lot of real estate investors have investments in a lot of different counties and this is getting very difficult to track. So we have an incredible lineup of people who are helping us out today. And I just really appreciate them helping us out. You can send in questions as we go along for those of you on the call live, and we’ll try to get to them.

And of course, we’re not attorneys. Amanda and Matt are CPAs, but just know that this is going to be, if you’re listening to this later, things could change. We’re recording this on Monday, April 13th, and tomorrow could be a totally different story. And please make sure you’re paying attention to local information. We’ll go through some updates really fast. Of course, as of April 3rd, we found another 6 million people applied for unemployment benefits. Last Tuesday, on April 6, we had the California Judicial Council come out, and on top of Newsome’s eviction and foreclosure moratorium, made it a lot more onerous. So until the state, from how I understand it, until there the state of emergency is lifted by the state of California, that date is when a 90 day hold would begin on both foreclosures and evictions. So we really don’t know the date. So when you’ve got cities like Los Angeles doing a shelter in place until mid-May, you know, you might not be able to look at starting an eviction cycle till much later this year. The Apartment Owners Association did do a presentation last week on April 7th about this and evictions in particular. I have a link on the slide. If you’re watching this on YouTube later, it’s bit.ly/evictionstop. And this is going to throw you into the video exactly where they’re talking about this issue and what you can and cannot do. It’s not that much fun to listen to. It’s a little depressing, actually, but it’s there for your enjoyment. And we really appreciate way putting that out and making it available for everyone.

The Pandemic Unemployment Assistance Program. We’ve got money finally starting to hit the streets. This is part of the CARES Act. Up to thirty six weeks starting, let’s see, February 2nd. It’s an additional six hundred dollars per week for those on unemployment.

So edd.ca.gov is you’re going to find out more information if you’ve got tenants that are on unemployment. I think a lot of landlords might be a little bit surprised how proactive they have to be, not only when it comes to the SBA information. You might have to help your tenants understand what’s going on. For instance, if you rented to them as of the last year and they haven’t filed taxes, if the government doesn’t know where to send money, you probably need them to fill out a form so they can get that unemployment assistance and the free check that’s coming their way.

The EIDLE loan. April 10th is when 1099 contractors can start applying for those. When it first came out, we as real estate investors could apply on their behalf and sort of roll them in to the assistance we were looking for. That quickly changed. So last Friday, April 10th, is the date that they can apply. You might want to let them know that.

Property taxes, it doesn’t look like California – while different counties are going to allow people not to pay their taxes, they may help you a little bit by not charging late fees. But up on the screen is just sort of a funny quote. Newsom came out praising them that they were going to work with people. But I just sort of thought it was funny that, what did they say, Any delay in payments beyond April 10th property tax deadline, we’ll tip local governments into insolvency at a time when our residents need us most. So I just found it it amusing that they’re not willing to play ball, but we as a landlord have to. Thought that was ironic.

Vacation rentals, please do your homework. Make sure it’s very local. Other cities chiming in on what Riverside County did as far as banning any vacation rentals and short term rentals that were not COVID-related in some sort. Newport, Santa Cruz and La Quinta, even though it’s in Riverside County, they did their own overlay. Airbnb came out with a $250 million host relief fund. So if you’re in the vacation rental space, just make sure you pay attention because the fine in Riverside County is not small. I believe it’s up to a thousand dollars a day. So don’t do that.

Let’s see. We covered moratorium and evictions. So this is the agenda tonight. We’ve got a very aggressive program. This is very Tedex style. 15 minutes we’re gonna be jumping around the state to all of our friends and experts. So hopefully you enjoy today. Dad. Before we jump into the show, is there anything you wanted to share?

Bruce Norris: I was just going to mention that there was a chart that you had in the beginning, it was the unemployment numbers. I’ll just verbally say them. For the last three weeks, we’ve had three million three hundred thousand. This is for, sorry, the US, not the state of California. Three million three thousand US Weekly unemployment claim, then it went to six point eight million, then 6.6 million combined for about 16 million in three weeks.  The prior three weeks, it was less than eight hundred thousand. It’s a multiple of twenty times.  So that’s an all-time record. I have a chart that goes all the way back to 1960, and I think the record for any one of the worst weeks was about eight hundred thousand. So this is unprecedented. And so it’s gonna be very interesting to see how this plays out. One of the things I did get to ask just a few of the people that we know that have different rental types. So I talked to a gentleman that has predominantly industrial. And so they’re small businesses. He’s down rents 30 percent in the first month that he would be able to collect something that was, you know, kind of after this kind of hit. So he’s down 30 percent. Our own track record has been really great for our own personal rentals at one hundred percent payment. And then the loan payments. We have tons of automatic payments that were 100 percent cleared. So that was great. So. But I’m sure we’ll get more and more feedback. I talked to Christopher German about the apartments, and so far it’s been pretty stable. He doesn’t think it’s early enough to really know. So he says next month and the month after, will really kind of tell the story.

Aaron Norris: I was able to get my haircut this weekend and he didn’t know I was in real estate. He was talking about his landlord really stuck it to him. She contacted him early this month and said, you know what? Why don’t you just send in half? And three weeks into it, she’s like, you know what? I changed my mind. I need the rest. And he was selling all of his toys in his garage to make sure that he could pay rent. And he’s like, so she’s gonna get an eighteen hundred dollar bill of all the rat issues that I’ve gone ahead and taken care of. So his rent’s fifteen hundred.

Instead of her, you know, sticking to her original agreement of 750, she’s about to get an eighteen hundred dollar problem. And then I also got a real estate investor who was asking me questions because she was giving tenants gift cards and how to do that without causing problems like her landlord, her property management company didn’t want her to forgive anything on their side. I’m like, yeah, just get gift cards. Send them a note. I’m like, they would probably really, really appreciate that. And that way it’s not in their books and what not. Don’t make your property management job any more difficult than it already is right now. So I’ve heard both sides, but now is the time if you’re a property manager. I don’t think you want to create an us versus them if possible. It’s just not the time.

I just sent an email to a friend of mine. I said, you know, you spend all your life protecting your family by being financially secure. And in the last month, a lot of that feels unsecure. Oddly enough. I mean, you go around when you got a mask on and the freeways are empty and you think, OK, what am I gonna do tonight? You just start thinking “I’ll go to….No.

You know, you just have no list other than I’ll just sit at home and play cribbage with my buddy, and it’s fine. But things have changed, and we all can remember maybe a month or two in our life that if we lost a job 30 days later, maybe we would be homeless and we didn’t have the wherewithal to even survive a month. So I think it’s a good thing to keep in mind that there are some people that we deal with that are there. And if they legitimately have lost their income through no fault of their own, because we have people in our family whose both incomes gone because they can’t work. The place is closed.

So and you really have to realize, you know, May’s going to be more difficult for in some ways a lot of different ways, but people have been locked into their house for a month going on two. You’re not going to always be dealing with rational people either. So just be patient.   With that, what we’re gonna do, we’ve got Amanda Han and Matt McFarland with Keystone CPA. If you missed the two-hour special we did a few weeks ago, Matt, I’m handing it over to you. The presentation.

If you missed the session, we did two hours where we went through all the different financial programs that are available to us real estate investors and also your tenants. You’re gonna find that on thenorrisgroup.com/resources. That is sort of our landing page for all things national, state and local having to do with real estate in general from both the real estate investor side and the tenant side.

Well thank you guys for coming back. I think you’re gonna do a quick intro of some of the programs that are out there and then maybe updates that we’ve run into since we did that two-hour session.

Matthew MacFarland: Yeah. Sounds good. Thank you for having us. Appreciate everyone logging in and it’s gonna be a lot of information tonight from everybody. So hopefully people learn a lot of good stuff.

Amanda Han: Yeah, so like Aaron said we did a two hour podcast of a week or two ago. So you know what, we’ll do an abbreviated version tonight of the things we went through before and then mainly highlight some of the updates since the last podcast we did. So let’s get right into it. I mean, like like Bruce and Aaron said….expecting in their bank accounts as we often see married and head of household, along with the adjusted gross income phaseout ranges. Some good news is that the IRS indicated that the first wave of direct deposits has already been dispersed. So I guess if you think you’re eligible and you’re expecting a direct deposit, now’s the time to check your bank account because it’s possible that that’s already been deposited into the account.

Matthew MacFarland: Yeah. And some other information came out just recently, too. So one of the questions that came up was, well, what about people who don’t have to file tax returns, right? How are they going to get their information? Well, the IRS now has on their landing page on their Web site where people who are non-filers can go in and enter their information. So name, Social Security number, bank account information, things like that, where they can verify who you are essentially and then give them a means to where to send the money for you.

Amanda Han:  Yeah. And the other thing you’ll see on the screen is that IRS is in the process of setting up banking information. So for people who used to get refunds by check, you will be able to go on the IRS website in maybe mid April to put in the information, your banking information, so you can get the money faster. Now, a common question we’re getting a lot still is, you know, what income is it going to be based on? So currently it’s going to be based on your most recently filed tax return, whether 2018 or 2019, if you haven’t filed your 2019 return yet. But, if you expect to be in a lower income than 18. Could make sense to get those filed. Now, the main point, though, to think about is ultimately the credit will be based on 2020 income. So I know for a lot of real estate investors, people are still gathering up their information, still working on strategies, on should I maximize my write-offs or accelerate my depreciation. If you’re able to use those strategies for 2020, you still will likely get that in the form of a tax credit on the 2020 return, even though your 18 and 19 income was higher and above the phase-out.

Matthew MacFarland: The other nice thing about this is this little section here on our web page about where you can put in your information to get your payment. This is nice for the people filing returns because as of a couple of weeks ago, we were going to order questions like, well, I’ve moved since the last time I filed a return or I didn’t have direct deposit on my return last time. What do I do? And at that point, the only answer is we’ll file a change of address form and, you know, hope the check gets to you. But now it looks you can go in and say, If you want the stimulus check, direct deposit, you can go into this Web site, put in your information, and it will process it that way instead of mailing it to you or mail it to the wrong address or what have you.

Amanda Han: Yeah. Again, for those who have high income, you know, 2020 is still a great time to plan ahead, because if you can lower your income this year, whether you know, naturally, because we have less income coming in or strategically in terms of, you know, cause aggregation and maximized write-offs, you still could get the benefit of the credit. All right. Let’s go real quick into new extended tax deadlines.

Matthew MacFarland: Yeah. And as Aaron was saying, the beginning of this, obviously this is all accurate information as of today because this is probably the third or fourth round of changes we’ve seen from the IRS in the last few weeks about different deadlines. So the current version is that all tax returns, all federal tax returns and payments that were originally due between April 1st and July 15th are extended until July 15th now. So that includes 1040s, that includes trusts, that includes 990s. You’re filing charitable trust tax returns, things of that nature. And also, they’ve clarified that first and second quarter estimated tax payments are now due July 15th instead of April and June 15th.

And then also for, you know, everyone who lives in California, California has kind of jumped on board with the IRS. So basically, in kind of in a nutshell, for California, anything that was due April 15th is now extended to July 15th, and that includes payments for 2019 year. That includes prepayments for the 2020 years or your eight hundred dollar minimum taxes, your LLC gross receipts fees. Anything that was due in that window is now pushed back to July 15th.

Bruce Norris: Quick question.  Usually in the state of California, you’re paying the second and third quarters on the second quarter. Is that correct? So now are you paying all three?

Matthew MacFarland: Yes, there’s a quarter that the California doesn’t typically impose. I can’t remember if it’s second or third, but anything that was due April, June is now pushed back to July. So, yeah, people are going to basically have a laundry list of things to pay come July if they’re paying taxes for federal, state and or paying estimated taxes for 2020 or for that matter.

Amanda Han: So similarly, I.R.A. and HSA Health Savings Account contributions are also extended automatically until June 15. So the main thing here is you don’t have to be impacted by coronavirus virus. This is just across the board for everyone. States, different states, I know we have different investors, landlords that have properties out-of-state or flipping out of state. States still have their own separate deadlines. So make sure you double-check on the AICPA website. There is a link that they’ve summarized state by state. So I just looked at it this morning. It looks like the vast majority of the states are on board with this July 15th deadline. But regardless, you know, just double check in case anything were to change.

Matthew MacFarland: OK. Another big question that’s come up in the last few weeks is in regards to, you know, deadlines and extensions and stuff as to whether or not 1031 exchanges were gonna be affected. And as of a couple of days ago, the IRS, when it came to this recent revenue procedure to further clarify the extensions and things, it now does look like the 1031 exchanges are covered by that. So this is notice 2020-23. It doesn’t specifically mention 1031 exchanges, but the consensus in the industry and us talking to a few different 1031 exchange commentators that we respect and have worked with a lot is that the notice does cover it because the notice talks about any person performing a time-sensitive action. And so a time-sensitive action would imply that if you have your 45 day window that fell between April 1st and July 14th or July 15th, that 45 day window has now been extended to July 15th. Or conversely, if you had your 180 day purchase deadline for a 1031 exchange that was going to fall in that window of time, that has now been pushed back to July 15th. Now, one of the things that has not been clarified quite yet that I read about was, I guess, just a quick example would be what if your 45-day deadline was April 15th? Okay, well, that’s going to be pushed back to July 15th now. Well, forty five days is part of the 180 days, but what are they doing with the 180 day deadline now? Because that original deadline was going to fall outside of the July 15th window. As of right now., the word on the street is that that is not being extended on the back end.

Does your 45-day window or your 180-day window fall right now between April 1st and July 15th? If so, it’s been pushed back to July 15th, but that’s all we know at this point in time. So hopefully that kind of makes sense. I think the same theory would go for opportunity zones. If you are getting up to the 180 day window for replacing your investment in capital gains income, I think that can still qualify as well.

Amanda Han: All right. And we’re also going to touch on more tax changes that are more relevant to real estate investors. There are quite a few tax changes. But for today’s purpose, we’re just speaking on the ones that are more relevant from the real estate investment perspective. So one of the big changes that came out was with respect to the treatment for net operating losses. Essentially, the government has made changes to allow people to use losses to essentially get money back into their pocket. So under the Tax Cuts and Jobs Act, net operating losses were no longer allowed to be carried back to claim a refund. OK. So before we could only carry it forward. Now under the CARES act, they basically got rid of that limitation for years starting with 2018 through 2020. So this means that if you had losses in 2018, 19 or 20, you can instead carry those losses back to the previous five years and then claim an immediate refund. So I guess an example might be a real estate investor or apartment owner who invested some properties in 2019. Maybe they had a big tax loss as a result of depreciation or cost aggregation instead of just carrying that loss to offset future income. You can now do a carryback and then claim a refund for the taxes that were paid up to the previous five years. A way to get money in your pocket now rather than waiting to offset future taxes.

Matthew MacFarland: As of a couple of years ago, we could still carry losses back. You still want to do the same analysis with your CPA to figure out cost benefit. Does it make sense to carry the loss backwards? You know how much are you gonna get back as a refund versus what do you think your income is going to be in the subsequent years and what tax bracket you’re going to be in the subsequent years to figure out where you will get your best bang for your buck.

The other thing that I read about this was – so let’s go back to your 2018 return. You’ve already filed your 2018 return. You were carrying your loss forward, but now you want to carry it back because you’re going to get a better refund.

Typically, there’s two different ways you can do that. The quickest way to do that is by filing a Form 1045. Generally, the 1045 has to be filed within 12 months of the end of the year. That’s generally the law. So we’re talking about the 2018 calendar year. You would have to file the Form 1045 by December 31st, 2019 to get the quick refund. And usually the IRS has to process these quick refund within forty five to 60 days, something like that. A lot better than filing an amended return where they can take three to four months. The key takeaway here from the recent notice is that if you still want to use the Form 1045, they’ve extended the deadline from December 31st, 2019 to June 30th, 2020. If you’re using that to change where you want to deal with your 2018 loss, obviously 2019, you still have an opportunity to do that if you’ve filed or even not filed at that point.

Amanda Han: Yeah. And another change on the net operating losses under the Tax Cuts and Jobs Act, they limited the usage to only offset 80 percent of income. Now that’s gone as well for 2018 to 2020 as well as carrybacks. You can offset up to 100 percent of taxable income.

All right. Another big change that impacts real estate investors, this one mainly is for investors who are in the non-residential rental space. And essentially, it made a correction in indicating that qualified improvement property that’s done to a property is now considered a 15 year asset. And the key benefit of that is it means that now those improvements are eligible for bonus depreciation. So an example might be an investor who owns a medical building or office building who made improvements to that property in 2018, 19, 20 or even beyond. You know, if you’ve already filed tax returns in the past for those improvements, you can potentially go back and do amended returns to now claim bonus depreciation. And for those types of properties, we generally see a fairly significant dollar amount when it comes to improvements. So probably a good opportunity for a lot of investors.

Matthew MacFarland: The reason why this is a big change is because before they updated this, the treatment of this was that you were writing these off over thirty-nine years, evenly over thirty-nine years. But now what you were classifying as 13-year assets, you’re classifying as 15-year, but then you’re getting 100 percent first-year depreciation. So instead of writing off over thirty-nine years, we’re taking it in the first year. So obviously you can see where that can have a huge impact on people’s tax returns; and in this video, obviously this can be coupled with a net operating loss we just talked about. So take a bonus depreciation, create a big loss, go back into amended returns and then claim a refund for prior taxes. So you can see that the intent of the government’s trying to, you know, get money back to the taxpayers sooner rather than later.

Another recent change has to do with what they were calling the excess business loss limitation. So under the Tax Cut and Jobs Act, they were essentially limiting somebody to claiming the most net loss you can claim from business activities that you were actively involved in.

You know, rental activites or a real estate professional, things like that, was a combined five hundred thousand dollars per year for a married couple, two fifty for an individual. They’ve essentially done away with that cap on those so that now if you are a real estate professional, you’ve got a substantial portfolio of rental properties, you do cost segregation and you generate a million dollar net loss on your rental properties because of all the depreciation, you can deduct that million dollars in the current year, and then that can help coincide hopefully with generating net operating loss you can carry back or forward. Things like that.

Amanda Han: All right, so let’s next let’s talk about the paycheck protection program.

So this is, you know, part of the loan programs that came out under the SBA. And this is something, I mean, from a real estate perspective, definitely something to consider. For those with active real estate income – so active, generally, we’re talking about flippers, wholesalers, syndicators, property managers, essentially any kind of real estate income where you are paying payroll or self-employment taxes on. Because one of the requirements is you must have payroll or self-employment income. That’s what the loan calculation is based on.

Matthew MacFarland: Yeah, and this works for people with employees typically, obviously, we apply for this as well as our business. Keep in mind that the proceeds you get from the loan mostly need to be used for payroll expenses. They are giving a cut off at 75 percent of the money to be used for payroll expenses. But you can also use it for mortgage interest, utilities, rent, certain other operational expenses. So you definately want to keep track, work with your team of advisers on this because this can be beneficial and hopefully this will work out to everyone’s benefit.

Amanda Han: Yeah. I mean, essentially, this is the government giving you a loan so that you can pay your employees. Now, you know, unlike many limitations in the tax world, benefits are limited when it comes to the owners of the businesses. So if you even if you are the sole employee in your business, you can potentially benefit from this forgivable loan. So question we’re getting all the time: where to start applying for a bank? I’m sure, you know, everyone’s going to talk about that. The other speakers will talk about that a little bit later, too. But generally, we’re talking to clients about starting with your own bank if your own bank is already setup for that because banks are giving priority to their own clients and often sometimes even priority to their own existing loan clients or lending clients. Something new that I read today was that the IRS just came out with a new form to allow the fintech businesses to be approved to be a lender. So Fintech meaning PayPal or Square. Those kinds of companies can now apply to be lenders to help with the shortage. So we’ll see if anyone gets the paychecks soon.

Matthew MacFarland: If you determined that your bank is not set up to do this for you, go to the SBA Web site and you can do a map search. Put in your zip code and it’ll provide you a list of approved SBA lenders in your area. And you can pick from there as to which one you want to go through.

All right. And then the other one that’s part of the same loan recovery. This is the economic injury disaster loan, also commonly referred to as the EIDL Loan. So this is available for those with active real estate as well as landlords, similar to the one we talked about to help to provide temporary loss of revenue. We forgot to mention on the previous loan, the interest rate was 1 percent, 2 years. On the EIDLE loan, it’s three point seventy-five percent interest, 30-year term. Up to ten thousand of this may be free grant money. It doesn’t mean that’s the cap. You can have a cap on a loan of higher than this, but only up to ten thousand could be forgiven. And one of the requirements in order for it to be forgiven is that it needs to be used for business operational expenses similar to what we saw in the previous slides or payroll interest. Things like that.

All right, so what does it all mean? As you can see, there are a lot of new and different opportunities for real estate investors that were not available before. So, you know, the details of these are ever evolving, which we’ve experienced, you know, so oftentimes things are being updated, you know, throughout the day even. So just make sure you keep in touch with your team, your CPA, your attorneys, your lenders, and make sure you maximize the benefit that you can have from these latest tax changes. All right. Did you take questions now or later?

Aaron Norris: Let’s move to Kaaren. Let’s loop her in and see if there’s any updates as we just did an interview with her last weekend. So we might be able to take questions after we do a little bit of chatting, because one of the questions I’m getting most and it may have changed, you and Amanda and I have been going back and forth, if you’ve got a self-directed I.R.A., are any of these programs available in it? And I sort of get the sense it’s a maybe and we’re not sure. Am I correct?

Kaaren Hall: You’re exactly right. You know, in fact, I’ve been asking, you know, the non-recourse lenders. Now, this PPP loan is a non-recourse loan. Right. And an I.R.A. can take on a non-recourse loan. But you go and you look at the PPP application, and it doesn’t say that an I.R.A. is an eligible applicant. It says something like another plan or something like that, but not specifically a 401K. So we’re just trying to get to the bottom of it. Right. In fact, I just ran it up the flagpole, had some attorneys look at it, and I’ll get an answer when we have it. But the PPP is a business loan. It is non-recourse. One attorney said he thinks that should qualify. But I don’t have a definite, definite green light yet.

Aaron Norris: We might as well cover this now because I end up blowing everybody’s hopes and dreams whenever they call for a non-recourse hard money loan with me. They’re like, what do you mean? It’s tax free? I’m like, No. You have a CPA that knows what they’re doing and knows what you’re about to do and that, you know, you’re going to be paying taxes pretty quickly on this. What’s the tax rate for any proceeds of profits triggered by a loan inside an IRA?

Kaaren Hall: It’s the same rate as the trust rate. And if Matt and Amanda were on, they can clarify. But I think it can go up to about 48, 49 percent or 38, 39. It’s high. Maybe thirty-nine percent.

Matthew MacFarland: That’s a good answer. It’s high. 

Aaron Norris: Most people stop right there. They’re like I didn’t know that. I’m like, yeah, you just have to know what you’re looking at and run the numbers to see if it makes sense. But what’s interesting about this is some of it’s forgiven. So if you are able to get this and ten thousand dollars is possibly just forgiven, is that free money that ends up in my IRA?

Kaaren Hall: TBD man. We don’t even know yet.

Aaron Norris: It’s very interesting. So we’ll stay on top of that as well. And Matt and Amanda, you guys are asking the same question then. Are you getting a sense that this is possible?

Amanda Han: I think I agree with what Kaaren said earlier. You know, we haven’t been seeing anything that says the IRA is not eligible. Right. So, I mean, all of these tax changes came out in a hurry. So I know that, you know, at some point they’ll clarify it. I guess it doesn’t hurt, you know, from a proactive perspective, it doesn’t hurt to try to apply for a loan. If it comes out, you’re denied or it’s not available or even if you just don’t like it, you don’t have to take the loan. You’re not forced to do it. But yeah, I had a client ask me the same thing. You know, if I get a loan, I’m going to have to pay the UDFI taxes on it, but it’s potentially $10,000 of free money. So as long as the tax rate is not 100 percent, I think you still might come out ahead. But yeah, hopefully we’ll get some clarity on that in the next weeks or days.

Aaron Norris: Regardless of where it ends up, I do like the idea. It was a suggestion by John Heyer who talked about opening up a separate account and just being very diligent of what you’re writing bills against on the money that was provided by this program. Just staying organized. If you get audited, you have all the backup proof. And it’s an easy way to segment the money to make sure, especially with the PPP loan where seventy-five percent has to go to payroll. It would just be really easy to just go, Yep, here’s a ledger for this account.

Bruce Norris: Just to be clear on the PPP program, that’s capable of being forgiven entirely. That’s not $10000, it’s the entirety of it being forgiven. Is that correct?

Matthew MacFarland: Yeah, that’s how it’s written for sure.

Amanda Han: So you have to use it for eligible expenses in a given time period. And if you meet the requirements, then it could all be forgiven. Yes. I liked what you were saying about that, keeping different accounts. And I think the government’s kind of set that up for us in that when you apply for the loan, you know, both the EIDL and the PPP, they do ask for banking information. Right. So it should automatically be direct deposited into your business or entity bank account so that money from there will be spent for business or real estate stuff. But yeah, you do have to be careful if you’re applying as a sole proprietor. And if you don’t have a different bank account, then definitely consider having a separate account just to take that money out.

Aaron Norris: Kaaren are there any other updates that we should cover that we didn’t talk about last Friday?

Kaaren Hall: I think we could just kind of go over it briefly if we have a couple minutes, because I think we might, if you don’t mind. I mean, Matt and Amanda already covered how the 990T was extended until July. So check that box.

You know, the RMD thing, I think every year if you’re 70 and a half, you have to take an RMD. And also, if you have an inherited I.R.A., you have to take an RMD. But that’s also a wave for 2020. You’re not going to have to make it up later on. It’s just waves. So that’s the best that can be. Of course you’re taxed on that RMD. But I think the one thing we got a call on today, somebody was asking about the coronavirus related distribution, the CRD. Before you touch your retirement account, you just want to be careful because it’s difficult money to replace. You’ve got these contribution limit, so you can’t really put it back in if you take a loan from your IRA. And so it’s actually not a loan. It’s a distribution of taxable distribution. Penalties are waived. And you’ve got three years to realize the tax consequence on that. So that’s great. But you’re also stealing from your future self. You know, if you do that, if you need it, you need it, you know, but your retirement account is there for your future self and to help you with your retirement. So that is their coronavirus related distribution. If it’s from a 401K, it’s a loan. If it’s from an I.R.A., it is a taxable distribution, 1099. So if you really need the money and you’re like, I really don’t want to touch my retirement account, some of the things you can do is, you know, check with your employer. Maybe you still have some PTO, sick pay, you know, vacation time, something that you can tap into, or this pandemic unemployment compensation, which is different from regular unemployment insurance. So tap into that or unemployment insurance, either one. Or even if you’ve got a whole life policy, you’ve got some cash value you can borrow from yourself, from your whole life policy where you can take money out of your retirement account.

Aaron Norris: Kaaren, one of the questions that came up is I was wondering if losses at an SDRIA will be considered?

Kaaren Hall: No. No. That’s a great question and a lot of people are surprised by that. If your IRA does lose money, then it’s not a write off. And you just lose it. You actually have to prove that you lost it.

You have to get a valuation on the asset to prove that. Add insult to injury, but that’s because the IRS wants to see that it’s true and real. And so a third party will verify that. And we’ve got some low-cost evaluators that we refer to our account holders. But no, you got to prove it.

Bruce Norris: I got a question. Does any of this apply to health savings accounts?

Kaaren Hall: It does, it all does.

Bruce Norris: OK.

Aaron Norris: Which part were you thinking?

Bruce Norris: Well, taking it and using it. It’s not an interest of three years and not a pre-payment. It’s not a taxable event for three years. Is that accurate?

Kaaren Hall: If you take the money out of an IRA or an HSA or something, then the money is penalty free and you have three years to realize the tax consequences.

You talk to Matt and Amanda or your competent tax adviser and you decide how you want to do that. Somebody asked me today, hey, look, I have really low income this year, so I’d like to just go ahead and pay it all this year since I’ll be in a lower tax bracket. Next year, my tax bracket will go up. I said, well, hey, talk to your tax person. Maybe you can do that. Just pay it off straight up and at a lower rate.

Aaron Norris: This is a good question for you. The question is, how long does it take to get a loan from a 401K?

And the last time I experienced this as an administrator for a defined benefit program, I was sent to an expert. It wasn’t your company, just to be clear. I was sent to the expert who had been at the company for two weeks, and they and the attorney that I was working with that we had hired, I knew more than both of them combined. I don’t know. It might not surprise you. So maybe you can talk about that process of what that looks like.

Kaaren Hall: Sure. Well, if you already have a solo 401K with uDirect, it’s a pretty simple process in your plan binder. You already have a loan document. Yeah, just make a copy of it so you can keep the template and you fill out a loan. You fill out the application and it takes about 24 to 48 hours to process that. Then you need to pay it back to your IRA within five years. We were talking about this the other day. So I looked it up, and there isn’t really a published rate. But what the general rule of thumb is prime plus 2 percent is a fair rate.

Aaron Norris: Let me see, trying to answer some questions that I can.

Let’s see. Matt and Amanda, just so you know, we’ve got four minutes in this segment. Did you want to cover anything else, Kaaren? Or can we jump around?

Kaaren Hall: I think we can jump around because I really wanted to touch on what’s new. Matt and Amanda talked about the new contribution limits and the extension. So that’s great. That’s what’s new in the IRA world.

Aaron Norris: OK. And again, we taped a half an hour session just with self-directed IRAs on the tenth. We’ll link to that when we come out, because this is just sort of meant to be a quick update. If you can prove the loss was due to mismanagement fraud by an operator does that change the loss rules inside a self-directed IRA?

Kaaren Hall: No, a loss is a loss. So I don’t think it changes it. I’ve never seen any, maybe Matt and Amanda can answer. No way that a loss is ever deductible, regardless of the reason.

Aaron Norris: And all those expenses, attorney expenses, have to originate from inside the account.

Kaaren Hall: That’s right. All the expenses are paid for by the IRA. That’s right. It’s bad news. I mean, you have to be super careful going in.

Amanda Han: The reason that is, is because for most pretax money, you take the deduction. You already took the deduction when you funded the account. So if I’m making a fifty thousand contribution, I already deducted it this year. So later on, two years later, if I lose the money, whether it’s due to mismanagement or fraud or just a bad investment decision, generally there the IRS doesn’t allow you to double dip by claiming yet another $50000 loss on the write off. So yeah, unfortunately that’s the case, but kind of makes sense when you think about the fact that it’s already deducted previously.

Insult to injury. I didn’t know you had to get an appraisal. Depending on what asset you’re holding, as an example, a note appraisal is no joke. It’s not like a three hundred seventy five dollar ordeal. You have to get somebody who specializes in note appraisal. It could be very expensive.

Kaaren Hall: It could be. We’ve got evaluator reviewers I’ve been using for about 12 years and they charge around six hundred dollars to do that, to appraise a note. What you’re looking at is what’s the principal value? What’s the unpaid principal balance. Is it performing or nonperforming? And then they take a little, you know, a little bit off for the marketability of the asset and they come up with a value. So, yeah, evaluators that we’ve got will charge under a thousand dollars for that kind of valuation.

Bruce Norris: We do that about every 30 minutes at the Norris Group for free.

Aaron Norris: Yeah, exactly. You know what? I think I might able to answer a few of these questions all in one swoop. The grant status. At what point does the PPP and EIDL Loan – have we gotten any clarification on when the federal government’s gonna be like You’re adorable, you get this money for free. Who makes that decision and how? Is there any clarity on that?

Amanda Han: You mean how the loan will be forgiven?

Aaron Norris: Approved first. But we get it. And so like the EIDLE. Ten thousand dollars can be forgiven. And then on the PPP loan, there’s a chance that the entire amount could possibly be forgiven.

Amanda Han: Yeah, there’s no information yet on how do you substantiate the money that you spend and what kind of application that will be. So I know that’s something the AICPA is working on. They’re trying to get some kind of uniform, you know, list or something from Treasury to say, okay, once you get the money, here’s a list of things that would be needed to show how the money was spent. I imagine it’s going to be, you know, same as what you would normally do in terms of filing tax returns, you know, having receipts and showing what funds, how much was paid for, what activities. But yeah, nothing definitive yet on exactly how you apply for the forgiveness portion.

Aaron Norris: Okay, well we’re gonna move on if that’s okay. And if you guys are hanging out, I’ll save some of the questions that came up because we do have good ones, but we’re gonna try to stay on track if that’s OK. So thank you so much for this.

Bruce Norris: Thank you guys.

Aaron Norris: Mr. Paul Herrera is the government relations and communications head for the Inland Valley Association of Realtors and several others. What we tried to do is sort of jump around in different areas, and we wanted Paul to come on because he’s got a very unique angle. He and I were on the phone a couple weeks ago talking to one of the electeds in the city of Riverside, trying to stop them from making bad decisions. And then Gavin Newsom sort of came up actually solving some of the things that we were asking them not to do. So that was good.

Hi. Thank you for coming on. 

Paul Herrera: I’ve been on a lot of those phone calls over the last few weeks, including one this morning. So they just keep coming around. So my part of the program here is to cover legislation and issues that we’re tracking. So I’ll start here. When it comes to the regular course of legislation, there really isn’t any other day at the federal level where the relief legislation is moving forward. In fact, you get the three pieces of them already passed and a fourth piece that’s in negotiations. We’ll see where that goes. But look, normal course of business has pretty well shut down at this time. California’s legislature is out of session. They initially planned to come back on the 15th of April. That’s not going to happen, obviously. They’ve put the return date now to some farcical tomorrow. And it’s really hard to imagine how they get there because they can’t come back into the building and hold hearings and private capital in the building to the public.

So there isn’t regular legislation. We expect that the legislature is going to have to find a way to come back into session in May because they have to pass the budget, and they may have to revise. That’s coming up. And this is when we’ll start to figure out just how bad the damage is on state budgets. And we’ll start learning what the impact will be on the local level. That’s going to be a huge issue. So let me start with something that we are tracking that are not directly COVID-related. There is still qualified for on the ballot a split rule initiative that would remove property protections from commercial real estate for cities in California. I just can’t imagine a world in which California voters, after seeing California voters reject Prop 13, which was the school tax bond that was on the March ballot. I just don’t see how voters are going to come around to approving a $9 to $13 billion tax increase on small businesses who are now being hampered by coronavirus. They’re not gonna be in a position to pay it. This is one of those blood from a stone situations. You know, once you get down to the vote, the member, assuming they get to the ballot in November, at this point, they have qualified, they can’t go forward. But I don’t see how they’re going to find favorable polling to actually pass them.

I’ve tried a couple other things around the state. One of them was I look at the local results of that Prop 13 failure. What I noticed was it was a bipartisan rejection of that bond, which was very surprising. It’s friendly to new borrowing for everything from infrastructure to schools. Definitely. And the fact that it didn’t pass in a single city of several counties, including cities where you have a 2 to 1 Republican advantage registration. So you see that it’s not a partisan issue. It is the voters in the state getting a lot more skeptical about spending and about taxation. Then you see some tax increases that were voted on at a local level type. Yucaipa had to have some sales tax measure. There were several throughout the region. There were school bonds. There were college school bonds in this area. Most of them failed by two to one margin, somewhere within a few points of two to one margin. These are situations that we just haven’t seen the last couple of years. That has changed even though the makeup of the electorate partisanship has shifted the other way. You would expect them to be friendlier to some of these initiatives, but they have not.

Aaron Norris: Just a recap if you weren’t able to hear some of what he was saying, he was just talking about the election that just happened on a two to one margin, very bipartisan. A lot of the bills, at least in Riverside School bonds and fees and whatnot, everything failed.

So this roll tax for property taxes on a Prop 13 change would be unlikely to pass if they decided to move forward.

Paul Herrera: So I was talking about voters rejecting new spending even before all this happened. And I’m very skeptical that these federal initiatives scheduled for the November ballot don’t really have a chance of going anywhere at this stage. And I felt that way before COVID because of the school bond results statewide. We were working on some legislation that was going to have an impact on our industry, for instance, trying to reform fire insurance and vulnerable communities around California. That’s been an issue we’ve been working with the insurance commissioner over the past several months.

And there is actual legislation that was introduced in February that was heading toward its first hearing in March. That didn’t happen. That along with other reform options that we were starting to get pretty excited about that could open up the pathways to new housing construction. Legislature was finally starting to take seriously a supply approach to housing affordability around the states. We were starting to see some real conversations around this and all that’s been shut down along with the legislature by what’s happened. It’s hard to imagine that any of those really come back onto the discussion table in this legislative year. We’re looking at only 2021 before it comes back, and we’ll see what kind of shape the state budgets and local budgets are in. But nobody wants to make a commitment that in any way impacts state resources or local resources at a time when the ground is still shaking. We can’t even assess the damage of what’s happened out there, much less start to determine where the resources will be for future warming. It’s just a tough position. So it’s not legislation that we’re really tracking. It’s emergency orders.

You know about the governor’s eviction moratorium you mentioned briefly. That’s really the least of our concerns at this point, because the state judicial council then followed up last week with one of the most sweeping orders that we’ve ever seen, and one that I’m quite concerned about, actually. If you didn’t follow it, the state judicial council essentially locks landlords out of the courts so that they would not allow courts to issue any summons or allow the filing of any new eviction procedures for at least 90 days after the emergency order from the state has been lifted. The emergency order is scheduled to go on right now until May assuming this doesn’t get extended. So the judicial council order now moves that to the end of August when the first eviction proceedings could begin. And now you’re looking at a severely backed up judicial system that who knows how long it’s going to take for that to really function. So the timeline for an eviction and the time in which people may have the opportunity to not to pay for anything to recover rents could be easily eight to 10 months, more realistically closer to a year plus, depending on how long it takes to rebuild coming off the backlog. That’s something we really don’t know what the ultimate impact will be on, say, California investors and their ability to hold on that long.

Small landlords will hold a few on reserve, if they’re responsible, for three to five months. They’re very responsible. You know, the higher end of that, nobody holds a year. Nobody has that kind of expectation of just being unable to do business. And this is where you and I have had these conversations with Riveriside about the need for landlords and tenants to work together, communicate with one other, communicate with government and try to find solutions that recognize that we’re all in a very difficult situation together and not have this, you know, us against them mentality. Unfortunately, that’s not being reflected in the law making in an emergency order that’s taking place. So you have the state judicial council action, and that has really overshadowed any kind of local action, including what you and I discussed in Riverside, what’s in Corona. Los Angeles is the only one that has a more aggressive version with a twelve month repayment period that they created. But even then, given the lockout from the court system, even a twelve month repayment may not mean all that much because it assumes that during the time after the emergency order, people are still making the regular rent even to having trouble making up for lost time from the previous time. So it’s hard to see how any of the work orders are in any way more aggressive than what the state’s done to the court system and outside of the regular legislative process.

We are looking at some cities that are considering rent increase moratoriums. I had a conversation on that this morning. There’s a few cities in the Inland Empire who have never before discussed in any serious fashion rent control that are looking at these as an emergency measure. And for the most part, a message for them has been they’re not very impactful. Landlords aren’t raising rents right now. It’s not really an area of focus. So it’s more symbolic than anything else. And what we’ve seen is there’s a few folks out there who have long term ideas of how they want to change the landlord tenant relationship, and this involves opportunity in which to start to enact long term plans. And what we want is to not see this used as an opportunity to change the landscape long term in ways that wouldn’t have happened if it wasn’t for the situation. So I’m watching them very, very closely, and honestly a little bit resentful of opportunism where I’ve seen in a couple of places, and it’s creating challenges that shouldn’t be here right now.

As an organization, we’re giving really maximum flexibility, working with local state governments on how to address the crisis at hand so that we have tools to work through this time being while trying to look at safeguards for longshoremen. That allows us to come back to a somewhat reasonable place. This is still California, and it’s not like it was a friendly environment to be an investor before this. So that’s what I’m really keeping an eye on. And then long term being not that long term, six months from now: budgets, budgets, budgets, starting with a May revise in Sacramento next month, then as cities and counties start to see what’s happening, we’ve never seen an issue hit the economy in real time like this one, at least not recently. Not in my life. Usually with local governments and county governments and state governments, there is just a little bit of a delayed reaction before they start to get hit in their budget. And so they’re safe for the fiscal year, then that starts to impact the following year a little bit. Then year two, three, after that slow down, they start seeing the real impacts and the heavy duty lifting. And even after the country’s recovering, they’re dealing with tax collections based on the really bad news. In this case, it’s happening in real time. Sales aren’t happening. How restaurants are operating. Not seeing tax collected by hotels and being admitted back to counties and cities. The only thing that is holding shape at all is property taxes because those are built off of assessments that were completed back in August of last year. Even then, there’s going to be an issue with collections and there’s been some discussion about creating some form of property tax holiday as people, again in real-time, deal with the fact that they don’t have any money to use to pay for these.

The federal government can print money at will, and so they can pass a two trillion dollars spending measure like they just did without having any ability to back it up with the tax collections and pay for it. The state and local can’t do that. You have to balance on a yearly basis. So the state had a $21 billion budget surplus when this started. Hard to imagine any of that survives this situation. At the county levels, some counties like Riverside County were already facing draconian cuts the next couple of years because of pension obligations made 20 years ago. Coming to you now and in a good economy, they’re going to have trouble making ends meet. Now we have this.

Aaron Norris: I’ll point out really quick too that you’ve got the double whammy of the stock market going down, which affects pension funds. However, I know that cities are applying for the PPP program. Is there any talk about that as part of the payroll, the pension funds getting rolled up in that? Because that’s one of the expenses that can be allowed for – that they leverage that to sort of plug these gaps. Because if the stock market stays down and it crashes, they’re a huge world of hurt.

Paul Herrera: The fourth round of relief at the federal level is likely to aid in relief for local governments and some state governments. The question is just how much of a burden can the federal deficit take? And right now, it seems to be unlimited. But there are limits to to to some of this borrowing, and it certainly limits the political will to keep writing trillion dollar promises into the future. And state governments are going to be so impacted, local governments so impacted that it’s just hard to imagine they can fill in all the gap. You’re going to be able to get through this fiscal year, but beyond that, we’re going to be looking at cutting, you know, cutting some serious tissue and bone at the local level. And I don’t know, unless we see a quick bounce back, some kind of V-shaped recovery that allows us to get to a place where things sort of level up, I just don’t see how we avoid serious pain, and in a very short timeframe that we normally don’t see with government spending, local and state level.

So yeah, they can do things to try to, you know, to level off some of the worst of it in the short term, but this next fiscal year is going to be extraordinarily painful. And where do they get the money? I don’t know. I don’t think taxpayers are going to want to see tax increases. And when it comes to increasing taxes on businesses, blood from the stone starts to become a phrase that gets tossed around quite a bit. So it’s gonna be very, very, very challenging. And people are going to be looking for money just to keep some basic services going.

Aaron Norris: We need to move on to Mr. David Granzella of NorcalREIA. Dad, you look like you have a question.

Bruce Norris:  I just want to ask, is there any thought from the Fed to expand Section 8?

Paul Herrera: At this level, there’s by some people in the federal government, but not enough to actually make it policy. Certainly not this legislative year. OK. Next year, depending on what happens in November elections. Who knows what that could shift. OK. Not right now.

Aaron Norris: Okay. Thank you, Paul. All right. Well, if you can hang out and figure out questions. Have a nice glass of wine and we’ll chat. Thanks. All right. David Granzella is up. David, I’m going to send this over to you. David is the CEO of the NorcalREIA up in Sacramento. David, welcome.

David Granzella: Thank you very much for hosting this. Well, frst let me start off with something positive. I was talking to one of my friends who is a property manager, manages about twelve hundred units in Sacramento, Placer County. He manages some of my properties. We spoke today and as of right now, this part of April, ninety-six point four percent of the rents are all paid up. So we don’t know what’s gonna happen in May, but somehow everything’s been falling into place for them. And in regards to my personal multis that I managed myself, 100 percent of those rents are in place, so we’ll see what happens. And I was thinking today that I usually give a gift card during a holiday season and so forth for Walmart. And I thought now might be a good time to extend that one more time.

Bruce Norris: Very good idea.

David Granzella: So let me touch on a few things before I get in the presentation. Bottom line is we all know absolutely everything’s changed. Most of the buyers up here in Sacramento, Placer County, California, are in retreat mode, if not paused at least. Sellers are backing away. As of the last six weeks, one thousand five properties were canceled or put her on hold. I refer to that as pause. It’s just a peak uncertainty. Sellers and buyers are backing away. It’s a subdued market. Uncertainty and retreating seems to be the most prevalent words I hear when I talk to people. Unemployment, we all know. Lenders uncertainty. One of the the interesting things I found out that as of March 20th, forty three percent of the current offers had multiple offers. As of March 20th. So that was also some positive news.

Moving over to the presentation. You guys see that picture? The story goes the first week of March: 714 listings. April 5th, 1176. The pending sales, as you can see, took quite a toll also, which is expected. One thing I noticed today on his presentation is it went up from the fourth of April to the 11th of April up 20 units, which I don’t know. It’s neither here or there because I think we’re in the middle of – we don’t know what. So that’s more or less, as far as I could see, a hiccup. 

Christina Suter: Well, Lisa, that was amazing. I loved her summary. Lisa and I touched base earlier today to make sure we didn’t talk about the same things, and Lisa covered it beautifully. I’m going to try to talk a little bit in different directions in what she’s covered. So I really wanted to do sort of man on the street. But let’s start a little bit with the UCLA forecast. So let’s go high for a minute and then let’s go man on the street level. So the UCLA forecast suggests the GDP will decline by 7.5 percent in Q2 and then we’ll see another decline in Q3 by 2.35%, leading to a potential annual rate of a negative 5 percent growth in GDP.

Now, that would be significant in that it would show up as actual – those are recession numbers right now. Whether that actually occurs or doesn’t occur, we don’t know. This is just, you know, UCLA’s most current update and their projected forecast. I think what’s important about that is kind of the bifurcation between the man on the street and not so much. So the International Monetary Fund cuts its forecast for global economic growth itself, but it only cut it by point one percent. And it’s still calling for an expansion at the 2020 to 2021. They are also suggesting maybe an unemployment peak of up to 13 percent in Q4, which kind of aligns with the previous numbers we’ve heard of 18 million. Right. Bruce, you talked about a loss of 18 million jobs over the past weeks. So we might see a peak, but that would be a national number. This is not L.A. This is not San Francisco. This is not specific. This is a US number that would be potentially an unemployment peak at 13 percent. And, you know, but seeing a recovery, even UCLA with these drastic numbers is suggesting that there’s going to be an avid and aggressive recovery in 2021, at least an average and a noticeable recovery in 2021. So kind of just like laying some economic backgrounds like, well, how is this going to wash through.

And I really think that – I’ll talk about the bifurcation a little later. So the passing of the markets. Yes, when you talk about Pasadena, La Canada Flintridge, you know, Altadena, what we’re really heading into this sort of balanced market. We were already slowing down. The market was already losing steam from where it was back in the end of 2018. This slowing progress that I have noticed, being a flipper in that market myself, as well as being an investor and a hard money lender, I was seeing basically that the market now was about balance. So days on market was forty-nine to 50 days on market. The shorter-end ranges from twenty nine to thirty days for a hot product. Right. So things were still moving. They were active. But since I couldn’t find the most recent numbers, I ended up talking to some real estate agents that specialize in that area, and they really talked about how upper-end homes are not seeing buyers, that those seem to be frozen in the Pasadena area. Now, I’m not saying it’s going to stay that way, because what I was also hearing from the same people is they’re really doubling down – again, bifurcation. If you’re a broker and you have funds in the bank, then you’re able to do a virtual tour, encourage people to do a drive by, have the buyers send inclusive proof of funds and then schedule one on one showing. That seems to be what’s going on in the offices when you’re dealing with the upper-end properties.

I actually don’t know below that price point. I wasn’t able to talk to somebody, but then again, you know, a lot of passing of properties are eight hundred thousand, nine hundred thousand, or above. So we’re dealing with a particular segment of people. They’re also pushing things out to their network, to their pocket, doing pocket listings and pushing things out, but being very careful in things. But even the upper-end brokers, at least the ones I was talking to, were saying, Yeah, we’re putting our own money in to make things continue to run, but we’re not too sure how much longer we can continue to do that when we’re seeing it in volume. Such a drop in the listings. Right. So a drop in showing. So that’s what’s gone on, at least the word on the street in the passing market. But, you know, as you know, there was definitely a scare, you know, when Mayor Eric Garcetti described and said that real estate transactions are considered essential, but open houses are prohibited. There really is something that’s having to be walked around. So I’m kind of like, let’s think this through for a minute, because that’s kind of where my side was trying to lay some background about, let’s think this through. Let’s start with two assumptions.

One assumption is that the virus is going to be here for several more months, if not longer. Right. We’re starting to hit what they hope is a stabilized number, and in a week or two they think that we might hit our maximum number of seeing Coronavirus continue to expand and maybe then starting to see a contraction in the L.A. area. But that’s also, if you think for a minute, that’s also with people on the stay at home order. So what happens when people stop being on the stay at home order? How do we actually stop the rolling of the Coronavirus again through a new segment of the population? All of those that have been capable of holding ourselves at home. So I don’t think that this is going to be a quick, you know, gee, everybody stay at home. We’ve got the virus under control. Everybody can come back out again. You know, I think that if you think it through, we’re going to have to accept that in order to continue to mitigate this virus, what we’re looking for is either a version of a cure. A way to slow it down, or are we looking for a vaccination. Right. And that’s what’s going to take time. It’s not the virus. It’s the capacity to actually not catch the virus or mitigate the effects of the virus. It’s going to take time. And that’s why I think we’re not going to see one way, but we’re gonna see more than one way, an ongoing effect in the way that people are managing the virus and managing their lives around the virus. So that’s one assumption. So it’s the length of time I think we need to think about.

The second assumption I want to lay out here is that what I’m seeing on the street is that the lower end workers in the service areas are really the ones that are losing their pay. Waiters are not waiting. Salespeople are not in retail stores. Housekeepers are not cleaning house. Caregivers are not having children come to them. I know somebody who works at First 5, and she was very clear that right now their primary concern is getting food to families with young infants who don’t have food, more or less paying their rents. Right. So there’s definitely this sort of like, you know, gee, the worker class is the one that is taking the man on the street and the one that is taking the hardest hit of this. And like we said, you know, a 300 percent increase in unemployment in a very short period of time. So May Dalio put out a really good update on this if you want to listen to it. He said it’s really all about PNLs and balance sheets, but it’s those with assets on their balance sheets, that’s what it boils down to really.

As a consultant, I’ve talked to a couple different people who hold assets, and I’m capable of reaching out to them and saying, Gee, you’re holding assets in this class versus that class. What was the news I was hearing on the street from them as property owners? So I talked to one person who owns houses here in Pasadena. And they said, Hey, you know what? Not a problem. I had two houses, a house and a guest house that were up for rent. I rented them both. This wasn’t a big problem. You know, we met there wearing mask and gloves. It’s done, and I’m collecting my rents on my other homes. But yet I’ve talked to other people who own maybe a C or D grade triplex, and they’re getting no renters. Right. Nobody’s moving into those units, and there’s another one where they own a triplex and they got one rent out of three units. And so that’s where we’re seeing our 30 percent nonpayment of rent is really based on the grade of assets. So if you think about how it rolls out, the renters in D and C were probably going to have a harder time. They are the ones that are going to either be staying in their homes, staying in their apartments or staying in their units because they have protection, but they’re going to have a harder time when it starts to unfold. They’re going to have a harder time getting the job. You know, when we actually start hiring people, how long is that going to take while this continues to roll out? That’s my question. So I think that might take a while. I think it might take even longer for them because they don’t have the cash in the bank and they don’t have the capacity to support themselves. I think as this rolls out for them and it goes longer and longer, it’s going to be harder on their capacity to buy a car. Harder in their capacity to pay their rent moving forward, to catch up on where they’re behind.

So I think that’s going to create a bifurcation where they’re going to have a harder and harder time in the months even after the virus is done, even after we’re capable of creating a version of a cure, whereas the ranchers in the A and B units are probably going to do better. They’re more likely to work from home. They’re more likely to have a higher degree. They’re more likely to have a computer. And they’re more likely to have the Internet that allows them to continue to work from home and have the capacity to pay that bill. You know what six hundred dollars means to somebody who’s in an A or B unit? Even in L.A., that is, you know, their car payment or two months worth of car payments. But it’s not their rent payment. So it’s not the rental payment. So this is when you talk about, you know, opportunities as investors. I think we’re not going to see see the opportunities so much in the A and B units, but in the C and D units. Opportunities to purchase, but also, you know, how can we help? Right. So I have to do both sides.

If we’re an investor, this might be an opportunity to purchase in because they’re going to be landlords who can’t hold units that are empty for that long. But also, you know, encouragement to help out. You know, send that grocery card that you send at Christmas. Absolutely. Now, if you’ve got renters that need to unload their rent, you know, work with them. But again, it’s your holding power as well. Let’s be clear. We are investors. We’re not banks. We’re not endless pits, you know. So just trying to speak to both sides of the issue at the same time. Can we be humanitarian while we’re moving through this, especially if we have the opportunity?

So single families. So I think personally in the Pasadena Glendale office, you know, the pent up demand is going to get to show itself pretty quickly. People are going to be pulling and contracting off the market for that 33 percent drop in listings that we heard about. And, you know, David talked about how in Northern California, that drop in listings is going to pretty much unravel itself pretty quickly. As soon as we work out the Coronavirus, as soon as there’s a solution, as soon as the economy is willing to move forward again. [01:42:15][29.6]

I have a home on the market, and what I found interesting was that the buyer that bough that flip home I have on the market was as eager to sign the buying agreement with me as I was to get it signed before this continued to get even more complicated. They wanted to secure a home while there was a home to secure, just as much as I want to secure a buyer when I knew there was a buyer out there that was willing to look at my house. So I am seeing it on both sides in my own experience. So I think that’s going to unravel pretty quickly. It’s the single-family residences that are the lower end where I think we can have a harder time finding a buyer. Not that the buyers don’t want to buy. But again, how are they going to be able to prove their W-2s and their proof of income? It’s going to take longer for them to unravel. That’s where I think the harder hit will be.

So how long can the government continue to support, you know, we’ve got six hundred dollars for the US worker. We’ve got the EIDLE loans. Ten thousand dollars. You know, quick access and forgiving on longer on larger loans. The PPP programs will help the small business owners. And that is helpful. But how long can we continue to hold out? Even China, where the coronaviruses started. It looks to me, and I wish I had the statistics in front of me, but it looks to me like even China is starting to go. Our economy can’t keep holding. We can’t just be on pause forever. You know, we need to reopen some of our cities to be able to do that. And some cities are reopening more aggressively or are more willing to open than, you know, the city right next door. There are still blockades between cities so that you can’t travel from one city to another in China as a way of locking people into a set geographic area so that the Coronavirus doesn’t expand. But even they are starting to go, Hey, our economy can’t take this, we have to almost declare it done just because how long can we economically hold? So I think we want to look at it as length of time and a bifurcation between A and B and C and D products, and how can we be humanitarian moving through this and moving forward.

Aaron Norris: I’m going to ask you the question here. What are you hearing about the jumbo market in L.A.?Financing for the higher end flips.

Christina Suter: OK. I’m hearing that that is still available, but harder to get. What was interesting to me is I’m hearing that in the lower end, when you’re trying get investment loans, that those terms are trying to go wonky. I’ve heard I had literally only one length of time for investment properties. But again, this was out-of-state. This was not in-state. So I can’t really talk to L.A. on this particular one because for my investment properties to be accurate, it’s actually out of state. I know the theory is that loans should be available, but I’m not so sure that the secondary, the investment market, the loans for investors are going to stay stable.

Aaron Norris: Kathleen, I’m going to give you a heads up because I don’t think Iris is going to be back. She has twins and she’s having twins issues.

I just wanted to give Kathleen Cramer a heads up that it’s coming. One of the interesting things I have heard from brokers is that you don’t have lookie loos in the game right now. So when somebody is willing to make the effort to go see your property, it’s not a nosy neighbor. It’s somebody who’s actually going to probably move forward with the deal. It’ll be interesting. Have you heard anything about the urban exit? Are people sort of maybe rethinking some of the more urbanized areas of L.A. and they just want out?

Christina Suter: I would love to say yes, but I haven’t.

Aaron Norris: Somebody was bringing up the issue with undocumented people without papers. This is a real challenge for a very specific population of people. Some people may not have people that work in the education sector, but some schools in inner cities have 90 to 100 percent of their kids that are reliant on the breakfast and lunch program to eat. So I would agree with what Christina was saying. I think there is a bifurcation of the product that we need to talk about, and it is going to be the C, D and F neighborhoods, quite frankly, that are going to really, really struggle.

Bruce Norris: That’s why Section 8 would be clearly important.

Aaron Norris: So you’re starting with getting the articles of mile long food and stuff like that. It’s scary. There is definitely the have and have nots, and it is unfortunate. Well, Christina, thank you. You’re gonna hang out as well for questions possibly?

Christina Suter: Yes.

Aaron Norris: OK. OK. All right. Miss Kathleen, I’m going to you. I know you’ve got charts.

Kathleen Kramer: I have. Yes, I have some charts.

So thank you so much for having me. For those of you who attend or OCREIA, you know, I do the market update.

We’ll skip my background, but I’ve been in the business a long time. I do have a bachelors in Economics and I do speak at OCREIA. And right now, my husband and I, we mostly invest in non-performing second trust deed notes. So I have a little bit of anecdotal information for you on that because that’s going to be a hot area, I think, of investment on the other side of this thing. So might be an interesting thing for your listeners to hear about just some deals that are coming down the pipeline right now and what we’re seeing in the marketplace on that. So we’re definitely late cycle. This is a little slide that I used a couple months ago when we were talking about how to get liquid and get ready for something like this, not knowing that it was on our doorstep. So at any rate, here we go.

Here’s a little bit about Orange County and what’s going on here. So for many, many months, maybe the last two or three years, we’ve seen a lot of inventory in the high end, less inventory in the low end. Most of our demand is in the low end, and less of our demand is in the high end. So if you take a look at this, this is as of last week, on the 7th of April, the expected market time last year in the under 1 million price point was seventy-three days. It went down actually to sixty-one days. I think this is mostly transactions that were in process when the lockdown occurred about a month ago now. Anything over a million is getting much tougher to sell now. So you’ll notice that our expected market time over a million dollars is one hundred and nine days. It’s 10 percent of our inventory and 8 percent of our demand. And then as you go up from there, you could see that by the time you get to that high-end price point, you really have a very extended marketing time. Part of that is that jumbo loans are getting harder to get.

Chase came out this week and said that they are going to lock down the credit quality, just like we saw in 2008 and 2009, where these loans really went away almost entirely. Right now, Chase is at a 700 minimum FICO score with 20 percent down on a jumbo loan. So as long as Fannie Mae, Freddie Mac and FHA are still lending at that lower end of the price point, I think it’s still going to be able to transact. But the Alt-A, the loan, the bank statement kind of loan, those kinds of loans are gone for the most part. So this is really fantastic for people like Bruce and others who are in the private lending space because all of the sudden you’ve seen those types of transactions materialize. So there’s a much bigger market now. If you’re sitting on a pile of cash and you want to get a first trust deed on a single-family home in Newport Beach or, you know, Huntington Beach, Orange County area, there’s much better market for a private investor to go in there and get a rate that has a reasonable rate of interest in the sevens, eights.

I saw one of the aggregate lenders that does a lot of marketing. They have a pool of money. They were actually marketing an 80 percent jumbo loan with a good credit score that was like a 660-680 credit score at 7.99 on a first trust deed. So very interesting stuff. If you’re willing to jump into that owner-occupied space, which has a lot of regulatory requirements, that might be a little bit of opportunity. So active listings, a lot of people, just like in L.A. County, just like in Sacramento, we’re seeing that the active inventory has declined. So last year in April, we had 6,800 active homes listed in the MLS. This year we’re at 4,183. So active industry just in the last two weeks only went up six-tenths of a percent. We did still manage to add some listings in the last two weeks, but we’re missing about half of our inventory. So forty-five percent of our inventory is just not on the market right now.

On the other side of that is demand. And this is really the most dramatic chart. If you’re interested in this kind of data, I would highly recommend I put it on the top here. You should go to the Orange County Housing Report. This is Steven Thomas. He’s a local title rep. He’s been putting out these reports for years. And recently he expanded into the Inland Empire, L.A. County, San Diego County, Ventura County. So you can go to Reports on housing.com and you could subscribe and it’s by the area. But he does such a fantastic job. If you’re in the business, it’s really worth looking at the numbers. He has very accurate numbers and in the reports come out every two weeks. So just a little plug for him, because I’ve been leaning on his numbers for years and I always want to give credit where it’s due. So over the last five years, pending transactions have trended up in the first two weeks of April. So this is really the time that we’ve seen a lot of inventory come on the market. This year we’re down 814 over the last two weeks. So the home buyers are pretty much staying home. Fifty-two percent decrease over this time last year. As far as where we are with pending sales, which of course those are the ones that are in escrow, some of that is because of the lending criteria.

So anecdotally, I spoke with several realtors this last week. The jumbo stuff is just the borrowers are having a really hard time getting their loan through the appraisers or having a very difficult time getting in. And of course, Fannie and Freddie have come out with these specialized appraisals where you either get a waiver and they don’t have to do an internal inspection or appraisal inspection. But the jumbo loans don’t have that luxury. So I haven’t heard of any jumbo lender that’s willing to do just an external drive-by appraisal or do one of these fancy appraisals where they have the borrower go around with their phone, it’s geocoded, and they’re taking photos of different parts of the house at the appraisers’ instruction. So I haven’t really heard of any kind of workarounds in that space yet.

And of course, the secondary market in the jumbo space is very touch and go right now. The Fed may or may not be supporting that end of the market. And so I think that most of the banks and lending institutions are really just kind of clamping down and going very, very conservative. That might take a while to come back. It did take about a year before we started to see that loosen up after the last crisis. So that might take a little while in that jumbo end. So hopefully most of our investors are not holding jumbo product that they’re trying to move right away. This is more of a function of, you know, if your family wants to move or if you happen to live in Orange County. So just a little overview, and I would imagine that, Aaron, you’re going to be handing these slides out to folks. I can certainly forward them on.

But really, just as a summary, house price below 750 is still a hot sellers market if you can get an appraisal. People are doing the virtual tours and they’re still going in. But of course, transaction volume hass decreased significantly. Even in February, we weren’t really seeing any discounting. Sales to list price was at ninety nine point nine percent. So it’s pretty much if you went into escrow, you were good. Now, switching gears a little bit, I want to talk just for a couple of minutes about the rental market. So I did an informal survey. So what this entailed is I called three property managers that I personally have a relationship with. One of them primarily does single-family homes, not at the bottom end of the market. This is Orange County. So seventy-five percent of this is single-family homes in Orange County. How many of those tenants ask for a delayed rent payment in those single families? Three to five percent. So about four percent had actually approached her for a delayed rent payment, and she had followed kind of the AOA guidelines or the forms that the AOA had put out and then also some internal things that they had worked out for their company and they had a process for them to apply for a deferred rent. So that’s kind of how that went. So that’s good news.

But then you have apartment management and the apartment owners that I know and managers I know primarily work in the Long Beach market. So this would be maybe more of your entry-level tenant, the lower end of the spectrum on the apartment side, and 15 percent of their population asked for a deferral. So I have a feeling that more than that would have problems making rent. And that was kind of the feeling was that they were thinking that maybe they would have people that just didn’t pay, but 50 percent of their tenants actually picked up the phone and called them and said, Hey, I’m going to have trouble this month, probably a few more. Going to just ignore it and hope that it goes away. Sometimes people do.

So in apartments and single-family homes, if they’re vacant, they are harder to show for the same reasons that single-family home or, you know, the rental or the residential real estate is hard to show. So you’re seeing less movement. Aaron already talked about the California Judicial Council, and the Apartment Owners Association is a great resource. So if you’re a landlord, I think what you want to do is – a good resource if you don’t already have some tenant agreements is go to the AOA website and see that webinar that they did that’s posted there for free. They also posted a bunch of their forms for free. So the AOA is a really great resource for that.

Amanda already talked a little bit and Matt already talked about the loan program, so I’m not going to go into that. But starting last week, apartment owners might want to try actually the EIDL SBA program for that. So here’s a couple of resources for you. That Apartment Owners Association link, and then also for people that are interested in private lending; so let’s say that you were ahead of the game and you put aside some cash and you want to get into private lending. There’s a great law firm. There’s an organization for private lenders called the American Association of Private Lenders. AAPL is the organization name, and it was pretty much founded by this law firm in Orange County called Geraci. And they have been having a series of webinars that are free. They’re posted on their Web site and they’re just fantastic. So if you’re curious, a lot of people ask me when they hear that I’m doing notes, they ask me, you know, how do I get into this side of the business? How do I learn more? Well, here’s a way to learn more. And it’s free education. And it’s really on demand. So you can go to their Web site, geracillp.com, and you can tap into some of those things.

One of the other questions that I was getting this week was, gosh, Kathleen, I bank at Wells. Personally, I bank at Wells, and I’m not really that excited about Wells right now. Sorry, Wells, but they basically are saying, Hey, sign up on this waiting list and we’ll tell you when we’re ready to talk to you about your PPP loan. So I went to the SBA department, and in Orange County, there’s a list here of banks that are SBA approved and they’re approved for the express loans, which is the express pathway, and they’re still taking applications, I guess, as of a couple of days ago when I looked this up. So there’s some resources for you to check out.

If you’re interested, OCREIA, we were dark this month. We were supposed to have our meeting last week, but we are going to do a free Zoom meeting next Thursday at 5:00. And you could go to ocreia.com and I’m going to give a much longer economic update and talk a little bit more about the credit markets and what’s going on with credit markets and give you a bunch of resources on what you can do as far as if you want to educate yourself on what’s going on and what to watch for. But really, as a summary, I think that the biggest issue that I see and Bruce, I’m really interested to hear your opinion on this, is I think that until we have price discovery in the marketplace, it’s going to be very difficult to make that next investment in real estate. What I mean by this is we don’t really have an active functioning market right now. We don’t know when we’re going to be able to collect rent. If you’re buying a rental, we don’t know if you’re gonna be able to get in to get an appraisal done. We don’t know. There’s so many things that we don’t know. If you’re doing a jumbo transaction or, you know, you may not have financing available for a buyer on the other side. So a lot of those construction projects that were going on, like in L.A., where they were tearing down a house and putting up a fourplex or those types of transactions, that whole segment of the market is going to kind of freeze until we can get some price discovery. And the market’s kind of opened back up again and the lenders come back into the marketplace. So for me personally, I think it’s a little bit of a price discovery issue, so I’m interested to hear what Bruce might have to say about that.

Finally, I have one little anecdote that I’ll just talk about, a transaction that we did recently. We were making an offer on a pool of loans and trying to figure out, OK, how much do we pay for these loans? Obviously it’s a different world and it’s a different kind of price point than what we might have been looking at if we were making a bid on these loans in January. And so we made a couple of bids. We made two bids on pools, and they were turned down because we went in too low. And then finally, we found the market where we went in about 10 percent lower than where we were before on the loans that we were buying. We were able to secure some of that pool, so it’s not a big buy.

We’re buying on the way down, in my opinion. But, we had an investor that wanted to go with us and is patient and willing to wait the time that’s needed to wait for us to get into the court system and work some of these loans out. So just a little bit of anecdotal information for people to kind of get an idea. You know, I just don’t think that there’s a lot of transactions to do until we actually can discover what the real market prices are.

Aaron Norris: Kathleen, I’ll share with you. One of the things that we got the opportunity to look at was a two hundred and fifty billion dollar pool of hard money loans. The problem was that the Wall Street lender that had it had been funding those on a credit facility that had a margin call when the stock market went down. Right. There’s a few problems here. They were taking a 30 percent haircut on the principal, but they were originating first trust deeds that were funded at 90 percent of purchase with 100 percent of the repairs at 7 percent. I just don’t think that’s the rate. So I don’t actually think that’s the price. Right?

Kathleen Kramer: Right. It’s true. I would agree. And, you know, we have a very strict buying criteria. So we’re buying non-performing seconds, which, you know, a lot of people go, Oh, my gosh. It’s so risky. But we have a box that we fund that we buy within, and we tightened our criteria down 10 percent on the CLTV. We take that on the upbeat, unpaid principal balance. We look at the CLTV. We make sure the first is performing, which is a huge question mark that I probably don’t have time to get into right now, how that works in a forbearance market. But basically, we have this box. So we just went in the first two bids we made last week, we went in 20 percent below where we would have bid in January on the UPB. So the interest is just whipped cream on the top of the cake. Right. When you buy a distressed note, the back of the resurges and all that is just whipped cream. What you’re really buying is you’re buying the unpaid principal balance. We went in 20 percent and we didn’t win those bids. We went in at 10 and we were able to win a part of our bid. Not even all of it. There are still buyers in the marketplace, just not as many. And.

It’s an interesting time right now and we’re excited because we think there’s huge opportunity in this on the other side. Our thing is how can we help these people keep their house? That’s our goal when we go into it. Our goal is how can we help this person? We don’t want the house back. We’re not in it to own it. We want to help the person stay in the property and work something out.

Bruce Norris: Are you talking about California trust deeds predominately?

Kathleen Kramer: No. Actually, we think Californians are way overpriced, especially with the political climate here. People have always been saying, Oh, we only want to buy California notes. We want to buy California, and it’s really not our cup of tea.

Bruce Norris: Do you see migration issues for California over the next five years?

Kathleen Kramer: Absolutely.

Oh, man. Hopefully everybody’s drinking. Any time they say something depressing, everybody take a shot.

Bruce Norris: It’s both fun. It’s so fun to just listen to all of these smart inputs and people. I mean, it’s such a good balance of like a Pasadena and then an L.A., then a Long Beach. Then you have the haves and the have nots and even Orange County. I was raised in Stanton. I don’t think that really qualifies as a city that most people in Orange County want to claim. But that was where I was in Orange County. And it doesn’t look anything like Newport Beach.

Aaron Norris: Well, thank you, Kathleen. And you’re gonna hang out for questions as well?

Kathleen Kramer: I will.

Aaron Norris: All right, Derek Haarms, since we’re gonna get you a little bit earlier than expected, I’m handing you the slides.

So Derek Haarms, he’s with Compass Realty. So what’s really great about everybody that we asked to come on, we’re gonna be asking some very different questions of these two. But Derek is currently the president of the NSDREI, so the North Sandiego Real Estate Investors Association. And then Lenska is on the board with SDCIA, and she and I have been working together closely on ADUs for the last year. She’s got some background there, so I’m really excited. Derek, you’re going to start us off.

Derek Harms: Yeah, absolutely. And thank you Lenska for a tag team in San Diego County with me. So, Lenska and I talked earlier last week and decided that San Diego County wasn’t quite large enough to break up into north and south counties. So we figured we’d just go out together. And with that said, first off, thank you guys at the Norris Group, Aaron and Bruce for what you guys have been doing for years and things like this. It really helps the investor community have a place to go in times like this. And Bruce, I know like me and my cohorts and a lot of people I trust, I really look forward to hearing what you have to say. I look forward to the podcast on Friday to see, hey, what are they gonna be talking about this week? What’s happening with the COVID-19 update? So thank you guys for that.

The North San Diego Real Estate Investor Association, we meet up in Oceanside. So pretty far North County. We have a really great group, solid board of directors and just a really, really wonderful group of real estate investors and practitioners that come there. And so we’re thankful to all those who are listening tonight. I’m gonna share my screen and go through a couple of slides that I put together because I did a little research. And I want to make a quick statement, let everybody know that, you know, you can do your best to talk to as many real estate investors and agents and practitioners across the county, but can only talk to so many. So this is simply a sample size of what we were able to come up with. But I think it does a pretty good job in describing the sentiment and the feelings that everybody has.

Lenska Bracknell: While Derek is pulling up those slides, just wanted to say greetings. And like Spock always said, live long and prosper. It’s certainly weird times where the black market for haircuts and us wearing masks indoors to keep us from snacking all day long. And that my car is given three weeks to the gallon is unprecedented times. Bruce, I don’t think you have a chart for this. Those are all uncharted territories we are in.

Bruce Norris: I already introduced our investor group, really happy to be here. Here is some of the data, and this was put together and I want to give a special shout out to Gerry Ryan, who does our normal monthly market update and FBAR and Brian Daley and a few other people have helped me aggregate this data. And it’s really interesting when you go down the data rabbit hole how much time it can actually take and how interesting some of it can get. At some point you just have to stop and just put the data that’s relevant and move on. So first time, imagine, only imagine what you go through when you’re putting together your annual reports. Aaron, after all that, I would delegate myself. So here’s a snapshot. San Diego market update. So very interesting. In all of March, you had about seven hundred eighty-three new listings. Just in essentially the first week of April, you had a twenty-six percent decrease. That same timeframe, you had legitimately a 50 percent decrease in pending sales. So the amount of homes that got accepted offers were cut in half at the beginning of April. I’m going to touch on the sentiment that I’ve gathered from agents in the county here in a second. But it’s across the board, and sales, you can see, have gone down and inventory has actually increase up a little bit. And for those of you that don’t know the San Diego market, you know, to put it in a nutshell, our median detached sales price is six hundred and eighty thousand. We have an extreme luxury market, and we have, you know, a lower price market as well as most areas do. But I’m gonna touch on the numbers here in a second.

Lenska Bracknell:  I can only ditto what you’re saying.

Derek Harms: You’re seeing the same things, right? Pending sales are cut in half. Listings are down. I mean, it’s just across the board, right?

Lenska Bracknell:  I do have a different interpretation of it.

Derek Harms: Real estate agent sentiment. So some escrows have cancelled, not a massive proportion here in San Diego. From what I can gather, you’ve got buyers that got scared and some buyers that backed out. But for the most part, we’re still seeing deals get done. A lot of wait and see approach, whether it’s agents advising their clients to withdraw their listing that’s already listed or wait to list it.

“Affordable price points.” And I put that in quotes. That’s because it’s all relative. But under the eight hundred thousand dollar mark, you’re still seeing a lot of movement. And of all the agents I I polled and talked to in preparation for this evening, the overwhelming sentiment was that anything under 800, some of those we’re saying under a million, but anything under $800, we’re still having some movement. How agents consult their clients right now is huge because the buyer perception is a problem. You’re getting a lot of very low offers from buyers just because they think they can, but the seller motivation hasn’t been met yet. So there isn’t a bunch of sellers that are extremely motivated to sell for below what was the market price at this point.

Across the board, most agents that are doing volume are telling me that the luxury space is stalling. Each agent would describe luxury at a different level; but at least for the sake of the conversation, it was definitely over a million. And in San Diego, a million dollars isn’t really quite the luxury market, I would say. I think it would probably be maybe one and a half and above. I’d say that it’s stalling, but you’ll see here that Bill Gates just bought a forty-three million dollar house in Del Mar, and he closed on that, I believe, on March 27. Not that that’s indicative of the luxury market, but I thought that would be a fun fact to share. Thank you, Lindsay Dunlap.

It’s really hard to get everyone involved to sign the COVID-19 form. According to CAR, the way we interpret it is you’re supposed to get agents, buyers, sellers, vendors, whoever it is, appraisers, home inspectors to sign the COVID-19 form before entering the property. And from what I’ve gathered and what I’ve seen, it’s very difficult to do it. Some are. But for the most part, I haven’t seen many.

Vacant houses. They’re still showing and selling. I talked to a lot of flippers, which I’ll touch on in a second, but people are still getting their vacant homes shown and sold. Vacant homes have a little bit of a benefit right now because there’s no seller and family potential to deal with and any sort of virus concerns there.

That brings me right to the investor sentiment. So again, I’ve talked to quite a few investors, and thank you to all those who took the time to talk to me today and in the previous days. So what I did was I took notes of every conversation I had with people. And then I put here on this screen the common themes that I got from everyone. And so these were them: audit your portfolio, trim the fat and get a little more liquid, and do almost essentially a SWOT analysis and see where your strengths are, your weaknesses, and really tailor your portfolio to where all that lies. And if you can, stack a little more cash in case buying opportunities come down the pike here. That seems to be what a lot of investors are preparing for. They are preparing for a buying opportunity. Will that happen? I think the jury’s still out. But if you have some liquidity, you can strike when they do show up.

Some of the friends and multifamily space that didn’t quite have locked in, long-term, low interest rates yet. I know a lot of them are scrambling to lock in some of those loans if they’re still available. And when it comes to the flippers, we’re seeing a lot of people across the board that are due in volume, maybe still making offers, but adjusting for a longer hold time and lower resale values. The lower to middle price points here in San Diego are still the most desirable over time. They’ve typically been the most desirable price point for house flippers, and they just typically present the highest margin of safety in the least discerning buyer. That seems to still be the case right now. For what it’s worth, I personally have seen so much demand in that space. So we listed a house a couple of months ago, a month and a half ago and had 20 offers. I helped some buyers write offers on a house that had twenty-one offers. And so it’s these price points that are still seeing so much demand, and there’s still so much pent up demand that we think there will be a lot of room to grow in this particular space.

Some ways to get buyers in the door. So in San Diego, we use value range pricings if we choose. We don’t have to, but putting that lower end of the range into a very desirable number to get people in the door, maybe you won’t accept that price, but you want them in the door. Can’t get an offer if they don’t show up.

Seller financing, getting creative, solving problems and putting together outside the box solutions that typically sellers weren’t thinking about even three or four weeks ago. But now they’re open to it.

It’s interesting. I’m seeing a lot of e-mails come through from people who used to be home flippers and are now all of a sudden wholesalers and they’re not buying any of the inventory. Or maybe they are, but they’re just sending out the ones that they’re not buying. But it’s interesting over the past few weeks how many deals have gotten sent out my way and multiple other investors’ way just because of what’s happening.

This one was interesting. I polled multiple property managers, and the consensus was those that had less than a thousand doors under management, collecting between ninety-three to ninety-nine percent collection rate for April. And that’s pretty indicative of and relative to everyone that’s been here on the panel and they’re seeing a lot of similar numbers. And so those that I talked to that had over a thousand doors under management had an average collection rate of about eighty-seven percent. Payment plans for those that couldn’t pay, they projected their overall collection after payment plans to be north of 95 percent. So still really high numbers and definitely much better than I had anticipated for April.

May, I think could be another story. So the sentiment, again, seems to be that May could be lining up to be a bigger problem, and the media is having a very big role in that problem. A lot of. tenants are contacting property managers saying, We’re told we don’t have to pay rent and we heard this on the news and etc.. And it’s really backing property managers into a corner and it’s really unfortunate. So the group that manages my rentals and a lot of people I know in San Diego did something that was really cool. And I think a lot of other people are doing this as well now. But they suggested sending twenty five dollar grocery gift cards to each tenant that paid rent on time. And I thought that was a brilliant idea and agreed wholeheartedly to do that. And I haven’t heard how that was responded to yet, but I imagine pretty, pretty good. I like that idea.

Leads for property managers that used to be coming in as a firehose in this time of the year, you know, early spring going into that late spring and early summer period has now slowed to a trickle. So not too many people are inquiring about new rentals in San Diego, which is a shame. This one really floored me: tenant unions are knocking on doors organizing rent strikes. When I asked for more information, it was specific. This is really happening, and I had no idea that happened. This opened my eyes, and that goes back to just gathering data for a gathering like this really opens your eyes to a lot, even in your own market that you thought you knew.

So. Aaron asked me to talk a little bit about what we’re doing at Compass. So Compass is a real estate brokerage that’s grown tremendously over the past couple of years. What they’ve done recently is offered the Compass Academy to all agents, regardless of your affiliation. If you want to learn how Compass does it on the retail side of real estate, then it’s open to literally anyone with a license, which I thought was really cool. The program Aaron specifically wanted me to talk about was the concierge’s program. So the Compass concierge program was rolled out last year, and basically what it did was is it gave homeowners that had homes that need to be updated or renovated prior to market in order to capture the highest value on the open market.

Compass offered a program to actually subsidize and pay for a lot of these repairs upfront without any deed of trust but with a signed contract and a signed listing agreement for myself or any other Compass agent. You used to be able to get up to 5 percent of the resale list price after renovation. So if you had a million-dollar house coming on the market after you updated it and Compass would provide you a fifty thousand dollar loan at 0 percent interest, just assuming that you would sign a listing agreement. It’s a great program. You use it multiple times. I know a lot of agents throughout our company have used it a lot. Not only did it help you secure listings you wouldn’t have otherwise got, but it helped secure higher sales prices and it made the home sell quicker and it created more equity for the homeowner. So it was a really good program. A bit risky, though. You know, if you just look at all the details I mentioned and the security was minimal. So, you know, it goes without saying that they scaled this whole thing back by 80 percent the middle of March after the quarantine was issued, or this might have been the end of March, but the whole program was brought back a little bit.

Another cool program that Compass had that was essentially proprietary was their bridge loan program, which essentially allowed homeowners that had a lot of equity, but no cash, which we know exists in this country quite heavily, to get the home they want using the home that they have already. So what would happen is a company-approved lender would provide a bridge loan for a borrower and secure it against the home that they’re in now using the equity. So you have to have equity and help them pay for down payment and closing costs of the new property while also getting a first trust deed, a long term 30-year first trust deed as well. So it essentially allows you to tap in your equity, almost like a HELOC, but quicker, and once you found the home that you wanted to get to that point. That whole program has shut down completely since this announcement was made in March. So, again, I think they’re managing a rare risk.

That’s all I got in terms of slides. I mean, I can talk about this all night, but, you know, I know we only have so much time and I know Lenska has a lot to offer.

Aaron Norris: Lenska, let’s go to you. You said you had a different opinion.

Lenska Bracknell:  I have a few things to add or a different opinion on the pending sales. I’m on the board of SDCIA. And if I may, in the times where big means a lot, we are the biggest investor club down in Southern California. I think we were founded approximately about 1976. I have been a member for over twelve years, and I serve as a treasurer. And you see that little plus behind it. That means I wear a couple of other heads since we have a lot of members and do a lot of events. And by the way, thank you for doing this town hall meeting, and hopefully it will not be the last one. So I tried to behave today in order to get re-invited.

One of the questions we send out in a survey – So I’m going to start local, very granular and then I’m going to move up to the twenty thousand feet level. So he has a V-shape greeting. So our question was, if our members believe in the V-shaped recovery or other, we kept it at that because this was challenging enough as some of our investors did not know what a V-shape or a recovery is. Only thirty-six percent believed in a V-shaped recovery, and the rest of them believed in anything other, and two, just didn’t know what it meant. So I’m doing the market updates similar to the other associations. So I’m the one that comes up. And let me tell you, I put all my own graphs and stats together. I have nobody I can go to online and get it from. So I spend hours on it, too. So ditto on that. So I always say I want to provide you with stats, graphs and facts. So no fortune-telling, only fortune building.

So I’m starting out it in February. All right. In San Diego, we had a super busy November, December, January and February. This market was not typically what it used to be, where, you know, the median price dropped. As you can see, the remainder right here is holding pretty steady where usually you go down starting in June. So we had a super fast market. We had multiple offers. We had cash. We had very low active listings and a year over year appreciation of 8.5 percent.

So we’re going back to March. I was sitting at home when the COVID-19 came down, and I immediately started going into research mode. I called my title reps, I called escrow offices. Nobody could confirm what I was thinking. Escrows came to a halt. Open houses are being canceled. A lot of canceled listings. Nothing. For two weeks, every day I went on the MLS and looked for canceled, withdrawn, expired listings. Nothing struck me out of the ordinary. So what struck me out of the ordinary was quicker closings, twenty-six days. Pending sales dipped, but they only dipped because we didn’t have the inventory.

Sold listings: It’s like the same year over year. Price per square foot increased to 430 in March. Yes, active listings were down 30 percent, which is unusual for that time of the year where we normally see more inventory. But the appreciation rate just slowed down, which tells you that is not normal. Normally in the summer months or spring sales season, we see that number increase and then later on in the year make the correction to the average of 5, 6 or 7 percent. So to make things even more interesting, this is the average percent of the original price to closed. You guys see that shooting up right here, though practically sellers were not lowering prices and they did have a few multiple offers. So I figured we were just flying an airplane in the beginning of March and the engine quit. So for all you pilots, when the engine quits, you’re not going down, right. Your prop is spinning and spinning and you’re looking for a place to land. So all the buyers that have their financial house in order, and suddenly your house emotionally became your safe haven, your life boat, your office. Actually, it became my gym. Let me tell you, that’s one of the hardest things I need to learn: how to do Zumba by myself in my master bedroom. So that’s the hardest one. So it was very active.

So in terms of numbers; and Derek, you said, Oh, the investors are all still cheering. OK. So I looked up cash sales. How are they compared to last year’s and this year’s months? So they were pretty consistent. I did it for the first 50 days in 2020 compared to the first 50 days in 2019. So we were about 330 for the 50 days, and the second 50 days going to March thirty first, in 2019 we had about five hundred, and in 2020 we had 410. Still pretty strong, ninety less, but we had less inventory. So investors, the cash sales I consider I investor purchases. So then the last 10 days, we were down 50 percent. So I feel a little bit like the sentiment is a little bit like 2007/2008.

I remember I must have been one of the first people making a short sale back then, and I didn’t want anybody to know. Right. And then the tone started changing. And half a year, a year where everybody was talking, “How long did you stay in your house?” OK. “I lost the house also in a short sale.” So I think people don’t want to really deal with reality because even so, this market is not showing any signs of weakness. Right. But, I want to remind you guys. What has happened from June 2007 in San Diego to January 2009? We went down less than two years, and now climb back up to the same value at about 2017. San Diego recovered pretty quickly. Now we have a very strong employee of the military, the Navy. So that is our biggest employer.

The tourism industry, which is obviously hit hard by COVID, but then next in line is biotech. So we in San Diego are producing those test kits. And by the way, they have been producing them since January. Now to share what Fannie Mae does, this little Homes Purchasing Sentiment Index, where they ask people and that’s pretty straight on, so this gives us an added tool towards real estate. So it dropped 11.7 Points in March and practically all indexes are down except for the mortgage rate outlook, which people think will get lower, past 11. So we could say this is why some home buyers are still sitting on the sideline. Whoever does not need to buy or does not need to sell is not in this market right now. Even so, some buyers are enjoying the less competition.

So we then sent out a little survey, like I mentioned before, to our members. And so here are the numbers. So actually, 40 percent said that they collected below 75 percent of their rent pay. Also, twenty-five percent said they will ask for forbearance and tools. Two comments were, “But my hard money lender is not allowing me or working with me. So I don’t know who the hard money lender is, but that is probably an important question for an investor. They also said that 15 percent have trouble closing due to lending restrictions. So these are my numbers. Our members did feel the pinch. Remember, in 2008, it just started with one person not paying the mortgage. And yes, we have much better loans in San Diego now with mortgages. But remember, household debt is up. Mortgage debt is up. Student loan debt is up.

What I find interesting that we print all these trillions of dollars. Somebody has to pay for it; and I think what is also unprecedented is that the Fed is now going to issue municipal bonds where we always said – Derek, I think this was your question. What about pension funds? Suddenly, corporate debt is rated double B, so we have a bubble with three Bs. So much corporate debt and pension funds are not allowed to hold a triple B bond, so this is all going to be interesting. I just think we have not even started to comprehend what all these little things are going to add up to. Lenders are asking for a forbearance. The servicing companies still need to pay. The banks, the investors. Right. So if you’re a non-bank and not backed by Freddie and Fannie, then you have to come up with it.

Now, part of it is they didn’t want to go through stress tests. So, it will be very, very interesting times and I feel like we’re all coming together with a geopolitical issue, trade wars, currency wars. Thank God I’m the last person that’s talking because, not that I’m negative, I know the Americans are very – and you can see it by how we handle the crisis – we make the best out of it. And thank God for all these funny movies, because laughing is still one of the best cures, I think. But, the crisis has shown us with other crises as we have. We have people without savings. We have a medical system that’s not adequate. Germany has eight times more hospital beds per person. And when you see Germany, how they handled it and how few deaths they had, it’s contributed to the good medical system.

I’m on information overload. I have been probably on fifteen webinars, and the information is coming so fast. But it is so exciting, and I need to thank Bruce for making me a much better, more critical person and not take for granted what you hear in the press. Find the chart. Find numbers, and substantiate what the press is saying. Remember what Bernanke said to us three days before the “” hit the fan last time. The banks were so insolvent, so are our corporations now. My 86 year old mom asked me, “So how come an airline does not have savings to weather a few days or a few weeks?” So I think we will learn a lot about that crisis. And with that one, I think I’m going to close it. And I can’t wait. If Bruce has any input on the trillions of dollars we are renting…

Bruce Norris: What do you want me to do? You want me to be and go through a series of things.

Aaron Norris: We have a very engaged audience. So the vast majority of the people that have started have stayed with us. And everybody, we are going to release this entire thing in its entirety on Friday. We’re not going to divide it up. First off, I want to thank all the speakers for hanging out today and doing all the homework that I asked them to do. For those who don’t know, a lot of these associations have supported us at I Survive Real Estate for the last 13 years, and these are some of our friends. And I think today you found out why. There are other clubs, but we couldn’t invite all of them and we wanted to get a little bit of a taste of all over the state. But thank you guys for being willing to hang out today as well.

Bruce Norris: I want to thank you, Aaron. I mean, your expertise in this field makes all this possible. Zoom is when you go fast. That’s what I think, and now you’ve got that platform. So anyway, I’m going to quickly go through a lot of points and you guys can ask me questions. There are a few things. We have to see what our willingness to restart life is. So right now, I’m walking around in a mask. If I deign to go to State Bros., I mean, I’ve got gloves on and a mask, and there’s very few people in the store. We all keep our distance. How quickly am I going to be willing to go to a forty five thousand person stadium and watch an Angels baseball game and stand in line next to 40 other people that I don’t know. I mean, will that take a while? That’s a reasonable question.

Will we change what safe means? I don’t know if you’ve felt this, but I’ve spent all my life trying to put my family in a safe position with paid-off assets and all that. But in the last 60 days, I’ve had to reevaluate what safe means. So I spent the money to buy a whole house generator that runs on propane and got a large amount of food, et cetera. I go to a place that I have a key to, that I can go alone and work out into in a dojo and lift weights or whatever I want to do. But I have to pass by a store that is never without a line, and it’s the gun shop. That’s a little concerning. So, I think this is going to come down to is: Number 1: Do we have coronavirus one and done? Or, do we have Coronavirus repeat and repeat? I think outcomes are very, very different if we have repeat. It’s likely we do because we want to get out. But the fact that we’re hiding ourselves is preventing the spread. So it would be easy to see that we might have several bouts of this and that’ll bring a very different demeanor to it. I certainly hope it’s not going to happen, but it seems likely that it might. I think there’s going to be people really rethinking how they live. As far as in New York, you’re stacked on one another. Aaron, you lived in, what, a five-story place where there wasn’t even an elevator.

Aaron Norris: Yeah. And I had friends that lived in a seven floor walkup. No elevator. Yeah.

Bruce Norris: You have to pass people, and everything in New York is little stores, stores, stores, all on the sidewalks with a million people on it. That kind of place is gonna have some ramifications where people would say, “You know what? I might not stay here.” On the real estate side of this thing, interest rates are more expensive than they should be. The gap between the 10 year and the 30 year mortgage is way bigger than it should be. So you should be in the 2.7 range or less, and you’re not. It’s because of all the problems with the funding. For us to have buyers show up after this, I think they’re going to have to have something called earning forgiveness. So can you go without a quarter or two of earnings and still qualify for a loan, or do you have to reinvent that in consecutive earnings for the next year or two? That would be a big mistake.

As far as inventory for sale, I think for the next two to three months, nobody that has to sell will put it on the market. No one that can pass on buying will be out there searching very hard. After that, I think we’ll start to see some things emerge. The one thing we really have going for us is the inventory mix is all private party. There is no appetite for lenders to foreclose on anything, and they are not allowed to. Historically, when I look at price damage; and of course, this is a different dynamic. This is Grand Junction, Colorado, nationally, which is a benefit, by the way.

Aaron Norris: We’re all going through the same.

Bruce Norris: That’s right. Grand Junction, Colorado, had an isolated thing. They didn’t make Federal policies to help out Grand Junction. So Grand Junction just went to 50 percent vacancy, rentals had massive migration out, there was unemployment, and no fix nationally. But now we do. That was one business that left for years and years. Here, we’re talking about a massive issue that might take months.

Aaron Norris: Well, my question to that would be the state of California has decided to really overstep its bounds in a lot of ways, I get that it’s an emergency. But you’ve got other states that aren’t doing that. So it is happening nationally, but as a private landowner and a landlord, will I leave because it’s clear that the state isn’t taking my business seriously?

Yes, there’s going to be two big states that are big losers. New York and California. One because of health, and California for policy. I think people with money are looking at this and going, “Wow, I’m really the stepchild here, and it doesn’t seem like it’s going to go my way any time soon, so I might find a new home.” That’ll be very interesting to see that transition, because I do think that will occur.

You know, when you’re a buyer and you’re in that first tier where you’ve saved your $5 grand or $10 grand and you just used it up in, let’s say, the next three months. That’s a big deal. So your down payment just disappeared. You also may be attached to the businesses that go and close. So you work for a restaurant that was barely hanging on, and now three months later, they’re gone. We already know some pretty cool businesses that are gone. That means tenants are gone, or somebody that has the building, and it means that people don’t have an income. So all of these things have domino effects on who can qualify. So I’m not sure what they’re going to do about that, but they ought to think about getting people to own without a down payment with a safe loan program. We’ve talked about that before.

It was mentioned about price discovery. So that’s exactly what goes on in your mind as you participate. When you’re building houses like we are in Florida, what price point do we want to have those to be rented at? You contemplate that all the time. Also, there are a lot of houses being built to flip. What’s the price point and the amenities that we’re going to be at to flip? Is that going to change? We’re going to have price discovery for that. I think there’s gonna be some big ramifications for world relationships with China. I think there’s a price that’s gonna be paid. I don’t know how big it is, but I think there’s gonna be a pretty healthy big price, lack of trust, and saying, “You know what? We’re not going to repeat some of these mistakes.” One of which is most of our medication comes from that. That’s ridiculous.

Aaron Norris: Yeah, that was brought up early on in the cycle.

Bruce Norris: So thank you for telling us that because you won’t make it anymore. I hope that’s the decision.

Aaron Norris: Do you think if that’s the case that there will be some states that see manufacturing come back?

Bruce Norris: Yes, I do. I think they have to, or we shift it to another country. But, you know, that’s possible that we don’t want to pay the price that we’d have to pay. But doesn’t that help employment?

Aaron Norris: Well, you’ve got Japan, who’s spending several billion dollars to take automotive out of China. So, yeah, they’re already making that move.

Bruce Norris: China is going to have some ramifications, and I don’t know that I’m smart enough to figure out what the ramifications are for the rest of the world for that. To me, that’s a given. That’s going to be a domino that heads downhill.

Lenska brought up the Federal Reserve and how they’re having to solve stuff they never thought they’d have to be involved in. And also the federal debt explosion. It’ll be very interesting to see how this plays out, where interest rates go, how we keep promises to retired people and on and on. It’s going to get to the point where we know we will never pay this back.

Aaron Norris: That’s why I’m wondering if this event will be used as an excuse to prop up pensions specifically because they have the double whammy of the stock loss, stock loss and payment demand.

Bruce Norris: I think you may see federal law passed. Two things, I guess. You could have federal law passed to where you can break the promises on a federal level for states, which would be terrible because you have people that are counting on that that opted out of Social Security. I think the other thing, and probably more likely as a blended of it, is that the federal government or Federal Reserve will back that somehow to where the states can pay a certain percentage of those promises and those people have a retirement that more mimics Social Security than it does the crazy number that isn’t going to be met by any state. And they know it. That’s the problem. They know it. There’s a lot to think about, and it depends. Does this last three months and we’re back to the ball game? Well, that’s a different outcome. If we go through and get this again in November or October, we start this whole thing again.

There are some really smart people. We interviewed one of them, Rand Paul. And the reason I did that is I respect his opinion and he used the word depression in one of the other interviews he did. That’s why I had him on and specifically asked him the question, Have you ever used that word? You’ve been around a long time. Have you ever used that word to describe an outcome? Is there any other economic cycle? And he said no. And I expected that he would say no. So, you know, you’ve got Ray Dalio. That person’s name was mentioned. That’s a really smart guy who’s taken a look at all the cycles. This cycle doesn’t surprise him. It’s like, yeah, we haven’t done it in our lifetime, but it’s been happening for centuries this way. The only problem is the ramifications of that. Sometimes he talks about how you have an upcoming power trying to take over the existing power; and you have the dollar being the world currency getting challenged, et cetera. So there’s just a lot of big pieces of the puzzle that are at risk of change or pressure. 

I’m really not excited to have to go through this. Warren Buffet even said I had to wait eighty-nine years to see one of these. Well, when Warren Buffett says that, it gets my attention. In 2008, I was watching Warren Buffett on TV on the Squawk Box show, and he says, “If they don’t pass the $700 billion bill, everybody needs to go to their room and pray.” And he was not kidding. I didn’t go to my room and pray. I went to the bank to withdraw a hundred grand. When I got there, there was a line of 200 people with IOUs because they were trying to withdraw some cash. I had never seen anything like that. Talk about one of those scary moments.

Aaron Norris: This is real life you did this?

Bruce Norris: Oh, yeah. 2008. I thought, OK, well, I need to get my share of cash so we can do that. Well, I knew the managers of some of these places, so I got the maximum allowable across counter. Didn’t have to get in the line. But in a whole day I got $20 grand. Remember a guy named Larry King, a friend of ours? He called me. He says, “I’m in one of these lines to get two grand.” So anyway, when Warren Buffett says something like this is a first, yeah, the hair on my neck stands up.

But you know what? Americans are resilient. So when we talked about the boston Marathon event where runners got blown up at the end of the race, it would be easy to think, “OK, well, that’s sort of the end of that kind of event.” And then the next year, 33 percent more people ran in it just to basically say, screw you, we’re gonna do what we always do and now more. I hope that’s where we land. And I hope we say, you know what, even if it raises the price of medication, I think I’d rather have it made here because then we know we have it. I think that’s not a bad decision, and there may be other things like that which occur that are long-term benefits. So I don’t know. I mean, that’s a lot to say in a very short period of time, and I really appreciate other people’s opinions. Each of them have expertise in their own box of real estate too. So you have different outcomes.

Aaron Norris: No, absolutely. Maybe we have some time. I mean, we’re almost hitting the three-hour mark, and I feel terrible. Speakers, if you want to chime off, maybe we can just do a few questions here and there. Matt and Amanda, you were up first, so we are going to bring you back on real quick.

Airbnb rental relief. If the properties are out of state, which state would you request to file for relief from where the Airbnb property is?

Amanda Han: I would say definitely apply with your state of residency. If you’re a California resident and you have out-of-state rental properties, you pay California taxes on those out-of-state properties as well. I would definitely apply with your home state. I don’t know if Matt thinks any differently.

Matthew MacFarland: That’s a good question. I would look at the state where the property is. Maybe apply both places. I mean, who almost knows, right?

Aaron Norris: Right. Wherever you can get in line and they say yes.

If you are a retiree and do not file your annual taxes, how do you get the payment?

Amanda Han: So for a retiree, if you’re already on Social Security as your income, IRS has indicated they already have that information, so you don’t need to file a tax return. Now, one of the slides we showed earlier said that the IRS Web site now has what they call a non-filers page. For people who are retired but don’t have Social Security yet, that’s where you would go. Put in some basic information and also your banking information, and basically, they’ll do direct deposit. Essentially, I tested out the Web site myself. Obviously, we don’t have a lot of clients who are non-filers, but you put in some basic information and it creates a simplified tax return to be submitted to the IRS just for the economics impact payment purposes only.

Aaron Norris: This is going to solve a lot of my questions upfront with you guys. There is some questions on how as a sole proprietor, how can I file for multiple ones? What’s the trigger where I know that I can apply as a sole proprietor, an individual with no employees?

Amanda Han: An individual with no employees. Yeah, if you’re a sole proprietor and you pay self-employment taxes, you can still apply for the PPP loan as well as the EIDL loan. You would just be using your own Social Security because you don’t have a tax I.D. number for the legal entity.

Bruce Norris: I’ve got a question because I heard something I wanted to confirm. On the EIDL loan, that’s the one that’s got $10 grand of money that you don’t have to pay back. Is that correct? I think that applies to if you have a staff of 10 people. If you are one person, is it $1,000?

Amanda Han: Yeah, that’s a great question. So, you know, we were looking at that because there were some articles that came out, I think, a week or so ago from Inc magazine and money.com. They referenced the SBA had a bulletin in one of their top branch offices that said that. That bulletin has since been removed. We didn’t really see anything that indicated this was capped by a number of employees on the SBA’s own website. However, I was just showing Matt, after we did our part of the presentation tonight, we also applied for an EIDL loan and we got a response back from the SBA from our application about a week ago. The SBA, in their response, did say that the grant portion, that ten thousand forgivable amount, they are looking at it based on the number of employees. Not as good of news as we had hoped for, and it looks like they’re saying now there’s this additional calculation. It doesn’t mean that you’re not approved for the EIDL loan. It’s just saying for the advancement portion, which is the grant part, that it is based on the number of employees up to 10 for the ten thousand.

Matthew MacFarland: So it could be a total coincidence that we got it during the presentation, or maybe the SBA is actually listening to this presentation. Who knows. 

Aaron Norris: What’s the threshold to where I can apply for multiple businesses if, say, I’m part of multiple-member LLCs? Is there a limit to how many I can apply for?

Matthew MacFarland: Our understanding is it’s based on who files tax returns. The way we look at it is if there’s a partnership out there, the partnership follows its own tax returns. So depending on what kind of business they have, what they have going on, they may be able to file or an individual file because they file taxes. A question we get a lot is what about disregarded entities? Single-member LLCs? They don’t file their own taxes. So in our interpretation, our understanding is you would just include that activity underlying your individual tax return and file that way. But again, you know, that could change tomorrow for all we know.

Amanda Han: Yeah. And also look at the term “trader business.” So meaning if you’re a real estate investor that you have rental properties, that’s one trader business. And maybe you’re also a broker or a wholesaler.

Again, an S corp or special C, that’s generally another trader business for tax purposes. So, you know, that’s how we’re kind of interpreting that right now in terms of buy businesses.

Aaron Norris: Maybe a question for Kathleen. I’m not sure. Dad, your opinion here. What is going to happen with the hedge funds who bought all the REOs and decided to rent? Do you think they will liquidate?

Bruce Norris: Honestly, most of them are probably held in vehicles that are long term, like REITs.

They’re single family. It’s almost like having a scattered apartment, in my opinion. And I’ve talked to John Burns about that. So I think a lot of those properties are really permanent rentals that are in vehicles that really are not something that intend to be liquidated. As a matter of fact, they are probably are doing much better than some of the other hedge fund investments that they could have had. So real estate’s really not the damage path right now for most investors. It’s been taking on stocks primarily.

Aaron Norris: Kathleen, I don’t know if you’ve been following any of that activity on the notes side, too. I mean, I’ve heard a lot of hard money lenders of the Wall Street variety that have just up and left or severely changed their programs, especially if they were using lots of leverage. Any thoughts on that?

Kathleen Kramer: You know, I think that right now there’s not a lot of ability to determine the actual market price of assets. As far as investment tomorrow and what are hedge funds going to be buying, I think right now they’re looking at gold and Bitcoin. Gold on the short term, and bitcoin may be on a five-year time horizon as a replacement for fiat currency. I do want to mention that I saw a very interesting interview with a gal named Pippa Malmgren, and her father was Harald Malmgren, who was in the Reagan administration. Pippa has a PHD in economics, and she’s a business person, and she has been a consultant in the Bush administration and other administrations. She was asked to write a memo to our government and another government about forming a version of the RTC. So if you remember, in the S&L crisis, most of us weren’t even born then. But in the 70s, the essentials crashed and they had all these assets. So the government set up a corporation called the Resolution Trust Corporation, and they took all of these distressed assets from the S & Ls, savings and loans, and they put these into this RTC, and the RTC then valued them and auctioned them off. So Pippa was asked to write a memo, and in this interview she was saying that the government in the United States is very interested in forming private public partnerships. So there are two entities, BlackRock being one and PIMCO being the other, that are in line to be the new RTC, if you will, on behalf of the federal government.

So what I see is I see the Fed buying a lot of bonds. They’re buying a lot of this debt and they’re providing liquidity to the market. And by that, they’re holding the market up. So I think Lenska was very appropriately talking about the triple B rated bonds, which, if a corporation falls into triple B, then the pension funds have to sell their debt. They have to sell those bonds. The federal government has been buying them and putting a floor under that market so that it doesn’t crash. Corporations can still go out and borrow hypothetically because I don’t know anybody that’s getting a brand new loan right now. That’s what the government’s been doing.

Now, let’s just walk through this for a moment. So let’s say that the Fed puts money in. They buy these bonds of these corporations that have no cash because they spend it all buying back their shares. Right. And now they’re failing. So then what happens? The business is failing. It goes bankrupt or it says, Hey, I can’t perform on my bonds. And who’s holding those bonds? Well, the federal government bought those bonds. The Fed did. What does the Fed do with those bonds that are now in default? Well, they hand them off to BlackRock or PIMCO. BlackRock or PIMCO put a valuation on them and then they sell them to the highest bidder. So whose going to bid for those assets? Well, you know, if some of those assets are mortgage-backed securities and I’m in the real estate business and I know about real estate and I understand how to value real estate assets, I might put together a pool of funds and I might go bid on those assets. So you asked me about hedge funds and you asked me about BlackRock and, you know, some of these groups that own these assets. Well, that’s why the federal government is considering BlackRock for this kind of a thing because some of those assets are going to be real estate related.

Lenska Bracknell: Yeah. And if I can add to that. If you also watch some of the tickers, they are already raising money for certain REITs or purchases. So I was always wondering what they are raising the money for? So thank you for solving that puzzle for me personally.

Kathleen Kramer: Yeah. In fact, you know, one of my favorite investors is this guy named Howard Marks. So if you know who he is, he’s a 1 debt buyer, and he has started a company called the Oak Tree. They just celebrated 25 years. I think I got a newsletter from them. So, you know, they buy distressed assets and they buy distressed debt. They put together an opportunity fund last year at the end of the year, and it’s traded on the New York Stock Exchange. So you can Google it. I’m not going to give you the call sign, but you can google it, and they’re raising money right now. They’re selling shares and they’ve got about, $250 million right now in cash. It’s just sitting there in cash. So you can go look at their SEC filings and see what they’re doing, but they’re just sitting in cash waiting to buy these distressed assets. And that’s pretty interesting.

Lenska Bracknell: Note that the Fed started QE in September 2019. So someone knows something we don’t know.

Aaron Norris: Great segway into some political stuff, and Paul, I’m going to be coming your way on this one. The question was raised: does it matter who is president next?

Dad, do you have any thoughts on that?

Bruce Norris: I think it’s unlikely that we have a change. That’s the bottom line. I wish we had other choices, to be quite honest with you. But I think we will stay with the president that we have. It’s hard to imagine him being replaced by the candidate that we’ve got. This is beyond who’s president. I hope for something like this, this pandemic and the seriousness of it, and we have since shown some signs that we possibly can act like Americans instead of Republicans and Democrats. I think that would be a really important thing for the next four years.

Bruce and Aaron Norris: It would be nice. We’d have to get all parties to grow up.

Aaron Norris: Paul, one of the reasons I wanted your opinion on this was because California is a great example of a state that’s very liberal. We have a majority liberal state and house making it very easy to pass policy. They keep trying to change things to make it easier for them to pass things without the other party involved. Just skirting them altogether. Is there anything that NAR or the California Association of Realtors in particular is worried about if we have a Democratic president?

Paul Herrera: Gridlock can be our friend in some cases because it avoids bad things from taking place. And if you get a wild swing the other direction, then some things are off the table. That said, in a scenario in which we’re in an economy that is going to have a lot of cracks in the foundation and a lot of it related to how government fund finds itself, especially local and state-level, a lot of those really ambitious ideas that might be more of an issue for our long term marketplace might not be on the table at that point. You’re just trying to figure out how to deal with pension obligations and funding local services, state services and the federal government being the last remaining piggy bank that is able to borrow and use those funds. So are there some concerns? Sure. But you never know how the politics of that are gonna work. You know, we spent a generation trying to protect the mortgage interest deduction, believing that Democrats would be the ones to undo that one. As it turned out, it was the Republicans that did it in the tax reform that basically made it useless to most Americans. So you just don’t know how that’s going to function in any given administration.

Aaron Norris: Well, I feel like maybe we should revisit this in another month or so if everyone’s willing. We’ll work on that. It’s just getting really late. And we’ve got some of the speakers that need to go.

Bruce Norris: Thank you for participating, man. We really appreciate that.

Aaron Norris: Is there any last thing people want to ask or chime in on?

David Granzella: Thank you very much for letting me participate. You did a fabulous job. Maybe next time we talk about where the puck’s going to go by then.

Aaron Norris: Yeah, a little more clarity.

Bruce Norris: Well, we need a few more months before that is more clear.

David Granzella: Absolutely.

Thank you, Aaron. Thank you, Bruce. I’d love to do this again.

Lenska Bracknell: SDCIA will be sponsoring the I Survived event, but I am voting for getting out of our P.J.s.

Aaron Norris: Sounds good. All right, everyone. Have a great night. Thanks so many people for hanging in with us for such a long session. Hope you find it’s helpful. Good night.

The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.

 

Resources: