EPISODES
Episode 31.
Chris Wilhoit, Director of Operations, Lima One Capital
All right, you get to meet one of my closest peers in this space and, better yet, one of my closest friends, on this week’s episode. Chris Willhoyt, director of operations at Lemowan capital and the man who was at the helm of our rental thirty product launch years and years ago. What’s the pulse of the appraisal situation across the country? Where in the world or valuations going from from a technology perspective? All of this and more in this week’s episode. Thank you so much for listening. You’re listening to the real estate of things podcast. Welcome to the real estate of things podcast. I’m your host, Dalton Elliott. I am joined today by Chris Willhoyt, director of operations at lemowan capital. Chris, thank you for joining. Absolutely thanks for having me, for sure. So you and I go to really, way, way, way back. I was a wee young little boy just graduated from Firman Rock in the REGALIL. Today, you were one of the three people who actually interviewed me to come aboard. I think you refer to that day as the biggest, biggest misseculre life. Right. You said, I let’s bring this guy on or maybe you were the third vote that just made the wise decision. I took the scale positive. Oh you did. Oh Yeah, yeah, where will we be without the real state of things? So this is true through that’s true. Good decision on you. You’re wise and just like you and I are catching up before this episode. Yeah, I’m just going to ride your cotails. You’re much smarter than me, so this is going to be easy. So I’m just gonna I’m just going to do some more better here and you’re going to do some teaching and we’re going to be get together. Yeah. So just a little introduction about myself maybe to start with, I’ve been with the company since two thousand and thirteen, shortly after the kind of relocation from Atlanta to our Greenville offices. And…
…when I joined we were very small, kind of startup minded company of a fewer than ten people at that point in time. And and since that time I’ve held a bunch of roles in operations throughout the evolution of our operations team, at leam one, and helped spin off some of the groups, the one of which Dalton is now the the Director of Ur and our sales groups. Over that period of time, from two thousand and thirteen to today, and then, most notably, in two thousand and fifteen, we saw a huge opportunity in in the market for a call it ultra small balance. I like to call it mom and pop single family rental ending because, you know, you had your be two hours of the time calling American finance, which has gone through several iterations of names, and other larger institutional minded lenders really looking for large aggregators of single family residential rental properties, of which there are only a couple right. They’re handful of those types, to large aggregators, which typically comprise, you know, your kind of single bar or securitization market. And so we saw an opportunity where the majority of single family residential rental properties owned in this country are owned by by mom and pop investors, smaller investors who in between one to ten properties. That’s, you know, the vast majority of of that, what comprises about thirty three percent of the total real state market, held by investors in that set smaller group. And so it was really a segment that was completely missed by that that focus on the large institutional investor. And so we we started a program in two thousand and fifteen, with a lot of feedback from our current clients at the time who really had no access to permanent institutional grade capital for their single family residential investment…
…properties other than going to, you know, smaller regional banks or trying to go agency financing, and in there, you know there are their issues going down each of those avenues. You know, agency financing really just isn’t made for investors and so you don’t get the protections of you your LLC’s and the different types of liability protection from the ownership investing in the properties, since Inga May, you know, require such guests in your personal name and the regional banks are was going to tap you at at a certain point. And so what? That’s where we really saw a huge a huge potential for ultrasmall balance single family rental lens and we started out in two thousand and fifteen. I helped helmed that particular department until two thousand and twenty, where we saw an opportunity to grow a little bit Lema One and took over director of operations, now under by perviews, consolidating all of our processing and our credit credit overlays for our different deal teams throughout the organization, along with technology initiatives, and we’ve consolidated and really created a corporate valuation strategy which is helped us navigate some really turbulent waters over the last two years with with the flood of traditional financing really taking up most of the APPRAISALLE per view out there in the in the market place. So long, long introduction for myself. Turn it back to you, Dalton. See US where where you want to go? Yeah, I know, good, good walk down memory lane. And you have quite the pedigree here. Yeah, when I when I got here, rental thirty was like two months old. And Yeah, learned a lot at the knee of Mr Willhoy. So it’s been a fun ride. But youmage of the valuations piece and you know you’re a you’re a secretive fellas. I know you won’t give away anything crazy, but yeah, like covid throw in and everything.
But one thing that you know you had, and had and have an incredible housing market. And Yeah, we sometimes forget about size and lose view of perspective. Right, like we are hit Leem one top dog in the space, right, but whenever you back out and look the whole mortgage industry, there forward originators that do, you know, more in a month than we do in a year. So it’s just different. So talk to me about like that valuations piece, where it is now and, more importantly, like where’s it heading, like what’s the future look like on the valuation side? Yeah, yeah, it’s a good question. So you, I mean, you had the nail on the head with the issue that that really we and other competitors like ours, really any small nondepository, even small depository institutions who are forward originators, are going to run into in a market like what we had was that there’s a there’s only you know, there are only so many qualified licensed to praisers in the market place period right, and part of that, the problem statement is that as a field, it’s a fairly old style of employment feel, where you have to do an apprenticeship for a certain amount of time and some of these aging out appraisers in in the market place where we don’t want to take on an apprentice and go through that Hasshole of the five or seven years it takes to accrue with the amount of of appraisals under that leadership to become an appraisal themselves. And so what we had was a rapidly increasing volume of new home purchases and reefinances requiring, you know, full appraisal reports in the space. Along with our rapidly increasing investor base and because of the market share that that the traditional forward originators have with with their AMC’s, the appraisal management companies, we were struggling to get traction there right,…
…and so a lot of what we had to do was continuous curation of our praisal management companies down to the county level and and really try to create some concentration with different AMC’s at that type of small micro layer. So and were couldn’t we were able to pivot a little bit off of what you know, your agency lenders can’t do and go try to find some direct engage appraisers who might want a more challenging appraisal assignment or want to work something non agency. Because the other the other problem statement that we ran into was that our appraisal requirements are more demanding of an appraiser’s time. Right, so they can do a you know two or three traditional conforming ten of for single family residential appraisal reports for everyone new construction ruction or subject to valuation or portfolio five or six, you know, single family rental properties, right, we’re sometimes there’s going to be access issues into those properties because they’re tenanted not by the the owner, right, and so so you know, just run into all types of problems and all of that comes together into into just a problem. Statement. Off, we have to pay more attention down to to the market level of our coverage, and so our timing to its really consolidate that our praisal department was was actually perfect for us, because what we saw once we did consolidate and bring on some technology to help us to actually manage these huge networks of vendors down to that level, was turn times spiked right like everybody else’s in the market. You know, completely unacceptable turn times for us at the twenty day range. We’re pretty standard and it’s just, you know, one of the hallmarks of the business purpose lending space is quick closing, right,…
…and so that’s that’s one of the things that we weren’t able to compete on anymore. And so what we also saw was a pivot away from your traditional single family ten of four, ten, twenty five, ten, seventy three, which requires an appraiser to actually go visit the property, make the inspection itself and to to then drive by and physically locate all of their comparables in their market. So they’re’s been a pivot from that to what are traditionally called hybrid appraisal approaches and they’re not on a fanny may form and so typically not recognized by the agencies. But so these are kind of a product. It’s custom fit for a company like ours, where a third party other than the appraiser can make the inspection on the property, return that inspection report to the appraiser who does their market research on the comps and does a traditional valuation on the sales sales approach for that property, but they don’t have to go physically visit the property. Right. So you think about some markets where that’s really difficult, right La Atlanta, large geographies that you know if you want to go visit all of your properties, it might take you a whole day right just to inspect and physically go locate all these properties, whereas you hire somebody else to do it and you can and sit and do the research at and really increase your throughput as an appraiser. And so that’s that’s one of the things that we did and really the business purpose living space as a whole pivoted towards that. And then we also saw some some interesting movement away from the traditional appraisal and so I think, you know, fanny May and some of the some of the agent GSC agency really recognize the problem of a diminishing population of licensed appraisers within their markets and for a long time they created a patch where, you know, a lot of a lot of reefinances and new home purchase is didn’t require appraisals at all. or part of the evolution of that…
…too was they also spent a lot of time creating a hybrid form of their own, and so fanny may actually now has a hybrid form that they don’t recognize, which is an in broad, broad use around around non agency lenders like ourselves. But hopefully that gets in traction and you know, the whole market can pivot towards that hybrid kind of concept every time. Yeah, so a lot going on driving the I guess you can say advances in the valuation space, but it seems like the chief driver is that you just have an aging appraiser population and, like you said, no real a printer at least the apprenticeship numbers aren’t keeping up with the numbers of appraisers who are aging out right. Yeah, that’s yeah, that’s part of it. And then to you just you know, almost no market, right, or almost no supply demand chain can can take a two hundred percent. You’re over, you’re increase all of a sudden, right, and so that’s part of the problem too, is like you’d you literally couldn’t have projected that the volume would have been what it was over the last year and a half. And so even if you were to have projected that, is that a sustainable volume over duration that you really need to staff to as as a net? You know, if if you could conceptualize staffing a national appraiser, you know, firm, you know, would you have done that anyway? Right, because you know, even if it’s two hundred percent of volume based on the previous year, is that sustainable over a long enough duration? So so really, I mean that problem statement. I don’t think would have would have been better, or even if we knew it was going to happen, because it wouldn’t. Wasn’t going to always happen at two hundred percent volumes. So really it’s just part of it. I think, which is healthy is that the real estate appraisal industry as a concept really hasn’t been revisited probably since two thousand seven, two thousand…
…and eight doc frank, which required the AMC’s and the different consolidation of the non arms lengths between between, you know, a forward originator and the actual praiser, and so since then, you know, I really haven’t been a lot of shake up there and I think this is a healthy shake up that’s really caused by stress of a supply and demands like that that they just couldn’t keep up with, right, and it’s created innovation, and innovation for us is good because that means we can maintain the speed and then that’s also good for our investors because it decreases cost because in a praiser, visiting all these properties expensive at their you know, their higher you know higher salary, right, and so it’s much cheaper to send someone else, like a real estate agent or a broker to those properties make dis inspections in return. So certain a healthy amount of Shak up there and I have hope that continues to gain traction and specifically the animes hybrid form as as that evolves and matures. Yeah, you mentioned faster and less expensive, and so that those are two legs of the triangle and then you have quality as the other leg, right, on the faster, cheaper quality side of it. So judrive not to. I mean just asking. Right, you mentioned faster, cheaper. Does quality suffer? Yeah, where’s the quality piece fit in? I think it can. Write. So. So, if if you paint a very broad brush on the industry and you just around on the entire market, right, the US market, which is not a muchnous market by any means. Right, when you say I’m going to do hybrids everywhere, all the time for all of my products, you know, fix and flip new construction and your bridge permanent rental, regardless of the complexity of the assignment, you’re going to supper quality like there’s just you know, there are situations in which in a praiser needs to visit the the physical location of the property to really understand it’s the subject’s proximity to amenities and at the neighborhood and different things that will impact the…
…value. Right, and so understanding the complexity of the assignment is is a really crucial element to making sure that you don’t lose quality while adopting something like a hybrid approach or a more innovative approach where where it’s going to be cheaper, faster and they’re not going to visit the physical property. Right. So, anytime you’re doing, you know, new construction, you know, I think it’s it’s typically a good idea to at least have that appraiser to drive by some more complex Rehab project, you know, where they’re going to scrape to the foundation and rebuild. Always a good idea to have a physical inspection by the appraiser to make sure that their understanding the theoretical subject to value the property. But you know your median value single family residential rental properties. You know. For the most part, I think it’s a good approach that increases the throughput, decreases turn times and allows us to get to get those valuations back quickly. Because you mean well. You know, apart from just a desire to move quickly, that that really has been a lunch lunch pin of the business purpose lining space for so many years now. It’s really important to move quickly because rates are moving extremely quickly right it is an incredibly volatile interest rate environment, and so our ability to, you know, project that interest rate movement is basically, you know, it’s not in our hands at this point. Right. So the Fed is moving interest rate several times already this year. They will be again several more times this year and we just don’t know what that kind of all actility is going to look like. You’ve got, you know, other international issues and concerns that are also putting pressure on that and so, you know, ability to execute quickly is paramount to to our investors to make sure that the rate we quote them, you know,…
…at the date of their application is is as close as possible at the rate we can close under. So, yeah, that’s fair. So walk with me down the future lane. Five years from now, are you able to put a finger on the pulse of what valuations look like in this space and the BPL space? Yeah, only in our space, right, I would say, in really only for lemo one capital. So so I would you know, I’d like to take that concept of a hybrid and move it further along, specifically for Lema one capital, so that we can create a concept of a hybrid. It really doesn’t require third party engagement. Rom Third Party appraisers, and that’s where I think the industry is moved in. So, without giving away too much of the the secret sauce here, you know, I think moving wholesale away from our reliance on third party appraisers is really where we need to go as as a company to ensure that we can have the quality evaluation that we want with the turn times that we need and and we’re controlling the cost for our for our clients. So the couple things that over the last couple of years of really allowed that to happen. Right. So you’ve got an increasing quality of national data available aggregated at your fingertips right all the time. So you’ve got all the same public data in most markets that any local praiser and in lest data that any local appraiser would be using at the click of a button, right. And so that’s really what allows you to move away from relying on a third party appraiser in their local market who has subscription to their MLS and no one else has that right. So you know, typically, if you’re you know you who work in Georgia, it’s a license a praiser and there’s no reason for you to have other MLS right outside of your local market, whereas today you can subscribe and get, you…
…know, basically ninety ninety seven percent coverage over the US and get most MLS and public data. And so you know that. Plus, you know, just understanding our market place and using the data we’ve aggregated through our originations of time allows us to to project that in the future we’re going to move away from relying on third party appraisers like that. Yeah, it’s a what you’re saying reminds me of the conversation I had with Gary Beasley, like CEO of roof stock, brilliant human, and I picked his brain. I don’t know it was thirty minutes, an hour after we finished recording the podcast and just diving into the valuation side and what they’re doing at roof stock to a similar pathway that we and others in the space are following. I’m really like asking questions, like you can’t just look at the data go are is it in a good school district? That’s very different from being is it early across the street from the Great School in the school district? Power Lines, like all these things that he’s like, yeah, you just don’t need to in a lot of places. You don’t need to actually send somebody out there to answer those questions. We could. So, like the data pieces, it becomes what do you want? Like? What? What is going to change the value at all, have any impact on it? Where can we find that data source? Plug it in? Here’s how we feel about you know, yes, know, to what degree, and you know. Then you have you have your model for valuation. So it’s that’s that’s probably the most oversimplified run down that one could possibly give. But again, I’m I’m a simple boy. You’re the you’re the you’re the mad scientist over here, Chris, so you mentioned good. I’m just going to say where I completely agree with that assessment is that you’re always going to need an expert to say, you know, to look at the physical location of the property. And that’s another thing apart from you know, this is kind of a data element, but…
…apart from just data, you’ve got better mapping of these properties. Right, you’ve got Google Earth and you can zoom down to the properties location, find those power and find those things without physically being at the property, right you can. You can you know if you if you do still want an inspection on the property, because you’re you know, your risk appetite says that these properties in these markets still probably need a physical inspection by a third party. There are great APPs and and services that can can return that kind of inspection of that property for you, Geo geotagged with the dates and you can walk people through the the actual photos of their property, and so you can get you can get pretty secure that you’re getting a full view of that property without ever having to physically be anywhere near it. Yeah, so, yeah, absolutely. Yeah, all right, one thing. I want to come back to his single family rent growth just as as up into the right. I don’t know which way this is, if it’s going to be mirrored or not, but whatever, up into the right is nineteen point. Yeah, what nineteen point three percent single family rent growth year over year, as measure measured February, two thousand and twenty two to twenty one. So crazy. So we have we have a housing supply issue which was present before Covid, exacerbated by covid that’s going to take years to get from where we were post recession, like post great recession, which is under building, overbuilding. Before under building, Pre Covid, we weren’t really even called up at the pace covid or a wrench in it. So now we’re, you know, we’ve fallen even further behind. So then that drives more of an increase for the rental side of the fence and rental rates. Yeah, single family rint growth has been insane. So is this like? What does this look like the back part of this year? Like do we in February next year? Are we going to look and see kind of a similar match drink year over year compared…
…to the February stat you just throw out? Where’s this going? Yeah, not so my crystal ball. I don’t think so and I don’t think that’s sustainable for renters. Right, right. So, you know, I think there’s several factors all coming together that have really influenced that astronomical growth of single family rent in the US. And it’s truly at the single family level. And some of it was just, you know, on the back of, you know, the most stringent covid restrictions, people realized they wanted to move their families out of high rises or condos or places with no green space or yards and into single family residential properties. Increase of remote work allowed that to happen and so you had this large diaspora of people moving from their physical location, which they used to be required to be at because of their job or their workers or specialty, into now being able to to be location agnostic because, you know, they can work remotely or or maybe they’re even going to relocate right. So you you have that. That also in that you know, what they called a great resignation. So several factors all contributing to movement of people around the US. And then what those people came up against was the guy that what you said, new housing starts have not kept up with with the demand growth. And then when that demand growth skyrockets overnight, in a lot of these areas you have house price appreciation that has just become outrageous, right. So in the twenty percent and a lot of markets home price appreciate appreciation. And so when you combine PN price appreciation with people moving from, you know, areas where the cost of living is much higher to areas where the cost of living is much lower, they bring, you know,…
…that capital with them and they’re going to increase the cost of the properties because they don’t don’t care what the cost is in that market. You know, they have the cash. They’re going to they’re going to pay for the property in cash, and that creates a very competitive market where your HPA is going to heat up really quickly. Right, when you have a quarter of all properties in the US selling for cash over a yearlong period, it’s just you’ve never seen anything like it, right. And so what the thread is doing to kind of ease that burning hot home price appreciation is increasing, increasing the prime interest rates, right, but there’s a there’s an immediate shock that that actually makes affordability, where home price appreciation isn’t going to drop over night, even worse. Right. So your your you know, first time home buyers, new entrance to the market, or even people who have just lived in one market and now now it’s ready, they’re ready to buy, buy a home that renting for x number eight years and they’ve saved up that down payment. Well, HPA makes that down payment requirement much higher and now their DTI is all out of Wack because, along with that higher cost of property, you’ve got, you know, interest rates that are up point and a half on the two points over over that same period. And so there’s got to be some balancing right. So typically, when when your interest rates go up, your HPA should kind of flap, flatten out a little bit and really start to cool off. And and that’s, you know, that’s the basic premise here of what what we’re trying to accomplish with. That’s trying to accomplish with interest rate increase. So there’s going to be a period where that’s going to create even more out of whack you know, new new owner or singer or first time hen buy here affordability, and that’s a that’s a huge problem and that’s a problem, honestly, that that, you know, we’ve tried to help tackle. On the new construction side, right like our new construction…
…lending has just skyrocketed, and that’s that’s because, didn’t you know, there’s there’s a historically low inventory right. So it’s the lowest inventory for for housing in something like forty five years right across the US, and so it’s just not keeping up with demand. And so you have to start, you know, creating incentive for for new builds, and and that’s that’s also where you see, you know, there are a lot of individuals who are trying to take advantage of that rent growth and the HPA, and there’s a lot of built to rent happening right. So instead of building new high runs developments, a lot of these larger developers are going out and building scattered site single family residential contiguous build to rent development’s right where you can place, you know, place tenants within that community and for all intents and purposes for the property management looks and feels a lot like what an apartment complex would look and feel like. For them. It’s a manager right. It’s all contiguous, combined single family residential property, but it’s just keeping up with the demand of where renters want to want to place themselves in their families today. Yeah, while that’s interesting read and I’m going to have to have you back on here for the Thanksgiving special and we’re going to hold your fifth to the fire. We’re going to play that cliff and see how it stacks up. Yeah, I have I hope it does stack up right because because you know, at a certain point, you know, I think the concentration of investor own properties in pretty seeing about five percent here every year, from about twenty eight percent to thirty three, thirty two percent over that same period of time. That shows you a little bit of that cash and then it also shows, you know, some of the build to rent inventory and then, just you know, investors going in snapping up single family rental properties take advantage of that nineteen percent rent growth, and so where that’s healthy for Le More on capital. I also think you know that we need to also balance that out by increasing the accessibility…
…of new construction financing for our our good builders, and that’s exactly what we’re trying to do on that side of the House as well. Very well put, Mr Willhoy professor, will Hooy, that’s going to be your name on this podcast. We’re going to I’m going to tell market it. We have professor, Professor Christopher t will hoyt, professor, thank you so much for joining us and teaching this class today. Always learn something when I’m around you, and thank you very much, my good friend. Thank you. Don’t thank everybody for listening. Take care. Are you a real estate investor looking for the right lender that can finance all your deals and help you scale Lima one capital has the best suite of loan products in the industry, Barnet, whether that’s fix and flips, fix and holds, building new construction or buying rental properties. They have incredible financing solutions for it all a reliable comments, since Linder is one of the most important parts of your investment team, and that’s exactly what you get with Lima one. Let Lima one capital show you how they’ve helped thousands of real estate investor scale and increase their wealth. Check out Lima onecom or call eight hundred two five nine zero five hund ninety five to speak with the consultant and preparation for your next project. Thank you for joining us today on the real estate of things podcast. Subscribe and tune in weekly for new content from the industry’s best while we continue to unhack the nuances of this dynamic market. Follow US across social media for additional insights and analysis on the topics covered in each episode, and remember to rate, review and share the show.
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