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This past week, the 10-year yield held steady; and the stock market volatility continued.  With that stated, I saw one major commercial lender drop their rates noticeably.   That usually means their economists feel interest rate risk to the high side is much less than expected.

Risk of Outliers

From Wikipedia, “In statistics, an outlier is an observation point that is distant from other observations. An outlier may be due to variability in the measurement or it may indicate experimental error; the latter are sometimes excluded from the data set.  An outlier can cause serious problems in statistical analyses.”

So why am I bringing this up?  Okay, let’s jump into my thoughts for the week.  First, my degree is in math-economics (econometrics long ago).   And, yes, that means I am very comfortable with numbers and economics.  In our daily lives, we receive signals all the time.  Some folks pick up on signals easily; and then others do not.  That all goes right back to each of our unique gifts.

Now back to outliers.  I do not care if it is in the field of auto repair, medicine, or real estate; it is important to pay attention to the meaning of an outlier.  In real estate finance, if the most efficient financial institutions are offering interest rates of around 5% for a risk (and then there is one institution that is much less at around 4.5%), then what should we be thinking?

Here are the choices:

  • Woohoo, I am going to save a lot of money!
  • Uh-oh, how can they do that? Where is the surprise?

Occasionally, an outlier works out fine.  Yet, if we all just step back and think about it with some uncommon sense, then we might realize that an outlier carries risk.  It just has to; and here is why.  Why would a financial institution be able to offer a rate far less than everyone else?  And, better yet, why would they have to?

Pricing is a function of supply and demand.  Hey, if an institution is better, more efficient, etc., then I can imagine they could price their products lower than many (think Walmart and Amazon types).  However, if a very tiny player in the market is stating they can do something that no one else can, then I am going to be very fearful and skeptical.  For those of us in the trenches, if an institution is that good, then we are going to know about them quickly and start using them often.

Now if none of the smart players are using this company, then I suspect that a surprise is coming.  And, as I have often written here, surprises cost money (sometimes big money).  The surprise will usually come somewhere down the road in the loan process.

For example:

  • Oh, I am sorry, we really cannot offer that rate.
  • Oh, I am sorry, our underwriter said we have to pass on this risk.
  • Oh, I am sorry, your property does not qualify.

Sadly, I get calls like this a lot from folks in the business that need me to save their butts at the last minute.  Note that usually ends up costing clients a lot more money because we need a solution with minimal time remaining on a deal.  We all know clients and business partners that believe the wonderful offers that are often too good to be true.  It is just the way it is.

Be smart.  The reason many of us use trusted relationships is to utilize knowledge, experience, and integrity.  That is our protection in whatever we are trying to accomplish.  It is not that hard if you utilize the right professionals.  It also protects your own reputation, your client’s money, and leads to increased referrals.

To sum it up, make sure you have the right people involved in your personal and professional lives.  Signals are out there in all we do.  I suggest you work hard to not ignore them!

Investments Opportunities for Purchase with Strong Cash Flow:

Back on the January 15th update, I wrote about “Creating Residential Listings Using Commercial Opportunities.”  Each week,  I am presenting some of those investment opportunities to better educate all on what is actually available.  Note that these are all Single Tenant Net Leased properties that have listed in about the last 10 days.  In addition, I assumed a 5% loan with 50% down.  This is just a small sample of what is actually available.

If you assume investors in the Bay Area are getting a cash flow of 3.5%, then you can see the potential improvement with these properties above.  This approach is great for the investors desiring increased cash flow, an opportunity to get out of daily property management, and/or taking the challenges of rent control off the table.  Should you wish to discuss any of these or others, then give me a call.

That’s it for this week.  As always, feel free to give me a call with any of your strategic financing needs.

Articles of Interest:

Realtor.com shared “With No Letup in Home Prices, the California Exodus Surges.”

NREI reported “How Lease Agreements Can Protect Against Risk in Single-Tenant Office Assets.”

The San Jose Mercury shared “Why the Bay Area is the epicenter of California’s housing crisis.”

The SJ Mercury News also shared “Teacher housing coming to Los Gatos.”

See the table below for approximate interest rates.
Type Rate Fixed Term
Apartments 4.325% – 4.850% 3 to 10 year (30 yr amortization)
Commercial 4.635% – 5.150% 3 to 10 year (25 yr amortization)
SBA Lending Call for Options Call for Options