Real Estate Crowdfunding: Realtyshares Foreclosure Process Example 2018

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Final update. I’ve invested in multiple real estate crowdfunding websites, including $2,000 into a single debt investment at RealtyShares. Unfortunately, this loan backed by a multifamily unit went into foreclosure and I outline what happened. There are risks in every investment, and my loss is your learning opportunity!

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Initial investment details.

  • Property: 6-unit, 6,490 sf multifamily in Milwaukee, Wisconsin.
  • Interest rate: 9% APR.
  • Amount invested: $2,000.
  • Term: 12 months with 6-month extension option.
  • Total loan amount $168,000. Purchase price $220,000 (LTC 76%). Estimated after-repair value $260,000. Broker Opinion of Value $238,000.
  • Loan secured by the property in first position. Personal guarantee from borrower.
  • Stated goal to rehab, stabilize, and then either sell or refinance.

Brief recap.

  • January 2016. Funds committed. Loan closed.
  • July 2016 to May 2017. Sporadic payment history for over a year. They would be on-time for a while, then there’d be a late payment, then things would brought back current, etc.
  • May 2017. Borrower stated that the property was under contract for $225,000 with final walk-through completed and expected close within 30 days.
  • June 2017. Borrower stopped paying. I guess the sale fell through (or they lied). Foreclosure process initiated by RealtyShares.
  • September 2017. Judgment granted in Wisconsin court. By law, there will be a 3-month redemption period where the borrower can still keep the house if they pay foreclosure judgment plus interest, taxes, and costs.
  • January 2018. The foreclosure sale was held and property ownership was reverted to RealtyShares. A judge still needs to confirm the sale.
  • February 2018. The judge confirmed the foreclosure sale, and RealtyShares is officially the owner of the property. Property can now be assessed and fixed up before sale.
  • April 2018. Property listed for $134,500 as per new BPO (Broker Opinion of Value).
  • June 2018. Property is under contract for sale. Exact price unknown.
  • July 2018. Property sold. Final disbursement of $1,133.73 received.

Final numbers. I invested $2,000 and got paid $210.84 of interest and $1,133.73 of principal for a total of $1,344.57. This means I only got back 67% of my money after more than 2 years. On the other hand, I have made over 50 different real estate-backed loans now, and it was only a matter of time before I got a full default. This was my first investment that finished foreclosure, but it won’t be my last.

The question is how often that happens and the size of those losses. When it came to Prosper or LendingClub, the interest rates might be higher but when a loan was 60 days late you were pretty much done. As an unsecured loan, you had nothing to fall back on if the borrower broke their promise (besides hurting their credit score). Sending it to collections typically only got you pennies on the dollar. In this case, I got back 57 cents on the dollar when you exclude interest.

Beforehand, RealtyShares told me that the foreclosure process in Wisconsin typically took about 12 months. That turned out to be a good estimate, as it was 12 months between foreclosure initiation and the property being under contract for sale.

Lessons. First, don’t put too much weight on a BPO (broker opinions of value). A broker thought this property was worth $238,000 in January 2016. Another broker thought the same property was worth only $134,500 in April 2018. The final sale price was probably closer to $100,000. That is a big gap.

Second, you should consider the local economic situation. This area is hurting, and if you do some digging you’ll see foreclosures all over the place. I didn’t know this at the time, but the low-income rental market in Milwaukee, Wisconsin was profiled in the NYT Bestselling book Evicted: Poverty and Profit in the American City (my review). Many of the properties mentioned in this book were literally down the street from this unit.

Third, you need to diversify. If this was my only investment, I might have an overly negative opinion of the asset class. If my successful Patch of Land loan was my only investment, I might have a overly positive opinion. Instead, this is one of 50+ investments for me (mostly at PeerStreet) and while I maintain a positive return higher than cash across my investments, there is the occasional foreclosure like this. Basically, when you read about my experience or someone else’s, you must take into account sample size.

Finally, I believe that some marketplace/crowdfunding sites may be better at sourcing and underwriting loans than others. As of November 2018, Realtyshares has stopped accepting new investments (they will continue to service existing investments). Even before that, they abruptly stopped doing residential loans to “focus” on commercial properties. I knew their specialty was more commercial real estate, but I didn’t want to commit $25k to a single commercial investment, so I went with this smaller residential loan. Since then, I have shifted my residential debt investing to PeerStreet as they allow me to split my investments into $1,000 minimums and they also have a slightly different model.

Communications quality. I would grade the online updates from RealtyShares as acceptable/good. They are relatively detailed and consistent, providing me a look inside the foreclosure process. Here are some sample updates:

October 9, 2017 We have identified a real estate broker to sell the property. The broker spoke with the previous property manager who was at the property a couple of weeks ago and who may be available for property preservation. The broker is going to take a contractor to the property to try and get an accurate cost estimate to complete the renovation.

September 21, 2017 Judgment was granted at the hearing. We expect the filed judgment from the court in approximately one week and will process it upon receipt. We should be able to schedule the sale in late October and it will be held after the redemption period expires—sometime in December. As soon as we receive the filed judgment order from the court we will have the exact 3 month redemption date. Sale cannot be held until the redemption period has expired.

September 8, 2017 The partner has declined to go forward with the purchase of the property. On the foreclosure front, the judgement hearing is scheduled for September 18th. If the judgement is successful, there is a 6-month right of redemption period during which the property can not be sold. During this period we will identify a property preservation firm and a commercial broker to sell the property.

August 25, 2017 A minority partner has stepped forward and has asked for a week to visit the property with the idea of making a paydown in exchange for an extension. We have agreed to speak next week after his inspection.

August 22, 2017 Service has been completed on the foreclosure. The defendants were personally served with the summons and complaint on August 2, 2017. The statutory answering time will expire on August 22, 2017. The judgment hearing will be scheduled at that time.

June 29, 2017 Due to the borrower’s inability to stay current, we have decided to start the foreclosure process for payment default. The foreclosure will run parallel with the sales process, meaning if the sponsor can sell the property and pay us off before the foreclosure is complete we will stop the process, if not we will take over the property. Typically, foreclosures in Wisconsin take up to 12 months.

Bottom line. Investing in real-estate backed loans means that if the borrower doesn’t pay up, you can foreclose and take over the property. But what is that really like? The purpose of this post is to provide real-world dates and numbers for a completed foreclosure on a marketplace real-estate investment site. I haven’t seen any other similar resources.

My current active investments are at PeerStreet ($1,000 minimums, accredited-only, debt-only) and Fundrise eREIT ($500 minimum, open to everyone, equity and debt).

Infographic: Where Did Housing Prices Crash the Most and the Least?

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The Washington Post had an article looking back 10 years later: How the housing market has changed since the crash. Inside was an interesting map of where the home prices crashed the most and the least (click to enlarge):

I wish they had a similar map that shows how much each individual state has also rebounded from the bottoms. According to this NYT article, the national median price is up 44% over the last 6 years:

When the housing bubble burst a decade ago, property values dropped by as much as 60 percent in some areas. Millions of Americans lost their homes to foreclosure. Nationally, the median price of existing homes today is $269,600 — up 44 percent in the past six years.

There are so many local variations. The house that we bought in 2007 was supposedly near the market top, but today the market value is still probably worth 50% higher. That’s far behind stock market returns, but you also have to consider that we could have bought that house with a tiny downpayment. If you put $40,000 down on a $400,000 house and it goes up to $600,000, then you roughly quadrupled your money (after fees). This goes right along into the conclusion of the WaPo article:

Among the lasting fundamental changes brought about by housing crisis, says Sharga, is that people today look at a home as place to live, not as an investment.

“It’s important to realize that homeownership is something to aspire to, but it’s also important to be ready for it,” he says. “It can be a wealth builder, but, as we saw, it can also be the quickest path to financial devastation if you’re not prepared.”

You can still buy a house with zero to 3.5% down payment these days, and that’s big leverage. Leverage goes both ways. It can make you rich much more quickly, but it can also make you broke much more quickly.

US Housing Market Breakdown Chart

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I don’t have any clever observations to share along with it, but the WSJ Daily Shot shared an interesting breakdown of the US housing market. Occupied or Vacant, Owned or Rented, Mortgage or Not, Negative Equity or Not, Foreclosure or Not, and so on.

There was also a chart of the historical rate of mortgage foreclosures.

PeerStreet Review: Real Estate Backed Loan Investments, My 22-Month Experience

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Updated June 2018. I’ve now been investing in various real-estate crowdfunding platforms for over 3 years, with $30,000 currently invested. Over $25,000 of these funds are invested in real estate-backed loans at automated real-estate loans from PeerStreet (which recently passed $1 Billion in loans). For this type of lending, you have to be an accredited investor. Here’s my review after 22 months of being an investor.

The basic premise of PeerStreet is simple. Real estate equity investors want to take out short-term loans (6 to 24 months) and don’t fit the profile of a traditional mortgage borrower. They are professional investors with multiple properties, need bridge financing, or they are on a tight timeline. As a real-estate-backed loan investor, you lend them money at 6% to 12% and usually backed by a first lien on the property. The borrower stands to lose the equity in their property (I keep LTV under 70%), so they are highly incentivized to avoid default. In the worst case, you would foreclose and liquidate the property in order to get your money back. However, this is better than Prosper or LendingClub where it is an unsecured loan and your only recourse is to lower their credit score.

What are PeerStreet strengths? Here are the reasons that I decided to put more a higher amount of money into PeerStreet as compared to other worthwhile real estate marketplace sites:

  • Debt-only focus. Other real estate (RE) sites will offer both equity and debt (and things in between). PeerStreet only focuses on debt, and I also prefer the simplicity of debt. There is limited upside but also less downside. Traditionally, this might be called “hard money lending”.
  • Lower $1,000 investment minimum. Many RE investment sites have minimums of $10,000 or $25,000. A few will go down to $2,000 but there is not a steady supply. At PeerStreet, $25,000 will get me slices of loans from 25 different real estate properties.
  • Greater availability of investments. Amongst all the RE websites that I have joined, PeerStreet has the highest and most steady volume of loans that I’ve seen. I dislike having idle cash just sit there, waiting and not earning interest. They apparently have a unique process where they have a network of lenders that bring in loans for them. They don’t originate loans themselves, they basically buy loans from these partners if they fit their criteria. This steady volume allows the lower $1,000 minimums and more diversification, as well as easy reinvestment of matured loans.
  • Automated investing. The above two characteristics allow PeerStreet to run an automated investment program. You give them say $5,000 and they will invest it automatically amongst five $1,000 loans. You can set certain criteria (LTV ratio, term length, interest rate). When a loan matures, the software can automatically reinvest your available cash. I don’t even have to log in.
  • Consistent underwriting. You should perform your own due diligence in this area, as you can only feel comfortable with automated investing if you think every loan is underwritten fairly. The riskier loans get higher interest rates. The less-risky loans get lower interest rates. The shady borrowers are turned away. Otherwise, you’d want to pick and choose. After doing this for a year, I stopped wanting to pick and choose. I want to just sit back and let them choose for me. We’ll see if it works out.
  • Strong venture capital backing. PeerStreet just closed a $30 million Series B round in April 2018. Andreessen Horowitz did a $15 million Series A round in November 2016. Michael Burry was an early seed investor, using $6.1 million of his own money according to TechCrunch. You may recognize this name from The Big Short.

Here’s a screenshot of the automated investing customizer tool:

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(Tip: Even if you plan on investing only in $1,000 loans, once you are fully invested you might change later to a higher minimum like $1,250 in order to more quickly reinvest your idle cash. For example, if you have $78 in interest and then a $1,000 loan is paid off, then you could invest $1,078 automatically into your next loan.)

What is a potential PeerStreet drawback? In my opinion, slightly lower yields. This is just my limited understanding and I may be wrong, but PeerStreet has a network of lenders bringing in these deals and so the net yield to the investor feels lower than other sites. This “con” is also their secret sauce that brings in the high loan volume (and ideally the ability to be more selective), and so I am willing to earn lower interest rates for the added diversification and convenience of automated investing.

Here’s the 1-minute video pitch from PeerStreet:

How does PeerStreet make money? As with other real estate marketplace lenders, they charge a servicing fee. PeerStreet charges between 0.25% and 1%, taken out from the interest payments. This way, PeerStreet only gets paid when you get paid. When you invest, you see the fee and net interest rate that you’ll earn. In exchange, they help source the investments, set up all the required legal structures, service the loans, and coordinate the foreclosure process in case of default. In some cases, the originating lenders retains a partial interest in the loan (“skin in the game”). Here’s a partial screenshot:

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What if PeerStreet goes bankrupt? This is the same question posed to LendingClub and Prosper, and their solution is also the same. The loans are held in a bankruptcy-remote entity and will continue to be serviced by a third-party even in a bankruptcy event. From their FAQ:

PeerStreet also holds loans in a bankruptcy-remote entity that is separate from our primary corporate entity. In the event PeerStreet no longer remains in business, a third-party “special member” will step in to manage loan investments and ensure that investors continue to receive interest and principal payments. Additionally, investor funds are held in an Investors Trust Account with City National Bank and FDIC insured up to $250,000.

Tax forms? In general, unless you use a self-directed IRA, the interest earned will be taxed as ordinary income (like bank account interest). For tax years 2016 and 2017, I received 1099-INTs and filed it alongside my other 1099-INTs from bank interest. Here’s what PeerStreet says:

PeerStreet investors will be issued a consolidated Form 1099 for the income distributed from their investment positions. Investors may receive one or more of the following types of 1099 form:

1099-OID for notes with terms longer than one year (at the time of issue)
1099-INT for notes with terms less than one year (at the time of issue)
1099-MISC for incentives, late fees or other income, if more than $600.

My investment performance. I started with a $10,000 investment in August 2016, and then added another $15,000 in October 2017, for a total of $25,000. This way, each of my loans is less than 5% of the total portfolio. Everything is set for automatic reinvestment whenever a loan in paid back or the interest adds up to $1,000.

As of this writing 6/20/2018, my total account value is $27,138.26 invested across 24 different active loans ($1,000-$1,250 each). I have already had 26 loans paid off in full, with no loss in principal. A few had late payments, but they eventually all caught back up. Nothing has gone into foreclosure yet. My interest to date is $2,138.26, which works out to an internal rate of return (IRR) of 7.35% annualized net of all fees and taking into account the short periods where my cash was idle. Here are screenshots of my paid-off loans and a chart of cumulative interest earned.

Now, I don’t know what the default rate across all their loans, but I know that sooner or later I will experience one. (In October 2017, PeerStreet stated that they originated $500 million of loans with zero investor losses. They haven’t made the same claim when they reached $1 billion, so I’m assuming there have been some losses since.) This will require patience as it will take a while for the foreclosure process to play out. In my experience, this is a critical difference with private real estate loans. You can’t make a few clicks and get your money back. I may have to wait a year or longer if the loan requires a property takeover and sale. I try to counter this by diversifying across 25+ loans.

Bottom line. PeerStreet offers high-yield, short-term loans backed by private real estate. As compared to traditional “hard money lending”, accredited investors can diversify with $1,000 minimum investment per property, automated reinvestment, and steady nationwide loan volume.

If you are interested and are an accredited investor, you can sign-up for free and browse investments at PeerStreet before depositing any funds or making any investments. PeerStreet charges a servicing fee between 0.25% and 1%, taken out of the interest charged to the borrower. The returns you see in the listing are net of their fees.

LendingTree Chart: Mortgage Rates vs. Credit Score 2018

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Mortgage rates are rising. Home prices are still at recent highs. Yet, mortgage applications are also up, which suggests that people are worried about not being able to afford a house if they wait. Online mortgage comparison site LendingTree publishes a monthly update (March 2018) of what their real customers are getting approved for on their mortgages. Credit score, average APR, down payment, loan-to-value ratio, etc. Here is a chart of mortgage rates vs. credit score.

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Clean up your credit score. The survey suggests that the rate difference between the top credit scores and lower scores are widening:

Consumers with the highest credit scores (760+) saw offered APRs of 4.72% in March, vs 4.99% for consumers with scores of 680-719. The APR spread of 27 bps between these score ranges was unchanged from February and still near the widest since this data series began in April 2016. The spread represents over $14,000 in additional costs for borrowers with lower credit scores over 30 years for the average purchase loan amount of $238,593.

I recently paid my income taxes with a credit card, netting some profit but also using up over 50% of the total credit limit. My credit score monitoring services told me this increased debt utilization lowered my credit score by 40 points! This is exactly the type of thing you shouldn’t do if you are in the market for a new mortgage or refinance. If anything, I should have paid off the balance immediately before it was reported to the credit bureaus.

Fundrise Starter Portfolio eREIT vs. Vanguard REIT ETF Review – Updated April 2018

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Updated April 2018. This post tracks my experiment comparing a Fundrise eREIT portfolio and the Vanguard REIT ETF. In Fundrise, we have a start-up that bought a concentrated basket of roughly 20 properties chosen from the private market. In Vanguard, we have a one of the largest real estate ETFs in the world that owns a passive slice of 184 public-traded REITs. I invested $1,000 into both in October 2017 and hope to let them run for 5 years.

Fundrise Starter Portfolio background. Despite the name, the Fundrise Starter Portfolio is actually a simple 50/50 mix of their first two eREITs: the Fundrise Income eREIT and the Fundrise Growth eREIT. Learn about other Fundrise portfolios here. This private eREIT utilizes recent crowdfunding legislation that allows all investors to own a basket of individual real estate properties (not just accredited investors with high net worth). The minimum deposit is $500. You must buy shares directly from Fundrise, and there are liquidity restrictions as this is meant to be a long-term investment. Here’s a recent map of locations for the holdings. Most are apartment complexes, condominiums, and hotels.

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Vanguard REIT ETF background. The Vanguard REIT ETF (VNQ) is one of the largest index funds to invest in publicly-traded real estate investment trusts (REITs). You can purchase it via any brokerage account. You have the liquidity of being to sell on any day the stock market is open. A single share currently costs about $76, not including an trade commission. You are holding a tiny slice of (tens of?) thousands of office buildings, hotels, nursing homes, shopping centers, apartment complexes, and so on. Here are the recent top 10 holdings:

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Expenses. The Fundrise Starter Portfolio waived their advisory fees until 12/31/17 and is now 0.15% annually. Each underlying eREIT will also have their own internal fees and costs for managing the properties. The Vanguard REIT ETF has an expense ratio of 0.12%, with each public REIT having their own internal costs to manage their properties. Due to scale, I would expect the net effect of fees to be significantly higher for the Fundrise assets than for the Vanguard ETF. We will see if Fundrise can provide higher net returns for this concentrated holding.

Five-year time horizon. Both Fundrise and VNQ usually announce dividend distributions on a quarterly basis. Vanguard updates the NAV daily, but Fundrise only updates their NAV quarterly. Fundrise NAVs are only estimates as there is no daily market value available (similar to your house). Therefore, I plan on holding onto this investment for 5 years at the minimum. This will allow the investments to “play out” and also avoid any early redemption fees. I will withhold final judgement until both investments are cashed out, but will provide quarterly updates.

Fundrise Portfolio performance updates. Screenshot of my most recent statement:

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  • 10/20/17: $1,000 initial investment – 50 shares @ $10.00/share Income eREIT and 48.78 shares @ $10.25/share Growth eREIT.
  • 1/9/18: 2017 Q4 dividends of $17.98 total distributed. Total value $1,018.72.
  • 3/31/18: NAV values of $9.81/share for Income eREIT and $10.71/share for Growth eREIT.
  • 4/11/18: 2018 Q1 dividends of $16.13 total distributed.
  • 4/11/18: Total Fundrise value $1,049.44 (includes reinvested dividends).

Vanguard REIT ETF performance updates. I own VNQ and the mutual fund equivalent VGSLX (same underlying holdings) in my retirement portfolio, but will be using Morningstar tools to track the performance of a $1,000 investment bought on the same date of 10/20/17.

  • 10/20/17: $1,000 initial investment – 11.9545 shares at $83.65/share.
  • 12/27/17, VNQ distributed a gain of $0.012 per share, return of capital of $0.37 per share, and a dividend of $0.88 per share.
  • 1/9/18: Total VNQ value $971.45 (includes dividends). Share price $80.45.
  • 3/29/18: VNQ distributed a dividend of $0.71 per share.
  • 4/11/18: Total VNQ value $915.52 (includes reinvested dividends).

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The net asset value of the major US REIT indexes has dropped since 2018 started. Again, I wouldn’t put too much stock into the short-term movements as the accuracy of the Fundrise NAV is inherently limited, but this is the best information that I have available. Once a year has passed, I can also include a trailing 12-month yield.

You can learn more about all Fundrise eREIT options here. I have written about my past experiences in my Fundrise eREIT review and Fundrise Liquidity and Redemption review.

50 State Infographic: How Much Income Do You Need to Afford the Average Home?

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HowMuch.net compiled an infographic about the income you need to afford the average home in every US state. The key is that “afford” means that the total cost of housing take up no more than 30% of gross income. The highest income required is in Hawaii ($153,520 for a house worth $610,000) and the lowest is in West Virginia (West Virginia: $38,320 for a house worth $149,500).

I suppose the next level analysis would be to divide by the actual median income in each state to measure relative affordability. The same job can pay different salaries in different areas, so it can still make sense to move to a place with higher incomes and high real estate prices.

Big List of Free Consumer Data Reports (2/2): See Your Confidential Rental History, Insurance, & Employment Data

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

magLinks updated 2018. Here is the second part of my big list of free consumer reports from over 50 different reporting agencies. The first part included your credit, banking, and subprime lending-related information. This part includes your housing, insurance, and employment history. Request a free copy every 12 months of what these databases have stored about you and are telling prospective landlords, insurers, or employers.

Again, you may not need to check all of these, and many may not even have a file on you anyway. But for example if you are a renter then you’d want to make sure your rental history is clean and correct, because if I was a landlord I’d avoid anyone with previous blemishes on their record.

Rental History

Realpage Consumer Report. Provides tenant screening through their LeasingDesk product, including “the industry’s largest rental payment history database.”

CoreLogic SafeRent. SafeRent provides both tenant and employment screening data, including information regarding landlord tenant and criminal public court records. One free report every 12 months.

Experian RentBureau Rental History Report. “Every 24 hours, Experian RentBureau receives updated rental payment history data from property owners/managers, electronic rent payment services and collection companies and makes that information available immediately to the multifamily industry through our resident screening partners.”

First Advantage Resident History Report. Tenant and employment background checks. One free report every 12 months.

Contemporary Information Corp. CIC provides background checks on prospective tenants and/or employees and contractors for landlords and management companies. Keep records of any rental evictions.

Tenant Data. Provides tenant history reports, including any reported damages, unpaid balances, evictions, lease violations, noise complaints, or unauthorized pets.

Screening Reports, Inc. A national provider of background screening service to the multi-family housing industry.

TransUnion Rental Screening Solutions, Inc. SmartMove provides tenant credit, eviction, and background checks.

  • MySmartMove.com FAQ page
  • SmartMove will disclose the contents of a criminal and/or credit report retained by SmartMove to an individual who requests a copy of their report. To verify your identity and obtain a copy of your report(s) or dispute any information within that report, please contact customer service at 866-775-0961.

Auto and Property Insurance

C.L.U.E. Personal Property Report. A division of LexisNexis, CLUE stands for Comprehensive Loss Underwriting Exchange, which collects information that is used to calculate your insurance premiums. This report provides a seven year history of losses associated with an individual and his/her personal property. Includes date of loss, loss type, and amount paid along with general information such as policy number, claim number and insurance company name. This also means you can find out about previous claims on the house you are currently renting or recently bought, even if they weren’t made by you.

C.L.U.E. Auto Report. This report provides a seven year history of automobile insurance losses associated with an individual. Includes date of loss, loss type, and amount paid along with general information such as policy number, claim number and insurance company name.

Verisk Analytics aka ISO aka A-PLUS Loss History Reports. ISO stands for Insurance Services Office, A-PLUS stands for Automated Property Loss Underwriting System. Auto and property loss claim history.

Insurance Information Exchange (now owned by Verisk). Provide reports including your motor vehicle records and driver history, including any traffic violations or related criminal history. May require proof of adverse action to obtain free report.

Drivers History. Provides reports to its insurance clients containing information and data collected from open public sources and governmental agencies regarding driving violations issued to specific individuals.

Utilities

National Consumer Telecom and Utilities Exchange. NCTUE is a “membership of companies that provide services (telecommunication, pay TV, and utilities) […] to aid in risk mitigation.” Basically they track when people don’t pay their phone, cable, or utility bills. One free report every 12 months.

Medical History

MIB (previously known as Medical Information Bureau). Run by 470 insurance companies with a “primary mission of detecting and deterring fraud that may occur in the course of obtaining life, health, disability income, critical illness, and long-term care insurance.” They record information of “underwriting significance” like medical conditions or hazardous activities. If you have not applied for individually underwritten life, health, or disability income insurance during the preceding seven year period, then you probably don’t have a record.

Milliman IntelliScript. Tracks your prescription drug purchase history. “Milliman IntelliScript will have prescription information about you only if you authorized the release of your medical records to an insurance company and that company requested that we gather a report on you.”

Employment History

The following companies all offer background screening services for employers. Most will not have any information about you unless you authorized a potential employer to run a background check on you (probably during the application process). Some will not provide you information unless there was adverse action. Otherwise, you can get one free copy every 12 months.

The Work Number. (division of Equifax) They also keep historical income records.

Accurate Background, Inc.

American Databank, LLC.

Backgroundchecks.com.

EmployeeScreenIQ.

General Information Services.

HireRight.

Info Cubic.

IntelliCorp.

OPENonline.

Pre-employ.

Professional Screening & Information, Inc.

Sterling Talent Solutions (formerly Sterling Backcheck or Sterling Infosystems)

Trak-1 Technology.

Reminder: Also see Part 1: Big List of Free Consumer Reports with Your Credit, Banking, and Payday Lending Data.

Sources: ConsumerFinance.gov, FTC.gov, Wikipedia

Big List of Free Consumer Data Reports (1/2): See Your Confidential Credit, Banking, and Payday Lending Data

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

magLinks updated for 2018. Since these are available every 12 months, it is a good idea to check these near or around the same time each year. A lot of companies make their money by collecting and selling data – your personal data. In the past, it was often difficult if not impossible to see what they were telling prospective lenders, landlords, even employers about you. Under the FCRA and/or FACT Acts, many consumer reporting agencies (CRAs) are now legally required to send you a free copy of your report every 12 months, as well as provide a way to dispute incorrect information.

Some have an online request form, but some require snail mail with proof of identity. (Some are shady and really try to hide information about requesting reports.) You probably won’t want to bother checking all of them, but if you’ve experienced any sort of rejection or adverse reaction in these areas the cause might be found inside one of these databases. Keep in mind that you may not have a file with all of these places.

Credit-Related

Experian, Equifax, and TransUnion. The three major credit bureaus track your credit accounts, payment history, and other related information like bankrupts and liens. Free copy of each once every 12 months.

CoreLogic Credco. One of the largest credit-related CRAs and often used by mortgage lenders, your CoreLogic Credco Consumer File can contain: previous homeownership and mortgage info, rental payment history, any reported delinquencies, and other debt obligations like child support. Free copy once every 12 months.

LexisNexis. One of the largest personal information databases that includes public records, real estate transaction and ownership data, lien, judgment, and bankruptcy records, professional license information, and historical addresses on file. Free copy, must mail in form.

Innovis. A supplementary credit report and identity verification provider. Free copy once every 12 months.

SageStream, LLC (formerly IDA, Inc.) Per their site, they are a “a credit reporting agency that produces credit reports and scores from our repository of consumer information contributed by a wide array of companies including leading financial services organizations, wireless providers, utilities, retailers, auto lenders and many others” Free copy, must fax or mail in a written form.

Microbilt and subsidiary Payment Reporting Builds Credit (PRBC). Microbilt is a credit reporting agency, per their site a “leading provider of alternative credit data to businesses that want to offer credit and other financial services to the approximately 110 million underserved and underbanked consumers in the United States.” Free copy once every 12 months.

Banking-Related

Chexsystems. A consumer information database used by an estimated 80-90% of all banks to help determine the risk of opening new accounts. Think of it as the banks’ version of a credit bureau. If a person commits check fraud or overdraws their account, it will be listed here. In addition, the simple act of opening or closing a bank account may be recorded in their database. Having a negative ChexSystems record can leave you blacklisted from opening bank accounts at most major banks. Free copy once every 12 months. You can now request your report online.

TeleCheck. Per their site, they provide “industry-leading check acceptance, check processing and risk analytics services to merchants and financial institutions.” One of the major companies that protect businesses and banks from bad checks. Must order by phone or mail.

Certegy Check Services. Per their site, a “check risk management company that provides verification, guarantee and risk analytics to thousands of businesses that choose to accept checks as a form of payment for goods or services.” Clients include check-cashing stores and casinos. Free copy once every 12 months. Must order by phone or mail.

Early Warning Services. A collaboration between a group of big banks including Bank of America, BB&T, Capital One, JPMorgan Chase and Wells Fargo. Provides fraud prevention and risk management in relation to bank accounts and payment transactions. Must order by phone.

Subprime-Related (Payday Lending)

The following companies focus on subprime customers with clients including payday lenders, title loan lenders, rent-to-own stores, and subprime auto loan providers.

Teletrack (affiliated with CoreLogic).

FactorTrust. Free copy once every 12 months. Recently acquired by TransUnion.

Clarity Services, Inc. Must mail or fax form.

DataX Ltd. Must mail form.

Next up, see Part 2: Rental History, Insurance, & Employment Data.

Sources: ConsumerFinance.gov, FTC.gov, Wikipedia

The Real Estate Crowdfunding Capital Stack: Equity vs. Debt

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Before I share more about my real-estate crowdfunding experiments, I wanted to take a quick step back in order to provide better context. Just as ETFs and mutual funds are separated into stocks and bonds, real estate can be separated into two general types of investments:

  • Equity = an ownership interest in the asset.
  • Debt = a loan, typically collateralized by the asset itself or other assets of the equity owner.

In the business world, I could buy a piece of Amazon or Apple and participate in the ups and down of the business value, or I could invest in bonds issued by Amazon or Apple and get a fixed return as long as Amazon and Google keep making their interest payments within the stated period of time.

This is called the “capital stack”. In residential real estate, the stack can be quite simple. There is one homeowner and one mortgage-holder (debt). If they ever sell the house, any proceeds must first go towards the mortgage-holder. Anything left over goes to the homeowners. If the house gets sold for $400,000 and had a $300,000 mortgage, the homeowner would get $100,000. When you see the image below (source), imagine water filling up a container. The bottom layer gets paid first. If there isn’t enough “water”, the next layer doesn’t get paid. If there is excess “water”, that goes to the equity owner. (image source)

recapitalstack1

In commercial real estate, here are the four most common layers of the capital stack: common equity, preferred equity, mezzanine debt, and senior debt. Preferred equity, as its location suggests, is in between common equity and debt in terms of cashflow priority and return upside potential. It has a more senior position to cashflow than common equity, but it still junior to mezzanine and senior debt. Mezzanine debt can be explained as similar to when a homeowner might also take out a “home equity loan” that junior to the first mortgage (and thus usually at a higher interest rate). Both of these intermediate stacks are more complex in terms of how much extra return are you getting for how much extra risk, and thus I tend to avoid them. (image source)

recapitalstack3

The expected return of each layer is then adjusted based on its position in the stack. Keep in mind that as your expected return increases, so does the possibility that your actual return is zero or negative. (image source)

recapitalstack4

My equity investments. My initial feeling was that publicly-traded REITs do a pretty good job on the equity side. The big REITs hold big apartment complexes, hundreds of public storage facilities, etc. Is there an opportunity for higher returns from smaller properties? Perhaps, but the problem is that it takes years for equity investments to pan out. My plan is to invest another $1,000 into Fundrise eREITs and hold on to them for 5 years as a long-term experiment. As the dividends are paid and the net asset value is updated, I can compare side-by-side with the dividends and net asset value of the low-cost Vanguard REIT ETF (VNQ).

My debt investments. I prefer the idea of providing short-term, 7%-9% loans backed by a hard asset like real estate. This is an area traditional referred to as “hard money loans”. I can’t replicate this type of deal with an ETF or mutual fund. I plan to increase my investment in PeerStreet to roughly $25,000 total as they focus 100% on the debt side and I like their platform so far. I invest only in notes with a term under 12 months, and in the first position (most senior). This remains under my “5% Speculative Portfolio” and will track my returns regularly.

Housing Has Higher Long-Term Returns Than Stocks?

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

housemoneyI finally got around to reading an academic paper that looked a bit dry but had a great title: The Rate of Return on Everything, 1870–2015 [pdf] by Jorda, Knoll, Kuvshinov, Schularick, and Taylor. I wonder which of the authors came up with that.

One of the major findings that was residential housing – when you add up the returns from both price change and imputed rent – had a higher overall average return than stocks (equities). Not only did housing have higher returns, but it also had lower volatility (standard deviation). Here’s a chart that compares housing and equities:

jorda1b

When the paper was released, places like the Financial Times discussed the paper’s conclusions but none of them addressed my two immediate questions.

Did they account for the maintenance and management costs of rental real estate? If you own a rental property, you may still have to pay for lawn maintenance, replacing roofs, HVAC units, interior and exterior painting, replacing carpets, and various other issues. To be fairly compared with equities, you should also account for property management costs. Here’s are excerpts that deal with maintenance and repairs:

To the best of the authors’ knowledge, this study is the first to present long-run returns on residential real estate. We combine the long-run house price series presented by Knoll, Schularick, and Steger (2016) with a novel dataset on rents from Knoll (2016). For most countries, the rent series rely on the rent components of the cost of living of consumer price indices as constructed by national statistical offices and combines them with information from other sources to create long-run series reaching back to the late 19th century.

A number of additional issues have to be considered when constructing returns on housing. First, any homeowner incurs costs for maintenance and repairs which lower the rental yield and thus the effective return on housing. We deal with this issue by the choice of the benchmark rent-price ratios. Specifically, in the Investment Property Database (IPD) the rental yields reflect net income (i.e., net of property management costs, ground rent, and other irrecoverable expenditure) received for residential real estate as percentage of the capital employed.

Did they account for the annual property taxes required on residential real estate? In many US states, the annual property tax bill can exceed 1% of the value of the house. Some are closer to 2% annually, and these are owner-occupied numbers. Rental properties may be higher. That’s on top of any potential capital gains you’d owe upon sale of the house, and any taxes you’d owe on rent received. Here’s are excerpts that deal with taxes:

Although the extent of real estate taxation varies widely across countries, real estate is taxed nearly everywhere in the developed world. International comparisons of housing taxation levels are, however, difficult since tax laws, tax rates, assessment rules vary over time and within countries. Typically, real estate is subject to four different kinds of taxes. First, in most countries, transfer taxes or stamp duties are levied when real estate is purchased. Second, in some cases capital gains from property sales are taxed. Often, the tax rates depend on the holding period. Third, income taxes typically also apply to rental income. Fourth, owners’ of real estate may be subject to property taxes and/or wealth taxes where the tax is based upon the (assessed) value of the property.
This section briefly describes the current property tax regimes by country and provides estimates of the tax impact on real estate returns.

With few exceptions, the tax impact on real estate returns can be considered to be less than 1 percentage point per annum.

This is an interesting paper that tries to cover a huge amount of stuff. Estimating the return of all businesses from all countries for the last 150 years? Estimating the return of all residential real estate from all countries for the last 150 years? They mix together a bunch of different datasets, so it’s hard to know exactly the quality level of each and how well they accounted for things like taxes and maintenance.

I’m not sure why they prefer to use arithmetic averages instead of geometric averages, but even if you shave off 1% for additional property taxes and another 1% because you don’t think they account for maintenance costs adequately, housing returns are still at least comparable to equity returns.

Here is the most recent update of the Case/Shiller home price index from Multpl, which tracks US housing prices on an inflation-adjusted basis:

shiller1890

Some people use this to argue that housing returns only keep up with inflation, but home prices ignore the value of rent. The fact that most housing purchases involve a mortgage loan does complicate things a bit.

Bottom line. An interesting paper that compares the long-term returns (last 150 years!) of residential housing and equities. In the long run, some may be surprised that residential housing returns at least matched equity returns, and housing returns had lower volatility. This is a reminder that you can also build wealth via residential real estate, taking into account that rent makes up half of the total return. Stocks are not the only game in town. (Just like with stocks, can is not the same as will.) New services like AirBNB provide an alternate path to monetize residential real estate.

Coffin Homes: Living in Tiny Spaces As a Last Resort

“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

cof

The Atlantic has a photojournalism article The ‘Coffin Homes’ of Hong Kong which startled me and challenged my idea of a “tiny” living spaces. The size reminded me of capsule hotels in Japan, except these are in much worse condition and are permanent residences. A sad and extreme example of high population density and lack of affordable housing.

Cheung reports that there is a “dark side to the property boom in wealthy Hong Kong, where hundreds of thousands of people priced out of the market must live in partitioned apartments, ‘coffin homes’ and other inadequate housing.” These residents are among an estimated 200,000 people in Hong Kong living in such tiny subdivided units, some so small that a person cannot even fully stretch out their legs.