Scott discusses the effect of Hurricane Harvey on the Houston housing market and the future with Jason Bible from Houston House Buyers and Right Path Real Estate.
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Jason Bible With Houston House Buyers
Our good buddy, Jason Bible from Houston House Buyers and Right Path Real Estate is joining us today to discuss what’s going on in Houston, the craziness that’s there that Hurricane Harvey’s had, and the aftereffects of everything. Jason, thanks for joining us. You’re actually a refugee as well yourself with your family this weekend, correct?
That’s right. I was up at DFW teaching a class. We had the whole team up there and then Harvey started moving in. One of my favorite things to watch in all of this stuff is what the media does. I’ll never forget, we were in Austin on Thursday and I remember they said, “It’s going to be a little tropical storm. It might make a Cat 1 by landfall.” For us down at Texas, that just means it’s going to rain a lot and the typical sides of town are going to flood. In fact, it made landfall. We thought it was going to make landfall at Corpus. We got students down at Corpus so we’re sending text messages back and forth. We thought it was going to roll in as a Cat 1. We’ve watch these storms all the time. I thought that’s unusual for it to spend that much time in the gulf and make it as a Cat 1. All of a sudden, Cat 4 hurricane. It was real go-time.
The rumor that’s been running around some of the Houston Emergency Management Committee is that they didn’t want to announce that it was going to be a Cat 4 because they didn’t want people to evacuate and experience what happened for Rita in 2008, which literally, people were on the road for 24 hours trying to get to Dallas and didn’t get there. It looks really bad on TV. I have not been down there because I’ve been stuck up here with the family, but a lot of the things that were designed to work after tropical storm Allison aren’t working. Don’t get me wrong, people are losing their homes and all that, but the Texas Medical Center is going to be able to jump right back up and run. It looks like a lot of things are going on at the port. They might actually be able to open the port this week, which is amazing for the amount of rain they’ve had. It looks like a lot of the petrochemical plants are going to be up and running inside of a week or so.
That’s all speculation right now. It depends on a couple of other factors. The critical infrastructure that runs a lot of the US economy is going to be up and running pretty darn quick. It’s going to blow people away what happens in the next week, how fast the businesses’ infrastructure comes online. There are going to be substantial changes, at least we think, in the Houston real estate market. You and I were chatting about the note environment. What happens on the notes and when will you see non-performing notes? I heard Brock Long who’s the FEMA director talking about SBA loans. Ultimately, what will happen to those things?
We were already getting notices from our servicers. “You’ve got all these loans in Texas. You have to stop all foreclosure and all legal action.” No problem. We’ve reached out to some of our borrowers, “Just touching base with you, making sure you are okay. Don’t worry about making a payment this month. Whether their house is good or their house isn’t good, just forget about making a payment this month. We’ll talk about it next month when we get there. Don’t worry about your August payment. Use that funds for whatever you need to use it for. We’ll discuss on a later date whether you’re going to dry out or you’re okay.” If they’re in the affected area, anywhere from the Texas Riveria and Corpus Christi, up to Rockport and Brazoria Counties, Fort Bend County and in Harris as well. We’re not soulless and without a heart. We want to take care of our borrowers. When we left I said, “If you need anything, we can send anything.” We’ve got students in Houston just like you do and throughout the Coastal Bend area, too. We just want to make sure everybody’s okay.
Let’s talk about some of the initial numbers. I was looking at some of the numbers and we were talking about the GO Zone. The gulf opportunities on that happened ten years ago. With everything that happened then, that was an area they estimated a $150 billion in damages. Initial reports are somewhere, for Harvey, be in a $30 billion to $ 40 billion area. If you look back ten years ago, a lot of the areas that were affected were very rural areas, lower socio-economic areas, very low class areas. This is not a derogatory statement. It’s just the true facts of things.
If you were to look at the areas that are most impacted right now, where you need to look is the Beltway and I-10, the energy corridor, which actually where our office is at. It’s the most affluent area of Houston. We have two flips in there right now that I am absolutely certain that took water. One, we were about to list this past weekend for $460,000 and the other one’s going to be riding in a couple of weeks at a little under $800,000. Once you move inside the Beltway, you’re hearing it on the news, they’re talking about Piney Point because Buffalo Bayou runs through there. Starting point for a lot of those houses is just under $2 million. There’s some really expensive real estate.
The problem is that the NFIP Program has a limit on it. It’s either $250,000 or $500,000. Don’t get me wrong, these guys have $2 or $3 million houses. They’re not going to go broke, they’re not going to go, “Oh my gosh. I’m not going to get my money.” They’re just going to build back. They’ll probably completely redevelop it, scrape it and build a nice new house. Those are the areas in town that are impacted. One thing that’s hard to see on the news is our area of operation, Houston House Buyers, is really a hundred miles by a hundred miles. It’s 10,000 square miles. That’s really the Houston MSA. It’s enormous. I think I read some stats somewhere. It’s fifteen times larger than New Orleans. When people are giving damage estimates for Katrina, we’ll see if it reaches that number, Houston is way bigger. It’s the fourth largest city in the United States. When you go outside the MSA, it’s pretty close to 7 million people.
There are about 7.5 million people roughly in just Harris County alone. That’s not considering what’s going down the coast line to Corpus and everything like that as well. Corpus is about half a million people. They have roughly about 500,000, 600,000 in that area. You have stuff happen. Let’s talk about the numbers behind that. You have obviously a lot of damage. You were talking about some of your guys plans, having to ramp things up because, let’s face it, what’s happened with these people? People that have water damage, they’re going to get checks. What are they going to do with those checks, Jason?
Before we get to the checks, I want to give the important things like if you just got your house flooded, what are you doing right now? They are still undergoing rescue operations in Houston. Once all that’s done, I’m guessing the next three days, the water should recede for the most part of the city. The next thing that’s going to happen is you have to move your entire house to the curb. Everything that’s porous needs to get out of your house. If it’s porous or has an electrical plug, it needs to be sitting on the curb. Emotions are high now. Wait until you see people move everything they’ve owned to the curb. This happens once a year in Houston. One side of town always floods. People need to get all their stuff out of their house. The second thing they need to do is get all the carpet and porous materials that are wet, building materials. If you’ve got sheetrock that’s flooded up to two feet, you got to go up another two feet. You just take a saw, you can even take a razor blade, and just run the line across it, pull it out. Pull all that insulation. Throw all that crap out to the curb.
The next thing you got to do is start drying that house out, dehumidifiers and bands. If you’re not using a generator for those and you’ve got electricity, turn your air conditioner on and just crank it down, because you want as much moisture out of the house as possible. I see a lot of people in social media right now asking, “What donations do you need? Do you guys need food and clothing and all that?” I’m telling you, FEMA has already enacted all that stuff. If you read some of the stuff that Brock Long and a number of them are doing, they’re going to drop an incredible amount of this life-sustaining stuff into Houston. What people need now are generators, carpet fans, dehumidifiers and tools to take building materials apart. That’s the four things that everybody needs right now.
Probably the fifth is, even if you don’t have money to donate and all that, driving down to Houston or if you’re in Houston with one of your neighbors, just start going down the block and help people move crap, literally throwing stuff out the front of the house. The thing we want to keep from happening is mold and bacteria from growing inside these houses. If I was in Houston right now and I was in a flooded house, I would already be throwing crap to the curb. You can’t save it. I don’t care what your brother, sister, mother’s best friend told you. You can’t save any of this stuff. I’ve been through this so many times, you can’t save it. Just throw it out. “But Jason, I need pictures for insurance.” Let me tell you what, your insurance doesn’t cover mold. That is going to be an incredibly expensive claim. Take pictures, do all that stuff, and throw it all out. It’s completely trash.
My truck is going to be filled to the top with dehumidifiers, fans, generators. We’re up here in north of Austin, in Georgetown. We’re going to the middle of nowhere places to try and find stuff. They are already out of gas cans two days ago. We went to auto parts stores. We went to home depot. We went to a couple of those ATV stores up in there, everybody’s out. Those are the things the folks need to be able to mitigate or to reduce the size of losses they’re going to have in their houses.
I’ve been amazed at how few fatalities we’ve had, but that’s where the real danger comes in. You’re going to be working on your house, your neighbor’s house, you’re going to be tired, you’re going to make mistakes. You’re going to be working probably twelve, eighteen hour days, but make sure you’re eating, make sure you’re sleeping. You don’t want to get yourself hurt with a saw or accidentally put a generator inside the house instead of outside and you kill everybody with carbon monoxide. Take your time. When the FEMA guys said it’s going to take years, they’re not kidding. It took us nearly a decade in Texas Medical Center to recover. It’s going to take a long time. That’s the immediate response and then we can get into the real estate investor stuff, in case everybody want to know.
Also to you guys, there are plenty of places to donate. We donate money to the crowdfunding that JJ Watt has got going down there within Houston, Texas. Donate some money on that. We’re sending some supplies back with our buddy, Greg, here and his family. It’s fine. It needs to get a little bit of water inside the house, but David’s had enough flips to know what’s going on. We’ll be sending send some stuff back with him. Donate; every little bit helps. A dollar, $5, $20, whatever you can, everything helps. Especially donate to the local communities, the local funds, if there are any out there.
Let’s start diving in. This is going to be a long-term aspect of things, as far as every bit in Houston is going to be affected: property values, bail times. The houses that are open are going to be in high demand as well. You want to talk about that, Jason?
We’ve got about 30 properties right now that we own that are in the middle of rehab we’ve bought, or that are on the market to sell. Right now, it looks like about a third of them have been impacted by water in some form or fashion. We can’t get to them right now. We actually have closings on Thursday and Friday that were delayed until after the storm. That’s not uncommon for the insurance carriers to call the banks and say, “We’re not closing anything until after the storm.” What’s going to happen? I think you’re going to have a lot of people who think that FEMA’s going to ride in on a white horse and write them a big check. I think that there’s going to be a lot of misconceptions on what those SBA loans are going to be able to provide. Only 15% of the city of Houston has flood insurance. The average flood insurance claim, according to FEMA, is about $40,000.
There are going to be a lot of people that are going to find out, A, they don’t have insurance and B, they don’t have the cash to fix these things and the federal government is not going to come in and save them. There is a significant portion of the population, and if you watched some of the interviews, you’ll see it. They were doing some interviews on the weather channel. They were talking to some folks that were in West Barry. West Barry has flooded twice in three years. These are $400,000 to $500,000 houses. This one guy just looked at him and said, “We’re done. We’re not doing this anymore.” The last flood that came through there, we had a caller calling in a radio show and they built their house up. That new construction, you got to bring in two to three feet above the elevations. He then said, “We built this brand new house, a million dollar house. I’ve replaced a quarter million dollars in cars in the last three years.” You don’t elevate the garages. This people are going to get sick of it.
There are two types of people that I don’t think are going to be in Houston long. It’s Houston that are mobile. I would have been in this group if I wasn’t a real estate investor. They’ve got friends all over the country in their field and they’re going to pick up the phone and they’ll go, “John, I know you got that new gig in Seattle and I know you guys have always wanted me to work with you. Can I start Monday?” It’s going to be a lot of that. The other group, I think that are going to leave Houston are the retirees. I can imagine folks like my parents’ age. They got the job, they’re doing really well, and they’re not quite retired yet, then something like this happens and they’ve literally lost everything and they go, “Screw it. We’re done.” They put all the stuff on the curb. They may do the immediate remediation around the house. They’ll sell it to a real estate investor, buy an RV and they’re done. From a real estate investing standpoint, there’s going to be a lot of those people out there that are like, “I’m done with Houston. I don’t have to be here. I was here for this many years and I’ve survived this much stuff and I’m done.”
There are people that are going into San Antonio, Austin, Dallas, moving to the areas that aren’t so affected with flooding like Houston is. You have demand going up in those cities, so prices go up there, scarcity comes down. Then you also have that vacuum getting sucked out of Houston too.
You’re going to have a vacuum. I’m about to send out an email sometime today where Brock Long of FEMA said this is going to be the largest housing construction recovery effort in the entire United States. Housing was already at a premium in Houston. It’s for the houses that didn’t get flooded, it’s getting more expensive. That’s for rental properties and for retail-ready houses. There’s going to be a couple of events that all happen at once, and that is you’re going to have people that either are going to get checks from FEMA or they own houses free and clear and they just want out and they’re going to sell. These houses are not going to be fixed up. They’re not going to be retail-ready. They’re not going to be able to get a mortgage on them. A real estate investor’s going to have to come in there and fix those things up or home owners with cash. That’s the other group.
You’ve also got the fact that there are no new houses being built below $200,000. For those neighborhoods, I heard Bear Creek on the list, I heard parts of Cypress and Spring, a lot of those houses are under $200,000. Those are the affordable houses now in Houston. Affordable house inventory was already at a multi-year low. That’s going to jack the prices up on notes. You’re going to see the same thing I think with rental properties. I had this prediction going for about a year and a half now that this will be the first year that we’d actually start to see rental or leased decline. We’ve seen double-digit appreciation in leased rates since 2008. I thought this year will be the first year that we’ll start to see that. We’ve seen that with a lot of inventory, but with this most recent storm, I don’t think that’s the case. I think rental rates are going to stay steady, if not increase.
Long-term, six, twelve months, it’s a little bit longer term than most people think about month to month. They’ll see banks delay foreclosures. They’ll see banks delay the default stuff that people are making a home and they have hardships, checks and stuff like that. At some point, the banks are going to switch things over.
A year from now or eighteen months, whatever it is, you’re going to see, “We owe more on our house than the house is worth.” You’re going to see the defaults. You’re going to see the short sales. You’re going to see banks willing to sell paper off at a substantial discount when it’s a damaged home, so they can drop their books and let somebody else deal with it. It makes for an opportunity. If you’re an active real estate investor to hit those markets hard to try to come up with a win-win solution, a win for the borrowers, the homeowners. Write them a check, they’ll walk away. A win for us as note investors, let’s write a check for the bank, get a discount, and same thing, reaching out to the homeowners. Let’s create something that works for them when it’s walking away, and not just putting the money in on the fix-and-flip side or turning the long-term rentals to keep on it. I honestly think that the big plan, if you’re a real estate investor in those affected counties, I don’t think it’s to fix it up and sell it. I think it’s got to be fixed up and rent it for a while. Would you agree to that, Jason?
This is where the landlords are going to have to step in. One of the things I’ve seen on Facebook when they talk about real estate investors and disasters like this, they equate them with the ambulance chasing attorneys. I said, “You don’t understand. We provide liquidity for an illiquid asset.” Your real estate agent that’s your best friend that bought and sold four, five houses for you is not going to be the one that walks in and writes a check for your dilapidated house. It’s not. That’s reality of these things. We had experienced during the Tax Day floods in Richmond, Texas in south of there, the south west side of town, in some areas of town, they had water just below the roof of the house, which is a full remodel. We saw values collapse 50%. It was a 50% drop. Houses were worth $200,000, and then all of the sudden the prices in which we were buying and rehabilitating at were literally 50% of value because nobody knew what the value was. You don’t know what the value these things are until the market responds and starts buying it.
The question we have right now is, when is home buying going to come back? So many people are still in recovery mode or haven’t gotten into recovery mode yet. When does all that buying activity start? We still have people moving to Houston. That’s the other side of this equation. We still have a lot of people moving to Houston. They’ve got jobs and those jobs are still here. The house they probably had under contract to close last week is now under water. What do they do? I think in the short-term, you’re going to see values take a dip because there’s going to be a lot of inventory of these distressed properties on the market. Conversely, I think you’re right. Six to twelve months from now, banks are going to start looking around, everyone else is going to start looking around, “We’re back to normal.” I had some buddies that bought a bunch of property at New Jersey right after Sandy and they said, “It’s amazing how short people’s memories are. They’re like, ‘I don’t want to live here.’ Then three years from now, the values are higher than they were before.” In any case, I think it’s a buy and hold play. I don’t think you’re going to turn around and flip a lot of these things. It’s definitely going to be a hold on for the medium term, if you will.
We have a question, “What is the best scenario for notes and/or REO? Renting after a fix and flip is probably the best one. What is long-term?”
I’m a really strange guy when it comes to rental properties. I don’t ever want to re-leverage them. I don’t want to sell them. I’m going to pay it off. I really do. That’s my thing. Scott, what do you guys end up doing on the note? I know you flip notes from time to time, but there are some that you keep.
It all depends. It comes down to a variety of things. The fact that we buy dead at a substantial discount below market value already, with a 50%, 60% of current market values, for Houston it’s going to be below that number. Texas is really a lender’s paradise because we have been known for fast foreclosures, fastest in the country, and property values staying pretty level. We’ve got 1,700 different lending institutions licensed to do business in Texas. I guarantee all of them are doing business in Houston. There’s a lot of stuff in the next six to twelve months. If you look back at what the government did with the GO Zone, the gulf opportunity fund back in Louisiana, Alabama and Mississippi. They provided a lot of great long term discounts for investors to come in, buy these properties, or to build properties and give substantial tax discounts on it. We don’t really see those type of tax discounts on the paper side, but you do on the fix and flip side or the rebuild side.
With us, I like holding on to notes if they’re performing. If they’re not performing, then we become just like a normal bank. We can work something out. We’ve either got to, A, have you deed the property over to us and walk away, which we have plenty of times happen, some of a friendly foreclosure. A borrower is just going to sink their head in the sand and not do anything, then we are forced to foreclose, versus trying to come up with an equitable situation.
The fact that we do buy at substantial discounts is because there’s lot of flexibility for payments to be very affordable. To get something versus nothing or to defer payments for a period, that’s what we’re doing right now initially. Let’s defer payments on these for a while and see what happens when they pull themselves out of the mud and the muck. That’s why we have insurance on our assets as well to cover that aspect, in any case. That’s why I’m not really sweating because I have a blanket policy on a majority of our assets, especially Houston-related areas, anything that’s going to flood or gets wet. They have policies on that separate just what the borrowers have.
It’s too early to tell on that stuff. The thing you have to keep in mind is those that aren’t affected are still affected, property values, a dip in the market, they have to keep that in mind, especially even that are close to the affected area, their accounts are coming out the window.
I had a buddy of mine, when they had those last West Barry floods, they had just finished the rehab and his area wasn’t impacted and he thought, “My values are going to go through the roof because so many wants to live here. These are the areas that haven’t been flooded.” I said, “We’ll see how it happens.” It didn’t work out for him. If you’ve got an entire neighborhood, most of the sections in Sugar Land right now were spared. I don’t think there’s going to be much impact on values, if not they may go up. If half your neighborhood was flooded and the other half wasn’t, it’s still going to have that flood stigma on it. lt’s just the same as if your house was flooded. That is absolutely going to have an impact on those values. When they Google Search your neighborhood or the neighborhood they’re thinking about living in, and it pops up in a PDF form of the mandatory evacuation area, that’s going to be a problem. That’s going to impact values for a significant amount of time.
This is all the way down the coast line. Rockport and the whole Texas Riviera has been such a growing cheap waterfront real estate for the most part, and that price has gone up. When you see the mayor of Port Aransas talking about things being destroyed in Rockport to Bay Front, they’re getting demolished and hammered really bad, that’s a two, three, four, five-year full period. If you’re an investor buying that area, you have to hold on to it for people to come back and the values to come back to what you’re doing. You’ve got to think long-term on it. There are multiple ways to make things happen. If you do have a good asset or if you do have a property, you’ve got demand working in your favor. That’s a much longer haul play like we talked about versus the fix and flipping side of things.
If there’s a commercial guy that’s listening to this show, going down to Rockport and buying up some of those commercial assets, you will do extremely well in the next five to seven years. A lot of people outside of Texas or outside the Gulf Coast don’t really know Rockport. It was a bustling retirement community. It’s almost like a little resort community. Prices were going through the roof. I don’t anticipate that stopping anytime soon. They’re just going to go back and rebuild and build it bigger and better than they were before.
A lot of people are familiar with Rockport. I grew up in a ranch just past in Ingleside, and my parents lived right on the city limits on the local Ingleside hardware for almost a decade. You look at some of those economic shrimping, fishing, 22% of the refineries. Oil is down right now because of the largest plant there in America being shut down by Houston. There’s going to be a quick influx of prices as it takes a little while for it to come back down. Some of these economic standards, the industries, will recover fine. A lot of these companies are said to be off site to something if something major happens in the area, if there’s a little bit of blimp. There’s going to be a lot of digging out in some areas there that’s affected by people. The people that are in the rehab business, those roofers, those general contractors, they’re going to be very busy for a while.
If you thought construction costs were high already in the city of Houston, it just went to a whole other level. It’s going to be even worse. For those that are insured, now you’ve got insurance companies that are writing checks as opposed to real estate investors and home owners. The difference in cost for an insurance company to insure a roof is sometimes double, if not 60%, 70% more expensive than if you were to do it. In other words, there’s going to be a lot of claims dollars out there that are going to greatly affect the cost of rehab because they can pay so much more. For those of you that are real estate investors, you thought it was hard to get accrued now. It’s just going to get that much harder in Houston. Hopefully, we’ll have enough people from around the country that will fly into that market, electricians, plumbers, that sort of thing, that can work down here, assuming they can handle the heat.
Let’s talk about outside the box. This might be an opportunity to buy a lot of those truck storage containers with all the AC box on them. Haul them down there, drop them down, hook them to electricity or generators and create mobile cities out there. You know what happened with FEMA in New Orleans, a lot of those portable housing that kicked in. You’re going to have hotels here in Austin that are going to be full. All the outside areas are going to be full with those transplants and contractors coming in.
Probably the worst thing that’s happened, I drove up on 45 to Dallas and I drove down on 35 to Austin, I noticed both of the largest arteries in the entire United States are under construction at the same time. If you think the traffic on 35, and 45 was bad now, just you wait. It’s about to get way worse.
We have another question, “Are there a lot of short sales by you, Jason?”
Let’s talk about the short sale market in Houston. Jason, you know more about it. I’ll throw in my opinion on it.
Here’s the problem with short sales in Houston and in Texas in general. There’s been so much appreciation. They’ve had 55% appreciation since 2012. It’s very hard to get under water in a house. We’ve done a couple this year. Where we see short sales work is where a homeowner gets behind and the house is literally destroyed. Most banks, they figured out they could do paint and carpet rehabs. In this particular case, the homeowner was breeding huskies in their house and just destroyed the house. You can actually have dogs cause foundation issues. The dog was digging up the cable and of course water starts running underneath the house. The whole foundation was goofed up. In that case, when a bank looks at a deal like that, they’re like, “We’ll short sale this because we don’t even know what to do with it.”
I think there will be an opportunity for short sales on those flooded homes for people who bought in the last two or three years or have refinanced the last couple of years and don’t have enough equity to shoot the gap to get their house fixed up. There’s a significant reputational risk for these banks to just start foreclosing on people. Inside six, twelve months, I think at that point it will be a far enough memory. What they may do is just sell the papers so they don’t have to deal with it. They could give it to somebody like you. They’re not worried about the Facebook Live video of, “I’m an evacuee. I’m getting kicked out of my house.” I could totally see that happening. Like you said, it’s more a medium term thing, six, twelve, eighteen months from now than it is in the next couple of weeks.
I’m thinking exactly right on the same point with that. That stuff’s six to twelve months out. People are going to have the cash to fix up their houses. The banks don’t want to come across, especially local banks. There are a lot of local banks in Texas that are lending there in Houston. Something like 45 banks are licensed in Texas that are doing lending in Harris County, in that neck of the woods. That’s not counting credit unions either. For other lending aspects of cars, the boats and stuff like that, it’s all been demolished as well so there are a lot of defaulted paper out there. That in turn leads to defaults in other areas, like credit card debt. I guarantee, there are a lot of people who’d be living off of credit cards here for a little while until they’re waiting on insurance checks to show up.
I’m watching the assets. I think the next bubble that we’re seeing right now is actually the automotive industry. I thought, all those less-than-ideal borrowers just had all their cars flooded here in Houston. There might be a mini-bail out of the auto industry that’s taking place in Houston in the next couple of months.
That’s the same thing. For those that don’t know, used car industry, used cars paper, is a huge industry, huge money-making aspect. You’ve got something that has a bluebook value of say, $8,000. A used car salesman is going to have that and do a little bit of paint and carpet clean up to it. Give it tune-up. Owner finance it at $12,000 to $16,000 at 19% interest rate. They’re going to put a skip trace around it that if you don’t make a payment, they can turn your car off and they’ll sell the paper off. Either hold it because they’re making such a great return or they can sell it off at 75%, 85% on the dollar the day they closed on it because the yields are so phenomenal. What do you have happened with that? A lot of defaults; people can’t make payments, people are out of jobs, they lose things and they get repo-ed and the cycle starts all over again. Definitely used cars, there would be a lot of money made around the area outside of Houston, even inside of those that are driving in that neck of the woods.
I think another market that’s going to be really interesting is the investor to investor market. In other words, I think there are a lot of out-of-state owners that are not going to be in this business because they’re just not going to deal with this again. I am real interested to see of the hedge funds that are left out in Houston, how many survived. We’ve see a huge decrease in hedge fund participation in the last 18 to 24 months for two reasons. One is the storm risk. They can’t have a thousand houses under water and then expect to fix and get them all rented. The second is our HOAs are incredible and powerful down here. They don’t want to deal with either one of those. Of the hedge funds that are left, we have some friends of ours that have a hedge fund down in Houston and in Dallas. I’m interested to see if they’ll continue buying or if they’re going to start selling those assets up.
You’ve got to look at where that money is invested, what’s it focused on and if they’ve got the opportunity to pick up one of those assets, they just have to really cash out and move on. You see that at different markets across, especially when something’s essentially market-focused. That’s the thing to keep in mind with that. Texas, that’s strong. We’ve been very lucky over the last years, even with the downturn in 2008, 2009 and 2010. We didn’t see a lot of defaults like other market states. I think we’ve got a little bit of our own this last week handed to us.
What’s fascinating is even during the oil downturn, everybody kept telling me it’s going to be pure bedlam and I’m like, “It’s not.” This is a very diverse economy down in Houston now. It’s not the ‘80s over again. The opportunities, at least for, if you’re in the direct house-buying business like we are, those opportunities are pretty small window to be able to get in there and buy these houses that home owners just don’t want anymore, that real estate investors or hedge funds don’t want anymore. They’re just like, “I’m done. Cash me out, I’m ready to go do something else,” which I totally get. You’ve been flooded two or three times the last five years, I’d be done too. I was telling my wife. She works from home. She works for an online company and work anywhere as long as she has internet access. I said, “If I were just a regular corporate guy and I got flooded and I had a couple of rental properties and those are flooded too, I think we’re moving. I’m done with this.” Whether that’s Dallas, Fort Worth, Texas or is it Denver or Seattle or any of those markets, you go out to Atlanta. I think there’s a good portion of population that’s just done. They just don’t want to deal with this anymore. However, our job demand is still great. I think there are people who just got to come in and backfill their spot, if you will.
It’s just going to be a rotation through a little bit just a blip, as those are leaving and the investors come in and fix stuff up. They increase the demand or fill that demand. You have apartments already in check. I think in Texas in itself has about 94%, 95% occupied across the state. Austin’s already at 98 and a half, I think. It’s what I talked about with somebody a couple of weeks ago in Houston. You know where Houston’s at? It’s got to be pretty high up there, too.
It’s 92%, 93%. You don’t have to be an excellent operator multi-family. If you can fog a mirror, you can fill up an apartment complex. We’re predicting a big slowdown of multi-family at some point here, in part because of housing inventory. We were starting to see inventory start to rise in Houston. Now with this, now you have all these multi-family guys that can run around and tell everybody how smart they are. Rental rates are all-time high, occupancies are all-time high. You’re riding the wave. Just a simple change in the interest rates or banks no longer have an appetite for refinancing some of those performing multi-family portfolios, then all of a sudden you’re losing all your multi-family assets. I think that’s going to slow down a lot simply because housing is going to be in short supply.
The banks are going to have to open the strains, if not the federal government with aid to boost their construction. I was talking with the Shenoah Grove at the Quest IRA Boot Camp they did here. She was talking about how Austin’s at less than three months of inventory. That’s going to go down as people are moving here and say, “To heck with Houston.” It’s the ripple effect like what happened in Houston after New Orleans. Everybody moved to Houston, everybody drove their house down from New Orleans to Houston. Now they’re going to drive or float their house down from Houston to Austin.
I think a lot of them are going to end up in DFW. I think Houston’s at three and a half, four months of inventory on market. Dallas is where Houston was two or three years ago. It wouldn’t surprise me if it’s in the twos. It’s just crazy. What will be interesting to see is what happens to all those investors that don’t have insurance over the capital to be able to fix these things up and what happens? There are some hard money lenders in Houston and in Dallas and some in San Antonio and Austin that will not survive this. They weren’t doing all that great before and I can already see it happening now. It’s going to be real interesting to see the next six months who’s still on the real estate investment business in Houston and who isn’t.
I’m glad you brought that up. Hard money lenders don’t have the same type of government bailout like the banks do. There’s no FTIC insurance for that. With them lending at 65%, 70% of ARV, if those houses weren’t fixed, that ARV went way down now.
One of the discussions we were having with a friend of mine, he had just finished a rehab. For those of you who are outside of Houston, the bayou’s really a ditch. All these bayous are big ditches. In any other city, it would be like, “I got a ditch that runs in my backyard.” In Houston, the bayous sitting here, we call them bayou. The bayou’s actually considered a nice feature to have if your house backs up to a bayou because you don’t have any back neighbors. He was finishing a house on a bayou and it flooded. Is it now still worth half a million bucks? I don’t know. I think bayous got a bad rep in the last couple of days. What’s the house actually worth now?
It’s waterfront property.
It is water front in the living room. It is going to change the landscape. Two years from now, people will be like, “Harvey was a nightmare. I lost everything but we built a house back and it’s great and we like our neighbors.” The area that I think is going to be really interesting to watch is Sienna Plantation.
For those that don’t know what that area is, what part of Houston geographically is that at?
Sienna Plantation is in Missouri City, which is about fifteen miles south of Houston. It’s a relatively new neighborhood, maybe ten, fifteen years old. In Houston, if you’re watching the national news, I don’t know if they’re talking about it, but in the local news, they do evacuations in Fort Bend County by what they call LIDs. Those LIDs are Levee Improvement Districts.
There are two ways to mitigate flood losses. One is to build the house up. In other words, build the neighborhood up, bring a bunch of filter in and build a neighborhood. Or build a system of levees around the neighborhood, levees and retention basins and all that. One thing I have noticed, the national news, even the weather channel gets wrong is they’ll say, “Since the trouble with Storm Allison in 2001, Houston has added 25% more concrete.” That’s true, but you guys ought to see all of the water retention stuff we have. The neighborhood is this big, like the houses, and then the levees are out here, and there’s water retention stuff here, and it’s all outside the levee. It’s incredible. What’s fascinating that’s going on in Sienna Plantation right now is essentially all those levees and pumps, all that stuff has failed. Everything has failed. That entire neighborhood, that’s a big neighborhood, has been completely impacted.
Another one to watch is Cinco Ranch. That’s out on the west side of town in Katy. They’ve been doing water rescues out there. Some of these water rescues, the guys are in ankle-deep water. If it’s elderly folks and kids, I get it, but some of these are grown men getting rescued when they can just walk across the street. When you start getting water in the feet and it’s moving fast, you’ve got to have a boat to come and get you. Some of these areas of town, they’re just full of water. Just walk on out. One of our employees lives in West Barry. Their house took about a foot of water. She got two old boys and they all walked out in waist-deep water. She said, “We got a water Uber come pick us up.” A lot of these guys are just running around the neighborhood, just picking people up. A lot of people don’t realize, you’re sitting in your living room, you go to bed at night, you wake up and there’s two feet of water in your house and you’re like, “What just happened there?”
I think one of the things that national news does a bad job of is they make it seem like Houston has no flood mitigation plan and it’s inevitable this going to happen. A lot of the city that’s got water in it, it’s a couple of inches or a foot. That’s enough to cause a massive amount of damage. That’s what they’re filming a lot of these neighborhoods. I got a picture of the coast guard, they landed in a street in Cypress in between pine trees. These guys are amazing. When the helicopters start showing up, those are the serious water rescue because people are about to get swept away and killed. You’re seeing some of these guys on boats. We saw one the other night, some car got trapped and they essentially threw the boat in the water and they’re picking up. It was wild. A lot of these water rescues are people who are just getting flood, they got stuck, and they’re like, “Now, how do I get out?” You’re seeing a lot of them where they can’t even put the engines on the water. They’re actually pushing these people out. It’s wild.
Most of Houston, the ones that are impacted, it’s a couple of inches or a foot. It will be two feet, three feet in the street and then it’s a foot in the house. A lot of folks don’t know that although we’ve got all these boxed covered and these bayous and all that, the streets are actually the drainage. Your street ends up with about three feet of water. Right now, our personal residence in Sugar Land, once the brasses crest, we’ll see how much water we’re actually getting in our street. Right now, it’s a foot, foot and a half. We’re just hoping the neighborhood don’t flood. That’s another issue, too. Houston is the last stop before the Gulf Coast. As far as Dallas, because the Trinity flows down from Dallas down to Houston and we’ll see those flows coming in.
The Colorado goes down through Brazoria. It comes out there in Palacios there, south of Houston, about an hour out there and it fills it up there. What else?
A lot of people are just locked in their house, which is a problem because they’ve been there for four, five days ago. Most people don’t carry a whole lot of food or water for that longer period of time. One of the things that we did after Ike or Rita, we bought one of those Berkey filters. You can filter pond water and pool water out of it. We used it every day, it’s great. A lot of the folks that are stuck in Houston because their neighborhoods are flooding, they just sit there and watching.
I’ll tell you another thing. Reliant has done a phenomenal job with the power. I’m amazed. A few people don’t have power. They’re literally sitting there watching the news, which I’m sure is all about keeping people calm. The news is getting them all worked up and then they’re seeing the water go from over the curb, up the grass and everybody’s getting stirred crazy. I think that’s a lot in Houston now, so as the water recedes, I think everybody starts to calm down a little bit. Somebody sent me a video of a convoy, it must have been two miles long, of guys with boats going down to Houston and bringing those aluminum boats. I’m curious how long that Cajun navy is going to hang out because it sounds like Lake Charles is just getting absolutely obliterated right now.
That’s the next thing now, with the storm moving that way through BOMA and that neck of the woods, it’s going to be another Gulf Coast atmosphere with the flooding in that neck of the woods. Jason, how do people get a hold of you?
The easiest way is just go to Right Path Real Estate, our Facebook page, @RightPathRealEstate or RightPathRealEstate.com. I’m pretty active on Facebook. You try and friend me but I wouldn’t bother. I keep everything public anyway so you can share along and we can chat that way.
Once again, if you can, donate as much as you can. There’s hard times getting into the city and stuff like that. Yes, if you’re pretty sure of going into the city and helping out and things like that, but donate as much as you can. That’s what really is going to help people long term, whether it’s through the Red Cross or FEMA or Hughes and JJ Watt, stuff that he’s doing with crowdfunding which is a overwhelmingly crazy aspect of how much money they’ve raised. He donated a million, a million had been matched. Bob Kraft with the Patriots is donating $1 million. The owner of the Titans also donated $1 million to JJ Watt’s crowdfunding fund there.
I saw a news crawler. It said the owner of the Rockets donated $10 million.
Donate as best as you can. It goes a long way, trust me. Every year we have something happen in the United States, wherever it is. We’ve had Louisiana happened. We’ve had other floods in Missouri and other parts of the country. Help out as best as you can. It is what it is. There’s opportunity everywhere, there’s also opportunity to help out. We make enough money. It’s always good to help out and give back any way we can, because it does come back ten-fold. I’m a big believer in that and seen that over the last few years.
It’s great that everybody’s helping out now and showing up with boats. As many people have been rescued, there are twenty times as many people that need help out for the recovery. The big time work starts now, getting that wet stuff out of houses, cutting that stuff out, helping people essentially move their house out to the curb and the recovery. It’s going to be a much larger effort than what you see that’s going on now. It’s going to take years, but if you all can help out in any way doing that, come down and help. Get a couple of buddies together and go down for a weekend and just head to a neighborhood in Houston. Just going through and start pulling stuff out of people’s houses, that will be a huge helping hand for the folks down at Houston.
How is Tom doing? Tom has a roofing company there too, doesn’t he?
Fast Track Roofing and Remodeling. Tom’s in DFW right now with the rest of our staff. They’re all staying at the hotel we were at. He’s doing good. I talked to his brother a couple of days ago who’s the owner of Fast Track. He lives in Pecan Grove and so does Tom’s parents. Pecan Grove went under a mandatory evacuation. I don’t know what’s going on over there. Pecan Grove is right next to the Brazos so that’s not great. It will amaze a lot of people how fast the recovery goes compared to Katrina. It’s still going to take a long time, but it will be pretty amazing to watch how fast it goes. Any helping hands we can get down there to help us move stuff out of houses would be greatly appreciated.
Let me know, we’re glad to help out and put the word out as well to everybody. Jason, thank you so much for joining us here on The Note Closers Show podcast. I know it was a little bit off of notes. We talked about what’s going on there for everybody, which is great. You have this on a basis like this. Houston had been a very, very popular, very hot market, fourth largest market in the country, it’s definitely going to affect a lot of things. Once again, our prayers and thoughts are with all those that are affected by Harvey. If you can help in any way, please don’t hesitate to do it. Make sure you go out and donate money once again, and get a hold of Jason at the RightPathRealEstate.com or the Facebook page as well. We’ll have to have you back on in a couple of months to talk about what’s going in since then.
Also, the adventures that we’re going to have with all this. You’ve got to look at it from a positive standpoint. All the stories that are going to come out of these things, that would be great. Thanks for having me on, Scott.
Thanks, Jason. Have a great day. Be safe. If you need anything, don’t hesitate. Once again, if you like to get more information on note investing, as always, just text the word ‘Notes’ to the phone number 72-000, and you’ll get access to over 80 hours of video, education and training on the note business. Otherwise, have a great day. We’ll see you all at the top, everybody.
About Jason Bible
Jason got his first taste of real estate investing after joining a local real estate club. In 2012 made his first transaction and hasn’t looked back. Since then he has bought, sold, and leased dozens (maybe hundreds by the time you read this) of properties.
Jason has more than a decade of experience in risk management in the private and public sector. He managed the risk finance program for The University Of Texas Health Science Center at Houston. During his tenure he managed the workers’ compensation program for 5,000 employees, property conservation program for $2B in insured assets, and business continuity and emergency response program. He also managed the Fire and Life Safety program responsible for nearly 5MM gross square feet of laboratory, classroom and office space. His program additionally reviewed plans for new biomedical research facilities, one facility built annually during his tenure at $250MM per project.
Jason has a BS in environmental Science from Sam Houston State, Masters in Security Management from The University of Houston and an MBA in finance from Houston Baptist University.
- Houston House Buyers
- Right Path Real Estate
- Quest IRA
- Right Path Real Estate’s Facebook account
- Fast Track Roofing and Remodeling