April 10, 2020

JF2047: 2008 vs Coronavirus With Chris Clothier

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Chris is a partner of REI Nation and he personally owns $12-15M in residential holdings and commercial real estate. Chris has been on the show before on two other episodes, links are provided below. In this unique episode, Chris shares his thoughts on the differences and similarities in the 2008 crash and the current coronavirus pandemic.

Previous Chris Clothier episodes.

3 common mistakes forming a business partnership

Faith will ruin real estate business

Chris Clothier Real Estate Background:

    • Partner of REI Nation 
    • REI Nation manages an $800 million (M) portfolio consisting of single-family residentials
    • Chris personally owns $12-15M in residential holdings and commercial real estate
    • 18 years of real estate investing experience
    • From Memphis, TN
    • Say hi to him at: www.reination.com   


Best Ever Tweet:

“You need to be in planning mode, you have to plan for the 10 things that could happen.” – Chris Clothier


Joe Fairless: Best Ever listeners, how you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever; we don’t get into any of the fluffy stuff. We’ve got a special segment for you today. We’ve got Chris Clothier on the show and he’s gonna be talking about the differences between 2008 and the current real estate market with the coronavirus pandemic. So, first off, Chris, welcome and good to talk to you again.

Chris Clothier: Yeah, Joe. Thank you for having me. I appreciate the chance to just jump on here and chat with you a little bit.

Joe Fairless: Well, I always jump at the chance to talk to you. I have a lot of respect for you as a business person and as a human being, so I’m grateful for talking to you as well. A little bit about Chris – he’s a partner of REI Nation. REI Nation manages a $100 million portfolio consisting of single-family homes. He personally owns between $12 to $15 million residential holdings and commercial real estate. He’s got nearly two decades of real estate experience, based in Memphis, Tennessee. So, Chris, can you give a very, very brief refresher of your background, and what you do, just for some context for our conversation? …and then let’s talk about your thoughts on the differences between 2008 and what we’re currently experiencing with the coronavirus pandemic.

Chris Clothier: Absolutely. So for those who don’t recognize the name REI Nation, my family founded the company called Memphis Invest, and Memphis Invest rebranded as REI Nation when we moved into our seventh market for managing single-family homes for passive investors. So we started in Memphis back 2002, 2003 range. Today, as you alluded to a few minutes ago, we’re managing over 6000 single-family homes for passive investors, and really our specialty is what’s become known as the turnkey niche. So we are purchasing, doing high-end renovations, then placing long-term residents into those homes, and then we manage them once they are purchased by a investor that wants to be strictly passive. They just want to own the asset, have someone else manage the day-to-day. That’s what we do today. That’s about an $800 million portfolio spread across seven cities in the southeast Midwest area.

Joe Fairless: What are the cities?

Chris Clothier: We’re in Memphis, of course, where we started, and then we’re now in Dallas and Houston, Texas. We’re in Oklahoma City and Tulsa, Oklahoma. We’re in Little Rock, Arkansas, and St. Louis, Missouri.

Joe Fairless: Okay, got it. Cool.

Chris Clothier: And as you alluded to, we were a growing company in the very, very early days of the boom for passive investments, when it was becoming very popular across forums online and across the ability to use the internet to reach out, connect and due diligence on passive investments around the country. We were right there at the forefront of it before the first recession hit.

Joe Fairless: So how did tenants, how did owners react then versus what you’re seeing now?

Chris Clothier: Well, the interesting dynamic between the two is that back in 2008, there were a lot of people that were talking about a housing bust, that there was a bubble that had been created artificially, and that was through people that were buying property that had no business buying property, people that were highly, and even over-leveraged. You just had this inflation of value that there were a lot of people that were warning at the time that it was unsustainable, and then you had suddenly, this slow drip of bad news. It started, of course, with Bear Stearns crashing, and then – I’ve got my dates pretty close to accurate – about 15 months later, Fannie Mae pulling out of the investment market and dropping investors from, I believe, ten properties down to three properties that they would finance overnight. So from a Tuesday to a Wednesday, you went from having an approved loan and a property under contract, to your loan was canceled. Even if you had a closing set for 8 a.m. in the morning, it was no longer closing. So there was this slow drip of a crisis developing and all sudden, boom, one day you had the drop.

What’s happened here now is really a compression of just bad news and fear. But many of the hardships that are going to face the real estate industry as a whole, they’re still in front of us. They haven’t really hit yet. This is a whole new set of issues, from rent and mortgage abatement and some of these other things that are coming up, and the difference right now is that there’s no room to even take a breath. You’re talking about over a two-week period, we went from full occupancy and business as usual, to the likelihood of collecting percentages of rents rather than full rents. Whereas before, you had a little bit of time to prepare and you could see things down the road. This is one of those things that just smacked us all right in the mouth in a fairly short period of time.

Joe Fairless: So what’s your communication approach when, inevitably, you’ve got your customers reaching out to you personally? I know there’s got to be a chain of command where they’re reaching out to their point person, but they’re also reaching out to you too, saying “Hey Chris, what’s going on with my property?” So with 6,000 individual units– that’s a lot of owners. I understand that many owners buy multiple properties, but I’m sure you’ve got some approach where it’s like, “Okay, here’s my message now to my clients, and then here’s my approach, XYZ.” So can you talk about that?

Chris Clothier: Yes. There are 2,000 owners of those 6,000 properties. So you’re talking about a massive number of people, and all are going to have an individual situation to them. So the first thing that we did was we did not rush to communicate out anything. We took our time to absorb, to bounce a lot of ideas off one another. We spent a lot of time understanding what was happening rather than trying to react and put out multiple messages. And ultimately, the message we went out to our client base with was that we are preparing daily.

We remember what the 2008 crisis looked like, we remember the daily grind, we remember the fact that you had to have a plan A and a plan B and a plan C, you had to be thinking through every possible scenario and each way you could react, because there’s so many things happening. Whether you’re a single landlord or you’re a business owner with a smaller business, none of it matters. You have to be in constant planning mode, and what I mean by that is you can’t plan for what’s going to happen, you have to plan for the ten things that could happen, and then how do you react to those.

Then the bigger thing for us, I’ll tell you, we’re very confident right now. Mostly we’re confident because we feel that we have prepared as best we can. [unintelligible [00:07:38].20] I don’t know of anybody that I’ve spoken with out there that had a plan for it to stop a pandemic in this type of scenario. But all of us planned for if something bad were to occur. So all this was was we spent a lot of time ramping up, discussing, training, changing scripts, and by scripts, I mean, we have to know how to answer questions. Now you’re talking about from an owner and a resident standpoint, and we have to practice and practice and practice and practice what our message is, and make sure that we properly plan for the messages we’re giving, if that makes sense. I mean, you can’t just say something. You have to have a plan behind it. “This is exactly what we’re doing and why we think it’s gonna bring us and you the most success.”

Joe Fairless: What is your resident message?

Chris Clothier: The resident message was simpler than the owner message, I will tell you that. The resident message was that — we did not go out with a big message in advance of telling everybody of any plan. Every single resident in every one of our properties knew that rent was due on April 1st. So we did not communicate any mass message of what we were going to be doing in advance. What we chose instead was on an individual one-on-one basis, as residents are calling us, informing us of hardship, we have a list of resources for them, we have questions we have to go through with them, we have verification steps that we have to take, that are gonna verify that you are truly in a hardship. Then, the reality is that right now, housing is massively important to each of these residents. They don’t want to stress about housing.

So, the message becomes, “While rent is due, not paying anything right now really cannot be an option. You have to make some effort towards paying rent while we verify your hardship so that we’re able to fight for you on your behalf to an owner that they’ve done the best they can, they’re doing everything they can to meet their obligation, this is where they’re at.” We try and keep to a minimum the number of people that do not pay any rent for whatever the reason, valid or not. We’re trying to keep that to a minimum. So our message is one of compassion. We have a lot of steps we’re going to take, but you don’t take those steps until the month goes on. So again, nobody’s late with us until three or five days after rent’s due. So right now, nobody’s late.

Joe Fairless: Note to listeners – we’re recording this on April 2nd.

Chris Clothier: There you go. Sorry about that, Joe.

Joe Fairless: We took a similar approach, by the way, with no formalized communication to residents about rent in particular. We have apartment communities, so it’s a little bit different. Certainly, about amenities and social distancing among the community and staffing hours and all that, but that’s apples and oranges right now, so I won’t mix that up into this conversation.

But we took a similar approach where rent was due April 1st, and we’re going to have those conversations on an individual basis now. What about a different approach? Because I saw a post on Facebook – so it’s definitely true – where someone proactively gave all their residents 15% off rent, and they were getting at least from one resident, very positive feedback. For the record, we did not do this, so I’m not saying you should have. But I’m just asking, why didn’t you do something like that?

Chris Clothier: We discussed it. So here we are again, we’re recording on the morning of the 2nd April, and we already know that over 30% of our residents paid on time in full through the first day, and that percentage will grow through the second day and the third day; payday is Friday. There’s a certain percentage out there that are going to pay on time that are not having any issues right now. Heck, Joe, we had over 12% of our residents paid early, before the 1st. So their rent for April was in March, and most of them are paying the 28th, 29th, 30th, 31st those days. They’re making auto payments in their portal. So had we arbitrarily given a discount across the board, we have a fiduciary responsibility to our owners to make sure that we are doing what’s in their best interest too. There will be cases where we have to work with a resident. There are going to be cases where we’re going to have to do discounts and we’re going to have to implore owners to work with them.

So we chose, and we will continue this message to our residents, that those that can pay, should pay, and those that are in hardship should communicate, and that’s the route we’re taking… Because we don’t know what’s going to happen in May or June. So someone who could pay full in April may need help in May. I wouldn’t be able to give them the help that they need then, not arbitrarily cut it across the board. So we don’t know that we’re right, but we are very confident in our approach. So far, it’s bearing fruit. So far– in fact, we have a great plan for those that cannot pay on time, and we have a great plan for those that can, and we’re executing.

Joe Fairless: If I cannot pay on time, and I verified my hardship through the list of questions that your team asks, but I do make an effort to pay; say I paid 10% of whatever the rent is, what happens to the remaining 90%?

Chris Clothier: It’s gonna be again, on an individual basis, but I can tell you on the front end, we’re not here to make late fees and make life more difficult for anybody, and we’re not here to put anybody out of their home when the eviction proceedings are unfrozen. So there are a lot– I don’t have the exact number, but I know it was a good percentage of owners that proactively reached out to us and said, “Hey, I want to help my resident if they need help. I’m in a good position, so I don’t have to have full rent.” And what we’ve told all of our owners is, there will be a time and a place to make that decision. Let’s not proactively reach out, because there’s 6,000 residents here. Let’s not reach out to them to say, “You don’t have to pay.” Let’s review. It may be 30 or 60 or 90 or 120 days down the road when decisions have to be made.

And if we can communicate that the resident had great communication with us, they applied for all the assistance they could get, they applied as much of that assistance towards rent as they could, then I have a feeling that we’re gonna have a lot of owners that say, “Okay, that’s what I’m going to lose this year. Whereas I anticipated making a higher cash return, this year I may not make that cash return, but I reduced my principal, I’ve got an occupied property with a good tenant, I’ve worked at some goodwill, and we’ll just move forward.” That’s what I think a lot of owners are prepared and understand they’re gonna have to do this year, not all of them, but some. Some will be affected that way.

Joe Fairless: Looking back to 2008 and comparing it to today, you mentioned some of the differences at the beginning. But, what are some similarities that you see?

Chris Clothier: Well, I see the unfortunate effect of this compounding of issues that, if I were to guess, I would say that some markets, some neighborhoods, some areas, some classes of properties, however, you want to designate it, they’re going to be impacted by foreclosures months from now. They’re going to be impacted by an increase in vacancy and maybe a decrease in rent. Now this isn’t across the board and each market’s different, but you’re going to see those things happen. It happens slowly. Back during the crisis of ’08, by 2009, 2010, if your market was going to be affected on the real estate side, it was. It took a solid two years, but by then, there was no escaping. If your market was going to see an increase in foreclosures, a compression of rents, a compression of value, it had happened, and I think that’s going to happen again here. This is a completely different crisis, but now, the financial side is going to start taking its toll on the real estate, and people’s ability to maintain and stay in their homes and avoid foreclosure and eviction. So those things, they’re lagging, and hopefully it’s not massive, hopefully we can get through this… Which is a major difference from back then.

At least with a crisis like this, there’s hope of a cure to come out of it, a flattening of the number of people that are being affected… All these different things that we can see that didn’t exist in a way in ’08 and ’09. Back in ’08, ’09, we had no idea what was going to happen next. At least, now we know that with some degree of certainty that we’re going to get through this, and the faster we can, the less effect it’ll have on the number of foreclosures there are and where they occur, and rent rate compression and value compression. I don’t think it’ll be as widespread, but the longer this goes, you can see where that’s going to come 6, 9, 12 months down the road.

Joe Fairless: One interesting thing that I think will take place is the fire sale like we had, after the ’08 crisis – it won’t be nearly like that at the end of this, for many reasons… One of them being people have been squirreling away money, anticipating some correction. They had no idea, I don’t think anyone had the idea it would be a virus. You’d think that they thought that it’d be something else, but people have been squirreling away money and the distress properties that do come up, it is my belief, there’s going to be a lot of competition for those distressed properties. Whereas in 2009, 2010, there wasn’t nearly as much competition because of what you said, the uncertainty.

Chris Clothier: Oh, I think you’re spot on. You’re exactly right. So there’s not a liquidity crisis, yet. So as long as there’s liquidity in the market and there’s appetite for buying, I agree with you, 100%. We shouldn’t see that anyway. And look, between you and I and all of your listeners here, any investor that came through the ’08 and ’09, many of them that I’m talking to, they’re advising newer investors that this whole idea of “This is what we’ve been waiting for, now we can finally get involved in the market and prices are going to fall and I’m going to send out some great deals”, so many of us remember the destruction that came from ’08, ’09, ’10 to lives, to people individually. Certainly, none of us are hoping for that. Anybody that came through that is hoping for a calm, recovery and exit out of this, not something that’s volatile, with high losses. If you invest properly in real estate and you invest with good fundamentals, you can always find good deals. You don’t have to hope for or wait for some massive crisis to make your windfall.

Joe Fairless: Anything else we should talk about that we haven’t talked about as it relates to what’s going on right now compared to ’08 and just your overall approach?

Chris Clothier: The biggest thing I can implore everybody is that it’s not too late to plan. If you haven’t planned yet, that’s okay. Even by the time that you hear this, you need to be planning for what can come next, and worst-case scenarios and how do you navigate those issues. You need to be overly communicating with your partners, with your lenders, with your clients or residents. If this has shown us anything, it’s that we’re pretty weak when it comes to control, which actually is a very strengthening approach. We don’t know what’s coming next. So we get stronger by planning  for everything, so that we’re not surprised. So no matter what happens, we can look back and say, “I’ve got a plan for this and I’m going to execute that plan.” That’s the way we came through ’08 and ’09, and that’s exactly what we’ve done today. We have just very calmly said, “Let’s get to work.”

Joe Fairless: What you said at the beginning, you did not rush to communicate anything; you had conversations amongst yourselves and figured out the approach. What was your response to the owners, to their clients before you had that formalized communication ready to go? What were you telling them in the meantime?

Chris Clothier: Well, for us, we have for many, many years had a program where we call every one of our clients, every month. So we built up this massive goodwill through relationship. So for us, there was no need to rush out because we were already talking to every client, and the conversations that the clients had with us was, “Hey, I know y’all are planning and preparing. I just want you to know that I’m okay not getting rent or help my client out. Let me know when you know what you’re going to do.” So we didn’t have a clientele that was in the dark. We had a clientele that, because we call them every single month — and that was our message. “Hey, we called you every month for the last 12 years for this day, because this day would come, when there would be uncertainty and fear, and you needed to know that we were on top of it.”

So there was not a need for us necessarily to get something out quick, and when we did get something out, we chose to do it by video, which we posted a message that they could all get to. So we put it on a website page so they could get to the message, and the message again was very clear, that (again) we’re confident.

Joe Fairless: Who was talking in the video? Was it just you?

Chris Clothier: It was just me.

Joe Fairless: Just you. Got it. Well, how can the Best Ever listeners learn more about REI Nation?

Chris Clothier: We have a very active blog at reination.com. We have a video series out there to help investors learn and all of it’s free. There’s nothing behind a paywall, you don’t pay anything for it, that kind of thing. I’m also extremely active on social media sites and even on sites like BiggerPockets. So I think I’m pretty accessible. You can come to reination.com, learn more about our company. You can always reach out to me. You can connect to us through social media or through BiggerPockets, and we’re happy to do what we can to help investors today navigate, get through this.

Joe Fairless: Thanks for talking about the macro-level picture, as well as getting the specifics of how you’re communicating with the owners of the properties, as well as the residents. Enjoyed our conversation, as always. I hope you have a best ever weekend and talk to you again soon, Chris.

Chris Clothier: Thanks, Joe. Take care.

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