Jack and Marcy talk about what is a re trade in commercial and investment real estate?
Why and when does this happen? What does it mean to you?
“Marcy: Hi, we’re very, very talkative today.
Jack: Yes.
Marcy: We have a lot to say. We’ve been saving it up for like a week because we’ve just been super busy for a week, and now we are going to tell you everything that’s been on our mind. Not everything.
Jack: There’s a lot of deep stuff in my mind. I don’t know, not my wife says it’s best if I keep it buried.
Marcy: Oh boy, okay. Well, we’re gonna try to keep this conversation leveled.
Jack: Um, so you know right now we’re in an increasing interest rate environment. By the way, I just thought of what I was going to talk about.
Marcy: Okay, so let’s talk about interest rates going up everywhere.
Jack: What’s happening is deals are being re-traded, so I wanted to make a video. What does that mean?
Marcy: What is re-trading?
Jack: So, give you a perfect example of a deal that we’re involved with. It’s in a major metropolitan city. A guy was buying a hundred and twenty thousand square foot office building, and he had quoted and locked in, in quotes, a low rate of three and a half percent. Let’s just say the purchase price was a million dollars. It was a lot more; it was like twelve dollars. But let’s just say the purchase price was a million dollars, and he locked in, I think it was three and a half, whatever it is. And now rates are higher. Now he’s getting quoted five percent. So, what happens is he’s going now back to the seller, and if that purchase price was a million, I’m making up the numbers, he’s going to sell and say, “Wait a minute, I can’t afford to pay you a million dollars anymore because the rates have gone. Like three and a half percent is now five. So that million dollars, I can only pay you 950,000 or some multiple of the sale price. So maybe they’re re-trading it at 90% or 95%. Effectively, they’re going and getting a discount. So re-trade, I think from a technical perspective, is when you agree on a price, and then something happens during your due diligence period that you have to reprice the deal. And it really, I really hate it, to be honest. It goes against my grain, but unfortunately—
Marcy: No, I mean if it happens, it’s just like not a good feeling. I don’t love it, yeah.
Jack: But unfortunately, it’s a reality of the marketplace as interest rates go up and inflation goes up. You know—
Marcy: It’s gonna— I mean, they’re trying to level it out, but it’s gonna take time.
Jack: That’s correct. So, you know, re-trading unfortunately is part of the marketplace now.
Marcy: And also, what has happened with re-trading, understand, like in the very beginning of a transaction. But we also have seen from other lenders what has happened is some of the borrowers that we have done deals with lately, they get to the table and then that lender is like, “Hey, we can’t do your loan anymore because of whatever reason it may be,” or they try to go back and say, “Well, your rate’s going to be XYZ,” or, “Oh no, it’s going to cost you more money,” and the borrowers are like, “Forget it,” you know, it just—it goes on the whole thing.
Jack: Very good point. Re-trading goes on from the lender’s side. Keep in mind we’re a little spoiled because we’re all private capital and we don’t have any warehouse lines.
Marcy: Right, because some places have to sell in the secondary market and they put all their loans together; they’re selling it on Wall Street somewhere, and they’re not—now there’s been a little bit of a stop.
Jack: Well, if you think about it, if the secondary market, let’s say, is investing 50 million or 50 billion, whatever it is, and they know rates are going up, they’re gonna wait until they get the higher rates. So with us, an advantage that borrowers have to come with us because—
Marcy: We’re a direct lender, so we fund the loans.
Jack: We’re all private capital, so really on the lending side, you’re right, that’s a very good point. There’s re-trading on with the lenders to the borrowers and then with the borrowers to the sellers. But the reality is it’s coming home. This is just part of the market cycle.
Marcy: I mean, it’s all coming. It’s because of what kind of atmosphere we’re in. We are now in the world.
Jack: I would tell people don’t be scared of it; you need to embrace it. You need to embrace it.
Marcy: But you also have to make moves now. Make moves. Don’t sit. The longer you’re sitting on stuff, the higher the rate’s going to keep going up, and things are going to just keep evolving. So I really tell everyone that, like, is really looking to the borrowers—are you really looking to invest in a particular commercial property? Don’t wait. You need to do it.
Jack: But you have to effectively be buying it for today’s values, which are different from yesterday’s values. Remember, the Fed, as of today, is talking about raising rates 150 basis points. That’s a huge effect.
Marcy: Yeah, well, next month, I’m sure it’s going to go up 0.5, so—
Jack: We’re talking about 50 basis points.
Marcy: Yeah, and then the next two months later it’s going to go up again. So, it’s just, my point is, like, anyone out there or any brokers that you’re working with, borrowers, everyone should start making moves faster than later, you know?
Jack: But effectively, the title of the video is re-trading, and re-trading effectively is exactly what it is. You agree on a price, and then you change that price because of circumstances, or some people, frankly, there’s no circumstance changes, take an opportunity to change it, but be careful. Because sellers, be careful, and buyers, be careful. Buyers, don’t be fooled here because when you agreed to pay these prices, it was based on one set of circumstances—
Marcy: -and they all changed.
Jack: The economy is in a different position now, okay? How would we do?
Marcy: That’s it. Re-trade. That’s our definition of re-trade.
Jack: Remember, like our YouTube channel, leave us questions, comments; we answer them. Follow us, hit the bell or the buzz button, and remember “When your bank says no, we say yes.””
Category: Borrowers
