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Show Summary
In this episode of the Real Estate Pros podcast, host Erika speaks with Giovanni De Francisci, a seasoned investor with over 20 years in the alternative investment industry. Giovanni shares his unique perspective on real estate investing, emphasizing the importance of being opportunistic, especially during economic downturns. He discusses strategies for shorting real estate and the current market conditions that could lead to significant investment opportunities. Giovanni also provides valuable advice for smaller operators looking to navigate the real estate landscape effectively.
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Giovanni De Francisci (00:00)
Well, the opportunities are few and far between in real estate because the cycles of real estate are very, very long, but you should buy in the middle of a recession and sell out in the top of the market. I think we are already in a decliningnationally real estate market has already topped out and is
the opportunities I look for are sort of like 2008,
there’s another very famous…
real estate saying, is that when there’s blood in the streets by real estate.
Erika (02:10)
everyone, welcome to the Real Estate Pros podcast. I’m your host Erika. And today I’m joined by someone that I’ve been looking forward to chat with, Giovanni De Francisci . He’s been making serious moves in the real estate world and he’s got a different spin on things. Giovanni, I’m glad to have you here.Giovanni De Francisci (02:29)
Glad to be here.Erika (02:30)
I think our listeners are really going to be interested in how you’re approaching real estate. So, you know, let’s jump on in for our listeners who may not be familiar with you. Tell us how you got started in real estate and what that journey was like.Giovanni De Francisci (02:47)
Well, being that I’ve been in the alternative investment industry for over 20 years, real estate is an inevitable part of your portfolio for a balanced investment portfolio. So for over 20 years, I have been in the real estate asset class, looking at it and being very cautious aboutreal estate because I do find that real estate on a risk reward basis is actually not a good investment. So you have to be very opportunistic about real estate. So I’m very concerned about real estate. I’m very opportunistic about it.
Erika (03:30)
So when you say opportunistic, can you break down for our listeners what that process is like and what you’re looking for?Giovanni De Francisci (03:40)
Well, the opportunities are few and far between in real estate because the cycles of real estate are very, very long, but you should buy in the middle of a recession and sell out in the top of the market. I think we are already in a decliningnationally, regionally within the US it’s not so much the case, but generally
nationally real estate market has already topped out and is
So
the opportunities I look for are sort of like 2008,
but we tend to sort of act as if the real estate market only crashed in 2008.
There are two or three instances that I’d like to use. There’s a famous movie called Coming to America with Eddie Murphy. Do know the movie? Do know I’m talking about?
Erika (05:24)
Unfortunately, I do not but I’m sure our listeners were and I’m gonna have to go I’ll watch it after this because I know who Eddie Murphy isGiovanni De Francisci (05:27)
Okay.Okay, so Eddie Murphy plays a prince in Africa.
who comes to America because he wants to experience America before he is betrothed to a woman in Africa, maybe even to find an alternative wife and queen for himself. And when he gets off the plane in New York, he says to the cab driver, take me to the city. And the cab driver says, whereabouts in the city do you want to go? ⁓ Bronx, Harlem, Queens. And the guy goes,
Queens! That’s where Prince should go. I should go to Queens. And when the car, when the taxi drives up to this barber shop…
in Queens and you know the the Princess Louis Vuitton luggage are strapped to the roof of the car. He gets out and goes into this barber shop and when he comes out of the barber shop you know his luggage has been taken off the know the roof of the cab and is laid all over the sidewalk and all the people have sort of pilfered into his luggage and are walking around with fur coats and gold toothbrushes hanging out their mouths.
That scene is Queens and if you look at it you see people who are warming their hands in five gallon drums at the corner of the street. That’s because landlords were not maintaining their buildings. So in the late 70s, early 80s real estate was so worthless.
that landlords did not maintain their buildings because it was just throwing money into the wind. There was no point in maintaining the buildings. If the roof caved in, so what? Wasn’t worth rebuilding. And
there’s another very famous…
real estate saying, is that when there’s blood in the streets by real
very few people realize when that saying was actually sort of coined. It was coined by Baron de Rothschild during the French Revolution. And essentially Baron de Rothschild was saying, the asset, the castle, right? That puts a target on your back for you to have your head chopped off. His idea was to go buy that asset.
Right? Like as if living in one castle wasn’t enough of a target on his back. His idea was to go buy more castles. Right? Because the people who had the other castles were forced sellers. They were desperate to get the bullseye off their back. And so he was buying castles very cheaply. Now.
Was there a need for castles immediately after the French Revolution? I don’t know. But, you know, the saying still sticks when there’s blood in the streets by real estate. So opportunistically, real estate’s a good investment. And that is immediately, you know, after a crash, a recession.
in the doldrums, that’s when you should be buying real estate. Not when it’s easy to buy real estate. Not when it’s easy to borrow money to buy real estate when everyone’s telling you, hey, buy real estate. You can’t go wrong. You’ll make money. Well, the pros in the space, they’re the ones who are getting on podcasts telling the amateurs in the space.
to buy real estate and that is called selling to the greater fool. So they’re looking for someone stupider than them to sell to. And that’s what I see happening right now is a lot of amateurs getting into real estate. There’ll be a thinning of the herd, culling, sort of to use Darwinian theory. And two, three, four, five years from now, real estate will be more…
more reasonably priced and that will be the time to really almost blindly buy into real estate. So that’s what I’m looking for.
Erika (09:57)
So, and I’m sure you want to capitalize on that prediction of yours. So when it comes to your world, how are you structuring your private capital strategies? So, you know, these opportunities are successful for you.Giovanni De Francisci (10:15)
⁓ Well, first of all, I’ve the key is to be where the rubber meets the road. So I have found someone. Let’s use the movie, The Big Short. Okay. So in The Big Short, you have three or four main protagonists. You have Michael Burry, is, I forgot the name of that actor.you have the garage, the garage band, which is called Brownfield capital. You have, you have that hedge fund with Vinick in it. Who’s trying to, you know, the Jenga cubes. So, I am positioning a short strategy into real estate and.
At the 2008 crash, when people stopped paying their mortgages, that was known to the bank as a non-performing note. Those non-performing notes are held within a package of mortgages and banks and institutions don’t know how to individually deal with these individual notes that are non-performing. They can package them and they can…
sort of manage them as a whole, as an aggregate. But when you have non-performing notes, they take them out of the package and then, you know, get rid of them. And so they feed them off to this other group that services those non-performing notes. And I am encouraging this person who services non-performing notes to not just
to not just service these non-performing notes, but to create a fund to buy up these non-performing notes. so let’s say you buy a building for a million dollars, conventional. So you put 20 % down and you have $800,000. What’s going on? There’s three major events that are happening to drive down real estate prices. Interest rates have tripled in the last three years.
⁓ which is sort of like a Volcker like effect or Volcker, effect on, on, on the markets. It has not impacted asset prices the way it did with Paul Volcker, but I think there’s a lagging effect to that. will ultimately affect them. So there’s one, two, you have a new law that has been implemented in Florida.
which stems from when that building collapsed in just north of Miami, south of Fort Lauderdale. It killed, I think, like 100 people or so because the homeowners were starving the building of money for it to be properly maintained. so, unfortunately, structurally collapsed. So a new law got passed which requires all buildings
that are over three or four stories tall to go through an extra rigorous building inspection. And well over 50, I think I’ve heard like 80 % of these buildings are not meeting compliance and code. you know, I know someone, just anecdotal information, I know someone whose condo is in West Palm Beach.
their special assessment for the condo is 80 % of the value of the condo. Now, normally when they get a special assessment like that, they would refinance their mortgage, pull equity out, pay off the special assessment and just add it as a debt to their condo. But now what you have are banks are not willing to lend money for these refinances for two reasons.
One, they think asset prices are declining in Florida. And two, they don’t think that these people can afford to pay the new mortgages. So you have a slowdown in the velocity in the transactions between parties, buyers, sellers, lenders, borrowers. And then lastly,
I think that people are starting to lose optimism. America is losing its optimistic view of the future. so people are hunkering down. They’re getting into a defensive nature, which inadvertently causes a slowdown and a depreciation in asset prices. So these three factors combined are creating
a, I think, forces to drive down the price of real estate. And lastly, I think that the federal government will not do a bailout like it did in 2008 and nine. The government was not, the government was not rewarded for
for bailing out the markets, right? You on the left, you had Occupy Wall Street shouting, you know, Wall Street got bailed out and Main Street got sold out or left out or whatever. And on the right, you have, you know, all these conservatives who think that government does nothing but harm and wrong. And whenever they intervene in the markets, causes dislocations. They couldn’t be more wrong because clearly the real estate market
you know, rallied, you know, and recovered quite considerably. And we did not get major inflation like they feared they would. So I think this time the government is not inclined to do toxic asset relief, quantitative easing, bailing out the banks, giving cash to banks so that they could refinance and renegotiate people’s mortgages.
And lastly, I think we have a president who takes everything very personally. And so give him some bad news that’s beyond his control. Let’s take COVID as an example. He’ll deny its existence. And so you can’t find a solution to a problem you don’t think exists. So if we have a decline in the markets and the economy and we don’t have
the government doing quantitative easing and toxic asset relief, I think that the bottom of the market will be much deeper than it was in 2008 and 2009. I think this time people are racing for the exits. I’ll give you an example, right? Imagine you’re standing in, you’re sitting in a crowded theater and there’s a little bit of smoke.
and the theater owner comes out on stage and says, everyone stay calm, we all know there’s smoke in the theater, the fire exits are well illuminated, ⁓ sprinkler systems are working, not to worry, it’s against the law to shout fire in a crowded theater, and then you see the guy rush off the stage and rush out the fire exit.
Well, I think that’s what’s happening. I think the smart money in real estate is racing for the exits. The dumb money is, ⁓ look at that. There’s a seat that just opened up in a better spot. I think I’ll move to that seat. And so it hasn’t permeated throughout the industry yet. So I think that we’re going, we’re going to…
Will it happen now? It’ll definitely happen. Most likely you’ll start seeing things clogging up by, by next summer. And we’ll, I think we’ll start seeing the mark in certain areas. It’s already clogging up people racing for the exits. I’ll give you another piece of anecdotal information about three years ago or so Zillow.
desperately wanted to get out of the i-buying market that all the homes that they had bought in the 45 days before they decided to get out of the real estate market in Phoenix, they listed every single of those homes that they had purchased in the last 45 days, they listed it below what they bought the homes for. So the smartest guy in the room is so
desperate to get real estate off its books that it’s like fire sale. Everything must go. Please people come buy this real estate. And if Zilla was racing for the exits, I can assure you we should be racing in. And so this is creating an opportunity that I think will get oversold. It would nowhere near that right now. And when I’ll give you
One last piece of example, okay? When I was in Phoenix, my girlfriend was living in a home that the landlord bought for $380,000. She was emotionally attached to the home. She was paying $1,400 a month mortgage, which was…
Erika (19:34)
Mm-hmm.Giovanni De Francisci (19:55)
I think it was $1400 or $1700 a month mortgage, which was enough to pay the mortgage for the landlord. She lived in the home for over 10 years, maybe 12 years or so. At the bottom of the market, the home was worth $80,000. I begged her. I begged her to stop paying the mortgage. That she was just…that the landlord was just, she’d register as a charity that she could save money by buying a home, you know, paying six, $700 a month in mortgage payments and use all the rest of the money for house improvements and so and so forth. Her neighbor stopped paying the mortgage about four months after I knew him for
two years or so, you know, we were chatting and then he was like, are you still not paying the mortgage? He said, no. And I said, okay, so how about foreclosure and eviction? goes, I’ve never gotten a letter. I said to him, you probably have squatter’s rights. You should go see a lawyer and you should see if you could literally take control of deed. The lawyer put a commercial, put an ad in the newspaper.
The note owner or the bank or whatever, the landlord never turned up to court. And so the guy ended up with the deed of the home because no one cared. That was how worthless real estate was in Arizona in 2010, 11. It was insane. It was absolutely insane.
So I’m waiting for that opportunity. when an opportunity, because I think it’s going to get worse than that. When an opportunity like that arises, I want to go buy up some real estate, but it’s not anytime soon.
Erika (21:47)
And you know, for our smaller operators who are listening today, Giovanni, what kind of advice would you give to them if they want to dip into shorting real estate, but you know, they may not have as many resources to do so.Giovanni De Francisci (22:03)
Uh, well, it’s a different kind of strategy, but you can do it. Um, you need probably to be in section eight housing. I mean, wouldn’t say you’re shorting it, but if you can build up a lot of whether, whether government is your tenant or at least the person paying.You will have a very good credit rating with lenders. You need to take, mean, the lender wants to service you, right? But if you develop a good relationship with the lender, a very personal relationship with the lender, with a regional bank, don’t forget, you know, Wells Fargo or Bank of America, you want a sort of smaller regional
kind of bank develop a relationship with their commercial lender, not individual residential lenders, consolidate your debt and mortgages into sort of commercial mortgage, let’s say. And then when the opportunity arises, tell the lender what your strategy is that you want to start buying homes at the bottom of the market where, you know, banks will be struggling and
you know, give it a year, two or three. And then when you go to the lender to execute that strategy, that lender, mean, as they say persuasive communications, tell people what you’re going to tell them, then tell them, and then tell them what you just told them. Right. And, what you have to understand is that we have too much fear for lenders. Okay. Lenders are, are.
Service personnel they want they’re there to service you you’re not there for them. They’re there for you Okay, so if you meet them for drinks and hang out with them and develop a relationship and have them like you They’ll confuse liking you for thinking that you’re dependable, right? Which is why? salesmen take clients, you know to to sports games or titty bars or
steak dinners or rounds of golf, right? Liking someone is confused for trustworthy. They’re two separate things because you can, because con men, there’s no such thing as an unlikable con man, right? So all con men are likable. Not all likable people are con men, right? But there’s no such, the person, you can trust anybody that you don’t like.
Right. You should be careful of everybody that you do like because a con man will work to gain your trust by gaining your likeability. Right. So if you understand that, you know, a more, a, a loan officer at a bank is judged on his metrics, must
shovel money out the door, they must make loans. If you can meet that lender’s needs, you know, he would rather lend lots of money to a few people than a little bit of money to lots of people because it’s a lot of work for him. So he’d write, he’d rather approve more loans to the same credible group of people than diversify because it’s just a lot of work for him. And he can’t like and trust that many people.
Right. So what you have to understand, you to, for the smaller operators, you have to understand that the banks are there to service you. You just have to figure out how to set their triggers and get them to literally work for you. It’s a little, it’s a little bit like the relationship between a horse, right. And a human, a horse is much more powerful than a human, but if the human knows how to interact and control the horse,
The horse will do the hard work and pull in the direction for you. Get scared of a horse, right? The horse thinks you’re smarter than it. It thinks you know there’s danger in the area and so the horse darts off, right? So, exude confidence, the banker will like you. Exude fear and trepidation, the banker will act like a scared horse and dart.
and not do what you want it to do. So that’s my advice to smaller operators. And I wouldn’t call myself a big operator. I’m a tiny operator. I just walk tall and carry a big stick.
Erika (26:36)
I love it. Well, your insight today has been so great, Giovanni. Before we wrap up, if someone wanted to reach out, connect with you, maybe collaborate on shorting real estate plays, what’s the best way for them to reach you?Giovanni De Francisci (26:51)
via you.They have to reach out to you first. You are the point of contact. I’d like to not be reached directly by anybody.
It makes you point of contact. It makes you powerful.
Erika (26:58)
Well, like Giovanni.I see that. Well, Giovanni, we appreciate your time and your story and your perspective today on the podcast.
Giovanni De Francisci (27:09)
You’re Ciao Erika.Erika (27:11)
And, and for our listeners, if you got value from this episode, make sure that you’re subscribed to the real estate pro podcast. got more conversations coming up with pros like Giovanni who are out there building fantastic real estate empires. We’ll see you on the next
