Monthly Archives: October 2009

What it Takes to Succeed in Real Estate, or any other Business

I learned early on in school exactly what it took to get an A, B, C or D in a class, the only exception being College Algebra.  When I entered the corporate world it didn’t take me long to figure out what it took to exceed, meet or not meet expectations on a performance appraisal.  Most of us have this internal barometer.  So how are you doing in your business?  As the CEO of You, Inc. are you moving your company backward or forward?  Are you taking advantage of every resource available to you and making the most of your time?  I know I’m not always.

think and grow richI was first introduced to the book, Think and Grow Rich, by Bob Proctor, in 2006.  He has been carrying around the same tattered copy of the book since the 1960’s.  At end of my one year mentorship program with Bob he gave me my own leather-bound copy, which I now carry around with me wherever I go.  On a cross country trip to New York recently I reread Chapter 2 on Desire.  In this chapter Napoleon Hill lists his six ways to turn desires into gold:

  1. Fix in your mind the exact amount of money you desire.  It is not sufficient merely to say “I want plenty of money.”  Be definite as to the amount.
  2. Determine exactly what you intend to give in return for the money you desire.  (There is no such reality as “something for nothing.”)
  3. Establish a definite date when you intend to possess the money you desire.
  4. Create a definite plan for carrying out your desire, and begin at once, whether you are ready or not, to put this plan into action.
  5. Write out a clear, concise statement of the amount of money you intend to acquire, name the time limit for its acquisition, state what you intend to give in return for the money, and describe clearly the plan through which you intend to accumulate it.
  6. Read your written statement aloud, twice daily, once just before retiring at night, and once after arising in the morning.  As you read – see and feel and believe yourself already in possession of the money.

Complete these steps and you will be part of a small but exclusive group of successful entrepreneurs like Henry Ford, Andrew Carnegie and Charles Schwab.  You may not amass the fortunes these men have but you will no doubt become a success.  Ask yourself this question, have you ever heard anyone you consider successful say “I just wing it.” Do you think Bill Gates got rich that way?  Of course not, he had a plan.

In Lead the Field, Earl Nightingale wrote “success is the progressive realization of a worthy goal.”  Keep in mind this means you become successful the moment you take action to reach your goal, not when you actually achieve it.


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Performing an Autopsy on a Dead Real Estate Deal

autopsyLast week I played doctor.  This week it’s forensic pathologist.  Admittedly, I’m not very good at either one.  I let a real estate deal flat line and the cause of death remains unclear.    Fortunately, there is a lot that can be learned when you dissect a paper corpse.  The writers of CSI could have never dreamed up an episode this good.  Come to think of it this story is actually more like a dark comedy than a murder mystery.

It started out like any other normal real estate transaction.  Actually, it didn’t.   But isn’t that how you begin any good script?   The subject property is not a short sale or REO, but owned free and clear by my real estate partner and client.  The subject property description:   new carpet, paint, appliances, pool, blinds, ceiling fans, etc.  Is this starting to sound like a police report yet?  The home goes under contract in 6 days to VA qualified buyers, a very nice family currently renting in the area.  The plot up to this point seems fairly predictable.  The nice family buys the home of their dreams and lives happily ever after.  Except that this is not happily ever after, this is Buckeye, Arizona where real estate market values have plummeted by more than 50%.

Of course, the trouble begins with the appraisal.  Every good story needs a villain and in today’s struggling real estate market the lender fits the bill perfectly (deservedly so).  And what made-for-TV villain would operate without a trusty accomplice, in this case the appraisal process?  So the contract price is $135,000.  However, the appraisal comes back at $125,000.  This is not an insurmountable price difference by any means.  Luckily, my client is a dealmaker, not a deal breaker so he lowers his price to $127,000 and the buyer agrees to bring an additional $2,000 to help make up the difference.  Problem solved.

the old joker Suddenly the bad guys don’t seem so bad.  My client and I conclude the lender hired a competent, local appraiser that applied some common sense to the process.  He carefully reviewed the subject property and three other comparable homes using similar criteria but the appraisal came in a little low.  It happens.  Of course my client is disappointed about it but the margins on this deal are still very good.  So is it time for the nice family to ride off into the sunset?  Not so fast.  Enter the next evil doer, Mr. Desk Review Appraisal.  This is starting to feel like a Batman and Robin movie…too many villains.  And Mr. Desk Review Appraisal plays the part of the Joker.  Here are a few lines from the script, I mean the review appraisal:

It starts out on page 3 admitting that “no physical inspection of the property has been made.” The madness continues on page 6 with the line, “Reviewer’s recommendation of value is based on this limited data and a complete appraisal should be completed on the subject if significant variances in value or descriptions of the subject physical characteristics are noted in this report.” And here’s the Joker’s punch line, “Reviewer’s recommendation:  $93,000.” This is followed by the parting shot, “Overall, the original appraisal report seems to be accurate and provides a fair estimate of value for the subject property.”

Huh?  Never mind that the desk review appraiser is not licensed in the state of Arizona.  Forget about the fact that the subject property or the comparables he used were never inspected, or that he works 360 miles away in Sherman Oaks, California and has no geographic competence.  The lender used this desk review to trump the original appraisal and will only underwrite the loan based on the $93,000 value in the report, thus killing the deal.

The autopsy results conclude that the lender did not really want to loan this family any money.  A mortgage lender friend of mine pointed out there was probably something in the file the underwriter did not like.  This desk review just gave the lender an excuse to bail out.  Case closed.


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Real Estate Recovery Roadblock #3: Banks and their unlikely business partner, Uncle Sam

bank and government tug of war“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things,” Adam Smith, author of ‘Wealth of Nations’, 1776

Read these recent headlines from major metropolitan newspapers and ask yourself this question…are the banks and the federal government really capable of injecting life into the real estate market?

Now that you’ve had a chance to read these headlines I hope you answered ‘no’ to my question.  Here’s the reason why the banks and federal government are failing:  they make horrible business partners because their objectives are completely different.  The banks care about the bottom line and the government wants to keep people in their homes.  This tug-of-war has unnecessarily extended the housing crisis and delayed a recovery.

An argument can be made that the little recovery we have seen has come in spite of the banks and government partnership, not because of it.  Its like Thomas Jefferson once said, “I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”

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Real Estate Recovery Roadblock #2: The FHA 90-Day Seasoning Requirement

fha steak seasoningThere are certain seasoning requirements I absolutely love.  For example, if I’m cooking halibut on the grill I must coat it with olive oil and add Emeril’s Essence.  And no rib eye tastes right to me without McCormick’s Montreal Steak seasoning.  For other great recipes see the Food Network website.  But on to business…it’s time to get on my soapbox.

The FHA 90-Day seasoning requirement is more like the Great Wall of China to real estate recovery than a roadblock.  Here’s what it means to you, the investor.  The FHA will not insure the loan for the buyer of your home if you the seller have owned it less than 90 days.  In other words if title of the property has changed hands in the last 90 days because you the investor bought the property through a short sale, at the auction, or from a bank or wholesaler you cannot sell it to an FHA qualified buyer until day 91.  And this absolutely, completely, unequivocally sucks big time.  Especially since real estate people who track this stuff say about 25% of the buyers out there go FHA.

What is equally frustrating is that the VA and USDA have no such requirements.  None…zero, zilch, nada.  But unless you are flipping houses in an area with a high concentration of military personnel good luck finding a VA approved buyer.  And the USDA eligible properties are usually located on the outer edges of the city (if you are wondering where you can go to find if a property you have or want to buy is in one of these areas visit the USDA Property Eligibility site.)

great wall of chinaWhy does the FHA have this requirement?  Obviously, because it prevents flipping!  Believe it or not there are a few bad apples out there that have manipulated values and artificially driven up prices in certain areas.  Rather than dealing with the bad guys it was easier for the FHA to create a policy that today not only harms the buyer and seller, it also severely hinders a real estate recovery.  I believe these are called ‘unintended consequences’.  It would be nice if the FHA recognized that while there have been times when investors were poison to the real estate market, at this critical point in time they are the anecdote.

So what is a savvy real estate investor to do?  Buy strictly near military bases and on the outskirts of town?  Well, yes.  Unless you’d rather rack up thousands of dollars in holding costs waiting until you find a conventional or all cash buyer, or even worse, day 91, to start marketing your flip.  Of course, there are other creative ways to get your home sold and save on holding costs, like a short-term lease/option with a well-qualified FHA buyer.  But in this scenario you better have a huge margin factored in up front because it could take up to five months to get a deal like this closed.

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Real Estate Recovery Roadblock #1: The Appraisal Process

angry peopleIt would be easy to slam the Home Valuation Code of Conduct (HVCC) in this post.  Yes, the NAR and other real estate organizations blame this so-called voluntary code for road blocking the real estate recovery, and I agree with them.  If you’re not familiar with the code or its origins, read the ‘Washington Report:  Home Valuation Code of Conduct’ from the Realty Times to learn more.  But, I thought it would be helpful to go a little deeper in this post.

Now before you appraisers out there get your pitchforks and torches out remember I said the appraisal process, not the appraiser.  Easy does it…I’m on your side.  You get an earful from the buyer, the buyer’s agent, the listing agent, the seller and the bank.  I don’t envy you one bit.  Kurt Vonnegut’s book, ‘A Man Without a Country’ comes mind.

If you’ve sold a home in the last six months, either your personal residence or an investment property, you’ve undoubtedly had a problem with the appraisal.  And you can bet the problem wasn’t that the appraisal came in too high.

I purchased a home at the courthouse steps on 9/1/09.  I had it painted, put in new carpet, stainless steel appliances and landscaping.  It quickly went under contract for $124,900 with multiple offers, but the appraisal came back at $112,000.00.  Of the comparables the appraiser pulled, two were short sales and one home had one less bedroom and bathroom than mine.

The appraiser assigned to this file told me that short sales and bank-owned homes were part of the market and must be included in her review.  Keep in mind that this was a USDA loan so the HVCC does not apply. When I told her that six new homes built in the same subdivision by the same builder had just closed for $20,000 – $50,000 more than mine she said they could not be included in her appraisal because they were “different”.  Excuse me?

Now I don’t blame her.  She’s been programmed to spew this nonsense by the lenders she works for.  But if a new home is “different” from a move-in ready, traditional sale (i.e. not a banked owned home or short sale), then how can a traditional sale be compared to a distressed property?  The terms of sale and condition are completely different.  Furthermore, using this twisted logic how would values in any real estate market ever go up?

Statistical multiple listing service data in my area proves that traditional sales, on average, are worth 20-40% more than short sale and banked owned properties.  Here is the information directly from Mike Orr’s Cromford Report for the month of September:

  • Bank Owned Homes:                        $68.66 per square foot
  • Short Sales:                                          $84.41 per square foot
  • Traditional Sales:                               $116.73 per square foot

By the way, if you don’t have a subscription to Mike Orr’s Cromford Report, you should get one, even if you don’t live in the Phoenix area.  It has to be the single best resource for any real estate professional and it tracks every market indicator you can think of.

apples to orangesSo what needs to change?  For starters, apple to apple comparisons for terms of sale must be made.  If the appraiser can’t do an apple to apple comparison allow them to go further out.  Next, factor in days on market (more value should be added to the property if it goes under contract quickly, and conversely value should be deducted if the home sits for months on end.)  Additionally, consideration must be given to how many offers are received on the subject property.  Finally, the HVCC must be eliminated (see Inman News story from yesterday, ‘NAR:  Appraisal Rules Undercut Tax Credit’).  Another by the way, if you don’t have a subscription to Inman News, you should.  This is a must read for every real estate professional.

The bottom line is market value should be determined what the market is willing to pay, not what the lender is willing to lend.

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The Top (3) Real Estate Recovery Roadblocks

recovery roadblockLast fall my wife made me a delicious lunch to take with me to the office, which of course I forgot.  The next day she put my car keys in the lunch cooler so I would remember to grab it.  Needless to say, discussing stuff like real estate recovery roadblocks and the Case-Shiller Home Price index may seem a little above my head, but here goes… 

The Case-Shiller Home Price Index, released September 30th, had home prices up in 18 of 20 metropolitan markets.  Many real estate experts are using this data to promote the idea that the housing market is recovering.  For example, in Tom Brown’s recent article on Seeking Alpha, ‘Case-Shiller’s Recent Strength:  It’s Not Just Seasonality’ he claims that “The evidence is growing that the long slide in home prices is at last coming to an end.  For months, skeptics have dismissed recent price strength as merely the product of the calendar.  Now, it seems, they’ll have to dismiss it all some other way.”

On the other hand, the doomsayers out there believe that this so-called recovery is just pie in the sky.  These analysts believe that the federal government is propping up home prices with the $8,000 tax incentive, scheduled to expire on November 30th.  Coincidentally, the current administration favors an extension of this tax credit, as reported by Inman News just yesterday (see Obama Backs Extension of Tax Credit.) 

So who is a professional real estate investor to believe?  First of all, don’t get me started with the whole concept of a national housing market.  There is no such thing.  Real Estate is a local business.  I personally know a handful of investors that have been making money in markets such as Ohio, Texas and Arizona for the past 24 months.  Not one of them could care less about the Case-Shiller index, or any other index for that matter and neither should you.

Admittedly, I just got back into the game a few months ago after stumbling around in the dark for the past few years.  However, as slow as I can be at times (remember my lunch story?) it didn’t take me long to find three major real estate recovery roadblocks.  I will take time to discuss each over the next couple of days.  I bet the waiting will absolutely kill you.  So I’ll give you the bullet points now and expand on each of them over the next few days.  Here they are in no particular order:

  1. The Appraisal Process
  2. The FHA 90-Day Seasoning Requirement
  3. Banks that move like glaciers and their new business partner, Uncle Sam.

Stay tuned…

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