Donald Trump wasn’t available next Tuesday, January 19th, 2010, from 1-4p to teach the Attracting and Working with Real Estate Investors class in Mesa, Arizona so I was asked to speak on this subject in his absence. This is a brand new class being offered through the Arizona Academy of Real Estate and it’s worth 3 hours of Agency if you’re a Realtor. If you’re not a Realtor you’re still welcome to join us. We don’t bite and I promise you’ll learn something. I can also guarantee it will be more interesting than a mold remediation class (no offense intended to any mold remediation instructors.)
Monthly Archives: January 2010
Wife: I have some good news and some bad news.
Husband: What’s the good news?
Wife: The good news is I found a picture that’s worth $500,000.
Husband: Wow! That’s wonderful! What’s the bad news?
Wife: The bad news is that the picture is of you and your secretary!
According to animalinfo.org, the hairy-eared dwarf lemur is one of the world’s rarest mammals and one of the smallest primates, weighing in at just 3 ounces. In the real estate world one of rarest mammals you’ll find is the homeowner who is NOT in foreclosure and has equity. If you are homeowner or investor and fall into this category, congratulations! Maybe animalinfo.org will create a new section for you.
If you are a listing agent that represents a seller that is NOT in foreclosure and has equity that too is excellent news! You don’t have to deal with the bank, which could easily add another 7-10 years to your life. You are also spared the “Are we there yet? Are we there yet? Are we there yet” question you will undoubtedly get from the seller, the buyer and buyer’s agent. Isn’t it bad enough you have to hear your kids ask this question all of the time?
But here is the best news of all: The market is willing to pay more for your home because the market doesn’t have to deal with a bank. As a matter of fact, the market desires your home so much that it may pay more than your asking price because move-in ready homes are so difficult to find right now. Here’s a December breakdown, taken from Michael Orr’s Cromford Report, of price per square foot sales in the Phoenix metro area:
- Normal: $115.34
- Short Sale: $85.41
- REO $71.10
“Normal” means not a short sale, not bank owned, but a good old fashioned traditional sale where the owner is NOT in foreclosure or upside down. Now doesn’t it feel good to be considered normal? If that doesn’t warm you right up then the fact that, on average, your home will sell for about 20% more than a bank owned home or short sale should cheer you right up. Or should it?
Brace yourself for some bad news. Let’s say you find that buyer who is willing to pay your asking price, or perhaps a little more. You execute the contract and open escrow. Then, the appraisal comes back low. I mean really low. I’m talking 20% below your contract price. How did this happen? Because the appraiser used bank owned and short sale comps to determine the value of your move-in ready, don’t have to deal with a bank home that the market is willing to pay much more to get.
So is there a happy ending to this story? It depends. If you get the right appraiser the deal will get done. If not? You either lower your price to match the appraisal, get the buyer to come in with cash to make up the difference between the appraisal and contract price, or put the home back on the market.
“Luck is what happens when preparedness meets opportunity.” – Earl Nightingale
Everyone has a junk drawer. It contains the pens, pencils, paper clips, AA batteries, loose change, TV remotes, etc. And, if you’re like me and have daughters it also has pink hair clips, Barbie doll accessories and Peter Piper Pizza game tokens. I love my junk drawer, a household melting pot of stuff, a place for everything I don’t have a drawer for.
What does this have to do with real estate investing? I have met many newbie, would-be, so-called, part-time, full-time and yes, even sophisticated investors that use this same junk drawer mentality to acquire property. At a networking event last month I met a guy who was hocking developable land in Mexico one second and a wholesale- flip-opportunity in suburban Phoenix the next. Then there’s the guy I know who is running a short-sale business here in Arizona but is also trying to buy a property in California that he can convert to an assisted living home.
You’ve heard the phrase “jack of all trades but master of none?” That is the definition of a junk drawer real estate investor. If you’re going to have sustained, long-term success in real estate you must be very clear and consistent.
- Do you want to be an active or passive investor?
- Do you want cash flow or appreciation?
- What is your exit strategy?
Active or Passive Investing?
An active investor is directly involved in the day-to-day operation of the business. For example, in a flip model that means identifying the subject property (via the MLS, wholesalers, bird dogs), doing the due diligence (market analysis), arranging the financing, acquiring and rehabbing the home, marketing and finally selling it on the retail market. There’s also a lot of coordination involved throughout the process, like dealing with utility companies, insurance agents, construction trades, loan officers, title companies, sellers, buyers and buyer’s agents.
The passive investor funds the deal, either with traditional bank financing, a secured/unsecured promissory note or partnership interest in the entity that is created by the active investor to purchase and sell the properties. It is then the responsibility of the passive investor to get out of the way and collect the profit, or mailbox money.
Keep in mind you can be both in any real estate deal and most investors are, especially when just starting out. As you become more successful, more often than not, you’ll meet active real estate investors disguised as passive real estate investors. They will tell you that they want to invest money with you. But, before long they want to be involved in every decision, no matter how trivial. There is an affectionate term for this type of investor – PITA – Pain in the Ass Investor. Needless to say, stay away from the PITA.
Cash Flow or Appreciation?
- Profit from a flip
- Rental income from a buy and hold
If you seek a quick return on investment then you want to cash flow. Of course, your rate of return will vary. If your exit strategy is to buy and hold, on average expect 8-12% cash on cash. On the other hand, if you flip like I do it’s not uncommon to get a 40% ROI or more.
Are you more interested in long-term wealth accumulation? Then investing for appreciation would be for you. Real estate that appreciates quickly typically cost more to buy and maintain (i.e. beach front property, vacation rentals, move-up homes, multi-family properties.) But, they will increase more in value as time goes by.
There are many acquisition strategies. However, there are only four exit strategies:
- Fix and flip
- Buy and hold
Which will you choose? That will depend on the market you are in. In Phoenix from 04-07’ it was difficult to buy and hold or lease/option. The price of real estate was too high (can you say negative cash flow?) Those who used these strategies during that time got creamed (I know because I was one of them.) The music stopped and I didn’t have a chair. Today, the buy and hold strategy is a great way to go because prices have bottomed and there are cheap, cash flow homes available on the market.
Don’t Be a Junk Drawer Real Estate Investor
Resolve not be a junk drawer real estate investor. Decide what type of investor you want to be, what kind of return you want and what type of exit strategy you plan to employ. Then, become an expert in the market you plan to invest in. Pick a small geographic area and conquer it. It’s like Max Weber, one of the founders of modern sociology once said, “Only by strict specialization can the scientific worker become fully conscious, for once and perhaps never again in his lifetime, that he has achieved something that will endure. A really definitive and good accomplishment is today always a specialized act.”