Where Do You Do Your Best Thinking?

Yesterday morning I woke up at 5a.  That’s what time my alarm goes off in the morning.  I usually do my P90x workout – Thursday is my yoga day.  But that’s a 90 minute routine and I had a lot of work to do.  So I decided to skip it and get my day started even earlier.

I hopped in the shower and about 15 minutes later my wife, Linda, strolled by.  She wanted to know when I would be done.  Apparently my bride was anxious to get her day started too.  Our daughters would be awake very soon and she needed to get ready.  She pointed out to me that I take very long showers.  I couldn’t disagree.  I told her I find long hot showers to be very meditating.  I do my best thinking in there.

Linda then brought to my attention that several celebrities, including Jennifer Aniston, take 3 minute showers to conserve water.  As a matter of fact, Jennifer Aniston even brushes her teeth in the shower (that is, of course, if you believe the celebrity gossip magazines).

Now I’m all for conservation.  Our back yard has fake grass and we recycle everything.  But I draw the line at short showers.  Besides, I told my wife, Jennifer Aniston is a hypocrite.  She lives in a huge house in Beverly Hills that overlooks the ocean.  According to People magazine the master bathroom has a spa bath with soaking tub.  Her water and electric bill is higher than my entire neighborhood.

I had to laugh this morning when I came across a piece in the New York Times titled, Do Nothing (Impossible?).  The writer, Matt Richtel, discusses the benefits of doing nothing.  There’s even a website you can go to, do nothing for 2 minutes.  The idea is to clear your mind.  I tried it as soon as I got to my office today and it seems to be working.  How else can you explain my extra creative wittiness in this post?

Bob Proctor, one of my favorite personal development coaches, likes to say that 2% of people think – 3% of people think they think – and 95% of people would rather die than think.   I don’t know if he did a real survey to come up with these numbers but my guess is he’s pretty accurate.

So where do you do your best thinking?  In the shower?  At the gym?  In your car?  Do you ever turn everything off and clear your mind?  If you do so on a regular basis you’ll be in rare company.  According to Napoleon Hill, author of Think and Grow Rich, some of the most successful people in this country, from Thomas Edison to Henry Ford, devoted time everyday to thinking.

I recommend you start out by devoting 5 minutes a day to this exercise.  Over time, see if you can increase it to 30 minutes.  You’ll be amazed at the results you get – in both your personal and business life.  But if you’re like me and do your best thinking in the shower then you may want to set aside some extra money each month to pay the water bill.


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Do You Suffer from Analysis Paralysis?

“The sense of paralysis proceeds not so much out of the mammoth size of the problem but out of the puniness of the purpose.”

–          Norman Cousins

Dateline:  Rocky Point, Mexico – March, 2010.  My business partner Manny Romero and I, along with a couple of buddies, headed four hours south of Phoenix for some sun, sand, golf and cervezas.  This would be our first annual guy-only trip – we called it a Mancation.

No detail was overlooked.  Manny set us up in an awesome resort condo right on the beach.  He booked our tee times.  I checked the weather – perfect conditions – and packed the cooler full of Pacifico beer.  The iPod was loaded up – Zac Brown Band’s Toes the first song on the playlist…

I got my toes in the water, ass in the sand,

Not a worry in the world, a cold beer in my hand,

Life is good today, life is good today.

It was a memorable trip.  We ate shrimp tacos and listened to mariachis.  I lost 17 golf balls in two rounds and nearly broke my 7 iron in half.  On Saturday night we jammed out to a cool Mexican rock band with a lead singer that looked like Jesus and had a voice like Chris Cornell.  All the while we barely noticed the college kids – it was spring break.  When Sunday morning came we wearily packed up the car with our golf clubs and empty cooler for the ride back home.

There was a wait –a very LONG wait – at the border checkpoint to reenter the United States.  It took more than three hours to get out of Mexico.  When I rolled down my window to greet the Customs agent he took one look at me, Manny and our two friends in the backseat and asked “what are you guys celebrating spring break 10 years later?”  I told him I considered that a compliment – we were actually celebrating spring break 20 years later!

Here’s the thing – we knew that our Mancation was the same week as spring break.   We realized it two weeks before we left.  Most middle aged men would have cancelled the trip, paralyzed by this new information.  Not us.  Our purpose was a good time, line at the border or not.

Analysis paralysis is an ugly disease.  It can kill a vacation or keep you from getting started in real estate investing.  Studying stuff like employment figures, vacancy rates, median incomes, economic diversity, contract ratios, median prices and absorption rates in your town is a wise thing to do.  Just don’t forget about your purpose – to make money.

Tom Ruff of Information Market and Mike Orr of Cromford Report know the Phoenix housing market better than anyone.  They have a way of analyzing complex data and drawing simple conclusions, without the doom and gloom.

In his January 2011 Housing Opinion Tom wrote, “We are living in the time after the crash, not the time before; Phoenix is now offering the same opportunities we saw in the early 90s. I haven’t heard anyone say, boy, I wish I’d have bought that home down the street in 2006 when I had the chance, but I’ll bet you, ten years from now when they look back at this unique time in history…”

In his January 16 mid month pricing update and forecast Mike Orr concluded, “So we see a generally gloomy picture for sales pricing and no sign of any improvement in the next four to six weeks. In fact we see continued deterioration. We do not get too concerned about this however, since sales pricing is a TRAILING INDICATOR of the market and is the last thing to show any turnaround. When we look at other measurements things are not so gloomy. This is because lower pricing results in increased demand which is certainly making its presence known at the moment.”

Remember your purpose.  Don’t over analyze.  Keep it simple.  If you can buy a home in this market and rent it for more than it cost to pay the debt service and expenses then you’ve made a smart investment.  If you can buy a home, fix it up and sell it for what you paid, plus another 12-25K in profit, then go for it.  Let the numbers guide you, not paralyze you.

Next week Manny and I will embark on Mancation II to Rocky Point – only this time we’re doing it Super Bowl weekend and are returning on Monday morning.  We’re expecting the line at the border to be much shorter this year.  What can I say?  Analyzing the numbers from last year’s trip I learned that we should go a different weekend.  I also concluded that I need to bring more golf balls and a spare 7 iron.

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When Buying an REO be Last, Not First

If you’re not first, you’re last!  That has to be one of the best movie lines of all time.  Yes, Talladega Nights is a movie about NASCAR and yes it’s a bit sophomoric.  But Ricky Bobby, the race car driver who patterns his life after these words is wise – in a redneck kind of way.

Nobody likes to come in last.  It goes against everything we are taught.  There is no trophy or medal for last place.

That is unless you’re buying a bank owned property.  It pays to be last.  In this video my partner, Manny Romero and I share three tips for getting the bank to accept a low offer.

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High Speed Chases and Before and After Pictures

O.J. Simpson and a white Ford Bronco.  It was June 17th, 1994.  The world seemed to stand still as the former NFL running back dodged cars, not linebackers, through the streets of Los Angeles.  Luckily, no one was hurt during the high speed chase.  Broadcast live on every major news network, the chase lasted more than 2 ½ hours.  By the time it ended most of the country was tuned in.  It was riveting television.

Coverage of the chase changed television history.  Afterwards news helicopters in every major media market were dispatched whenever police pursued a fleeing suspect.  Why?  Because it was easy to capture – but more importantly the high speed chase made for incredibly compelling drama.  The audience could almost always count on a crash at the end.

I’ve discovered that before and after pictures offer a similar experience.  How else can you explain the wildly successful American Idol and The Biggest Loser?  Over a period of 2-3 months the viewing public gets to watch a rapid transformation.  On American Idol, the common man or woman goes from an unknown karaoke regular to polished superstar.  On The Biggest Loser the severely overweight shed hundreds of pounds.  The change is breathtaking.

That’s why whenever possible we take before and after pictures of the properties we fix and flip.  Our investors are captivated by the process and it demonstrates our ability to create value. We remodeled this house last month.  Check out the slide show below.  In one of the photographs our contractor, Errol Spence, is standing inside a flooded bathroom.

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A few tips when shooting before and after pictures:

  1. Take your pictures during the daytime – and when shooting the after pictures try to take them at the same time of day.
  2. Shoot your pictures from the same angle.
  3. Concentrate on areas that have the most dramatic improvement.
  4. Use a camera with a wide angle lens.

If a picture really is worth a 1000 words imagine what 30-40 before and after photos could be worth to your real estate investing business.


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Buying Investment Property in Arizona – Part III: Seller Financing

He was standing by the side of Mormon Lake Road – about 20 miles east of Flagstaff, Arizona.  The man was looking through a large spotting scope.  It was pointed towards a tree line to the south of Mormon Lake.  He fidgeted with the focus ring and then walked to the back of his Toyota Highlander SUV to grab some more equipment.

My wife and I were driving by.  And we were curious.  What was he looking at?  I pulled up beside him and Linda hopped out.  It turns out the man was a birdwatcher.  He was keeping tabs on an osprey nest that sat in a tall pine tree at the edge of the lake.  Apparently the winged creature nests there every fall before migrating south to Mexico.

While the osprey is a beautiful bird and all frankly I was more interested in the guy’s Toyota Highlander SUV.  It was a hybrid.

What can I say?  I’m a guy.

As my wife sat there admiring the glorious majesty of the osprey I couldn’t help but wonder – did this man’s SUV get good gas mileage?  How much horse power did it have?  Could it tow a boat?  Was it worth spending an extra $4,000 over the gas model?  The birdwatcher later admitted to me that the numbers didn’t pencil out.  He bought the hybrid because it was the right thing to do.  Over the long haul the extra money he paid for it would exceed his cost at the gas pump.

Most hybrid cars are like that – they don’t make economic sense.

In the real estate investing world there is hybrid exit strategy that does pencil out – seller financing.  I call it a hybrid because seller financing is really like a fix and flip – buy and hold combination.  Let me explain it to you by breaking down a deal my partner Manny and I just closed last month.

We partnered with an investor that had a self-directed IRA and purchased a bank owned home for $120,000. It cost another $25,000 to fix up the house.  We sold the home to a buyer and did what is known as a carry back for $225,000.  The buyer put $10,000 down and is paying us 9.95% interest.  The loan is amortized over 30 years but will balloon in five.  Here’s a breakdown on the numbers:

  • $225,000.00 sales price
  • $145,000.00 purchase price and repairs
  • $  80,000.00 spread
  • $114,000.00 interest paid over 5 years
  • $194,000.00 NET PROFIT = our investor’s share of the profit  equals a 13.4% annualized cash on cash return

We make money up front with the down payment – cash flow for five years – and a large spread at the end when the buyer refinances or pays us off.  There you have it – a hybrid that makes money.

But here’s the catch – you have to find these buyers.  They’re not working with Realtors.  Why?  Because most Realtors don’t know what seller financing is and sellers don’t usually advertise on the multiple listing service.

We get our buyer leads from Craig’s List, our website and radio ads.  We’ve had more success finding the buyer FIRST and then locating a house that meets their needs.  This is easy to do right now because of all the bank-owned properties on the market.  As I sit here today we have six buyers waiting for us to find them a home – they are all well qualified with $10,000 or more and solid income.  The only reason they need us to finance them is because their credit is dinged up from a recent short sale and/or foreclosure.

What more could you want?  You get an above average return without the leaky toilet in the middle of the night phone call from your tenant.  With the extra time and money maybe you could take up bird watching.

Check out this video to learn more about our seller financing business model:


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A Second Chance at Homeownership this Holiday Season

I just drove by the house you have for sale on Frost Drive – is it still available?  No, I said.  We put it under contract a few days ago.  The voice on the other end of the line then asked, do you have any others like it for sale?  Unfortunately, we don’t I explained.

The caller’s name was Don Price.  A semi-retired engineer, he moved into his dream home – located in a 55+ community – about three years ago.  Not long after that child protective services showed up at his door with his three grandchildren.  Unable to stay in the neighborhood because of the age restriction he was forced to sell.

And here’s where it gets tough – Don was over $150,000 underwater on his mortgage.  The only option for him was a short sale.

As you probably know even with a stellar credit score a short sale will keep you from buying another house for at least three years.  The FHA, Fannie Mae and Freddie Mac won’t do it.  Don Price knew this too.  So he called me when he saw our sign in front of the house on Frost Drive that said NO QUALIFYING – FORECLOSURE – BANKRUPTCY OK.

I told Don we didn’t have any others for sale in the area but we could probably find him a similar home.  As it turns out I didn’t have to – Don found it for us.  He checked on the internet everyday and drove around the neighborhood looking for new for sale signs.

The house he found was owned by Bank of America.  It had been flooded, presumably by the prior homeowner.  We bought the house by partnering with an investor that had a self-directed IRA, remodeled it and sold it to Don using seller financing.  We closed on Christmas Eve.

There are millions of former homeowners just like Don Price.  Their only mistake was buying a home at the worst possible time in American history.  We recognize that this is a crisis but with crisis comes opportunity.

What I like most about seller financing in this marketplace is that it creates a win-win-win-win.  Don wins because he gets a second chance at homeownership.  Our management team and investor partners win because we get an above average ROI.  Finally, the neighborhoods we buy in win too because we put families into homes that were once an eyesore.

Last month, we posted a video tour of the home we bought for Don Price and his family BEFORE we started the remodel.  Check out the amazing transformation in this video we shot after the rehab was complete.

Happy New Year from Free Real Estate Education!

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Buying Investment Property in Arizona – Part II: Buying and Holding

“The investor of today does not profit from yesterday’s growth.”  – Warren Buffett

42,249 – Is that a big number?  I guess it depends.  Aren’t numbers supposed to be relative?  If you’re buying a house in Phoenix $42,249 doesn’t sound too bad.  But if you’re purchasing a Honda Civic it sounds a little pricey.  Approximately 42,249 new U.S. jobs were created in October.  That sounds promising.  But what if told you that on this day, December 16th, 2010, 42,249 homeowners are in foreclosure in Maricopa County, Arizona?

566 – Not a huge number right? $566 will buy you a fancy 40” high definition TV.  A pretty good deal considering I paid $2,100 for mine just three years ago.  However, if 566 people were ahead of you at the motor vehicle division wouldn’t you want to cry?  It just so happens that 566 homeowners were foreclosed on today in Maricopa County, Arizona.  To put this in perspective back in 2005 when I was following auction sales about 500-600 homes were sold a month at the courthouse steps.

So where are all of these homeowners going to go?  Where will they live?  Many of them will move back in with their parents or other siblings.  Some will move out of town.  A small number will rent an apartment.  1 out of 5 of them is an overextended investor so they don’t need a place to live.  What about the rest?  They will undoubtedly look for a single family home to rent, preferably in the same neighborhood they live in now.

Consider this hypothetical scenario for a moment – I’m an investor with $100,000 in a traditional IRA account earning me 7% interest annually.  Unhappy with such an average return I roll the $100,000 into a self-directed IRA account and use the money to purchase a single-family home in Peoria, Arizona.  I rent the house for $950 a month and net $775 after paying taxes, insurance and HOA fees.  That’s a 9.3% cash on cash return.  Not bad.

Okay, I know.  You didn’t come here looking for hypothetical scenarios.  You want real world examples.  Well, here you go – I recently represented an investor that purchased a single family home in Maricopa, Arizona.  It was a bank owned home we found on the multiple listing service.  He paid $82,000 and made $5,000 in repairs.  He put $24,000 down and financed the rest.  He rented the home immediately for $850 a month, netting $400 a month in cash flow.  The cash on cash return is 16.5%.

Here’s the best part.  He’s depreciating the home over 27.5 years earning another $2,500 annually in tax deductions.  This asset serves another purpose as well – an inflation hedge.

It’s a rather simple formula but it amazes me how many investors screw this up.  Renters want single-family detached homes – not condos, townhouses or attached dwellings.  Renters, especially those with families, want at least 3 bedrooms with a den, a two car garage and a finished backyard with grass.  Most importantly, they want to be close to schools, shopping and freeways.

Renters don’t want to commute so stay away from the far out areas like Buckeye, Queen Creek and Maricopa (even though my investor client bought in this area I’m still not a fan.)

So do you feel ready now?  Not so fast.  Do your homework.  Connect with real estate professionals and investors that have similar goals.  Ask questions – lots of them.  And remember what Warren Buffett once said, “A simple rule dictates my buying:  Be fearful when others are greedy, and be greedy when others are fearful.”

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