Tag Archives: investing

If it’s 99% True, Then it’s a Lie

She sat across the desk from a master.  This real estate broker was about to be grilled by one of the best question askers I have ever met.  Mark Saenz sized her up quickly.  With a twinkle in his eye he fired the first shot.  “How’s business?” he asked.

She told us that business was great.  How couldn’t it be?  “I’m finding houses on the multiple listing service for .50 cents on the dollar” she claimed.  “Really,” Mark said.  This unsuspecting Realtor just stepped into his trap.  She shook her head confidently, “Yes, I am.”

Mark told her he would buy every house she could find for .50 cents on the dollar.  This, of course, made the agent very happy.   She was grinning from ear to ear.  “Okay, I found a condo in Phoenix you can buy for $140,000.  It’s worth about $210,000.”  A puzzled look came across Mark’s face.  “I’m no math expert, but that doesn’t sound like .50 cents on the dollar to me” he answered.  The Realtor said, “You’re right, but it’s in turnkey condition, no repairs needed.”

“But you just told me you were finding properties for .50 cents on the dollar” Mark insisted.  He told her if she found any to call him.  Then we wrapped up.

This meeting took place in September.  2008.  Here we are, more than two years later, and poor Mark is still waiting for the Realtor to call.

Mark Saenz taught me a lot about the art of asking questions.  Before I met him I would accept what most people had to say at face value.  I would give them the benefit of the doubt.  Why would they lie to me I thought.  Besides, they said what they said with such authority.  They must be telling the truth.  If there were a few holes in their story I would fill in the blanks myself.  That was the polite thing to do right?

Like me, many people just fill in the blanks – especially when desperate.  Back in 2007, l was a struggling real estate professional.  My net worth went from $8 million to negative $2 million practically overnight.  I would listen to any sales pitch and consider any investing strategy imaginable if it meant I could improve my financial situation.  I wanted to believe these opportunities would work so I didn’t ask too many questions.  It was like I didn’t really want to know the truth.

Fortunately, I learned from Mark that questions are like a shield.  They protect us from the smelly stuff that my daughters always complain about whenever we drive by the dairy farm near our house.

If you’re thinking about paying someone to teach you how to invest in real estate then I advise you ask a lot of questions.  Here are my top three suggestions:

  1. How many deals did you do last year?
  2. Can you show me HUD settlement statements for those deals?
  3. How many properties do you own right now?

If the sales person fidgets, fusses, stutters, stammers, sweats, delays or tries to change the subject then your shield worked.

My business partner Manny Romero likes to say that “if it’s 99% true, then it’s a lie.”  The problem with the real estate business is that many of the investors and educators you hear about or see on TV leave 1% of the story out.  Why?  Because that 1% will make you, and your checkbook, run for the hills.  The truth hurts doesn’t it?

 

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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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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 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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Follow the Numbers, Not the News

It started out innocently enough.  An email popped up in my inbox from a real estate investor I’m connected with on LinkedIn.  This investor, who shall remain nameless, was responding to an article titled ‘Mortgage Picture Brightens, for Now’ I sent out via Twitter.  He brought another article to my attention that stated 1 in 10 with a mortgage faces foreclosure.  This discussion quickly evolved.  Here are a few excerpts: 

Me:  I’m in Phoenix and these reports don’t accurately depict what is going on in our market. Real estate is a local business. I’ve flipped 5 homes here since the expiration of the tax credit – all of them sat on the market less than a week. Demand here remains strong and in many areas there is less than a two month supply of homes. While median prices may dip another 5-10% that doesn’t bother seasoned investors because they will adjust their buy price accordingly.

Investor:  The current inventory in the Phoenix market has never been higher with for sale signs literally everywhere. I do a significant amount of business in Phoenix. I have a client in Phoenix who buys over 20 properties per month at sheriff sale at dramatically reduced prices. The listing time on residential properties continues to longer than we have ever seen. Obviously, no two investors see the market the same way. That’s what makes apples and oranges.

Me:  Actually inventory levels have been higher. At this moment there are 43,566 homes for sale on the MLS. Two years ago there were 53,511. Days on market today – 172. Days on market two years ago – 383. I agree with you that things have slowed down here but to say that inventory levels and listing times “have never been higher” and are “longer than we have ever seen” is not accurate. Check out Mike Orr’s Cromford Report.  I buy about 4-5 houses a month at the courthouse steps. I have a few that aren’t selling in dead areas, but in other parts of town inventory is moving.

Clearly this investor and I have different views of the Phoenix housing market.  He has based his investing decisions on what someone else has told him (news articles, clients) and on the amount of for sale signs he sees when he visits Phoenix.  I choose to buy when the actual numbers make sense.

Since this exchange took place last week I’ve put two more homes into escrow, one of which I didn’t even have to list on the MLS and it’s all because I follow the numbers, not the news.  What Warren Buffett once said about stock investing can also be applied to real estate, “be fearful when others are greedy and greedy when others are fearful.”

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