"Real Investor"... or ... "On Trick Toni"...?

I'm hearing a lot of subtle grumbling from people about the "slowing down of the real estate market", and along with it a fair amount of whining, and most of the whining is coming from the folks who just showed up at the real estate investor party.

First, the "real estate market" has not slowed down at all. Yes!, There are certain segments of the market which have started to cool off, such as condo's and new home sales in certain markets. The types of products you would expect to see cool off when you have had a long period of endless supply and a recent slow down in demand.

In any given market place there is a natural pace of annual absorption. If every year you sell 1,000 oranges to a certain community, then selling 1,000 Plus "X more" oranges every year will eventually catch up with you, because there are only a certain number of oranges the community can eat, unless the community is growing. While many areas of the country have been growing, they have not been growing at a rate fast enough to absorb everything that is being offered. This is particularly true in markets where growth is dictated by the influx of retirees or second home purchasers versus job growth. You can change your mind about a second home, or retirement community much faster than you can change your mind about moving to a region to take a new job. So what happens if you are the last person to come into town with a truck load of oranges when there are already too many vendors showing up...? "Yes!, you have a sale and make sure you aren't leaving town with a truck load of grey, oozing, orangie things".

Demand falls when the price goes above a certain point. In this case of oranges it would probably the "sticker price" of oranges versus a comparable alternative, such as tangerines. If the price of oranges goes significantly higher than tangerines, people will switch. In real estate, the "sticker price" is not the most important number, or more specifically "numbers". We have all been amazed at how home values have shot up each and every year for the past 5-7 years by as much as 30%!

However, in real estate, very few people, when they are buying, pay attention to the "sticker price". I learned long ago from Lonnie Scruggs, that the two most often (and most important) asked questions by home buyers are: "How Much Down, and How Much Each Month", which then gets translated into a price, courtesy of your friendly neighborhood mortgage broker.

So what does this all mean...??

It's probably time to pull down one of the other "umpteen" courses on real estate investing, and learn a new strategy or two. the reality is that most of what we today call "Creative Real Estate Investing" was born during the late 70's and early 80's when the residential real estate market (in every category) was in the tank! High interest rates - NO, really high interest rates like 18-22%, plus negative job growth meant you had to be "very creative" to make money in real estate.

It is very interesting that most of the whining comes from newbies and people in the real estate game for less than 3 years, while the more experienced investors, the "real investors" are off in a corner, smiling like fat content (Cheshire) cats. Most of whom had predicting this day would come when the "easy money days" would come to an end and the real creative strategies would make you rich.

Instead of whining, now may be the time to get to know some of these more seasoned players get to know what they know about what you do to profit when a market turns...

A lot of the strategies that were "Flawless" over the past 3-5 years are not going to work (as well) over the next 3-5 years. Pre-construction investing, rehabbing and wholesaling deals with huge paydays (as in six-figures on one deal) are not going to be the "hot ticket" in many markets going forward. Subject-to, Preforeclosures, short-sales and good old fashioned land lording are already starting to "sizzle".

The question is, did you get in this business to be a rehabber, or did you get into this business to be an investor? There is a difference between being a Real Investor and a "one trick tony".

The party is not over (at all), it's just moved down the street...

"Volunteering Your Life Away..."

I have a very dear friend who is as honest as the day is long...
Is as hard working as they come...
Would give you the shirt off her back...

Next week she will be fired from her job, and one more stress fracture will probably show in her marriage because of it.

She is a great person, but unfortunately, she is TOO DARN BUSY.

Her husband and she do not know each other any more, and her kids have to schedule an appointment to say "hello".
It's o.k. she says, when I see them I make sure it is "quality time" ;)

She is Busy all right - Busy in the worst possible way!

She fills every waking moment of her calendar with events that are very well meaning, but do very little for her bottom line, and because there is no rhyme or reason to her volunteer work, it creates a life of half filled promises to those she says are the "most important ones" in her life and partially completed projects at work. The plans she made late last year for becoming a real estate investor - these were the fist victims of her hectic schedule.

In fact, by the time she finishes with the church choir, the YMCA Board, the HOA Beautification Committee, and the Chamber of Commerce meetings, she has little to no time left for her family. In addition, her volunteer activities require that she constantly leave work "on time" and she has little to no time to go the extra mile with her job.

"I'm sorry, what about the status of her investing plans and the promises she made to herself at Year's end...?

FORGET ABOUT IT!!

After a full day at work and full evening of volunteer duties, "who has time...?"

She tells herself constantly, "it's o.k., I wasn't really as serious about this real estate thing after all ... there is always next year to get serious..." Foolishly she thinks the extra hours she devotes to "just one more event" is going to make a huge difference in the life of someone else, while in the meantime her children and her husband go starving for the attention she committed to giving to them... time and attention hijacked by yet another "worthwhile event".


The worst guy I ever worked for, back when I had a full time job, let a lot of garbage fall out of his mouth on an almost hourly basis. In fact, you could set your clock based on what stupid thing he would say next. But even in the scrambled mess he had for brains, he did manage from time to time to get out a piece of sage advice. His best phrase was, "the road to hell is paved with good intentions".

Won't comment on the "road to hell" (I have other plans for my afterlife), but I will say "the Road To Poverty, or "the Road to Failure", or "the Road to Misery" is paved with good intentions.

I will never forget the "mini-lecture" a group of us received during my 2nd year in the MBA program at Wharton. As with many "B" Schools, Wharton had a very active Club network. There was a club for EVERYTHING! And one particular club had the benefit of having its invitation accepted by John Johnson the Founder and CEO of Johnson Publishing to come to Philadelphia to speak. At the end of the speech, Mr. Johnson took a small group of us out to dinner, and during the early part of dinner he asked each of us to go around the table and discuss our plans for the future. At one point, one of the other members of the dinner party started to boast about how they were getting through school and "volunteering for this charity" and "volunteering for that event". Instead of the "pat on the head" they were looking for, Mr. Johnson looked as if he were about to explode and then uttered some of the most profound words I have ever heard from a multi-millionaire.

His exact comment was, "Save the volunteer stuff for when you are rich!... G-d opened up a door for you to be here and now, don't waste it by focusing on everything except what is most important - getting a great education and going on to do what others will never be given the chance to do. Then you can make time for your volunteer work" He then immediately went into the story of how when he was still a "very young, but highly successful business man" Martin Luther King, Jr. came to visit him in Chicago to discuss the plans that were being made for the civil rights march on Selma, Alabama. The more Dr. King spoke about the plans and "this historic moment in time", the more excited Mr. Johnson became, so excited in fact that at one point he screamed out "YES!, let's do it, I'm ready!! I'll rent a bus and I'll personally drive down all my employees!"

Suddenly the room went completely silent, and diligently trying to gain his composure, Martin Luther King leaned across Mr. Johnson's desk and said quite firmly, "we didn't come up here to get you to drive a bus, we came up here because we need you to pay for all this!", and in that split second in time, Mr. Johnson relayed to us that he suddenly realized what G-d had called him to do. Slowly he repeated his thoughts on the topic of filling your calendar with volunteer duties: "G-d has opened up a door - just for you. Not everyone can do what you do, or knows what you know. Do what you are called to do, then make time to do your charity work".

Today I see so many people who, like my friend, have confused activity for progress. Particularly in the area of volunteer work. If volunteer work takes so much out of you that there is little to nothing left for your family, your job, your partner or for you - Then you have made a huge sacrifice for Nothing! Volunteering for "everything" does not make you more important, it only makes you less effective! Unfortunately, often times the relationships which tend to get trampled the most when you over commit are those which G-d specifically gave to you to be responsible for. Selah.

Next week my friend is going to get the ax, I know, and she will stand around asking the question: "What happened...? I am a good person, and always the first in line to volunteer...?"

Employers would rather have employees with "o.k." personalities and know how to get a job done, then one with great personalities, but continuously miss deadlines. Partners would rather have partners and team members who are reliable and can "deliver" than folks who are "well liked" but can never get their assignments in on time.

Next week my friend is going to get WHACKED, she will never know what happened. While the senior management of the company was meeting to make decisions that day as to "who stays and who goes", one other senior person was noticeably absent, she was out that day, volunteering...

"How to (Correctly) Value Real Estate..."

WOW!!

I received a ton of feedback on yesterday's post "Whose Profits Are They Anyway...?"

One of the best was from Scott who made the point that when looking at commercial deals, often the purchase price is based on projections of cash flow and that the Seller has the right to claim that the cash flow that is projected one year out from the sale date was cash flow that was really created by the seller and not the buyer, because during that first year the buyer is really "living off" the efforts of the Seller - Scott is Dead on Right on this point!

Nonetheless, this is an issue that both the Buyer and Seller sometimes get into heated discussions over, and underscores the importance of not only having some fundamental negotiating skills under your belt, but also clearly understanding how to value a property prior to making the jump from single family houses to commercial real estate investing.

What did concern me in some of the emails I received though is that there is still a lot of confusion out there as to how you value a property. I got lots of emails talking about "cap rates" and "GRM" [Gross Rent Multiplier] when talking specifically about valuing investments in single family houses - THIS CONCERNS ME GREATLY!

YOU DO NOT VALUE INVESTMENTS IN SINGLE FAMILY HOUSES THE SAME WAY YOU DO COMMERCIAL PROPERTIES>>>
BIG "NO NO!"

The best guard against paying too much is to make sure you understand the fundamentals for valuing the type of property you are putting under contract. Each of the basic "Real Estate Food Groups" has its own particulars for valuation based on one of three schools of thought:

Income Approach,
Replacement Costs and
Comps.

Each of the three is appropriate for one of each of the Four Food Groups: Residential, Commercial, Industrial, Retail. (As I have said before on many occassions: LAND IS NOT FOOD GROUP!! <- But more on Land in a future post]

For today, let's tackle just one of the members of the Food Group; RESIDENTIAL,

Residential can be divided into two groups: 1-4 units (in the property) and Greater than 5 units (in a property). 1-4's would include single-family houses (both row homes and detached) as well as duplexes, tri-plexes and four-plexes and individual condo units. Although banks and lenders will look at several different ways to value a property (to make sure they are not lending "too much") there is only one appropriate method for an investor to value a Residential (1-4 unit) investment and that is by looking at market comps. Comps, as in recently COMPLETED sales of units of a similar size, quality and amenities package located within close proximity.

And the single most important step in running comps is to accurately determine what is the neighborhood in which the property resides. A task that is a little more involved than it may first appear. Specifically, answering the question: "what is the neighborhood" 9 times out of 10 means being familiar enough to know when one neighborhood ends and another begins. In a condo project it is relatively easy - the total collection of condos is "the neighborhood", in a suburban subdivision with 500-800 houses all built by a small handful of builders from 3-4 basic plans, all constructed within 3-5 years of each other, the subdivision is the neighborhood. However, when you get into urban situations, the neighborhood can change "block by block". in most cases knowing the neighborhood means getting in a car (or in some cases getting out of the car) and looking with a notebook and map under arm. Making notes as to what streets, or rail lines , or water features define when one neighborhood ends and another begins.

Since 85% of the value of any single family home is derived from the neighborhood it sits in, "knowing the neighborhood" is a critical step. Many national "gurus" will gloss over this key item - As my mother use to say to my sister and I after watching our "umpteenth" episode of I LOVE LUCY, "Lucy has her money - you got your's to get!"

THE NATIONAL GURU's HAVE THEIR MONEY - YOU HAVE YOURS TO GET! You can not "gloss over anything" at this stage of your investing.

Understanding the proper method for determining value and then USING IT, is a critical step in building a solid foundation as an investor.

"Whose Profits Are They Anyway..."

Just got through responding to an email from Jimmy, who was telling me how much he loves the blog and the postings on the Realinvestors site (http://www.realinvestors.com) in the Forums.

Jimmy then went on to ask me a series of questions that went something like this...

"...I see you have lots of stuff going on in {omitted to protect our deals} ... I see a {xx} bedroom multifamily unit building in {omitted} great for Condo conversion for (XXX)K, is that a good buy....Its a complete rehab and a shell near {omitted}."

My response: "...I have yet to see a successful condo project be taken all the way through in {omitted}. Buy it based on apartment numbers, or you will be turning the keys in back to the lender in 10 months."

In his next response, Jimmy goes on to explain the wisdom of being able to buy now, rent and do a condo conversion later <- SMART. Then, in a couple of more exchanged emails we discuss the "condo market" for this location and Jimmy shares with me what he plans to spend, which prompted this response, and is the essence of what I wanted to share in today's blog:

Jimmy - Buy it for “what it is”, (and not a penny more) Not what it “can be”!
What it is, is the value the seller has created - What it “can be”, will be the value that you create.

Why would you ever want to give “your profits” to someone who has not earned them...?

However, if you decide to go forward, based on a condo deal, (as in paying dollars today to someone else for a non-existent condo market) then please call me. I have some non-existent condo’s I’d like you to buy from me too!

-Sherman

|------ End of Email ------------|


The reality is that both new and seasoned investors alike make this mistake all the time: Over paying for a property based on the efforts that are to come (by them) versus the effort that has already occurred (on the part of the seller). It is very easy to get caught up in the buying fever that takes place when you know you have a deal in a "hot", or "up and coming" area of town. But don't let your enthusiasm allow you to be pulled into a situation where you over pay.

Golden Rule(s):

"Never Play Ball on Another Man's (Woman's) Court", and;
"Never Give Your Profits Away To Someone Who Has Not Earned Them"!