"Don't Be An Idiot!"

Got an interesting email the other day from someone who claims to be "an investor", and I just assumed they believed they meant "a real estate investor", but please read on...

It was an unsolicited email, actually more like a "rant", and in this unsolicited email they listed all the reasons they were NOT coming to this year's conference in Baltimore October 4th-7th (http://www.TrumpStrategiesBaltimore.com)

Personally it makes little difference to me if they come or not. As I always tell people, if I am involved in the sponsorship of an event, I design it for me, and if I am the only one who shows up, I'll get something out of it. This was true day 1 with the DC-CMREIG club (http://www.DCREIA.com) and probably the reason every meeting has at least 250-300 people. Honestly, I go for me, and if I am the only one in the room with the speaker that day I am happy. Far too many people need to get "approval" to do anything, including becoming successful, if this is you I got a future blog coming on this topic. Trust me, no one on the FORBES 400 "needed permission to be successful", so we need to work together to get over this if it applies to you.

Anyway, back to this guys email. Not only was his list a short list, it was quite frankly a stupid list. He basically went on to say that he did not "need any more education", and he was simply going to "figure this thing out on his own".

The main reason you go to a conference is to network amongst successful investors who are actually making things happen and have figured this thing out. No, I'm not talking about a "pitch-fest", nor a one-day "traveling circus" sponsored by some national guru who gives you a "FREE PREVIEW" in the hope he can get you to fly all over the country attending a string of Bootcamps that will teach you the basics, but nothing about local markets.

No, I'm talking about a bona fide "come early, stay late" lots of opportunities for exchanging information conference. And to the best of my knowledge, these are almost always sponsored by local REIA's. E.g. the "super-regional" event sponsored by groups like Ohio REIA, Georgia REIA, Denver REIA, and of course the "National Real Estate Investor's Conference" in the DC area, which is brainchild of the folks at MAREIA and DCREIA (DC-CMREIG and DC-VAREIG).

The reality is that in today's real estate market some folks are going to continue to make money, but twice as many are going to lose their shirts and get hurt. As George Ross said in a recent Real Investors Talk Radio Interview (http://www.RealinvestorsTalkRadio.com) "There have been as many fortunes LOST in Real Estate, as were ever Made". Of course he goes on to say the reason for losing money is the investors lack of education on how real estate really works as well as lack of surrounding themselves with good team members". Interesting it is not lack of money - in our interview he specifically talks about a deal he and Trump are splitting a $300 MILLION Dollar profit on, that they bought from an investment group that have (actually, had) hundreds of millions of dollars. Unfortunately what they had in cash, they did not possess in "brains" when it comes to real estate investing, and the lack of knowledge caused them to lose both their lower-Manhatten project and a ton of M-O-N-E-Y.

It is not that George is "Anti-Real Estate", it is more like he is "Anti-IGNORANCE". Actually, he is a realist, and the reality is that you can make a ton of money in real estate, and you can also get hurt - Not hurt bad, hurt "P-E-R-M-A-N-E-N-T-!", as Burgess Meradeth said in ROCKY II

Any time you have the type of upheaval we are seeing now you have both a CRUSHING Impact, and OPPORTUNITY. They key is to figure out what side of the transaction you are on.

If we have said it once, we have said it a thousand times: "you make your money in this business when you buy, and you recognize your profit when you sell". Well right now knowing what to buy and how to "buy right" is going to make some folks very wealthy. Turbulence in markets always does. But you can not figure this thing out listening to the major media. If the reporters working for the major media are so darn smart, why do most of them live in apartments paying rent to their LANDLORDS?

If you want to learn this business, then you need to be where the folks who understand it are, and ask them questions, like: "What Are You Doing Right Now In This Market?"

For everyone loosing their shirt in Northern Virginia (Wall Street Journal Article on Wednesday of this Week), there is an equal number of investors making a killing by picking up their pieces.

I just left a settlement 3 hours ago with a $52,000 settlement (PROFIT) check for one of the last of a 1/2 block of buildings we are rehabbing in Baltimore City, where the market continues to be VERY STRONG in the Sub-$200,000 price point. But to hear "people talk" you'd think now is the time to dump everything and move back into a pre-12,000 stock market. And in 12-18 months we will be hearing about how people are getting smoked in the stock market when the Dow crashes back to below 10,000.

Bottom Line: you have people who are serious about real estate, and understand the power of investing in and around a place like DC (Capital of the Free World) and then you have those who are simply looking for "easy money" and last month it was real estate, today it is the stock market, and next month it will be oil and gas futures. People who consistently are looking for the next "big thing", but won't spend a dime on actually learning how to make money with a sound, proven strategy in either real estate, stock and commodities speculation. In the end the true "real" investor understands the importance of networking and investing in their education BEFORE and DURING their investing in actual deals, and that the learning process never ends.

Pity this "easy-money" crowd never read bothered to H. Russell Conwell's Acres of Diamonds: http://www.temple.edu/about/temples_founder/acres_text.html If they did, they would realize you never make a dime chasing the next "Big Thing". No, you make money by making the time to figure out what works, what's proven, and then finding the most successful person in that endeavor you can get in front of and getting their help until you can figure it out on your own. If you want diamonds, you need to be digging in South Africa, and if you want oil riches, you best own some land in Nigeria or Saudi Arabia, but if you are fortunate enough to be living in DC, you'd be smart to make the time to figure out how real estate investing really works - cause DC (both downtown and the 90 mile radius around the White House) real estate market has been making people rich for generations.

But back to this guy's "stupid email"...

The Bottom Line: You Never STOP Learning.

You will either pay your tuition to go to learning events, or you will pay your tuition in the marketplace of hard knocks. They key is to invest in the right learning environments -Or- simply choose not to play at all. There is nothing wrong with working for "The MAN" until the day you drop dead, and many people make money who speculate in things like oil and gas and the stock market. They have a plan, and as said earlier they pay "tuition" to learn.

But doing what this guy was advocating - "going it alone" is a plan for idiots!

Sherman Ragland - Thanks for Reading...

Strategy #7 - Rehabbing, Which of Course Leads To...

Strategy #7 is, again, one of my favorites: Rehabbing.

Rehabbing is taking a structure and giving it a face lift and a tummy tuck ;)

Many people believe that a building should last "a 100 years.." Well, the reality is that any building regardless of its use, (as in residential, commercial, industrial, etc) is made up of systems. The most obvious one, which is the one we see is the shell, or outer building. But buildings also have plumbing systems, electrical systems, HVAC or ventilation systems, and depending upon the use or complexity other systems including elaborate roofing systems and telecommunications systems.

And each of these systems has a different life. While the brick on the front of an old warehouse may last 50-150 years without much TLC, the electrical system may be "shot" in 25-30 years, and the roof may need to be replaced even sooner. However, just because a roof needs complete replacement does not mean we need to tear down the entire building.

There are a number of reasons why a building may need a face lift. Technology changes. Just yesterday we were combing around in the basement of a 12-Unit apartment we are about to manage the rehab of, and there was this thing in the basement that (I kid you not) was the size of two phone booths put together, but about 3/4 of the height. At first I thought it was a coal furnace, but then our contractor informed us it was a "gas furnace". Today, the same unit would be about 1/5th the size and 1/10 the weight of this monstrous beast. Way to big (and expensive) to remove, I suggested we sell tickets to let people come in and guess what it is (was). In addition to technology, tastes change. I remember wholesaling a single-family house a number of years ago when I was first getting started. I put a contract on the property with a lawyer who was representing an estate sale. The house seriously only had one owner since it was built in 1958, and the owner had not changed a thing. In many ways it was something out of the "Jetsons", full of "appliances of the Future". Was very retro, but no one would want to live in a house today with the type of appliances and bathroom fixtures this house had. In addition, the exterior needed work and again, the technology had changed in terms of exterior treatment. While there was nothing physically wrong with the wood siding, most people would want to have either a brick front, or vinyl siding on their house, as this is what "new houses" today look like.

The key to rehabbing is to know the market.

I have said this in earlier posts and I am also accused by some of my students of "pounding it over your head" in my home study materials, that 80% of the value of any house is not what is going on inside the house - it is the neighborhood!

This is why I laugh when I see some of these new "reality" TV shows that demonstrate "how to make money flipping houses". And as we know from prior posts, we do not use the "f"-word. They mean "rehabbing", which is not what everyone else means when they say: "flipping". In any event, I laugh because one of the serious flaws with these shows is they never talk about what is going on with the neighborhood in which a property is located. They talk about "colors, and bathroom fixtures" and what the hosts "thinks will sell", but they never say things like: "this is a blue collar neighborhood and what people are able to pay for houses is between x and y dollars", or "you will have a difficult time selling any house in this neighborhood without exposed brick on one wall and a roof top deck to see the harbor". In other words, the common elements in 99.9% of the houses in the neighborhood that makes that neighborhood what it is.

We have all been in places where we catch ourselves saying things like, "If this house was in that neighborhood it would cost twice the price" - you are correct! So, let's establish up-front that "Value" and "Cost" ARE NOT the same thing, and therefore, that spending "X dollars" to improve a house does not guarantee you in any way that you will recover 2timesX, or 3timesX, or even 4timesX dollars back. And this is the great fallacy of these shows that lead you to believe that in every situation or in every neighborhood you get back what you put into a rehab: WRONG. You get back what the neighborhood says the house is worth, and if you over improve a house, you will probably still sell it, but you may find out (at the end, when you can do nothing about it) that you have subsidized your buyer. If 99.9% of the houses in a neighborhood sell for $200K to $225K, and the cost of your rehab and house acquisition were $265K, then do not expect a new buyer to come along and pay $285K. No more likely the maximum offer you will receive (depending on what is going on with interest rates and other available "similar" properties) is $225 to $230K. Therefore you over improved your property by about $40K, and you will have to "eat it".

So, what are the keys to being successful at rehabbing:

#1 - Know your neighborhood! Starting with knowing what IS the Neighborhood. In a place like Prince George's or Montgomery Counties in Maryland, all you might have to know is a zip code, or the "subdivision". But in a place like DC, or Baltimore City, the neighborhood can change from "block to block". If you want to be a "successful" rehabber, you need to get into your car, with your map, and a knowledgeable mentor or real estate agent and learn the neighborhoods. You absolutely must know where your target neighborhood ends, and someone else's neighborhood begins.

#2 - You must know what is happening within the neighborhood. Is it improving, or is it in decline? Is it mainly a neighborhood of owners or renters? You can make money with either, but you will spend money differently on a property you intend to sell versus one you intend to keep and rent. What are some of the "core" features of a house that anyone moving into that particular neighborhood is going to expect? Finished basements, roof top decks, nice back yards for kids, etc. and of course, what are comparable values within that neighborhood.

#3 - You must have a handle on costs! In this business (Particularly rehabbing) you make your money when you buy, you recognize this profit when you sell and you lose it when the contractor shows up! There are a number of ways to get your arms around cost estimating and cost containment (does you no good to be correct on your estimate, and then overspend because of either a bad contractor, or a constantly changing scope of work).

There are a number of reasons to think seriously about rehabbing as an option, and an equal number of reasons to stay away from it as an investor. We'll cover more in these tomorrow.

Sherman Ragland - Thank you for reading...

Strategy #3 - Wholesaling "Revisited"...

I know I promised that I would revisit wholesaling at the end of describing all of the strategies, but I had such a great interview yesterday with Dwan Bent-Twyford (The Queen of Foreclosures), that I wanted to come back to Wholesaling a little early while the conversation was still fresh in my mind.

You probably remember Dwan from a few years back as the "Co-Partner" in the "Dynamic Duo of Foreclosures", Dwan and Sharon. For a few years Dwan and Sharon crossed the country sharing with people their secrets to making money in foreclosures. After a few years of this, Sharon confided in Dwan that she really did not enjoy being up on a stage talking to a room filled with 450, 600 or more people. Honestly, I can understand this. A Harvard University study once revealed that most people would rather put their hand in a blender rather than getting up on a stage and speaking to a crowd.

As all good friends do, Sharon and Dwan decided to re-work their business so everyone could still stay involved, but not necessarily speaking so for a number of years that followed, Dwan did the speaking and Sharon took care of the "back-office". As fate would have it, both Sharon and Dwan met the "men of their dreams" and their lives took different directions with Dwan and Bill wanting to move to the mountains of Colorado and Sharon and Juan deciding to stay put and develop an incredible real estate operation in South Florida. So those of you who wanted to know, "Hey, what's the inside scoop on Sharon and Dwan", you just got the whole story.

So, yesterday for the Real Investor's Talk Radio show, Dwan and I were talking about her early days as a recently divorced mother of a pre-toddler, how she was determined to "not starve to death" nor have to put her daughter in day-care. For many people this would be an impossible task: make money to live as the sole bread winner and not have to place your child in some form of day care. but Dwan was able to survive without sacrificing her desire to be the "only mom her daughter would know".

Her story is an incredible one, and I hope you choose to listen in to the show this week. To hear the complete interview this weekend go to http://www.RealinvestorsTalkRadio.com

The part I wanted to discuss in today's blog, however, is Dwan's "Secret to Success", combining foreclosure strategies with wholesaling, or more precisely, focusing on foreclosure and pre-foreclosure opportunities with the specific intent to wholesale the deals to other investors, mainly rehabbers.

On average, Dwan makes 20% of the total retail value of the house when she wholesales, so a $200,000 house would translate into a $40,000 wholesale fee. This is clearly at the upper-end of wholesaling fees, but she is able to command these premiums because she focuses on a strategy in which she creates huge potential profits. Her story is an amazing one, as is her approach to this real estate business and it points to one of the keys to success that most full-time real estate entrepreneurs share: Failing Forward.

Failing forward is the title of a John Maxwell book, but it can best be summed up in my phrase:
"Crawl, Walk, Run - Win Gold Medals".

There are times in this business where you will absolutely feel as though you are "crawling across the floor". That is, things are not moving as fast, and you feel like you are working really hard. This happens in the early stages because everything is new, and you are also making every possible mistake in the book. The key, however, is to NOT GIVE UP.

YOU DONT GIVE UP, because sooner or later two things happen: 1) You hook up with a good mentor, or really start to listen to the mentor you have, and 2) You begin to actually learn from your earlier mistakes, if the mistakes are small ones, you recover quickly.

It is foolish to believe that you are not going to make some mistakes when you first get started - this is true of anything in life worth doing. As my old ski instructor, Don, used to say, "if you are really trying, you are going to fall down". If you are serious about becoming an investor, then you are taking action, and if you are taking action, you are going to make some mistakes. Just make sure that you move at a pace you feel comfortable with, and not be "pushed" into moving faster than you are ready, which of course leads to potentially falling down and not getting back up again. You will fall down, but you don't have to get hurt when you do. The key is to not give up, and to make adjustments as you move forward.

In her early days, Dwan literally went knocking on doors in a neighborhood asking people if they wanted to sell their homes. Of course she realizes today that that was "less than optimum" strategy, but after three weeks of going "door to door with a baby on her hip" she did actually get someone to say "YES!". She made $22,000 on this one deal, and the rest is as they say: "History!"

Today instead of living out of her car, Dwan and her husband Bill and their three children live in a 7,700 square foot house on the top of a Colorado mountain with a view that many have described as "breathtaking". Or in Dwan's words: "Worth every door I knocked on and did'nt have to in those very early days".

How did it come about? Wholesaling houses. Albeit, wholesaling with a "twist", but this is what happens once you get past the "Walk and Run" phases and move into the "Winning Gold Medals".

More on how to do this in a future blog post.

Sherman Ragland - Thank You for reading...

The Great "Head Fake" of 2006...

The data has been coming in at a fast and furious pace and it is clear to anyone who is paying attention:

THE Real (US Residential) Estate Market Correction of 2006 is almost over as soon as it began.

For years now the media has been telling us that real estate was headed for a "CRASH", that the "BUBBLE WOULD BREAK" and it would be "UGLY". Well the data is coming in and it is now clear that while the US residential market has slowed down, the major reason for the slow down had to do with the combination of interest rate increases (long and short term) and over-production by the nation's major home builders.

What is truly unique for all of us, and particularly those who have been around real estate for more than "One CYCLE", is the quality of the data that is available about Supply and Demand. While we have always had fairly good data on "Demand" (Historic Home Sales) it has been much more difficult, until the past 3-5 years to have good data on "Supply". The reason for this is that during the last real estate cycle, and last real estate "recession" the majority of homes were NOT built by national builders - today they are. With the creation of "publicly traded" home builder companies over the past 7-10 years, for the first time in US History we actually have somewhat of an accurate picture of what is going on at both a local and national scale when it comes to the supply side of home production.

I know as investors we like to think that the "World Revolves Around Us", but the reality is that Pulte and NV build more houses in a day in one city then even the most active investor will ever own in a lifetime.

In the past three days we have seen a lot of data released on housing, including current inventories and pricing by the national home builders and one thing is clear: The National Home Builders Have Turned OFF the Spigot! It has been confirmed to me that in Prince George's County alone, three of the national homebuilders are walking away from their purchase contracts for land. In other words, they are not going to build next year. However, the story does not end here, because people are still buying new houses. In fact, Coldwell Banker predicts that 2006 will be the 3rd best year on record for new home sales.

We have gone from a "Seller's Market" to a "Buyer's Market", but the "Buyer's Market is already starting to evaporate.

Today, National Association of Realtors Economist Ken Fears and Maryland Association of Realtors Chief Economist of the David Lereah, are both predicting that the buyers’ market will be short-lived.  Fears predicts that the market will reach a plateau later this year, with historically strong sales that will allow for robust revenues for real estate practitioners in the coming years.

For investors what this means is that a window of opportunity is opening and will soon be slammed shut. Anyone who was active in buying rehab properties over the past 18-24 months knows how hard it was to find a good deal because of the pricing. In the past 6 months pricing has softened with everyone thinking the "party was over". The party wasn't over, the bull was taking a break. But this window of soft pricing will not continue to remain open.

Yes, foreclosures are at a record high. But this is mainly due to people sitting on adjustable rate and "exotic" mortgages. In the past two months long-term fixed rate mortgages have actually declined and are predicted to decline even further this Winter and Spring. That means people who are looking to buy this coming Spring and have the capacity to get a "traditional mortgage" will find pricing heading higher. And those using adjustable rate and "exotic" mortgages (which get priced based on short-term interest rates) will find themselves in either a smaller house than what they wanted, or in an apartment.

Listen to everything you hear in the general media, but do not let some journalist with a high-shool education, who lives in a "flop house" dictate your investment strategy. If you do, you'll be scratching your head this time next year wondering "What Happened..."

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