Archive for January, 2008

As I have mentioned in prior posts, the most difficult part of this real estate business used to be finding the really great deals. I remember just 14 short months ago how I lost two consecutive deals because I ended up getting outbid on both, and that the prices of both of those properties had risen several thousand dollars over my original offer price in the bidding process. I can also remember thinking that at the prices the winners paid neither looked like a particularly good deal. And it turns out that I may have been right, as one of them is still on the market.

Today though things are quite a bit different. One of the striking differences is with realtors. It used to be that they would always posture you and tell you that there were multiple offers whether there were or not in an effort to bid up prices. A few even refused to submit offers that seemed too low to them. And they often didn’t even return phone calls.

Well that has all changed, at least for most of them. I’m now getting calls FROM realtors asking if I’m interested in heavily discounted prime homes in move-in condition, some of which still have the sellers living there.  And there’s not a foreclosure, pre-foreclosure, or short sale in the bunch.

Not only that, but the sellers have told them to tell me that they just want to unload. Talk about a quantum shift. My hit rate over the last two months is 5 for 6 – I made six offers and had five accepted. I’ve had to throttle back my marketing somewhat because of the opportunities. There just aren’t any retail buyers out there.

But this has presented a wonderful NEW problem to deal with. And that’s which properties to buy. For example, right this minute I’m tracking four properties that I want to buy, and that I would buy, if I had the funds.

The problem is, I only have the cash for two of them.

I know I can buy any of the four for the price that I want (I pre-negotiate prices before I even go out to see homes most of the time). All four will cash flow nicely after I pull all of my money out when I refi. So – which to choose?

What this really comes down to is a question of capital deployment.

Most investor’s eyes glaze over when I start talking to them about this. But this is a VERY important concept that EVERY investor should know, especially in this market.

Why? Because there are simply too many choices out there in the market. And that can be as bad as not having enough choices.

Why? Let me give you an example. There’s a realtor that works one of my areas that fancies himself as THE realtor for investors. You know the type – drives a red convertible and has a Bluetooth headset stuck in his ear 24 hours a day, and pitches every deal like it’s the one that’s going to let you retire.

Well this guy has been spamming me with crappy deals now for some time. Close to 8 mile, need $8,000-$10,000 in rehab, low rents, and on crappy streets where only section 8 renters will rent. But they’ll cash flow. Barely, but they will.

Now I have to admit, 14 months ago when they were hard to find I would have taken notice and paid some attention to them. But now? No chance. You tell ME which is the better deal:

Door Number One
3 bedroom 1 bath bungalow. Needs $10,000 in rehab, maybe more because the utilities are turned off so you can’t inspect the plumbing, electrical, ac, or furnace. Rent heavy street, will rent for $800 to a section 8 renter. Purchase price: $57,000.

Door Number Two
3 bedroom 1 bath ranch.  Needs $3,000 in rehab for new carpet and paint because the sellers, who still live there, are smokers. Owner occupied street, will rent for $900. Purchase price: $63,000.

The kicker? They are on the SAME STREET.

These are both actual examples. Bluetooth convertible guy is pitching Door Number One, and Door Number Two is a property that I’m actually buying. Is the choice really that difficult? I didn’t think so. My realtor friend, however, doesn’t get it.

But think about it. Both properties will cost about the same when they’re done, but their ROI’s couldn’t be more different. With Door Number One you have holding costs while you rehab. Not so with Door Number Two. When you rent Door Number One you earn $100 less per month than Door Number Two. And with Door Number One you’ll probably get less price appreciation than with Door Number Two.

I recall from my corporate finance days that the optimal investment strategy was for an organization to deploy it’s capital to the place where it would generate the highest returns, and that the organization was supposed to continue doing that until they either ran out of capital to invest or they ran out of positive return projects to invest in. The same is true in the real estate market today.

But what it really comes down to is math. As much as everyone hates to admit it, this business is all about the math. And one math principle in particular – ROI. It should guide you every time you decide to invest.

I bought another house last week. On my lunch break. An hour and 20 minutes out and back.

Yes – I’d like the Chicken Fillet with extra tomatoes and a large diet Pepsi. Make that to go. Oh – and throw in a 3 bedroom bungalow with appliances and a finished basement too.

I got home that evening and told my wife. She said “Cool!” Did I hit the jackpot with her or what?

I remember buying my first property. The stress. The indecision. The second guessing. The back and forth. I was scared to death because after almost 11 months of submitting absurdly low offers, a very desperate seller had actually, finally, said YES to one of them. And then I actually HAD to buy it and put my money on the line and I HAD to act. Each and every morning prior to closing I woke up convinced that I had to get out of that deal – because I couldn’t be absolutely sure that it would work. But I didn’t.

And do you know what? That deal still stands as flat out the best deal that I have ever negotiated.

Fast forward to now.

My wife wrote our Christmas letter this year that was to be included with our Christmas cards. All of that is a very long, drawn-out, and painful process, but the results always turn out great.

She wrote her section and the ones for the kids pretty easily, but she got stuck on how, with her space constraints, she could succinctly describe our real estate business.

It happened over Christmas break. We were at Starbucks playing a family game of monopoly (I’m 11-0 and the undefeated family champion, although my seven year old did come within $50 of beating me last time. No more free rides for HER! :-)   )

We were talking about the business and it hit her – that our business, since we were buying and holding, collecting rents and looking at commercial property (not Hotels)  was all about playing “Real Life” Monopoly. And as I thought about it, that’s describes exactly what we’re doing. Buying as much as we can as fast as we can, developing / rehabbing and getting the properties rented, collecting rents and rolling the profit into other properties. And we’ve done it so much and gotten so good at that I can buy something on my lunch break.

And to think that only 18 months ago finding deals was the hard part. This market is so upside down now that I negotiate price FIRST before I even see the inside. And that this approach works for eight out of every 10 properties that I’m interested in. The kicker is that after I get my price and I do get inside, then I deduct everything that I find that’s unexpected.

I hope this market stays around for a while.

Pretty strong I know. But I do. I hate ‘em.

Now don’t get me wrong, I LOVE the real estate business. I LOVE looking at houses. I LOVE buying houses. And I LOVE renting houses. I just HATE foreclosure. I must confess that I’ve become spoiled. I realized that in spades this weekend.

You see, since about August I have shifted my focus to looking at regular listings. No foreclosures. No HUD homes. None of that. I now only look at houses, excuse me HOMES, that are listed, have the utilities on, and sometimes have the sellers still LIVING there. (I know I know – it’s a radical concept)

And do you know what the darnedest thing is? I’m buying these homes that usually need less than $1500 in rehab, for LESS than I bought REOs for a year ago. I’m buying them with $50,000 in equity – and I’m renting them out almost immediately after I close on them.

So let me ask you this – if I can buy these types of homes and have them appraise NOW for the same After Repair Value that my competitor gets after a 90 day rehab on his properties, why would I choose to go the rehab route? More to the point – I can get at least two months of rent in the time it takes him to do his rehab! What’s wrong with this picture?

(For those of you keeping score at home – this is Item #6 on my wife’s List of Things That Should Be Illegal But Aren’t in my real estate business)

So as a result – I HATE foreclosures.

And it really hit home this weekend. I had been watching a particular property and corresponding with the listing agent for a couple of weeks when I saw the price drop again. I emailed the agent again, and she called the seller, who finally agreed to consider a price in my offer range. I booked a showing to see the inside. While I was at it I booked appointments to see three additional properties that had either come on the market recently or had dropped into my target price range – none of them foreclosures – just to maximize my visit to my target area.

So my son and I jumped in the car to go see them. The primary target property was ok. Oversold by the realtor as a zero rehab in move-in condition. She somehow just totally forgot about the $2000 in rehab, and she forgot to mention that the seller was a smoker and had pets. Nice smell. Definitely not a zero rehab deal. The next one was more of the same. Too much rehab and a wet basement.

The third one was the kicker. Billed as a “total remodel”, the pictures looked great, and the price was at the high end of my negotiation range. I thought for sure that this would be my First Property Purchase of 2008.

What a disappointment!

You wouldn’t have believed this one. A “total rehab” – and the owner hadn’t even bothered to turn the utilities on! It was cold. It was dark. It was wet. It was dirty. It was priced at full retail. AND it needed $15,000 worth of work. This was exactly like looking at a foreclosure. It looked like the owner had found a foreclosure and simply painted the inside, then relisted it for twice what he paid.

Talk about putting lipstick on the pig.

This was WORSE. I had been tricked into looking at a foreclosure.

And it was miserable. That’s why I HATE foreclosures.

Why do you subject yourselves to them? It’s time to STOP! There are simply too many non-foreclosure deals out there to waste time on them!!
 

For those of you that, like me, are too dumb to do rentals “the way they have always been done”, I’m working on some training materials that will walk someone through my “misguided” way of doing it. I GUARANTEE that you’ll get a rash of grief from the “experienced” landlords. I GUARANTEE that every experienced buy-and-hold investor that you talk to will tell you that it will NEVER work. And I GUARANTEEE that you’ll be blown away when you see the details for yourself. My refi strategy ALONE will knock your socks off. That’s Item #1 on my wife’s list.

But hey - what would you rather be -  popular or wealthy?

Watch this space. And get ready for CashFlowDennis.com

12,463
13,264

Recognize those numbers?

I know that some of you do. And those do should be fatally disappointed with them.

Why?

Because they represent the opening and closing Dow Jones Industrial Average numbers for 2007.

2007 opened at 12,463
2007 closed at 13,264

A whopping 801 point increase for the year.

An increase of 6.4%. For the entire year. (But don’t feel so bad – the S&P 500 posted an increase of only 3.5% for the year)

That stinks. 3.5%? 6.4%? My money market account pays something close to that. Without the risk OR the volatility.

And don’t get me started again on volatility. Did you realize that during the year the Dow posted nearly a dozen days where the average dropped more than 2%? I don’t know how some investors sleep at night!

So my question to you is this. What’s your plan for 2008?

More of the same and another 3.5% or 6.4% with the sleepless nights thrown in for free?

Or are you ready for something better. A better way that’s more secure, less volatile, and with a fixed rate of return. Basically everything the Dow is not.

Isn’t finally time to look at something different?

Then why not rocket out of the gate in 2008?

Visit www.MPSG-LLC.com to learn more.