Archive for April, 2008

Here’s the latest deal that I’m working on. It’s pretty incredible, and it’s an indicator of just how UNBELIEVABLE the opportunities are today in the Metro Detroit suburbs.

The property:

• 3 bedroom, 1.5 bath ranch in Harper Woods
• New roof
• New furnace
• New replacement windows
• Newer ac and hot water heater
• Central Air
• 2 car garage
• Sun porch off the back of the house
• Full basement, half of it finished (the half bath is in the basement)
• All appliances included – stove, refrigeration, washer, and dryer.
• All brick

The best part? Grosse Pointe Schools

Purchase Price: $70,000

Rehab needed: $0. This is a turn key rental – the only thing this homes needs is smoke detectors.

Sale comps in the neighborhood are around $120,000. Rental comps are in the $1200 per month range. I’m planning renting it for $1100 because I like to rent them up fast.

There’s another one on the same block in BETTER CONDITION that can be purchased for about the same price.

Why do rehabs when I can find LISTED properties in this condition that can be rented out the DAY AFTER you close on them? They’re in such good condition that you don’t even need a property manager!

Are you interested yet?

Part of my CashFlow Mercenary business involves finding good, solid cash flow properties for others and helping them get started in the CashFlow game.

But it isn’t for the weak.

If you’re ready to attack this real estate market with GUNS BLAZING and EXPLOIT it SHAMLESSLY for your family’s financial future then send me an email TODAY and let’s get started. You can participate in the CashFLow game without even lifting a finger.

The only thing that’s certain is that this market won’t last forever.

Email me at dennis@MichProps.com.

I spent some time on Saturday with some real estate friends and colleagues, and we were all talking about how boring our businesses were.

The business itself was exciting and interesting to each of us. And to a person it’s been a gratifying experience. But it never seems that anything really interesting happens, or at least nothing interesting enough to talk about to other people.

But then we got talking about the First House.

You know, the very first house that you got up the guts to actually make an appointment and go and see. That one.

And I got to remembering mine. The conversation with the seller seemed odd to me. While I was far from smooth then (some would argue still) I did my basic fairly blunt song and dance about needing a good deal, about paying cash, and about closing quickly. Strangely, this seller didn’t seem to bat an eyelash, and thought that a discounted sale price would work just fine. So we booked the appointment for the following Saturday.

The first bad omen was that we woke up Saturday to an unbelievable blizzard. I left with plenty of time to spare, but even in four wheel drive mode it took me 20 minutes to go a mile. I called and rescheduled for the following weekend.

The weather had moderated the next weekend, so I went to take a look. It was a two bedroom, one bath frame home on a slab in Waterford (I had not yet learned the proper purchase criteria from the Obi Wan Ijlal). It was also on a very nice double lot. Decent condition on the outside and not in need of anything before it could be rented. That was on the outside.

The inside was a little bit different.

Actually when the seller brought me in the front door the place didn’t seem all that bad. It smelled a little musty – but as I looked around I saw that basically all of the furniture and personal belongings were still there, such that it looked like the person living there had just up and left.

Pretty quickly I learned that that was almost the case.

All the rooms were in pretty decent shape until we got to the primary bedroom. The place was a mess. Personal belongings everywhere, couch cushions everywhere, the carpet torn up right in the middle of the room. And as it happened, in this home the back door was in this bedroom. It had been kicked in from the outside, and someone had put it back up in place and then nailed three 2×4s across the door to keep it in place.

I turned to the seller and asked – what the heck happened here?

“My son.” He said. “My son owned this home. Two months ago he had a violent reaction to some illegal drugs that he dad taken. He started bleeding badly (I did NOT ask for details) and he managed to call us, and we called the paramedics. They arrived the same time that the police were kicking down the door. They worked on him for about 20 minutes, but he ended up having a massive heart attack. And he was only 28. He died right there on the floor in the middle of the room where the carpet has been torn up.”

???

I didn’t end up buying that property. Nope. And it wasn’t because of the OD. Not at all. It was because the seller wouldn’t come down enough on the price to make it worth my while!

Hey – this is a business, isn’t it? And that wasn’t the only house that I looked at that someone died in. There was another. Maybe I’ll write about that one sometime. Talk about gruesome. I’ll tell you one thing though – you won’t BELIEVE the deal I got on it!

So it seems that after all of that this business really does have some interesting aspects to it. Maybe not on a day to day basis (I can tell because my wife’s eyes glaze over when I talk about  business), but enough to keep it interesting. Sometimes.

Just about a year ago I read a book by Robert Ringer called “Winning Through Intimidation”. It was a spectacular book with a spectacular – and completely not-politically-correct – title.

The interesting thing about it was that it really wasn’t about intimidation at all. No, it’s central thesis is that in any business deal the smart businessman will do the upfront preparation, and put in place the necessary safeguards, to protect his position at all costs. The reason? Ringer believes that every person that you do business with falls into one of three categories of people that all have one thing in common – they all want to cheat you, and they will if you give them the slightest chance.

I bring this up because I found his three categories interesting, and as I have wound my way through the maze of the real estate business I have been on the lookout for each of the types. And I found one a couple of weeks ago.

I found a real-live Type Two. Also known as a “White Hat”.

What’s a Type Two?

Ringer describes a Type Two as “just plain treacherous”. And “hard to recognize and extremely difficult to handle.” He states that their modus operandi includes using words like integrity, honesty, and ethics in abundance, and piously looking down on competitors and colleagues alike as unscrupulous.

This Type Two happened to be another commercial real estate broker – one of the few that regularly runs ads in the Sunday Detroit News and Free Press classifieds for apartment buildings. I called him as part of the research and ramp up that I was doing on my Apartment Quest, and he said that he had “the perfect building” for “someone just starting out.” I took the bait, and made an appointment to sit down with him.

The meeting in his office was pleasant enough. He spent the first 35 minutes or so extolling the virtues of his business. Telling me how he only deals with the best properties, how he won’t even list, much less sell, a building that won’t cash flow on Day One. How he takes great pains to dig into the financials of every building and price each one within a whisker of what it should ultimately sell for. And he also told me that I shouldn’t be “all that concerned” with cap rates, as they’re “only rough guidelines of value”. (Hmm. That sounded familiar. But I didn’t put 2 and 2 together at that point and realize that he was a Type Two.)

And he finished up his soliloquy by describing all of the charitable things that he was involved with outside the office.

Then he presented The Building to me. It really was a nice building, right in my area of focus in the east side suburb that I target. It was smaller that I would have liked, but he billed it as a totally hands off property that would run itself once I bought it.

Then he presented the numbers, and that’s when (the first) red flags started to go up. He was billing this as an 8 cap rate building, but he was using the current property taxes, “pro-forma” rents because “they are under market and you can raise them”, and no repairs or maintenance, “because the owner does all of the work himself”.

While this certainly wasn’t what I expected from a broker that “dug deep into the financials” of every building that he listed, I decided to take a look at it because it was close to a building that I was already making an offer on, and because he said that the buyer was “motivated” and wanted to trade up to a larger building.

I saw it and liked it, but when I ran the numbers it was clear that the asking price was almost 25% too high for it to be an 8 cap rate. So I worked up and offer and faxed over a Letter of Intent. That’s where the fun began. I offered the seller a true 8 cap rate, and I asked that he take back a 10% second mortgage.

When he called me to “review” my offer, he began by “quoting” the IRS tax code (???). He told me that the IRS has strict guidelines about interest rates on private mortgages, and that my offer of a 5.5% interest rate on the seller financing piece would subject the seller to imputed interest and other unfavorable IRS scrutiny. That didn’t sound accurate, but I didn’t know for certain. He also told me that I shouldn’t include the new property tax rate, “because I can always petition to have it lowered”. We talked for a few minutes more, and he tried to convince me that I should revise my offer upward due to these factors and resubmit. I declined and directed him to present it as written.

While I was waiting to hear back I did some research on the tax code. It turns out while there are strict IRS guidelines on these interest rates, they don’t kick in until you are in the area of 4.3%. Far below where I was offering. This guy had told me an outright lie to try and get me to offer more. ( Yeah I know – a commercial broker that lies – call 60 minutes)

A week passed and I hadn’t heard back on my offer so I rescinded it. The broker called to discuss it, and said that he in fact had run my offer by the seller, but that it had been “far too low” and that the seller was “talking to other interested buyers”, but if I was still interested, he thought that he could persuade the owner to come down on the price about 5%, but that was it. I worked the numbers and quickly realized that at that price it was – get this – a 6.2 cap rate. And at that price it had a negative cash flow with a 20% commercial mortgage.

I sent him the numbers that I used to do my analysis and asked what part of it was incorrect – and he didn’t have an answer. I then asked about his pledge not to sell buildings that didn’t cash flow – and he didn’t have an answer. But he did go on and on and on about what a nice building it was, and what good condition it was in, and what great pride of ownership it showed, blah blah blah blah. All the stuff that didn’t mean anything in terms of ROI.

So “Mr Integrity” was really Mr White Hat. He’s called me a couple of times since to try and get to “a meeting of the minds”. I declined.

I recommend Ringer’s book – it’s a good read but in it he comes across as an angry guy with a massive inferiority complex. He also sold out to the PC crowd on the second edition. He apparently got a lot of flack for the title, so he sold out and changed the title to “To Be or Not to Be Intimidated?: That is the Question”.

Check back soon for the next installment – The FSBO Building.

As I mentioned in my prior post, this being a newbie again is an interesting feeling. And with my brilliant powers of deduction I figured out that it’s because you don’t know what you don’t know when you first start something new. I mean, I’ve been in the same professional field for nearly 20 years, and although I have had numerous jobs with numerous different companies, it’s been largely the same with very little being new under the sun.

So the challenge with doing pretty much anything new is figuring out how deep and broad the knowledge pool is, so you can start to learn enough to get started. And it’s no different moving into the apartment building acquisition game.

At the beginning the knowledge pool seemed like it’s the size of the pacific ocean – impossible to see across and immeasurably deep. Even though I had a ton of experience with single family cash flow properties, this seemed like it would be a lot different.

So naturally I started researching this like I would anything else. Internet research. Book research. Talking to people. I did a good bit of this, which I’ll discuss in later installments, but afterward I still didn’t think that I knew enough.

So I looked into taking a seminar. Now I don’t know if you’ve ever considered taking a seminar on real estate, but if you have you’ve seen that every schmoe that ever had a brain fart about some particular area of real estate is offering not just a seminar but also some sort of high priced coaching or mentoring program. So much so that I did a search on google and found over 300,000 results.

That’s not to say, though, that they are all bad. In fact I took a seminar from a local guy a couple of years ago, and it was worth a multiple of the price and it set me on a path for success that would have taken me many, many years to accomplish had I done so on my own**. So I don’t have a problem paying for education. I’m just leery and I want to make darn sure that I get value for my time and money.

There are about a half dozen “gurus” that give seminars or otherwise sell information on buying apartment buildings. I dug deeper and narrowed the list down to two, one of which was having his next seminar within 30 days of when I was looking. I was indifferent between the two, so because I was impatient to get started, I signed up and attended his event.

I ended up being quite surprised by the content. It wasn’t complex. It wasn’t earth shattering. It wasn’t really even anything different from what I had already learned.

It was surprising because it basically just validated most of what I already knew. He did have his one “secret” technique that he uses to immediately increase the value of his buildings, but I found out pretty quickly when I returned that it wasn’t usable in Michigan, and in fact it was really only usable in his area.

The most surprising thing that I learned? That I actually had a better and more detailed excel spreadsheet than he did to analyze potential deals. And he was charging quite a bit of money for his.

Now don’t get me wrong – the seminar was a tremendous value – because it cleared up a great deal of the uncertainty that I had with respect to what I knew. And if I were in the same situation again I wouldn’t hesitate taking the same course of action, because even though I certainly still don’t know everything that I need to know, I realized that I knew more than enough to get started, and more than enough to start buying.

So fortunately, like most things, once I dug into it, it wasn’t nearly as daunting as it first seemed.

Check back in a few days for the next installment “The White Hat Broker”.

 
** If you’re looking for the absolute best information on doing flips in Michigan, I highly recommend Mark Ijlal at MarkIjlal.com.

My oldest paid me a very nice compliment yesterday.

Like probably most grade school kids with cable, ours have been glued to the television at 8pm last Friday, Saturday, and Sunday and this Friday, Saturday and Sunday, as one of the cable channels has been playing the Star Wars movies in order. It reminds me of the times when my parents used to let us stay up and watch every time a new Godzilla movie came out. Remember Monster Zero?

Last night was The Empire Strikes Back. Some good scenes and action, but my least favorite of the original three because of the lame non-ending.

So we’re watching the part where Luke is training with Yoda on Dagobah, and they’re talking about the power of the force, and the power that it would take to extract his X-Wing fighter from the bog where he crash landed. Luke is trying to make the point that the size of the thing matters; Yoda is trying to get him to understand that it’s the size of your heart and what’s in your head that matters. Luke finally agrees to make an attempt.

“Ok.” He tells Yoda. “I’ll try.”

Then Yoda responds – “No! Do, or do not. There is no try.”

At that moment, my oldest looked over and said “Daddy – that’s what you always say to US!”

And she’s right. I’ve been telling all of them that for years. And I’ve been demonstrating it to them with my own actions as well with work and with our business.

It was really gratifying that she remembered, and it’s even more gratifying to observe that none of the kids tell us that they’re going to “try” to do things anymore. They just do. Even the youngest. I’ve even heard them say the Yoda line to each other. It’s nice to know that what we’re teaching is getting through.