The path to wealth comes down to doing the right thing for the right reasons. The first question to ask yourself. Am I an investor or speculator? You should never be a speculator.
There are two times not to speculate. When you can afford to and when you can’t.
Speculation is gambling pure and simple. Cognizant Real Estate Investors use competent analysis to take the speculation out of the deal. You should invest with a margin of safety. The key to this is knowing what questions to ask. This is a very detail oriented game. By not asking the right question’s you put yourself at risk. Thorough due diligence is the order of the day.
Emotion is your enemy. Logic and numbers is your best friend. When ever, I get excited about a deal. I take a step back. Emotion will cause you to out step your business plan causing you to fail. The market is driven by 2 basic emotions Pessimism and Optimism. More on that later.
By speculation you put yourself and your investment at risk. The Foreclosure wave of 2006 and 2007 are a result of over speculation and bad market timing. These people will live to fight another day, no matter how bad is seems during the process.
Real world example here: Two very successful investors in South West Florida. Bought a house. Got a great deal. They should have called the county to check for code violations. Turns out the house was scheduled for demolition. In the end they bought a really expensive lot in a bad neiborhood. Always check with code enforcement.
I recently made a mistake of calling the wrong code enforcement agency. Got a clean bill of health. Bought the house. We got tied up for 6 months with code violations. We bought the house with a clear exit. We had a signed contract for the resale. The code violations slowed the rehab down so much we had to scrap that exit. Once we are done rebuilding the house, we will see what the market has for us. Should have read the bottom of the tax bill better!
Here is a short list of questions to ask
1. Are there open code liens
2. Does the owner have clear title to sell
3. Is this property going to be insurable
4. Is the property able to obtain conventional financing
5. Is the market, stable? Declining? Upward trending?
6. Am I competing with production builders for buyers?
7. Do I have an accurate walk thru inspection with proper rehab estimates?
8. If the house is in foreclosure, is there a sale date set?
9. How much is this house worth? Really Worth? In some markets sellers are forced to give concessions to sell the house. These concessions are built into the purchase price. Subtract these from the purchase price to find the “true” price. Do not be fooled into thinking that 70,000 sale was a true sale. That investor could have netted 60,000 after closing costs and down payment assistance. 10,000 might be your projected profit. In that case you got out of bed for the knowledge. Knowledge is great, profits are better. Check your comps. Sellers and agents will try and provide you with comps to help you make the choice. Get a second opinion. Love everyone, trust no one.
10. What is the average “days on the market” (DOM) for this property? Always factor in holding time.
11. Last but not least what is my exit? What are you going to do with it? In the good old days we just bought houses. We would then figure out what to do with them. Please don’t do this. Walk in the closing table, with a primary exit, and if that does not work this is what I will do.
When it comes to question asking, ask people who do not expect to profit from your purchase. Never ask the barber if you need a haircut. Unless you are planning on getting one.
Every Investor should have a “Power Team”. This should consist of a Real Estate Agent, Mortgage Banker and a Mortgage Broker (they live in different worlds, trust me I have been both), Appraiser, Title Company, Home Inspector with Contracting experience, Insurance agent, attorney, CPA and last but not least handyman/General Contractor. These peoples job is to save you from yourself!
Keep Your clients Informed......
What Every Mortgage Applicant Should Know
1. Thou shall not change jobs, become self-employed or quit your job.
2. Thou shall not buy a car, truck or van (or you may be living in it.)
3. Thou shall not use charge cards excessively or let your accounts fall behind.
4. Thou shall not spend money you have set aside for closing.
5. Thou shall not omit debts or liabilities from your loan application.
6. Thou shall not buy furniture.
7. Thou shall not originate any inquiries into your credit.
8. Thou shall not make large deposits without first checking with your loan officer.
9. Thou shall not change bank accounts.
10. Thou shall not co-sign on a loan for anyone.
What Every Mortgage Applicant Should Know
1. Thou shall not change jobs, become self-employed or quit your job.
2. Thou shall not buy a car, truck or van (or you may be living in it.)
3. Thou shall not use charge cards excessively or let your accounts fall behind.
4. Thou shall not spend money you have set aside for closing.
5. Thou shall not omit debts or liabilities from your loan application.
6. Thou shall not buy furniture.
7. Thou shall not originate any inquiries into your credit.
8. Thou shall not make large deposits without first checking with your loan officer.
9. Thou shall not change bank accounts.
10. Thou shall not co-sign on a loan for anyone.
Enjoy the days - make of them what is allowed, play as hard as you work, don't forget to DO WHAT YOU WANT TO before it's too late even if you could later do it. Old folks who have money and no memories are pretty boring company, so that should NEVER be a goal.
Who I am doesn't matter - it's who we BECOME that might one day improve the world, if only by a fraction. My "Heroes" wear the Unform of the USA, my mentors have been those whose lives have changed the world for the better. Be they good teachers, great Doctors, hard-working scientists, engineers, realtors, lenders, store owners, single Moms/Dads, if their lives somehow improved theirs AND others', I listen carefully to all they have to say
Who I am doesn't matter - it's who we BECOME that might one day improve the world, if only by a fraction. My "Heroes" wear the Unform of the USA, my mentors have been those whose lives have changed the world for the better. Be they good teachers, great Doctors, hard-working scientists, engineers, realtors, lenders, store owners, single Moms/Dads, if their lives somehow improved theirs AND others', I listen carefully to all they have to say
I see a lot of Motivational “Fluff” that comes out every New Years. Motivation without planned, researched action is just “Fluff”.
What are your planned and researched action steps to a better 2009?
Here a few modest tips to become more effective within this type of market:
1. When you plan your detailed action steps, include both positive contingencies and negative contingencies for yourself and/or business models
2. See the Macro picture. However you should focus on the Micro picture. Louis Pasteur said, “Fortune favors the prepared mind”. The great Yogi Berra said it best “You've got to be very careful if you don't know where you are going, because you might not get there”
3. Be prepared to aggressively seize opportunity. In this market, positive opportunities are far out numbered by the negative opportunities? Try not to let the positive opportunities pass you by.
4. Do not depend on the Government or the Banking Industry to have a precise plan. The Government is usually the last to come to the party in the boom-bust learning curve. They know even less than the Banking industry about the market. Look at the Banking Industry (there are many quality bankers, please do not take this as a slam on all bankers). Short Sales make perfect sense, until you realize you are dealing with the cooking of a balance sheet and not a sound business model.
5. Do not waste your time fighting Forecasters, The Unhappy, Journalists and Economists. Most are entertainers at best. Again, to quote Yogi Berra “There are some people who, if they don't already know, you can't tell 'em.” A friend who mentored me in the mortgage business always said. “Focus on what you can close.” Those are wise words. You are either part of the solution or the problem; spend your time with the solutions of the world.
Get to know your farm market like the back of your hand. You should have the value pegged. That way you will not work on deals that will not make you money. The key is to quickly kill the bad deals to focus on the right ones.
Then when you know your market. How will you get paid?
Its really boils down to is the buyer getting a conventional mortgage? If a conventional lender detects a hint of an assignment of contract, the deal is dead. Also, many sellers will not execute a contract with someone who has no intention of really buying the house.
That is where a simultaneous closing comes in. I have done a lot of these. They work when the deal is good. The assignment of contracts is kind of last phase stuff. They work in an up swinging market with a dwindling inventory. I do not know many places with that set of trends currently.
Most New investors end up trying to become a wholesaler due to credit/capital constraints.
The natural Evolution of an investor is:
- Landlord
- The rehab and flip
- Whole the leads (quality leads) that you yourself can not close.
- Hard money lender.
The key to making those happen are: SPENDING LESS MONEY THAN YOU MAKE
Too many people enter into this game to compensate for lifestyle desires that do not equal their income ability. Until you fix yourself, you will never step up to the next level.
In times like this, it’s all old school. The old rules work.
First things first, most days I get some sort of prediction from someone about the state of the housing market. I have found that most of these are either driven by an agenda or by emotion. There is too much speculation as to what tomorrow may bring, when today is here, right in front of you. We usually will not know what happened today until tomorrow. So why even focus on tomorrow, when you have today! Use what you learned yesterday.
It is often a waste of time and resources to speculate what will happen tomorrow in any sort of detail. With an empirical base of facts and historical references you can deduce a range of outcomes that tomorrow may bring. If are using all of those ranges in your business model, then good for you. If you are using one of those ranges, you are playing roulette. If the range of outcomes is based on anything but empirical facts, then you are playing “Russian” roulette.
What is empirical? In economics, "empirical" generally refers to statistical or econometric analysis of numeric data. Other forms of observation-based hypothesis testing are not considered to be "empirics."
The use of the adjective empirical, especially in scientific studies using statistics, may also indicate that a particular correlation between two parameters has been found, but that so far, no theory for the mechanism of the connection is known.
Below are some thoughts based upon empirical evidence.
Plan on, a good portion of the mortgage transactions, (2004 thru 2006) to default. We (SWFL) are at 2003 pricing. So people who bought houses in that time frame……
Most people buy houses, not HOMES. A HOME is the house you can and will pay for as long as it does not break you.
People who live in houses well..........
It really boils down to; do you make your decisions from emotions’ or logic? For 95 percent of the world it’s all emotions.
Foreclosure has become quite acceptable. You will be amazed in the coming years (today even) what a bankable loan is. The current generation of bankers gave away the income stream for fee’s years ago. We will be seeing these cycles until that business model changes. Would you rather have 4 percent of the loan balance or the interest? Making money on the interest spread of a portfolio is what banking was all about, not fees.
This is the aftermath of a mania; we have been doing this since recorded history was born.
Watch and learn, so the next one does not bite you. That is about all you really can do. We as people have a predisposition go from greed to fear and vice versa. The speed of the world and pop culture are amplifying these tendencies.
Welcome to the aftermath of Fractional Banking on Steroids, AKA CDO, SIV, etc. Pick your financial poison. We really do not know how bad it is because the Fed quit publishing M3 in 2005. It’s not pertinent anymore, LOL.
What is M3?
The different types of money are typically classified as Ms. the number of Ms usually range from M0 (narrowest) to M3 (broadest) but which Ms are actually used depends on the system. The typical layout for each of the Ms is as follows:
- M0: Physical currency. A measure of the money supply which combines any liquid or cash assets held within a central bank and the amount of physical currency circulating in the economy. M0 is the most liquid measure of the money supply. It only includes cash or assets that could quickly be converted into currency.
- M1: M0 + demand deposits, which are checking accounts. This is used as a measurement for economists trying to quantify the amount of money in circulation. The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency.
- M2: M1 + time deposits, savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is a key economic indicator used to forecast inflation.
- M3: M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. This is the broadest measure of money and is used by economists to estimate the entire supply of money within an economy.
In the end, the worse it gets everywhere else, the better it should become here as the “Refugee Retirees” flee again to our Paradise. Go back thru history, 1991 thru 1993 was a time that lots of people moved to SWFL.
So what is going on today?
Here is a snapshot of Cape Coral, July 1-23rd 2007 versus 2008, SFR home sales
2007
· 102 sales
· Money in motion 28,968,595
· Average sale 284,006
· Median sale 239,500
2008
· 227 sales
· Money in motion 41,136,410
· Average Sale 181,218
· Median sale 142,300
That is a 222 percent increase in the number of SFR Home Sales. The Average sale price is down. That means Cape Coral is affordable again. The money in motion is up. Money in motion defines the market. Title companies, the Government and Insurance companies obtain revenue by money in motion.
It certainly looks like you could make some money in Cape Coral.
FYI, in a declining market, you should strive to do business below the average price and price per SQFT. Instead of predicting what tomorrows market may be bring…. Yesterday data shows the way.
This is encouraging. The world empirically is never as good or as bad as it seems on the streets and in the media. The world is either cyclical by design or maybe the experiment just works better that way.
Any input, corrections and suggestions is greatly appreciated
Jeff Tumbarello
Southwest Florida Real Estate Investor’s AssociationReal Estate Investor
Fort Myers, Florida
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