Real Estate Investing Basics

Now Taking Real Estate Questions from the Class

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real estate class

Dr. Philip Rulon could tell a story.  He was my American history teacher in college at Northern Arizona University in Flagstaff.  I actually looked forward to his class.  Twice a week, for 75 minutes, Dr. Rulon would colorfully describe important historical events like the Civil War, the Great Depression and the JFK assassination.  He knew so much.  It was like he was there.

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Dr. Rulon’s lectures never felt like lectures to me.  His classes were more like fireside chats – rich with perspective and detail.

He was particularly good with the American Presidents.  To this day I remember how he narrated the story of Franklin Delano Roosevelt.  I sat at the edge of my seat as Dr. Rulon revealed how FDR died – in the arms of another woman at his vacation home in Warm Springs, Georgia.  This was juicy stuff and certainly not the kind of information you could find in a history textbook.

One of Dr. Rulon’s favorite presidents was Lyndon Baines Johnson, or LBJ.  He once told us how after LBJ took office he was asked if he would replace J. Edgar Hoover, the controversial director of the Federal Bureau of Investigation.  Dr. Rulon quickly changed his voice into a Texas drawl to imitate LBJ and then answered the question – “No, I’d rather have him on the inside of the tent pissing out then on the outside of the tent pissing in!”  The entire class burst into laughter.       

teaching real estate agent classA little over a year ago I was given a tremendous opportunity to teach a continuing education class for Realtors called Attracting and Working with Real Estate Investors.  The staff at the Arizona Academy of Real Estate felt my insight and perspective as an investor would be valuable to real estate agents.

I developed an outline for the class and decided to adopt Dr. Rulon’s teaching style – educating through storytelling. 

Now admittedly I’m not in Dr. Rulon’s league yet.  Earlier this week I taught the class and several of my funny anecdotes bombed big time.  Yes, I heard laughter.  But, I think they were laughing at me, not with me. 

Luckily, I got the chance to rebound quickly because I had to teach the class again yesterday.  I’m proud to say that things went much better.  The audience was engaged and I was asked some great questions.  Here are a few, along with my answers:

Are you concerned about all of the investors in this market pricing out the first-time homebuyers?

No.  Even with all of the investors in the Phoenix market housing is still very affordable.  And even if prices suddenly went up I wouldn’t be worried.  Very few people in San Diego, Los Angeles, San Francisco, Chicago, New York or Miami can afford to buy a house and yet these cities manage to survive.  Besides, if we’ve learned anything from all of the fallout of the market collapse it’s that not everyone is cut out to be a homeowner.

Don’t you know that the SAFE Act prohibits investors from doing more than three seller carryback transactions a year?

Actually it doesn't. It prohibits mortgage originators from doing more than three carrybacks a year. I'm not a mortgage originator, I'm an investor. I don't charge loan origination fees, points or pre-payment penalties. I make money from the sale of real estate – that's it. Attorney Clint Coons writes about this for BiggerPockets in a post called Are You Safe to Sell Under the SAFE ACT?

housing declineDo you think property values are artificially high because banks are keeping new inventory from flooding the market (i.e. shadow inventory)?

Probably. But this type of thing takes place in the free market all of the time. It's smart business to create artificial demand. Take Disney for example. They put popular films "in the vault" for years. When a movie like Beauty and the Beast is finally re-released people are willing to pay almost double for it. McDonald's knows this too. How else can you explain the popularity of that awful McRib sandwich? I would argue that the banks holding back inventory is the ONLY smart thing they've done through this downturn. It benefits us all.

Class dismissed.

    Jeff Brown
    Replied about 9 years ago
    Hey Marty — Teaching can be a blast. What’s your take on this potential scenario? Lenders continue to keep back REOs. Some because they’re hopin’ against hope the gov’t might reenter bailout mode, others due to their belief recovery is on the horizon, bringing a rising market with it. What happens to that strategy when/if interest rates rise while underwriting toughens, and House/Senate reduces/eliminates gov’t participation in the secondary market? At that point, lenders with sizable inventories will be stuck with homes in a market providing a significantly reduced supply of qualified buyers able to act on their desire to purchase. At that point, a resumption of falling prices would ensue. Your take? Thanks
    Marty Boardman
    Replied about 9 years ago
    Jeff, that’s certainly possible. I’ve been reading that the government is thinking of pulling the plug on Fannie Mae, Freddie Mac and the FHA. There seems to be agreement on both sides of the aisle on this issue. It makes sense. The taxpayers have dumped over a $135 billion to prop these companies up since 2008. However, nothing moves fast in Washington. I don’t see any significant policy changes taking place for at least another 2-3 years. By that time the banks will have sold off most of their excess inventory. Thanks for reading!
    Replied about 9 years ago
    I imagine the banks did their cost-benefit analysis considering the amount of money/value of inventory in question. The likelihood of that scenario must be small. I wonder what the banks’ holding costs are though?
    Replied about 9 years ago
    Great article on real estate questions, but i think you will always be on the safer side when you have good knowledge of how this industry work. Meaning get all the knowledge required before taking any steps……