Captain Obvious – Old School Fundamentals Matter

4

Back in the 80’s there were what’s known as Exchange Clubs for those on the investment side of the business. Brokers/agents who would meet weekly to share their buyers/sellers/exchangers so as to enhance chances of a successful transaction. It was a great idea in a down market, and worked well when captained by seasoned pros. Most of these groups, however, were more than sparsely populated by untrained house agents lookin’ to survive in bad times. More succinctly put, they would have to have risen three rungs on the expertise ladder to reach clueless.

Here’s an example that happened in real life, no kiddin’.

These meetings were set up so agents with a listing or a buyer would ‘present’ it to the group, via a whiteboard and an experienced investment broker acting as moderator. One day a new guy had a triplex on the board that was clearly overpriced, under-maintained, and not so well located. After the initial two minute summary of general info, the moderator began asking the agent questions about the seller’s motivation and intent. The answers were vague, and given in a voice of rising irritation. Then it happened.

Someone asked why the rents were so low compared to the asking price. After all, the comps in the area showed a much better price/rent ratio than this property. The agent lost it. “What the hell do the rents have to do with anything?!!”

Ever been in a room when the silence was so complete ya coulda heard a snail sneeze in the next zip code? We were dumbfounded. All eyes turned my way, as I guess my facial expression gave away my immediate thought. I raised my hand to be recognized while the moderator desperately searched for other hands — he knew what was surely coming. A fruitless search, as everyone was sittin’ on their hands waitin’ for my question. ๐Ÿ™‚

“The Info-Sheet you handed out for this presentation says this is an ‘income property’. Is that a typo?”

Whereupon the moderator called for order in the room. The agent was not amused, and bellowed so. When asked by the moderator, who was now beside himself tryin’ not to burst out laughing,ย ย how he’d arrived at the value, there was more silence.

He never came back. Duh.

The point here, is that there are so many things obvious to even the beginner, that attempts to deny them tend to crush your own credibility. The days of finding the next sucker to buy your pig in a poke have pretty much gone the way of the Dodo bird. The same goes for those trying to flimflam sellers into um, questionable purchase terms.

Here are some Captain Obvious thoughts for the week.

When you’re doing your due diligence on properties, as a buyer, seller, or broker/agent, do what you can yourself. Not super experienced yet? Do a walkin’ clipboard rent survey in a neighborhood you like. It never ceases to amaze me what I find when doing those surveys. We do ’em ourselves in every state in which we do business.

BawldGuy Axiom: There is absolutely no substitute for boots on the ground research, whether they’re your boots or not. Reading reports simply doesn’t cut it for real pros.

Then there is the question of time and measure. When and how much? The impact of time on value, and amount upon return. Look, when the smoke clears, the principle remains — more is usually better than less when viewed through investors’ eyes — more profit, more cash flow, more tax shelter, etc. (Captain Obvious snickering in the corner.) To expand on the incredibly obvious, sooner is better than later. The more quickly you do well, the better your return. Talk about abusing the Duh Factor.

BawldGuy Axiom: Generally speaking, sooner is better than later, more is better than less, and more, sooner is much mo’ betta.

Most of what I see, hear, and read in the real estate investment world is too clever by half. I know we OldSchoolers harp on the fundamentals, but we haven’t survived and thrived for this long cuz we’ve been usin’ all the so-called sophisticated ‘techniques’ hawked by many out there without the slightest clue of what that light at the end of the tunnel really is. Most of the time it’s a freight train comin’ their way. Do we make use of sometimes very complex techniques and concepts? Of course. But most of ’em are that way as a response to the Internal Revenue Code, not cuz we prefer complex over simple. Only the fool thinks that way.

Want an example of a coming train wreck for many investors?

In the mid-late 70’s and again, but to a lesser extent the late 80’s, investors fell in love with the idea of taking over properties ‘subject to’ the existing loans of record. They did this as stealthily as possible so as not to let the lender(s) in on their clever ways. Is acquiring investment properties this way illegal? With the exception of fraud, nope. Here’s what happened when the music stopped, and all the chairs were removed.

  • Interest rates trended up, which made lenders care a lot more about who owned the props encumbered by their relatively low interest loans.
  • Lenders began to enforce loan contracts, calling them due and payable when it was discovered the original borrower was long gone.
  • Thousands of investors without the horsepower to come up with the scratch quickly, lost all their ‘subject to’ investments.
  • The original borrowers, many ignorant of this distinct possibility, had their credit terribly damaged for a long time. Think lenders gave a damn? Think the investors who caused it gave a damn? Don’t answer, they’re rhetorical questions. ๐Ÿ™‚

What’s comical (not) is how most of the investors caught in this scenario will truly be surprised. They were told lenders don’t care, they’re happy ‘somebody’ is making payments. True enough — ’till it’s not. Then? BOOM!! There it is. To those who think otherwise, I believe in live and let live — to each their own. What you do is nobody’s business — until that is, you’ve trashed their credit under the guise of ‘helping them’.

Again — fundamentals will not fail you. The farther you veer off the path of OldSchool principles, the more swift will be your downfall when the whirling steel blades hit the bovine excrement. Don’t believe me, believe recent history.

Fundamentals matter.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.

4 Comments

  1. Jeff,

    As always… great article. The Take-Away in my opinion is in the last paragraph…

    “Again โ€” fundamentals will not fail you. The farther you veer off the path of OldSchool principles, the more swift will be your downfall when the whirling steel blades hit the bovine excrement. Donโ€™t believe me, believe recent history.”

    For the unititated or those who think they are smarter, quicker, better, etc. then the market… that paragraph is prophetic!

    Pete

  2. “The days of finding the next sucker to buy your pig in a poke have pretty much gone the way of the Dodo bird.”

    Jeff, Great first story! There are so many investors still trying to pass on crappy deal, mostly to new investors, to make a quick buck. Wish I was there to laugh in his face, but I think I was only 8 years old in the late 80s. Lol. Would have loved to see an exchange club at work. You know of any national Reia’s or groups that still work them?

    – John

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php