Fact Is - Most Are Diggin' For Gold In a Silver Mine

First off, you gotta know I’m all for the newbie out there willin’ to plow the dusty south 40 hopin’ to work their way up the ladder. Really, I am. Most of my experience has been that if they did just that, over time they’d be as successful as their talent would allow. In other words, most of the time out there, if you packed a 16 ounce cup, and worked hard ‘n smart long enough, you’d fill your cup with 16 ounces of success. As a young man I thought somewhat naively that this would be so in all circumstances, all markets, anywhere, at any time.

What I never had to factor in, never experienced, was an over supply of real talent attached to a buncha money — all lookin’ for the same thing — somethin’ to turn ‘n burn in one way or another. Wholesalers, the down and dirty paint ‘n carpet crowd, all the way up to the seriously skilled heavy-fixer guys — in all my many moons in the business, all the different markets both in degree and geography, I’ve never seen it like this.

What’s ‘this’ you ask?

The sheer number of legitimately experienced buy-to-sell-quick investors is off the chart high. Regardless of what seems to be the case, the number of properties that can be acquired yielding quick, high profits isn’t unlimited. In fact, the market has adjusted in most regions to the fact there are nearly an infinite number of rookies out there willing to do whatever it takes to do the next deal. They deny that, but look at the typical wholesaler’s profit, or the rehabber’s last deal or two, and you’ll readily understand what I’m talkin’ about.

More succinctly put, the real pros with real money are makin’ almost all of the real deals. The rookies, those who’re working’ their way through the muck ‘n mire are getting’ what the real players are leavini’ behind. That sounds harsh, I know, but it is what it is. Yeah, I know all the stories you can tell me, and I believe you. But you’re simply not gettin’ the smoking’ deals you read about. You may think so, but for the most part? Sorry.

An example is an investor I’ve met about a year ago, talked with, and chatted on line. He’s very well capitalized, smarter than the average bear, and has forgotten more than most of his competition has learned in the last year. Here’s a typical deal for him.

He pays cash for the property, then fixes it up, you guessed it, for more cash, all which is his own. He then goes to the local banker, get’s a 70% LTV loan (or less, often way less) which always covers every single dime he’s already put out. The property is then in excellent shape, commands top rents, is very well located, and throws off more cash flow than anyone might expect.

And not Dime #1 has left his pocket when the smoke has cleared.

Tell me 20% of the folks out there chasin’ those same deals can even carry his jock. How ’bout 10%? Maybe. Maybe not. Not on this or any other planet.

That leaves the next level down — the genuinely experienced and skilled folks who’re goin’ from one deal to the next — dependent upon the profit from this deal. They’re not capitalized for more than the deal they’re in now. Most never will be. They’ve never wanted anything long term — just the next payday. They’re good at what they do, work their butts off, and are truly deserving of their rewards.

Problem is, when you’re constantly fishin’ in Lake Leftover, it’s almost axiomatic you won’t be able to gain enough lift and velocity to take you to the next level. Furthermore, it’s only gonna get more difficult. The first guy I spoke of? The guy who now owns all the cash flowing homes in areas in which you and I would let our mothers live alone? He’s now decided to up the ante big time.

How?

He’s gonna leverage his impressive track record to the hilt with investors who have wheelbarrows of cash just lookin’ for a great return. They know this guy, or someone they trust knows him. Now, instead of buying with just his cash, he’s buyin’ everything he can find that fits his already very well defined gold standard. He’s applying the same formula, which means not only are they gonna corral more properties than ever, they’re gonna do it over and over and over ’till there simply aren’t many left.

You can have the few he, and those like him, missed.

Meanwhile, 80-90% of their competition — which, less face it — aren’t really competition at all — are finding less and less. Where every now and then they used to be able to find the occasional gold nugget, the abundantly capitalized partnership is now able to snatch the ones that used to get away due to their finite capital.

They’re out there now in ever increasing numbers. Those who are, at least in their minds, competing with them, are in a race driving 1969 VW’s against a field of fully equipped, super-charged, state of the art Corvettes. I talk with these people almost every day. They’re buying/fixing for cash then takin’ all of it out with loans still allowing for solid cash flow.

Still, even they’re not the ultimate warriors out there. Had lunch last month with someone I’ve known for awhile who’s very experienced, having gone through the fix-up wars successfully for many years in more than one state. He’s currently partnered with a relatively LARGE entity who’s now doin’ this in multiple states. My friend is handling just one major region of Southern California for Heaven’s sake. At any one time he has a dozen or more of these gold nuggets in various stages. As I said, he’s a bona fide seasoned veteran, and the guys running the operation he’s now a part of are even more experienced and adept than he is.

This might lead an objective soul to only one reality — most of the quick-turn investors out there are competing for the properties that didn’t make the ‘gold standard’ cut as defined by the big boys with the, um, gold.

This surely doesn’t mean there aren’t tons of folks around the country happily wholesaling their butts off for impressive annual paychecks. Ditto for rehabbers at all levels. What it does mean, is that while they think they’re diggin’ for gold, they’re swingin’ their picks in a silver mine — at best. Much of what I see out there isn’t even at that level. Copper would be more like it. This is what happens when values are crushed so low in such high numbers, for so long a period of time. Eventually the big boys can’t resist that much gold — good-bye little guy — take what the big boys leave behind.

As I said though, a wholesaler or rehabber makin’ six figures a year beats most of the alternatives from here to East Toilet Seat, Montana and back, right?

Photo: randa

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.