According to the SBA, over 50% of small businesses fail in the first five years.  I would venture to say that real estate investing is a lot tougher and even more fail.  There are so many moving pieces but managing the cash flow is the silent killer.

Here is how the process works for us:

• You write one big check to buy the house
  You can use private or hard money loans to leverage your money.  It is expensive but a life saver.   In this market even the most aggressive lenders require us to have 20% of the total cost into the deal.
• You write many little checks to fix the house
  Your contractors get paid upfront no matter what.
• You wait 1 to 3 months for offers and escrow to close
  During this time you will have loan payments, property tax bills, utility bills, potential break-ins and vandalism.
• You sell the house and hope to get an even bigger check back
  This is the most discouraging process for us.  Very little of it is in your control.  Lenders will come up with ridiculous requirements and ridiculous timeframes.    They will waste 45 days and deny the borrower.  They will ask for whatever they want and you will give it to them because they call the shots.

As arduous as the process seems, it is workable and relatively easy to manage when you have one or two houses in the cycle at a time.  But as your business grows you will need to have more and more active deals in the pipeline at once.

Here are some tips that have helped us as we have scaled relatively quickly.

• Be selective on what buyer you put into escrow
  Early on I made this mistake multiple times.  I would put the absolute highest offer in escrow if I saw a lender approval letter.  Not all offers are created equal.  Don’t waste your time with marginal buyers.
• Stay on budget!
  Once you spend extra money it is gone forever.   Just because a deal has a good margin doesn’t give you the right to be flexible on the budget.
• Don’t do mediocre deals
  If you have your money and time tied up in mediocre deals you might have to pass on some awesome ones!  Don’t waste your time with them.
• Pick Aggressive Buyer’s Agent
  In 2010 especially we had many scenarios where we had multiple offers.  I would pick my top 3 or 4 offers and try to get their highest and best.  But secretly I always leaned towards the agents that will call me every day or three times a day to see how they can get their client in the house.  If they are willing to bug me that much, imagine what they will do when the lender needs something.
• Never count on the money until it is in your bank account

In 2011 we had two deals fall out of escrow after they received loan docs.   The money isn’t made until it is in your bank account.

• Find other streams of income to level out the peaks and valleys
  We have slowly been investing our profits into rentals.  Those checks come in every month and help us survive the valleys.  Wholesaling is another good way to even things out.
• Always keep reserve cash on hand
  Last and probably the most important is, you need to have solid reserves or access to money.  Stuff happens and when you own real estate it usually costs a lot of money to fix.

I try to buy a lot of houses and every so often I think I am pretty close and am disappointed to hear the dreaded No from a seller.  Sometimes they are less polite and use words like: “cheap”, “crazy”, “wasting my time”, etc.

Here are some of the things I remind myself when I hear no:

This is a Numbers Game

You are not going to buy every house you offer on.  But if you stay in the game long enough and make enough offers you will eventually get to a Yes.

There is Lots of Inventory

The market is big.  There are a lot of distressed sellers right now.  Don’t worry about the deals you miss, focus on the things you can control.

No can be Temporary

The percentage of escrows that don’t make it to the finish line is substantial.  If the Seller picks another offer don’t give up on the property.

Investors are Required

Owner occupants cannot buy most of the stuff I go after.  My job of revitalizing a neighborhood is required and should be profitable.

Be Relentless

Persistence pays.  Keep at it.  You will hit slumps, but you can only get out of them if you don’t give up.

The process of buying should be a math equation.  If you normally get 20% of what you offer on and you need to buy 5 properties a month you need to make at least 25 offers on properties in a given month.

I have posted a lot about wholesaling and how I think it should be done on this blog.  Many beginners seem attracted to it because it requires the least amount of capital and has very few moving parts.  In reality I think this is one of the hardest things a real estate investor can do.  You have to compete with people like me and buy the house cheaper than I can, so you can sell it to me and make a profit.  It is possible, but I have most of the benefits namely more money and more experience.

Now let me tell you a story about the niche Mary has found (I changed her name as I didn’t tell her I was writing this), she is a real estate agent and small investor.  One day I put one of my rentals in the MLS for real estate agents to help me rent it.  Not very many people do this, but I figured I would give it a shot.

A week later Mary called me and said she had a tenant she would like to show the property.  She showed it, the tenant wanted it and we scheduled a three way meeting.  All the paperwork got signed and we had three happy parties: the tenant loved the house; I was satisfied Mary delivered the tenant to me on a silver platter (they saw the property and liked it, they filled out an application, and they had a credit check and had proof of income); and Mary got paid.  We have a deal where I pay her between 2.5% and 3% of a one year lease, which is really a bargain (3% of $1,000/month is 12,000 x .03 = $360).

I stopped listing my properties in the MLS, but I still give Mary a list of all my properties and she has helped me rent five or six.  After about the third one I figured out what she does.  She takes my list and makes two or three signed and posts them near my house (not right beside my sign, but close enough).  She then meets the tenants she feels are qualified and does all the paperwork and emails it to me.  If I like them we do a meeting and sign paperwork.

Her model is great because there is not very much competition.  The start-up costs are minimal (just some signs) and the market is huge.   She also gets to make connections with many landlords and learn firsthand what tenants like and don’t like about every property.  The work can also easily be done “after hours” if you have a full-time job.

I think someone could easily generate $1,500 to $3,000/month doing this part-time and learning so much along the way.  You could very easily always have 20 to 30 signs up and just keep a list of tenants and properties rolling.  I know it’s not the most glamorous work but I think the odds of success are astronomically higher then wholesaling.

What do you think?

Well, 2011 is now officially finished.  It was a great year for us and we hit almost all of our goals.

The holiday season being so prevalent I have been thinking a lot about what went right in 2011 and what went wrong.  How to make 2012 even a better year and what to focus on.  We have a new set of goals that are pretty similar to what happened in 2011.  As I have been thinking about this, a quote I have heard comes to my mind.

“The average person spends more time planning their vacation then their finances.”

I was meeting with someone who invests money with us and presenting him an opportunity.  I had not seen him a while so the conversation started with him updating me on how his last trip was and continued with him inviting me to join him on his next trip and giving me the details.  Once we finally got to it, he apologized that he had not had a chance to review the opportunity I had emailed him two weeks ago and would not have time to do anything right now.

Just for fun, I reminded him if he spent half as much time thinking about this investment as he did planning his vacation he would be a lot farther ahead.

Now I am not saying I am against vacations, or don’t take them, but if you do proper planning you can take a lot more of them!

Later this week, I will post a recap of 2011 and what we are planning for 2012.  If anyone has some topics they’d like me to post about specifically let me know, I’ve had a tough time coming up with topics.

A real estate transaction has a lot of moving parts and escrow companies exist to be a neutral third party that handles closings, funds, pro-ration of taxes, ties in the loans and basically makes sure the transaction happens the way it is supposed too.  As we have started buying more properties from standard Sellers versus Banks

California can have two kinds of licensed escrow companies: the Department of Corporations (DOC) licenses escrow companies or the Department of Real Estate (DRE) can have its licensed agents/brokers handle escrow.

As a very big warning they are not created equal at all.

DOC Escrows have a laundry list of requirements. The most important ones are:

Fidelity bonding. Each applicant must file with the Department a fidelity bond if the transactions processed are of the type not listed in Section 17312(c) (i.e., the transactions listed in paragraph 2 above). The fidelity bond must provide fidelity coverage on each officer, director, trustee and employee of not less than $125,000 for the purpose of indemnifying the escrow agent (or the escrow agent’s successor in interest) for loss of trust obligations held by the escrow agent as a result of fraudulent or dishonest abstraction, misappropriation, or embezzlement of trust obligations by an officer, director, trustee, or employee of the escrow agent.

The fidelity bond may contain a deductible; however, the escrow shall deposit with the Commissioner a surety bond satisfactory to the Commissioner in the amount of the deductible. The amount of the surety bond shall always be maintained in the amount of the deductible of the fidelity bond. The surety bond shall run to the state for the use of the state to cover any loss of trust obligations that the escrow agent’s fidelity bond does not cover due to the fidelity bond’s deductible.

Minimum financial requirements. Financial requirements must be demonstrated through submission of audited financial statements that indicate that the company has liquid assets in excess of current liabilities of $25,000 and tangible assets in excess of total liabilities of $50,000. If branch offices are maintained by the escrow agent, the tangible net worth requirement increases by 50% of the requirement for the first branch office and 25% for each additional branch office. Any losses projected by the applicant during the first few months of operation as shown in the applicant’s proposed budget must be taken into consideration when calculating the tangible net worth and liquid assets.

Surety bonding. Each escrow agent must file with the Commissioner a surety bond of at least $25,000. The bond is intended to be used to pay to the state or any person any amount that is due to the state or such person under the provisions of the Escrow Law. The amount of the bond required may increase up to a maximum of $50,000 depending on the escrow liability of the company. The bond must be increased by $5,000 for each additional Licensed office.

In lieu of the surety bond a Licensee may deposit with the Commissioner a cash bond in the amount required. The cash bond may be represented by cash deposited in a bank, an industrial loan company or a savings and loan association. Such cash deposits or certificates must be assigned to the Commissioner and may not be included in the assets of the Licensee for purposes of the tangible net worth and liquid asset requirements.

Background checks. All stockholders, officers, directors, managers and employees must have background checks performed by the Department. These background checks include, among other things, obtaining criminal history information through the Department of Justice and conducting civil court checks for activities that would indicate previous involvement in fraud, embezzlement, fraudulent conversion, or misappropriation of property. Each stockholder, officer, director, manager and employee will be required to file fingerprints cards, which must be cleared through the Department of Justice. Applicants may use the Live Scan program to submit fingerprints electronically to the Department of Justice for clearance. The fee for each clearance is $10 plus any fee charged by the Department of Justice or the live scan operator.

Minimum experience. The Escrow Law requires a manager who possesses a minimum of five years of responsible escrow experience to be stationed at the Licensed location during open office hours.

Department of Real Estate Escrow Requires:

All you need to open a DRE escrow is a California licensed broker to back you.  The broker is liable for any trust account issues, but these are usually only called out if there is a big problem.

Banks typically use DOC escrows, but some big real estate offices have a DRE escrow setup.

Be very careful you can always send the money to title and they don’t release it until it is recorded.

My posts have been a bit scare lately.  May was a very busy month and it seems like June is going to be even more busy.

The market continues to be a bit on the crazy side.  Retail resale values seem to be trending down with less than average activity, on the opposite side investors seem to be paying more and more for product.  That seems like a scary convergence.

We have been pretty conservative and buying mostly “project houses” that need a lot of work or have a funky situation going on.

I read an article in Wall Street Journal earlier this week.  They studied a pretty small sample pool of investors, but it has some interesting results:

• Farewell, flippers. Half of the investors surveyed say they plan to hang onto their properties for five or more years.
• Hello, newbies. A whopping 59% are new to real estate investing.
• Cash is king but… more than three-quarters plan to combine cash and credit to build their real estate empires.
• What happens when they all want to sell? Great expectations reign. Nearly half expect a profit of 20% or more.

So if 59% of the buyers are first time investors (“new” whatever that means) and 50% are planning to rent out the house that leaves a lot of new landlords out there.  I wonder how many of them will do okay?

Every so often an investor will explain to me the specifics of a property they are trying to buy.  After giving me the details and explaining the twenty different ways they have tried to make the deal work, they are hoping I have the secret idea #21 that will finally get the deal done.  I am sure my advice is usually very disappointing, but I usually tell them to move-on to another deal.

You can not get ‘fixated’ on a specific house. This is a numbers game!  Do you research, negotiate and try to buy the property for your price/terms.  If you cannot make the deal work, add it to your follow up list and maybe the Seller’s motivation will eventually change but that is something you are not in control of.

In April, I wrote close to 75 offers in a specific market we have been trying to get properties on.  We looked at every one, prepared our numbers on every one and presented an offer with the willingness to purchase it.  We missed on 95% of these, and some of them we really liked, but we are in business for the 5% of Seller’s who are willing to say yes.

Along the way another important thing will happen, if you are constantly analyzing 10+ deals at a time you will have a mindset shift.  You realize the market is big and there is enough to go around.

The publishers of Crash Boom were nice enough to send me a review copy of the book.  The premise is that the Real Estate market is majorly cyclical and if you pay attention when the bottom is forming in the Real Estate market and you want to be a buyer.  He basically reviews the last 3 Real Estate cycles and points out that the lows are not as low and the highs get higher each cycle. Therefore if you can buy Real Estate at these prices you can expect to see prices rise above the highs of 2006. Another important correlation he points out is the DOW Jones Average and the US Housing Market: if you have been paying attention, the DOW Jones has been going up in the last few years and the Housing Market has not been moving at all, and in some locations has still been dropping. In the last 40 years the overall correlation between these two Markets (the DOW and the Housing Market-see page 89) is significant, therefore Greg states, “when we get our next economic boom, the revival of housing values will come” (page 88).

Greg spends the first half of the book explaining how even in the Great Depression, owning Real Estate was always better than not owning Real Estate. Holding Real Estate for the long term has always been a formula for success and most family wealth has been accumulated by purchasing Real Estate and keeping it in the family for many generations. Real Estate plus time usually equals success.

Right now Greg believes we are in the phase of “irrational pessimism” (page 59) caused by the wave of foreclosures, but that is the Crash phase of the cycle and the Boom phase will follow. At these prices people should buy single family houses and become landlords. There are “6 million people who went from being owners to being renters” (page 64). “The stars are aligned to make this the best time in modern history to be a landlord” (page 65).  He explains how the typical housing cycle last for 12-15 years and what happens during that time is quite predictable.

This book is a call to action in which Greg breaks it down into a simple formula. “First, the market is finding a bottom and the cycle will get ready to reset all over again. Second, you are aware of it at an early point, and third, you have plenty of time to get your assets in gear and make an investment” (page 83).

If someone would have told you two years ago to buy Google or Apple shares because they knew what value those shares would be priced at today, I am sure you would have invested as much as possible. In essence Greg is telling you that the housing market prices will go back or above 2006 levels so just find a method to hold as much Real Estate as you possibly can, knowing that you will have to hold it for 5-10 years. In the meantime, being a landlord will be as easy as it has been in any modern time, therefore you have to plan your success formula with this in mind. Simple, ride the cycle up. The Crash has occurred and the Boom is coming.

Why are people that know that the Housing Market has bottomed not buying real estate. Greg tells us that there are three reasons holding people back. “1-I don’t know how. 2-I don’t have money. 3-I don’t want to be a landlord.” Greg does not spend enough time answering Reason #1 but directs his readers to his website “OwnAmerica.com”. Reason #2 is answered much better and Greg points out that over 10 trillion dollars are currently held in IRA’s, those that can tap into this source of funds will have a direct path to success in Real Estate. In answering Reason #3, being a landlord one must view the tenant as a customer.  Once you view your tenant as a customer you will view being a landlord as a business and you will become more professional.

My Personal Take

The book really reinforces my existing shift in focus from retailing to holding properties.   My business plan is to own as many positive cash-flowing properties that I can afford without overleveraging myself.  If we make it near 2006 prices (the peak in California) I will be very excited and probably sell almost everything.

I am not sure the America in general is ready to be positive about residential real estate yet, especially when talking about appreciation but I think this is a good read for an experienced investor or someone just thinking about getting started in real estate.

Even if you can just dig in, keep your job and buy 1 property a year… in 10 years if we see appreciation that will be life changing money.

I ran across these videos from late night guru Tommy Vu. These are pretty funny if you got some a bit of time on your hands.

Some of the quotes he was famous for:

• “Are you man enough to get off your lazy American ass and go to Vu’s seminars?”
• “A lot of your friends will tell you, ‘Don’t come to the seminar. It’s a get-rich-quick plan.’ Well, tell them, it is a get-rich-quick plan because life is too short to get rich slow.”
• “Tom Vu says his system is different than other experts’.”
• “Okay. You’ve seen me make a lot of money. You’ve seen my students who are average people make a lot of money. Isn’t it about time for you to go out and make a lot of money?”
• “Don’t say someday you will do it. Someday may never come. Come to my free 90-minute seminar now.”
• “There’s two kinds of work in America: hard work and smart work. Which one are you doing now?”
• “This is not a country club! This is my house!”
• “Are you afraid to ask your Boss for the day off to come to my seminar? Well then you don’t deserve to be rich”
• “Today I’m gonna show you how to drive a sports car. First, you need a lot of money!”
• “Don’t listen to your friends. They’re losers!”
• “Do you think these girls like me? NO, they like my money!”

In the early 1990′s I guess he got investigated by the Florida attorney general and never aired his infomercials again.

He was hocking Las Vegas condos in 2006 and 2007 and now is a ‘semi-professional’ poker player with nearly 1.5 million in winnings.

The Wall Street Journal released an interesting article about the number of cash-buyers in certain markets.

They show Stockton, CA which is quite a depressed market at 29%, that is where I guess the Inland Empire would be.  Los Angeles County is at a more reasonable 18.7%.  They said in 2006 it was more like 12%.

It is just absolutely crazy that Miami, Florida is over 50%.

Here is a report from CAR on the historical ALL Cash transactions (this took a long-time to find).

I wonder how many of these cash buyers are investing for short-term or long-term and how many of them are planing to refinance their properties?