Investors Club Meetings

As a percentage of the people bothering to peruse my fringe, not often updated, home flipping blog, I would imagine a lot of you have been to one of these before.

I’ve previously described these rooms as follows- “a bunch of RE investor wannabees, 10 or so people that know what they’re doing, and one really-effing rich guy”.

I used this description about 6 months ago in an email, and find that it still rings true today.  I comment on this because the keynote speaker at the club meeting I went to today does exactly what I do.  Only he does it worse.  You have no idea how gratifying it is to know that someone less knowledgable, less successful (and frankly, less attractive) than yourself became  known well enough to be the “front of the room” guy at a meeting such as the OC Investors Club.

I say this not to toot my own horn (other than the attractiveness part), but to lend credence to the business model.  After being somewhere between inquisitive and dickish during the Q&A, I was able to more or less prove to the audience that the speaker had some shortcomings that were eating into his profit margins, and that I had the experience to avoid these.  I’m not sure who will raise more capital out of that meeting, but that is entirely not the point.  The fact that, as an audience member, I was able to gain any interest at all when the front of the room guy is in DIRECT competition with me makes me incredibly happy.  So happy, in fact, I decided to write a completely pointless blog post about it.  Hope you enjoyed it,  but more importantly, I hope you too are able to find happiness in such simplicity at some point.

 

Black Swans and Back Taxes

Peyton Manning played a terrific 14 years in the NFL, and then played 0 games this year.  Lehman Brothers functioned as a wildly successful investment firm for 158 years, and then filed bankruptcy.  Strangely enough, tulip bulbs in 17th century Netherlands were worth more than 10 times the salary of a skilled craftsman, and then worth nothing at all.  History has shown us time and time again that long periods of success often end in dramatic and abrupt failure.  So why aren’t we better at avoiding it?

Well for one thing… success is way more fun.  People often overlook unsound reasons for success, choosing rather to attribute their success to their shrewd business acumen and charisma.  The problem with charisma is that it is only charisma so long as it is making a lot of money.  A less successful businessman is far more likely to have the attributes of a “snake oil” or “used car” salesman than he is to be described as “charismatic”.

So it is then, that the true measure of a successful businessman is not what he does in the thrill of victory, but what he does in the agony of defeat.  Primarily, whether he chooses to view it as agony, or opportunity.  Opportunity in the sense that there are valuable lessons to be learned from large mistakes.  Opportunity in the sense that it provides a venue to prove he is as accountable and responsible as he is shrewd and charismatic.  Opportunity in the sense that he is, for better or worse, a human being, just like those he is responsible to.

All of that to say… we made a pretty terrific mistake on a recent flip.  Purchase price was $82,200, resale price was $127,900.  There was very limited rehab, as it was 2006 construction and the pergranisteel (along with a number of other high-end upgrades) were already there.  After some minor repairs and staging, we were all in on rehab at about $6,000.  The numbers looked like a decent/juicy flip until… we got the prelim.

What do you get on the prelim (house people language for preliminary title report) that scares you more than anything?  Liens the title company didn’t tell you about.  Especially when they are for back taxes and there’s no way to fight them.  Especially when they’re for $13,000+ (more than 10% of your resale price).  These are things you like to know about ahead of time… seeing as how there’s no way in hell you would have bought the property.  This is why you rely on Title companies to give you this sort of information, and sometimes it doesn’t work out like you want it to.  Actually, this is the first time it has worked out this way.  Kind of like Peyton Manning’s neck, Lehman Brothers terrible use of leverage, and whatever the hell happened with the tulips.  At the time, prior to the event happening, one could not have reasonably expected the title company to screw up… but they did.

So I ask you (yes… all three of you), what would you do in such a situation to get things back to where everyone is happy?

You Can’t Always Get What You Want

There are a number of analogies and expressions one could use to describe the feeling of not getting what you want for an extended period of time.  The dry spell, the slump, the doldrums, the cold streak, etc.  There are also a number of less socially acceptable terms that define the process of ceasing this period of time (the baseball derived “slump-buster” likely being the least socially acceptable of the bunch).   Whatever words are chosen, however, it is clearly not a desirable psychological place to be.

The life of an auction focused flipper is certainly not immune to this type of frustration.  Every day, 75-100 properties are considered for bidding, and if lucky, 1 or 2 is bought.  Sometimes zero.  Rarely, if ever, more than two.  Going 3 or 4 days without purchasing can be excruciating, considering the amount of work put into each property.  Moreover, having the wrong properties postpone/cancel at the last minute is even more frustrating, as it takes away the opportunity for massive profits just as quickly as it was found.

Right now… were on 9 days of non-purchase, and my slump-buster hormones are bursting at the seams.  This, however, is why you don’t get emotional in the property flipping business.  Rarely is a slump buster a good decision in the long run, and what could result in juvenile ridicule in some situations can result in catastrophic financial results in others.

While most of my posts will be to help you, the reader, learn more about flipping properties and buying at auction, this one is mainly for me to maintain self-awareness, as well as my sanity.

The good news is there are no auctions tomorrow, due to Veteran’s Day, so I can take the long weekend to get focused once again!

Desert Hot Springs is HOT!!!

Usually when a fisherman finds a particularly good spot to fish, he doesn’t make a large commotion.  Perhaps this is because he doesn’t want to risk upsetting the fish, and this is understandably a valid concern.  More importantly however, he doesn’t want to indicate to any other fisherman that might be lurking what a great spot he’s found, hence increasing his competition.  He would much prefer to relax, reel in the fish, and likely enjoy a frosty adult beverage while admiring his handiwork.

Such is the case with buying properties at Trustee Sale.  The less competition that exists for a certain area, the better our chances of buying at large discounts to market value.  The same logic of course applies to buying any thing in any market, but I thought I’d give some concrete examples of how we’ve been able to succeed, knowing that this blog is nowhere near popular enough for me to have invited the competition before making a ton of money on the properties.

On to the examples:

The following three properties we bought between very late July and mid-August.  All of them closed escrow in October.  The returns we made on two of them were outstanding, the third was pedestrian.  There’s was a reason for that, and I’ll explain that too in a future post.

DHS Flip #1: 9901 Cholla Dr

Purchased: 8/19/11 for $65,000

Sold: 10/18/11 for $93,900

Rehab: $0

CFK: $0 (Cooperative)

Lawyers: $0 (N/A)

Investors: Thrilled

Comments: Meth lab with semi-cooperative yet not fully cognizant occupants, who eventually left peacefully without doing (further) damage to the property.  Sold to cash buyer who bought without contingencies or inspections, and intends to again flip the property.

DHS Flip #2: 65940 Avenida Ladera

Purchased: 7/29/11 for $67,500

Sold: 10/20/11 for $110,900

Rehab: $12,500

CFK: $0 (Vacant)

Lawyers: $0 (N/A)

Investors: Thrilled

Comments: Granite counter tops make all the difference in Rancho Del Oro… buyers love them and were willing to pay a $10K premium for a $1500 install.  I will make that trade every day of the week.

DHS Flip #3: 66805 Flora

Purchased: 7/29/11 for $38,212.01

Sold: 10/14/11 for $67,500

Rehab: $12,500

CFK: $0 (Cooperative)

Laywers: $0 (N/A)

Investors: Tepid

Comments: Granite counter tops and other high end appliances again made all the difference, this time the wrong way.  This price point doesn’t require high end materials, which cut deeply into our profit margins, but taught a valuable lesson.  Buyer was a cash buyer that waived all inspections and this is his 7th buy and hold property in DHS.  We go back to him with other, similar properties or convince him to join our buy and hold fund.

Snatching Victory From the Jaws of Defeat (Part II)

So what was our mistake???

Actually, I discussed this in a previous post: see The Importance of A Listing Agent

Our mistake though was not solely picking the incorrect listing agent initially.  It was also exacerbated by not realizing our mistake and taking corrective action immediately.  For months, three months to be exact, we let the property linger on the market, with the wrong agent, and be passed over while other properties opened and closed escrow, despite their higher prices and lack of upgrades.  We were either paralyzed or mystified, but one thing we were not was proactive.

I made it a personal goal of mine to not do this again.  While we try to be loyal to agents that have performed well, it is a simple fact that certain agents can sell certain areas better than other agents.  Whether it be their comfort level selling the properties features, their ability to market to their social spheres, or their willingness to hold more open houses and do more to market the property than put it in the MLS and forget about it, all of these things will affect the sale.

So, with this, it allowed a new policy to blossom from within Real Estate Legends.  Agents are evaluated on their performance on a monthly basis, and not allowed to continue to list properties they are not effectively marketing.  It is our opinion that this will lead to higher performance, ultimately translating to quicker sales at higher prices.

That certainly was the case with a few recent properties, which you can read about in my next post, “Desert Hot Springs is HOT!”

Snatching Victory From the Jaws of Defeat (Part I)

When you buy a property at a significant discount to market value, it is, for all intents and purposes, pretty hard to screw up the deal.

Here’s a little anecdote about how we came pretty close to doing exactly that.

401 S El Cielo was purchased at Trustee Sale Auction (as all of our properties are) on 4/26/11 for $69,606.01.  I include the exact amount here because it is indicative of the limited competition at the Riverside/Corona courthouses, that is not the case in LA/Orange counties.  Why is it indicative of limited competition you ask?

In bidding for properties at Trustee Sale, the protocol works as follows:

1) Beneficiary provides a published bid- this is the amount owed on the property, plus liens/judgments etc.  This is provided days, sometimes weeks in advance of the property’s sale date.

2) Beneficiary provide an opening bid- this is the beneficiary’s perception of current market value of the property.  This is provided sometimes the day before the sale date, but usually the morning of the sale.

3) Bidders qualify for properties by providing cash or cashiers checks (realistically, no one rolls to the courthouse with a wad of Benjamins for this purpose, it is always cashiers checks) in amounts greater than the opening bid.

4) The auctioneer opens the bidding on a property at it’s opening bid amount.

5) The first bidder, if any, bids $.01 over the opening bid amount (this is called a “penny over” bid- we Trustee Sale folks aren’t particularly creative).

5a) If no bidders, the property reverts to the  beneficiary.  This homeowner has now been foreclosed, and the property is officially an REO.

6) A second bidder, if any, bids a minimum of $99.99 over the most recent bid.

7) Any further bids are increased by a minimum of $100 until there are no further bids.

So why did I walk you through that?  Because any time you are able to buy a property on a “penny over” bid, it means you:

A) Bought something no one else wanted/qualified for/had on their radar.

B) Either got a tremendous deal or will lose your shirt.

We at Real Estate Legends try to keep our shirts, whenever possible.  If you’ve ever been to the beach with any of us, you would probably agree with that sentiment.

In any event, 401 S El Cielo was a penny over bid, and we were excited.  Once we were able to access the property, it was determined that the property did not require extensive rehab, minimizing both our investment and the amount of time it would take to re-sell.  Again, stoked.  Very stoked.

But then… we made a mistake.  A big mistake.

I’ll talk more about that in Part II, next week.

The Importance of a Listing Agent

“Real Estate Agents are a dime a dozen.”

Perhaps.

However, I think that the right listing agent in the right situation can sometimes make all the difference.  When would this be the case, you ask?  Consider the following scenario:

A property is located in a gated, condo community that has some nuanced features that only a resident would know about.  In addition to this, the HOA decided that it was no longer allowable for agents to give out the gate code in order to allow showings.  As you might imagine, this makes it difficult for buyers to see the property, and knowing that agents are generally lazy, they move on to easier to show properties quite quickly.  What’s more, if you as an agent are the one listing this property and do not yourself live in the community, you are probably not likely to be available at a moment’s notice to arrange an appointment for the persistent buyer’s agent who DOES call and such a “high-hanging fruit” type listing.

So… what does one do in this scenario?

We decided that our inability to sell the property was, in this case, due to the Indian  Native American and not the arrow.  That isn’t to say the listing agent was bad, necessarily.  By most measures, and with previous properties, he had actually been quite productive.  On this property however- it was best to move on to a new agent.

After 90 days of marketing, no offers, and being the lowest priced unit in the complex, we decided to find an agent that specialized in not only the area, but this particular condo community.  Sure enough, by only reducing our listing price by 1.275%, we were able to generate an offer within 4 days of marketing the property with this new agent.  What’s more, it was her buyer, allowing us to save slightly on commission paid.

The property closed this past Friday, 10/7/11.  It wasn’t our best flip, but it serves as an important lesson: The listing agent might actually matter a great deal.

Find out more about the adventure that was 401 S El Cielo in my next post: Snatching Victory from the Jaws of Defeat.

My Inspiration

On the advice of people much smarter and web-savvy than myself, I decided to start a blog about my latest adventures in real estate.  Some of you may have accidentally found yourself on my initial blog, balboapeninsula.blogspot.com, which was my half-hearted attempt at hyper-local branding.  Two years and zero peninsula listings later… that has probably run its course.  This new blog, however, has the potential to be quite a bit more captivating, for the following reasons:

1)      The very nature of flipping houses lends itself to blogging.  There are always new tasks, always constant inventory, and each new flip is entirely unique.  The amount of money to be made in such a short time is also compelling, and in this real estate addict’s opinion, exhilarating!

2)      The process of buying at trustee sale auction is not well known, and I know how to do it pretty well.  You might want to learn, and I’m happy to teach you how.  That doesn’t suck, right?

3)      I’m often told “wow, that’s risky” or asked condescendingly “how’s that working out for you?” by skeptics.  My main ammunition against skepticism is transparency.  How could I possibly be more transparent than blogging our every move, including property acquisitions, CFK negotiations, UD actions, rehab, listing and closing escrow, in addition to how much we’re making on each deal?  In fact, I dare you to find another business out there that is as transparent as we are.

So, now that you’re here, take a look at what we’ve done thus far.  You’ll notice that our acquisitions prices are quite compelling, and our annualized returns are unlike anything you would ever see for a flipping business in Orange or LA counties.