Zen of Real Estate

Economy Get Blessing by the Fed

Dear Everyone,

Just wanted to add a quick note. Ben Bernanke, chairman of the Federal Reserve, told Congress today that troubles within the subprime mortgage industry did not appear to have far-reaching consequences. 

"The impact on the broader economy and financial markets of the problems in the subprime markets seem to be contained," Bernanke read from a written statement before the Joint Economic Committee.

He was not as definitive when addressing the housing market, saying that the prospects for the housing market "remain uncertain." Yet, he believes the economy will grow this year and that inflation will decrease in the coming months.

Some good news to start your day.

Elaine 

Deal or No Deal?

Dear Everyone,

I looked at a house over the weekend. Here are some of the things that went through my head while I was looking:

Exit Strategy

I begin with the end in mind, forming the strategy before I ever step inside the property. That way, I can think about ways to execute that strategy while looking at the property. I can also see if the property condition is a match with the exit strategy. The strategy for this property was wholesaling--sign a contract with the seller, then find another investor to purchase the contract.

Property Condition

The property is an older home owned by an elderly gentleman who wants to downsize. I looked first at the items that can be costly and scare off buyers--the age of the roof and windows; potential water problems in the basement; telltale cracks in walls that hint at foundation problems; and general condition of electrical wiring and plumbing. Then I attend to features that help sell the home. That's why knowing the exit strategy is so important. If I'm going to be selling to another investor, I have to think like an investor while looking at the property. If I'm going to sell to a homeowner, then I have to think differently.

Neighborhood Condition

It doesn't matter if I find the perfect property if it's located in a neighborhood where no one wants to live. I drove around the neighborhood both before and after looking at the property. There were both positive and negative findings. It was an old neighborhood with some boarded-up properties. I noted some individuals several blocks over who were engaged in questionable activities. On the other hand, the property is located across the street from a school; there is new condo construction nearby; and a neighborhood of expensive homes within a few blocks.

Conclusion

The seller passed on my offer. Property values in the neighborhood are low, so I had to make my offer accordingly. Sellers sometimes get excited when a real estate investor shows interest in their home. They start seeing infinite dollar signs and thinking, "I could do that. I could sell my own home." And they are correct. They could sell their own home. Oftentimes, they do not. "No" is frequently "no for now." I will stay in touch with the seller. We could do business in a month or so.

Elaine

Existing Home Sales Up!

Dear Everyone,

If you've been affected by all the doom and gloom reports about the flagging subprime industry, take heart. According to a report issued by the Association of Realtors, existing (as opposed to new construction) home sales rose 3.9 percent in February, the largest amount since 2004.

The report also showed that our beloved northeastern U.S. fueled this increase in sales. That makes me smile. Think back a few weeks to February. If you can't remember, I'll jog your memories. The weather in the northeast was horrid. It was brutally cold and quite snowy. Stalwart buyers braved the weather and bought homes anyway. Imagine that. Armageddon averted yet another day.

With that tidbit of good news, I hope you have a pleasant weekend. I will spend the weekend trying to increase existing home sales in April.

Elaine

Trump: The Anatomy of the Deal

Dear Everyone,

Vornado Realty Trust purchased controlling interest in two buildings: 1290 Avenue of the Americas in New York and 555 California Street in San Francisco. Vornado bought the buildings for $1.8 billion from Hudson Waterfront Associates, a Hong Kong-based group of investors.

This transaction might have been ignored as just another deal, but the Vornado purchase captures attention because Donald Trump holds 30% interest in both buildings. Vornado gets the buildings. They get The Donald.

Personality and kingly ego aside, there are lessons to be learned by this transaction that can be applied to real estate deals of much smaller proportion:

You Make Money When You Buy

Thinking about buying anything for $1 billion might make your head swim, but Vornado actually purchased the buildings at a substantial discount. The folks at Vornado calculate that they are paying $775 per square foot for the New York building and $575 per square foot for the San Francisco building. Comparable buildings in New York are on the market for $1,200 per square foot. Deal or no deal? You know the answer.

The lesson for smaller investors is you have to know the property values in the area where you are buying in order to know if you are getting a good deal. 

You Can Make Money More Than Once on a Deal

Le Donald sold majority interest in both buildings to Hudson in 1994 for $100 million. Trump, who was strapped for cash at the time, sold at a bargain price. However, by maintaining 30% interest in the buildings, he afforded himself the opportunity to profit from his sale to Hudson; from lease income; and from the Hudson sale to Vornado.

This is not much different from offering residential buyers a lease with the option to buy. The seller/investor acquires cash at the beginning of the agreement with an option fee; ongoing profit from the lease payments; and profit at the end of the option period. Also, don't have a fire sale just because you are strapped for cash. You can offer discounts to speed up the sale while also structuring a deal that is beneficial to you and your bottom line.

You Can Choose When You Pay

Vornado can cash out Trump, but they are not required to do so until 2044. Somehow, I imagine that Donald Trump won't mind the wait. In the meantime, he will continue to profit from his 30% interest in the buildings.

The lesson for small investors? The potential for creativity is endless. A deal is a deal when both the seller and buyer agree.

Elaine

First National Bank of Wal-Mart?

Dear Everyone,

Now that Starbucks has added 'record label' to their menu, it's not such a stretch to think of going to Wal-Mart for a midnight shop and loan application. But Wally World's attempted foray into the world of banking was recently cut short. The retailer withdrew in reaction to an FDIC moratorium on applications for industrial loan corporations, the kind of banking structure sought by Wal-Mart.

Wal-Mart sparked (yet another) uproar when the retailer applied to become an industrial loan corporation. Critics, including Alan Greenspan and members of Congress, feared that the big box retailer would ransack the banking industry in much the same way that it ran amok in the food industry upon offering groceries in Wal-Mart stores.

In announcing that it was throwing in the towel on the ILC application, Wal-Mart Financial Services President Jane Thompson labeled the brouhaha "manufactured controversy."

"At no stage did we intend to use the ILC to establish branch banking operations, as critics have suggested--we simply sought to reduce credit and debit card transaction costs," Thompson said in a statement.

This is how my brain functions. I thought of Paul McCartney, the "cute" Beatle and first artist signed to Hear Music, the Starbucks label. Then I thought of listening to a post-Heather, Starbucks-produced McCartney album while sipping a mocha frappaccino (this is not a paid mention, just a caffeine craving). Then I thought of going to Wal-Mart to get some Ben and Jerry's New York Super Fudge Chunk (craving again) and apply for a mortgage. Scary and intriguing. This stream of consciousness makes me think that one day, in the near future, we may see real estate brokerages proposing wedlock with retailers.

Watch and see...

Elaine

Impact of Subprime Market on African Americans

Dear Everyone,

I am a great fan of Mellody Hobson. She is the president of Ariel Capital Management, a Chicago-based mutual fund that manages nearly $20 billion for both individual and institutional investors. I admire the fact that she has found success in a "boys' club" industry. I also admire that under her leadership, Ariel has increased its visibility by boldly venturing into new areas, such as providing financial backing for Oprah's Broadway production of The Color Purple. Bravo, Ms. Hobson.

In the April issue of Black Enterprise magazine, Mellody Hobson writes that African American communities will be hard hit in the coming year due to the high numbers of interest-only mortgages granted to African Americans and the oncoming adjustment this year of $1.5 trillion in ARMs (adjustable rate mortgages). She also mentions the annual Ariel/Schwab Black Investor Surveys. These studies consistently show that most African Americans prefer investing in real estate over investing in the stock market.

While Ms. Hobson was writing to encourage African American to invest in the stock market, her two points present opportunities to the observant. Real estate investors are in a position to lessen her predicted financial blow in African American communities by including these communities in their marketing plans. Whether your strategy is obtaining pre-foreclosures or rehabs or rentals, Ms. Hobson's observations suggest that there will be many opportunities to purchase in African American communities.

Offering seller financing to your potential buyers is another opportunity. If it is becoming more difficult for the credit challenged to obtain financing, then you have the option of filling that need. There are a host of seller financing strategies, from holding part of the note (a seller carryback) to allowing your buyer to lease the property before obtaining a mortgage (lease option) to carrying the entire note (contract for deed or land contract, depending on your state). My caveat, particularly aimed at newbie investors, is that this is not a strategy for the faint of heart nor the short of cash. This is not a strategy for you if a missed lease payment would lead to your financial ruin. This is also not a strategy for you if, even with the financial resources to offer seller financing, you would spend sleepless nights wondering if your monthly payments will arrive.

Finally, it is my humble opinion that African Americans are an overlooked source of investing capital. You're leaving money on the table if your investing strategy includes recruiting sources of private money yet you're not doing anything to connect with African Americans. In the 2006 Black Investor survey conducted by Ms. Hobson's firm, 52% of blacks stated they preferred real estate to stocks.

A word to the wise...

Elaine

Dunderhead Nominations

Dear Everyone,

Ladies and gentlemen, for your consideration:

Nominee for the Newbie You-Did-What!? Award

To the Florida woman who spent her life savings three years ago as a deposit on a preconstruction condo. She still hasn't flipped the condo and is now desperate to sell at cost so she can get her savings back. Dear everyone, there is a saying among investors that "you make money when you buy." The saying should be rephrased, "you make money when you buy and have an exit strategy that you can execute." This is a sad, but cautionary tale.

Nominee for the Foot-in-Mouth Hall of Fame

The nominees in this category are every rehabber who touts the features of their property to potential buyers and uses the phrase, "Women just love..."  While I understand the danger in making assumptions, I encourage anyone who is in the habit of using this phrase in front of female potential buyers to assume they are about to lose a sale.

Remember, dear everyone, that only you can prevent you from being a dunderhead.

Elaine

Women & Investing

Dear Everyone,

I had a long conversation last night with a woman who is interested in investing in real estate. A busy mother and career woman, she doesn't have time to scout out properties. I'm more than happy to do that for her, but parts of the conversation were disturbing and familiar.

In guiding this woman to think aloud about her investing goals, I discovered that she had taken courses in real estate and attended a high-powered commercial real estate conference. Yet, she still hasn't moved on the information she's already gathered. Why is that?

I am constantly talking with women who complain about their financial lives. Despite being highly educated and competent, their jobs simply don't pay enough. They don't have an emergency fund to tide them over the unexpected. They don't have savings or investments. They are living financial drama to drama. When I hear these conversations, I talk about simple investment strategies that could, in the short term, ease the financial strain and, in the long term, be a source of wealth. Women are almost always enthusiastic about these strategies. Initially, that is. When it is time for the woman to act, then a laundry list of reasons interfere. They can't invest in real estate because they hate their jobs, their credit is terrible (and it usually isn't), they have to pay off all their bills first, they have to go on vacation or they have to wash their hair. These are all reasons I've heard. Well, except the hair-washing, of course. 

Nothing gives me more pleasure in my work life than introducing women to the world of real estate investing. I love seeing the look of surprise on a woman's face when she receives a check after closing on her first deal. She is always surprised, even though we have run the numbers far in advance of closing. It's similar to the look on a child's face when she reaches into a cookie jar and discovers there are actually cookies inside. There are cookies in several different investing cookie jars. The real estate jar just happens to the jar on my kitchen counter.

We, being the good girls that we are, are so afraid of making mistakes with money. It's as if we believe that we will become poor and destitute if we make a mistake. If we make a mistake, there were be no more money for the rest of our lives and our mother's will be ashamed to speak our names. So, instead of moving toward financial independence, we continue complaining and listening to each other complain. I know this because I still contend with these feelings. But I've learned to move forward, taking the butterflies with me.

I offer a challenge to women to take at least one step within the next week toward financial independence. Start your emergency fund. Call a professional financial adviser. Order a mutual fund prospectus. Send me an email if you need suggestions or support. It's fine if you're afraid. Just move forward, taking the butterflies with you.

Elaine 

American Idol and Real Estate: The Real Story!

Dear Everyone,

I'm sure your first question might be, "What does American Idol have to do with real estate investing?" The truthful answer would be, "Absolutely nothing." Although I might recommend investing in real estate to past winners and those, such as Jennifer Hudson, whose careers have skyrocketed as a result of being on the show. Jennifer, you looked fabulous on the Vogue cover. Call me.

Now that I've made my gratuitous sales pitch (seriously Jennifer, call me), I noticed two things this morning. First, I noticed reports of the ongoing subprime industry saga. Then I noticed reports of the ongoing American Idol saga. I watched a video report of last night's show. Two singers forgot lyrics. One singer moved Paula Abdul to tears. Wait a minute. There are currently other talent shows on television. There have been several talent shows in television history. Am I the only one old enough to remember Ted Mack and The Original Amateur Hour? None of the current or previous shows capture attention the way AmIdol (I really want to seem cool, so I used the abbreviation) has.

Everyone I knew watched the Ted Mack show, because, well, because there was nothing else to watch. (For you young ones, this was in the olden days when Swanson TV dinners of fried chicken and mashed potatoes were heated in the oven. No microwaves yet. After heating, you actually ate them in front of a black & white television.) The Ted Mack show, which pre-dated cable, had a captive audience, but I don't remember anyone chatting up the show on the playground. The difference between Ted Mack and AmIdol (being cool again) is drama. No one cried on Ted Mack's show. We didn't know if the contestants had posed for racy pictures. We didn't know at the time that we were supposed to care about those things.

And that brings me to the subprime saga. Yes, we've experienced financial crisis before. But it seems that the current one is engaging us in a way others in the past have not. Times have changed. We're able to sit at our computers or tune into CNBC and witness the interconnections of international markets. This creates an element of drama and excitement. And the drama of the crisis looms larger than actual crisis.

So, dear everyone, enjoy watching AmIdol tonight if you choose. Cry along with Paula and the other contestants if you feel moved. Stay informed of the subprime lending saga, if you choose. Let your stomach do flip-flops every time you hear the words, "New Century Financial." Just do yourself a favor. In the midst of your emoting, remind yourself that you are responding to the dramatic and go about your investing business.

Oh, if you see Jennifer Hudson tell her to call me.

Elaine

The Most Important Thing

Dear Everyone,

I'm working late tonight because I had to spend some time this morning being human. I received an early-morning call from my best friend. Her new granddaughter was about to enter the world. I had to be there. There was no excuse, no real estate, no business, nothing more important because the caller is my best friend and because her granddaughter will be the first (and possibly only) child to be named after me.

By the time I arrived at the hospital, my little namesake was already here and about 30 minutes old. I sat in a rocker and held her. She quietly nestled with sleepy eyes, tired from her journey getting here. I am truly a wealthy woman. 

Elaine