Push the Reset Button

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This week, I’m waxing philosophical on perhaps the most important “pillar” of our little association here in Madison – it’s the “Life Pillar”. The Madison REIA is built on the three pillars of Networking, Education, and Life and we always have some great things to say about the first two, so it’s time to focus on that third pillar of living life – a life that you love.

When your PC or phone or other device starts acting wacky or not doing what you expect it to be doing, most experts will advise you to simply reboot and that will clear everything out and start fresh. We would all be well-advised to do the same thing for ourselves from time to time. And there’s nothing like a good slap across the back of the head by the Universe to get related to this, as I did this past January.

Imagine, here is a former racing cyclist, training 3 days a week at super-intense cardio levels having “bad heartburn” that wouldn’t go away during training. What’s that about? At first, the good folks in the E.R. couldn’t figure it out either. Heart strong as a horse, EKG perfect (later, I found out that they call this “non-ST”or “NSTEMI”), but blood work-up showed a marker called Troponin, an indicator of heart muscle damage. Turns out, I had hereditary heart disease that blocked enough coronary arteries that I needed to be cracked open and fixed up. Filleted like a walleye.

I was remarkably calm all that week in the hospital from Tuesday through Friday, the day of the surgery. I just continued working (have laptop will travel) and all was good. The first real eye opener was meeting all the good folks in the O.R. at St. Mary’s Madison when one guy said that he operated the heart and lung machine to keep me alive while they removed my heart to work on it. Wait, what? It’s like dropping the engine of a ’57 Chevy to pull the head and change the rings. My humanity and mortality became quite present in that moment. And in the next moment, I was out like a
light for what seemed like 3-5 seconds when it had been about 7 hours.

Today, back at it full steam, I still work hard, mainly because I love everything that I do, from coaching people on real estate investing through writing, to developing business processes and programs for our
REIA. Oh, and the occasional construction project or two, just to keep my fingers in the mix. But I have learned that I need time off the grid, off the projects, walking, riding my bike, vacationing, doing whatever I darn well want to – if it is enjoyable and completely different from what I normally do.

This is my reset button and I love pushing it. Not only does it keep me recharged, it makes everything else that I do so much more powerful and effective. It’s a hard thing to wrap your head around – that if you stop working, when you come back you’ll be working better and more effectively. Of course, this only works if you really take the time to really do a reset, and not just some other kind of work. Kick back, relax, enjoy, live life with your loved ones. And the key is to do this reset frequently; a small version once a week, a bigger version once a month.

I am blessed with the ability to do just this because of my career in real estate investing and the freedom that this brings in my life. I am grateful that what I do allows me to stop and relax pretty much whenever
I want to. And it helps to love the stuff that I do when I’m not relaxing. Still, doing that with a passion means that I put a lot of energy and responsibility into it. Relaxing is relaxing. Brainless. No thinking. Whatever YOU do in life, look for ways that you can hit the reset button. It can be tough with a 9-5 job, but there are things that you can do that, if you look hard enough, will give you the reboot you need.

Be Careful Out There

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I’m on a safety and protection kick this month, so going to roll with it.  This time, let’s talk more about liability protection for your awesome rehab.  This is especially poignant right now because it’s a little difficult to find general contractors (they’re all booked solid), so the natural instinct is to find anyone that can fog a mirror while operating a worm-drive Skilsaw.

I know, I’ve been there.  It’s frustrating, the clock is ticking on your rehab and you can hear the money flowing out of your pocket into your private lender’s.  Not that you don’t just love your private lender to death, it’s just that you want to get on with the next one and keep things moving, right?

Here’s the potential problem with hiring Ted & Ed’s Most Excellent Carpenters, Inc. for your project.  You may have scored a good new find for your projects, but each and every time that you get a new contractor on your projects, acting as a general or a specific trade, you have to check a couple of things.

First, make sure that YOU write the contract between you and your contractor(s), otherwise the terms will all be in favor of the contractor.  If S/he refuses, hard as it may be, you should walk.  You have not experienced pain as difficult as having your contractor not showing up on your job site because s/he has taken on other jobs along with yours and there’s no contract language.  Tick-tock on that private money.

That’s a whole world of discussion and exploration to talk about contractor agreements; we spend an entire class session discussing it in our REI Blueprint Course.  But the one thing that you must have and must follow-through on is your contractor’s liability insurance or bonding, along with that of the subs.
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Shifting Gears a Little

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We’ve been talking about safety over the last couple of these little chats, which is under the risk umbrella of “liability”, so I’ll hang here under that cover for a little bit.  First of all, if you’ve got an established entity, probably an LLC, you’ve already started the basic requirements of liability protection.

If you’re touring a vacant OR an occupied property and “something happens”, your first level of defense is going to be your LLC which, by the way, assumes that you are visiting that property as someone doing business in that LLC.  So what kinds of things could possibly happen during a property visit?

Wow, well – any number of things, many of which you may not have caused, or inadvertently so.  Like turning on a light, but the fixture is shorted out and wires heat up and a slow-burning fire begins to smolder,  only to burst out long after you’re gone.  Did you do that?  Well, yeah – but did you cause it?

Or you test a kitchen sink and it’s difficult to turn on the faucet.  Finally, you get it to turn, but no water comes out, so you shut if off again.  However, something broke inside that faucet and long after you’re gone, water starts leaking and eventually turns into a massive flood.  Did you do that?  Cause it?

As you can see, there’s an unlimited number of wacky things that can happen that someone can attribute to your carelessness or neglect, and property owners may be looking for someone to blame.  Now, in these simple examples, homeowner’s insurance should cover it all, but what if there is no insurance, or the property is bank-owned or corporate-owned without that kind of insurance?
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Danger, Will Robinson!

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A select few of you will immediately know that unobscured reference to a favorite television show of the mid-to-late 1960’s called Lost In Space.  The show’s helpful robot was programmed to protect the young man of the family, Will Robinson, from the dangers around in their space travel.

But what if the only space you get lost in is that trashed-out vacant property?  Well, I’m here to tell you that there’s plenty of things to watch out for – plenty of danger – to you and anyone named Will in your party.  Continuing with the thread we started last week, let’s talk about a few more ways you need to be alert and careful when looking at these kinds of properties.

This warning does not generally apply to properties that are inhabited, as any dangers there would likely already be identified and, if not fixed, at least marked somehow.  So, we’ll focus on vacant properties that you may come across in your travels through space.

One of the most prevalent dangers of a vacant property is mold and toxins.  It’s remarkable how fast a property degrades when people leave, and many times this is because when humans move out, critters move in.  Most critters don’t abide by proper bathroom etiquette, so their biological output goes just about anywhere, and frequently everywhere.

When these bad boys and girls move it, they generally don’t knock either – they love chewing through soffit, fascia, or even roofing to get in.  Of course, that kind of damage also lets something else come in quite freely – the rain.  And soaking wet drywall, studs, carpeting, and other building materials are ideal breeding grounds for black mold.
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Solid Kitchen Floor Danger

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I was looking for something in my old properties folders when I came across a couple of gems that made me smile and, at the same time, made me thankful that no one was killed in the process.  Now, before you think I’m being all dramatic, let me explain what one of these two properties was all about.

This was “back in the day” when most of the properties that we acquired came off the MLS.  Life was so much simpler then.  Banks would foreclose on properties in default, many of which had been long since abandoned, then they would take them back into REO inventory and have a REALTOR list them.

We miss those days of so-called easy pickin’s when banks had no intention of touching the properties, they just wanted them GONE to eliminate the “non-performing asset burden” on their books.  Now there are “programs” and “PMI” and other things that can make holding these assets lucrative.

We all thought it was weird when a bank would come in, strip out carpet, spray everything in sight with a bad flat white paint, carpet the floors, and then list the property at a price as though it was newly remodeled.  It was truly lipstick on a pig in the strongest sense of the word.

So, let’s talk about property 1 – it was pretty trashed and had that special brand of homeowner uniqueness to it – one step up into the living room, one step down into the kitchen, two steps into the main floor bathroom, etc.  You get the idea; an ADA nightmare.

But we noticed something interesting about the kitchen – the floor was rock-solid, but all the surrounding floors (one and two steps up and down) were regular-sounding wooden subfloors.  The kitchen sounded like it was “flat on grade”.
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Real Estate Investing and Brain Surgery

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I hate flying.  Not only do my arms get tired, the whole process has become encumbered with ridiculous charges and even more ridiculous assertions – like the fact that 3.5 ounces of shampoo has the potential to bring a Boeing 777-300ER widebody out of the sky and smash 396 passengers into the dirt.  Really.

Sorry for that “arms tired” pun – too much CaddyShack, I guess.  I used to fly so much that I had one of those super frequent flyer special god-like cards that often whisked me into first class.  Trust me, it’s not all that glamorous, flying is just annoying and stressful; even more so now.

So, we drove to North Dakota last week, and the nice thing about a couple of real estate investors driving in the car is that we will often detour through interesting neighborhoods – because we CAN – with a fair amount of ooo’ing and ahhh’ing and the frequent exclamation of “send ‘em a letter”.

It made me think – how much different is real estate investing in Bemidji, Minnesota than in Madison, Wisconsin?  Well not much, but the devil’s in the details.  True, there are distressed properties and, more importantly, distressed owners, and the real estate law is similar, so what’s different?

For one, real estate investing is a contact sport, and what you need to play are lotsa contacts.  From contractors to REALTORs to title company to attorneys to suppliers – all relationships that need to be built and nurtured.  You can come into an area and start from scratch, but it takes time.
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Property Tour #3 Is Only a Few Weeks Away...

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One of the favorite features of the Madison REIA Blueprint Series is the property tour.  For those enrolled in the program, we do 4 live property tours in and around Madison every year.  Why do you suppose these venues are so well-attended and loved?

Well, let’s see – the first thing that comes to mind is the “HGTV Effect” as we like to call it.  This is where people really love to see a distressed property that’s essentially been left for dead, abused, and misused for many years, inhabited by raccoons and their relations and generally just trashed.

Yes, we’ve got plenty of those on the tour (good thing we provide masks).  Also inside the HGTV Effect is the re-building phase, where people get to see how our rehabbers have chosen to bring a property back to life, what updates they’re doing, and how they are proceeding with the process.

During all this, of course, we stress the educational part of the process – it’s what the REI Blueprint is all about.  So we have participants use their Rehab Estimate Worksheets to arrive at a rehab cost, and we analyze that work right on site of the properties where we do this.

Property Tour #3 is coming up on Saturday, August 26, 2017, so if you’re a bit of a real estate geek and this sounds like a fun thing to do all day Saturday, you’ll want to check out the REI Blueprint Series on our website.  CLICK HERE for more details on this event and the REI Blueprint.


Pay What?

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We’re often asked how to figure out what to offer for a property, and it’s one of the earliest things that
we teach in our Blueprint Series and are constantly reinforcing in our coaching program. Many people
think that the approach real estate investors use is just to “low-ball” the price and see what happens.
Besides being deceptive and an unfair business practice, “low-balling” rarely works, and it creates a poor
reputation for ethical and honest real estate investors. Let’s take the high road and show you exactly
how to arrive at a fair offer price, then stand behind that price and how you calculated it.
The very first thing to do is to determine what the house would be worth completely fixed up and in a
move-in- ready state. The most accurate way to do this is to use the Multiple Listing Service (MLS) to
look at what similar houses have sold for nearby and recently.
The catch there is that only real estate licensees like a REALTOR or a real estate broker is granted access
to the MLS, and only through a real estate brokerage. So, if you’re not a licensee, your best bet is to
hook up with one who is willing to work with you and perhaps be paid by selling your finished property.
The process of finding these comparable properties is often called “getting comps”, and it is part science
and a lot of art. The art is in having a good working knowledge of neighborhoods and having a sense of
where the market is heading. In other words, being good at reading tarot cards might be a useful skill.
Let’s say that you arrived at good comps of $225,000 for a property. We call this the “After Repair
Value” or ARV for short. The seller needs to get out, and the house is in rough condition; no REALTOR
would list the house as it is; it may not be financeable by a bank for many reasons (that’s another post).
You visit the house with your handy-dandy Rehab Repair Estimate Worksheet (oh, you need one of
those? Then CLICK HERE) and you get to work. Yes, using this worksheet is also part science and some
art as well, but with a little practice, you get good at it.
When you run through the worksheet, we’ll say that you came up with $53,000 in repairs. Not an
unusual number for a house in rough shape; this stuff adds up fast. Now the (simple) magic begins. To
figure out what to offer, you multiply the ARV by 70% and subtract the repair costs. Done.
In this case, 70% of $225,000 is $157,500, less repairs of $53,000 yields $104,500. That’s what we call
your Maximum Allowable Offer, or MAO. We use 70% because the difference, 30%, is what we need for
things like holding costs (utilities, insurance, etc.), closing costs, and your profit. It’s a solid number.
There are other schools of thought that have you doing extremely elaborate calculations, including
things like the actual cost of utilities and insurance, closing costs, etc., but in the end, they all tend to
average out to 30%. You could say that’s one weird little trick, but we won’t. It just works.
It’s important to stress the VALUE of your service to the seller. They can be DONE with this problem in
as quickly as a week, and they will pay no commissions, have no repair or even clean-up costs, and walk
away with a check. Fixing it up and using a REALTOR can be costly both in time and money.
So the key to being an effective, ethical real estate investor is to have a process and a plan for
calculating your offer prices, stick to that plan, and show your seller what he is up against and why you
are a great solution to his problem in the long run.

From Distressed Properties to Distressed Owners

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Back in the day, which was a Wednesday, investing in real estate pretty much meant that you bought a property and rented it out.  Sometimes it was a duplex, sometimes a single-family house, sometimes a 4-unit, and up from there.  The goal became to have as many “doors” as you could get to increase your income.  This worked swimmingly for quite a long time, and then something new appeared – on TV.

Bob Vila and the gang came along with “This Old House” and started the rehabbing revolution.  At the time that he was doing it, the owner of the house was right there playing the game with him.  Then someone else came along and discovered that you could buy so-called “distressed” properties, fix them up, then re-sell them on the open market.  A new practice was born; they called it “fix-and-flip”.

Early on, “distressed” meant houses that were in pretty bad shape that the bank had foreclosed on and taken back into their “Real Estate Owned” (REO) inventory.  The interesting thing was that REO inventory was toxic to a bank – the rules used to be that the bank had to set aside seven (7) times its “non-performing asset” value in liquidity (cash) that it could no longer use for loans.  Consequently, if the bank had, say, $500,000 worth of REO inventory, it had to keep $3.5 million liquid that it could not lend to customers.

This could quickly crater a bank; whose lifeblood is the ability to make loans.  So, it was with little surprise that it was relatively easy to acquire these properties from the bank at severe discounts.  They were grateful to have them gone.  Now, this explanation is a bit trivial and used for illustration purposes only; it does not go into new liquidity coverage requirements (LCR) and all the changes that have occurred since the 2008 crash and the introduction of Dodd-Frank.  And we’re only talking about portfolio loans; those that are held by a bank.
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Flipper and Other Mutations

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If you're a sci-fi geek and you just stumbled on this tome, I'm sorry to disappoint.  I'm not talking about people walking around with a third arm protruding from their chest or additional eyes on the back of their head, although in some instances, I would personally welcome such appendages.  If you've ever worked on a residential construction/rehab project or have children, you know exactly what I mean.

Instead, let’s look at how the media has mutated the public discourse on the perception of Real Estate Investing and Real Estate Investors.  I don’t just mean TV and print media here – there’s plenty of accountability to be passed around to social media and so-called “real estate gurus” as well.

There was a point in time not too many years ago when the term “Real Estate Investing” referred to the purchase of properties for rental, creating income.  The person who did this was a Real Estate Investor. 
President Dwight Eisenhower kicked off the whole real estate investing thing in this country with the 1960 enactment of the Federal Real Estate Investment Trust Act (REIT).  But Real Estate Investing as we know it today got its launch in 1980 with PBS Television’s This Old House from WGBH in Boston.

By the ratings explosion, it was clear that the creator, Russell Morash (who also introduced Julia Child to the world), had stepped into a surprising phenomenon.  People loved this stuff.  They loved doing it, but they really loved watching it on TV.
Fast-forward to today and cable networks such as HGTV, TLC, and DIY and countless web sites owe their existence to this phenomenon.  Here’s just a couple of ways that they have contributed to the mutation:

For those of a certain age, “Flipper” referred to a lovable bottlenose dolphin whose antics and social message aired weekly on NBC.  Today, a “Flipper” is anyone who rehabs houses.  But, technically, a “house flip” is a wholesale deal – where you control a property with an accepted offer, then “flip” it to someone else to fix up.

How the term rehabbing became flipping is T.V. shenanigans.  The term is really “doing a fix-and-flip”, which is where a rehabber purchases a property taking title to it, repairs and renovates it, then sells it on the retail market to someone who’s going to live there.

But the word “flip” is catchy in T.V. show titles and commercials, so flipper, flip, and flipping became shorthand.  Flipper is turning over and over and over in her watery grave, no doubt.

The term “Investor” conjures up notions of using one’s own money to do a deal, but that is rarely the case.  No, today an investor is someone that invests, time, money, or other resources into a real estate project.  Most of the time, that’s time, resources and OPM - Other People’s Money.

And because of the proliferation of so-called “real estate gurus” that fly into town, sell people the dream and completely focus on making money at any cost, investors are frequently portrayed as “low-balling scum” – the kind that offer a ridiculously low price and strong-arm little old ladies into selling.  Sigh.

And it’s no coincidence that the groups flying into town are the ones buying time on the networks to air their flipping shows.  Oh - you thought that the network was just featuring them?  Nope, those shows are paid for with money that’s being taken from people who want to be just like them.

So, the message, grasshopper, is to do your due diligence, learn exactly what this industry is all about, get the terms right, and learn how to contribute to the betterment of the community with your very visible work.  Stop in at the Madison REIA and they’ll show you how.  Tell ‘em Flipper sent you.