Are Short Sales A Smart Play For Investors?

I read an article recently by a fairly experienced real estate agent who was touting Short Sales as the best way for investors to participate in the current market.  The basis for this belief was that short sales provide investors with a low risk way to insure against major changes in the condition (of the property) or in the market, while still retaining the choice to buy.  Hmmm…

I’m not going to knock short sales in general.  I won’t do that simply because I have been around real estate investing long enough to know that you can’t use generalities or broad strokes to determine if any one strategy is good or not good.  Theory doesn’t work in real estate investing; facts and numbers and research are what work to determine the best “play” in any given market and specifically within subsets of the market.

I actually do know quite a few people who have been successful with short sales in today’s market.  But here’s the caveat, most of the people I know who make a ton of money off short sales are the real estate agents who know how to work the system and get their short sales SOLD (and in turn earn their commissions).

As an investor, I have a few issues with pursuing short sales.  And a few problems with the proposition that short sales provide low risk and the ability to be in control.

First, the only way to be successful in real estate investing is if you buy at the right price and/or sell at the right price to make a profit.  If your money is not actively earning you a profit because you’re waiting around the 6 (on the extremely optimistic side) to 18 months (on the very realistic side) it takes to get a short sale done, then you are not aggressively participating in the real estate market. Your money is sitting idle somewhere.

In essence, you’re waiting around to see IF your offer will be accepted.  I do agree that this allows you to exercise control by electing not to go through with an offer if the condition of the property changes or the market continues to decline.  But, in the meantime, you could have been pursuing other deals that were purchased and sold for a profit or rented for cash flow.

What good does it do to minimize risk and be in control if you’re not earning money?

Second, there seems to be a perception that buying a property in a short sale means that you’re getting a wholesale price. This is the same perception that gets inexperienced investors in trouble when they get all giddy about buying properties at an auction house.  They get caught up in the frenzy and excitement of the bidding process and fail to realize they’ve just purchased a home at over 90% of its current market value.  I don’t know the exact number but I have heard that the properties sold at auction houses (not to be confused with properties sold at courthouse auctions) typically do go for well above 90 cents on the dollar.

Realistically, with a short sale you are paying less than what the current owner paid (thus the term short sale) but you are, more often than not, paying the full market price.  Now that may be okay based on your exit strategy, but if you’re flipping for profit and paying full retail then this would be a disaster in the making.

The other thing with short sales is that they can and do affect the overall market value of properties in the neighborhood.   So, if you are successful in getting a wholesale price accepted on the property you are purchasing,  you can bring down the value of the immediately surrounding properties.  If your objective is to flip, you may have just shot yourself in the foot.  You pay less now, but your neighborhood will have felt the negative effect of the price that you secured in your offer.  This is not necessarily a problem if you are using a hold strategy.  If you’re selling for a profit however,  you may have to wait longer for your value to bounce back.

I like any strategy that allows an investor to buy low and sell high. I’ve been fortunate enough to apply this strategy for over twenty years, through up and down markets and always come out making healthy profits.  The past year and a half we’ve been doing that through properties purchased at the courthouse steps.  We do a lot of research to ensure that we only walk away with properties that are secured at a low enough price point that we can turn a profit for our investors and ourselves.   And in comparison to short sales, we can be in and out with our money in less than 120 days, with a nice profit check in hand!  If we were doing short sales, we’d still be sitting around waiting to see if our offer was accepted and the deal was closed.  Heck, we can buy two properties and generate profits twice in the time it takes to do one short sale.

Short sales just don’t seem like a smart play to me if your objective is to make money as quick as you can in today’s market.    And I don’t know about you but I like my money just as fast as I like my cars!

Size Does Matter! (oh yeah!)

It’s an age-old debate.

We’ve all heard the rumblings in conversations we’ve taken part in or perhaps we’ve eavesdropped as others battled it out- “does size matter?”.    I’m here to tell you, first hand, that it does.

Now, before I offend anyone (and I have on occasion offended some who are faint of heart)- I’m talking about the size of our dreams and ambitions.  I think it’s pretty likely that many of us may be suffering from a temporary shrinking of our dreams because we’re feeling the squeeze of the economy.  We’re tightening our belts, scaling back our expenditures and doing away with a lot of the excesses we came to enjoy during the years of the abundance mentality.  But are we doing all of that to the detriment of the size of our dreams?

One of my favorite quotes is by James Allen who wrote the inspirational, self-help classic, As A Man Thinketh.  He very eloquently said:

Dream lofty dreams, and as you dream, so shall you become.

As someone who tends to be pretty frugal about spending my money, I’m certainly not encouraging anyone to go out and jump back in to the frivolous habits that helped create our credit crisis and the mortgage collapse.  I think a little frugality is what we Americans need in order to re-evaluate our belief systems about money.  In comparison to most societies, we tend to be over-indulgent and gluttonous.  We need balance when it comes to our spending power and our saving skills.  That’s an entirely different conversation.

What I am talking about now is reconnecting with our ability to dream and dream BIG!  If we scale down our dreams, we risk the chance of minimizing our potential and short-changing our accomplishments.  Dreaming big doesn’t hurt our savings accounts.  It doesn’t negatively affect our credit.  Dreaming big allows us to set new goals, soar to new heights and feel the sense of joy that comes when our dreams come true.

Here’s a few things that happened to me the other day that got me thinking about the size of my dreams.  It was one of those days when the convergence of several non-related conversations started me reflecting on the goals I was setting for myself and my family.  It was a little touch of serendipity because I ended the day with new, loftier aspirations for 2010.

·         Conversation #1 – My buddy Mark just finished building an amazing dream home in Hawaii.   But before moving in he was approached by “Hollywood” to see if he’d be interested in renting it out to the who’s who.  As it turns out, he is currently renting his place to Jennifer Aniston for a few weeks at an ungodly amount and has a movie producer wanting to lease it for 12 months for $800,000!

·         Conversation #2 – I’m in the gym with another buddy, David, who as a local jeweler has a real passion for creating amazing one-of-a-kind pieces for his clientele.  He tells me he is in escrow on several goldmines for $25,000,000.  Did I mention he already owns a few?  Oh, and he currently has $23,000,000 in inventory at his jewelry store!

·         Conversation #3 – Another friend, Sandy, comes over to have her son play with my son Rocket.  She’s just closed on a deal and is looking to purchase a CASTLE or CHATEAU in France or Italy.  Did I mention that is a 2nd home?!?!  On top of that, she’s made an offer on a home in my neighborhood which is listed for $7,5000,000 (down from $9,500,000).

The common denominator for me in these three conversations was not the amount of money each person was making, but that none of them had set their sights low just to avoid disappointment.  Each of these three people is successful in their own right, but they are also ordinary people as well.  They  are, however, extra-ordinary in the size of their dreams.

Like I said, I walked away from each conversation one step closer to realizing that size does matter.  I will always keep a tight reign on the money I work hard to earn, but I will never allow myself to let headlines and meltdowns dwindle the size of my dreams.  I encourage everyone out there to GO BIG!

Go confidently in the direction of your dreams.
Live the life you’ve imagined.

~Henry David Thoreau

What’s Lady Gaga Have to Do With Real Estate?

Lady Gaga

What's Lady Gaga Have To Do With Real Estate?

Lately, my 8 year old daughter has me listening to Lady Gaga’s latest CD while we’re driving in the car.  I gotta admit that her music is kind of catchy!  Not exactly my style, I’m more of a guitar-driven rock-n-roller, but I find myself bopping my head along to Lady Gaga’s tunes.  “p-p-p poker face.”  And it started me thinking about the kind of people we admire in our lives.

We all have people that we hold in high esteem, some we know on a personal level while others we admire from afar.  I have people I respect for a whole myriad of reasons, from displays of personal kindness, incredible business acumen, or for being totally unique and committed to a set of goals and passions.  In the entertainment industry, I have always been a big fan of Madonna.  Not so much because of her music, but because of her incredible business sense and her ability to redefine herself on her own terms.  She is a chameleon who doesn’t appear to take NO for an answer.  It seems to me that Lady Gaga is much like Madonna in this regard.  She is incredibly unique, knows her key market and with her track record of recent hits- she is driven to succeed!  I don’t see her being likely to put her passions aside simply because someone else thinks her dreams are too lofty  or unattainable.

So exactly how does this road of thought lead me to real estate?  Well, I’ve been hearing lately from quite a few people who want to tell me (or should I say educate me!) on why real estate investing is a bad idea in today’s economic climate.  I’ve heard a whole host of reasons- from claims that we haven’t hit bottom yet when it comes to values declining or that it’s impossible to get a good deal at the foreclosure auctions because of competition driving up prices.

For me there are three important things that I  stay true to when it comes to investing in real estate- which for me has always been a strong passion (just like I am certain that music is for Madonna and Lady Gaga).

The first rule I stick to is that I never take NO for an answer.  If I am committed to a financial goal, I find a way to make it happen.  I might have to tweak things here or there, re-adjust my approach, but the point is that I make my dreams come true.  I don’t listen to nay-sayers and I don’t let others get in my way with their baseless “wisdom”.  Real estate is my way of making things happen for my family and no one is going to get in the way of me having the life I want for them.

Second, real estate investing is all about doing your homework and paying attention to the numbers. You can’t wait until after you buy a piece of property to determine your exit strategy.  You also shouldn’t go blindly into a market or a particular deal without doing your research or working with a team that can do it for you.

Third, I always make sure to be surrounded by like-minded people. A strong team of smart, driven, approachable people can make anything happen.  (I’d bet that Lady Gaga has a whole team of amazing people helping her catapult her career into the stratosphere).

We’ve been having such incredible success in the Las Vegas foreclosure market over the past year.  Our investors are singing a sweet tune with the returns we’ve been able to rack up through purchasing wholesale real estate at the courthouse auctions. Our principle approach is simple:  buy low, sell high!  History has shown this approach works and it’s working right now in markets like Las Vegas (and San Diego).  We do our research and then when we’re done, we go back and do even more research.  We know exactly what is going on in all aspects of the market.   Our investors trust their money to us because we provide results and we can illustrate this with our solid numbers.   Our team is made up of bright and highly-driven individuals, each with their own area of expertise.

So while we are closing one great deal after another, most people are missing out on the opportunities because they can’t stay connected to their passion to succeed.  Perhaps they lack the passion altogether.  Why are so many investors and/or potential investors so easily derailed by negativity and doomsday headlines?  While some people are looking for the hole in the boat (and subsequently drowning themselves), there’s another set of people who are out there achieving financial success (and waving from the shore).

So what does Lady Gaga have to do with real estate?  She offers us a good lesson in perseverance and passion and the importance of setting your sights on your dreams.

Incorporate these three basic rules and you can have your real estate profits soon sounding like music to your ears:

  1. Don’t take NO for an answer.
  2. Know your market (do your research)
  3. Surround yourself with great people

If I ever meet up with Lady Gaga, it might just be as we laugh all the way to the bank and stroll by all the dream crushers who tried to educate us on why we wouldn’t succeed.  The nay-sayers won’t know what hit ’em as we pass by them singing “can’t read my p-p-p poker face!”