Pre Event Report

Illusions on a Double Dimple Photo source: Amazon

Ben, the two of us need look no more

We both found what we’ve been looking for

—Don Black

Weather or Not

I made it to Frisco after taking almost four hours for what should’ve been a 2.5 hour drive, according to The Googles. Waco was probably the most interesting part of the drive. I had to go through a thunderstorm that was like driving through a tropical storm. There were times I couldn’t see the car in front of me, even though the traffic on I-35. It slowed to almost 35 miles an hour.

By the time I made it to the north side of Waco, I had driven out of the rain. The roads were not dry, and the sky looked like it could start to pour again at any second. But it had still been free of the rain long enough for the automatic windshield wipers to stop for a couple of minutes. Then my phone went off in panic mode. “Warning! Warning! Warning! Severe thunderstorm warning for the next 18 minutes. Really helpful, Siri.”

So anyway I managed to get to the event and get checked in to help with the event. My job tonight was to attach badge holders to the end of lanyards, and I did a few hundred of those. Then we broke for the evening and I went to the other hotel because I hadn’t been able to get booked at the Hilton tonight.

I got checked in at the other hotel, which shall remain nameless for reasons you shall see. I went up to the room and found it to be very very nice, if not worth the price that I’m having to pay for it. But that’s what happens when you go to a conference and have to get a hotel in a downtown area.

Rats have their place in nature and science. We don’t have to worry too much about them at the Hermits’ Rest Ranch because we have three dogs and numerous wild raptors who all love rats. Photo source: The Scientist

Ratatouille

By that time, I was hungry for dinner. I went downstairs to the restaurant, and it’s pretty nice and reasonably priced—for a hotel. The waitress was really personable and made me laugh. She took my order and went away. While I was waiting for my food to come out a fairly large gray rat scampered across the restaurant in front of me. I was tired, so I rubed my eyes thinking, “Did I really just see a rat run across the restaurant?”

About the time I convinced myself that I didn’t see what I saw, the rat ran back across the other direction. So when the waitress came by with my drink and to take my order, I told her, “By the way you might want to tell your manager I just saw a rat run across there.” When she realized I was serious, she burst out laughing, “Oh no. Now I have to set traps for it.”

She then left to get my drink refill, and I heard the guys in the bar laughing all the way across the hotel. Mind you, it wasn’t really empty in the restaurant, just slow. Like you expect from a hotel restaurant on a Monday night.

She came back and told me that she told the guys in the bar, and they were having a good time about it. She also told me she poured my second drink so it would be comped. Then she left to check on my order and the rat made the third appearance. I told the waitress about this when she came back, and she told the manager who reiterated that she had to set traps for it now.

Everything was settling down when the waitress went to get my food. She came back and she was laughing so hard she could hardly walk. She said the rat had made it to the kitchen and the three big burly guys in there were all up on the counter yelling that “there’s a bunch of them on the floor and there’s only one.” She says, “Frederico says, ‘He’s been here a long time. He is gray. He’s got lots of gray hair.’ I couldn’t convince him that they’re all gray.”

She and I talked for a long time about how she ended up here and things we have in common. Her husband is a national record producer, and they live in Junction. She came up here to open the hotel and his ended up staying for almost 7 years. I told her that I spent 10 years on a three month contract once. This was a very enjoyable and to what had been a stressful then boring day.

Find your hope and laughter where you can.

Because I was unable to write much this week, Suna adapted this post for republication on the Hermit Haus site on 2018-02-09.

 

Figures Don’t Lie

Selfie by Suna Last year, Paul Esajian invited Sue Ann and me (and some other investors) to watch the San Diego Chargers from the Fortunebuilders skybox. Paul has given us some great advice in the time we’ve known him.

This post originally appeared on the Hermit Haus blog on 2016-09-24.

Hanging on every word

Believing the things I heard

Being a fool

—Russ Ballard

One of my mentors, Paul Esajian, says, “Always trust the numbers.” By that he means your numbers. Phill Grove, another mentor, emphasizes this concept. He says, “Always do your own due diligence. Run your own CMA. Do your own repair estimate.” In other words, buying real estate is a perfect opportunity to follow the advice of the old Russian adage, “Doveryai no proveryai”—trust but verify.

Trust but verify. Especially when dealing with wholesalers.

We expect homeowners to lie through acts of commission, omission, and ignorance. They, after all, are in dire straits. They really need to get out of a problem house, and they often know what they need to accomplish that goal down to the penny. We expect them to over-emphasize their house’s strong points and ignore or hide its deficits. Further, they may not even know about a termite infestation, a leak in a wall pipe, or countless other problems that can drive a renovation over budget and into red ink. And, to be fair, homeowners expect investors to lie to them, too.

But wholesalers are a different animal. They speak Investor, so it’s easy for investors to let their guard down too much. For example, wholesalers know how to get our attention with numbers. They know the secret formula we use to make sure we have some cushion for the unforeseen issues that arise in every project: .7ARV – R = O. Our Offer should be in the neighborhood of 70% of the After Repair Value of the property less the cost of Repairs.

The Perfect Deal

Asking Price	$100,000
Repairs	$40,000
ARV	$200,000

So when we see an opportunity like the one shown to the right, our immediate tendency is to short-circuit our processes and jump to the conclusion, “That’s a good deal!” Why? Because .7 of $200,000 is $140,000. Subtract $40,000 in repairs and we should be comfortable paying $100,000 for the house. I mean, what could go wrong? Well, there are only three possible reasons why the numbers match our formula so well:

• The deal is a perfect fit to our expectation, and we stand to make about $25,000 after holding and marketing costs. 
• The ARV has been overstated, intentionally or not, which could reduce or eliminate our potential profit. 
• The repairs have been understated, intentionally or not, which (again) could reduce or eliminate our profit margin.

We don’t need to talk much about what happens in the first outcome, where the numbers are correct. Everybody is happy. Everybody wins. But I reckon each of the other two outcomes deserves its own post. As I write them, you can find them gathered here.

Most wholesalers are hard-working, honest people. But especially with the growth of HGTV, DIY, and similar networks, vast numbers of newbies are coming into this profession, and wholesaling is the logical starting point. (We can discuss why in another post some other time.) People in our profession follow the distribution of the general population with roughly 2% falling somewhere along the psychopathy scale.

It’s like one of my favorite bosses (she hired me three times in the corporate world) once said, “Figures don’t lie, but liars figure.”

Construction Management Academy

JD Esajian explains all the steps involved to permit a house his team is renovating in La Jolla.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-08-03.

As Sue Ann mentioned the other day, I spent the weekend in San Diego at a class called the Construction Management Academy. It was two full days under the tutelage of JD Esajian, formerly of Flip That House and one of the founders of CT Homes and Pacific Builders.

There were a lot of details to pick up on, but we didn’t spend as much time on management systems as I would have preferred. Instead, JD used several of their current projects to call out the things you have to be aware of in a construction project, many of them unique to projects that sell for more than a million dollars in California.

Here are a few of the chestnuts I brought home for the Hermit Haus team:

Here I am on a rooftop deck of a $3.2M renovation that turned a 2K square foot home into a 4K.

• It is cheaper to fix problems uncovered in planning than in construction. Spend the time needed to thoroughly plan every project instead of trying to minimize the time between closing on the purchase and the start of demolition.
• Some neighborhoods have lengthy delays for permitting. (We know this is also true of Austin, where two of our projects have taken more than a year to permit.) That’s okay so long as you know it going into the project and take the appropriate steps:
  • Factor the extra holding costs into your purchasing decision. Usually, this means negotiating a lower purchase price, but it may mean leasing the property out for a year while you work on getting the permits.
  • Make sure your financing plan takes the lag into account. You don’t want to have to repay the purchase and renovation loan(s) before your have started your project. Also, you probably don’t want to be paying high private- or hard-money interest rates for a year before you start work.

I’m going to have signs like this one made to post at all of our job sites. Not all adults behave as such.

• You can’t count on appreciation to help you out if you buy wrong. Run your numbers many times before you fork over the cash.
• There has to be a transparent, workable system to facilitate communication and accountability among all team members, including yourself, contractors, lenders, and anyone else involved in the project.
• Always have a contingency in place. There is a truism that you never know what you’ll find when you open a wall. Or a floor, for that matter.
• You’re not alone in this business. Network with your peers. Chances are someone else has already solved the problem that has you stumped.
• Every company should have a mission statement and a code of conduct. Make sure yours are prominently displayed on every job site.

People Matter

Heart makes [the redevelopment] business rewarding. Money only makes it possible.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-03-22.

We like to say we are “redevelopers” instead of “flippers” for a couple of reasons:

1. We are not dolphins.
   By the most common measures of animal intelligence (brain weight and the ratio of brain cells to body cells), dolphins are probably more intelligent than humans are. That would make Flipper smarter than me.
2. Flippers have something of a bad reputation.
   Deserved or not, many people think of flippers as preying on the weak or just taking advantage of other people’s misfortune. After all, we buy below market and sell at the top of the market.

While some do take advantage, most of us want to do good in the world. We will even walk away from a deal if we don’t feel we are doing right by the seller. To that end, I want to share a story from a fellow redeveloper, Cheryl Thompson. I met Cheryl though FortuneBuilders, an investor group to which we both belong. She posted this story on the group’s closed Facebook page and gave me permission to reproduce it here.

Last week I got an opportunity to spend time with a woman who was selling her parents’ home. Three bedroom/1 bath. Amazing hardwood floors. She walked me through the impeccable and memory filled home that her father had built in the 1950s. The property in top condition would be worth $90,000. My MAO (maximum allowable offer) would have been $30,000 – $36,000.

She told me how her father had died four years ago, and she bought her mother a condo that would be easier for her to get around in after she had a stroke two years earlier. Now this kind and love-filled daughter had to sell the house. For most, this is the OPTIMUM opportunity. She explained how she was going to use the funds to keep her mom comfortable and safe in her condo with nursing staff and how she was managing all this single-handedly.

As I walked through the house, my rehab hat was making a detailed list of items that would have to be done to the house to get top dollar. My heart hat was listening to the woman’s goals and knowing deep down that I had to use my knowledge to help her, not to fatten my own bank account.

I stopped in the middle of the basement and said to her, “I can’t buy your house. You have too much capital here to be able to take care of your mother with. I’m going to show you how to get top dollar for this house and put the money in your bank account for your mom.”

The tears in her eyes said it all.

We started the walk through again and I pointed out exactly what she needed to do to be able to list the property with a realtor. I told her what to pay attention to and what to let go. I gave her my favorite realtor team’s name and number.

She mentioned that even though her parents had had insurance with State Farm for over 50 years that State Farm had dropped her because the house was now vacant. I asked her who was insuring it…she said, “No one.” I panicked. An uninsured vacant house. At that moment I begged her to call my company, who insures vacant houses before the end of the day. She had 1 hour and 15 minutes to get it done…and $90,000 to lose if something happened to the house while she was getting it ready to sell.

When I was getting ready to leave, we hugged and agreed to stay in touch. I felt like I had run a victory lap knowing that this woman was going to be able to take better care of her mother for at least 1-2 years because of our 30-minute meeting. She would insure it, get it ready for sale, hire a realtor, and feel a little bit less overwhelmed because our paths had crossed.

This is one of the most beautiful things about FortuneBuilders. We have knowledge (lots of it) that we can put to work for great good.

I love deals. All kinds. But the best deal you can ever make is one that will make another person’s life a whole lot better.

Since we started Hermit Haus Redevelopment, I have not had the opportunity to help someone like this. The people we have talked to have many reasons for just wanting out of the house. Either they don’t have the money to do the rehab themselves, or they don’t have the time, energy, and patience an extended rehab requires. Giving these people what they want is not taking advantage of them. Sometimes they see the what’s in their best interest in terms other than financial gain—like my father did when he sold the house he and my mother had lived in for $20,000 less than its “as-is” value. He felt it was worth $20,000 to move out of a house with too many memories and move where he could begin to rebuild his life after Mom died.

If you know of someone who wants out from under a house that has become a burden for them, we are happy to help by buying that house. If you know someone who wants to know how to get top dollar for their house, we can help with that, too.

Balanced Investing in Real Estate

I address a group of investors with Ryan Connell of Grand Coast Capital and Paul Esajian of FortuneBuilders.

This post originally appeared on the Hermit Haus Redevelopment website on 2016-02-20.

We are attending a real estate investing convention hosted by FortuneBuilders this week. Anyone who has ever an event like this knows that you are running from the time you wake up in the morning until the time you fall into your hotel bed at night. There is so much to learn and so many people to meet!

And the people are the best part of it. I met another investor who lives in Milam County, where our ranch is and where we hope to retire someday. Isn’t it ironic that I had to travel to a convention to meet a neighbor with whom I have so much in common?

But the highlight for me was being asked to address a group of fellow investors about investment strategies and how you can be fully invested in various aspects of the real estate economy and still have a comfortable degree of diversification. I hadn’t spoken in public since I left the corporate world a few years ago, and this crowd was the largest I have stood in front of since I left rock and roll behind in the 1980s. Being asked to explain your investment strategies to a crowd of more than 300 fellow investors is very exhilarating and very humbling.

A balanced approach to investing can help you achieve the goal of personal freedom—whatever that means to you.

My points echoed the advice of all my mentors:

• Wholesaling and redeveloping properties should only be one part of your overall strategy. These activities have the highest reward, but that means they also have the highest risk.
• A rental portfolio can help you build real wealth over the long haul, but it is also not without risk.
• Putting your money to work by buying into or investing with a hard money lender can generate moderate income while spreading the risk over a much broader pool than lending on a case-by-case basis, but the returns can be lower.

For the last point, I have a considerable chunk of my investment portfolio in Grand Coast Capital, but I still engage in private money lending. While I intend to increase my Grand Coast investment over time for a more certain return I still enjoy helping my fellow local investors achieve their goals when I have free capital to invest with them.

JP Getty once said that the best way to get rich is to help others get rich. Not only is helping others efficacious, it is the most rewarding path. Helping others is not just part of our mission statement at Hermit Haus Redevelopment, it is our core value.

So I would be remiss in my helpfulness if I failed to include this caveat: Nothing you do in the investment game is without risk. As my dad used to say, “If it was easy, everyone would do it.” What he didn’t say was that if it was easy (or risk-free), there wouldn’t be any profit in it.

 

Home Again

The Hermit Haus team: Carol, Russell, Suna, and me Suna is ready to go home.

Here I am with Than Merrill of Flip That House, CT Homes, and Fortunebuilders Grand Coast Capital took a few investors to see the San Diego Chargers play. Suna is in the front. Paul Esajian stands behind her, and I’m peeking over his shoulder. I blurred all the face except for us and employees of GCC.

Traveling at night, the headlights were bright

And we’d been up many an hour

And all through my brain

Came the refrain of home and its warming fire

— Karla Bonoff

We’re finally home. It was a long weekend in San Diego, but we survived and we learned. A lot. I’ll be posting about what we learned on the Hermit Haus blog over the next couple of months.

More importantly, we came together as a team and had a good time. Thankfully Russell and Carol rented a car, so we were not stuck eating the dreadful hotel cooking. We were able to get away for a few quiet meals, including on nice sushi meal somewhere in SD proper.

Fortunebuilders put on a mixer for those of us who joined the “Inner Circle,” which gives us better access to the big three: Than Merrill, JD Esajian, and Paul Esajian. From what I can tell, Than is the CEO of Fortunebuilders and its subsidiary companies. JD runs the renovation business, and Paul runs the financials, including Grand Coast Capital, a national hard-money lender.

Because Suna and I invested in Grand Coast, we got invited to see the San Diego Chargers play a home game and network with other investors. They put us on a bus and led us up to the Fortunebuilders skybox, where they put on a board of finger foods and booze. We had to leave before the game was over, but that’s okay. I wasn’t really interested in the Chargers. Apparently, nobody else was, either.

But the important thing is that I survived flying there and back again. I’ve never been a fan of airports and airlines, but now TSA seems to be actively everyone to drive to their destinations. If only Suna had the time. I love seeing the country at ground level. What I can see now may all be overly familiar, but that is comforting. At least I don’t have to worry about “special screening” at home or in my car.

 

San Diego

Suna and I waiting to fly out of ABIA yesterday Suna having dinner in the hotel restaurant

Does this look like a $30 meal

I never saw my hometown until I stayed away too long

I never heard the melody until I needed the song

—Tom Waits

Suna, Carol, Russell and I are in San Diego for a Fortunebuilders “bootcamp.” It turns out they have a special meaning for that word that goes far beyond my previous usage. A Fortunebuilders Bootcamp is a large educational event that offers a range of classes to hundreds, if not thousands, of investors and potential investors. Russell is attending the “Internet Intensive” while Suna, Carol, and I are in the “Rental Intensive.”

The Internet Intensive focuses on using the Internet, including a proprietary system called Realeflow, to market to a range of buyers and sellers. Russell is a good choice for that since he is in charge of our back office systems and website.

I’m looking forward to the Rental Intensive and hope I learn a bunch of stuff about managing my rental portfolio.

I can’t say I’m impressed by the hotel hosting the event. The restaurant is overpriced as only a “artistic” or “trendy” place can be. Unfortunately, the quality of the food was not up to the pricing, once again demonstrating the difference between confidence and arrogance. I also wonder if the leadership isn’t looking at the hotel as a distressed commercial property that they can add value to.

 

Bootcamp

Suna and I enjoyed our dinners together, regardless of how “trendy” the restaurant was.

The view from our hotel room was much better than last time. So was the room. Here’s our graduating class with former Dellite and now Fortunebuilder Linda P. with Suna. I am hiding in the back, as usual for a hermit.

Here’s your ticket; pack your bag

Time for jumpin’ overboard

The transportation is here

Close enough but not too far,

Maybe you know where you are

—David Byrne, Chris Frantz, Jerry Harrison, and Tina Weymouth

Suna and I spent the weekend with Carol and Russell at a Fortunebuilders “Two-Day Intensive.” Folks from Houston to Waco who joined last week were there, so it was a networking opportunity besides being a great learning opportunity.

I learned that when Fortunebuilders speaks of “systems,” they’re not necessarily talking about automation. They mean anything that you can reduce to a series of repeatable, coachable steps. The system we focused on this weekend was evaluating houses to buy.

First they taught us a formula to help ensure we make money on every flip. Then they taught us how to fill out an evaluation form that helps determine how much repairs will cost and plug those numbers into the “secret formula” that apparently “everybody uses.” Then they loaded us on buses to walk though a couple of houses and put what we learned into use.

I’m very happy with the quality of instructional design in the Fortunebuilders educational materials. They actually pay attention to good design and adult learning theory, unlike much of the other stuff on the market.

 

A New Hope

Brody was incredulous when I told him he would have to stay at Braesgate with Elizabeth for a few days. The view from our hotel room wasn’t very impressive. The view from the event hotel parking lot was much better.

In the service of “keeping Austin weird,” they have erected these guitar statues all over downtown. Carol and Russell agree that we should work closely together in a new business. Brody was glad we got home safely.

Be true to your school now

And let your colors fly

—Brian Wilson and Mike Love

Suna and I spent the weekend in Austin attending a Fortunebuilders “training” session. Although they presented more information about flipping, which they prefer to call “redeveloping,” that we could possibly assimilate, the three days were primarily devoted to marketing further training and the back-end systems they have developed to support their own redevelopment business, CT Homes.

Carol and Russell also attended, and we sat together for much of the weekend. Russell couldn’t get off work for the Friday session, but he was there for both Saturday and Sunday.

We had lunch together almost every day, but Suna and I were on our own for dinner, when we didn’t run into someone else attending the event. Since I hate to drive in traffic, we stayed at a hotel in walking distance of the event. The weather was perfect and walking to the event (and meals) gave us some much needed exercise. It didn’t take long to develop “conference butt” as we were stuck in uncomfortable chairs for hours on end.

In the end, the four of us decided to formalize our relationship by forming a new redevelopment company, Hermit Haus Redevelopment. The name was Carol’s idea based on the fact that I am so much a hermit. We also decided to sign up for the full package of Fortunebuilder training, including joining their “Inner Circle,” which is supposed to grant us better access to the big dogs. We’ll see….

The main thing I’m looking forward to is learning how to systematize everything. I’ve worked myself into a full-time job as a real estate investor. Hopefully, the systems will enable me to offload some of what has been eating all my time. But honestly, I’ve always been better at developing systems than following them.

 

Peachtree Update

While looking for a gently used range for Peachtree, I found this classic full kitchen. Wonderful! It’s a steal at only $10-thousand. We decided to paint the trim red. It fits the neighborhood, and I think it will “pop.”

These cabinets will look great once all the crap is cleaned off and the sink is installed under the window.

The Peachtree project is coming along nicely. Demolition is complete. The popcorn is off the ceiling. The replacement stove is in the kitchen, and the new countertops and cabinets look superb.

Since Carol will list the property when it’s done, she came by to see the progress. She liked what she saw.

While we were thinking about what we wanted to do for lunch, she mentioned that Russell wanted her to go to an hour long presentation by a company called Fortunebuilders and asked if I wanted to go with her.

The hour long presentation turned out to be a two-hour pitch for a three-day event at the end of August. I was impressed and signed up for the three-day, as did Carol.

Fortunebuilders seems to focus on education in the real estate business. They introduced me to the concepts of wholesaling and reverse wholesaling in this event. They also have real systems that should take some of the load off of me. I have definitely turned this business into a full-time job. Maybe they can help me learn how to get back to enjoying my retirement.

Wholesaling

Getting a property under contract and selling that contract

Reverse wholesaling

Wholesaling to a known buyers list

I look forward to learning more in August.