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.”

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.