Wealth Note to You, the Reader––
(click here to listen)
At this moment we’re in an extraordinary time of change and almost unprecedented opportunities, opportunities not seen since the days of the Savings & Loan melt down and the Resolution Trust.
Fortunes were made in that time of change and fortunes will be made today as we continue to muddle through the aftermath of the sub-prime lending rampage and real estate “correction”, as pundits prefer to call the catastrophe.
We don’t really know when ‘retail’ real estate values will truly return to ‘normal’, if we remember at all what normal was. But we do have choices, choices that may well transform your future if you take action now.
For some real estate professionals, brokers and sales associates accustomed to making their living on commission income, their choice may have been to go back to the apparent security of the Day Job they left behind– if that day job still exists at all. Others are adapting to the new environment, seeking out the many new opportunities that change always bring.
As investors and real estate developers, we face our own challenges. Investors wonder when or if the market values will be restored to the properties they already own; for now many if not most are waiting. Real estate developers are back at work, but it’s not what it was. What is needed is a New Paradigm better suited to today.
This book is for those willing to look at Change as Opportunity for personal and professional growth. Real estate is a marketplace that always adapts to new realities. Housing is a “commodity”, like food and clothing, that will always be central to human needs. Upscale or down, everyone “needs a place to live”. Real estate developers, investors and brokers make this work: We are the “hands on” facilitators.
There is much you can do, right now, to benefit from this always-changing environment. Fortunes are made in times of economic dislocation and change–wealth is created.
In the pages that follow we will look at Seven Strategies, and Action Steps you can take right now, that will re-position your investing for today and for your Future. Along the way we will also look at Pitfalls–traps–that await the unwary.
Introduction– A little background
Few of us come into the real estate business “naturally”. I don’t think there’s a gene for it. There’s a new crop of real estate professionals coming up trained in masters degree programs devoted to real estate; you can earn an MBA in real estate. Chicago real estate billionaire Sam Zell always knew he wanted to do real estate, and he did it well. Interestingly enough in what’s called “distressed” real estate. We’ll talk more about that. Many more seem to end up in real estate by default, often working part time as a sales associate in some retail brokerage firm, “showing the pretty houses”.
In my own case, I was celebrating my freshly minted college degree and heading off to graduate school to study history when my Uncle Lee, the family real estate guy, suggested I consider a career in real estate. I demurred. (No mean commercial career for me!) Not too many years later, with a young family and a low paying job as a college admissions counselor, I joined the legions of others, testing the waters as a part time real estate salesman. (Uncle Lee was delighted.)
Within months, as you might guess, I was making more money fooling around in real estate part time than I was working full time for that little college. This was all in Hyde Park, on the south side of Chicago. And Lord knows 25 years later, somehow, I found myself back on the South Side. (Just how that happened is a story for another day.)
Initially, I made a “contingent” commitment to the real estate business (there’s a real estate word for you). I’m sure this is familiar to many still in the field after a number of years, particularly those who may have shared my notion then that “I’m only going to do this for five years. I’ll be able to either retire or go back to a recreational career in academe.”
Well, I didn’t go back to the Hallowed Halls. But I can say I never quit reading. I didn’t quit writing. I never quit teaching, and decades later I’m still messing around in real estate. There’s something to be said for “You can’t teach old dogs new tricks.”
Never one to follow convention, I did my first real estate syndication – an investment partnership – within a few months of coming into the business, and made that a specialty for some years. The reason I was able to do that was, being a professional student – which one becomes when you commit yourself to years of graduate school – I read a lot about the business I was now in. We all understand taking that broker’s exam is like getting your bachelor’s degree: All it is is a license to start learning about the business.
Chapter One– ‘Jump Starting’ your business
Call it a ‘work around’ or thinking outside the box, when business stalls it’s time to innovate. Are there other ways to work with the market you already know?
My first listing was a “gift from the boss” to help get my business underway. The property was a little three-unit commercial building, down in Hyde Park. The three stores were on 53rd Street, “historic 53rd Street” but nobody thought about that then.
It had just been built, a cinder block building with a brick facade, the cheapest possible kind of construction. And the listing was for… I don’t know, $175 thousand, or whatever, but it had three great leases on it.
So, I thought, ‘I’m going to score on this one! I’m going to get out of these $25 thousand condos I’d been showing...’ (which are now turning over for $150-200 thousand).
But you know what? I couldn’t sell my new commercial listing. No “savvy” investor was going to put money in a commercial property, a retail property in Hyde Park. (“Bring us one on the North Side!”) I’m sure many folks, likely in the business in urban and suburban neighborhoods, have to fight the same battles today, getting retailers or investors to come to “problematic” locations.
But through my reading I learned of a New Thing . And you may find it incredible. It was a new thing then and so very familiar now. That was limited partnerships or “syndication”.
WHAT TO DO WHEN YOUR SALES SLOW
Frustrated by my lack of quick success, I speculated “If I can’t find some investor with, at that time, perhaps 40 thousand dollars... (There was no 90% financing or hundred percent. You had to have 20% down, in real money.) If I couldn’t find an investor with $40, 000, maybe I could find 8 investors with $5 thousand.
Since time immemorial, merchants and investors have pooled money to invest in costly or high risk ventures. “Smart Money” in Hyde Park, in those days, figured my little commercial building was both costly and high risk. I was able to tie up the property with a note. (I certainly didn’t have any money!)
Where did I get this ‘inspiration’? Because I’d been reading about syndication. “Syndicates” flourished in the late Middle Ages to fund exploration and trading expeditions and, later, to establish colonies. Such partnerships and joint ventures built much of our country and continue to do so today.
Beginning in the 1960s, the Securities and Exchange Commission (SEC) established rules permitting real estate developers and promoters to sell to investors “limited partnership interests”, in fact securities, like stocks or shares in a company, to fund major projects.
One of the first was the syndication of the Empire State Building (think the Willis Tower of today). Thousands of small investors were enabled to “own” a piece of the Empire State Building. The offering, in thousand dollar units, sold out in days, raising the equity required to buy the property. The details of this path breaking venture were spelled out in the professional journal Real Estate Review.
I got together with a neighborhood attorney. (I think he went to school on this subject on my dime.) I promised him five grand but that was all right. We did a partnership agreement and you know what? I sold 10 partnership units, “just like that,” at $5 thousand a pop. The “extra” $10 thousand was for the legal and other startup costs.
Of course these investors were happy with having a piece of the deal, rather than the whole thing.
MAKING MORE $$ BUYING THAN SELLING
When it comes to “structuring” real estate deals, as you might guess, I earned the real estate commission for having sold the property to the partnership I had formed. I received a payment for “selling my contract rights” to the partnership.
Over the next few years I got a management fee for looking after the property. And then I got a so called “subordinated equity position” of 10%, which meant, once all the investors got their money back upon liquidation, that I would stand in for 10% of the profit. But until that happened, until I resold the property at a profit, my 10% interest wasn’t worth a dime.
When I in fact eventually sold the property a few years later – because ultimately investors did figure out that maybe one might invest in commercial property on 53rd street – I collected a real estate commission again (and my 10% of profits).
IT’S REALLY ABOUT ENTREPRENEURSHIP
Over the next several years, the next 5 or ten years, I followed that model in most of my early rehabs, my early condo conversions... They were all limited partnerships. (I never did find that high rolling investor who was going to put fifty grand in my hands to invest on his behalf.)
Today Limited Liability Corporations (LLCs) are used in much the same way: to raise money from the public.
The message in all of this? If you take entrepreneurial leadership in a situation, if you’ve got the fortitude and belief in the project, and you put your earnest money down to get the Contract Rights, then you have something to sell to an investor.
If you simply find a piece of property – and this strategy is as good today as it was 30 years ago – you find a piece of property you think is going to be a great deal for some reason. You believe the property is a good investment, a possible condominium conversion, a piece of vacant land that you’re convinced some fast food franchise would just love to have.
And having found it, you seek out that “deep pockets” investor and lay it all out about what a terrific deal it is. That investor has two choices. What do you think they might be? Number 1, if you’re lucky, they merely take a giant bite out of your deal because, friend, you’ve got a great idea... (but no money, no control). Or (#2) they simply go around you and buy it themselves.
You know the line. Show ‘em the property, explain the merits, and their question to you is, “If you think it’s such a great deal, why don’t you buy it yourself?” With luck, maybe you get a commission; the investor gets the profits.
AN ALTERNATIVE BUSINESS MODEL
There is another scenario, call it an alternative business model, where you are no longer working for the sales commission and become an entrepreneur– You’re going to ‘buy it yourself’.
When we have this entrepreneurial business model in mind we view the marketplace differently, as actors (some like to say Players) not merely as agents for others. When we understand the mechanics of the industry, if we have schooled ourselves in the use of Tools and Techniques such as the use of limited partnerships and LLCs, then we are in position to act.
It’s all about using your available resources, your money. To plunk down the Earnest Money, recognizing that if the deal doesn’t fall in place, that maybe your money is gone– That’s your entrepreneurial move. And that is putting your money where your mouth is.
But, putting that money down, securing the Contract Rights to the property, is also giving you absolute control of that transaction, in a sense the asset itself, for a period of time. And at that point only do you sit down with one or more investors...
TIP– I still counsel against working with a single investor. I don’t want anybody having that much leverage or control over my life. I will assemble a group. That way, no single person has so much money in the deal that they can yank my chain whichever direction they care to, right or wrong. That business model, assembling a group of investors, is still the operative model and applies even to the little niche market that we’ll talk about shortly.
Lack of ready cash does not necessarily deny you the opportunity to be a player. Not if you have schooled yourself in the protocols of raising money from the public.
Investing time and energy learning about partnerships and syndication is modest in comparison with the rewards available to successful entrepreneurs.
Your investors are interested in the fact you took initiative; that you control the deal. Why you did that is revealed in the quality of the proposition, the benefits available to them if they choose to participate. It’s your knowledge of the marketplace that intrigues and reassures them, not your liquidity or FICO score.
Make your proposition unique. There’s nothing more unique than a new and highly profitable niche the investor otherwise has little access to. For years my favorite niche has been Distressed Real Estate.
Distressed real estate is an industry niche market in its own right. It’s a piece of the business I came to late. Not “too” late, because it’s bigger today than when I turned my hand to it over 30 years ago.
Are you presently involved in, or moving in the direction of, or actually taking those seminars about “doing foreclosures”, short sales and all the rest? And maybe even buying those lists, subscribing to those wonderful lists and getting those reams of paper over the internet? Well, welcome to My World... At least up to a point.
There’s a whole new generation of seminars being floated today that purport to disclose the nuances, the specialized methods used to reap the rewards(!) of the Short Sale. This is promoted to real estate professionals as a strategy for securing discounted, reduced price (mostly residential) properties for the benefit of bargain hunting home buyers or investors.
I don’t fault the propriety or motivation of those pursuing short sales. Or those figuring out how to negotiate with REO bank-owned sellers. What I don’t understand is why one goes into this specialized market – with the extra skills and work it entails – merely for the compensation to be realized as the broker. All this work and expertise for a few thousand dollar commission?
My hat’s off to those learning this new marketplace. It’s real and this market will be with us for awhile. But to pursue preforeclosures and short sales as a band aid of choice for one’s flagging brokerage business is to miss an extraordinary entrepreneurial opportunity.
Have you brokered (sold) a property for an investor or dealer? You may have been focused mostly on your commission check, and properly so. But recall who walked away with the Serious Money? Most likely it was the seller. On which side of the table would you prefer to be sitting? Seller or broker? Just how do you “switch sides” and move the to the Money Side?
If there’s an underlying message it is this: There are amazing opportunities out there today due to the extraordinary rise in foreclosures in every market. Foreclosures are, by definition, distressed real estate. Taken collectively, for our purposes, foreclosures are a niche market.
Building Wealth on The Fast Track. In any market distressed real estate presents opportunity for investors and dealers. Those who school themselves in what’s required to respond to the opportunity will prosper.
Key to capitalizing on the situation is entrepreneurial intervention. Pick your market segment, perhaps single family residential because of the easy entry and low risk, and take action.
In fact any market segment, including commercial, will do. If you have the capital to pursue the higher priced properties.
Taking positive action is the intervention; buying and fixing is the intervention. Left alone, that distressed property will languish and perhaps deteriorate further. Unlike the investor’s incremental increase in value over time, restoration of value to a distressed piece of property results in an immediate increase in value. It’s what we call “building wealth on the Fast Track”.
• Google “Entrepreneur” & “Entrepreneurship"
• Scan your local Multiple Listing Service (MLS) for six (6) projects “too big” for you, but nevertheless “interesting” (look for apartment buildings, smaller strip shopping centers or commercial buildings).
• Answer the question: “Why are these deals interesting?” (See Supplements for worksheet.)
• Put together a list of self-declared or potential Investors...
This is the Introduction and first chapter of the e-book How I Made My First Big Payday in Real Estate (and How You Can Too). I am distributing this book (FREE) to my program members, friends and readers of this web blog. You will be able to download a copy at the links shown below.
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