Read and React – Outliers by Malcomb Gladwell

Earl Nightingale, an early pioneer of personal development, once said that “success is the progressive realization of a worthy goal.” By that definition anyone that has set a goal, and is in the process of achieving it, is successful.

So I was intrigued when I picked up a copy of Malcomb Gladwell’s book, Outliers – The Story of Success. Who would Mr. Gladwell consider successful? What were his prerequisites? What would he conclude led to their success?

Gladwell says opportunity – being in the right place at the right time, is essential. That’s a major reason Bill Gates and the Beatles, among others, achieved worldly success.

It’s also 10,000 hours. Mr. Gladwell did extensive research and discovered that successful people spend 10,000 hours or more mastering their craft. He found few prominent musicians and athletes that would admit God-given talent played a role in their success. It was preparation.

I generally agree with both of these conclusions. Timing is everything. But I must steal another quote from Earl Nightingale here. He said once that “luck is what happens when preparedness meets opportunity.”

If Bill Gates wasn’t intellectually aware when his moment to shine came along then the world would be much different today. It was Gates’ endless study, easily above 10,000 hours, that made him an expert in the computer industry.

The mistake that Gladwell makes in Outliers is assuming that being in the right place at the right time PLUS spending 10,000 hours preparing EQUALS success. He’s leaving out the two most crucial assets that every successful person must have BEFORE opportunity and preparation ever come into play:

1. A Goal.
2. A burning desire to accomplish that goal.

Without a goal, and a burning desire to accomplish it, it won’t matter where you are or how much time it took you to get there. You’ll be like a cork in the ocean, a ship without a rudder.  Success will elude you.  And your bank account.

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The Benefits of a Bidding Service

The conversation usually starts like this – Marty, I want to buy a house at the auction.  It’s in my neighborhood.  I know what it is worth.  I’m confident I could rent the house and make $300 a month in cash flow.  Or, I could flip it and make a quick $10,000.

Then the million dollar question comes – how do I do it?

This question is usually followed by more questions:

  • Can I go to the trustee’s sale myself and bid on it?
  • How many people will I be bidding against?
  • How do I know what the opening bid will be?
  • Can I inspect the property first before I bid?
  • How do I know if the title is clear?
  • How much money do I need?
  • Do I have to pay all cash?
  • What if the house is occupied?
  • How do I get the owner out?

If you’ve never been to a trustee’s sale here in Maricopa County before then I suggest you go – just to observe.   You’ll quickly see it resembles the floor of the New York Stock Exchange.  Things move very fast.  The Arizona Republic just did an excellent job of explaining this in a recent article, Phoenix-Area Housing Auctions Fast and Furious.

This is why our firm uses a bidding service.  The information they provide us (i.e. opening bid amounts, title reports, property pictures, bid placement) is extremely valuable.

Earlier this week we bought a house at 2596 E. Westchester in Chandler.  The auction date for this property had been postponed 16 times before it finally went to sale (see the video below).  Now can you imagine going downtown to the trustee’s office 16 times over 9 months in order to purchase this home?  I can’t.  I have better things to do.

Our bidding service, AZBidder.com, was profiled in another Arizona Republic article last Sunday.  Dan Mayes runs AZ Bidder and was interviewed for the story.  He explains that his service makes the process more transparent.

I couldn’t agree more.  If you’re considering buying a house at a trustee’s sale, whether it’s here in Arizona or elsewhere, then find yourself a reputable bidding service and use them.  Pay their fee.  Consider it a cost of doing business.

And with gas prices nearly $4.00 a gallon using a bidding service could be more environmentally friendly than driving a Toyota Prius.

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Cutting Off Your Nose to Spite Your Facebook

Digital Equipment.  Sears and Roebuck.  The Republican Party.  Yes, you’ve probably heard of them.  But are they recognized today as being progressive and forward-thinking like Apple, Wal-Mart or the Democratic Party?

Clayton M. Christensen, author of the book “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” concludes that successful companies and organizations fall from grace, and ultimately fail, because they don’t embrace disruptive technologies.

What exactly is a disruptive technology?  For Digital Equipment, a mini computer company that thrived during the late 1980’s, it was the PC.  Digital was so entrenched in their business model they failed to explore other rapidly developing opportunities.  Perhaps it was arrogance.  The company’s managers may have concluded that the PC was irrelevant.  A more likely explanation is that they were just plain ignorant.

According to Mindy Finn, a conservative internet strategist, the disruptive technology that led to the Republican Party’s doom during the last presidential election was social media.  While right-leaning shows like Sean Hannity and Rush Limbaugh dominated the radio and TV airwaves at the time, Republicans had a weak presence on social media outlets like Facebook and Twitter.

So if the failure to embrace disruptive technology can bury the likes of Digital or the Republican Party what could it to do you, the small business owner and entrepreneur?

I posed this question to my good friend, Jim, just last week.  Jim and his Dad own a small home building and remodeling company in northern Illinois.  Their business is in survival mode.  During our conversation Jim actually bragged to me about not being on Facebook.  He had no idea how powerful this social media outlet could be for growing his business.  That is, until I set him straight.

Don’t you want to be friends with every past, present and future client of your company, I asked.  Wouldn’t it be good for your business to have a fan page that every past, present and future client could visit to view before and after pictures of your projects?  What if you uploaded pictures from active job sites with your Blackberry?  Do you think that would make potential clients feel more comfortable about hiring you to fix up their home?  What if you also used this page to post helpful home maintenance tips and promote special offers?  Would your customers find that valuable?  Jim couldn’t help but answer yes, yes, yes and yes.

Some of my trading-time-for-dollar 9 to 5 buddies laugh at me for being so active on Facebook, Twitter and my blog.  They think it’s un-manly and a waste of time.  I guess I get that.  How could having a social media presence help them get a raise or a promotion at work?  It’s difficult for them to understand how influential these mediums can be for relationship building.  I’m happy to trade in my man card if I get new business opportunities in return.

I’ve discovered that successful entrepreneurs don’t care about what other people think.   And they don’t ignore disruptive technology – they create it.

 

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Read and React: Affordability the Key to Recovery

To Christians, Jesus was the messiah.  God with a bod.  But in his hometown of Nazareth Jesus was just another guy.  His own family thought he went crazy after he left home to teach in the synagogues.

This is why it came as no surprise that my younger brother didn’t seek advice from me.  I mean if Jesus’ own family wouldn’t listen to him why should mine be any different?

My brother was in the market for a rental home.  You know, the standard 3 bedroom, 2 bathroom, 2 car garage kind.  Why not buy instead I asked?   It makes sense.  Buying a home today is more affordable than ever.  Prices and interest rates are historically low.

My suggestion was sound.  I’ve been in the business for 10 years and have flipped more than 200 houses.  I know what houses are renting for too.  Based on my brother’s criteria I knew his monthly mortgage payment would be at least $300-400 per month less than rent.

None of this mattered to him.  I was, after all, his brother first – not a real estate professional.

Eventually he figured it out on his own.  After looking at trashed rental properties for three weeks straight he stumbled upon a bank owned house.  He crunched the numbers and finally came to his senses.

I just read an article in today’s US News and World report titled Buying Beats Renting in 80% of US Cities. In it Trulia’s Ken Shuman said “With home prices nearing a double-dip and more foreclosures expected to flood the housing market over the next two years, the decision between renting and buying a home across most of the country has clearly moved in favor of buying.”

Duh.  Think about it for a moment.  Hundreds of thousands of homeowners have been foreclosed on.  The mortgage underwriting guidelines are very strict.  So for the few that can qualify there are some great deals to be had.  Everyone else has to sit it out for 3-5 years and rent.  Rental prices go up.  It’s simple supply and demand.

Affordability is the key to recovery.  Now is the time to buy, whether you’re looking for a home to live in or a rental property.  That applies here in Arizona and 80% of the rest of the country.  My brother didn’t take my advice but hopefully you will.

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One Day Listed, One Day Sold

$157,401. We bid $157,401. That’s one dollar over the opening bid. We won 51st Place at a Maricopa County trustee’s sale on April 19th (this is same house I wrote about last week).  Winning for one dollar over the opening bid that means there were no other bidders competing against us at the auction.

And that is scary, especially in this market. Since January 4th my firm has placed bids on a 160 houses. We’ve won 6. That’s 1 in 27. I’ve watched us get outbid on some houses by more than $50,000.

So when I found out we won the bid for a dollar over my palms started sweating. How could that be? No one else bid? Did I miss on the market analysis? Was the house completely trashed?

The answer is no, I didn’t miss on the market analysis. And the house was in great shape. We put in new appliances, carpet, fixtures, door hardware and blinds. The pool had to be cleaned. That’s it. Our rehab cost was about $8,000.

The house went on the market one day and sold the next. Our contract price $214,900 and we close May 27th. We’ll net about $25,000. Not bad.

It reminds me of a bumper sticker I saw once, “I may not always be right, but I’m never wrong.”

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Read and React: The Home Affordable Modification Program Strikes Out

Many baseball purists would argue that Babe Ruth was the greatest baseball player that ever lived.  Did you know that his career batting average was .342?  That means when the Big Bambino stepped up to the plate he put the ball in play 34.2% of the time.

This got me wondering – how can someone who was successful about 1/3 of the time be considered great?

Imagine you were a postal worker.  If you delivered to one out of three houses on the block would you keep your job for very long?  What if you were an auto mechanic?  Would fixing 33% of the cars correctly keep you in business for more than a month?

Last week the Wall Street Journal reported that the Federal Government’s Home Affordable Modification Program has helped 630,000 homeowners modify their loans.  That’s not very good considering they originally claimed it would help over 4 million.  Only 15% of those 4 million got any help.

The article went on to explain how Pennsylvania has a much more successful, and less expensive program, that’s been helping homeowners stay in their homes.  The federal program costs the tax payer about $13,600 per modification– Pennsylvania’s $1,620.

Obviously the states can do a much better job of managing this crisis than the feds.  It’s like Milton Friedman once said, “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”

 

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The Four-Day Fix and Flip

I made my way to 51st Place today.  Our firm bought this house on Monday, April 18th at a trustee’s sale on the Maricopa County, Arizona Courthouse steps.   By Tuesday at 5a we had our contractor, landscaper and pool cleaner all at the home to start the job.

It was finished today – our crew repainted the inside, installed new ceiling fans, light fixtures, door hardware, appliances and carpet.  Our landscapers hauled away a trailer full of junk.  The pool tech dumped about 10 gallons of chemicals into the water to get rid of the yucky green stuff.

Four days.  That’s all it took to go from acquisition to list ready.  Time is money and if you’re going to make a business out of fixing and flipping homes it’s best to have a system – and a team of professionals that can get the job done fast.  We can generally get a property we buy at the courthouse steps prepared for the retail market in four days – 7 if we need kitchen cabinets or the pool is in really bad shape.

Here’s our checklist once we buy a house at the auction:

  1. Purchase a vacant insurance policy.
  2. Get all the utilities turned on.
  3. Dispatch our general contractor to the home to change the locks and make a supply list.
  4. Send the Realtor the information for the home to list.
  5. Stage it.
  6. List it.
  7. Sell it.

If you’re just starting out you may not be able to turn a house this quickly.  Don’t sweat it.  It takes time to establish relationships with the various trades.  They won’t put you at the top of their list immediately.  However, if you pay on time and treat them to a 12-pack of cold beer occasionally (once the job is done of course) you can bet they’ll work hard to meet your deadline.

Happy Friday everyone.  Cheers!

 

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Read and React: Real Estate Appraisers Rise Up!

Once again we can all thank the federal government and The Dodd-Frank Wall Street Reform and Consumer Protection Act for punishing the small business owner (i.e. the real estate appraiser).

Last Friday J. Craig Anderson of the Arizona Republic reported about the law in an article titled, Real Estate Appraisers:  Low pay imperils industry.

The Dodd-Frank Act created the Home Valuation Code of Conduct.  It prohibits mortgage brokers and Realtors from communicating with the appraiser.  The worst part is the law requires a third-party management company to “assign” these appraisals out.  The logic our benevolent leaders used to justify this new system is that it will take pressure off the appraiser to “hit the number.”

That sort of makes sense.  But wait.  Guess who owns these appraisal management companies?  The banks that are lending the money!  And of course, the management company takes about half of the $350-400 fee for themselves.

So this so-called pressure the appraisers were feeling from the mortgage broker (and the home seller, buyer’s agent and listing agent) has been removed – only to be replaced by pressure from their new clients – the banks.

Instead of feeling influenced to appraise a home too high our brothers and sisters in the appraisal industry can now be influenced to appraise a home too low whenever it’s in the bank’s best interest.  And I can tell you from personal experience this happens – a lot.

To recap, our federal government creates a law that helped the banks invent a new revenue stream while taking away from the little guy.  Welcome to the United States of Unintended Consequences.

 

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Be the Bank Using Your Self-Directed IRA

Anything allowed by law.  That’s right – you can use the money in your IRA account to invest in anything allowed by law.  Best of all, it grows tax free.

It’s actually easier to talk about what isn’t allowed by law then what is.  So let’s start there shall we?

You can’t use a self-directed IRA to invest in:

  • Collectibles (i.e. coins, art or wine.)  Why wine?  Because if you are a wine drinker, or live with someone who is, your “portfolio” could easily be consumed.
  • Insurance annuities
  • Non-arms length transactions (an example would be investing in your brother’s new gold buying business.)
  • A drug cartel (that should be obvious.)

A self-directed IRA can be used to invest in:

  • Real Estate
  • Promissory Notes
  • Deeds of Trust
  • Mortgages
  • Automobile liens
  • LLC memberships
  • Cattle
  • A bunch of other stuff I don’t have time to list

Yes, you can use your self-directed IRA to buy and sell cattle.  You’ve heard of cow tipping before.   But, I bet you didn’t know about cow flipping!

Most people have no idea you can do any of this stuff.  And why do you think that is?  It’s because the financial advisors of the world don’t get paid if you self-direct.  When you decide to take control of some or all of your retirement money they lose their commissions.

We recently started working with a new investor.  She had a 401K plan from a previous employer with $350,000 in it.  Too bad that was three years ago.  When she checked the balance last December it had dropped to $270,000.  Her 401K had become a 201K.

She rolled the money over into a self-directed IRA and partnered with us on two seller carry back deals, both located here in Arizona.  Her IRA is the bank – lending money to a buyer we found for her at 9.95%.  Check out this video to learn more:


 

 

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Staging a House the Martha Stewart Way

“Martha Stewart is now under house arrest. So she’ll go to her $40 million 153-acre estate. So she’s going from the big house to an even bigger house.” -  Jay Leno

T.J. Maxx.  Target.  Burlington Coat Factory.  Walmart.  Kirkland’s.  Goodwill.  Did you notice I didn’t mention Kmart?  That’s not because we don’t buy our staging items at Kmart.  It’s just because we don’t have many Kmarts around here.  If we did, I’m certain some of our stuff would come from the Martha Stewart Living line.

And for what it’s worth, I forgive Martha for the whole insider trader thing.  She’s paid her debt to society.  But I still don’t tune into her show – mostly because listening to her talk is about as exciting as watching a car rust.

So why stage a vacant house?  Here are my top three reasons:

  1. A high percentage of buyer’s start their search for a home to buy online – a home that is staged looks more, well, homey.
  2. Staging items like furniture, pictures and plants give the buyer an idea of how much space they will have in the house for their own stuff.
  3. Lived in homes, or homes that looked lived in because they are staged, usually sell faster.

We like to stage the kitchen, master and hall bathroom and master bedroom.  The family room isn’t a bad idea either.  Our budget is around $500.  I’m sure we’d make Martha proud.

For more tips check out this video:

 

 

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