Ed, I am CALLING you out! - Posted by alan

Posted by alan on July 19, 2002 at 24:54:20:

Jim,

Thank you for your comments.

My point was to show that in Calif. that to get a “desireable” property (near major met. areas) in a desireable area at a “discount”, is near impossible. The Campo area that Ed spoke of is not desireable. It is considered a border crossing area for illeagle aliens. I would think that it would be hard to find a property and then try to find someone that would take your newest “headache” off your hands (via rental or LO). This is my opinion and I would like to see what Ed would call a “deal” in this area. Who am I going to rent to? Possibly illegal aliens, border patrol guys or some guy who wants to run a meth lab in the CA “outback”?

I travel ALMOST every week out of the year. I have been to 49 of the 50 states (No to Alaska) over the past 3 years for my work.

I am not being condensending that I believe So. Cal is the best place in the US (or World) to live. Yes we have problems, but I would not change it (except to move to Santa Barbara where it is more “peaceful” & expensive). I would live no other place on the planet unless it was south of Santa Barbara and along the coast.

I have also lived other places, despite the fact I am a “Native” San Diegan. Those stops have included Miami, Houston, Dallas, Spain (via USAF), Denver, Bakersfield and Los Angeles.

Eugene ORE, one of the locations you mentioned, is one of my favorite visits. It is very pretty. Properties can still be had for a reasonable price and it appears that one can get most of a mortgage paid for by a tenant. Most properties, however, are somewhat aged. I am a “hands-off” type landlord and do not wish to spend time and $$$ on fixing things. It is my preference to find newer homes (at a decent price) that have fewer problems.

I have never spent time in ATL, but have flown thru there on my way to other locations. I do know of people who do live there and what you say is basically true. Homes are much more affordable in ATL than they are in CA. But please note, I am 3hr. time change and a 5 hr. flight away from any property I would wish to purchase in your area. It would not be a wise business move to purchase a home so far from my home base.

However, the “closest” locations that fit my criteria (positive cash flow with very low down, newer type properties) are either in Hemet or the California Central Valley (Visalia, Bakersfield, Fresno, Modesto, Porterville). This area is a 4-6 hr drive for me. Many of these props can also be had for less than 100K. It appears, to me, that “deals” do not exist in So. Cal. for the reasons I mentioned in my earlier post.

My “REAL” complaint (if you can call it that) is that this forum caters to a concept of buying a home with little or no money down. I believe that these concepts (no money down) work best in a “down” market (when cash is at a scarcity) vs. one that is “red-hot” where everyone has equity. You can pick up a property on a discount and it is easier to cover the mortgages with the rents.

I recently sold my residence (upgraded to a larger house) and had no fewer than 8 offers in a 2 week span. ALL offers were cash deals and I would have laughed at any type of “creative” deal as a creative deal would not have put 100k cash in my pocket like the sale of my house did. My main reason to sell my residence was that I wanted (or needed) the 100k in cash vs. renting out my “old” residence at a small profit. If you had been in the CA RE market in the early to mid 90’s, you would have seen CA prop. values drop on an order of 5-10% annually. I had no intention of taking a 5-10% hit before grabbing my $$$. Hindsight is ALWAYS 20/20 (my old house could go for 30-50k more next year), but I took the money off the table and I am happy with my decision.

Alan

Ed, I am CALLING you out! - Posted by alan

Posted by alan on July 17, 2002 at 18:08:12:

Ed,

I have recently read a number of your posts. In one, you told a guy that the situation he was looking at was not a “deal”. Your reasoning was that rents x .75 was not greater than his mortgage payment (including tax + ins). It appeared to me that he was in a “break even” situation. Although he was in a break even scenario, he would reap the tax benefits of owning (and depreciating) a property. I do not know what you call a “deal”, but my definition is anything that supports itself without my $$$$$. Appriased “value” (imho) is secondary due to the fact of the “wild rides” we have had (recently) in the Calif. marketplace. If you recall the early 90’s, people were LOSING 5-10% of their home values PER YEAR in So. Cal.

I do not know where you live, but I live in So. Calif. I believe you (or ANYONE else) would be hard pressed to find a decent (read “turnkey”) property at a discount at this point in time. OWC is not a term used much today. If it is used, the “term” is usually 9-11% with a fairly quick cash out. Everyone wants a “seat” (their cash) when the music stops playing (just like the stock market of 2+ yrs. ago). Most everyone wants CASH and to be cashed out, TODAY. It is my belief that you can not buy “turn-key” properties today (like you have in the past) in So. Calif.

In addition, ANYONE with a pulse (almost) can get a 100% financing on an investment property. All it requires is 80% LTV @ 6.5-8.5% interest and 20% LTV @ 12-14%. Scenario #2 is 10% down, and an interest rate around 7.5 - 8.5%. The “problem” is that these financing structures would drive most to bankruptcy within a few payments of being missed. These types of “deals” would be “alligators” for most investors. At least those in So. Cal. If a renter could buy a house for as much as rent, most would. As a result, it is hard to create positive cash flow properties.

With avg. home prices in Cal. hovering around $300K and EVERYONE has equity in their homes, there is no one who wants to (or needs to) do a discounted deal. Offering prices in San Diego (my hometown) are now EXCEEDING asking prices (just like San Fran).

So, my question is, how do you do “deals” in a red-hot So. Cal market where financing turns almost ANY deal into an alligator?

Perhaps a nice purchase in Barstow or Death Valley should do the trick? Wait 100 years or so and the Los Angeles subarbs should be encroching! The problem: Unless there are significant changes to human longevity, I will be dead LONG before my property in Death Valley appreciates.

Alan

PS. Maybe those no money down deals work in Kansas City, Houston, or Souix Falls, but WHO wants to live there? Let alone who will want to live there in the future. As Gen. D. Mac Authur once said, “Know where they are going and get there before they do.” That is the crux of the real estate market.

Out!

Brokers puff - Posted by Donald

Posted by Donald on July 20, 2002 at 04:54:40:

Alan

Don’t be brainwashed by ‘Brokers Puff’.
Donald

Re: Ed, I am CALLING you out! - Posted by Ed Garcia

Posted by Ed Garcia on July 18, 2002 at 03:31:08:

Alan,

You’re calling me out ha, is this going to be a shoot out at the OK Corral?

I’m going to segregate your post in order to properly cover your questions.

QUESTION:

I have recently read a number of your posts. In one, you told a guy that the situation he was looking at was not a “deal”. Your reasoning was that rents x .75 was not greater than his mortgage payment (including tax + ins). It appeared to me that he was in a “break even” situation. Although he was in a break even scenario, he would reap the tax benefits of owning (and depreciating) a property. I do not know what you call a “deal”, but my definition is anything that supports itself without my $$$$$. Appriased “value” (imho) is secondary due to the fact of the “wild rides” we have had (recently) in the Calif. marketplace. If you recall the early 90’s, people were LOSING 5-10% of their home values PER YEAR in So. Cal.

ANSWER:

Alan, many investors make the mistake of taking their gross rent, subtracting the mortgage payment, taxes and insurance, and what’s left over is considered the positive cash flow of the deal. This is incorrect. They would have seen the deal the way you did and also would have thought that they had a breakeven deal.

What the investor left out was expenses and vacancy. This is also why many investors get turned down for loans. When they pencil out a deal and use the first system they will show a break even or positive cash flow, when the bank is using the formula that I shared with you, hitting the deal for 25% for taxes, insurance, expenses and vacancy, the bank will have a different number.

If the bank sees that you’re shorting yourself or don’t know how to figure a deal, they’re not likely to lend to you.

Also, I will agree that every investor sees a deal differently and will accept different profit percentages. But they all should know how to properly figure a deal when expensing it out.

QUESTION:

do not know where you live, but I live in So. Calif. I believe you (or ANYONE else) would be hard pressed to find a decent (read “turnkey”) property at a discount at this point in time. OWC is not a term used much today. If it is used, the “term” is usually 9-11% with a fairly quick cash out. Everyone wants a “seat” (their cash) when the music stops playing (just like the stock market of 2+ yrs. ago). Most everyone wants
CASH and to be cashed out, TODAY. It is my belief that you can not buy “turn-key” properties today (like you have in the past) in So. Calif.

ANSWER:

Alan, believe it or not, I’m a Native Californian. I was born in Glendale California, reside in Alta Loma California, and my business is in Rancho Cucamonga California.

I lived in San Diego California for 2 years, and go there at least 6 times a year.
I realize that right now there is a shortage of housing in San Diego and so the market is sizzling hot. But I can take you to Campo and other suburbs of San Diego and there are plenty of deals. I will agree that the market is hotter then it was 2 years ago, but then again, 10 years before that it was just as hot. So when you say you can’t buy properties like you did in the past, I’ll agree however just keep in mind that everything is relative and a good investor knows how to make money in all markets.

QUESTION/STATEMENT:

In addition, ANYONE with a pulse (almost) can get a 100% financing on an investment property. All it requires is 80% LTV @ 6.5-8.5% interest and 20% LTV @ 12-14%. Scenario #2 is 10% down, and an interest rate around 7.5 - 8.5%. The “problem” is that these financing structures would drive most to bankruptcy within a few payments of being missed. These types of “deals” would be “alligators” for most investors. At least those in So. Cal. If a renter could buy a house for as much as rent, most would. As a result, it is hard to create positive cash flow properties.

ANSWER:

Alan, with your opening statement you don’t know what you’re talking about. The loan that you’ve just described is not for NOO (None Owner Occupied), it’s for OO (Owner Occupied). Secondly, an investor should make investments that make economic sense or don’t do the deal. I would rather see an investor sorry for the deal that they did not do, rather than the one that they did. To invest for the sake of investing is dumb. That’s why many Californian investors are looking at deals in other states.

QUESTION/ STATEMENT:

With avg. home prices in Cal. hovering around $300K and EVERYONE has equity in their homes, there is no one who wants to (or needs to) do a discounted deal. Offering prices in San Diego (my hometown) are now EXCEEDING asking prices (just like San Fran).

ANSWER:

Alan, this is your opinion. For starters you prices are not comparable to that of the north. Last year I made on loan on a house in San Jose that was only 1170 sq. ft. and was a 2-bedroom track home. The house appraised for $650,000 and I placed a new first on it for $450,000 so you’re not there yet. San Diego is hot, Orange County is hot, the San Fernando Valley is hot, the Inland Empire where I live is hot, but in San Bernardino County, there are deals, Riverside County, there are deals. The area’s that you have mentioned like Barstow, Palmdale, and stretching out in that area, there are deals. And even in the areas that are considered hot, there are foreclosures. No, there are not any short sales at this time, but there is no need for them either. Property values are up and moving.

QUESTION:

So, my question is, how do you do “deals” in a red-hot So. Cal market where financing turns almost ANY deal into an alligator?

ANSWER:

You change the rules. You don’t buy the way that everyone else is buying. You look for properties with up-side potential. A “lot” to build a house, land that can be sub-divided, a boarded up commercial property that can be used for another purpose such as an old Gas Station that can be converted into another type of commercial property, Buy apartments and convert them to condo’s, a small 2 bedroom house in an area like Pacific Palisades to either tear down utilizing the lot to rebuild, or up date the house and ad another bed room and bath etc, and the list goes on.

QUESTION/STATEMENT:

PS. Maybe those no money down deals work in Kansas City, Houston, or Sioux Falls, but WHO wants to live there? Let alone who will want to live there in the future. As Gen. D. Mac Arthur once said, “Know where they are going and get there before they do.” That is the crux of the real estate market.

ANSWER:

I think that this statement is condescending. I’ve been to the places that you’ve mentioned and met some wonderful people. I currently own a 205,000 sq. ft. distribution warehouse in Ohio, I been to at least half of the states and I can tell you that California is not the only place on the planet. As far as Gen Mac Arthur, his statement is applicable, however to give you some food for thought I’d like to quote Albert Einstein,

“We can’t solve problems by using the same kind of thinking we used when we created them.”

Ed Garcia

Re: Ed, I am CALLING you out! - Posted by Gary

Posted by Gary on July 17, 2002 at 20:51:42:

alan,
i’m sure why ed uses that formula is because if you have anything go wrong with property, you have to have funds to fix it. breaking even before maintanance is not a good deal. you want tax write off, build equity, and cash flow that would constitute a good deal.
good luck,
gary

Re: Brokers puff - Posted by Ed Garcia

Posted by Ed Garcia on July 20, 2002 at 12:21:45:

Donald,

Please explain,

Ed Garcia

Re: Ed, I am CALLING you out! - Posted by alan

Posted by alan on July 18, 2002 at 09:42:12:

Ed,

Here is one of the points that I failed to make in my original post:

  1. Over the last 2 years a number of people have been burned by the stock market decline.

  2. People who did not have Enron or MCI stock (or those that SOLD before it went to $1 a share) have some CASH.

  3. These people are looking for “safe havens” for their money. Their perceived safe haven is REAL ESTATE.

This is who we are competing against (among others) today to find those deals. One thing we ALWAYS have to do is know WHO the “enemy” is and what they have at their disposal. The “enemy”, in many instances today, are other investors who were not “toasted” by the last two years declines in the stock market.

As a result of this anamoly (money leaving the stock market), people COULD buy a turnkey prop. in Palmdale (for example). Price for the sake of arguement, $100K (in CASH, no financing). Owner could then rent it out for 700-800 per month and STILL have a better rate of return than that money had in the stock market (over the last 2 yrs.). In addition, owner now has a depreciation schedule to write off some of their taxes. This is a “killer” deal when compared to the stock market.

BAZILLIONS (many millions) of dollars are doing just that. The way you can tell is that the stock market is reaching a 5 yr. low. The stock market “bubble” not only burst, but is now turning into a black hole. Real Estate, in many locations of the US, is at an all time high. This is despite the fact that we are in a “recession”. Do you see the similarities between the stock market (of a couple of yrs ago) and the RE market today?

My point is that real estate market is in a SIMILAR situation as the stock market was a couple of years ago before the bubble burst. There are massive differences between a real estate bubble and a stock market bubble. In real estate, the property will usually become worth more than it costs (after a decline). You just have to have the patience to wait it out. Individual stocks on the other hand (read ENRON, MCI, Qwest and others) will probably never recover.

A number of these new RE “investors” (former stock market types) are willing to take a 100-200/month “hit” (negative cash flow) and speculate on getting that money back (and more) when they sell. These “new breeds” are going to be in for a surprise when the bubble bursts and they are forced to keep these properties at a monthly loss.

This will create a bunch of KILLER opportunities. But, I believe, those opportunities are at least a few months away (if not 1-2 yrs). The market has to cool a little first.

Alan

Ed - Posted by Donald

Posted by Donald on July 21, 2002 at 04:48:00:

Ed,

First of all, let me say I have a lot of respect for you. (I am learning a lot from Mr. Ed.
:o)

Examples of brokers puff, ie. BS/horse hocky: (the sales pitch they feed buyers and sellers)

1…The market is hot and ain’t nobody buying below appraisal around here.
2…Man, these houses are moving fast.
3…You can’t find a motivated seller within a hundred miles.
4…Ain’t nobody getting a divorce, facing foreclosure, lost their job or going bankrupt around here.
5…Ain’t nobody doing seller financing or taking back some of their equity on a second, around here.
6…Your ain’t gonna get one of them ‘no money down’ deals around here.
:o)
Donald

Re: Ed, I am CALLING you out! - Posted by Ed Garcia

Posted by Ed Garcia on July 18, 2002 at 10:47:17:

Alan,

You crack me up. You tell me that you’re going to give me one point and then you give me three.

First of all don’t compare the stock market to RE investing. The difference between the two different types of investing is CONTROL.

An average investor in the stock market has NO CONTROL because even if they research their product there are so many variables. They consider themselves expert investors until they take a fall, and then they become a victim.

A prudent real-estate investor will have CONTROL because they will make their money on the buy and maintain cash flow. Using this formula a prudent investor can not only wither a storm in the event of a market change, but make money while they’re doing it.

The RE investors who will get them selves into trouble, are the one that you’ve described, who invest with no rime or reason. This investor can also fall victim to a prudent investor who does flips. Alan, you’re probably right, there will be investors from the stock market who will be looking for another vehicle to invest in. And there is no doubt that they are looking at the RE market as we speak. But a prudent, experienced investor, can make money in either market weather it be up or down. Also bare in mind that there are other types of RE investing other than SFR’s .

Alan listen to me very carefully. The RE investor that you’ve described who purchase an investment property based on taxes and write offs are a thing of the past. A prudent investor, invest in property that makes economic sense or they don’t invest. For example an investor who invest based on future appreciation is an accident looking for a place to happen.

So don’t worry about stock market investors who are going to saturate the market or spend your time with none productive thoughts. You apparently have Analyses Paralyses and need to shake it and go out and find a deal.

Ed Garcia

Re: Ed - Posted by Ed Garcia

Posted by Ed Garcia on July 21, 2002 at 13:46:54:

Donald,

Go to the board and look at the top. I wrote my response to you titled, To Donald and others…

Ed Garcia

Challenge for Alan. - Posted by Kent C

Posted by Kent C on July 21, 2002 at 05:41:26:

My broker tells me all the time “You are wasting your time…they wont even consider it…” Then I get the $38k listing for $10k cash as is. Put $20k into it and it appraises at $60k (appraisal just in)…

Try this Alan. You sound like you have good credit. Pick 10 houses out and lowball them. SEE how much they WILL come off. EVERYONE expects a 20% lowball at least! If its that hot try 70% FMV and see where you settle. But I personnally wont give that much. I PROMISE you, you can get a finished house for no more than 70% FMV in your area!!! Even if its only 2 out of a 100. Perhaps your game should be to buy at 90% and sell at 105%. I dont know. All I can say is there IS a game. Discover it. I never bought houses by what people or courses said to do. I’m just making it up as I go (grin).

Kent C

Alan

My area is very aggressive with other investors. This one had been on the market a year with them over looking it! This is because they knew $38k was too much and didnt try lowballing. They also did not see what I did in its architectural beauty. I made a condemned house awork of art. It DID need a lot of work. That is what contractors are for. Its MY job to coordinate their efforts and then give my wrist a workout on signing checks. (and recieving them).

Ed, you ROCK! (n/t) - Posted by Kathy (MI)

Posted by Kathy (MI) on July 18, 2002 at 13:53:31:

eom.

Re: Ed, I am CALLING you out! - Posted by Jim Pack (GA-FL)

Posted by Jim Pack (GA-FL) on July 18, 2002 at 12:42:38:

Sorry, but I just gotta add something to this debate.

Ed, you are right on for every point you made. Alan, you got sorta the right idea on stuff but it’s not really fleshed out (complete). I wanted to comment on one particular aspect of the debate: about living in other parts of the country.

First off, I don’t want to run-down California. I was stationed there several times and enjoyed it immensely. But, there are PLENTY of other wonderful places to live and invest. Most investors I know shudder when someone mentions investing in real estate in California. Their reply: "Why spend $500,000 on a 3 br 2 ba ranch, have the power bill be equal to the mortgage payment and get earthquaked/firestormed/mudslided all the time? I am just kidding, like I said. I really do like CA.

Look at where people are GOING and working. Check out city and region growth figures. In the state I currently live in, Georgia, Atlanta is booming and you can still buy a 3 br 2 ba condo or house for under $100,000! Atlanta is a great place to live. Look at Money magazine’s “Best Places to Live” and you see all kinds of wonderful places like Eugene, Oregon. I’ve been there and it’s a beautiful town with LOTS of cheap real estate. Friends in my Real Estate Investing club in Jacksonville, FL buy mobile homes all day for less than $2000. On one of my scouting trips to Punta Gorda/Port Charlotte, FL, I found nice, clean 2 br homes for: (I’m not kidding, I saw it myself) $29,900! The rents in that neighborhood were $600-$700! People are moving there everyday and almost all the homes are waterfront property with boats in the back yard. Most of those houses were in the $119,000 to $200,000 range. They even have a “Hooters” in town AND a mall.

Don’t get stuck in one place. The country is full of great places to live AND do real estate. Listen to Ed, he’s pretty sharp.

Jim Pack
Saint Simons Island, GA