Access Wealth Strategies

(Author note: I wrote this post at the beginning of 2010 but it got lost in pending status until now.)

Every year, I see magazine articles or major websites that offer their best tips and strategies for the new year. Thus, I’ve decided to share my thoughts as well.

During this global “Great Recession” and related credit crunch, there are historic numbers of distressed assets on sale, and that includes more than just real estate.

Warren Buffett was talking about how great an investment distressed assets were back in 2008. In fact, he would buy them because he knew the long term value was higher than the current impared pricing. Listen to Buffett talk about what he would buy as much as he could in this video below.

The options available to Buffett are one thing, but what options are available to the rest of us?

• Perhaps you are a business owner who currently lease your store or shop space, then there are likely buildings you could purchase that could cost less than your current rent payment.
• If you want to invest in real estate, there are a variety of options. Certainly buying homes from wholesalers or the trustee sale auction is not too difficult.
• A more complicated deal would be to gather some investors to buy performing or non-performing real estate loans at a discount. The numbers I’ve seen are that non-performing loans are selling for 30% of face amount and performing ones are selling for 60%. If the loan ends up performing then you get a good return. If you have to foreclose, you may end up with a great return.
• Paper assets are also on sale. Earlier in 2009, stocks certainly crashed down to levels not seen for a decade. They could fall again.
• How about buying a business from an over-extended owner who needs to raise cash? Make sure it’s a business you know very well and want to own.

A very experienced businessman once told us he’d seen 3 different real estate cycles in the Phoenix area over 30 years.  During the prior cycle he saw people who drove in to town in a pickup truck and a decade later, flew out in their personal Lear jet. They had made millions from buying and selling real estate assets during the market downturn and subsequent rebound.

That’s the cycle we are in now.  What do you think about it? How are you going to capitalize on it?

In the first post of this series we looked at when to buy and sell: Buy when fear is rampant and sell when greed reaches all levels of society in the current market.

In the second post of the series we looked at what to buy.

Buffett already tells us to use price fluctuations to our advantage with the following quote:

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

So, how do we know when is the right time to buy and sell? What do the prices look like?

In general a long up-trend will end after asset prices are above the long-term valuation by a standard deviation or more.

Here are 3 good examples from recent experience:

• The technology-driven Nasdaq stock market peaked in March 2000 with the PE (price to earnings) ratio reaching 264 while the more mature Dow 30 index peaked at 42 when the 100-year average is only 14 to 21. In these cases people were paying a very high price for not very much earnings.
• During the residential real estate bubble which peaked in 2005, home prices in some bubble markets had climbed to twice their traditional price to rent ratio. Essentially prices doubled but rents stayed the same. This is unsustainable in the long term because people would eventually choose to rent when they can save so much money each month.
• During the commercial real estate bubble that peaked in 2007, the cap rates had fallen so low that instead of a traditional 10% cap rate, many markets were priced at a 7% or 8% cap. Some coastal markets were even in the 3-4% cap rate range. This was a time when interest rates were rising even above the cap rate — that implies the buyers were banking on appreciating prices only, not current cash flow.

Here’s an example from personal experience. In 2006 I owned some lower-end mid-tier quality rental units in the Dallas/Fort Worth area of Texas. The tenants earned about $25,000 per year and paid around $600 per month in rent.

In early 2006, one of my tenants mentioned to me that she wanted to start flipping houses! This was a clear sign that the last possible buyers had entered the market and the only place for the real estate market was to go down (which it ultimately did starting in 2006).

In case you are wondering, I already had this property for sale and fortunately it sold in March 2006 before the complete collapse of prices.

The summary of the past three articles in this series is to buy quality assets below their long-term conservative valuation at a time when the masses are selling in fear. A good paraphrase of Warren is Buffett to buy value when others are selling it — in other words, the asset is “on sale”.

You may also find these Motley Fool articles interesting:

• Warren Buffett’s Best Advice Ever
• Everything Buffett Needs to Know, He Learned Right Here.

A few weeks ago in March I toured a house in Mesa, AZ (Near Phoenix) which was being rehabbed and flipped by Ivy Coppo, a realtor with Trilogy Investments and Real Estate. Ivy is an expert in managing flips for investors who purchase properties at the Maricopa County (Phoenix, Arizona area) trustee sale auction.

This 3 bedroom / 2 bath house in Mesa is for Ivy’s own portfolio.  Check out the 3-part video series below for the before vs. after tours of Ivy’s flip and my interview with her where she reveals her numbers and tips for successful flips.

Ivy’s Flip in Mesa, AZ – Part 1 (Before)

I arrived a couple of days after Ivy won the bid on this house at the trustee sale auction – the crew had already been hard at work.

Ivy’s Flip in Mesa, AZ – Part 2 (After)

I toured the house with Ivy after the rehab work was completed, just a short week later.

Ivy’s Flip in Mesa, AZ – Part 3 (Interview)

Ivy answered my questions about flipping houses:

• How many properties she flipped in 2009
• What kind of properties were flipped, price ranges, locations
• Her typical timeline for a flip
• What percentage of REO / short sale properties vs. flipper resales are on the market?
• What kind of buyers are there for these flipped properties?
• Her best vs. worst cases for a flip
• How she increases the chance of a successful closing
• What’s the typical return for her flip?
• What about the risks? e.g. tenants/owner occupied properties, hard money loan costs, due diligence
• Her advice to newbies

Please leave a comment and let us know how you liked this post and what you would like to see in future posts.

If you liked these videos, you might also be interested in:

Interview with John Ray, largest buyer of homes at the Phoenix trustee sale auction.

Phoenix Foreclosure – Video of Live Auction at Trustee Sale

There has been much hype about buying foreclosed properties in mainstream media and on the internet. You may be wondering:

What is it really like bidding at the foreclosure auction? Are there good deals to be had? What does it take to get a good deal?

Last week I interviewed John Ray, owner of a foreclosure auction bidding service firm located in Phoenix, AZ. John has been in real estate for 20 years and is a wealth of knowledge when it comes to bidding on foreclosed properties at the trustee sale auction.

John’s company BidAZForeclosures.com has been bidding at Maricopa county foreclosure auctions on behalf of investors for 7 years, currently buys about 100 properties a month, and is one of the largest bidding groups.

This interview lasted over 30 minutes; it has been captured on video and edited into 4 parts. It is well worth your time to watch all 4 parts because you’ll learn John’s insider perspective on getting a good deal at the foreclosure auction and how to avoid common mistakes investors make.

Topics Covered in Part 1 of This Interview

• Are there good deals at auction?
• How many properties are bought at the auction?

Overview of the foreclosure auction process:

• How do properties end up at foreclosure auction?
• Why do some foreclosures get postponed?
• How does the bank establish the opening bid?
• What is a “total debt” bid vs. a “specified” bid?
• What really happens at the trustee sale?
• What happens after you win a bid?
• How do you get title to the property?
• How do you take posession of the property?

Topics Covered in Part 2 of This Interview

• How does the current market cycle compare to the previous one?
• What’s happening with bank REO properties?
• Why aren’t banks doing more short sales?
• How do you buy properties at auction?
• Why do investors use your bidding service?
• How risky is it?
• What are some common mistakes?
• What due diligence do you do before bidding on a property?
• What happens when you make a mistake?

Topics Covered in Part 3 of This Interview

• Is there any truth to the “old boys network” that controls the auction?
• What is it like bidding at the auction (examples)?
• What is blind bidding?
• What are dropped bids vs. jumped bids?
• Where do you get the property listing info?
• How are you different from other bidding groups (examples)?

Topics Covered in Part 4 (Final Part) of This Interview

• How do new investors get started?
• What is the Jump Start program and how does it work?
• What are some common beginner mistakes and how do you avoid them?
• Do you really have to pay all cash at the auction?  Are there other options?
• What is “hard money” and why do people use it (examples)?
• How does an investor work with a bidding service like yours?
• How do we contact you for more information?

Please let us know what you think of the interview, whether you love it or hate it, by leaving a comment. If you enjoyed this interview, please rate the videos on YouTube as well.  Thank you in advance for your feedback!

If you’d like to see a video of live bidding at the Phoenix (Maricopa County) trustee sale auction, see my prior posts:
Phoenix Foreclosure – Video of Live Auction at Trustee Sale

Phoenix Foreclosure – Video of Before and After Rehab & Interview with Expert Flipper