Beware of False Profits
I know I am a little late with my Happy Easter and Happy Passover messages, but the title above is more real estate than religion related.
Part of my job as a REIA leader is to be a filter. Almost every other day, I get someone who wants to speak to or send an email to our group. You really are that popular. I make sure that I filter out the frauds, the unproven, and the outdated. My job is to filter out these bad elements.
That being said, I spent my Saturday morning at just such an event. I attended to see if the material would be useful for our club. I walked out with a resounding NO. The speaker was supposed to be Scott Yancey of the TV show Flipping Vegas. I will admit that I have watched the show and was already unimpressed by Scott before I walked in the door. I suspect that without the TV show money he would be out of real estate investing.
The first red flag hit me before the meeting started. The speaker was not going to be Scott Yancey. It was some guy named Terry. I have no idea who he was. I turned down Dave Lindahl, who is a very legit educator because he wanted to send a substitute to our group. As Terry spoke, I wanted to scream. There was several times where he spoke of his brother who was broke. I was thinking that if you can’t teach your own brother by example then what good are you? Can you even provide a good example from your personal life; do you even invest in real estate? Second red flag.
Then Terry started giving examples of deals in the Pittsburgh area. No address, no picture, just a price and a dollar figure indicating value. Now I was scratching my head on this one. The first thing that struck me was that the “value” of the property was almost exactly the price of the median house in Pittsburgh. With no idea of what part of town it was in, I had to ask was the value a legit number. The price was $60, and the “value” number give was 124k. They also had no info on repairs, other than saying that it needed some. The repair cost on this example was $10,000. At this stage, there are a ton of questions in my head. I’m sure you have a few questions yourself.
Then instructor Terry started talking about exit strategy. Keep in mind that most of the room was filled with people who had never bought a property in their lives. They were sheep waiting to be slaughtered. Terry’s ideal of an exit strategy was to buy a house at 60k that was worth 124k and sell it to an investor at 80k. Last red flag I needed. First off, if the house is worth 124k less a 10 k rehab, why on earth would you ever sell it at 80k that is foolish? If anything a 10k rehab is mostly cosmetic. Do the work yourself and sell the darn thing at 124k. No need to give up all that equity. Secondly, if you had some education, you would hold paper on the property and sell it above 130k as it sits to a homebuyer who couldn’t get bank financing. Even for the laziest among us, the exit strategy would be north of 90k as a wholesale deal, assuming that anything about this house was real.
Where I finally got up and left was when the brought in the student example. Terry did announce that she was being paid for being there to give her testimony. BIG RED FLAG. Any real estate educator alive can gather student testimonials for free. Successful students love to tell others how they learned to make money. If you doubt that, then see my testimonial videos for Ron Legrand and Jon Iannotti. The only reason that I don’t post a ton of testimonial videos is that I don’t have anything to sell. On a side note that will change at some point. Back to the student, she was their good example. She had apparently gone to their training two years ago, and had since that time done 12 real estate deals. One every other month, all wholesale deals. If you are a full time real estate investor, 12 is a pathetic number over a two year period. There is a member of our club who does more than that per month. I usually do a couple per month, and I’m generally too busy to focus on my own real estate deals.
Lastly before I conclude my rant, let me tell you about the Terry method of determining market value. They apparently have a formula for figuring this out. Major red flag. The only way to determine market value is to know what other similar properties in that neighborhood have SOLD for. No amount of fancy math will get you that answer. You either know the market well enough from experience or you need to know someone who can access sold comps for you, generally a real estate agent. Market value is so specific that if you cross a zip code, or enter another school district then the sold house is not a comp. The same is true in our area if you cross a bridge, river, or major road. Ok I will now end my rant.
(May 2014 Newsletter)