Satori Alliance | Financial Counseling | Real Estate Investment Products | Financial Guidance Seminars

Last week, we talked about setting up the structure of our LLC for purchasing distressed properties: contracts, corporation categories, issues like that.

After that, we dealt with the infrastructure: everything you need to get a business - even a small investment group like ours - rolling. I comfort myself by noting that every piece of research and work I do now amortizes itself for the future. It’s beneficial not only for my own investment efforts, but for any my clients set up in the future as well.

I define infrastructure as more than the technology that our company will use; I also consider the business plan and the business processes part of its essential infrastructure. All that needs to be written down somewhere - keeping it in someone’s head doesn’t do anyone any good. In fact, it only causes problems later with mismanaged expectations and incorrect assumptions.

I spent considerable time putting together a binder that will represent the architecture of our game plan. It has eleven key categories, all of which relate to any business:

• Mission and Vision Statement
• Business Plan
• Marketing Plan
• Financials
• Legal Issues
• Vendors
• Alliances and Partners
• Resources
• Processes and Best Practices
• Investors
• Communications

This binder will progressively fill up until it represents the core culture and structure of the investment group.

We also tackled our technological and physical infrastructure. Because we’ll be looking for buyers across the country, we researched toll-free telephone numbers. My partner, Bob Rinehart, also launched the creation of a customer-relationship management (CRM) system, so that we can keep track of not only our prospects and buyers, but the properties themselves. He will first use an off-the-shelf small database to develop the basic structure.  He will then be coding and designing the full system using the open-source SugarCRM application.

We talked about remaining virtual, but decided that there will be so much collaboration between Bob and myself that we need to be in the same physical space, along with an administrative person. We looked at ten office suites, and determined that going with Regus, an executive suite management firm, was the best way to go. Rather than making a year-long commitment, which most commercial real estate agents are asking for currently, we were able to make a six-month commitment with three-month options after that.

We’re trying to make money the old fashioned way, which includes saving it too.

I’m really excited about delivering an insider’s perspective as this investment group is progressing. Very few people get to see the inner machinations of real estate investment deals, so I’ll be reporting not only as a way of telling the story, but also as a way of educating others about the nitty-gritty of real estate investing.

We spent considerable time recently conducting in-depth conversations with our accountant. In any sort of investment work today, you have to bring in accountants’ expertise. It’s my job to make sure my clients get profits; it’s the accountants’ job to make sure they keep as many of the profits as possible.

We actually have some nice flexibility regarding how we set up the company. As an LLC, we have to pay taxes, but only on a pass-through basis, which means investors are the ones liable for the taxes. On the other hand, we could also create what’s called a C corporation, designating a specific fiscal year-end date for distributing capital. Doing so lets us schedule the triggers for tax payments. This doesn’t avoid taxes for our investors, but it can potentially defer them for almost twelve more months.

We’ve ordered what’s known as the tape (the roster of properties), and soon we’ll see the properties we’re purchasing. We’ll conduct our due diligence, doing as much as we can to determine their actual and potential value. Then we’ll unleash the company that will post the signage indicating their availability.

That’s a look at some of the structure of the company. Check in next week to learn about the infrastructure of the company.

For those of you who were curious (and still are) about this venture, but chose not to participate, I’m going to periodically update you on our progress. Usually, once people decline an investment, they never get to see what happens with it. This will be your view into a deal as it unfolds.

As regular readers know, we’re purchasing a lot of distressed real estate properties from all around the country. The supplier is offering clusters of either low-end or midrange property. The low-end properties are very inexpensive; some of them are even damaged. We’re going to purchase a low-end group first, sell them for cash, regenerate profit, create notes, and find investment partners for those notes.

I anticipate taking a midrange cluster next, because properties in that group will be in better shape and selling will involve working with real estate agents. Once the agents give you an opinion about price, the idea is to price below that number in order to create a feeding frenzy among people who have lots of cash.

Next up: we’ll see the tape for the properties, approve the contracts, and conduct due diligence to ascertain the actual value. Stay tuned.

For several weeks now, I’ve been blogging about investment opportunities in distressed properties. As enticing as these opportunities can be, I also have to issue some caveats about when and how they can be the wrong step to take for some people.

Take my client John (not his real name). He’s a wonderfully optimistic go-getter who’s been looking for a fixer-upper for his family. He frequently says to his wife, “If the house we buy isn’t exactly what we want, I’ll make it what we want.” If it has only one bathroom, he’ll put in a second one. If the kitchen needs to be remodeled, he’ll tackle that. Landscaping lacking? He’ll redo it.

But in these situations, I feel like it’s part of my job to push back on some of these dreams so they don’t turn into nightmares later.

I asked him about his remodeling and carpentry skills. John admitted he didn’t have all the skills, but that he could learn.

I asked him how much a kitchen remodeling, for instance, might cost. He estimated about $30,000, less if he did the work himself.

I asked him about paying for these improvements, reminding him that he was currently at the top of his qualification range. He was putting all his cash into a down payment of 3.5%. His response was that they could get a line of equity on the house to finance the remodeling.

I had to deliver bad news about today’s market. You can’t get cash from property anymore unless the loan is 75% of the property’s current value or less. That means with a 97% loan, he can’t get a home equity line until the house increases in value sufficiently for him to reach that 75% mark. We ran the numbers, and it would take nine years at 3% increase each year to reach that point. In a real catch-22, the value of the property won’t increase that much without an updated kitchen.

John talked about saving $500 per month to finance it, even though he wasn’t currently saving that much. Even so, we ran the numbers, and it would take five years to save enough to remodel the kitchen.

John is now looking at his decision with a completely different perspective.

Fixing up houses to live in them or flip them is a viable dream — as long as the finances are there to support the effort. So be sober when you consider a fixer-upper. And if you’re an investor and you’re selling to someone who wants to do this, to avoid the liability, make sure they have the resources and capacity to do what they say they want to do.

I’m seeing a perfect storm threatening the real estate industry that I’ve been part of for thirty+ years. It’s not a pretty sight. Like an ominous weather pattern, you can see it swirling and still not be able to do anything about it.

The three elements of this storm: regulations, expectations, and retirement.

Regulations. Over the last few years, even for a qualified prospect, entering into a buying or refinancing deal is like having a second job that lasts anywhere from three to six months. Pulling together the documentation for buying or refinancing has always been a challenge, but it’s worse now. Lenders are demanding more documentation than ever before. At the same time, new regulations are coming faster than most people can keep up with. That usually means even more documentation.

At the same time, the government has imposed rules about appraisals that muck up the process. For instance, mortgage brokers can no longer communicate with appraisers. That increases the amount of back-and-forth communication. The more people that are involved, the more chance for slippage and miscommunication.

Expectations. To buyers, this looks like incompetence. Many of them have expectations that buying will be easy, especially as the economy improves. Having researched as much as they can on the Internet — not always a reliable source of information — they’re ready to shop around for real estate agents and mortgage brokers. So when they’re asked for even more documentation on an ongoing basis, they get frustrated by the pace of the process and frequently walk away.

As a result, the professionals are constantly afraid of losing clients over events they can’t control. That changes the dynamic of the relationship in a negative way, because the agents have to develop five times as many prospects in order to get a single sale. This stretches their workload even more, potentially causing more delays.

Retirement. The final piece of the storm is retirement. The real estate and mortgage professionals who got into the postwar real-estate boom have already retired, and others who came in when the industry was flush in the 1950s and 1960s are increasingly thinking about it. That means the industry faces an increasing loss of professionals with patience and perspective.

What can buyers and investors do? They can ratchet down their expectations. Be more patient and educated about the process. Go ahead and research information on the Internet, but develop an intelligent consensus about data (such as what a house is worth) from multiple sites. Take the time to find a professional whom you know and feel comfortable with. Competence and experience are the best umbrella in a storm as bad as this.