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Even as I’m working on finding prospects who will be passionate about acquiring distressed property, I’m knee-deep in administrative activities to ensure the success of the project. Here’s a progress report of what’s been happening.

I’ve sent lists of our properties to a couple of different wholesalers - one in Florida and one in North Carolina - who will post them on their Web site and add their fee to the purchase price. This effort has made me realize that we need to have photographs - not just listings - of all our 33 properties posted on a Web site. But we’ve gotten as many as three dozen photographs per property, and it’s time-consuming not only figuring out which ones would be best, but uploading and captioning all of them.

I’d really like to find other wholesalers, as well as other on-the-ground services to help out. Unfortunately, Stonecrest, the originators of this project, are keeping all the people at DBNR’s level isolated from each other. They are concerned that if more inexperienced investment groups have access to the more experienced ones, the latter will be bombarded with queries. I understand the logic, but I don’t agree with it. In the meantime, Web communities such as Bigger Pockets are filling in the gap somewhat, but there’s a lot of information there to sift through.

We’ve been wrangling over customer-relationship management (CRM) systems as well. We started out with a product that Stonecrest recommended, but that proved inadequate. We’re now working with ACT, but need to be able to upgrade to SugarCRM at some point in the future. All we really need is a database that everyone can access remotely, and one that is updated regularly, and it’s proving to be tougher than I thought it would be.

This project is also turning out to be an education for my management and leadership skills. Coordinating the activities of salespeople is still not the same as me doing it myself. For someone who’s worked independently for so long, I find myself getting impatient when people don’t file their sales reports. I anticipated that it would be challenging to manage a remote staff - and it is. We’re all learning together.

I have finally chosen someone to provide title information. That was my second-to-last piece of infrastructure work. This was also tougher than I thought, because some provide niche services for escrow companies and lenders, and charge more simply because they can. But other people are putting information on the Web and charging as little as $100 per month, which is a third of what industry leader First American wanted to charge for the same information. I went to First American and told them about this discrepancy, and to their credit, they gave me a contract at the lower rate.

The last piece of infrastructure work? To find someone to do evictions, if that becomes necessary. That’s something that, thankfully, doesn’t have to be done right now.

It’s clear from my work on our DBNR project - buying and reselling distressed properties - that the recent meltdown has changed the rules of real estate considerably. If nothing else, the people we’re encountering and the work we’re doing across the country differ greatly from what I’m accustomed to here in the Bay Area. Further, I’m finding that our project requires a different kind of due diligence - one that incorporates judging both qualitative and quantitative qualifications.

Take, for example, our property in St. Louis, Missouri. Generally, before any kind of a housing transaction, you request a credit report to see what someone’s payment and credit history has been. We had five prospects, four of whom supplied four credit reports. In the Bay Area, a credit score of less than 620 is cause for alarm. The highest score of the four in St. Louis was 524, and the lowest was 390; frankly, I didn’t know credit scores went that low.

You want to be convinced that someone can make their payments on time. The report should show whether there are late payments, and if so, with what frequency? Mostly, we want to see if there were any evictions, which would indicate they’d stopped making rent or mortgage payments.

With this group, though, we had to dig a little deeper and see if there were mitigating circumstances. I learned a lot by asking such questions. For instance, one woman had a foreclosure on her record, but it was because she had helped her sister buy a house, and it was her sister that hadn’t made the payments. Another prospect had declared bankruptcy, but was quite upfront that he’d done it to protect his assets from his ex-wife. In other situations, there have been medical debts that remain outstanding.

You might be surprised to know which prospect we finally chose - the one with no credit score.  He had a good explanation - he had always worked for cash. While he had no credit score, he not only had documented income, but he was able to document that he’d owned other properties. We negotiated a $38,000 purchase price, with $500 down and $600 per month.

We also came up with what I think is a highly creative way to ensure his passion about his property. If he makes his payments on time for a year, and documents the repairs he’s going to make, we’ll reduce the balance by $5,000. That gives him a purchase price of $33,000, for a property he believes may be worth as much as $50,000 once it’s fixed up.

This is someone who’s passionate about owning a house. Given the number of people who have chosen to walk away from their homes in this crisis, perhaps this is the way the mortgage industry should have been qualifying homeowners all along.

DBNR investment group’s current project - buying and flipping distressed properties - always had a bit of a grab-bag aspect to it. The idea was always to gather up properties (33 of them in 14 states), extract them from the balance sheets of overwhelmed lenders, and sell them to interested and committed buyers. We never had any control of the what and the where, which has yielded some interesting treasures and potential troubles.

Cleveland, Ohio

We have an old, gabled house sitting on a 6,000 square-foot lot on Church Street in Cleveland. The house is white with vinyl siding, the kind of place that’s common in the Midwest. I got a call from a carpenter who’s interested in the property because it reminds him of the home he grew up in. He had an accent straight out of the movie Fargo, in which he unexpectedly asked me about the second house.

I wondered, What second house? We only received title to one address, but he said there were two houses on the lot and that both had address numbers. We each did some research and determined that not only did the local zoning rules allow for second houses, but it was a common practice to build second homes for an older family member. The second house’s address numbers - which apparently were unofficial - may have been added to keep the mail straight between the two houses. But that was a clear bonus.

Syracuse, New York

We were under the impression that only single-family homes were part of the packages. But when I looked at the picture of the property on McClennan Avenue in Syracuse, I realized it was actually a four-plex. A call from a woman whose boyfriend does fix-up work confirmed this. It needs sheet rock, flooring, and water heaters in the units, but we only paid $4,300 for it, and multiple units almost always have more value than a single-family home. Another surprise bonus.

Clearbrook, Minnesota

Not all of the surprises have been pleasant, I have to say. One of our properties in Clearbrook, Minnesota looks like a barn that was converted to a house. It’s painted a bilious shade of pink. As if that weren’t challenging enough, we got a call from a neighbor insisting that the structure has been mooching off of his utilities and there’s no easement on his land. Any sale is going to have to involve paying him something, he insisted. Interestingly, though, he said he’d be willing to take the property off our hands, cheap. We’re going to have to hire a surveyor and maybe a lawyer on the ground there to hash out the facts.  Or, we may just sell it to him, after all, it appears to be 29 miles from nowhere. . .

All in all, we’re finding that, if nothing else, it’s a big, diverse country out there. Some of the accents of people who are calling are so thick, we have to listen to the messages two or three times before we understand them. The ease with which that second house was built in Cleveland and the pink barn was built in Clearbrook presents a strong contrast to the difficulty entailed here in Silicon Valley of building a second structure on a property. I’m finding that there may be much easier places to live than here in California when it comes to real estate.

I’m also meeting lots of motivated people, and enjoying the surprises along the way - well, most of them. . .

If that’s true, I think I’m well on my way. Anyone who’s ever started a business will empathize. Entrepreneurs, after all, have to keep their eyes on a goal that’s far out on the horizon. They have to hold a strategic vision for where their company will end up. My goal is to be able to create a real-estate operation for distressed properties and ultimately be able to franchise it. This requires establishing easily replicable systems and processes.

I’m finding that Fitzgerald’s opposing idea is a bit more prosaic. That’s a requirement of being an entrepreneur that doesn’t get shared as often - the need to maintain a highly tactical view at the same time they hold the strategic view. This involves a lot of administrative work, discipline, and patience. It’s not glamorous.

For instance, now that the for-sale signs for our real-estate project have been posted, the phones are ringing with inquiries. That’s a good problem to have, motivating us to hire an administrative assistant (my daughter Amy, as it happens). But she needed a space in the office, and a desk, and working electrical outlets. We didn’t want to spend money on a second Internet connection, so now we have cords and cables running across the office.

Some of the calls are coming from service people we’ve hired on the ground in various cities, relating to cutting grass and looking for used plywood to board up windows because new plywood is too expensive. Talk about prosaic.

Having Amy here is great, but her job also requires some knowledge of real estate issues. Anyone who’s been in this position knows the conflict that comes from knowing that you could probably do something faster yourself, while also understanding that if you’re going to build your business, you have to train and trust other people.

To help myself with this, I’m reading John C. Maxwell’s The 21 Irrefutable Laws of Leadership: Follow Them and People Will Follow You. Maxwell cites Ray Kroc’s “law of the lid.” Kroc, who took a couple of McDonald’s hamburger stands and built an empire, said that your business will never get bigger than you can conceive of it. I’m finding it’s hard to hold that big vision in my head when I’m tripping over the cords and arguing about plywood prices.

But I’m working on it.

After work being so slow for so long, it is both gratifying and exhausting to have so much going on with DBNR. There have been updates and hiring and even some detective work going on.

Every week I compile and send an update to our investors. The first set of financials on our project to buy and re-sell distressed properties is due this week, and it looks like we’re already keeping our costs lower than expected.

We were involved in detective work on multiple fronts. The company through which we’ll be ordering credit reports vetted us to make sure we were a real and viable operation.

At the same time, we found out that our representative in Kansas City, Mo., had put up a for-sale sign on someone else’s lot. It took a little while to track the error all the way back through the company we’re working with, but we finally determined that the error originated with one of the original lenders sending a bad address.  That lot materialized into another home - Wonderful!. We delivered profuse apologies and the problem was rectified.

Being accurate is important because we’re taking dozens of phone calls on the properties we’ve listed, so much so that we’ve begun a spate of hiring (good news here in the valley). We’ve brought in an administrative assistant to offload some of those duties, and we’re developing a sales structure and a compensation plan in anticipation of bringing on another salesperson next month.

We hired a remote agent in St. Louis, Mo., who is not only showing properties, but who is also an all-around handyman, gardener, and even inspector when necessary. We have 28 potential buyers for this particular property and we are weeding them down to the most-qualified five. And we’ve contracted with a wholesale buyer who will list all our properties on her website and add her fee to what we give her as our price.

In addition to all the other reasons I am enjoying this project, I am delighted to be interacting with people from all over the country, all of whom are working toward a better life and economic situation for their clients.

One of the most amazing facets of 20^th century America was the transition of dispossessed immigrants into an economically viable middle class. It was that transition that perpetuated America’s reputation as the land of opportunity.

In recent years, though, it has been more difficult to overcome those economic gaps. The underprivileged underclass has been frustrated in its attempts to make the leap from one world to the next.

What I’m finding with the DBNR investment group, however, is that the current housing crisis may provide the opportunity for people who want and desire a better life to bridge that chasm.

Certainly, I’m learning that these people truly live in a different world from the Silicon Valley lifestyle to which I’m accustomed. We’ve been taking phone calls about our distressed properties from people who are truly enthusiastic about the opportunity to own their own home. But many of them don’t have e-mail or even computers. When they need to fax something, they go to a copy shop.

That’s just the tip of the iceberg. Their world may not include bank accounts or even W-2s. They pay in cash themselves or use prepaid debit cards. Some live from benefit check to benefit check. Others I’ve spoken to make a good living, but they’ve always been paid in cash and so have no record of their income.

The world that I’m used to lives on documentation, records, and histories of financial dealings. But when faced with such a challenge, the only alternative is to become more creative. I’ve set up relationships with title companies and credit reporting services, so that prospective buyers can drop off information. Those companies can do scanning, faxing, and e-mailing, and generally make it easier to accommodate our prospective customers.

Some of these people understand that their world is different, and I can hear the enthusiasm in their voices at the possibility of getting a home. They are not afraid of the condition of the houses. They are not afraid to submit to a credit check (there are others who are not as passionate or courageous, and I suspect they will remain where they are).

As for me, I am excited about helping those who truly want to do so make that leap.

For those of you who have been enjoying the updates of our new real estate venture, we’ll return to that topic next week.

The mortgage industry’s loan modification efforts are going from bad to worse, evolving from a fiasco into a disaster. It’s a case of a vicious circle becoming a vicious vortex. As in many situations like this, there’s plenty of blame to go around.

In the first place, there are remarkably few loan modifications being done. You’d think mortgage lenders would be bending over backwards to keep from having more foreclosures on their hands.

Instead, they’re overwhelmed by the wave of borrowers that need loan modification. Staff trained to handle 1,000 borrowers are now handling 100,000, but - according to reports I’ve read - instead of devising a rational system to handle the deluge, customer service agents are being rude and even outright lying to get people off of the phone.

Understandably, two things have happened. First, professionals in the business community - people with experience such as mortgage brokers, real estate brokers, and real estate attorneys - have realized that they can reap some revenue by acting as intermediaries with the lenders. You’ve seen the ads. But at least they’ve been getting some results, because they understand how the system works.

But of course, at the same time, con artists have also smelled the blood in the water and started charging people thousands of dollars … and have given them nothing in return. Unfortunately, these thieves prey on the very people who can least afford to absorb these losses.

Here’s where the vortex starts spinning faster. To control the con artists, California State Senator Ron Calderon, the Chair of the Senate Banking Committee, has introduced SB 94, which forbids anyone from charging for acting as an intermediary for people needing loan modifications. If you look up “throwing out the baby with the bath water,” this bill will be listed there.

Senator Calderon somehow thinks that leaving borrowers at the mercy of the lenders and their backlogged systems is somehow better. Instead, those borrowers needing loan modifications will be stuck in the queue and lose more time, which will eventually cause more foreclosures.

This bill has already passed in the State Assembly. Contact your state senators http://www.senate.ca.gov/~newsen/senators/senators.htp and urge them to vote against SB 94. If this bill passes, the foreclosure situation will get worse, not better.

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.