Wednesday, October 31, 2007

Optimism Not Allowed

Happy All Hallows' Eve!

OK, I thought yesterday's article on MSNBC entitled "Hard Times Costing Many People Their Homes" ( was an accidental repeat from months ago. It falls into the category of "Tell me something I don't know."

But then I saw this article, "Home Prices Continued to Slide In August" ( ). I think the media was afraid that the nation thought the housing downturn had ended over the weekend. Now that the Southern California fires are over, we desperately need an antagonist. The easiest fallback? Real estate, of course!

Here are some excerpts (with my commentary in red, of course):

NEW YORK - U.S. home prices fell nationwide in August for the eighth consecutive month, offering little hope of a turnaround anytime soon (you're kidding? And I was just about to list my house!)

Things could get worse . . . .There is really no positive news in today's report . . . . At both the national and metro area levels, the fall in home prices is showing no real signs of a slowdown or turnaround. (So, there's no slowdown of the slowdown? And things are getting worse? Hmmm--isn't that what was just said in the paragraph above? Repeat as needed.)

An index of 10 U.S. metropolitan areas fell 5 percent in August from a year ago. That was the biggest drop since June 1991. The lowest ever was a decline of 6.3 percent in April 1991. A broader index of 20 metropolitan areas fell 4.4 percent in August over last year, with 15 of 20 of them reporting that prices fell. (This must be a case of "throw in as many numbers as possible to 1. Make it sound authoritative and 2. Confuse them. Notice that we are far from the lowest ever 1991 percent of decline.)

Housing prices have been a key worry for consumers, and the effect of the slowdown alongside the summer's steep decline in credit availability, has many worried that the economy will go into recession. (Or so the media is hoping--endless possibilities for story lines.)

Notably, eight of the 20 metropolitan areas . . . showed their lowest annual returns ever recorded in August. The report showed drops in Cleveland of 4.1 percent; Las Vegas, 7.6 percent; Miami, 7.8 percent; Minneapolis, 4 percent; Phoenix, 8 percent; San Diego, 8.3 percent; Tampa, Fla., 10.1 percent; and Washington, D.C., 7.2 percent. (So, twelve of the 20 areas have not hit their lowest ever numbers.)

Tampa surpassed Detroit as the worst performing city. Detroit had a 9.3 percent drop over last year. (Yet, it's still not Detroit's lowest ever annual return? Hmmmm.)

And, just in case you're still optimistic about the future of real estate, we have this:

Tuesday, October 30, 2007

Can I Pay You to Move?

Rental applicants were screened so carefully through the local apartment association background company that I rarely had any problems with tenants. I wrote earlier about the bad tenants we had at one property, who ended up breaking their lease early and left. So I don't have real horror stories, just some interesting anecdotes that I'm sure will come out in future posts.

In 2005, we wanted to sell at the top of the market in order to trade for income producing properties (aka, the fateful apartments). However, we did have the poor timing of listing a couple of homes with leases intact. Initially, we went on and tried to unload, ahem, I mean, sell them to investors as occupied properties. But, in California, the CAP rate would have been negative 12%, at least. That didn't go over very well. So, we found ourselves in a predicament of trying to sell properties while still under lease to tenants.

The first time we did that, the tenants, who were responsible homeowners waiting for their house to be built, gladly showed the home in immaculate condition, sold it, and agreed to live out their lease in another vacancy of ours. I felt bad, but I also knew that this was a temporary arrangement for them.

When it came time to sell four in order to buy those apartments from h--l, it didn't go quite as smoothly. We tried to convince one tenant to move out early. She wasn't willing to do that. Then I offered her $1,000 to leave. By her reaction, you would think that she just won the $34,000,000 Power Ball. She moved out so fast and cleaned up the place so well that it was worth every penny.

Another tenant wasn't quite as cooperative. They did not want us to list it for sale at all, even though their lease was expiring in three months. Due to the 1031 requirements based on several sales (your time starts ticking at the first sale, which had already occurred), we couldn't wait three months to start marketing the property. I told them that they would receive the required 24-hour notice of entry and that I would be present at every showing to ensure that no one left with any of their furniture (having my agent there wasn't good enough for them). They were less than thrilled and wouldn't cooperate in making the home ready to show.

What's a landlord to do? Throw money at them, of course. Things sold quickly in 2005, so I told them that I would give them $100 for every showing. All of a sudden, the house showed beautifully and there were no teenagers in bed when the buyers came in. It worked and we sold it. Lucky for them, the buyer was another investor who agreed to lease them the property. He should have asked me if they had been paying the rent on time first.

Initially, we wanted to sell five homes for the trade. However, one older tenant, who we still have, would cry every time I brought up selling the home. She even contacted our lender to see if she would qualify to buy it. She had taken care of the home like it was her own and paid the rent on time every single month (actually we would receive it several days early). I would call telling her how we needed to sell because the house wasn't providing an income for us and we couldn't afford to keep it anymore. She cried. She would call me . . . and cry. Finally, I told her that we wouldn't sell it at that time, but, if she wanted to buy it, she'd better do it soon. That was 2 1/2 years ago. Now the house is worth about $50,000 less than it was then. She's still paying the rent early each month, and, since her first academy award winning performance, we bought and sold the apartments--and lost almost everything. But we still own her house, which has doubled in value.

I'm glad we have a good rental property with a tenant who isn't afraid to cry.

Monday, October 29, 2007

Do As I Do

We have kids. As you know if you've read some of my posts, we have lots of kids. What do we want to pass along to them when it comes to business and investments?

We tell our children the following, not just in words, but by our actions (this advice is for those who have completed college--yes, we feel that a higher education is preparation for life, not just a job):

You'll never be financially secure working for someone else. Your job, as much as you love it, is always at risk for many different reasons. Therefore, you need to make your job a bit less important. The only way to do this is to start a business of your own. You can begin small, while you're still working. That way, you will be prepared if your fired, laid off, or the company you work for shuts down.

We live in the greatest country in the world--no offense to my many foreign readers, but I'm sure that you feel the same about your country. One of the advantages to living in America is the opportunity to start any business that we can imagine. Jokes in this country abound about the 7-11 owner from India, the Chinese dry cleaner, middle eastern gas station owner, or the Ethiopian self-employed cab driver. Instead of laughing at them, I think they should be making fun of Americans who take entrepreneurship for granted and don't use it to their advantage.

Where do you begin? A business can be an off-shoot of what you do in your job. It can be what your heart's desire (or vocation) has been, but you didn't pursue professionally. You can start to invest in stocks or real estate. You can buy an existing business. Try to find something that doesn't rely on you to be there every second in order to make money. Also, it would be great to be able to duplicate it in order to multiply your return, like owning several store locations.

We discuss all business matters in front of our children. Most of the time, they don't seem to be paying attention or they're not interested. However, over the years, it's apparent that much of what we've talked about has sunk in. My 17 year old is very adept at understanding mortgages, equity, and most of the general aspects of real estate and management. I know this because, after 7 years, he's starting to ask pointed questions about the way to purchase and sell property. He talks about things that most people don't know until after they've bought their first home, or later. We didn't set out to teach him, he merely observed what we do.

I hope that by watching us succeed and fail, my children will not be afraid to venture into a business endeavor of their own one day. They also know that, even with the best research and planning, if they don't make it the first time around, it won't be the end of the world. That they get back on that entrepreneurial horse and start over again--the next time not repeating the same mistakes as before.

Most importantly, do not continually spend your money on depreciating assets. Buying too many "things" has the potential of robbing you of your financial goals. Save some money. Each time you have enough, buy a stock, or a condo, or a small retail strip. In the end, these investments will buy you so much more than the "things" you sacrificed in the first place. They may even be able to gain you what money can't buy: time, peace of mind, security.

We'd never be capable of encouraging our children to become financially independent, if we didn't set the example ourselves.

Saturday, October 27, 2007

I'll Just Wait Outside

I promised to write about one of the more interesting folks that I've come in contact with while showing our rentals to prospective tenants. Before I get started, I want to make it clear that I don't feel showing a vacant house is the most safest thing to do--whether you're a landlord or an agent. So, if I had to meet a caller alone, I would never, and I mean never, enter the house with them--regardless of their gender or whether or not they were accompanied by children.

I only show our homes when they are vacant and rent-ready. Therefore, I don't have to safeguard a tenant's belongings. I would open the door, let them pass me in, and say, "I'll just wait outside. Let me know if you have any questions." Besides this being the safest thing to do, I think it's a good marketing ploy. This gives them the opportunity to open the closets and medicine cabinets, to talk, and take their time imagining themselves living in the home. Have you ever been to a FSBO showing and the guy follows you around and tells you about every special light bulb that he has installed in the house and every small improvement he's performed in the last 20 years? It's so annoying. No time to think. All you want to do is get close enough to the front door so you can make a run for it. I don't want to transmit that aura to people.

Some prospective tenants were downright scary. I met an appointment at the scheduled time at one house. The man was with his young daughter. You'd know why he brought his daughter if you saw him. He was a small man in his fifties with a long braid that went down the middle of his back, a bandanna on his head, a leather vest, and so many tattoos that I couldn't see his skin. Not that I wanted to see his skin. As I waited outside, I scolded myself for being so judgemental. After all, it's what's on the inside that counts. He was a very nice man. He liked the house and gave me $500 in cash (from a giant wad he pulled out of his pocket) to hold it until he and his wife could complete rental applications.

I called the background company that I used to screen all applicants and gave them the man and his wife's social security numbers. I was told that that guy's number belonged to a 70 year old man and the wife's number came up with nothing. I called the prospect and said that there must have been a mistake. He said, "Of course, my daughter filled this out for us and got the numbers wrong. Here try this one." He proceeded to give me a totally different number. I called and this time his SS number belonged to a dead man. Well, well, well.

I reviewed my options: rent to him anyway, ask for yet another (fraudulent) number, call the police. I decided that I really didn't have a good reason to call the police, plus I feared for my life. So, I called the gentleman back and said, "I can't seem to prove who you are. Until you get this cleared up with the Social Security Administration, I won't be able to rent you the property. However, when you do straighten this out, give me a call and, if it's still available, you can move in (NOT!!)."

But I had another problem now--remember the cash? I had to return it and I didn't want to put cash in the mail or issue a check (I didn't want him to know where I lived). I wanted to get rid of it and him. I called back. Now, he wouldn't talk to me (he was probably packing to make a quick get away if a knock came to the door). His very unhappy wife growled that I should meet her in a parking lot to return the money. Ok, so I'm literally shivering in my boots.

My husband had a conflict and would not be able to accompany me until the meeting time. I pulled into a parking space, looking for the car described to me--and for my husband. I didn't need him to come out with me, but I did want him to watch my back. He's nowhere to be seen and up pulls the "lady," again with the daughter that they assume gives them reams of credibility. I exited my car, shakily returned the money, and burned out on my way home. I saw my husband as I was leaving, but I didn't stop for anything.

Lesson learned: Never accept cash from a prospective tenant to hold a property.

Friday, October 26, 2007

Sign, Sign, Everywhere a Sign

(This is my last post about the fires. We are experiencing much smoke here in Wine Country Temecula due to the Poomacha fire on Mount Palomar. It does not seem to be a threat to us in any way. Due to the decrease in wind, it appears as though most of the fires will be contained soon. Then begins a boon for contractors in rebuilding the devastated areas. If anything changes, I will let you know.)

Everything seems to have stopped this week due to the fires. I think that if I were marketing one of my rental homes today, it would stink that no one would be calling. Another week with a vacant property--and probably too late for anyone to move in by the first of November and the next mortgage payment. I am not in this position now, but I have been in the past.

We closed our second property just a couple of weeks before 9/11. The entire world seemed to stop for a month after that. I was worried that everything would change and no one would be calling about the rental. I was wrong and someone moved in during the month of October. Whew!

My preferred mode of advertising was the paper. It is kind of costly. I would put an ad in the largest paper in this area that covered many cities in the Inland Empire. I placed the ad only in the weekend editions. Back then, it cost almost $40 for those two days. If the house was vacant for 6-12 weeks, which some were at times due to the glut of investment properties, it could get costly.

We started using signs at one point. We didn't know any better, so our signs read, "For Rent, 4 Bdrm, 2 Ba" and our phone number. Can you tell what's wrong with that sign? We were inundated with calls from people looking for a $1,200 rental. It was $1,595. We wasted our time, royally. When you have seven kids, and everything needs to stop when you answer the phone, you don't get too happy about dead end calls. So I learned my lesson.

The next sign we posted said, "For Rent, 4 Bdrm, 2 Ba, 1985 sf, $1,595." Did we get less calls? Yes. But we also showed it more and were able to rent it. The only problem with the signs were that we would lose many of them. Either gardeners removed them or the wind blew them away.

Signs in a prime location for one of our rentals kept disappearing. One day my husband and I were driving past the area when we saw a kid from the school near by walk over and pull it out--and chase another kid with it. We followed the boy in our car to his house in the same neighborhood as our rental. My husband knocked on the door. No answer. As he returned to the car, he noticed the sign laying on the lawn. He just picked it up and returned it to its place on the street. Note to self: don't place signs in the path of a school.

We closed on our third house directly before a neighbor's young girl (Danielle van Dam) was kidnapped and brutally killed by another neighbor of mine in Sabre Springs in the beginning of February, 2002. Our street was turned upside down for months, with our house being searched over and over. We also provided moral support for the parents during this trying time, all the while doing our best to dodge the ever-present media.

Again, I agonized over whether or not I would have the time and the energy to rent out the house. It was a resale and needed a little bit of touch up here and there. It was also in Temecula, and I lived 45 minutes south. However, even with all of the upheaval, I was able to find tenants. It's just took a bit longer.

Now that I write this, I should have seen a pattern with disasters happening around the time of the last two homes we purchased. I can tell you that the road blocks didn't stop us from buying more. By the end of 2002, we had contracts on two new homes in Lake Elsinore, one of which we still own. I'm glad that I'm not superstitious. These two homes were 60 minutes away from our house in San Diego. That meant that if someone stood me up for a showing, I would have wasted a total of three hours or more, depending on traffic and how long I waited in front of the rental. We would always try to price the rentals just at or below market so that they would not be vacant long and I didn't have too much driving to do. Sometimes we missed the boat and would have to bring the price down until we hooked a live on.

In my next post, I'll tell you about one of the more interesting prospective tenants I've come across during the marketing of our rentals.

Thursday, October 25, 2007

The Conveyance Advantage

Short update: Fire statistics from the Office of Emergency Services in Sacramento,CA, as of 8 a.m. yesterday:
  • 18 fires burning
  • 426,236 acres burned
  • 8,884 firefighters on site
  • 40 reported injuries
  • 3 reported deaths
  • 1,664 structures destroyed
  • 25,153 structures threatened
  • 51 shelters open with a population of 22,195
  • 321,000 evacuees
  • Aircraft and personnel from the following states: Nevada, Arizona, Oregon, Colorado, Washington, Wyoming, North Carolina and New Mexico.

My husband (the eternal optimist) reminded me tonight of all of the wonderful items that we have been able to pillage, I mean, convey before selling our rentals. As I write this, I am adding up the worth of these items. Since I wasn't able to sell the Lousy T-shirt on the unmentionable auction site (see, maybe I'll find comfort in knowing that we have recouped part of the approximately $700,000 that we lost.

In one new home that we sold six weeks after we bought it (for $40,000 more--those were the good old days--and the cause of the slump), we really made out. I was able to take the solid Corian cutting board that the developer makes out of scraps in order to prevent the homeowners from cutting directly on the counter. It's very heavy and we use it everyday.
Monetary value: $20
Useful value: Priceless

In that same rental, Lennar gave us a GE Profile refrigerator. Now, I've owned GE in the past and swore I'd never own another. However, this was free. Need I say more? We figured that it was worth at least $500.00. After all, it's a Profile, which means that, when installed, the front sits flush with the cabinetry and doesn't stick out. Therefore, it's a tad smaller than a standard refrigerator.

We had intended to remove it at the same time that we moved. However, we listed the house first, and, specifically, said nothing about the fridge conveying after the sale. A very young, newly married couple purchased the home and assumed that it came with the refrigerator. They neglected to ask us for it or to put it in the contract. The agent begged us to reconsider. No can do. We allowed the buyers' parents to enter after funding, but before the transfer of title (this translates to about 2 days before the close of escrow) in order to paint the interior with designer colors.

Unfortunately, we went to pick up the fridge while the parents were there. They begged us to reconsider and offered to write us a check for the fridge so that it could be there when daddy's little girl moved in. No can do. We needed it that day. The agent ended up splitting the cost with the dad. "After all," we asked, "how much can a small GE refrigerator cost?" Later, we decided to check it out.
Monetary value: $1,200
Useful value: Hey, it's our REFRIGERATOR (it also came with a three-year extended warranty.)

In another resale home that we bought and sold, we were able to pull out a very nice built-in (not anymore) garage unit. We had learned our lesson and took it before we listed the property. It sits in our garage today.
Monetary value: $800
Useful value: Are you asking me or my husband?

Our very first, and one of our best, tenants had to leave in a hurry. We think that some business associates of her fiance had threatened them, but we're not sure. Well, they left the house in excellent condition. I attempted to refund her entire security deposit, but she left no forwarding address and I couldn't find her anywhere. Her mother acted like I was a terrorist when I asked where I could send the check. She didn't want it either.

This same tenant left many nice furnishings in the garage--probably too much to take while fleeing in the middle of the night. We have been kind enough to "store" these items for her for free until her return. At which time, we will be happy to release them to her. Did I mention that this was five years ago?
Bike: $120
Trundle Bed with Mattresses: $400
Misc. things that I can't remember: $50

The pillaging doesn't end with useful items. Oh no! When you pay for the flooring and blinds in a brand new home, frequently there are many materials left over--for patchwork or whatever. We now have a shed and garage rafter stacked with carpeting, tile, blinds, and blind slat replacements that we will never use.
Monetary value: $100
Useful value: -$100 for storage space

Let's add it all up now:
Cutting board made of counter scraps: $20
Refrigerator taken from the clutches of young newlyweds: $1,200
Garage storage unit that I never see: $800
Total "borrowed" items from fleeing tenant: $570
Left over carpet, etc: 0

Total of value of items: $2,590
Approximate amount of money lost: $700,000

Total amount of money left to recoup: $697,410

Now we're getting somewhere!

Wednesday, October 24, 2007

Read Between the Lines

(Very quick (for those who couldn't care less) fire update: Yes, Southern California is still on fire. Some of it is headed toward the coast, which is unusual. I have a view of the Poomacha fire on Mount Palomar. It looks like it's still in San Diego County. We're finally getting some smoke as it drifts north, but we have sunny skies, too. Hope it stays that way!)

After I sent the apartment association in Kentucky an amendment two days ago to the complaint that I filed last week against my prior property management company, I was sent the following e-mail (my comments in red):

Mrs. Maxwell (Schmuck),

I just wanted to follow-up and let you know that our Executive Committee (those who would like to think they know something about investment properties) will be meeting in the next week and will review this complaint (you don't have a chance of being believed). I apologize for referring you and your husband to ###### Property Management (and I'll kill them for causing me this extra work) and for the problems you have experienced with their company (although I'm sure that they're all your fault ). I assure you we screen our members (the same way as your PM screened tenants--see prior post) and verify as much information as we can about them (by asking them if it's true) before accepting their membership (for life--no matter what). They have been a member of our organization since July 2005 (and we've regretted it ever since) and this is the only complaint (that I'm telling you about) we have received against their company (but as individuals, well, that's another story).

Again, I am sorry (psyche!) your experience was not favorable with ###### Property Management (and you are not favorable to me) and I will follow-up with you (when pigs fly) as soon as our Executive Committee meets (for beers) regarding this complaint (why did you ever think that we'd listen to you when we have such an honored board member in your property manager?).

Sincerely (please drop dead),

###### #######

I'll keep you updated on this.

Anyway, my sitemeter went berserk yesterday! This blog started exactly one month ago tomorrow. I've had hits from almost every state in the country and from many other countries: Israel, China, Italy, Brazil, Spain, Canada, Hungary, Germany, Japan, UK, Philippines, Switzerland, South Africa, France, Costa Rica, Chile, Australia, New Zealand, and places I can't spell or pronounce. You know what this means--it must be easy to accidentally access a blog that you have no interest in reading.

If you are one of my three loyal readers or if you are some of the many who are new to my blog, please pass this along to someone who may be interested in reading, sharing, obsessing, venting (not at me, I hope). You may know a person or two who have talked about RE investing for years, but have never done it; or a successful seasoned investor who needs a good laugh at someone else's expense; or someone who has lost money on their rentals, or have gone into foreclosure on their investments or a primary residence. Let's get a good discussion going!

Appeal to the voyeur in them, and ask your friends to join us and make my sitemeter blow a fuse.

Tuesday, October 23, 2007

Rent from Us--No Job Necessary!

Four years ago, my best friend moved out to Temecula, too. Three months later, the devastating fires hit San Diego County. We drove to the area about a week after the fires were contained and, sure enough, the house she had been renting was burned to the ground--along with most of the homes in that Scripps Ranch neighborhood. I felt sorry for the owner, but he seemed to be well insured. I think the key to non-owner occupied commercial insurance policies is the coverage for loss of rents. Even if the house is rebuilt, the fact that the owner has to pay a mortgage on it while it's vacant can be devastating. Please review your policies now and make sure that your rental income will not suffer in a similar disaster.

With fires still raging in many areas of Southern California, we are under blue skies here in Temecula Wine Country for the time being. We pray that it stays that way. We know many displaced families and are hoping that they make it back to a home still standing. As of last count, 1,200 structures reportedly have been destroyed. It's completely out of control and has already burned 245,000 acres. I'll keep you updated.

Now to my post--I had intended to entitle this one "Kentucky Schmucks." But I couldn't decide who the schmucks were--the property managers or my husband and I. So I rethought.

Before we sold our KY albatross, I had asked the incompetent PM for the applications of those who owed us rent and skipped out, so that we may pursue them through a collection agency. He never provided it. After the change of ownership, when I threatened him with a complaint to the apartment association where he sits on the board, he mailed them immediately. As you know, I made good on my threat anyway. I have e-mailed the executive director of the association with the information that I'm about to give you.

Not that it's necessary, but just to prove, once again, the incompetence of this PM, here are some excerpts from the approved rental applications of people who didn't pay the rent:
  • Employer section blank
  • Employer: "Wendy's", Position: "cook", How Long: "Start Tuesday or Wednesday", Current street address: "None"
  • Reason for moving: "Can't afford to keep up rent and bills."
  • Employer: "on disability", Salary: "$623/month" (this is for a $400/month apartment!)
  • Employer: "SSI", Salary: "$620/month" (yes, another $400/month apartment)--I'm beginning to think that people in KY don't eat. Oh, but I forgot, they do eat. It's the rent that they don't need the money for.
  • Current street address: "Salvation Army."
  • One applicant had an employer without a phone, and had been there only one month. Gosh darn! He'll have to be approved without confirming employment.
  • Reason for moving: "Evicted and then lived w/ friend."
  • And my all time favorite approved rental application is. . . . . .Previous street address: "Shelter", Employer: "None at this time (still looking)." Well, you've come to the right place!

Now, don't get me wrong, folks. I have nothing against homeless people or those who work at Wendy's. My only concern, and I mean ONLY, is that an applicant can prove to me that they are capable, and have a history, of paying the rent. It's really very simple. I don't care what they look like or where they work, they just have to prove that I won't have to chase them down every month.

We had asked about the screening process and the PM made it seem so professional. He knew that we knew how to screen and approve applicants because we had been doing it for years by then. Out of all the tenants we had, I only approved one who made it difficult to collect (I had rejected them initially, but the husband gave me a big deposit and several months of rent up front). They moved out early anyway, so I didn't have to deal with them for long.

As distant apartment owners with supposedly trained and licensed property managers, is it our duty to review and approve every application? I don't think that it is, even after this experience.

I can imagine the ad that he put in the paper: "Out of a job? Down on your luck? Don't despair! Come to our apartments where you can live for free!! No job necessary."

Now who do you think are the schmucks?

Monday, October 22, 2007

Fire Trumps Foreclosures

I live in the Inland Empire city of Temecula, just north of San Diego. As you may know by now, there are fires burning all over Southern California--Malibu, San Diego, down by Mexico, South Temecula--sandwiching us in. Today's fire headlines, deservedly, have replaced all the news of the gloom and doom of foreclosures.

The one in San Diego is huge. Most of the freeways are closed and people are being evacuated. I don't know where you go when the city is on fire and the freeways are closed. Many of my friends have been evacuated and are unable to travel here where it is still relatively safe. The smoke is thick down there and it's hard for people to breathe. This fire has the potential to be worse than the one that burned much of San Diego four years ago. It's so windy that helicopters and airplanes can't be used to fight the flames.

The fire burned from the mountains and is headed to the Pacific Ocean, burning through much of the path that it did in the last fire. It keeps shifting with the wind, so it has moved to areas with thick dry brush that has not been burned in a while. At least one person has died, firefighters have been injured, and many houses destroyed. Last time, several people were killed after being trapped by quick moving flames--many in their cars while evacuating.

This is a good time to give all the prayers that you are capable of giving for the health and safety of the citizens and our brave fire personnel. It's unlikely now, but if the Temecula fire appears to be making it's way out to where I am, I'll make a quick post to let you know, and then disconnect my hard drive and throw it in my van with my children, pets, pictures, and videos. We did have to evacuate four years ago due to a fire that came very close to our house, so I think that I know the routine.

Sunday, October 21, 2007

Can't Buy Me Love

To recap our last two years (just in case new visitors don't have time to read all of the prior pages), we bought apartments in other states and lost about three quarters of a million dollars. When we have the final tally, you'll be the first to know.

So, what does $750,000 buy these days anyway:
  • Ten sports cars

  • A lower middle class home in San Diego (still!)

  • A mansion in Texas

  • $75,000 cash flow per year on a 10% assisted living TIC

  • Landscaping on my friend's property in Fallbrook (wink to CW)

  • One year at an Ivy League college

  • A 15-day cruise to the Bahamas for 100 people in an upper floor cabin with a balcony

  • A diamond encrusted bra

  • Dinners out for eternity

  • A live-in housekeeper for 15 years

  • 10 best friends who like you for your money

  • A yacht

OK, now what CAN"T $750,000 buy:

  • Love

  • Heaven

  • Respect

  • Integrity

  • A devoted husband (I supposed it could buy one for a while, but not for life)

  • Children who think that you are the center of the universe and shower you with flowers that they picked from the garden with stems so little that they don't reach the water in the vase

  • One true friend

  • Self-confidence (although, the plastic surgery it could buy may help to boost this)

  • A big house on an acre in Southern California

  • An awesome blog

I guess we didn't lose much after all.

Saturday, October 20, 2007

Here I Am--In the Closet

You know by now that my husband and I have seven children--together. Sometimes I wonder how I was able to do so much investing, while caring for them. We signed the contract on our first rental property in December, 2000. It closed in April, 2001. In May, I signed my first rental contract five days after a C-section with my fifth child. What was I thinking? It goes to show you that when your eyes are on the goal, the tasks you perform in between are irrelevant. My baby was with me and that's all that mattered.

In 2000, I didn't use e-mail very much, and neither did any of the builders, agents, lenders, or title companies. I couldn't imagine doing it today without my computer. So I spent much time on the phone and in front of my fax machine. Being on the phone with five kids running around was a less than ideal way to conduct business. Many times, they'd come looking for me--even though I had told them that I'd be on the phone and not to disturb my conversation. As they'd scream my name at the top of their lungs, I'd have to mute the phone stick my hand out the door, and say, "Here I am--in the closet!" I've also had to lock myself in the bathroom, but that causes so much echoing when the kids would bang on the door.

I needed to find a way to invest while raising a busy family. Research was key. First I'd get the free new home magazines from the grocery stores. I would mark the neighborhoods where I thought the numbers would work. Then I'd call the agents asking about the pricing for the current phases, tax rate, HOA, etc, in order to determine if that development was still a viable option. On the weekends, we'd pack up the kids and peruse the areas in person.

The kids would have a blast running through the houses and saying, "This is my room! I like this house," as we reminded them repeatedly that we weren't buying the houses for ourselves. We will let other families live in them. The looks they gave showed how perplexing that statement seemed to them. They eventually got used to the routine. The grand openings were the best because, for us, we had the opportunity to buy in Phase 1 (which was good then, but not now), and, for them, they got food. We would also drive around the area and view the open houses--which is how we met the only real estate agent we have ever worked with in Southern California.

The only problem with taking the kids house hunting was when we were ready to talk to the agents. It's hard to focus when you're trying to get the kids off the tables or when you're in the bathroom every five minutes. We did the best we could. It got to the point where we would check off the most important items and then place a deposit, knowing that we had time to pull out and get our money back.

It must have worked because those were the homes where we made our fortune in real estate. I suppose back then, we could have bought a mud shack in California and still made a killing.

Friday, October 19, 2007


As you all know by now, our property managers in KY were--let's be kind here--less than competent. They were HIGHLY recommended by a contact I have at the local apartment association.

We had a great young man (21 years old) managing the property for a year. He worked for our train wreck of a first PM. When we fired her, we kept him on and he was the best manager who we ever worked with. Go figure!

Anyway, he had to quit for family reasons (or maybe he got tired of babysitting 49 tenants--and their friends) and gave us a two week notice. Unfortunately, it was about two weeks before I was due to give birth to our seventh child last year. There were complications with my pregnancy, too. So, it's safe to say that the timing of his departure really stunk!

In desperation, I called my contact at the apartment association and she sang the praises of the managers we hired. They were investors themselves and owned houses in San Diego. My husband and I both interviewed one of them and reviewed the contract with a fine-tooth comb. Since we thought so highly of the recommendation of our contact, we didn't call other references, nor did we have time. I delivered the baby in an emergency C-section just about when the transition was to take place.

The rest is history--or at least in this blog. I have never worked with such incompetence in my life. I don't know if they were trying to rip us off (YES!) or if they were just in over their heads (YES!). So, in an attempt to ensure that they are not recommended to other unsuspecting landlords, I sent an e-mail to the executive director of the apartment association yesterday. She had already agreed to accept a complaint from me. In order to give you some idea of our experience with the company, I have copied excerpts below.

Oh, by the way, the co-owner and on-site manager is on the board of directors for this apartment association. I have changed, or deleted, the names in this e-mail to protect the guilty (and my rear end--although, outlining my experience does not constitute slander). If you are thinking of hiring a property manager in Kentucky, please e-mail me and I will give you the name and location of the company.

". . . . .At first, we were pleased at the progress that Dave and Tom made with filling our many vacancies. However, within two months, we realized that, although they could easily occupy the units, they were incompetent at collecting the rents. Soon we were owed tens of thousands of dollars in back rents. In addition, our expenses went through the roof and a handy man was paid $20 an hour. We were charged for time that the handy man spent on other properties.

After the transition, it took five months of our asking before Dave transferred the Section 8 deposits to his management account. This caused us to incur bank charges on an account that we had to leave open to collect the Section 8 deposits. Taking care of this is a basic management duty.

After my husband paid a visit to the property, he found that the office was being used by ##### Management to manage another property. We were never told this. We also were not paid rent by the other owner and, even though Tom told my husband that we would not pay for a phone, we were charged for the entire phone bill. Worse, Dave just kept putting people in the units from whom he collected no rent. We began to wonder if he knew these people personally. There was no other explanation as to why he continued to fill the units and not collect the rent. My husband was on the phone with him repeatedly to no avail.

At this point, we were losing money and ##### Management was asking us to send them checks to make up for those who didn't pay the rent. In February, my husband handed Dave a check for $5,000 that was never reflected on any monthly statements until we asked about it in May.

Due to the gross mismanagement of ##### Place by Dave and Tom, in February, 2007, we listed the property for sale with Joe. We found out later that Joe and Dave and Tom are friends who all work for an organization called Real Source. In February, we were in contract on the building for $1,490,000. We had bought the property for $1,110,000 and had placed $200,000 in improvements. My husband was present for the inspection of the property. He explained to Dave that he was not to submit anything to the agent or buyer without permission from one of us. After the inspection, the buyer asked Dave directly for a rent roll. He sent her a rent roll with a detail of back rents that were owed to us by tenants who were currently paying rent. This one erroneous fact caused the buyer to cancel the contract. We sold the property this month for $1,075,000, which was over $400,000 less due to Dave's mistake.

Starting in January, 2007, we asked Dave to obtain estimates to resurface the parking lot. This request was completely ignored for three months, as we repeatedly asked. Finally, in May, 2007, my husband became insistent. Dave claimed that every asphalt company in town was too busy to give us an estimate or start on the project, except for one. My husband had to call other companies himself from California in order to have them submit their estimates. Even though Dave and Tom stated that they would follow-up, they did nothing until we acted.

My husband paid another visit to the property in June, 2007. At this announced inspection (he never just dropped by), he found a motorcycle parked in a vacant and "down" unit. Dave claimed that he didn't know how it had gotten in there, even though the person who owned it needed a key to access the apartment. My husband also walked into a supposedly vacant unit with the air conditioning running full blast, all of the lights on, with sparse furnishings. Dave claimed not to have any idea of how that occurred. My husband also found that Dave gave the key to a vacant unit to a tenant because his shower was inoperable and he was forced to perform his personal hygiene in the apartment next door. Dave also allowed the apartment complex next door to store a boat in our parking lot without asking us first or charging a storage fee.

The accounting statements were wrought with errors, which surprised us because we were told that Dave is an accountant. We would have to ask for things repeatedly (like bank statements in the file from previous management). After January, we never received an itemization of maintenance and repair costs. We would be told that they will work on it, then they wouldn't and we would have to ask again. I have a trail of e-mails to prove this point.

Many times Dave would not pay the mortgage on time, but neglected to tell me. As soon as they took over, I had to ask him repeatedly to pay the mortgage, which was over 30 days late. I would find out from the bank and have to ask Dave to send in a payment. Finally, in August, Dave informed me that he would not pay the mortgage because we owed him money due to the fact that he had not collected the rents.

In January, there was police activity at the complex. We were not informed of this until someone else called to let us know. This happened again last month.

Although we pay for landscaping, my husband would find weeds in the planters, without any sign of a landscaper being there for some time.

In July and August, I was able to find a buyer through another agent and negotiate the contract myself. However, in the middle of the contract, I received a letter from the county Department of Public Safety with a list of repairs that needed to be completed to a unit before we could close and transfer title. This tenant had requested repairs on numerous occasions and called the county in desperation that management would not repair the unit for health and safety issues. A week later we received another letter from a different section of the Department of Public Safety regarding trash, debris, and furniture on balconies and porches, and junked vehicles in the parking lot. This was surprising to us since, starting in January, my husband had asked Dave repeatedly to have the balconies and porches cleared. As usual, Dave said he would, but didn't act. This was an ongoing occurrence, i.e., we were promised one thing, but neither Dave nor Tom would deliver.

Due to Dave's inability to collect rent, he and Tom requested that we have title cut them a check for $15,000 from our proceeds. We agreed because our understanding was that there would be outstanding bills after the close for which they would be responsible. Dave paid the electric bill, picked up the check from title, and then canceled the payment, so that we would owe the utility company over $4,500. Dave refused to pay this bill, even after I contacted him to explain that our understanding was that he would pay the utilities. He only paid the bill in order to transfer the account to the new owner. Then, once he collected his payment, he tried to charge us for it twice--once to him and once to the utility company directly. . . . . ."

If I hear a response from the apartment association, I will be sure to share it with you. Hmmm, I wonder who they will believe--one of their very own board members or me?

Thursday, October 18, 2007

How do you know . . . . .

I need some answers! I'm going to ask a list of questions about owning multi-family commercial property. I have been puzzled about these issues for a while. I don't think that I would, or should, own apartments again without some experienced input from other investors.

How do you know . . . .

. . . . if your property manager has a vacancy listed on the rent roll, but is pocketing the rent instead of reporting it?

. . . . if the vendors conspire with the PM to overcharge you?

. . . . if a crime has been commited on your property?

. . . . if your PM is a convict from another state?

. . . . when a seller has paid people to act like tenants until after the inspection?

. . . . if the PM won't answer your calls after you hire him?

. . . . when your manager deletes your e-mails before he reads them?

. . . . if the handy man has worked the hours reported?

. . . . if the complex next door was given permission to store a boat in your parking lot?

. . . . how to decipher the monthly statements when they're written in a foreign language (or just seem to be)?

. . . . if your property is still standing?

. . . . when to stop yourself from telling the PM exactly where you would like him to stick his excuses?

. . . . if the complex only looks clean for one of your visits, and the rest of the time it's a veritable slum?

. . . . if the tenants are trashing their units (like more than the $250 deposit will cover)?

. . . . when you've had enough and it's time to cut your losses?

. . . . if your rehab estimate is accurate?

. . . . when your PM is being sarcastic (nevermind, I think I know the answer to this one)?

. . . . if the county has condemned some of the units?

. . . . if you should not be in the apartment business?

. . . . if you need to start a blog for therapy?

Tomorrow I hope to post excerpts from a complaint that I am filing with an apartment association in KY against my former PM.

Wednesday, October 17, 2007

Who You Gonna Call?

I'm getting calls from friends asking me for real estate advice. This happened a lot in the past. We even gave free seminars to show people how to do what we did. Back then, I didn't mind touting my valuable words of wisdom because I had worked hard and succeeded. While I'm flattered and everything now, I always ask, "Have you read my blog?" to which they respond, "Yes."

I have to blink hard a few times before I ask why they would be asking me for advice. "Why don't you ask someone who knows what they're doing?" They tell me that my experience is still valuable. OK. So they ask me a question about whether or not they should buy this or that. I say, "No." Hey, better safe than sorry. Actually, my ever-so-humble advice is to "buy and hold" because I think prices will drop more before they correct again. But, then again, I really don't know what I'm talking about.

I use this blog to make people feel a little better about losing money in real estate or business ventures, or even a personal foreclosure. I hope they realize that if they lost less than we did, they must be doing well. Perspective is everything. I'm also trying to analyze what went wrong with my situation and how not to repeat it. If it helps someone else, then great. It's not meant for advice, necessarily. I just want some company when I feel like whining about my financial loss.

My husband and I decided to cut our losses and move on long ago. But every now and then we get twinges of regret. It's not often and it's not for long, but it happens. The other day, he looked at me and said, "You know, we could have paid off our mortgage with the amount of money that we lost." I glanced back and said, "Twice." There are many things we could have done with that moola, especially when it comes to charity. But it was not meant to be.

The financial strain that we were under caused us to be very creative. So we can be thankful for our situation because it brought us where we are today. I promise that a future post will be about the business that we started out of necessity. It's still in it's infancy and so many exciting things are happening that I'd like to wait so that I have something to tell you.

I just wanted to assure you that positive things can happen from overwhelmingly negative experiences. Things may not seem so impossible after all.

How Much Is That Rabbit in the Window?

Our microwave/fan combo over the stove started making funny sounds the other day. We'd turn on the fan and get a high-pitched shrill, as though the belt were broken. My husband and son removed it yesterday so that we could order the new part.

The good news is that we didn't need to buy a new part. The bad news is that a lizard had crawled in the fan vent from the outside. I've always wondered what happens if you get too close to a microwave while it's on. The poor lizard was burned to a crisp. But, hey, it was a really easy and inexpensive repair job. We only needed one thing--"Where's the trash can?" It could have been worse. The lizard could have chewed through a wire or become stuck in a part and broken it.

This reminded me of a rental that we owned here in town and how much damage small animals can cause. We had tenants who were placed by a temporary housing agency that worked with insurance companies. This family had mold in their upscale home, and needed lodging. The placement company paid top dollar, so we were more than happy to accommodate them. According to the rental agreement, they were not allowed to have any pets.

When they finally moved out, we found that the carpet disappeared in some places and there were strange holes in the walls. It seemed bizarre until we saw the small round pellets in the garage. When I asked the prior tenant about it, she said that her daughter's friend brought a rabbit to a sleepover and it got loose. Hardly! This would have been one very fast and hungry pet. The entire carpet needed replacing and the walls patching. I couldn't believe that the rabbit didn't croak from eating all the junk. One tough bunny!

We talked to the nosey, I mean, helpful neighbor across the street. She confirmed that the family who lived there owned a rabbit. The cost of repairs (plus the inclusion of a non-refundable pet deposit) was $7,213.90!

They had paid a $2,000 security deposit when they moved in, so I they owed a balance of $5,213.90. I was told repeatedly that they would pay, but it never happened, so I hired a collections agency for the first time ever. This company collected the debt immediately, but, for some unknown reason, refused to pay me the money. Go figure. What's my recourse when a collections agency doesn't pay their debt? The media, of course (and small claims court).

A San Diego news channel filmed a report on the agency. Before it aired, the company paid up. They asked me to stop the news story and cancel the court hearing. I told them that, since I was paid my money, I would back out of the story, but had no control over whether or not it aired. It was broadcast on the 5:00 news. Oh well.

All this trouble over a cute, little rabbit. Not just any rabbit, but what turned out to be one of the most expensive bunnies in the world. Years later, a friends of mine opened a business raising rabbits. She kept trying to give me one. Uh, no thank you!

So, what ever happened to our little furry friend? The snoopy, I mean, alert neighbor across the street told me that she saw another neighbor's dog eat it before the tenants moved out. Bummer!

Tuesday, October 16, 2007

Wrong Businesses

Two of the worst businesses we ever became involved in were Amway/Quixtar and worm farming. Yes, you read that right--we were worm farmers. Worm castings. Worm poop, to be exact.

From 1993 to 1999, we had the misfortune of being Amway distributors. I'll probably receive a letter from Quixtar attorneys telling me to remove this post. That's how they keep their reputation clean, I hear. My best friend, at the time, was our sponsor. The up line was real excited because here were two college educated professionals to join the others in their line. We worked the business very hard. We can prove this because we offended all of our friends, neighbors, professional associates, and relatives. Yep, we were definitely in an MLM.

We attended all the expensive seminars and conventions. Bought all the tools (books, tapes, anything else they shoved in our faces). Showed the plan night and day. My poor husband was out prospecting all hours of the night after work, and I told everyone who I worked with that I'd be leaving my job soon to be with my kids. It didn't quite work out that way. We could never really get it off the ground. Neither could most of our up line. Many are not in today and those who are haven't gotten very far.

Here is the part that bothers me the most about Quixtar: those at the top claim that they have made their riches by doing what we were doing in the down line (getting distributors in to buy their consumables from their own business--very expensive). I have found that this is not true. The leaders of the group actually make the majority of their money by selling the books, tapes, and convention tickets. Therefore, it's an act in futility to attempt to duplicate their success when you don't even have the opportunity to do so. This information comes from lawsuits and previous up line themselves.

I have had friends and acquaintances tell us that they have joined Quixtar over the years. My husband and I never tell them what we know just in case, in the off chance, they will be the one in a million who makes it to the top. We are not dream busters. However, each one has gotten out even sooner than we did. I think that they're all smarter.

We did learn some things, though. We learned that it's best to think positively. Good sales techniques were taught at the meetings. We discovered what we don't want in a business. That the only people out at 8:00 at night are other distributors prospecting each other. That rejection only makes you feel like dying, but you don't really die.

Always open for new opportunities, in 2004, after moving to Wine Country, we purchased a worm farm. Not only did we buy the farm, so to speak, but we invested into the company, too. To the tune of $50,000. Not long after, the former inmate (from a telephone company scam), who headed the organization, ran it into the ground--or so the district attorney's office says--and we lost our entire investment. Obviously, we couldn't find anything out about the man before we invested because, as we discovered later, he had used so many aliases. So as not to soften the blow, I always tell people that we bought into a scam--just to confirm that my brains were hibernating during this one. All of the investors tried to resuscitate the company, but it didn't work.

The lesson I learned from that experience is not to trust chain-smoking, grossly obese, emphysemic, Christian-claiming crooks, who are missing teeth and whose pants fall down when they stand up. Yes, it's true. I am not exaggerating.

How ironic that this post is about Amway and worms!

Monday, October 15, 2007

#1 Reason

Why did we get into real estate investing in the first place? You may be asking yourself this question (or not--but I'm gonna tell you anyway).

In the 90's we had owned various businesses (I will outline these and others in a future post). Our number one reason for experimenting with something other than regular employment was to have more time with our family. Money was not a motivator for me. I just wanted to spend more time with my husband and kids, and the rat race was for rodents. I loved my job, but hated the impact that it had on our family.

My husband and I had been interested in real estate ever since we were married at the tender age of 19. That was 23 years ago (OK, so I just gave away my age). We were determined to buy a property with what little we had. As soon as I graduated from college, we bought a condo in Point Loma, by the coast in San Diego. When we were ready to move up to a real house, we wanted to rent out our condo. It was something we explored very seriously, but we didn't do it for two reasons:
1) My dad said that it was a very bad idea. This is a man who would put his money under his mattress, if he thought it would be safe, but we listened to him anyway.
2) We didn't know anything yet about the art of borrowing equity to purchase appreciable assets.

So we sold it in 1992 after the market started to drop. We would have realized a larger profit if we had sold sooner.

By then, our favorite pass time (because it was cheap entertainment for us) was to peruse all of the new developments and open houses in San Diego. We drove everywhere. We saw that some people had purchased homes from builders that depreciated during the 90's. This led us to believe that new homes were not a smart asset. By 1995, we started to notice that subsequent phases were selling for just a bit more than the previous ones. In 1996, we bought our first new home in Sabre Springs, near Poway in northern inland San Diego.

We had became quite adept at our ability to value new and resale homes. We could drive by any house, uncover a few details (square foot, number of bedrooms, lot size, age, and location) and appraise it to within a few thousand of the asking price. We would have never thought that our little hobby would become a business if it weren't for my brother.

Being in the house in Sabre Springs in the late 90's gave us an equity of about $200,000. We were feeling pretty good about ourselves. My brother came to visit one day and asked us why the equity was so valuable to us if we needed to sell our house in order to access it. Then we'd have the money, but no home. He said that he had been researching real estate investments and that we should take a serious look at it. That was about all we needed to ignite our passion even more.

We immediately started looking for something to buy. We acquired an equity line of credit for $100,000 and just followed what we were taught our whole lives--20% down and pay off as soon as possible. We looked in every neighborhood in San Diego, but the numbers didn't even come close to breaking even. My husband was working full time in sales, but I had quit my job years before to be a stay-at-home mom, so we could afford to lose only $200-$300 per month on a rental. We kept moving north to where the properties were less expensive and ended up in the Riverside County town of Temecula. We bought two Z-lot (lots so small that the eves overlap on one side) houses right away for $185,000 and $187,000 in a gated community in the heart of Temecula (they sold in 2005 for $385,000 and $405,000, respectively). Like good little children, we put 20% down on each, and, with the expenses involved, it ate up almost our entire equity line. We purchased the homes at the end of 1999. By the time we closed and found a renter, my fifth child was a week old (in a future post, I will detail my experience of buying houses and managing tenants while caring for a growing family).

Prices were appreciating well by that time, so we refinanced both homes in order to buy more. We had learned the lesson of leverage and decided that our equity would rise exponentially if we put less down and purchased more homes. We had to expand further north to Murrieta and Lake Elsinore because those home prices were even lower. Then we came back to buy a resale in Temecula. By the time we moved out here, we were able to refinance four homes for the down payment on our new primary residence and rent out the home that we left in Sabre Springs (which, if you recall, we sold 18 months later for $300,000 more than it was worth when we moved). When it was all said and done, we owned 13 rentals, nine of which I was personally managing:
  • five in Temecula (two of which we flipped, but lost money on),
  • two in Murrieta (one that we flipped and one we sold less than a year later--both money makers, but if we had waited just a few more months, we would have made $100,000 more),
  • two in Lake Elsinore (one of which we still own)
  • three in Texas (one of which we still own)
  • one in Sabre Springs, which was managed by a lease-to-own agent

Here we were with lots of equity and no cash flow (except for the money that we were making selling off some of the properties). I was pregnant with my sixth child and could not handle the day-to-day management of the homes we had left, plus we needed to be able to concentrate on finding an asset that would provide us with a monthly income. So, my husband quit his job in order to focus his time on this issue. We knew that, if we didn't find something with cash flow, we could sell the houses off and live on the proceeds. But, as you already know, we purchased those fateful apartments, and the rest is history.

We did end up getting the time with our family that we so desperately desired. My three and one year olds have never known a father who works outside the home. Our oldest was able to spend his last six months at home with a full-time father before starting college. If we didn't have the hope of the performance of apartments, my husband would have never taken the opportunity to leave his stable job. All in all, we reached our #1 goal, but, as you know, it didn't quite work out the way that we had planned.

The best laid plans of mice and men . . . . .

Sunday, October 14, 2007

Such a Lonely Word

I've been humming that old Billy Joel song, "Honesty," for the last couple of days, so I suppose I should be posting a thing or two about it in relation to our experience in the commercial real estate industry. That's better than making my family listen to me sing it for a few more days. Let me first state my little disclaimer: I have no doubt that there are plenty of honest people in the commercial RE sector, but we have never had the good fortune to meet one of them.

We may have lost a ton of money, but we retained what money can't buy--integrity (let's not forget our sanity, too). Would it have been easier, faster, and more profitable to fudge a few numbers and tell a couple of white lies in order to unload our properties--just enough where it wouldn't be worth someone's money to sue us? Heck, yeah!! But then how could I have lived with myself knowing that I did the same thing to someone else that caused us so much heartache? Frankly, I wasn't even tempted. I wish that I could say that about others involved in this wacky business. Do you remember the cartoons when one of the characters realized he'd been duped? He would turn into a lollipop--SUCKER! Well, I believe that's what people in this field saw when we came their way.

Initially, it all seemed so innocent--"Let's project the utility expense just a bit lower here to qualify you for the loan." My mortgage broker seemed like a nice family man, and I enjoyed working with him. He wasn't a scumbag, that's for sure. But when it came to shifting this and moving that, he knew exactly what to do. Since we were dealing with the rehab property, it made perfect sense to try to determine the numbers at full occupancy. Later on, though, we realized that these numbers made no sense based on the history of the complex. How could you lower the utility costs when you plan to add 40% more tenants? Maybe we were supposed to manage it better than the last tightwad who owned it.

The owners of the buildings that we considered buying had no qualms about misrepresenting everything: deferred maintenance, age of the roof, number of tenants, amount of rents, number of paying tenants, cost of utilities, amount of property taxes, pretty much anything we asked. It was so bad that I would call the county office to find out what the property taxes were currently and what they would be once we purchased the complex. The number of lies were ridiculous. Then we would request a package and the disclosures didn't look anything like the claims--or they contained inconsistencies that would tell us that something wasn't right. My husband set up a program on excel (or something like it) and would plug everything into his computer. We disqualified more properties than I can remember.

I guess that didn't do us a whole lot of good because the Ohio property fooled us. Initially, we dismissed it, but then I received an e-mail from the agent saying that the contract on it fell through and it was being reduced. I asked him why the buyers pulled out and he said that they couldn't come up with the down payment. Now, I think he was not being honest. I also believe that this OH seller completely forged many of the disclosure documents, including the 12 month history and two years of tax records, in addition to the copies of the leases.

I believe this because, as we were firing his managers due to their inability to collect the rent (they must have thought that a philanthropic organization bought the place), the woman told me that the prior owner only required them to collect enough to pay the mortgage, which was $20,000 (including tax and insurance impounds). His documents showed that he collected between $28,000 and $32,000 per month for the immediate 12 months prior. Then I had to call the insurance agent who we both used because they didn't send the bill to the mortgage company. The agent told me that the prior owner had desired to continue to carry liability insurance on the building after it was sold to us. He said the seller told him that he was afraid of being sued. Let's analyze that for a moment. He couldn't be sued by a tenant because he was no longer liable, unless there was a lingering issue, which he would have been required to disclose to us. However, we had owned it for 18 months by then and knew of no tenant who had a beef with him (of course not, he didn't make them pay the rent!). By the process of elimination, who else would sue him over the building---that would be us, the idiot buyers. The agent was not able to provide him for coverage on something that he no longer owned.

We also found that, although the seller and his manager claimed that the building was 100% occupied, our new PM found many vacancies--to the tune of 12. We could have foreseen this if we had required Estoppel certificates from all of the tenants (although, I have to say that those can be easily forged, too). The best way to determine the performance of a prospective property is to hire a new PM and have them walk the property, inspect the units, and review the leases (they looked good to us, but, again, easy to forge). I would never keep the management company of a prior owner unless they were closely scrutinized, their other buildings were inspected, and other PM's in the area were interviewed. I did not want to keep these managers, but the seller and agent insisted that we would make more money if we did. It must have been opposite day!

I have to say, though, that commercial real estate agents take the cake in dishonesty. Most seem to learn as little as possible about the property so that they can misrepresent it without feeling guilty, I guess. The agent who we used to sell our OH property made things up on the spot, like the fact that we were doing a 1031 exchange (wrong) or the reason for selling it (had no idea) or the numbers that we gave him (they were projected for the rest of the year, but he represented them as actual). Every time I corrected him, he would claim that he didn't know. I found it common to ask agents about a property and they would have to get back to me after asking the owner. I guess this makes their answers seem more legit on their part.

The worst agent, who we had the pleasure to do business with, was our KY guy. He co-owns one of the biggest commercial real estate firms in the city, and quite possibly the state. It was really unbelievable how low he would stoop to have things work to his advantage. (If you are interested in buying in KY and would like his name, so that you can avoid him at all costs, just send me an e-mail on the link). Every person with whom we came in contact after we retained him knew of his reputation to be less than forthcoming, to say the least.

He is a part of something called Real Source (as were our scary PM's there--are you surprised to learn that they knew each other?). He almost blatantly refused to sell to anyone outside of Real Source. Most of those he met through it were new investors. So, in February, he was successful in getting us a contract on the property for $1,490,000 (we sold it for $1,075,000 this month). It was with new investors from northern California.

My husband flew out for the inspection. He saw our agent, who was also the buyers' agent, collude with the inspector to hide small defects that he found. The inspector also claimed that the ancient boiler would last another 50 years. We didn't have any information that it didn't, but I would be very doubtful. We received a report that had no requests for repairs. This was a 70's building still undergoing rehab. What?! As we considered our options on how to proceed, I was relieved that our brainless PM sent them a rent roll showing that a few of the tenants owed us back rent, and the buyers got nervous and pulled out. Whew!

After that, our agent disappeared. We had no activity and were locked in with him until September. I contacted someone I knew professionally from the local apartment association to tell her how horrid our managers were and that we needed new ones. She thought of an interested buyer and had her agent daughter work directly with me to negotiate a deal. I tried to cut my agent loose, but he wouldn't release me from his contract. So he agreed to take $7,500 in commissions and didn't lift a finger during the close. Then, a week after it closed, he called my husband to ask if he'd be interested in buying a Real Source property. My husband was kind enough not to hang up on him--maybe that's why he didn't call me.

I had planned to get into the lies that the property managers told, but, frankly, this is getting too long and depressing. It's a good lesson to learn though, especially if you are new to commercial RE. Don't take anything that anyone tells you at face value--especially if they have an innocent sounding southern drawl. Check and double check everything. We had an attorney, but we probably should have included him more in the property search process (we tried to avoid the $175/hour fee as much as possible--see where that got us?). We knew that the proformas on LoopNet were just made up numbers, so we should have been more alert for other areas of fraud.

Hopefully, you are able to learn from our mistakes and not be too afraid to dip your toes in commercial RE. I've always been intrigued by NNN retail properties. If anyone has experience with owning these, please share.

Saturday, October 13, 2007

They Made How Much?!

Here is an interesting news item about the mortgage loan bust in Orange County (Southern California):

Call me naive (and I'm sure you have already), but I really didn't think that mortgage brokers made soooo much money. Money, yes, but the amounts they mention seem outrageous to me. I suppose in sales, the sky is the limit.

I can't wait for the opportunity to mention this to the broker who we use in California. He usually moans to me about not making any money off of my deals because I always negotiate his fees down to almost nothing. I would get that "car sales" feel sometimes (sales people on the car lot are known to use that line). I knew that his cut from the lender would more than compensate him for his efforts, but 2-4% on each loan? The disclosures never had that much listed. Could he have been making money from lenders which was not required to be disclosed? Or maybe the commissions quoted were not common.

It's also interesting to note that the article claims that Irvine "has been ranked by the FBI as the safest large city for the past three years." Irvine?

Gosh, I guess I learned TWO things today!

Friday, October 12, 2007

Tex Mess

Finally, my writing has been recognized and I have been offered an assignment to write a regular column! Does it count that it's a newsletter to my husband's customers (I will be telling you about the business we started in a later post)? I'm honored that he is impressed with my feeble attempts to communicate our experiences in print, but I think I just agreed to more work with no pay. Darn!

Work with no pay. Reminds me of my apartment-owning experiences. Only there was pay--us paying them. Speaking of which, I should tell you about our very first "property manager."

I write "property manager" because he really wasn't. Three years ago, we decided to buy houses out of state. My brother had about a dozen outside of California. Remember our "high equity, no (or negative) cash flow" investments? To make an very long story short, we decided to buy three new homes in the booming town of McKinney, Texas, in addition to the ones we owned in California. We found them through an agent who we connected with about a different listing. He had repeatedly visited this Fox and Jacobs neighborhood, but they would not work with investors at the time. Then, when they had some left over from a phase they were closing out, they became eager for investors to pick up the houses. I bet every new development in the country today is more then willing to work with investors now. My, my how the tide turns!

Two of the homes were 3700 square feet and one was 2900. I can't remember exactly, but we paid between $165,000 to $175,000 for each of them. Cheap by California standards, but expensive in Texas (there is no personal tax in Texas, but the property tax rate for that area is a whopping 2.92%). The agent said that we would be able to rent the big homes for $1,995 and the smaller one for $1,795. I asked for rental comps and he provided me with these exact figures from the MLS. With these rents, we would be clearing $1,000 a month total. Well, as we found out later, he was just a bit off.

Anyway, I digress. Since they were new and under warranty, the agent said that he would be happy to find us tenants for free (red flag!) and would probably have them locked in before we closed (wrong again!). Then he could put them on auto pay and we could save the management fee. Well, since we had bought primarily new homes, we were familiar with the process and in dealing with the developer after the close. So this scenario all made sense to us--except for one small detail. We were thousands of miles away.

After the close, the agent seemed to drop off the face of the earth. When we would contact him, he talked a good talk with that Texan drawl that makes everyone sound so sincere and honest (the KY accent does the same thing). He said he couldn't figure out why they weren't renting. Months rolled by. We reduced the rent. Then we started receiving notices from the home owners' association about overgrown landscaping (which the agent was supposed to be coordinating) and dead grass. Uh-oh. How are you supposed to rent a property that looks like a foreclosure?

We had reduced the rent by $200 on each (which brought our net income down to $400/month). The new year came and went, and we were still sitting on three vacant properties. In April, we finally cut the guy loose and hired a real property manager. She rented a big one and the small one within a month for $1,495 and $1,395, respectively. The other big one rented two months later on a six-month lease for $1,650. Now we were under $245 a month.

A year and a half after we purchased them, we sold one of the big ones and the small one, which were occupied at the time, to a friend because our apartments were sucking us dry. Due to the costs involved, we didn't make any money on the sales, but we pulled our investments out. I have to say that I wish we had kept them. The one we have now rents for $1,595 a month, is under newer adequate management, and we are cash flowing a tiny bit every month.

Lessons learned from this experience:
  1. Don't buy super big houses, even if they seem cheap to you. Resale is a killer because you eliminate a large number of buyers by having a listing at the high end of the local market.
  2. Don't take rental advise from a real estate agent--especially if this same agent has something to gain by selling you the properties.
  3. When someone offers to do something for free, you get what you pay for.
  4. Don't buy three houses on the same street at the same time. We were competing against ourselves. We had bought two at the same time in California developments, but never three.
  5. Don't think for a minute that someone (who has already picked up their commission checks) will care for your investment as well as you would. I think this is the third time that I've said this on my blog.
  6. Hold on to a potentially good thing.
  7. I can't think of any more than six.

Being our first experience with property managers, we felt that jumping to apartment management would not be much different. But, in many ways, it was. We learned a bit from working with the two Texas managers, but not enough to own apartments. Unfortunately, we didn't realize that until it was too late.