How Do I Love Thee?

Is it just me, or does everyone love everything about real estate?

I have to assume that it's just me, so when I'm in a social situation, and I want to burst with talk about my true love, RE, I have to contain myself. Like those who are pet lovers know, just because you think it's so cute when little Poochie tilts his head a bit this way to indicate that he knows what you're talking about, most of your friends couldn't care less. So you resist the urge to show them that picture you took when you put a tutu on the dog. Oh, you mean you actually showed people--well, let me tell you, you may have lost of few acquaintances that night.

I try my darndest to only bring up RE issues, whether my own (depressing) or those in the news, when others mention them first. But I'm always thinking about it. Not always, always, but sometimes a conversation will remind me of something--maybe it's a sharp tangent, but, nevertheless, the trigger goes off and, boom, "Do you know what I found out when I was perusing the MLS?" Yet, I resist--maybe I love my friends more than RE, or maybe I don't want to be known as that sicko who can't talk about anything else.

Yesterday, we were blessed to spend time with some good friends who live in the San Diego RE market. I mean, they live in San Diego County. My friend was gracious enough to bring up the current foreclosure situation and asked what percentage I feel that fraud is present in the actual loan docs. I gave her my opinion (very low percentage) based on absolutely nothing but my own experience. Now, if we're talking about misrepresentation of loan terms by unscrupulous lenders and brokers, I think it would be very high. Anyway, that was all that I needed. I gave her what seemed like an hour long dissertation on the state of the market and had several "the most important" points to make. Right before her eyes glazed over and she passed out in her chair, I think I may have convinced her that I actually knew what I was talking about. NOT!

So, the moral of this lazy Sunday post is that one must refrain oneself from talking non-stop about any subject in which one is interested, unless one is by oneself in one's car pretending to sing along to one's radio. Or, maybe, one can just non-stop think about it, right?

Let the Countdown Begin!

I know that you investors out there can relate to my countdown to the day that our last apartment sale closes---Wednesday, October 3, 2007. Four days and counting. We are selling at a loss. Surprise!! If we were realizing a profit than this blog wouldn't exist, right? The loss on the sale is minor compared to the amount of money we put into it.

I can't wait to post all the details about this one. Unintentionally, it ended up being an experiment gone awry. I can tell you that it's a 49 unit (in addition to one converted into an office/laundry room) in Kentucky. It's in a C-D class multi-family area (the class refers to the apartment building, not the resident population--although, I can't lie, there is a relationship between the two). When we first started looking at small apartments in San Diego, we used a great commercial agent who told us that we can either have an income producing property or one that we can bring our friends to--but not both. Get it?

So, this one was supposed to be a good income producing property--once we completed rehabbing about 40% of the units. There's something that never works about projecting numbers, even at worse-case scenario. With a distant rehab, we found out the hard way that it's just too hard to oversee and impossible to predict the unpredictable challenges. There were many, mostly consisting of monthly statements from our various PMs asking for $7,000 to $10,000 a month. I don't know about you, but, with no money coming in from either of our "income sources," it was hard to find that much money laying around. I looked under the cushions and in the washing machine, and, although I have to say that the wash garnered me quite a large chunk of change, it just was never enough.

I bet some of you are thinking that we should have found a way to hold on to both properties so that our losses would not be so great. We played that game for about a year: sell the only the one in OH, sell only the one in KY, keep both, sell both, every scenario that you can imagine. However, we decided that it was best for us and our children to sell both and lose the money, or risk losing more money AND our other properties, too (our primary residence and two SFR). Hopefully, in the course of the next few months, you will have a much clearer understanding of the chain of events over the past two years. Also, as more people start posting comments, I can respond with information that fills in some of the blanks.

As one of my friends explained, "You just need to get the monkeys off your back." Amen. I have never known stress as I have for the past few months. This was the first time in our years of investing that I actually lost sleep at night. Not good. Not cool. Not conducive to shrinking the giant bags that exist under my eyes anyway. I hate to say this, so please don't hold it against me because it's totally twisted, but it gave me great comfort to hear about the troubles that so many were experiencing with foreclosures. I was not happy for the sufferings of others (now that would be really twisted), it was the whole concept of being in the same boat. That's why this blog was born. I pray that our situation will bring comfort and hope to others who feel despair at their financial circumstances.

What a minute! Did I just get sappy on you? Yuck! Wipe that slobber off your cheek. I don't intend to do that too often. So, please forgive me and don't forget to check for a post tomorrow--sans slobber.

REIT Schmeet

I just saw this article on MSNBC.com: http://www.msnbc.msn.com/id/20973389/page/2/

It's about Real Estate Investment Trusts losing money. The article is fascinating, but I did lose interest after reading about 60% of it. Now, I have never felt that REITs are really like real estate ownership because they are, essentially, stocks tied into aspects of real estate. If you can trade your lousy real estate as easy as buying and selling stocks, then, well, you don't quite get the full spectrum of experiences as you would with your name or LLC on title.

However, I thought that I'd invite anyone who has lost money by owning REITs to post a comment on this blog. I've never been a REIT fan because 1) I felt that the return was very low by industry standards (compared to a TIC or something similar) and 2) no control over the actual real estate. This is coming from someone who leveraged much, took great risks, and lost a boat load of moola. But, I was always under the impression that they were a "safe" and mindless (not in a negative sense) way to invest in real estate. I guess I was wrong. Everyone even remotely related to this industry will eventually feel the burn, I suppose.

So, you REIT enthusiasts out there, are you holding on for, what history tells us, are better days or are you dumping your REIT and buying pork futures?

Property Manager Lingo

I can't wait to tell you about the disaster known as our other apartment property, but it'll have to wait until we close on the sale on Wednesday, Oct. 3. I don't want to do anything to risk this falling out of contract, even though it's as solid as a sale can be right now. At that time, I will post a picture and give you some details. I thought, since it's late, I just would spend some time telling you what I learned about communicating with property managers.

When a PM says, "I ran the application and he qualifies to rent," what they actually mean is, "I found this homeless person who I felt sorry for and told him that he could live for free in your apartment until you ask me why the tenant in #103 isn't paying." Who said PM's don't have a heart? At least it beefs up the rent roll, right?

When a PM explains that your expenses are high due to many repairs that month, what they're really saying is that they needed some extra cash, so they used the most expensive companies that give them the biggest kickbacks.

When a PM states emphatically that they are doing their best to work with tenants who are late on their rents, what they really mean is that the tenant who owes you $2,000 in back rent has skipped town and they have no idea where they are.

When a PM says that there's a little leak in the roof and it should cost only $200 to fix, what they do in reality is hire their brother to fix the leak for $1,500.

When the PM assures you that the gardening has just been completed, what he means is that he walked out the door of the office, picked up a piece of trash, threw it behind the overgrown bush, and went inside to listen to the phone ring.

When your PM looks puzzled at the motorcycle parked INSIDE a vacant apartment while you're visiting your distant property, what he's really thinking is, "Darn! I forgot to move my Harley before the Man came."

When your PM tells you that he couldn't answer your calls because his cell phone was in the repair shop . . . . . he's lying.

Don't get me wrong. I'm sure that there are some fantastic multi-family property managers out there. I just never found one, even after interviewing every PM in a certain area. It took me a while to realize that the person whose name is not on the loan docs will never be as concerned about my property as I am.

This is a good post on which to comment for those of you who can give some concrete guidelines for choosing a competent property manager.

Lousy eBay Listing

Here is the link to my very first eBay listing ever:
http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&rd=1&item=220157898675&ssPageName=STRK:MESE:IT&ih=012

As much as I hate to part with it, I'm auctioning off my Lousy T-shirt.

I told you that I'd be modeling the shirt and I didn't lie. That's me! My hair, my arms, my torso--yep, all me.

I hope you enjoy it and pass it along to your friends!

Looks Nice, Doesn't It?

Doesn't this apartment complex in Ohio look nice?

It did to us. It was almost new. We performed our due diligence. Reviewed the performance history with a fine-tooth comb. Looked at the business tax records of the owner. We even hired a forensic inspector from Kentucky to give it a thorough go over. There were two assumable two loans on it---one at 5.5% and the other at 5.9%. Everything looked good. The owner was asking $3.2M, reduced it to $3.1M and we bought it for $2.95M. The owner insisted that we leave the husband and wife "management" team in place because they had been keeping it 100% occupied, so we did--against our better judgement. They were not professionals. Yet, we were excited and this was supposed to give us a small income ($4,000/month) while we partially rehabbed the other complex we bought (that's another post), which we expected would give us a much larger return.

Then the first month after we closed, management collected only about 75% of the rent from the existing tenants. Wait a dog-gone minute! "What's going on?" we asked. They said that we should understand that not everyone is able to pay their rent every month and that we should just cut them a break. Uh--NOT!!

After three months, we fired them. That's when the woman told us that the prior owner only required them to collect enough to pay the mortgage. Well, we wondered, then where did those fantastic numbers disclosed in the due diligence come from? Hmmm.

We hired a new professional management company, which came with glowing references. The man who runs the company is very nice and knows the rental market. We worked with him for one year and nine months--and the experience of having this complex was a nightmare. Again, all details in future posts. I'm sorry to do that, but, if I tell you everything now 1) I'll have to type for 48 hours straight and 2) it'll be a case of too much information and no one will learn anything.

Anyway, I tell you all of this because, after we sold the apartment complex on August 31, 2007, for $2,670,000 (yes, do the math by subtracting this number from the one above, then get the tissue out and start bawling---that's only the loss on the sale and doesn't include the tons of money that we threw into it trying to make it work), our now ex-PM sent us this shirt:

You can imagine our joy at receiving this shirt! It's easy for the PM to laugh in relief at getting rid of our property. After all, it wasn't his children's college funds that were lost. He didn't face the financial strain and stress from having a property manager who spent money like it was growing on trees and couldn't seem to place tenants who could actually pay. By the way, did you know that Ohio has a law that prohibits evictions in December? Oh, you didn't? Well, they must have a universal class in Ohio that is required to be taken prior to renting an apartment because all of our tenants knew. Do I detect some bitterness? No, not me--never.

Well, as much as we love this shirt and hate to part with it--and we do, really--we are going to have to auction it off to try to compensate for some of the money that was lost to us under this PM's watch. So, as soon as I can figure out how to do it, I'm slapping this puppy on E-bay. I don't want all of you to bid at once because I don't want E-bay's system to crash, so just one at a time, please.

Believe it or not, this shirt has never been worn. No, not once. I wouldn't let anyone in the house wear it because it is such a precious possession of ours. However, noticing the cheap, itchy material of which it is made, I did throw it in the wash once to soften it up. Hence, the faded, wrinkled look.

Ok, you eager beavers, I will post a link to the E-bay auction as soon as I have it up and running. I plan to model the shirt myself to give you something to really laugh at.

You Lost How Much???

The time has come!!

Real estate investors who have lost money need support. I'm hoping that this will be the place to get it. Or, at the very least, whine about your experience and feel better.

I'll tell you a little about my situation now. In future posts, you'll get the whole story. What I really want is to hear about you. So, I'll go first and then it's your turn.

My husband and I entered the real estate investment market at the end of 2000 (we are not agents or in any other related fields), when we were 34 years old. At the suggestion of my brother (who didn't enter the market until much later), we used the exploding equity in our house and started buying single family homes in Riverside County of Southern California. We lived in San Diego at the time and couldn't make the numbers work there, so we traveled 45 minutes north up the 15 and landed in Temecula, just over the county line (with houses priced 1/2 of the going rate in San Diego). We didn't know it, but Temecula was on the cusp of booming--and so was our portfolio.

We ended up buying three homes in Temecula initially and two up the 15 a bit more in Lake Elsinore. We bought many others, but I'll get into that another time. We managed all of the homes ourselves--never working with property managers (PM's). This becomes really important later on, as it is one of the reasons for our demise. We later expanded into Texas. That's when we had our first taste of what working with a PM was like.

In 2005, we had millions in assets. By then I was having our sixth baby and couldn't manage the houses myself. Our equity had now doubled, but we had a negative cash flow each month. We decided that my husband would leave his job and manage our investments. The first thing we had to do was generate a cash flow. We looked at everything: TICs, NNN, duplexes, car washes, apartments, worm farms, everything. We decided to 1031 four of the houses into two apartments in other states because the cash flow on Loopnet.com looked so good (OK, as many of you already know, that would be our second mistake).

I'll give all the details in later posts, but the bottom line is that two years later (right about now) we have realized a loss of about $600,000 to $800,000. We are closing on the sale of our second apartment next week, so we won't know the tally until all of the numbers are in. To say the least, it is a humiliating experience, especially when you are totally maxed out and don't know what to do while you're trying to sell off the property and save what little is left. We feel so stupid (hard coming from two people with college degrees) for allowing this to happen even though it seemed that we tried everything to make it work.

Our loss is only indirectly related to the current market, so we can't point our fingers and say that it's not our fault. The worst part is that, from the moment we started buying real estate, we have waited with eager anticipation for the market downturn, so that we could stock up on some great deals. Now that it's here, we have to sit and watch, as we are in no position to make another purchase right now.

The most amazing revelation is that we are not turned off to real estate at all. I still firmly believe that it is the basis to most successful financial portfolios and I plan to be involved in it for a very long time. If you look at the history of the overall performance of the real estate market, it has always gone up--eventually, anyway. You just have to time it right. Repeat after me, "Buy low, sell high. Buy low, sell high. Buy low, sell high."

We have learned from this experience and would like to pass some of that on to you--but I want to hear about what you've been going through in this market and how you're dealing with it. So, please post your comments! And, while you're at it, grab some cheese to go with that whine.

I plan to update daily. I'll catch you tomorrow!