justinsadauskas

All over the place in this one so I’m just going to use bullets points today so I don’t have to fake transitions:

– Shane Schleger, one of my few poker friends, once told me to start a blog where I just comment on everyone else’s blog.  I almost did.  I think he just wanted me to stop bugging him on AIM with my blog comment of the week. In his honor, I’d like to talk about two blogs this week.  First, Daniel Negreanu’s video blog entitled “REAL TALK.”  I’m not a big fan of Daniel Negreanu.  And I’m also not a big fan of anyone who considers themselves “REAL.”  Everyone knows someone who says, “I keep it real,” or “I’m not fake” or some variation of that.   And almost without fail it’s a euphemism for “I have no social tact.”  For this world to move peacefully most normal people have developed a filtration system, where you don’t say whatever comes to mind.  If you don’t think the overweight lady should be buying a bag of Doritos, it’s really not your place to say.  If you don’t like someone’s new haircut, keep it to yourself.  These “REAL” people are offesnsive – often without knowing it on a daily basis and cause confrontation they don’t plan on.  This creates unwanted enemies.  But instead of looking in the mirror,  they start calling themselves “REAL.” In my limited Daniel Negreanu experience he fits into this category.

His REAL TALK  blog attacks the FTP main players, Howard Lederer, Chris Ferguson, and Ray Bitar.  His overall premise is spot on and he seems to have paid attention to the facts, but his point is childishly obscured when he suggests they should be given a baseball bat to the balls. It’s almost if he’d rather argue whether they deserve a baseball bat to the balls than if the big three committed any wrongdoing.

The second blog is Doyle Brunson’s.  http://www.doylebrunson.com/blog/

Same topic.  His presentation is cleaner, but he only wants to blame Ray Bitar – saying he believes his friends when they say they didn’t know FTP was illiquid.  Yikes, that’s really putting your head in the sand.  I’m very surprised by his blog.

– Jeremy Lin –  Who doesn’t love that story?  Talk about a positive black swan event! Lin went from sleeping on someone’s couch in relative obscurity to being more highly sought after than Jay-Z and Beyonce in NYC.  And it only took one week!

His play has been analyzed ad nauseum, but I think he will eventually fall into the middle tier as a starting point guard.  Offensively he’s very, very good – more than just a product D’ Antoni’s system.  But against the top 5 – Paul, Rose, D Williams, Rondo, and Westbrook – he’s just can’t compare athletically.  Obviously that’s tough company but besides Rondo’s shooting those five are better than Lin at every aspect of the game.  Also, Lin is a defensive liability and I don’t see that changing.  He has to be Nash-like on offense if he’s going to make up for his defensive problems and get into the top-tier.

– Sklansky’s Fundamental Theorem of Investing – Paraphrasing Sklansky, for a trade or bet to be good, you have to have information asymmetry on your side.  Specifically, know why the other side is taking the trade and why they are incorrect in doing so. Even if a trade at the outset looks extremely appealing you better be careful unless you know why the other side is presenting it.

As Sky Masterson famously quoted, “One of these days in your travels, a guy is going to show you a brand-new deck of cards on which the seal is not yet broken. Then this guy is going to offer to bet you that he can make the jack of spades jump out of this brand-new deck of cards and squirt cider in your ear. But, son, do not accept this bet, because as sure as you stand there, you’re going to wind up with an ear full of cider.”

Theoretically Sklansky Theory of Investing is great – makes perfect sense.  Definitely a good idea if you are going to trade high-stakes futures.   In real life however, I’ve found that you are better off walking through the door and asking questions later.  I once bet a friend that the song lyrics were “Kumbaya, my Love.”  A sucker is born every minute.  That particular minute it was me.

Don’t fall into the trap of giving the masses credit.  Whenever I’ve asked myself questions like, “If it were so easy, how comes everyone not doing it?” or “That looks to good to be true.”  I’ve found that it usually is that easy and it’s probably that good.  If a house is selling for 20% below market value, buy it.  If you have a good business idea that seems obvious, go for it.  Don’t get paralyzed.

On the real estate front, I’ve been slacking a little, I went back to Chicago for my birthday so I haven’t had time to look for new properties.  I mentioned the house  29810 Greater Mack -I thought the short sale deal was as good as closed, but  I got a call from the other agent and he said, “We are close now – hopefully we will close in a few weeks.”  Hmmmm.  I don’t even know what they are working on – I think trying a to release a second mortgage or something.   Like always, nothing with the banks moves fast.  Of course, when they want you to do something, they give you about 48 hours.

I said in my last blog that I was going to write about edge in real estate but I think I’m just going to focus on my experiences with the banks, since that’s most of the edge anyway.  I will probably write that later this week.  Thanks for reading.

I was all ready to sit down and write this blog about EV, utility and life – but  I checked twitter right beforehand- and saw that Phil Galfond had just written a blog.  http://www.philgalfond.com/quick-update-fake-math-and-my-philosophy-on-being-a-logical-poker-player. Now, Phil Galfond has no idea who I am but I’m a big fan of his.  For those of you that aren’t online poker players, Phil is one of the best poker players in the world and also one of the most authentically honest and humble.  That humility really endears him to a lot of poker players.  I, like 99% of poker players, think I’m awesome.  When I’m self-effacing or humble its usually veiled in bravado and/or false modesty . I think the twitterites like to call it #humblebrag. I am ok with that, it’s a disease of all poker players –  we can’t help it.   Like my wife Katie says, I always think I’m right.  And I always tell her that I do think I”m right, why would I say something that I didn’t think was right?  A logical point I think – but it never satisfactory nor endearing.  Anyway, Phil Galfond is actually awesome, and doesn’t always think he’s always right – thats why people love him.  I became a fan of his, when he first wrote the post entitled “G-bucks” on 2+2, a play on Sklansky bucks (Expected Value), where he was the first person to discuss pitting your actual hand against an opponents entire range in a highly quantitative way.  Lately in my Phil Galfond stalking he always seems to be one step ahead of me. I started a workout/diet plan found at leangains.com last December which I really like and has worked really well.  I was really proud of myself for cracking the code on diet.  I had found my secret little website.  Turns out Phil Galfond has been a celebrity member for over a year.  And now, no shock, he steals my blog idea hours before me.  Pretty soon he’s gonna be stealing rental properties from me.  Apparently you have to wake up earlier than 10 am to get one by Phil Galfond.

Anyway, back to my blog.

Terrance Chan, mma fighter, poker expert, and admitted math nerd recently got this tattoo:

It’s a normal distribution curve – very important in probability math.  His friend called it the “nerdiest, meatheadiest thing ever,” and I think that’s an accurate description.  I’m not cool enough to pull off a tattoo and be taken seriously, but if I was it would definitely be a page out of Terrance’s playbook = the expected value function.

The term expected value (EV) originates in math (specifically probability mathematics) and is used to describe the long-term average outcome of a given scenario.  This equation states that the EV is just the summation of the weighted probabilities of an event.   When you first start to learn poker, expected value is the first concept you learn.  It becomes the basis for every decision you make.  It doesn’t take long then before it is so ingrained that you begin to make life decisions in terms of EV.  Pretty soon, you are deciding whether or not you should pay the parking meter by weighing your chances of a parking ticket versus the extra quarter – (a battle I always seem to miscalculate).  And while some poker players feel hampered by this knowledge, I don’t see how it as anything but a blessing.   It gives you a method to make good decisions for situations the average person doesn’t handle very well.  Should you play the lotto?  Run the chances of winning, divided by the prize pool – if its higher than your investment in a ticket – play, if not don’t.  It’s pretty simple when it comes to monetary decisions – expected value analysis is the answer.

But expected value doesn’t tell the whole life tale.  You might play a negative expectation game like roulette if the enjoyment you have playing is worth more to you than the amount you expect to lose.   Money is not what’s important, what’s important is happiness.   So to solved life problems, you have to couple the expected value of an event with your personal utility curve (aka happiness curve).  I think when you do that you have a construct to theoretically solve ALL of life’s problems.  You can decide whether or not to take a flu shot, drink expired milk, or get drunk on a work night.  For the latter,  you’d have to weigh the probability of your expected level of fun (happiness) at the Thirsty Thursday party with the expected level of pain (negative happiness) the next morning.  If you’re in the plus, party your heart out, if not stay home.  Maybe your analysis would tell you that 2am tequila shot won’t increase your utility enough to offset the extra intensity of the headache.   You’ll have to grind the math on that one.

Now most people do this intuitively, and the idea is mostly tongue in cheek.  Coming up with a remotely accurate utility curve is obviously impossible.  But, I think if you break down some of your daily decisions, you’d find that you might see some problems in a new light.  If you want an example of that just read that dirty dog Phil Galfond’s latest blog  he decides whether to take a break or continue to play poker during a downswing by using probability and happiness to come to an interesting decision – one that most poker players don’t make correctly.

Next blog will be about the edges I think I have in real estate.  Thanks for reading.

No ice cream anecdotes today – I’m all bizness….

I received an email from a real estate agent I worked with about a year ago, when I was still living in Chicago.  The subject read:  Money Man deal.  The body…. 174k  7.5%  amort 5yr  10k balloon 3-4k down.  That jibberish was the whole email.   I remember being irritated with the brevity and lack of detail.   It was a foreign language to me, so I told him to pound sand cause I didn’t know what that meant and I sure wasn’t nobody’s money man!   As it turns out that deal was not only illegal but also financially terrible.  It did however, open me up to the idea of selling notes.  Though it wasn’t until six months down the road that I got wise to the beauty of the land contract.

From Wikipedia:  A ‘land contract’ (sometimes known as a “contract for deed” or an “installment sale agreement”) is a contract between a seller and buyer of real property in which the seller provides financing to buy the property for an agreed-upon purchase price and the buyer repays the loan in installments. Under a land contract, the seller retains the legal title to the property, while permitting the buyer to take possession of it for most purposes other than legal ownership. The sale price is typically paid in periodic installments, often with a balloon payment at the end to make the timelength of payments shorter than a corresponding fully amortized loan without a final balloon payment. When the full purchase price has been paid including any interest, the seller is obligated to convey legal title to the property to the buyer. An initial down payment from the buyer to the seller is usually also required by a land contract.

You probably didn’t read that.  Here’s what you need to know.  The best way to think about a land contract is that you are essentially “the bank” giving a note/loan (like a mortgage).  You set the rules, down payment, interest, and the purchase price (amount of note).  Unlike a mortgage, you have title interest in the property rather than a lien, giving you more rights on a default.  The buyer is required to maintain the property, pay property taxes, and property insurance –  just like a mortgage.  So you don’t have to manage the property, all you have to do is make sure your payments come in.  If the land contractee fails to make these payments, you take the property back.  After X number of years and payments, they own the house (like a mortgage).  You can charge up to 11% interest on land contracts in the state of Michigan.

Now land contracts tend to get a bad rap because in the last decade people used them to sell houses to people that couldn’t get a loan at a time when all you needed was a pulse to get money from a bank.  So the absolute worst financial candidates were getting these land contracts and no shock, some of them defaulted, trashed the house, didn’t pay taxes etc.  You can’t make it around the block without some old-timer in a cowboy hat giving you a land contract horror story.  But times have changed!

I will use an example of a  land contract deal that I hope to close on next week.  This guy bought his house for 130,000 in 2005,  it’s now worth around 40k.  Either by choice or by inability to pay, the house was foreclosed by the bank.  The house went to auction and the bank bought the house back for $28,000.  Now under Michigan law, the owner has 6 months to redeem the property (buy it back for the price it sold at auction).  This right is transferable.  He obviously doesn’t have 28k in cash or he wouldn’t be in his situation and he really wants to stay in his house, so the deal got brought to me.  I will redeem his house for him under the agreement that I will land contract it to him.  We negotiate the terms.  We agreed upon 5k down, 10% interest, 60k note amortized over 5 years.  So my initial investment is 23k (28k-5k down payment) plus closing costs  (commission and interest to the bank) puts me around 28k  total, maybe a little less.  After 5 years and 60 payments, he will have paid me $76, 500.  So my ROI (if I did it right) is 34.6%.   If he defaults, you can quickly see that i am getting the home a great discount and because it’s essentially his home, I see him fighting like hell to keep it, so the chance of default is pretty low in my estimation.  He gets a little higher payment than he used to have, but he owns the house outright in 5 years and gets to a keep his home he otherwise would not be able to keep.  Definitely a win/win.  These deals that were once pretty lousy are now much better because of the changed market conditions.  Specifically, the difficulty in getting a loan and the drastic housing value collapse.

Now every land contract does not have a ridiculous ROI like the one above, the negotiation depends on a lot of factors.  However, they are usually quite a bit higher than the ROI of a rental in my area – and a LOT LESS work. There are two problems however.  I want to be in this business for life and if I have all land contracts after 5-10 years – whenever these notes get paid off – I’m left with a pile of cash and no passive income.  My fear is that the market condition will change and reinvesting the money won’t be as easy, especially if the housing market improves drastically.  Also, you can’t refinance the money out like you could in a rental.  At the current >5% interest rates, this is a problem.  You can refinance money out of an income property out at 70%.  So if you make 15% ROI on a rental and refinance it out and repeat – your ROI keeps going up on that same amount of money.  My plan right now is to resist the urge to snap up every good land contract and get a 50/50 split of rentals : land contracts.  In the future when I get a little more seasoned, I might start hedging one way or the other, but I think it’s safest to see how everything goes first before going all in on just one of the other.

Some tips – don’t set up a balloon – nobody can get financed or save enough to pay it by the end.  Escrow the taxes and insurance – too big of a  risk to let them handle it.  Add it to their payments.  Definitely get title insurance – I had some clown with like 50k in back taxes try to get me to buy his house so he could stick me the bill.   A lot of these deals come through short sales where you land contract it back to the owner.  Sometimes the banks make you sign an arms length transaction waiver to prevent this type of circumvention, sometimes they don’t.

caveat – I am just starting out and don’t want to sound like an authority or law expert.  These are all my original ideas and its possible I’m out to lunch so do your own due diligence.

I’ve only had one job in my life outside of poker – ice cream truck driver.  While I kicked ass at selling ice cream no doubt, Crazy Ray, will tell you I just had a good route.  The day I brought in the single day record shattering haul, he famously mumbled under his breath while shaking his head in disbelief, “Those Mexicans sure love their helado.”    Maybe he had a point, maybe my success was due entirely to my demographic, but I like to think I knew how to push a Choco Taco on a 3 year old better than the next guy.   If was all about the hustle.  If you weren’t playing, “Pop Goes the Weasel,” at full volume most of the day, you weren’t trying. I’d mix in a little “Entertainer” for variety but only at ear drum breaking volume.  It was a war of attrition – kids against their parents.  You play those chimes long enough, the kids keep asking for a buck. Every parent has a breaking point.  At 20% commission, you take no prisoners.  The assumptive upsale.  If a tiny tot comes out with a twenty dollar bill, you assume he or she wants 20 ice creams until told otherwise.  I was good, Crazy Ray wasn’t, and the Mexicans did love their helado.  That’s all there was to it.

As prolific as my summer as an ice cream truck driver was and as impressive as my $780 mark would be to a prospective employer – the rest of the resume was blank.

The good thing about not being able to get a real job was that at least I never had plans for one.  I’d always had an interest in real estate investing and everyone starts somewhere right?  Fake it til’ ya make it.  Like the first time I saw a 10-20 limit holdem game when I thought that everyone at the table was either Johnny Chan or a millionaire – eventually you sit down and realize no one knows what the hell they’re doing – at anything.  I’ll fit right in.

I’m hoping for a lot of feedback on this blog, so I’m just going to lay out what’s going on and you’ll see every deal I make – good or bad – and hopefully maybe you’ll steer me clear of some lemons and get me into something good.  We’ll choose our own adventure.

So here’s plan.

The mission:  To develop a self-sustaining investment portfolio generating enough passive income after taxes to provide a comfortable life for my family.

The model:

http://forumserver.twoplustwo.com/30/business-finance-investing/ask-me-about-real-estate-investing-99351/

I didn’t know where to start out, so I used this thread on 2+2 as my guide.  It’s a great guideline for me and other beginners to get thinking about real estate in a reasonable way.  I would recommend the “spex” method to people starting out because it’s very disaster proof.

The Porfolio (aka what I got so far) –

23430 Allor

– acquired for $31,000 + 7,000 in additions = $38,000 total investment. Currently rented – $800/month

23103 Avon

Acquired for $50,000 + 3,000 to pass inspection = $53,000 total investment – Currently rented – $1000/month

29810 Greater Mack – Under Contract 

– investment $61,000 (roughly) –  projected rent – $1100-1200/month

Land Contracts – two purchased for $44,000 – receiving $1045/month total

$25,000 Promissory Note – receiving 15% interest

Vacation rental (not bought as an investment originally) http://www.vacationrentals.com/vacation-rentals/94605.html?promoType=none

This used to be my second home, and it’s worth about 50% of what I bought it for in 2007.  I don’t use it as much as I’d like so I was thinking about selling it . On the advice on my CPA, I decided to turn it into a vacation rental for a little while before I sold it to catch a big tax-break.  I listed it on the first site I googled not expecting any action.   Shockingly, my phone’s been ringing off the hook.  It might end up being a nice surprise.

I have one new land contract that will close soon that I will blog about separately because I think they are a very interesting type of investment.  So that’s what I’m working with.