Recent activity and considering investors

22 Apr

Hey guys.  Life is pretty hectic these days.  I’m a new dad, with a 6 month old son

(gratuitous picture, can’t help myself)

Between the little guy, real estate,  and other hobbies, I’ve been slacking a little on this blog.  I do plan to blog more regularly, so don’t give up on me.

Last week, I officially closed on 22624 Mylls.    The final purchase price was $61,000 and some change, and it will be rented for $1000/month on May 1st to a friend of mine.  That’s not quite within my 2% guideline (purchase price /monthly rent), but I really liked this house and didn’t sweat the difference too much.

The house on Greater Mack is also being rented for $1000/mo.  For both, I took less than what I could probably get per month in order to get it rented immediately.  Locking up the extra month’s rent seems better than gambling on higher rent especially if you like the tenants you are putting in there.

I have also committed to a government contract type investment.  I have two friends, Will and Jamison, who were roommates from college that I do a lot of business through.  Both are my age and like-minded, motivated entrepeneurs.  Jamison made a lot of money running gold parties, long before they were cool.  Now, he runs his owns small investment/VC company.  Jamison approaches me with all kinds of different inventions and ideas.  For some reason, he thinks I have a lot more money than I do, no matter how many times I tell him otherwise.  He still ends every pitch with, “So can I mark you down for $500,000?” Anyway, he came to me a couple weeks ago with a new business plan.

He is raising 1.1 million for a company that will bid on a specific government contract to build a medical device that moves handicapped people from their hospital bed to their wheelchair and vice-versa.  The U.S. government is requiring that contracts only be given to disabled veterans .  So Jamison, has linked up with a disabled vet that has all the proper paperwork and strong business background.  The vet will run the show and bid for the contract. I am essentially an angel investors.  I have a lot of details, which I will spare you guys, but the gist is that the government is guaranteeing like 18 million dollars worth orders, and our bid would net us a 400 – 500% profit over 5 years if all goes well.  Since the company must be headed by a disabled veteran to bid, we only have one adversary bidding against us.

Overall the way I feel about this deal is that  its probably great, but its still is a lot riskier than anything I’ve done before.  Not only are there a lot of logistics, there is a small risk of getting Madoff’d.  I’ve never met with the guys that’s gonna be in charge and have only known my investment buddy for around one year.  Obviously, I’m very confident it’s legit, but nothing if for certain.

I am often in these type of situations where an outsider might call me crazy for my trust of people and my lack of due diligence.  But I tend to look at things differently. For example, I often size up potential renters over the phone, and if they seem honest, I’ll let them go check out my houses without me there.  Saves me time, at the risk is they steal my appliances.  It’s a weighed risk/return.  Granted it would be embarrassing if a guy stole all my stuff, or in this case my $100,000 got absconded; but its not without upside.  I just weigh the value of my time, with the chance someone steals my crappy appliances, and I have a no-brainer decision to let them in there. With this deal, I admittedly don’t know that much about it, but I think it’s worth the risk.  Also, I’ve had some luck with trusting people in the past….

Back in 2003-04, I lent some guy name “Fossilman” some money over the internet to go play the World Series of Poker Main Event without ever meeting him. That worked out pretty well.

One another thing is that I do think I have some  backup when I take some of these “blind” risks – I use other smart people as my guide.  For example, if Mark Cuban is investing in the same company as I am (he’s not), it’s probably safe to say that its +EV.   My buddy is no dummy and neither are the other people that are putting up $100,000 to get to the the 1.1 million – so I’m using them as my barometer.  If its good enough for them, its good enough for me.  Now Bernie Madoff conned hundreds of smart people so it doesn’t always work, but hey, you can’t be scared of every shadow in life.  Its important to understand the worst case scenario, but not be paralyzed by it either.  So here’s to hoping it works out.

I am closing on another house 30206 Champine this coming Tuesday.  I originally reported that the deal was for $60,000 but I was mistaken it was for $70,000.  This was a major gaff on my part.  At $70,000, I can’t get enough from rent.  So that means I need to flip it.  I think it will sell between 80-95k – but it has a major foundation problem,  that I don’t have time to get inspected.  Not exactly Real Estate Execution 101. Anyway, it was my broker’s old house and him and my other agent buddy say its still a good deal, so I’m going to give it a go (they know the area inside and out).  I will be flipping it as soon as possible.  I will let you know how this turns out, it really could go either way.  It will be a good learning experience either way.


One thing I am considering is setting up an email group for potential investors. I am getting near the bottom of my liquid money for real estate, and I no longer have the cash to buy whatever potential deal may arise.  I think I could raise money for most of the deals, but I’m not 100% certain – outside of poker players, its hard to get anyone to commit to anything quickly.  You know, regular people.

The deals that I would ask for money on would be so good, that it would bring me physical pain to pass them up.  They would all be very short-term – either short/sale purchase or redemption purchases, all with the intentions of immediately selling.  The short/sale purchases are relatively self-explanatory.  The redemption deals work like this.  When a homeowner goes into foreclosure, the  home is auctioned off at a sheriff sale.  It is an open auction.  The bank typically bids exactly what they are owed.  Usually that is more than the home is worth, but sometimes it is not.   The homeowner then has 6 months to “redeem” the property – or buy it back at the auction price.  This right is transferable.   So when a house is bought for less than it is worth, a smart owner will put it on the market and try and sell it.  However, you have exactly 6 months and very often something goes wrong and homeowners find themselves with a few days left and they either lose the house and take a huge credit hit, or they have to figure out a way to panic sell it and at least save their credit.  That’s where we come in.  Recently, I almost bought a house for $135,000 worth about $185,000.  In the end, the investor seemed very interested but stopped returning my calls and it fell through.  Another example is a house in my subdivision that just went up on the MLS but has only 5 days left to close.  Obviously, it’s a perfect spot to come in with all cash, lowball it, and flip it.

A recent short sale deal came up 62031 Romeo Plank –

I wrote a lowball offer for $225,000 maybe 8-9 month ago.  I didn’t hear anything for until about one month ago and a bank representative emailed and said the deal was close to getting done.  Well, my money for that house is long gone.  They say nothing is a guarantee in life, but this house at 225k is as close as you can get.  I think I could sell it for 300-350k.  I would never bring in outside money unless I thought the deal was a straight killer – its not worth the stress for me.  So what would happen is I would send out an email asking for money.  Once we raised it, we would buy it, sell it, and then disperse the percentage made on the deal (might have to withhold taxes or something not sure).  I would make the real estate commission for selling (only if there was profit, otherwise I don’t get any) and if I put up money, I would get the same % everyone else.  I would be looking to make returns from 30%+ in a couple of months.  Any less, I wouldn’t bother with.  This particular deal might actually still come to fruition.

If I do ask for money at some point, it would have to be based solely on trust.  I’m not drawing out individual contracts for these deals, we wouldn’t have time anyway.  I think a lot of these readers don’t know me on a personal level, but I post as J_V on 2+2 and I think I’ve built up some credibility there.  If you want references, please let me know and if you play poker, I can provide them.  I can’t really prove my credibility to non-poker players (nor do I care to)  but using my trick to evaluate deals, you can see who else invests, and make your decision accordingly.  There are other details I wanna work out, but if you might be interested feel free to email me with your email address.  I won’t do anything with it right away but if a deal does come up, you will be included.  Thanks for reading guys.

Real Estate Happenings

3 Apr

Last week, I closed on 29810 Greater Mack.

The total price was a little over $61,000.  I need to re-glaze the bathroom, paint and then I will rent it out.  I am planning on listing it for $1150/mo, but I’d be happy with $1100.  We will see what happens.  I will post the pictures before I put it up for rent.

I am still waiting on closing the 23802 Elmira deal on land contract.  This is a really good deal, but apparently there are some complications, because he is getting divorced and his wife filed for bankruptcy so we need to get clear title before we can move forward.  The good news is that he is working 16 hour days to save up money for the payments and down payment.

Some guy on 2+2 calculated the present value rate of return of the Elmira deal at 49.5% annually on a financial calculator.  If someone could tell me how he got that number (or if its right?) I would greatly appreciate it.  Sad (and lazy) request for a finance major, I know.  The terms are  – buying for 30k, selling it back to him at 60k in 5 years at 10% ammortized over the 5 years.  He has to pay his own insurance and taxes – so that’s a non-issue.

I wanna talk a little bit about the banks, since they are involved in almost all my deals.  The banks are like that super grumpy old man at the poker table who is just terrible at poker.  He is rude to everyone, asks for setups, blames the dealers, and is generally miserable to be around.  But because he is so bad, everyone lets his bad behavior slide.  The banks are the same way.  The banks make their own rules – have no code of ethics or anyone one to oversee them.  You don’t hear from them for months about a deal and when they say it’s time to go, you have exactly 48 hours to get your stuff together or the deal dies.  But, they are BAD at business.  I still don’t really know what makes banks make the decisions they do, but they clearly are motivated by reasons other than getting fair market value.  They will list a house for three times more than its worth.  They will not budge on certain houses, and then give away others.  On the Greater Mack deal, they wouldn’t pay me my real estate commission of $1200 bucks.  So I said fine, the offer just went down $2000.  They accepted the next day.  I didn’t even ask the reason, I’m sure some red tape or pure idiocy.  The way I get my good deals is I have a guy that lets me write the first offer on all of his short sales.  It gets the process started for him and I get to pepper tons of low ball offers at the banks.  Most of them get lost in the shuffle but once in a while, they accept or make a bad counter.

2 deals that are close to getting done were done via that method.

20901 Hawthorne.  Bid $20,000 originally.  Bank countered to $30,000.   I think I can rent it $800-$1000.  Its on a weird border between super old entrenched rich and a not-so-rich area, but the school district zones put it in the rich area – Making the rental demand high.

30206 Champine.   Bank is considering taking $60,000.  I think its worth $85,000 – 100,000.

Another deal that is still waiting to close is 28624 Mylls.  Shouldn’t have any issues here, not a great deal, not a terrible one.  Bought for 62,000.
Rent = $1000/mo

Also, I just saw that for the first time in forever, homes prices and rent prices are on the rise at the same time.  Traditionally demand for rent and house price move in opposite direction, aka inversely proportional, so if both are increasing in price, its a good sign for the market. Cash is king though because the banks still won’t lend.  Like I said, they don’t do anything right.   Just wanted to give everyone a quick update and I hope to be blogging more often.

Lin(dgren)sanity, motivation, and new deals

7 Mar

– Interesting how Daniel’s Negreanu’s real talk hasn’t been so real when it comes to one of his good friends, Erick Lindgren owing money all over town.  Daniel was quick to defend his theiving friend and at the same time insulted “new school” players for not understanding the rules of poker debt.  Watching Daniel spin this one will be entertaining.  Seems like Daniel is only “real” when its convenient for him.

As an aside, about 7 years ago, Daniel reported a hand in a poker magazine, that I actually got to witness.  In the article he bemoaned his luck in a tourney where he lost, “with kings to ace rag.”  How the hand actually transpired – Daniel tilt-shoved 10 bb’s with K3o UTG and was called by ATo, the flop ran out KxxAx.  Real Talk. 

– I knew about some of Lindgren’s debt issues a couple years ago, but the level of his actual explotation was way worse than I suspected.  Some people are chalking it up to degeneracy.  I think that’s a copout.  You can be a degen without stealing.  What Lindgren did was outright thievery, worse than someone with a gambling problem.  Taking a loan or making a bet without having a foolproof solution for payment/repayment is inexcusable and a permanent condemnation of your character.  Sure some of the old school players may have gotten paid back eventually, but the random kid in a fantasy league sidebet was getting conned pure and simple. 

– I’ve been thinking a little about motivation lately. Personally, I’ve had two strong motivating factors in my life.  The first was to make my dad proud.  He’s always believed in me, often times more than I did in myself, and I’ve always wanted to prove him right and reward him for his support.  That was certainly a very powerful motivator.  However, my strongest motivator was entirely different.  Namely, I could never let the people that wanted to see me fail, win.  The doubters, the schaudenfraude’s, the haters, etc – I would never let them have the satisfaction of seeing me broke. Every tilted session, everytime I wanted to play above my bankroll, every near catastrophe was averted because I thought about those people that would smile if I went bust.  I bet if you asked other successful poker players they’d have a similar motivation.  As Chris Paul was recently quoted, “”I hate to lose more than I like to win.”  While not exactly the same – it echoes a similar sentiment. 

As an aside, the schaudenf***heads that bother me most are not the people that are clueless.  “The casino always wins,” “Everyone goes broke,” “But how much did you lose?” types are just ignorant.  Whatever – they don’t get it, I don’t really care.   The people that really irritate me are the people that just want to see you fail because they want to justify their own lifechoices.  They don’t want to see someone playing a game for a living have success.  They don’t want that to be possible.  They want to see you fail only so that they can feel a modicum better about whatever conventional lifepath they took.  What a sad, sad group of people.  May they never be right. 

Real Estate

I had an offer accepted on a new property:

22624 Mylls. Image

I am paying $63000 and getting some commission back.  The kitchen and bathroom are pretty dated, but I loved the location and the bones of the house.  Something in my gut told me ot pay a little more than I normally would.  I am hoping to rent it for $1100/mo. 

29810 Greater Mack – should close soon.  Still waiting on the release of a 2nd mortgage. 

I am close to closing a Land Contract on Elmira – I blogged about that earlier.  Really, really hope it doesn’t fall through. 

 20901 Hawthorne.  Short Sale, one of the many short sale offers I wrote last year.  Looks like I should get accepted around $30,000.  I haven’t even been inside yet, but it looks decent from the outside.  It’s in a borderline neighborhood for my usual standards, but its in the best part of that neighborhood and is in a really, really good school district.  Renters flock to the area because they can get cheaper housing and get their children into really good schools.  At that price, this deal should be a winner.  Still a long way to go before close. 

Rent and land contract payments have all been on time.  I had to buy a renter a new washing machine.  Other than that smooth sailing. 

I said I would blog about the banks and I do plan to get to that soon.

Just Talking To Myself

22 Feb

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.

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.

The Life Theorem

11 Feb

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. 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 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:Image

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. Image

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.

Land Contracts versus Rentals

7 Feb

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.

Do your ears hang low?

3 Feb

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:

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)

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.

Necessity is the mother of invention

31 Jan

On April 15th, 2011, I logged in to play poker as I normally would on a Friday but my session was interrupted with this infamous message –  Image I didn’t even read the text the first time (tldr, ldo) and restarted Pokerstars assuming it was weird bug – after all I had logged in successfully 100,000 times before that morning.  When it popped up again, I took the time to read it and the reality of the message began to set in.  While other professional poker players were feeling a combination of shock, anger and despair – I felt relief.  It was over.

I had been playing poker – poker beyond 5 card draw – ever since the movie “Rounders” came out in 1998.  My first game of Texas Hold Em was against my roommate in college for 10 dollars with toothpicks as chips, I was Matt Damon and he was Teddy KGB. I won when my A5o beat his K9s.  By the time I was 20, I was making more money in a semester than my parents.  I was a millionaire by 25.  And there I was, staring at the message of death – sad for all the lives that I knew would be rocked – but relieved that I had to move on.

I had lost more than $50,000 in one day more times than I could remember in the year and half preceding Black Friday including that day previous.  People always ask how I got “the balls” to risk so much money in poker.  The reality is I didn’t have balls, not compared to other people, and that might have been part of my success.  The most painful poker loss I ever stomached was a $200 beating my sophomore year in college.  I laid in bed for hours thinking about how I must be a degenerate gambler to lose that much money.  Money that would last a month in college.  The truth is you get used to the amount of money at risk. You win, you risk a little more.  You win again, you risk a little more.  Balls  have nothing to do with it. But almost everyone reaches a threshold of comfort – more accurately a threshold of pain.  Mine was $10,000. Some people hit it at $1,000. Some people hit it at $100,000. A few sickos never feel it.  I could win $10,000 in the morning and forget I had won that much by the evening, but I would never forget a $10,000 loss.  It would ruin my day.  A $50,000 loss would ruin at least a week if I didn’t win it back.  I could win $20,000 in the morning and lose $20,000 at night and be devastated.  I knew it was silly, I knew it was detrimental to my health and my poker game, but I could never trick my brain into thinking otherwise – and it wasn’t for a lack of trying. The phenomenon is not unique to me, actually it’s very universal.  It’s an evolutionary function of the brain – but that’s for another blog.  This inability to forget losses made for a very stressful life.  On one hand I was making a bunch of money, on the other, I was miserable most of the time.  My overall results were around break-even for the year, but you couldn’t tell it by my mood.  My wife is a saint for putting up with me during some of those days – we can laugh about those days now, but only because they are over.

The stress was exacerbated by the way the poker economy was shaping up in 2010-11, the most profitable games were extremely high stakes and the middle limits (where I felt the most comfortable) were almost non existent.  So you really had to risk a lot to find good games.  They would be built around an amateur and 5 world class players, and playing a $20,000 dollar pot was pretty common. I could have dropped way down in stakes and played for a modest, stress-free living, but I had put myself in a position where my bills/month were very high – so that constant pressure to play and produce on a monthly basis would have been overwhelming.  If you had asked me what I would have been doing at 31 when I was 25, I might have said retired, but I had lost a good portion of my bankroll when the economy tanked in expensive houses that were no longer worth what I bought them for, the stock market crash, and poor spending habits.  While I tried to be extremely careful not to spend too much, when you are making money hand over fist it’s an easy trap to fall into.  I take solace in the fact that smarter people than I have succumb to the same trap.

By Black Friday, I was an expert at a game nobody played.  I’d even call myself  great at a few games no one played.  An icicle salesman at the North Pole.  I was a dinosaur by poker standards and had lost the passion needed to learn a new game.  I didn’t have it in me to start at square one.  A couple of my close poker friends had already switched expertise and were adapting nicely with the changing times.  For me, I knew that black pop-up message didn’t mean it was time to move to Mexico or Canada or Vegas, I knew it was time to move on.

This blog is going to be mostly about real estate investing, my current passion.  I know this post is dramatic and self-aggrandizing to be sure but I know a lot of poker players will probably read this blog, so I hope they can relate to the story and my struggles and triumphs as I try something new.