Three Pillars of Business Success

I had purchased Don DeRosa's Building Wealth real estate course. As I commented in another post, I have not been too impressed with his courses (though his personal help has been great). Sometimes you read something many times and then suddenly you have an "aha!" moment when it makes sense. I had one of those recently after re-reading his course that puts into perspective some of my past business failures and makes me optimistic about my present course of action.

In Don's course he talks repeatedly about 3 factors that are the key to success in business:

1. Organization
2. Exposure
3. Capital

Most people that get into business have neither a plan nor goals, they run their enterprise chaotically, don't keep good records and just go from their gut. Then there are people who fail to do enough marketing to keep their pipeline filled with new clients. Sometimes they start with lots of marketing, get a few clients and forget to continue marketing and have to continually restart their business. And finally, the major cause of business failure has to be under-capitalization. Few people realize how much start up money it actually takes to get a business profitable.

Let me review my past businesses in light of this.

• I was involved in Networking Marketing for over 12 years in an Amway Business. Although the initial investment to get involved was minuscule, I realized after a couple of months that this business required real capital to build to a successful level. Although it was still relatively inexpensive, I had to invest thousands of dollars per year for advertising tools, training seminars and tools, gasoline and entertainment expenses. There was an initial negative cash flow after which I started to break even as I gained some success reaching the Direct Distributor level. I also had written goals and a plan. However, the weak link for me was exposure. To make the business grows requires you to really expose the Business Sales plan to about 2o new people a month. And this requires lost of one-on-one talking to strangers to market your business. For me, I dislike talking to people so much that I could not attain the 20 exposures per month. And in a business like Network Marketing, your down line duplicates your effort. So, I got 2 out of 3 aspects of this business right and reached some success, but the real riches were beyond what I was unwilling to do to get out of my comfort zone. By the way, of all the people that quit the Amway business in my group - none were willing to do any of these 3 things.
• My first real estate venture was in West Virginia. I did not do my due diligence when starting to buy properties, had no plan, no exit strategy and no idea how to handle the business. I purchased 12 properties in a 6 month period and was overwhelmed as to what to do. I ran out of cash and could not rehab them, they sat vacant and were an overwhelming cash flow drain. I didn't know how to market the properties. In essence, I failed in all three aspects Don talks about. And I ended up losing close to $100k. An expensive seminar!
• My current real estate venture seems headed on the right track for the moment. I have set goals and made a business plan. We are on track to attain the capital we need ($210k so far), we have been continuing to market using direct mail and are consistently getting leads. We have about 5 houses in our pipeline and seem on track to reach our goal. We will have to fight the tendency to reduce marketing once we have some houses in our possession, but I think we will be able to continue and expand out marketing. I have also created an Operating Manual (not public) which outlines every aspect of our business, so that we stay organized. We have bought QuickBooks and my wife is taking a training course to help us keep our finances organized. So I feel good about this venture. Of course, two weeks does not prove anything, Quarterly and annual reviews of our performance Vs goals will be needed to stay on track

Maybe after some failures I have learned something.

Davos and the Club of Rome

As many people are aware, a group of "prominent" business people, scientists and politicians are meeting in Davos, Switzerland to discuss the pending end of the world as we know it. Dire predictions of global warming catastrophes, economic collapse and massive starvation.

For anyone over 50 this is reminiscent of the great prognostications of the Club of Rome meetings from 1972 from which the book Limits to Growth came out. The Club of Rome was composed of " prominent business people, leading scientists and politicians". Limits to Growth made predictions of shortages of every raw material and resource, populations explosions which would cause massive starvation, economic collapse and other great predictions, all of which proved to be completely wrong.

Likewise, the nonsense that is spewing out of Davos will one day be viewed in the same manner. Even though we are in the midst of the Greatest Economy ever, the Davos experts only see economic collapse. Business people have bought into Global Warming, but only due to their self-interest.

Those with a negative outlook will always be with us due to their scarcity thinking. And for the press the only news worth printing is bad news. Yet, mankind is always moving onward and upward.

Ronald Baily writes of his Club of Rome experience:

"What are the lessons to be learned from this record of badly exaggerated predictions of environmental disaster? First, scientists, even well meaning ones, don't know as much as they think they do. They generally go wrong because they ignore or misunderstand how human beings interact with the natural world and with other people, that is, they are largely ignorant of economics. This ignorance constantly leads them astray because as biologists and ecologists, they tend to think that human beings are merely more clever herds of deer. When deer run out of their sustenance, they die. When human beings begin to run out, they turn their brains and their social institutions to producing more. Science can tell us what may be problems, but it can't tell us what to do about them. Solutions depend on a deep understanding of human values, politics, and economics. Scientists are no more qualified to pronounce on those topics than their non-scientific confreres and fellow citizens."

New carnivals

My post on Investing in Stocks is at the CarnivalofInvesting

NY Home Equity Theft Law

I'm trying to purchase a house from a homeowner in foreclosure and my attorney just pointed out a new New York statute called the Home Equity Theft Prevention Act. NY is one of the unfriendliest places to do business in the country and this law certainly is an abomination. Ostensibly the law is a result of people that prey on homeowners in foreclosure by getting the homeowner to Deed their home to them with the "promise" that they can continue to live there indefinitely. The buyer then re-finances the home for way over value, then stops making payments on the new loan and forcing the homeowner into foreclosure again.

This is certainly an unscrupulous practice. However, the provisions of the law give the homeowner two years to come back and recover their house. As a result, Title Insurance companies are going to be reluctant, if not completely refuse, to insure the home. This will prevent people from being able to sell their homes and prevent foreclosure.

While in principle, this seems like a reasonable way to save the poor or ignorant from unscrupulous buyers, it goes too far. "Let the buyer beware" is no longer a maxim in our society. "I'm a victim" is the rule of the day.

If an offer is too good to be true, then it's probably illegal. So, everyone must pay for those who want to take the easy way out.

UDATE: The Title company has advised me that they will provide Title Insurance for this property only if the contract was signed before Feb 1. This will work for this property but I have 4 properties I am negotiating short sales on, so I don't know if this new law will kill my business. I'm not violating any part of the law, but the Title companies are hedging.

Is Generating Wealth an Obligation?

I quoted some commenter's yesterday on a post at IWillTeachYouToBeRich. In particular I was struck by a comment made by a Susan who wrote a long rant about why people that spend money are ruining the planet. This women is suffering from a severe case of scarcity mentality that believes we live on a planet with limited resources. People, by her account, who consume resources are responsible for the starving people in Africa. I think that her philosophy may be not just wrong but maybe immoral.

I was reading a post at 1stmillionat33 and found an interesting quote from a book called Karma Yoga:

"A householder (as opposed to a monk) who does not struggle to get wealth isimmoral. If he is lazy and content to lead an idle life, he is immoral, because upon him depend hundreds. If he gets riches, hundreds of others will be thereby supported."

Now, although I used to practice Yoga, I don't subscribe to it's philosophy but this quote rings true for me. However, it is not all that much different from what I believe to be similar exhortations in the Bible. The most classic is the Parable of the Talents in which Jesus saves his most severe criticism for the man who buried his talents (money) and praises those who invest wisely. Money is an issue discussed in frequency only second to love in the New Testament. To be sure, much of it cautions us about attaching ourselves too closely to money, but much teaches us to use our money to help others. Unless you have money, you cannot help the poor. Even Mother Theresa needed wealthy people to fund her charities.

Paul Zane Pilzer wrote a book called God Wants You to Be Rich in which he laid out some Biblical reasons to create wealth. He states the underlying reason people fail to grasp this is our belief in scarcity in a world that God has shown nothing but abundance. In another book by a Taoist named Stuart Wilde - The Trick to Money is Having Some - Wilde writes:

"Why would a God who has put us in a veritable Garden of Eden and expect us to be poor and lacking in needs...it is natural that we would use the resources around us and become abundant..poverty is unnatural. Imagine a God who considers welfare and food stamps holy and alternately considers the opening of a factory that creates wealth to hundreds of families wrong - how illogical!"

"All philosophies that teach that poverty is groovy, do so as a cop-out. It keeps the non-performing members happy for they can live in the ego trip of thinking that somehow their lack of creativity and effort will be blessed at a later date."

Pilzer writes:

"An increase in wealth for an individual always represents an even greater increase for society at large"

So if you are concerned about the poverty in Africa or in the ghettos of your city, the way to solve that problem is to create wealth. The reason that more people in the world are living in better conditions then ever on history has to do with the wealth that the work and creativity of the people of the US have given to the world. The US is not a leech sucking resources from the world as the anti-Americans claim, but has been the largest force in raising the worlds standard of living. And as Americans have become prosperous, they have become individually the most generous people on earth.

So the next time a Susan challenges your goal of becoming wealthy, let her know that she is in fact the problem and you are the solution. And don't forget to remind her we are living through the Greatest Economy Ever, so her lack of success is not due to outsourcing or some other excuse.

Spending Money

Ramit wrote a provocative post at IwillTeachYouToBeRich about friends that seemed to be spending extravagant amounts of money. He wrote of three friends who made very good incomes and were saving what he considered to be adequate amounts of money. He basically agreed with their spending patterns and justified it based on the fact that they had a spending and savings plan. I may be wrong, but it sounded like all 3 friends were single and did not own their own homes. When you are young, single and have no immediate plans to marry, spending money extravagantly may seem like a great idea.

Then there are the comments, which range from outrage to complete agreement. The interesting aspect of the comments is the emotion that is attached to them. For nearly all people, money decisions are emotional decisions. It is tied to their self-worth in a most intricate way. How we act towards and with our money says a lot about who we are. In fact, how we manifest money may just be a reflection of how we feel about ourselves and money. Some people worry that having money will change them, when in fact it is our inner beliefs and attitudes towards money that is reflected outward by how much money we generate.

Getting back to Ramits' 3 friends, here's my thoughts. I am not opposed to spending money as I discuss in my post on Prosperity Vs Scarcity. But, I think in each of the 3 cases Ramit discusses, the friend is demonstrating a complete self-centered behavior. In my mind this is the most troubling aspect of their spending patterns. If any of them do marry, I would expect that each will spend their marriage struggling with money issues with their spouses. And if they ever deal with a true financial hardship, I would be surprised if they didn't have a huge personal crisis to go along with it. Even if you have a good financial plan, spending out of self-centered behavior does not breed a mature attitude towards money.

Now some interpretation of the comments:

• After all - we are only young once! [so lets be self-centered and spend on ourselves]
• These people are ruining the planet by spending money [I'm so holy and self-righteous]
• I agree [because I'm too undisciplined to stop spending]
• These #%&ing people all make six figures [and I'm lazy/jealous]
• I have lots of money but can't stand to spend it [I'm afraid of losing it]
• You should feel guilty about spending money [because I have none to spend and by the way how do you a make six figure income?]

None of the commenter's were at all unemotional about their money and each made an unsaid comment about who they really are. Although it may seem I am mocking these people, my intent is not to attack them, but to point out that there is underlying emotional baggage that each attaches to money.

Money is a symbol of energy and it not good nor bad, positive nor negative. It is impartial. It is only the significance that we attach to it that creates any meaning. Abundance is never a factor of how much money one has, it is a factor of how one feels about the money one has.

So before you make a savings plan, decide to spend lavishly on shoes, attack others for spending their money or blasting Walmart, it might be worthwhile to think about your attitude about money.

• What were you taught as a child about money? That it's evil or good? That corporations are greedy or that rich people are bad? We tend to carry our early life teachings through our lives without ever examining them
• Do you have fears about not having enough or having too much money? What is the basis of these fears? Is it rational or based on some underlying emotional conflict that you haven't resolved?
• Why are you spending money? Are you trying to make yourself feel better about some other part of your life that is unfulfilled?
• Can money be used for good? Is it possible that by creating wealth you will be helping others?

There are other questions you can think of as well. Try to do some reading about money. Books by Ayn Rand, Milton Friedman (Free to Chose), Adam Smith, or Joseph Schumpeter may broaden your outlook on money. My favorite book is Unlimited Wealth by Paul Zane Pilzer.

When you truly understand yourself and really understand the role of money, then you will not be caught up in mindless spending, hoarding or jealousy about money that dominates society. Money will just be a game that you play.

why worrying about your stock portfolio is a waste of time

Nearly all the financial advice people receive these days is about investing in the Stock Market. I asked the question Should you invest in real estate or stocks? The key metric in my mind was risk.

I stated:

"One of the interesting things to consider when answering this question is what does the business world think about the risk of investing in real estate Vs the Stock Market? That answer is quite easy to answer. Just think about how much money a bank will loan you on a house Vs how much they will loan you to invest in a stock and the relative interest rate of each loan. From what I know, the maximum margin loan you can get on your brokerage account is 30%. On a piece of real property the amount is 80% or more in some cases. Interest rates on margin accounts are typically over 10% Vs less than 6.5% on real property. So the business community is telling us that stocks are an extremely risky investment while real estate is a very safe investment. "

JLP at AllFinancialMatters made a great table showing this risk based on the Callan Periodic Table of Index returns:

Now JLP, as a stock oriented financial person, analyzed the Callan Table looking for ways to beat the market or maximize his returns. But, from my perspective, as a statistician, I look at the table as proof that trying to get the best return from the market is purely random. And anyone that claims they can outperform the market is selling snake oil.

What JLP's table proves is that:

1. Unless you have inside information, you are wasting lots of time and money buying advice and newsletters from someone to fool you into thinking that they can predict random events
2. If you invest in the short term, you are entering a high risk gamble. You must stay in the market for long periods (20 years) to average the good returns you the market can provide.
3. If index funds are this volatile, managed funds are worse, and individual stocks are insanely risky. Gambling on the next Microsoft may be exhilarating, but it is not a wise use of your investments.
4. An S&P index is no doubt the safest of all and provides a very good return for your risk

Now, some people point to Warren Buffet as an example of how to beat the market. But a look at how he really made his money shows that his strategy was to buy whole companies and manage them well. He was not just gambling on a stock - he had control. When you and I invest we do not have control. So our risk is much greater and there is little we can do about it. That's why I suggest real estate (not REIT's which the financial planners will tell you to do) - control.

If you invest in the Stock Market (a good thing), even using index funds there is risk because you have not control. Understanding that risk and choosing to invest in an index fund is a pretty good long term investment. But putting part of your investment portfolio into into things where you have control is also extremely important in my opinion.

UPDATE: Here's an excellent analysis by MyPocketChange of the number of years needed to generate an average market investment. My estimate of about 20 years is statiscally pretty accurate. Here's Pocket changes quote:

My last comment… You’ll notice how the best returns are lessened as the investment period increased just like the worst returns improved. This truly shows the gambling nature of short term investing. The highs are high and the lows are low. And unless you can find a pattern to the 3rd plot above, you truly are rolling the dice. In the end, the average person will pick as many winners as losers, and he’ll end up getting the same total return as if he had simply invested for the long term, except one thing… transaction costs. Each time he buys or sells, returns are eaten up by fees. Sure, plenty of people will beat the long term return. But
they are lucky and even more are unlucky (due to transaction fees). My advice?Don’t gamble with your investment money. It’s worth too much. Invest long term, and invest with index funds (their low turnover makes them long term investmentsby definition). You’ll minimize your expenses and minimize your risk. It might not be glorious or exciting, but it gives us all the best shot.

Real estate short sale offer accepted

I wrote two days ago about some offers I had submitted to banks in junior lien positions. I called one of the banks today to see if they had received my faxed proposal (I had trouble the previous day transmitting) and within 10 minutes they not only confirmed receipt, but accepted my offer. They were owed over $40K by the property owner and accepted an offer of $2500 from me.

Yesterday I called on another property with a $66K first lien. The attorney told me the mortgage company was walking away from the property! I just have to clear up some junior liens. This is an interesting property because about 10 different entities have put liens against it. The owner has a very common name and it seems these lien holders will put a lien against any property with a similar name. Each name has a different middle initial or co-owner or address. It's pretty obvious that the owner is not the defendant, but it's crazy that someone can slap a lien against your property so easily. At any rate, this is a property that I can quickly do a wholesale flip. It needs lots of work and is not in a great area.

The Greatest Economy Ever

Are we in the midst of one of, if not the, greatest economies of all times? If you read the papers or listen to the nightly news, you would never think that. In fact, most Americans are pessimistic about the economy (though optimistic about their personal financial situations).

Here's some thoughts to cogitate on while listening to the doom and gloom:

1) The stock market is at an all-time high,
2) Retirement accounts have recovered from the collapse of the 90's bubble,
3) Unemployment is at a 25-year low,
4) Taxes are at 20-year lows,
5) Federal revenues are at all-time highs,
6) The Federal deficit is down almost 50%, extremely unusual during a prolonged war and increased Federal spending
7) Real estate values have soared,
8) Inflation is at a 20-year low,
9) Home ownership is at an all time high,
10) Corporations are reporting record profits
11) Our job growth rate is the highest in the world

I've read a couple of articles recently that triggered this post. The first was from the UK Times - The Great Moderation, that discusses how the historical peaks and valleys of booms and busts has moderated substantially over the past 25 years. We have has a lengthy period of low inflation, low interest rates and stable and continuous growth. And the major predictors (like long term interest rates) remain stable despite minor changes in Fed rates.

The other story that peaked my interest was on CNNMoney - Everyone Wants to Start a Business. This is a trend that is pretty unique to the American culture and the main reason, in my opinion, that our economy leads the Western World in growth rates (I will say that I see the same thing going on in China right now as well, but limited in scope.) Start-up's of small business' drive job growth in this country. Further, new businesses growth is what creates the "creative destruction" that Joseph Schumpeter" described as essential to well functioning capitalist societies. If you never study any economic theory again, I would advise you to study the idea of creative destruction. You will really understand why entrepreneurship and outsourcing are all good and necessary parts of our booming economy. During the 1970's nearly no one talked about starting a business - I never once heard this discussed in college. But today it is the rage.

The third part of the equation is an insight provided by my favorite Economist, Paul Zane Pilzer, in his book Unlimited Wealth. I wrote a post called Prosperity or Scarcity discussing Pilzers' premise that technology has transformed the formation of wealth to the point where we have unlimited resources. To quote him:

"Technology is the major determinate of wealth because it determines the nature
and supply of physical resources".

Here's a look at the stock market for the past 60 years:

Since the 1980's the growth has been nearly exponential (plot it on a logarithmic scale and it is a straight line). One of the reasons I failed to start investing in my 401k was that when I started working in the '70's the stock market had been flat for over 10 years.

So are we in the greatest economy ever? I think so, due to three factors:

1. Reagans' policies transformed us from a "jobs culture" to an "entrepreneurial culture" which has driven "creative destruction" to the greatest levels of all time
2. Technology has opened the door to unlimited resources and unshackled us from the "fixed-pie" paradigm that Keynes used to dominate thinking about our economy.
3. The Federal Reserve Board has been driven to keep money supplies constant since Volker took over in the 80's and price stability has allowed businesses the confidence to expand.

Certainly, nothing is permanent. Some mad jihadist could explode a nuclear device somewhere and devastate the economy, politicians can change tax policy or appoint a new Fed chief that disrupts the economy. But for now, this is not your fathers economy. So don't buy into doom and gloom. Take advantage and create prosperity for yourself.

update:The Roaring Twenties are Back!

The State of the Economy

Is the unemployment rate about to collapse?

My Financial Resume

I read a post about posting a financial resume at the Carnival of Personal Finance from Canadian Financial Stuff and thought it would be worthwhile (though embarrassing) to do something similar. I am not proud of some of the financial decisions I have made in my life, but they are what they are. Hopefully, I am getting wiser (certainly older). Having a perspective on what you have done can certainly be the beginning of doing a better job in the future. So in no particular order are the big decisions I have made that put me where I am financially.

• Getting BS & MS in Chemical Engineering. I chose this field simply because I had read that Chemical Engineering graduates were the highest paid BS position out of college. My family had no money at all and I was motivated to make money from an early age. So, I didn't chose a profession I "loved", like so many people are advised to do today. I have no regrets about this decision. It has paid off very well from a salary standpoint. I've been employed by the same company for 28 years and earn a very good six-figure income. Sometimes I've hated my job and sometimes loved it. The cost of the MS degree was free plus I had a living stipend, so my out of pocket investment for my education was less than $10K for the both degrees (I received grants and paid the rest through a work-study co-op plan - my parents paid nothing). In sum, a very good investment.
• My first marriage - a very bad personal and financial decision. Sometimes love isn't the best reason to marry. And divorce is expensive, not only the legal fees (~$30K), but the loss in net worth (one-half goes away).
• Getting involved in the Amway business. I spent about 12 years in that business and had some success (getting to Direct Distributor level, winning a Cruise trip). All of the profits were re-invested in tools and training, so I never made much money. However, the books, tapes and seminars really were the best financial education I have ever received and worth every penny. I also, had many opportunities to consult with millionaires and listened to millionaires who had succeeded outside the Amway business as well. Finally, I had the chance to hear President Reagan speak which was priceless. Even though I didn't get rich, I think that this experience was one of the best financial decisions of my life.
• Not having a "six-months" living expense fund has been a bad decision. Working in a pretty secure field, I have been very lazy about accumulating this fund. Basically living paycheck to paycheck all of my life. I finally have some cash sitting in my account now, but this has been a very stupid failure on my part. Unfortunately, earlier in my life, even if I had a rainy-day fund, I probably would have spent it. My current wife is much more disciplined than my ex and so I think I am better off now in this regard.
• Cars - I've bought 2 new cars early in my life, but learned quickly that it was much cheaper to buy used cars (I've owned about ten used cars - see my post on buying used cars). Except for a Mazda RX-7, I've kept all my cars until they had over 200,000 miles. Two cars have been very expensive - the RX-7 and a '98 Dodge Intrepid - not because of repair cost as much as that they had catastrophic fuel system failures while travelling far from home. The Dodge failed 3 times while over 500 miles away and the cost to rent a car, hotels and travel back and forth to the dealer was 3 times the repair cost. My best car was a Honda Prelude which I drove over 225,000 miles personally and only made one non-routine repair to (water pump). On the car front, I have done pretty well. I spend about one-half as much on my two cars per year as most people spend on their one new car.
• Adopting 4 children from Russia was one my dumbest decisions but my ex was insistent on a larger family and I was too passive to fight her. The adoption cost over $45K and the legal fees afterwards cost another $50k, plus it ultimately ended my first marriage. Read how dumb I was here.
• Buying property on emotion. I have purchased 17 houses now. The first 15 were bought with my ex and all but one was based on an emotional decision. Our first house was a lakeside cottage which we overpaid for (but it's so "cute" she said and wanting to please her, I went along) and when we wanted to sell couldn't cover the mortgage. We tried to sell it on a land contract, but the bank found out and exercised the "Due on sale" clause and forced us to co-sign a new note with the buyers, who didn't pay of course. Our second house did make us a small profit after we rehabbed it. Then I found a cheap house in a nice neighborhood. It was the first motivated seller purchase and after rehab made a lot of money. But then, my ex decided to start "saving" houses in our area (like she wanted to "save" the Russian children later. So we bought 11 houses within a 6 month period - kind of like Casey Serin. I got caught up in the prospect of getting rich by rehabbing these. But I planned poorly, the properties couldn't be rented out and we had no cash to rehab. We lost money on all 11 - close to $100k. Since my first marriage ended I have bought two really good properties from motivated sellers and now feel pretty good about my real estate investments. But it has been an expensive lesson.
• Not funding my 401k uniformly throughout my career has been another stupid decision. not only was I not always funding it, I often raided the account to buy bad real estate, paying the taxes plus 10% penalty. Stupid, stupid, stupid. I'm sure I could be on the verge of retirement now had I been sane about this.But, then again, I would have lost half during my divorce, so maybe not.
• Not buying luxuries on credit. I have been very good about this my whole life, so at least here I don't have to hide my face. In fact, I have not really spent a lot on luxuries or eating out. I enjoy cooking and don't watch much TV at all. I find my entertainment in my life rather than watching someone else.

If I were grading myself, I would give myself a "C". About average. Some decisions have been good others bad. There's plenty of room for improvement. The next few years are critical as time is running out. Even though my career has been stable, times are changing. There's no time like the present to change your life and that is what I am doing.

Blog Carnivals

My post on living in debt appears at Carnival of Debt Reduction.

A post on Chinese Real Estate appears at the Carnival of Real Estate.

My post on Advice on Investing in Stocks appears at the Carnival of Personal Finance.

And finally Carnival of the Capitalists has my advice on the use of compounding and leverage in How to Get Rich.

Are real estate lenders or borrowers irrational?

It has been a busy week for our real estate business. I finally pulled together all the short sale offers for 3 different properties and have faxed the offers to the 3 banks. Each proposal has about 25 pages of documentation. The banks tell me it may take 30-45 days for them to respond. Fortunately, it takes forever to foreclose in New York, so there is no pressure of an upcoming auction to worry about at the moment. I basically used the format prescribed here - Creating a Successful Short Sale Package, but have had conversations with Don DeRosa as well during the week. He has been enormously helpful.

After working on pre-foreclosures for just a few weeks I have a few observations and a question- What the heck are these lenders thinking?

• Lenders seem willing to pile on second and third mortgages without a clue as to how much the property is worth. These second and third positions are essentially worthless when the first is foreclosing. Some national lendors may think that property values are appreciating rapidly everywhere, but local lenders should know better. Buffalo NY real estate is not known for rapid price increases (the opposite is happening in most of the neighborhoods that I have worked).
• Is there a lot of appraisal fraud that is going on? This seems especially prevalent in the poorer areas of Buffalo. Houses in poor condition are getting loans twice their after repaired value. The homeowners take the money and spend it without improving the property. I have yet to meet a conventional lender that will lend me more than "as is" value for a property, yet the inner city houses in a state of disrepair seem to get more cash than the property is worth.
• Some of the lenders in junior positions weren't even aware that the senior loan was foreclosing.
• ARM's are killing people. Most bought houses at the max payment they could stand and as the interest rate adjustment kicks in they have a hard time adjusting. Cities increase their tax assessments after the owners buy the house at inflated prices and then the bank forces a "catch-up" period of very high escrow payments that are too burdensome for the homeowner. Get a fixed rate mortgage.
  
• Banks must see that charging 11% interest rate for second mortgages justifies the higher foreclosure rate. I guess the math must work for them. For an investment property a high interest rate works since I will flip the property, but for a homeowner, borrowing at 11% seems too risky. Save some money for a down payment before indulging on a home.
  

Every one of the proposals I submitted was to a lender that will lose everything when the first forecloses. Will they accept my proposals? I don't know. However, because of my relationship with the buyers, I know there won't be any other buyers until the auction, so it's me or nothing.

Meanwhile, we looked at some properties through Realtors. We made one offer last week and will make another this week. We are working towards our goals methodically and consistently and I expect we will meet them.

Gas prices will change - so who's at fault?

There was a post on gas prices at AllFinancialMatters that I thought was typical of the lack of knowledge about Economics that exists in our society. JLP cited a simplistic article (written by a journalist likely not trained in economics) and then presented some anecdotal evidence about milk prices to confirm the journalists mis-information.

I saw something I thought humorous about oil companies and pricing (sorry can't find the link):

• when gas prices are going up oil companies are "price gouging"
• when gas prices are going down oil companies are using "price dumping"
• when prices stay the same oil companies are guilty of "collusion"

No matter what, "big oil" is always doing something wrong - taking advantage of the "little guy". People, (especially politicians) who engage in any of this useless rhetoric either don't know what they are talking about or are deliberately distorting knowledge to advance their own interests.

Oil and gas prices change in response to the laws of supply and demand - period. Oil and gas are commodities and fixing the prices of these items is very difficult to do. Prices have little to do with the cost of what it takes to pump or refine oil. So, if the supply of oil is reduced (by OPEC or hurricanes) then the price will go up. If the world economy is booming, demand increases and prices go up. And the converse is also true (which I believe is happening now - the Saudis are pumping more oil and the world usage is slowing a bit).

There is another factor in pricing that few people understand when it comes to commodities - the Commodity Futures market. The Futures markets were created to help business people reduce risk. For example, farmers planting corn in the fall could hedge their risk by purchasing futures contracts of corn. That way, if the price of corn fell drastically at harvest time, they wouldn't be wiped out. Of course, if the price increased drastically, they would lose that profit opportunity.

Futures markets are the most efficient system in Capitalism. They reflect nearly instantaneously the market price for a commodity. They greatly reduce short term price fluctuations, but they are not perfect. Speculators in futures markets can also create demand and drive up prices in the short term by bidding up futures contracts prices. This is what happened this past summer. Fear over oil shortages due to demand increases, hurricane forecasts and war fueled speculation that the price of oil would keep going up. However, as I discussed in my post on Straight Line Projections -things rarely continue in a straight line. Markets correct themselves. If prices are too high, people and companies reduce their purchases (price elasticity) and drive prices back down.

So when oil prices are increasing we see nearly instantaneous increases at the gas pump (now there is some de-linkage as gas futures and oil futures are different - if refining capacity can't keep up with demand, even falling oil prices won't necessarily drop gas prices). But why doesn't it seem that gas prices fall as rapidly as oil prices? Like most people, futures traders are reluctant to sell their contracts at a loss, so they tend to hang on a little longer than they should (who hasn't done this with a stock that's falling in price). But, in fact, once traders realize the bottom has fallen out of the market they dump their contracts and prices fall rapidly. This, in fact, happened just ten years ago when oil prices dropped to $12 a barrel.

Now the next time you accuse the oil companies of "price gouging" think about this. If buy your house and two years later due to market conditions, it is worth $50k more, will you still sell it at your purchase price? If not, you are just like every one else and no different than Big Oil.

Buying Real Estate through a Realtor - Buyer agent or Seller agent?

My wife and I have debated the merits of using a Sellers agent or a Buyers agent when making an offer through a Realtor. The sellers agent is financially obligated to put the best interests of the seller at the top of their priorities. The buyers agent, on the other hand, has no obligation to the seller and can negotiate without any conflicts of interest.

My wife's main point has been that the seller's agent can help reduce the price. Since the sellers agent will get the whole commission (typically 6% here) maybe they will be flexible and reduce their commission to 3% and help reduce the price.

This is nice in theory but I have found that it does not work out often in real life. Most sellers agents that I have tried to buy through are so emotionally attached to their sellers situation that they cannot focus on doing the deal. I had a back and forth discussion with a sellers agent just this past week who claimed she was negotiable on her commission. The house was owned by a woman who was in a nursing home and needed the money desperately to pay for her care. She had accepted another offer previously, let the buyers move in before closing and when their financing had fallen through, had to evict them, costing her months of time. Here is the Realtor's last email to me:

I am not going to write this up because she will not accept it - and
the deposit is too low- so why waste time? I do not want to waste
ANYONE's time.... my client's, yours, etc... she
can get more for it, she got 3 offers before and sold it for near list
price- you are asking for $30K less just on the list price! That is
insulting.... your 2 week closing is not an issue- the loss of $30K
just in proceeds not to mention the closing costs she has to pay does not
justify your reasoning of a 2 week closing and why she would take it....
that is a huge loss for her.... like I said, she is flexible but she will not
give the house away-

Also the title work is done so her next offer
with a mortgage would go faster than 60 days....

I will ask her
verbally- if you want to waste another agent's time go ahead- I think you will
be hard pressed to find an agent to even do this for you.....I would advise her
not to take it..... if you are not negiotable, why do you expect her
to be?

Now she never bothered to write up an offer and present it to the buyer.(How did she know it was insulting?) I was never able to negotiate with the buyer (how did she even know if I was flexible?) How did she know another closing would be fast? (Bank paperwork is usually the holdup here - not Title work - I can close in 2 weeks with my Hard Money lender)

So, I called my Buyers agent and she wrote up the offer within an hour and I submitted it. I doubt the Realtor even bothered to show it to her client. She let her ego overcome any sense of professionalism she might have had. This is not the first time this has happened to me with a sellers agent. Many have the same sense of defensiveness about their clients. This doesn't really serve the client well, despite how it seems. An agents job should be to impartially submit an offer in my opinion.

I think the possibility of saving a few dollars using a Sellers agent probably cost me even the chance of having someone look at my offer. For every deal that might save my a few dollars using a sellers agent, I probably will lose tens of thousands of dollars in potential profit through lost deals. I won't make that mistake again.

Post at Carnival of Entrepreuners

Check out the posts at the Carnival of Entrepreuners and read my post here.

All the Effects of Global Warming

Numberwatch's John Brignell has put together a complete list of everything attributed to Global Warming. Our demise is at hand. Thanks to Al Gore for lighting the way to our salvation.

Living in Debt - All bad?

I've spent most of my lifetime, since I left college, with a lot of debt. I've never missed a payment on any of it but it has created a lot of stress at times in my life. For my wife, debt is an extremely worrisome aspect of our marriage. She had only one debt in her life - a mortgage on her first home that she paid off in 5 years. Typically she was used to having a wallet full of cash - typically equivalent to $5,000US. I typically have less than $30 cash in my wallet.

I read a story on CNNmoney today about being Grown-up about Debt. This article focuses on people that seem to spend compulsively on non-essentials using their credit cards. To be honest, that has never been my problem. I tend to invest compulsively in education, businesses, and kids.

Here's a list of things I don't pay for with credit:

• vacations
• furniture
• cars
• dining out
• Christmas gifts
• entertainment

But I do use credit extensively. Here's what I have borrowed for:

• purchasing property (well over $1,500,000 so far)
• education (college, business seminars, real estate courses - about $30k)
• legal fees (a $30K divorce bill)
• adoptions (close to $100k)
• property improvements (not day to day repairs - just major upgrades)
• Business start ups (over $50k)

So do I use credit stupidly? Or is the use of any type of debt a bad decision? (My wife thinks it may be.) My first inclination is to defend my debt as "good debt", but I want to step back and really think about this first.

Consider my wife's lifestyle in China. She had her own home completely paid for, she saved up enough cash to even purchase a home for her parents with no mortgage. She always had cash reserves of 6 years of a typical Chinese citizen's income. She did this working as an accountant and living well below her means for 20 years after college and she did it primarily without the resources of a spouse. Her life was completely stress-free from a financial standpoint. At the time I met her, she had a pretty nice lifestyle - eating out whenever she desired, buying whatever cloths she wanted, travelling to nice vacation destinations - a very upper middle class lifestyle.

My life, on the other hand, has always been filled with financial stress. Making sure the dozens of bills I have get paid every month, managing unexpected financial needs, moving money around to get a better interest rate or refinancing when a balloon payment is due. I need to look at my on-line checking nearly every day to manage all my accounts. I rarely dine out and take but one vacation a year. Yet my income is supposedly great (over $100k per year). Comparing the two lifestyles, my wife's wins hands down.

Most of us have been led to believe that we need to spend what ever it takes to get a good college education. Now, I probably got my money's worth from my Engineering degrees. But with the cost of a college education escalating so rapidly, I think that for a lot of people it is a poor investment. The WSJ had a good article today on this.

Now, I think education is indispensable. But some things that are not taught at school affect your finances much more than what is taught. For example, a course on choosing a mate and how to develop a lasting relationship would have been a big help to me! Education with an emphasis on savings, not using credit for luxury or non-essentials, investing, and money management would all be higher priority than English literature. But more importantly, getting an education from someone who has succeeded in the field you have chosen is a lot more important than getting an education from someone with just a degree.

Now I think that some debt can be very good. As I wrote previously, using leverage to purchase real estate can turn your small amount of money into large amounts. However, even for real estate this may be a bad decision if you purchase your property at market value in an area that is not growing well. I think that if you treat your real estate purchase first as an investment, not as a cocoon, then it's a good use of debt.

Debt to buy a business can also be good. I've watched two of my brothers buy accounting practices and turn them into very profitable companies. My sister-in-law has also used debt financing to turn her business idea into a multi-million dollar enterprise.

So today my list of what to use debt for is very small:

• education - but only for those fields where there is a good payback. Getting a degree for the sake of a degree is probably not worth it. Get a more specific education in a field where you can start a business.
• real estate - again only when you buy with the intent of making a profit. Buying a house you can barely afford to make your spouse comfortable doesn't fit my model
• business - with the caveat that you have a well developed business plan and are committed to making it work what ever it takes.

Today most people expect that they should live a good lifestyle what ever their financial situation. They want to live in a home nicer than their parents and drive the latest model cars and take expensive vacations. They want to have the reward before they have paid the price of success. So we use debt and pay the consequences all of our life. This is exactly backwards from what really successful people do. Pay the price first.

The Bible teaches this from Proverbs 24:27

27 Finish your outdoor work and get your fields ready; after that,
build your house.

Advice on Investing in Stocks - an Alternative Perspective

A lot of people spent their time obsessing about their investments in the stock market. They spend hundreds of dollars on Financial Planners to help them "balance" their portfolios properly. Some buy expensive newsletters that promise them they can beat the market. They research stocks and mutual fund returns to get the maximum gain. Others just throw their hands up and keep all their investments in safe Bond or fixed income funds and accept a low return due to fear of losing all their money. Websites like AllFinancialMatters have lots of traffic, yet few research how well JLP really has done before taking his advice.

I've tried to do this myself. Researching individual companies, buying into the MotleyFool advice or getting tips from the "gurus" I work with. My brother subscribes to a news letter that he claims helps him beat the market using timing techniques. He says he would have gotten a 30% return last year except for a couple of times he didn't follow the advice and so his total return was below the market average. His experience reflects the all too human nature each of us employs when investing. We use hunches (influenced by greed or fear) to try to overcome our own ignorance, suffering from the Illusion of Knowledge.

Now some people seem to be well qualified to give investment advice (like Warren Buffet). Mr Buffet is an extremely brilliant man (MBA from Wharton School of Business) who started investing at age 11. After getting multiple degrees he convinced friends and family to invest $105,000 along with his $100 which he turned into a fortune. Most of his fortune did not come from investing in the stock market (as many seem to believe) as much as it did by buying and managing companies that he turned around. So Mr Buffet is really more a businessman than an investor in my opinion.

And this is where I differ with the conventional wisdom. If you are intent on becoming wealthy, I think that it is a mistake to believe that just by investing in stocks, you will succeed. The stock market is inherently risky and in the short term there is no guarantee. Now if you start by putting money away at age 11, using dollar cost averaging and investing in index funds, you will most certainly get rich over your lifetime. As far as I can determine, pretty much every other strategy of investing in the stock market is akin to gambling (day trading, timing techniques, technical analysis, buying individual stocks). And statistically, gambling is a losers game. Individual companies fail at an astonishingly high rate and since you have no direct control over what goes on in those companies it is a gamble to buy them individually (you can just as easily invest everything into an Enron as a Microsoft).

Perhaps the biggest gamble people take is putting all their eggs into their job (Read 10 Reasons You Should Not Get a Job). Most don't even bother to put aside a percentage of their income into a 401k, they just hope that they will stay employed and perhaps they will receive a pension (becoming increasingly unlikely) or Social Security (young people - have more children - please!!).

Now, I am not a millionaire, but do have a lot of experience trying different ways to succeed, if you have read much of this blog. I have also had the opportunity to talk extensively with some of the wealthiest people in the country, as well as listened to seminars given by many multi-millionaire businessmen and women. So I feel I can offer some advice to at least myself (and my children), if not to you.

• Invest in knowledge first and foremost. Get an education that will teach you how to succeed financially. If you desire to be an artist, that's fine, but it will be easier to paint if you have money and aren't forced to work 70 hour weeks at McDonald's. I think that a practical college education is about the only smart way to spend the enormous amount of money that a degree requires today. But college alone is not sufficient. Most professors don't know much about real financial success. Get around wealthy people and pick their brains. You will become financially like the people you associate with. So don't spend most of your time with broke people. Build extensive networks with successful people.
• If you are young and unmarried, start a business first or intern with a successful business person willing to mentor you in the basics. The best investment is always in yourself. If you have financial commitments already, you will probably need the steady income of a job to get started. But don't spend your extra cash on non-essentials. Instead, start a side business and re-invest in that business to make it grow. Use the principles of the "E-Myth Revisited" to make your business autonomous. Unlike investing in the stock of a company, starting your own company gives you control. And even if you fail, you will have garnered tremendous knowledge of how business works and what to do the next time.
• Always, always, always take 10% of your income and start saving it. Invest it into index funds. Don't waste a lot of time trying to beat the market. As you get closer to retirement you may want to move a percentage of the money into fixed return funds, but when young you should be investing for the long term. Some years you will lose money but by using dollar cost averaging you will grow your investments steadily over time. AND LEAVE THIS MONEY ALONE!
• Diversify into real estate - see my post on why here. Real estate is one of the safest investments around as evidenced by interest rates banks charge.

So invest in the stock market, but don't become obsessive about it. Use a simple strategy like I outlined above. Spend more of your time investing in yourself, your business and real estate.

Carnival of Investing feature

My post on Commodity Futures is up at Carnival of Investing

Real Estate Investing Carnival

My post on Real Estate Courses on up at The Carnival of Real Estate Investing.