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Have you ever gotten an appraisal that doesn’t match up with our estimates or your thoughts? Happens often. I was recently in Las Vegas with my wife and I had an epiphony. My real estate is actually up 20%, while the market is down. Radio show #3 from last Saturday was dedicated to this topic. While reading Kiyosaki’s Financial IQ I came to a realization. If you increase your rents, your values increase as well. In a nutshell, higher rents = higher values. Do sold comparable units even matter when you’re renting the home as opposed to selling?

The problem with many appraisers is that they base their valuation on 1 factor alone. An accurate appraisal considers all 3 of the valuation methods. The most commonly utilized valuation method is the sold comparable method. We are all pretty familiar with this method. A comparable is a similar home (same size, beds, baths, etc.) within 1 mile that has sold within the last year. As appraisals are largely a professional opinion of value, the standards change quite often based on the direction of the lenders. We’ve seen the time limit change from the last 12 months to the last 6 months. Some banks require a 3 month window, it could be 3 days at some point. This criteria is really not that pertinant however, when I consider my portfolio of properties. Why? I’m not selling. I’m renting.

The Income Approach is a far more accurate approach for the valuation of my portfolio. The reason? I rent my homes, I don’t sell them. There is no point to value the potential sale of a home while I’m getting $1,200/mo. in rent. In fact, my average rents in 2005 were around $1,000, whereas today they are over $1,200. So, while the comparable home sales in the neighborhood are down 5 or 10%, my rents are up 20%. The true value of my program is the derived rent, NOT the comparables. More Rent = More Value.

The final method is the Replacement Cost Approach. You would be very hard pressed to find someone who could rebuild these homes for you under $100 - $150 per square foot. If we took an average unit that I sell (let’s assume a 1000 sqare foot ranch) at just $125 per square foot, we’d be looking at $125,000 to replace the home. In addition, we need to consider the value of the land as well. I recently sold a lot in Sycamore for $35,000. The averge home of 1000 sqare feet with a decent sized lot could likely carry a value of $160,000, as the lot has value and the replacement costs could be $125,000. There were 2 competing bids for the lot and it sold within weeks of the listing. The average postage stamp lot likely carries some value despite the fact there the might not be sold comps to justify the value. Again, comps do not tell the whole story. Land and these structures derive intrinsic value from rents and the costs to replace.

The next time you have an issue with an appraisal, refer them to this blog post and the sold comparables that we’ve sent out with the email. In addition, you may want to ask them what the value was based on the Income Approach. If they don’t know what you’re talking about, fire your appraiser or find a second opinion. I had an appraisal come back very low based solely on comparables. The second appraiser I used factored in the Income Approach and the second appraisal came in $70,000 higher. The same house, $70,000 difference. Another example of an appraisal issue was the home I rehabbed in Naperville last year. The home sold in 2004 for $310,000 and I was able to pick it up at $195,000. Despite this fact, the original appraiser made so many negative comments on the home that the bank pulled the financing. Mind you, this was not the home inspector, this was the appriaser. Their job was to estimate value, not comment or provide the bank with a home inspection. Needless to say I was angry. I went on to work with another bank and another appraiser. The value came in fine and the project worked out just as I planned. The home sold for $425,000 with 17 days on market to a realtor. Even before the construction process started, the appraisal came in at $375,000 "as completed", which I thought was low.

This second opinion of value saved the deal and kept a great project together. Just like seeing a doctor for a second opinion can save your life, this process saved the deal. Get a second opinion if you ever have an appraiser give you a low ball value. An appraiser’s job is to understand and provide value, not to provide a home inspeciton or to be the price police. If they haven’t provided you with an value based on the income of the property, you almost certainly need a second opinion.

Here’s a link to Show #2 - We had our film crew out shooting our new DVD and I was thrilled to take the opportunity to take them into the studio with me.  It was great to see youg guys who were starting their own company. I had offers from several larger name companies that wanted to shoot the footage, but I went with these younger guys for a couple reasons. Their excitement about the project and their desire to learn was impressive to me.  They also wanted to understand real estate.  I grabbed Bryan before the show and brought him on because he had been asking me question after question.  The show was a hit and we took our first caller, which was fun. 

Check us out next Saturday at 1pm on 1410AM.

You may be shocked that my typical comments on the stock market have come a day late. Yesterday’s stock market fiasco was the worst in nearly 7 years…and you thought real estate was bad.  The point, I try so hard to make with investors is that real estate is often more “secure” than your standard 401K and IRA options.  This is counterintuitive to what you may believe and is certainly counterintuitive to what you hear from the media.  When I discussed with my dad early on in my real estate career, my vision was simply to do something I loved, while being profitable.  My original visions of becoming a custom home builder never happened, largely because my dad convinced me that the low end was far safer, which I now believe to be true.  I could never leave the comfort and safety of low end real estate.  If you can’t sell your $1M spec home, chances are you’re stuck.  As a builder, you need to constantly acquire new land and build new homes to make money, while being an investor, you can buy 1 project and make money for a lifetime.  I wanted to create enough wealth to retire extremely young and enjoy life during the process.  While being licensed to sell insurance and mutual funds, I never felt that I could sell the product because I didn’t believe in it.  I did not see anyone getting rich, or even getting a decent return except for the asset managers.  On the contrary, I see many of my real estate investors doing very well.  See, the particulars of our success are extremely fundamental.  Everyone needs a place to sleep.  Does everyone need stock? No.  You can’t rent your stock out and you’ll have a hell of  time using a bank’s money to buy stock, so the beauty of leverage is out for the most part.

The most idealistic investors focus on the flip, but their eye is not on the ball.  My program has been rooted in the HOLD since I started.  If you want to make a quick buck, flipping is a neat concept.  I’ve flipped before, many of you have as well.  That is a great little injection of capital from time to time, however if you’re like me, you’re likely trying to replace your income with rents.  That’s right, the good old fashion landlord routine.  And yes, it involves a little risk and a little work, however the rewards can be incredible.  If you’ve met me before, you’ve probably heard me say that Donald Trump is not a flipper.  He’s an investor.  While I’m not a huge fan of Donny’s, the point helps new investors realize that the old fashioned hold is not all that bad after all.  True investors hold and recapitalize at the right times.  Selling in a down market is nuts, especially when you consider that rents are through the roof and rates remain relatively low.   The market is dictating hold, so I hold. 

The most important component that differentiates real estate from traditional investment strategies that are so ingrained in our psyche, is the fact that there is a plan B.  What started out as my plan B, holding, has now become  my A game.  There is an inverse relationship between values and rents.  Chances are that you’ve owned homes in hot markets and cold markets.  This year is a “cold” market with regard to value, however my rent roll has never been stronger.  Nearly every home I have rents extremely quickly and at peak rents.  The 2005 hype is gone.  Flippers quit, yet investors are buying with both hands.  I’m not overly concerned with a 10% decrease in values.  First of all, I (and my investors) have likely purchase the home for 50 - 70 cents on the dollar, so a 10% hit in value still allows us to have incredible equity positions. It’s important to mention here that my cash flow has exploded.  My rents are 10 - 25% higher in this market than they were in past “good real estate” years.  

The best way I can explain the root safety in my program is with a teeter totter example.  When prices go up, we create equity and have the ability to sell at profits.  When prices fall due to increased rates or credit tightening, our rents go up as demand increases for affordable houseing.  This, of course, allows us to have the opportunity to cash flow.  Provided you stay in the first time home buyer market and stick to the basic fundamentals, you likely won’t get too hurt. In fact, you’re likely to do extremely well by sticking to the basics.  My fundamental teeter totter approach is basic, but it works time and time again. If there were a better way to create this much wealth with this limited effort, I would find it, sell it or invest in it.  I stick with low end real estate for one simple reason, it works.  It works in good economic times and in bad.  It is not an accident that I have (and likely always will) stuck with “first time home buyer” homes. It is an extremely well thought out plan that has proven itself in good and bad markets.

I tell people that question the risk element of real estate, if you’re risky, keep buying stock. The last 10 year has been a good indicator that the risk associated with the stock market is extreme in comparison to real estate.  All the while I’ve been buying little pieces of the American Dream and chipping away at retirement.  It’s closer than you think.  There are no doubt more responsibilities associated with real estate.  Just this last year, I have had a home burn down, and another get hit by a truck.  Both equity positions were lost.  This was a stressful and painful experience, however by staying with my strategy of accumulation (or mass consumption), I have made up the loss in just 1 or 2 new purchases.  Where many folks go wrong, is they stop accumulating. There are times to re capitalize your portfolio.  Sell some (not now) and buy some new projects.  When talking to my very first investor the other day, he mentioned that he had been stagnant for some time and that it was time to get back in.  I expressed how incredible the opportunities are now.  Don’t hesitate.  Managing 10 properties is not much different than 3.  At 20+ you’ll need assistants, management or some sort of help, but I had a full time job and 15 homes at one point.  It’s doable, and I see no viable alternative with this type of return.

I’ve thrown in a clip of a home of mine that burned down.  I lost the equity position which was tens of thousands of dollars.  I wanted to clarify that my tag line of “Expect Maintenance, Expect Issues…” was derived from my own difficulties.  In the same year as this fire, I had a home that was destroyed by a truck that smashed into it.  It’s never fun to lose equity, but the truth is that my insurance kept me from losing everything.  There is no insurance for your mutual funds.  This business has a fair amount of hurdles, but it’s been an incredible wealth builder for me and it can be for you as well, if you’re willing to work at it.  Enjoy!

**INCREDIBLE**

So you’re sick of the cash out refinancing?  So am I.  While it’s certainly worth it to utilize the bank’s money in these projects, it’s not always a fun process.  Our new construction financing program will blow you away.

Our new program is based on 80% of the END value and will be available up front.  I have 2 commercial banks that will allow you to finance my projects this way.  This program is limited to our projects.  Here are some details from one of the banks.  The loan functions like a construction loan and will provide your funds for rehab up front in the form of an escrow account.

It has taken me 10 years to establish the credibility to provide this program, but we have it in place, not only with one bank, but 2.  I couldn’t be more thrilled!!!

Here’s a video of a recent project I bought, I poke a bit of fun at some of the nonsense infomercial stuff you see.  Hope you enjoy.

On the 28th, I was the special guest on the SpringBoard Real Estate Investing Hour with Doug Crowe, on News Talk 560 AM the Wind. We spoke a bit about my background, how I got into real estate investing, about the current market, using cash offers, and more.

Click play on the audio player below to listen to the broadcast.

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