Commoditization of Real Estate Investment
Real estate investment has received a lot of attention from high profile events like Donald Trump and have long since been a staple of infomercials. These events appeal to novice and professional real estate investors’ constant quest for investment secrets and tips and are generally used as forums to sell investment programs, collateral and seminars. That’s one type of real estate investment circuit.
I have been attending a variety of real estate investment clubs looking at new business models. As a group, Real Estate Investors are true advocates of transparent transactions because they require efficient, accurate investment assessments in order to identify and complete more transactions. I am all for this.
I have been intrigued with investment groups who provide turnkey investment opportunities to their membership (or “networks”) for quick decision, often at the time of presentation. Also called “armchair investing”, the parallel is to make real estate investment as simple as investing in the stock market. The program entails having the Investor cash out, say, $100,000 in a home refinance, and divvying up the cash into ten down payments of $10,000 to invest in a portfolio of properties in lower priced U.S. markets in the $100-200,000 range, and lately, overseas. The schedule is to make these ten investments over a year’s time.
The investment groups – two examples are the Marshall Reddick Network and the Nouveau Riche University – offer investment opportunities to the investors via monthly seminars and online accessible databases. The groups have set up a national network of realtors who source the investment property listings from their locales purportedly under rigorous investment standards. These realtors often travel to the
Investment listings are offered turnkey, generally with all closing costs prenegotiated, usually with a rental tenant and always with a property management company in place. Investors proudly say they have never seen many of their investment properties. The investment groups also promote their own and affiliated mortgage brokers who specialize in investor-friendly loans with high LTV programs
These groups have achieved credibility by riding successfully on rising property prices, and testimonials are offered religiously, usually at the beginning of the seminars. It’s quite possible higher real estate valuations worldwide will “lift all boats” and these groups will expand further by offering investments wherever they see the tide turn up, whether in
How do these investor groups make money? In one case, half of the investment listing realtor's commission is shared by the investor group. Also, there may be other fee-sharing arrangements in the loan brokerage and settlement, I'm not sure.
The two negatives I’ve heard thus far comes up when an investor group works an exclusive arrangement to sell 10-20% of new units in a development. The sale of the units begets a surfeit of rental units which depresses rental income and can create negative cash flow… not great in areas where appreciation rates are slow. The second is the quality of the property management company and the hassles of remote property management.
Many of my investor friends use these networks as a benchmark for investments they are trying to source on their own in various locales. If you’re a real estate investor, or are looking into out-of-state investments, please reply… I’m interested in how you source your investment properties. I am also part of a team developing a unique investment network that matches investors with appropriate investments.
Pat,
I am also part of a small group that syndicates real property opportunity for the arm-chair investor, although we carefully screen for proper experience and/or 'net worth' benchmarks that are similar to 'accredited investor' standards, as our offerings are not for the freshman.
I have found through my own experience that many investment clubs recruit newbies to buy the existing club members stable of property. Unfortunately I too often witness fraudulent representation when comparing the clubs ‘prospectus’ to real world numbers. Realtors, who are usually concerned with just completing a transaction, can cloud the perceived viability of the investment even further by eliciting emotion rather than practical economics. Many of these clubs also seem to be more concerned with their investors buying their ancillary products..the books and CD’s you mention. Caveat Emptor is the MO one should practice when dealing with any investment. My group often finds ourselves acting as 3rd party consultants to investors who want to buy, but can’t ‘read between the lines’. This is an arena we are exploring further…an independent group that evaluates proposed real estate investments for the prospecting investor, consisting of a Realtor, mortgage professional, appraiser, attorney, and CPA…those with the critical skill sets required to make an informed decision.
We source our opportunity from inside referrals and using ‘short sale’ methods, mandating a minimum acquisition equity spread of 20%+ based on a tight appraised value or tax value. Investments offering ‘5% down to break even and 10% down to cash-flow’ do not sound like solid opportunities, unless one is a real estate collector, not an investor.
In any case, we have two current plays. One in OH, a conversion of an 8000+ sq/ft ‘mansion’ built in 1918, from a residence into a bed and breakfast. Second, in Western NY, the conversion of one SFR on 15 PRIME acres into a gated community of apprx 6-8 $1M+ SFR’s.
*Side Note* IRA's (and other qualified funds) have become a popular vehicle for the required capital infusion by the Members (investors) of the LLC (which we create for each specific opportunity). This is typically done by having the LLC initiate a Note or Bond (with terms) to the IRA’s custodian in exchange for the capital. This way investors may personally direct funds that they typically have little to no control over, and any gains may be returned to the IRA, ‘tax free’. There are a few Internal Revenue Code caveats to be aware of and avoid when utilizing qualified funds, but the upside is substantial. We have personally done this with Merrill Lynch on a few occasions with smooth success.
One last thought, all potential and current investors should follow the principle that money is made in real estate at the time of purchase, not sale….
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Last point is an apt one... it's the purchase that is the least transparent in an armchair transaction. I can only think of one reason to purchase real estate this way - complete implicit trust in the referrer of the investment and full disclosure of fees, including what the referrer may be getting.
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I'm a Knoxville, Tennessee Realtor and I've been to a couple of the Marshall Reddick investment club meetings and presented Knoxville rentals to the group.
I sold 4 homes on my last trip and not only have none of my investors ever seen their purchases, it's very unlikely they ever will.
One exception was a guy from Irvine who bought a Knoxville investment property and his daughter lives here. Now he can come to 'inspect' his investment and visit his daughter on a tax deductable trip.
We have a very strong management company that handles the rental and repairs although we specialize in brand new homes that typically need no significant maintainence or upkeep the first 5 years or so.
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Pleased to meet you Jim...
Since armchair real estate investing requires complete trust in the Realtors who source, price and close the transaction, I made it a policy not to recommend nor criticize any investment groups like Reddick. If I sound incredulous about this kind of investment, it's because the transparency factor appears shallow... after all, an investor generally makes the decision fairly quickly. That said, I do believe Reddick and other investment clubs that maintain good reputations provide a service that will eventually become more transparent as armchair real estate investment becomes more standardized and accepted. By standardization, I mean the ability for investors to more easily compare the properties they are acquiring using AVM tools, CMA and local Realtor reference sources, and also assess the credibility of the management company and the settlement coordinators. Of course, I always end any commentary I make about real estate investment with caveat emptor.
Oh, your blog is indispensable in adding to the trust factor that long distance investment requires...
I'm glad to hear your story/testimonial... you're on my short list of potential realtors I can refer RE investors to.
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Hey Jim,
When did you go to the Marshall Reddick event in CA and will you be going back?
Thanks,
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Surprisingly nice comment from a pen name usually associated with all that spam that comes in!
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