AZ Republic Article On Teaching Sellers

Brian over at How To Invest In Real Estate posted a story from the Arizona Republic about how sellers are basically clueless about the current real estate slowdown and are still looking to sell their homes for the inflated prices of the last two years. Realtors are having to educate them on the current market dynamics and find ways to make them realize they may need to lower their price, not once, but several times.

But one line in the article really jumped out at me and made me question the knowledge of most Realtors:

You can't count on city or town medians or appraisals but have to look at what comparable homes in the neighborhood are selling for, they said.

No shit.

As a real estate investor, this is the first thing that was drilled into my head. It should be the most self-evident statement ever to anyone remotely involved in real estate, yet at this meeting of 200 members of the Southeast Valley Association of Realtors, they had to specifically point this out.

And these are supposed to be real estate "professionals".

Another Prosper.com Update

I've already mentioned I've grown disappointed with Prosper.com and will not be lending any more money through there. I've noticed now that they have added a new feature called "Community Payment" which I'm not sure I like. The concept is simple: if a member of a group is behind on payments, other group members can chip in and make a payment on the overdue loan. This helps keep the group's rating up by cutting down on the number of late loans the group has, which can scare away other lenders from that group.

As a lender, I should be glad for this. If the borrower can't pay me, at least someone else will. In fact, this has just happened. One of my loans is 2 months late and I received a community payment. The amount was only $1.43 and after all the late fees and service fees, I only get $0.21, which is still better than nothing (although not by much).

But on another level, I am against this idea. The point of Prosper, I think, is for people to help other people get back on their feet by lending them money. But part of getting back on your feet means learning and accepting fiscal responsibility. The community payment option gives borrowers less of a reason to accept that responsibility. I think it is also a huge source for potential abuse. If you find a group whose members tend to make community payments for others, why not join that group, borrow money, and default on the loan? The community payments will stretch out even further the amount of time it takes for a loan to go to the collection agency and thus, hurt your credit score.

First Payment From Commercial Project Received

I received my first payment yesterday from the large commercial project in Louisiana I invested in recently. Also had an update on the progress from the property owners. They have hired a new property management company and that company is actually moving into the building, which is a plus. This company managed the building for over a decade before the previous owner took over and had the property at 80% occupancy. They are currently at 40%, but they feel they can get it up to 80%. On the bad news front, three air conditioning units went out and they will cost the owner $30,000 to repair.

In looking at my last post on this topic, I realized I forgot to mention one important fact: My ROI on this investment is infinite! Yes, I am getting a 12% return, but the money I put into this project came from a line of credit that is costing me 7%. I get each payment, use some to make my line of credit payment, and pocket the rest. While it looks like this means I am actually making 5% on my money, I am not. Because none of the money generating the income is my money, I have zero dollars in the deal. This means I am getting money each month with none of my money invested, which gives a return on investment figure of infinity! Of course, there is some risk involved in this and I do have reserves set aside in case things go south, but it's hard to beat an infinite return!

Bonus Cash!

I spent the weekend in Las Vegas, where I won about $500. Unfortunately, my wife lost the same amount, so it was a push overall. Still, it's good to come back from Vegas with the same amount of money as when I left!

But the bonus cash I am talking about is not from Sin City. It's from Security Union Title Company. When I checked my mail when I got back into town, I had a refund check for $44 from this title company. The accompanying letter says the refund is a result of an investigation by several states into the reinsuring practices of the company to "captive reinsurers." They claim the reinsurance agreements did not increase the title premium and without it, the charge would have been the same. Hmm.. Really? Then why are they paying refunds? And doesn't calling them refunds imply they were over-charging in the first place?

Reverse Merger Arbitrage Works!

Wow.. I just completed a deal that gave me a 2,567% ROI in 212 days. That's an annualized ROI of 4,419%!! And it's perfectly legal! Anyone can do it!

I sound like a bad infomercial. I better explain.

Thanks to Gualberto over at The Art Of Money blog, I learned about a stock investing technique called reverse merger arbitrage. He's explains the concept here. How it works is you buy shares in a shell company - a company that has no operations and is basically created just to be sold. The shell company has a stock symbol and is typically traded on the "pink sheets", the over the counter market (as opposed to on the NASDAQ or NYSE). These stocks are typically trading at pennies per share.

Why do this? Because the whole reason for this company's existence is to be sold to another company. The buying company wants to become a publicly traded company and issue stock. However, it is very expensive to put together an IPO - you need to pay a company to issue the stock, you need to get regulatory approval to be listed, you need to go through audits, etc. Rather than deal with all this, it is cheaper and easier to simply merge with another company that is already listed as a public company. Hence, the buying company buys out the shell company. Often, at the completion of the sale, they will change the ticker symbol and do a reverse split on the stock to raise the price from pennies to dollars.

Normally, a split or a reverse split does not change your investment amount. If you have 100 shares at $1 per share, after a 1 for 50 reverse split, you'll have 2 shares at $50 per share. In both cases, you have a total of $100 worth of stock.

But many times, the reverse split will include special treatment for small shareholders. For example, if you have less than 100 shares, they might say your shares will not be affected by the reverse split. This is probably done to preserve "round lots" and prevent the company from having to pay out any cash to shareholders. For example, without the special provision, if I had 99 shares before the 1 for 50 reverse split, I would end up with 1 share plus cash in the amount of 49/50ths of one share (or $49 in this example). But if the company has specified that holders of less than 100 shares are not affected, then, after the split, I am left with 99 shares still. But, and this is where the magic happens, because the reverse split affected everyone else, the stock price is now at $50. So I have 99 shares of stock at $50/share where before I had 99 shares at $1/share!

Hard to believe, but it's true. This happens. It's legal. It works. The drawback, of course, is that there is an upper limit on how much profit you can make - typically only 99 shares worth. But even so, that's one heck of an impressive return. But if you have several accounts, you can do this in each account.

Here's what I did. Back in December, Gualberto posted about a potential arbitrage opportunity with QRUS. That was going to be a 1 for 10 reverse merger with shareholders of less than 100 shares being unaffected. I bought 99 shares of QRUS at $0.30/share. Time passed and no news came. Nothing happened. It turns out, that deal fell through and the merger never happened. However, I held on to the stock, figuring another merger would come along soon. Sure enough, in July, Gualberto posted about a new merger involving QRUS. This time, the split was going to be 1 for 50, meaning I could make an even bigger profit!

Again, time passed and there was no news. (You'll find it's somewhat difficult to get news, or any information at all, on companies trading on the pink sheets.) One day, I received an information packet in the mail explaining the split. I took this as a good sign that the merger was going to take place, since I didn't get one of these for the failed merger. (Why incur the expense of printing and mailing the things if it's not going to go through?) Unfortunately, the only date listed for when the split would happen was "at least 20 days after" the information packet was first distributed. So I've been watching the stock daily and checking Gualberto's blog daily for news. One of his readers posted a press release saying the split was to happen on 8/2 and that the new ticker symbol would be DFXN. Sweet!

The next concern was that my broker, Schwab, would handle the reverse split correctly. Well, August 2 came and went and nothing happened. My account showed that my shares of QRUS were replaced by a number, no symbol. I called and was told that the stock was undergoing a reverse split and that Schwab was waiting for the new shares to arrive from the company. I explained to the broker about the special treatment for those holding less than 100 shares. He had never heard of such a thing. I was transferred the Schwab's Reorganization Department and they had never heard of such a thing either. So time went by and I was a little anxious about whether or not Schwab would handle the split correctly. Both the broker and the Reorg Department said I would received 1 share plus cash. This was not what I wanted. But I was hopeful things would work out since they said they were waiting for instructions from the company. Presumably, the company would know the special conditions of their split and would instruct Schwab to handle things accordingly.

Today, a week after the split, I logged in to my Schwab account and saw 99 shares of DFXN. The last trade price was $11. I got a real time quote and saw the bid was $8 and the ask was $11. I put in a sell order for $10.50 and waited. Nothing happened for about 30 minutes. The stock was somewhat volatile, trading between $8 and $14 over the last week and I didn't want to get too greedy and end up holding on to a $2 stock, so I changed my order to sell at the bid price of $8. The shares were immediately sold.

So, to recap, I bought at $0.30 a share and sold at $8.00 a share. Put another way, I turned $29.70 into $792 (not counting some trading commissions).Pretty darn impressive! And this was done in my Roth IRA account, so the profit is tax free!

I don't know how Gualberto finds out about these opportunities, but I check his blog daily for news of upcoming mergers. Next time, I'm doing this in 5 different accounts to really jack up my profits.

House 3: Lessons Learned

Each project gives you tons of opportunities to learn, so if you can't find at least some new things you've learned, you're doing something wrong. I certainly got lots of opportunities to learn on this project! My lessons:

Location, location, location! Of course, this is the cardinal rule of real estate and I thought I knew it. In fact, I do know it. Where I was lacking was my ability to properly judge a neighborhood. I knew when I was investigating the property that it was in a low income neighborhood. That means the crime rate will likely be high. I did not expect to be broken into four times! There were several homes on the same street that looked very nice and well-kept and the cars parked on the street were newer models and in good shape, so I thought the area wouldn't be so bad. I know better now.

Repairs. This is a mixed bag for me. I really like the handyman I used. He completed the job quickly, had regular hours, and went out of his way to help me on the times when the property was broken into, even after he was technically done with the job. On the other hand, others have suggested that his prices were a bit on the high side. Next time, I'll do some more research before hiring someone. This guy's service will be hard to beat though.. He was also a licensed contractor, as opposed to the handyman I had used on the last two houses. I really can tell the difference in work quality and professionalism and I'll be sticking with licensed contractors from now on.

I also learned a bit about what to replace. The property had an evaporative ("swamp") cooler in it. It was old and broken, so I replaced it with a new one. But the buyer wanted air conditioning and I ended up giving her some money at the sale to get that installed. I don't have any idea what it costs to install air conditioning in a house, but I'm sure it's cheaper than putting in a new evap unit and then installing air conditioning!

Security. Because of the neighborhood the property was in, I should have paid more attention to security issues. I always made sure all the doors and windows were locked and I did change the locks as soon as I owned the place, but there was more I should have done. The property backed up to an alley and had a double wide gate in the backyard. It took me a couple months before I realized I should put padlocks on that. I'm convinced that went a long way towards stopping the break-ins. Around the same time, I put up some temporary paper blinds in the front facing windows. I also bought two desk lamps and timers and set them in the house so there would be some lights on during the evening. The padlocks, blinds, lamps, and timers are super cheap when compared to the costs of repairing vandalism damage. And I still have the lamps and timers, so I can use them at the next property.

Oh, and just one last time, here's the post with the Before and After pictures.

House 3: Final Results

Here are the final numbers on House 3:

Purchase Amount


Fix Up Costs

- $29,443


- $303


- $517

Costs Subtotal
- $168,543

Selling Price


Selling Costs
Property Taxes
- $491

Income Subtotal

Misc. LLC Expenses
- $400


Time Property Held

168 days

Total Return (ROI)


Annualized ROI


Misc. LLC Expenses include the costs of running the business - a fax line, office supplies, etc. While not technically related to this property, this is the only property I've sold this year, so the profits of the entire LLC are really the same as the profits made by this one property.

Not the best ROI in the world and definitely below what I was shooting for. However, I'm reminded of an old adage of stock traders - never complain about a profit. If you compare these results to those of the last house I flipped, it's not so good. On the other hand, I owned the house for a shorter period of time and at least $3,000 of expenses were due to break-ins. If I hadn't had to spend that, my annualized ROI would be up around 12.5%. A lot of my profits from the last house were due to the red hot real estate market - since I had to hold the property longer, I was able to benefit from the run up in prices. In the current cooler market, I didn't get the rapid appreciation to help improve the ROI. My selling costs were also higher. To move the property quickly, I paid the buyer's agent 4% instead of the customary 3%. That cost me an extra $1,950. I also contributed 3% towards the buyer's closing costs and prepaids. This was another $5,850 that I paid on this sale that I didn't pay on the sale of the last house. However, given the relatively poor neighborhood, I knew when I bought the place that I would be required to contribute some money to the seller at closing since they would likely be cash poor.

My next post will go into the lessons I've learned from this property.

House 3: Done Deal!

I spoke with my escrow agent this morning and he confirmed the buyer's loan did fund on Friday and the docs got recorded, so it is now official - the property has sold! (He didn't get back to me on Friday because he had a family emergency and had to leave the office.) He said he was wiring the funds to my account this morning. In fact, I just checked and the funds have already hit my bank!

Today, I called the power and gas companies and had them take the services out of my name, something that will actually take another 1 to 2 days. I also faxed my insurance agent and cancelled my insurance on the property.

Now I need to start crunching the numbers and figure out the exact ROI. I'll post the info as soon as I have it!

House 3: Signing Complete!

When I showed up at the escrow office this morning, the buyer was still signing her documents. I took the opportunity to give her the keys to the property. Technically, I should wait until the loan has funded and the documents have been recorded, but I don't want to have to make another trip to the property or escrow office. I signed my paperwork and left. They are going to send the docs to the lender by courier in an attempt to get the loan funded today. If not, it will be Monday. I figure if the buyer has the keys, she might start moving in over the weekend and a property with someone living in it has a much lower risk of being vandalized than a vacant one. I'm not worried about the loan not funding. Once the lender has sent loan docs, it's pretty much a done deal.

After the signing, I went to the property one last time to pick up my lockbox (I actually still have a set of keys, should something go horribly wrong), my two lamps, and timers. Still no vandalism, so that's good.

Once I have verified the funds have hit my bank, I'll get the utilities taken out of my company's name.

House 3: Signing Tomorrow!!

Woo-hoo! The title company received the loan docs and we are scheduled to sign tomorrow morning! The buyer is signing at 8 AM and I am signing at 9 AM. The title company will courier the loan docs to the buyer's lender in hopes that they will fund the loan tomorrow afternoon. If not, it'll have to wait until Monday. (Damn - I didn't catch that the closing date was a Friday!) But all is good!

As usual, I found one error on the preliminary HUD statement. This time, it was in my favor, but I still faxed the title company a correction. They had the sales commission listed as 4%, but we raised it to 5% (4% to the buyer's agent) after the first escrow fell through.

A very quick check of the figures shows I should make somewhere around $6,000 from this deal. Pretty crappy in terms of ROI, but considering all that happened, it's nice to see I should still make a profit. I'll post a more detailed accounting after the funds are in my account and I have a chance to do a full analysis.

House 3: Two Days To Closing

I stopped by the property this morning and was pleased to see it was in the same state as I left it last week. I might get out of this thing without any more vandalism yet!

Spoke with the escrow company. They are working on my file now. They do not have loan docs for the buyer, but they have been told they will arrive tomorrow. (Of course, we all know that doesn't mean it will happen.) I was supposed to get the preliminary HUD today to review, but it hasn't arrived yet.