FEAR by Magi Bird, EMS Master

My very good friend, Magi Bird, wrote this. She's a very successful and experienced real estate broker and exchangor. She has trained and educated more equity marketing specialists (EMS, exchangors) than any other teacher in the country.

F.E.A.R.
by Magi Bird

In grade school I heard that fear was an acronym for "False Evidence Appearing Real". I also learned that Franklin Delano Roosevelt said "We have nothing to fear except fear itself." With the headlines screaming about inflation, foreclosures, gas prices, mortgage relief', bank failures, brokerage failures, bankruptcy, slowing sales, the declining dollar, falling home values and increasing unemployment, it seems a reasonable response to be afraid. When financially threatened it also seems appropriate to spend less, downsize, pay off bills, stay at home, cancel luxuries and vacations, stock up on food, turn off the air conditioner, hoard cash and do without. The result of this prudence: a contracting economy, job layoffs, business failures, bankruptcy, inflation, foreclosures, bank closings and more headlines.

STOP!

What has really happened? Five years of unprecedented low 30 year financing started everybody "investing" in real estate to make a quick buck. Money could be borrowed at 2% above the governments' published (but untrue) rate of inflation. House flipping became a National pastime and "I Buy Houses" became a bumper sticker. The entry of so many new "investors" to the real estate market created competition for the inventory and the law of Supply and Demand kicked in driving prices through the roof, detaching the economic value of the property from its price tag. The higher pricing created negative cash flows which consumed the discretionary earnings of the real estate "investor", who then had to sell under financial duress which dropped pricing. People stopped standing in line to reserve "to be built houses" they could flip at a profit without ever closing escrow. Builders with inventory in various stages of completion slashed prices to attract buyers, destroying the value of the homes families had just purchased. People who needed to resale were competing against builders and had to reduce pricing as well, resulting in negative equity holdings, walk always, short sales, foreclosures, bad loans, troubled banks and failures.

SO:

Is real estate a bad investment? Absolutely not! We are standing at the threshold of the greatest reshuffling of wealth that most of us will see in our lifetimes. When this cycle ends, which it will, the ones with the best real estate investment portfolios will be the big winners. Speculators, not investors, created the run up of pricing and investors will be the stabilizing element in the marketplace. If you do not know the difference between the two, do not buy any real estate until you do. In the world of investing, cash is King and cash flow is Queen Consort. Real estate must be purchased at terms that create a return on the capital you invested at regular intervals. That return may not exist at the time the real estate is purchased. The building may be vacant, in need of repairs, rezoning, restoration, completion or upgrading prior to it being rented. The income may be low or nonexistent due to the poor management practices of the previous owner. If this is the case you must be brutally honest in your self assessment. Do you have the skills, talent, time, tools, patience and experience to affect the required changes? Will you be a more capable manager than the previous owner? If not, do you have the additional capital and reserves to hire those services done for you and carry the property until completion and rent up? If there is any doubt in your mind, find a project or property that is up and running without deferred income or maintenance issues and pay a little more for it.

NOTICE:

I said that property must be purchased at TERMS that permit cash flow. The price is almost irrelevant because it never exists until I end the investment by selling. As long as the property produces cash flow, the principle of the loan is being reduced and the local population is growing, profit is inevitable. This is the jewel at the heart of real estate that you will find nowhere else. Even a hobo under a bridge needs a piece of turf to occupy for a period of time. Unlike vinyl records, land cannot be replaced by new technology. Shelter is needed by everyone, everywhere, at all times and the earth makes new turf very slowly. Real estate renovation, cash flow analysis and property management are not sexy or easy. They take study, effort, patience and practice. If someone tells you that it is easy, any fool can do it and it will make you rich overnight, beware. Real estate will, in fact, make you very rich, slowly.

NOW:

Is the time to buy real estate because sellers are competing for your money. You have opportunities to negotiate terms that will permit cash flow, in some cases without much down payment. In many cases sellers will carry a portion of the purchase price, scale payments to cash flow, share the risk, improve the property, guarantee the rents, include other assets, pay down interest rates or lease with option to buy. Avoid sexy properties. The market is pushed from the bottom, not pulled from the top. If you have to live in a million dollar house, buy it now for half that amount and bank payments for a year. Remember that your home is not an investment, it is overhead and every dollar put into it kills an investment dollar and all the earnings you could make on it. Do not be affected by a sales pitch and remember that headlines are the highest form of salesmanship. Disaster sells on the front page, don't be a buyer. Sound real estate investment principles have not changed but the penalty for ignoring them has come home to roost. Sharpen your pencil and take solid investment advice from people who have what you want. Today is your once-in-a-lifetime opportunity: never be stopped by F.E.A.R!

Winston Churchill said, "We will never, never, never give up!" Don’t you!

Magi Bird
EMSMaster, CEO,
magi@realtyequitymarketor.com