MIAMI (ad)VICE

A reader e-mailed me this great question:

> Hey BB,
>
> I'm very intrigued by your posts, researches and efforts and I'm very curious as to how one becomes as successful as yourself. I've just turned 20 but have no deposit (just started saving) nor does my mother have a property of her own. I'm working full time for under 30k a year, if you were in my shoes how would you go on about investing? Or how would you go on about it in general. Sorry for this PM it sounds almost like a personal assault but I was also looking to start investing in the US (in particular, Miami) since my income does not cover for the overpriced costs of properties in Australia. Just looking for tips on how I can build up my wealth.  Thanks

Here's the answer I e-mailed to him

Hi

The way to get rich is to be frugal at first.  You have to get a steady income, and then save more than 50% of it each month.  If you can't, you must work two jobs.  Other than borrowing money, this is the only way to build up some capital to invest.  You have to be willing to sacrifice for a period of time.  You have to be willing to stay at home when you know your mates are going out on a bender that'll leave them all a few hundred dollars shorter.  You have to learn to take the bus, ride a bike, or walk, instead of buying a car before you can afford it.  You have to eat cheap (no expensive restaurants) and drink less in bars (during my 20s I always took a hip flask of whisky with me when I went to bars, and while my mates drank 10 expensive beers I just ordered one and happily sipped from my flask to make the beer last the entire night).

Under the right circumstances, these are things you just need to do for a few months up to a year, until you've saved enough.  And then you take the plunge.

If you're young and fearless and have lots of time left to get back the money you may lose, you throw everything you've saved into one venture.  It could be a small business (I've done that twice in my life, and while these small businesses didn't become big businesses, they did turn small capital into big capital within a year due to hard work and commitment). 

But I must add that the only way to run a small business is by using the same methods you used to get your initial capital: be ultra frugal.  Don't go around pretending your business is bigger than it is.  Don't borrow for the business unless it's got 100% certainty of success (which is almost unheard of).  In these kinds of small businesses, try to structure it so you can do everything yourself, or with very few other workers.  When it's your success on the line, you'll work much harder, longer and cheaper than anyone you could hire.

Once your capital has grown ten-fold, decide whether the business is worth continuing.  In other words, if you stop doing all the work, will it still make profit. 

If it will, expand it.  

If it won't, ask yourself whether you're happy working in this business.  If you are, and if the income is satisfactory, continue.  If the work doesn't make you happy, quit.  Close it down (or sell it if you can) and take a holiday to a cheap place and reassess your life.

Live cheap (or get a steady job) for the next stage,  Make sure your money is well-invested at this point (not too risky, yet not too conservative).  You'll be a bit older now, and a bit wiser, and you'll have more money.  Sooner or later you'll see the next opportunity.  Repeat above steps.

I've had many businesses along the way, all of which I've sold or closed down, except for the most successful one  (a franchise company teaching Chinese entrepeneurs how to open and run English schools in China).  This company grew much too big for me to simply close down, although that didn't stop me from walking away (I just employ good managers, whom I pay well, and to my surprise the business continues to grow despite my absence).

Hope you don't mind, but I'm going to copy both your question and my answer onto the forum (I won't post your identity though).

Good luck!
Steve

Once again, I have to say "WHAT A DAY!"

But first let me say thanks to GARY, DHILLON and TASSIE for once again sharing valuable information in their posts above. To JASPERJONSSON, the only thing I can tell you about auctions is that I'm not going to go near them.  I haven't even figured out how to buy REOs from a bank yet!

Before I tell you what a learnt today, let me tell you what happened.

Last week, while waiting to hear back about my "Dream Waterfront SFH", I went to see many other REOs for sale.  Of the 2 dozen I saw, I finally found one that stood out.  It was a cute little house (traditional Spanish style with gables and high ceilings) on a large property (12,000 square feet, or about 1,100 square metres) with amazing palm trees (the highest I've ever seen) and plenty of space to make an enormous swimming pool and still have plenty of lawn left over.  It's in Miami Shores, which is a good area.  The asking price was only 120K.  This house in Sydney would probably be $1 million.

My agent tried to contact the bank's listing agent, but since they hadn't given a phone number on the MLS, all she could do was e-mail them.  They didn't reply. 

On Friday afternoon I learnt that I hadn't got my Dream Home, so I told my realtor to try harder to contact the agent for Dream Home No.2

By the time we tracked down the office of the listing agent, it was the weekend, and no one answered the phone.

This morning (Monday) I drove to the listing agent's office.  To my surprise they are a small unknown start-up company with only 5 staff, yet they have over 60 REOs on their books.  I explained to one of the agents that I wanted to put in an offer on Dream Home No.2, and he was super motivated.  He told me the exact history of the sale so far (he put in a 114K offer last week Wednesday for one of his clients, but the bank rejected it, and then another realtor came to his office on Friday and put in a 120K offer, which was still awaiting the bank's response).

Alas, as I was filling out my offer form, the listing agent received an e-mail from the bank accepting the 120K offer.  I was understandably pissed off, since I was offering 130K so would definitely have got it.

Now here's what I think I've figured out:

The listing agents for the REOs only get a small commission (about 1%, paid by the bank), yet the buyer's agent will get 3% (also paid by the bank).  Therefore, the listing agent would ideally also like to be the buyer's agent (and get a total commission of 4%, instead of just 1%).  This explains why, in the above story, the listing agent:

1. did not bother to give any phone number in the MLS listing to be contacted at (the MLS listing is the one used by all the estate agents)

2. only gave an e-mail to send offers to (this allows the listing agent to screen the offers, which they don't necessarily have to send to the bank if they don't want to)

3. does not reply to phone calls or e-mails made by buyer's agents (but I have a feeling they'd be happy to talk to a buyer directly, since they could then become the agent for that buyer).

What I think is happening is this:

The listing agent gets the REO from the bank.  They put the listing on the MLS (I'm sure they have no choice in the matter, since it's probably stipulated in their contract with the bank) yet they do whatever they can to hinder the number of offers made by other buyer's agents (by not assisting people to view the house, and by not being cooperative in answering the phone or e-mails).  During this stalling period, they are hoping to find a buyer whom they can represent themselves.  Once they've found their own buyer, they submit this offer, and hope nobody bids higher.  If somebody does, they have the option of just ignoring the bid (by not sending it to the bank) or of telling their own buyer to increase his bid so it becomes the highest.

This is what I saw today in the case of Dream House No.2.  The listing agent found his own buyer willing to offer 114K.  Unfortunately, the bank rejected it.  While the agent was hoping that his buyer would increase a bit (maybe to asking price of 120K), unfortunately for him a buyer's agent came to the listing agent's office and submitted a 120K offer on the spot from the listing agent's computer direct to the bank. 

Why did he actually come to the office?  Because he knows how the system works (ie. that the listing agents are going to be uncooperative, and probably won't even send in your offer to the bank).  How do I know all this took place on Friday?  Because the listing agent told me with glee this morning, while filling out my new offer of 130K "Wow, that aggressive agent who came in here on Friday and forced us to submit a 120K offer is going to be REALLY pissed off when he finds out someone has outbid him, ha ha ha". 

But unfortunately for both me and the listing agent, the 120K offer was accepted first thing Monday morning, before mine even went in.

What's the lesson though?

If you want to buy an REO, and you think you're going to do so by recruiting a buyer's agent to help you, it's like running a race with lead in your shoes.

The only way to go forward, as far as I can see, is to figure out how to track down every large REO listing agent in Miami.   Since they're going to be your buyer's agent, they'll illegally yet happily share inside info with you, and the only reason you'll be outbid is if you're not willing to better the offer made by some outside bidder.

Hi Jessie

I don't know anything about Atlantic City.  Perhaps someone else can answer that one.

As to some of the crazy prices you see listed on Trulia, there are a number of reason:

1. The very low ones are often placed by RealtyTrac.  This company has teamed up with Trulia, and I suspect they are able to place free ads on Trulia.  By placing ads for foreclosed homes at $1000, they probably attract a lot of interest, which leads to people signing up for their service (which comes at a high monthly fee, and is useless unless you're mad enough to think of buying homes at an auction, because RealtyTrac's only benefit is it's attempt to inform you of how many liens there are on a property)

2. Sometimes they are bogus posts, by agents wanting to get people to phone them, and then they'll say "Oh, that just sold, but I've got something a bit more expensive but soooo much better…"

3. Sometimes they are real ads, but the property is in an awful area

One good thing I've noticed about Trulia: it has every good listing that's out there.  IE. every decent property I've gone to see was listed on Trulia.

One bad thing I've noticed: it has dozens of expired listings which the agents haven't bothered to take off, plus it has those bogus RealtyTrac ones.

Sometimes, when you've located a property you're interested in, and you're investigating the sales price history, you will see recent sales of anywhere from $100 up to about half of the current listing price.  Upon further inspection (which you do through the local gov. tax websites) you will discover that these were random figures that were chosen to be put on the deed as it changed hands from the bankrupt owner to the bank during the foreclosure process.  The figure has nothing to do with the actual price or value of the property.

Today I met with 3 different "teams" of REO listing agents.  The biggest realty companies will all have their own teams dealing with the REO's given to them by the bank. 

Each team I spoke to repeated the exact same information:

Right now, in Miami, there is only a fraction of the number of REOs that there were before the Foreclosure Moratorium hit the market (about 2 months ago). 

In the past 3 weeks I've asked many realtors whether the Foreclosure Moratorium had affected the number of REO's coming out, and they all said no.  I now believe that these people were either uninformed (since none of them were REO listing agents, just regular agents) or they were purposefully lying (so as not to scare away investors like myself, who prefer to buy only when there's an excess of REOs on the market).

The REO listing teams I spoke to today didn't lie, and nor could they, since they don't have any REOs to show my right now (at least no SFH's in the range I'm looking for).

They also all told me that they have been informed by the banks that REOs will hit the market in much greater numbers next year, perhaps around March.  I shall be back here in January though, just to make sure I'm set up and ready, because I fully intend to buy at least 10 SFH's next year (in the 120-200K range).  I have already told my wife to sell one of our prime Shanghai apartments to raise extra cash.

Here's some more very good advice: just figure out which areas you want to buy in, and then drive around and jot down the address of each place you see for sale (and believe me, there are many on every street).   Nearly all will have a realtor's phone number on a sign stuck in the lawn outside.  You can either call this number, of just do a google search later.  Either way, you will be able to pinpoint which property is an REO, and then since you didn't see the property with a realtor you can get direct access to the listing agent (who'll then also be your buyer's agent).  For example, if you google search an address, and it turns out to be an REO, the person who placed the ad you've found (eg. on Trulia, Zillow or Movoto) will be the REO listing agent.

I should also explain why there are always "teams" doing the REO listings.  The head of the team deals with the bank, but the other 1,2 or 3 members of the team are buyer's agents, who run around trying to find  buyers for a particular REO.  Once the sale is completed, the bank won't realise that the buyer's agent was actually working together with the listing agent (the head of the team), so they won't figure out there was insider trading.  I suspect that the entire team then splits the profits they made from the bank (ie. about 1% for being the listing agent, and 3% for being the buyer's agent).

Below you will find a link to watch a short video clip on Bank of America's outlook on home prices (November 13, 2010)

I'll summarize: they think prices will still fall further, namely 5% nationwide.  Considering that California, New York, etc. are rising, places like Las Vegas and Florida will have to fall much more than 5% to create that average figure for the whole US.

Now don't forget: Bank of America has an enormous number of REOs on their books, so they're more aware than anybody just how large the so-called "hidden inventory" is.

See for yourselves:
http://www.bloomberg.com/video/64482410/

And since I'm in the mood for sharing Reuter's articles today, read the one below.  It appears China is quite willing and able to use hacking to obtain sensitive political and corporate secrets from the US.  The article points out that for 18 minutes last year the Chinese government had full access to sensitive US web traffic. 

More alarming is that in a separate incident they hacked into Google's source code, probably for the purposes of copying it and giving it to China's version of Google (called Baidu).  If Baidu can copy Google's source code, it's searching abilities will be equal to Google's.  The Chinese gov. will then happily bankroll Baidu's global expansion (as they are currently doing with their top car, banking, computer, aircraft, and pharmaceutical companies). 

20 years from now China will be a giant compared even to the US.  It's influence and greed will spread to every corner of the globe.  That's fine for greedy little countries with lots of resources and no morals (Aus, all of Africa and South America, and even part of Europe) but it's a real bummer for idealistic countries, or wannabe number ones.  

Anyway, here's the article:

 (Reuters) – China Telecom sent incorrect routing information last April that resulted in Internet traffic to major corporate websites and U.S. military and government sites being sent through China for 18 minutes, according to a report by a congressional advisory group.

The incident was one of several discussed by the U.S.-China Economic and Security Review Commission. Reuters obtained a copy of the draft report, which will formally be released on Wednesday.

In the hijacking incident, the Web traffic, much of which originated in the United States and was directed toward U.S. corporate and government websites, should have gone the shortest available route and not through China.

Some of the traffic was headed to sites owned by the U.S. Senate, the office of the secretary of defense, NASA and the Commerce Department, the draft said.

In all, the report said that 28 percent of all targeted phishing emails, a type of scam, originate in China. "Anecdotal reports about the success of these activities continue to surface, some with compelling links to the Chinese government," the report said.

The report also discussed the battle between Google and China, which began with Google announcing that it had been hacked and that it would no longer censor searches for Beijing. Eventually, Beijing took over the job of censorship and renewed Google's license to work in China.

The hackers reportedly got Google's source code, perhaps the most valuable computer code in the world. Cyber experts are watching Baidu, Google's competition in China, to see if it improves suddenly. Sudden improvement would indicate that Baidu was using Google code.

Google was unusual in that it announced that it had been hacked. Failure to report attacks has been a source of frustration for the FBI.

The U.S.-China Economic and Security Review Commission, which wrote the report, was set up in 2000 to advise the U.S. Congress on the economic and national security implications of the U.S.-China relationship.