Wednesday, September 10, 2008

Old MacDonald Had A Farm, Too!

If you stare at this picture long enough, you'll discover a smile on this couple's face. Look closer! See them smile?

Yes, this couple is out front of their house letting everyone know they're making a killing in real estate. He's got a pitchfork in hand ready to poke any trespassers that try to send any postcards to his farm prospects.

She's ready to back him up with that "ol' school marm warning" expression, which barely hides her exuberance over the $40,000 they pocketed as a down payment yesterday from the house they just seller-financed.

Yup! This couple flips houses bought from desperate, anxious sellers, and then turns around and seller-finances new credit-challenged buyers. More specifically, they take over loans and resell those loan terms to those that couldn't borrow a rake (or a pitch fork) at this point.

Two years ago, this couple found out what kinds of houses were selling the fastest and in what area over the previous 90 days. They discovered that the three and four bedroom houses in the 37237 zip code were the most common, and fastest selling properties. So they staked a claim in that zip code and mailed postcards to all the three and four bedroom home owners letting them know they buy houses. This stake, or claim is referred to as a "farm". Not to be confused with raising crops of course, but cultivating a profit nonetheless.

Farms are important to investors for several reasons. First, they focus the investor on an area that he can become intimately familiar with. This is important, because familiarity with values/comps trumps about anything else, even cash, when it comes to finding, funding, and flipping houses.

Others may have cash, too, but the professional investor that is cultivating a well-defined geographical farm area (defined here as something one can drive to and back from in 45 minutes) can and will beat any potential competitor to the punch because he can first instantly recognize the deal for what it is --- and land the deal like a seasoned airline pilot, before anyone else knows there's a deal.

Meanwhile, the amateurs are still compiling comps, addresses, computer print-outs, and pouring over last-minute CMA's (comparative market analysis), biting their nails, second-guessing themselves, if not simply flying blind. That's no good.

The best way to start and maintain an investing career is to first choose, and cultivate a farm area. It doesn't really make difference where the farm is, as long as the investor has enough prospects to pick over in a given geographical area, and become more intimately familiar with it than practically anyone else is/can/will.

The fastest way to fail in real estate investing then is to fail to have a farm defined. "Southern California" is a "region", and for our purposes of discussion would be considered a lousy farm. Any one zip code in "Southern California" would be superior to the entire region.

I'll just say, nobody can be an expert in a region, but few can be more of an expert than the investor who cultivates a familiarity around a one mile square. Of course the uniqueness of a property may dictate the size of the farm. For instance, say we're looking to buy a slightly used nuclear power plant, we might have to resort to a farm the size of a "region" just to get enough prospects on our mailing list!

Short of this, however, we need to focus on a specific territory, or farm area, so that we can be the fastest, most reliable buyer around.

After all, there's no such thing as "stealing in slow motion".

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9 comments:

MattJohnson said...

"He's got a pitchfork in hand ready to poke any trespassers that try to send any postcards to his farm prospects" - LOL.

I've heard you mention that distance from your farm area is important; what is your opinion of having a farm approximately an hour away (one-way) for a part-timer; do you think this is workable, or would I be letting too many deals slip through my fingers? I don't mind the sacrifice of time/travel.

Thanks!

Matt

Jay said...

Matt,

I haven't counted the average numbers of trips we've made to a given property to seal a deal. But in the real world of negotiating, inspecting, presenting, closing, and re-marketing a house, I can bet we've been to each property a dozen times (not including the loser deals).

So at two hours round trip, using your examples of 1 hour drives (one way), that turns out to be practically three full business days of driving for one deal.

Yes, if we've got several deals going on at the same time the travel time per deal might be less, but in our opinion we should stick to a close farm, OR maybe consider moving closer to our "distant" farm.

If you're determined to cultivate a distant farm, maybe consider scheduling all your appointments on top of each other to reduce the number of trips.

Have fun!

Anyway, my thought would be to first decide what we wanted to buy/invest in, and know "why". Then if we discovered that the better prospects were actually an hour away, then maybe it would be smart to consider moving there. Just a thought. This would be a long term commitment/option I would think.

MattJohnson said...

Thank you, Jay. Very good advice, and thank you for the insights.

My wife and I both live and work in San Diego, and are watching the prices finally starting to drop in and around our neighborhood (prices have dropped approximately 20-25% by our estimation). It's been a long, slow descent, and I believe the area still has a big adjustment ahead of it.

This is why we are considering setting up our farm out in the sticks, where a larger percentage of the bloodletting has already happened, and if bought correctly, properties will at least marginally cash flow if they don't sell. We're still fine-tuning our strategy; I have a friend who I may be able to hire to at least show the house.

It comes down to logistics issues vs. crappy market issues. :)

Thanks again; awesome advice.

Matt

Jay said...

Thanks!

john said...

hey guys,
jay i've been a lurker on sdcia for a few years and always love your writing style--lot of belly laughs plus you know your stuff. do you have any take on the REO game in riverside that Norris guys blogged about last week?
Matt,
I am right in same stage as you looking at doing REO's in riverside but i live in LA and its hour drive.

I figure if i buy 20 minimum I could make it worthwhile...

Jay said...

John,

I follow Bruce's posts, blogs, and videos, and it's an understatement to say I'm impressed that he's just gone forward in advance of practically anyone, and is defining market values in his farm.

Regarding REO's in Riverside, there's a bunch of unmarketed REO inventory sitting. What I don't know is how long that will be the case.

I also know that prices are still falling. Approx. 34% over last 12 months in CA. My hunch was [6/08] that we have another 15% drop to go. At that point, we've dropped over half from the high in 2005. With inflation factored in, it's an even bigger drop than that --- taking into consideration that incomes haven't increased with inflation that I'm aware of. So, that all may not be conservative enough estimate at 15%.

However, what I'm looking at right this instant is the rent/price ratio in my farm. It is possible to cash flow with 20% down at this moment based on comps I've seen.

This wasn't the case 1 year ago. We're kind of in "conventional" investing territory again. [There's a TON of people unrealistically trying to get 2006 prices!!!!]

However, with so many new NOD's coming down the pike still...it's a very good bet that if we want to hold long term and capture better price/rent ratios at cash flow that we can afford to wait.

Have you checked on financing availability lately?

There are end-user buyers asking for private financing because they can't get a loan with 10% down with credit rating of 780.

I'm really curious what Bruce's end-user financing has been like. He's says he has no problem, but why is that the case?

Meanwhile, I'm supposing you can get private money, or HML's to finance your buys, right?

Sorry for the long post.

john said...

Jay, thanks for your response.
Sorry for my long response, in turn, but here is my take:
I have been trying to watch the norris group guys and trying to follow some of their deals--just went to moreno valley last week and looked at a couple to see whats there.

I find there is a very small margin to do flips like they are doing...like so often the case-- I guess--they have a crew, agents, inside contacts--to get better deals than an outsider could get buying a few houses at a time. So I am not convinced it is as doable as I thought it might be.

I am trying to learn the ropes and get everything prepared now, looking to buy in December/Jan.
I got interested in this because a banker buddy of mine has a guy who bought 30 houses about 4 months ago-- all over riverside, and is buying 40 at the moment. He's closing all cash, quickly, then putting in 15k maybe in basic upgrades with his own crew-- kitchen, bath, carpet, paint--then renting them....sitting on them all. No flips!


Since I live far far away like matt in the earlier post, it only makes sense for me to get involved if I can pick up 15-20 houses and put together a good crew and some local managment.

Jay said...

John,

That's a tall investment order. This is a full-timer's domain! I guess you're aware of that already! :)

You're banker buddy's mass buyer is very smart holding on to his acquisitions as rentals. John Schaub (sp?) has said that the people who get rich in real estate have to actually own it. I think that's a funny line.

Jay

MattJohnson said...

John,

Having done a couple rehabs out of state, let me advise you to just be cautious and take your time. Don't do marginal deals at this point. You're going to stub your toe numerous times; when you're just starting you won't have the experience to accurately determine rehab budgets (things will pop up that you won't anticipate). You'll also get the wonderful experience of working with CONtractors, and having them try to screw you any way they can.

If you try to do a marginal deal before getting a few notches in your belt, you can get into trouble fast. The deals will come, wait until you can get fat margins and meet your buying criteria 100%.