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I received an email from Steve Davis, the vice president of Lifestyles, and it included a link to the Houston Chronicle.
It was an article about flipping and the business model taught by one of the gurus. Donald Trump’s Trump U is in town.
Flip Style
They offer a 90-minute introduction to what they do, that is, a 90-minute tutorial that was also a sales pitch for a three-day $1500 class. And in the free class they outlined the basic strategy for the business model that they follow, which is a flipper-style strategy.
Two days ago I made the case against the flipper-style deal for the dealer-style deal. And the gist of that argument was that all it is is another job. What you have done is you’ve gone out there and you’ve created a situation that is not passive.
You are drawing an income stream—if you’re any good at it—that is a lot of work. You have to get out there and you’ve got to hustle and find these deals, fix ‘em up, sell ‘em, find a deal, fix it up, sell it. And over and over and over again and what does that sound like? Sounds like a job.
What is Profit?
Now, the business model that Del teaches is 180 degrees the opposite. It’s go and build a real estate portfolio that produces enough passive income that you can get out there and fulfill your mission in life whatever it is. It may be that you are like me and that you actually have a passion for providing clean, safe, functional homes that working families can afford, or it may be that you have a passion for healing animals and you can do that as a veterinarian and you can go and pursue that.
Maybe you do it economically because remember- what is profit? It’s just the applause for helping and serving other people. But it could be that you volunteer at your church or your charity of choice or the school or the hospital or whatever the case may be. But the point here is the contrast between the two business models.
Unrealistic
And they go on to give the business model here which is from the article, “You go and find a property worth $200,000, but the owner’s willing to take $125,000. Why? Because he’s in trouble. You put in an offer even if you don’t have the money. Then you sign the contract giving yourself 60 days to close. The next day you put an ad in the paper advertising the $200,000 property for $150,000. You get that money in cash before the 60 days is up, and voila $25,000 profit without putting down a penny of your own money.”
Now, what does that sound like? To me it sounds unrealistic, so I went and looked on the local MLS here in town, the Houston Association of Realtors, just looking for the average days on market for property—not to mention a property priced that high.
Not Accepted
If you think back to what Del teaches you, you’re looking for a property that the median-income family can afford. And this is a property—if you look at what the median income is in Texas, that’s $45,000 a year, broken down monthly $3700 and change, pay taxes on that you’re looking at somewhere around $3,000 a month.
This is a family that should not be paying more than a thousand dollars a month for their home. What kind of a payment is somebody going to have if they are buying $200,000 houses or even if you sell them at that $150,000 price, $50,000 under market? That’s at least a 14 or $1500 a month payment, well above what the median family can afford in our state.
And if you look at days on market, we’re up close to 80 — and that’s not days to sale, that’s days until the property goes under contract. And this business model is suggesting that you give yourself 60 days. I’ll tell you what if you submit an offer to a seller with a 60-day option period for no option fee, I just don’t think you’re going to get that offer accepted.
Keep Properties
If you do have a passion for selling real estate, my suggestion is that you go and get your Realtor’s license. But if you have a passion for building real wealth, which is passive realized monthly income streams, cash flow, well that’s an entirely different thing.
What you’ve got to do there is build your asset column and your balance sheet. That means buy properties and they stay yours. It’s not about going out there and putting your name on a piece of paper and then selling a piece of paper.
As unrealistic as it sounds—you know, going in and finding that $200,000 property for 125 — it just, why are so many people just going into that blindly?
Expectations
You know, the author of this article goes in and interviews for example David Zugheri, the co-founder of Envoy Mortgage, who incidentally is a former vendor participant in our program—and his answer is that there’s just almost no chance of financing if the lender knows the house is being flipped. It’s just a dirty word in the real estate industry. And even though maybe one or two of these deals might happen, it’s just unrealistic to get in there and have these kinds of expectations.
So the question then is why in the world are folks going into that? Just a couple hours ago the unemployment statistics came out. It’s at 9.8 percent nationally, 9.8 percent nationally. So it occurred to me that it could be that some folks have just reached that point of desperation. Instead of going out there and looking for additional—for a job, they’re going out there and trying to find these.
Lesson
And the way this deal is described it was a something-for-nothing, instant-gratification-motivated style of a deal that you’re not even putting up an option fee to get this property under contract.
Now, I have no idea who in the world would accept an offer like that. You’re usually paying—if you have got a competent listing agent—a hundred dollars for just over a week, and to get two months option period for free on a property that’s $75,000 under market that the median-income family can’t afford, I think what you’re looking at is a lesson.
