Sunday, April 5, 2020

The Value of Trust

I recently had the privilege of hearing a talk about trust that Stephen M R Covey gave to the students at Liberty University. He is ths son of the man who has given us books like 7 Habits of Highly Effective People. The apple did not fall from the tree with this fellow. He spoke of trust as being a business virtue in addition to being a human virtue. He talked about activities and organizations where trust is present operating with more efficiency and speed along with being more satisfying to work with.

I got to thinking about how this applies to the real estate business, whether it is working with agent buying a home or as an investor rehabbing a house. I thought back to some of my experiences with and without the quality of trust. While I didn't see it that way at the time, it turns out life proves his theory.

Hardly anything can be done in this field without a team of people. Trust is the lubricant that smooths the rough edges and fills in the bumps in the road. When I first moved to the Sunshine State I knew no one and had no connections. My first deal here was wholesaling a small house in northern Pinellas County. It so happened that the investor who bought it connected me with a title company that just makes things work.

I didn't know them or the investor, and we worked through several issues. Over time I developed a degree of trust with the investor and I believe he, with me as we have done other deals smoothed out with familiarity and trust. This is even more so with the title company as we have done multiple deals and they have come through every time. I just have to email them the paperwork and I know things will be handled professionally and legally. I don't waste time with worry or excessive follow up.

When working on houses, the same holds true with the tradesmen involved. They can make your profit or kill it. You need to have people you can trust, not just to do the job, but do it on time for the quoted price. When you start out you have to go by recommendations if you can get them. Learning this by experience can be quite expensive, but sometimes it is necessary. For the investor, it involves forming relationships with other investors who may have come across your situation before. For the new home owner getting to know they neighbors is a good place to start.

I had a water leak in a second floor condo that had to be fixed NOW! I did not have a plumber at the time so I relied on one recommended by a lady at the local REIA. It turned out to be a good choice. Even as a new client, the guy showed up within the hour and the situation was resolved... and he didn't take advantage of the situation with the bill. From that one experience he earned my trust and I have used him on multiple jobs satisfactorily.

As time went on and he developed some health issues he recommended another plumber to do the work he was no longer doing. I didn't hesitate to call the new guy because I had confidence in the man who recommended him. He turned out to be just as good. This saved me a lot of time and aggravation looking for replacement.

The reverse of this situation is also true. When you depend on someone who promises to get the job done and they bail on you, you lose time and have to pay more to get another tradesman to finish the job... if you can find one who is willing to pick it up in the middle.

I had this situation on another job where my electrician that I had used for small jobs in the past started the job but was not qualified to finish it. He disappeared without a word. I wasted time trying to find someone to finish the job. Then I got another recommendation. It was a young Vietmanese guy. It seemed he had just gone out on his own. He pulled the permits got the job done and he will be called next time I need an electrician.

So what do we get from all this? What happens when your trust is misplaced? Yes you learn, but you don't stop trusting. If things look good at the beginning you have reason to trust until you see a reason not to... but you don't go looking for reasons not to. If someone is untrustworthy they will reveal it themselves.

Of course it is better to deal with people you know and trust. But how do you find them? Where are they?

The place to start is to be trustworthy yourself. In my case, no investor would risk their relationship with someone important to their business if they thought you were a jerk and going to treat their guy badly. Then you need to, using common sense and wisdom, show some trust in the people you are dealing with. If they sense you don't trust them, it will be hard for them to trust you and become dependably trustworthy. You have to do a cost benefit analysis. Build trust on smaller efforts and let it work it's way up. When it does you will spend far less time and get more done.

I go to meeting with a group of investors. There is a certain trust built into that group. You are expected to treat each other fairly. If someone talks about a rental property they want to sell, it is understood that you will not bother the tenant. If it is a contract to be assigned, it is expected that you will not go around them to the owner and try to cut them out. People that can't work with this way are banned from the group. Her lack of trust not only slows things down, it brings it to a halt. You only cheat someone once.

Most people will live up to your expectations. There are those who will try to take advantage of you, but its kind of like the old adage – if you want a friend, be a friend. It also helps to pick your friends wisely. Don't hang out with shysters.

You can find out more about this concept of trust being a business virtue as well as a personal one in Covey's book Speed of Trust. Living that kind of life will make things work better and you will feel better than if you are trying to hustle everyone.. Better to have people trust you than have them count their fingers after they shake your hand – like I do with most lawyers.

Saturday, March 28, 2020

Interest Rates Have Fallen

The Federal Reserve has been in the news lately as they dropped their interest rate to just above zero. (0.25% more precisely). They tell us they want to avoid a credit crunch. What does this mean for us unwashed masses in flyover country? There could be several different outcomes. It's been said that you could take all the economists in the world and lay them end to end and they still would not reach a conclusion. While it has never been done, it would be an interesting thing to try someday when more than ten of us can get together. In spite of this uncertainty it is worth considering how this rate drop may impact the world of real estate.


Right now, many businesses are experiencing between fewer and no customers. If they are not flush with their own cash, they need working capital to stay afloat. Shortly before writing this, I saw an article that said Cheesecake Factory does not anticipate being able to pay the rent on their facilities. The CEO of Texas Roadhouse said he will forego his salary for this year so the employees can be paid. This guy is showing leadership and appreciation for the people who make his business work. Money is needed to keep business running. The lower interest rate will help ease the pay back burden but the money supply (the amount the Fed creates out of thin air) is what will keep these people in business.
The same is true for some in the real estate business. If there are mortgages to pay, having tenants out of work does not make for a happy landlord... or happy lender. If this thing is over in a few months it may not hurt the rehabbers and builders too much, yet they still have unbudgeted carrying costs. It is not known at this time how the banks will use this availability from the Fed, lending it out will be giving the borrowers a larger nut to crack, and cuts into their profits but they will stay solvent. King Solomon summed it up well in Proverbs 22:7 “The rich rules over the poor, and the borrower is the slave of the lender.” But... it's better than going out of business. Or perhaps, it just delays it.


The thrifty, work hard and save your money types, will continue to take a beating at the hands of the banks offering their sub one percent CDs. Better to buy a Willie Nelson CD at least the online store won't insult your intelligence.

It's not that many people these days can count on interest accumulation to fatten their home buying fund, but this certainly will not make it easier to accumulate substantial down payment money. In a way it is good for new buyers that the FHA will finance them with almost no money down, But it does leave them vulnerable to downturns in the housing prices as we saw when the bubble burst years back.


When it comes to selling houses, if the money supply holds up, it may make it easier. With cheaper money more people can afford the houses on the market. So until they decide the market is expanding too fast and raise the rates it may be a good time to make hay while the sun shines and sell what is ready, IF the chicken littles in the media have not destroyed the confidence of the buying public.


I understand that most investors don't trot on down the the local financial institution to be laughed and misunderstood by some banker with the employee mentality when they want to fund their deals. However, some do and they may benefit from this lower rate IF the bank passes on the reduced interest and does not make them grovel too much. For the others, cheaper money may have an impact on hard money lenders as well... but maybe not as they are paying for availability apart from the banking system. However, if more money is available overall, it may just result in more competition (and higher prices) for deals.
These are a few of the factors we may be facing in the coming days. Others, including wild cards of how long people will be cowering in their homes, and the attempted destruction of public confidence as well as any regulations our helpful betters may see fit to impose can move any of these suppositions in either direction. Experts, or those we look to for answers don't agree so we just need to stay calm and flexible since this will help us respond to many of these situations we can neither predict nor control.
Having said all that, we need to go back to the beginning and look at something that is common knowledge among those who have been following the actions of the central bank (the Fed) for some time. We need to get rid of the idea that the Federal Reserve is a government agency acting altruistically for the benefit of the American people. Despite the name, they are no more a government agency than Federal-Mogul Corporation or Federal Express. They allow the President to appoint the chairman, but it is still an organization assembled by the major banks in the US. The whole sordid tale is told in the classic book The Creature From Jekyll Island. It's a good read that will scare the daylights out of you... even Willie Nelson said so after reading the book. There have been several other books written on the topic, but this one appears to be the definitive work that pulls back the curtain and shows what is really going on.

Right now there are just too many variables to be certain of the future... but as always we just need to be paying attention to everything going on around us and make the best decisions based on the best information we can get. There are no guaranteed of anything, except change.

Saturday, March 21, 2020

Tough Times Don't Last...

Robert Schuller was fond of saying “Tough times don't last, tough people do.” Thomas Paine told us, “These are the times that try men's souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman.” We aren't fighting an enemy trying to kill us with muskets and swords, but we are fighting an enemy that can destroy lives and our economy – our way of life.

Many have chosen to complain and obstruct honest efforts to get us through this time. They are the nay sayers who would rather point out their perceived problems than do what is necessary to fix the situation. For the forseeable we will be inconvenienced by efforts to stop the spread of this Chinese virus. This is much like we are inconvenienced here in Pinellas County as every where we go as streets are torn up and traffic rerouted in an attempt, they tell us, to provide a higher capacity storm sewer system to handle the massive rainfall we see during the frequent tropic storms and occasional hurricane. I hope the local efforts are worth the annoyance.

Fortunately, for the first time in many years, it looks like the direction coming from DC is taking us to the solutions we need. However we still see far too many people hurt by our disinclination to travel, congregate in larger groups and got restaurants. These choices are either our own or by decree. They are the right things to do and sometimes those who can least afford it pay the price. The government is trying to ease the burden with some cash, but by their very nature cannot take care of everybody.

Personal Cost

There are hospitality workers who are simply not needed for sparsely populated hotels. There are waitresses and waiters dependent on tips employed by empty restaurants. Clerks in shuttered stores. The list goes on. There are people hurting financially, emotionally and spiritually now. Like the government, we can't help everyone, but perhaps we can help a few... like those of us who we have the privilege of providing housing.

Among the suggestions is that people should be forgiven rent on their homes. This is a fine suggestion by someone with no skin in the game and nothing to lose or mortgages to pay. Like pretty much all give away schemes, they are proposed by those who think someone else should pay the bill. There may be some large corporate property owners with free and clear properties that could do this but many have mortgages to pay and simply cannot forego the monthly revenue.

Staying Afloat

That said, within the bounds of economic realities, it will not hurt work with tenants who have been with us all along but have run into some tough times. In doing so we have to remember that taking care of tenants includes keeping lenders fed who have financed the rental properties. This is not the kind of thing that Paine's sunshine patriot would do. The summer soldiers would throw up their hands and tell everyone there is nothing they can do. Taking care of people is the right thing to do and, long term, is good business. However, it can not be done to the point where your business can no longer function and you cannot take care of your other tenants.

Many small businesses cannot afford to be shut down or work without sufficient revenue for long periods. The real estate business is no different, some allowances won't be too damaging long term. I am suggesting that rather than cursing the darkness around us in the form of the Chinese virus, we can light a candle and pitch in and help where we can.

Other ways we can help ease the burden of our separated lives is to do such things a buying gift cards from our favorite restaurants to help them with some cash flow while people stay home. This isn't charity as these cards are fine to be cashed in when the virus is defeated and we start going out again.

Overcoming Adversity

One thing I have learned over time is that we aren't bothered nearly as much by all our inconveniences and annoyances when we are helping someone else. Americans came together after the War Between the States to become one country again. Americans defeated the Axis powers in World War II. Americans put a man on the moon. Americans developed much of the technology we use everyday. And we will defeat this virus in spite of the bellyaching and carrying on by the whiners among us. Each of us has a choice we can join the whiners or we can be overcomers.

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Sunday, March 15, 2020

Condo or Co-op: What's the Difference?

When my most recent excursion into real estate as an investment I came across what I thought were some fairly inexpensive condos that I could rehab and rent or sell. But a before we had a look at some of them, a realtor friend said to me, “You know, those are co-ops, not condominiums.” That started me down the path of learning the differences.

When you drive by, unless it is stated in the signage, you can't really tell one from the other. However purchasing each is where you find that they are two different animals. With a condo, you are actually purchasing real property. You have a recorded deed that specifies exactly what you own... and that you actually own the property. With a co-op, you put your money down and get a stock certificate and the right to lease a particular unit. This, in itself should be an immediate cost savings as real estate closings carry a substantial price tag. 

That is first major difference and all the others flow out of that. For example, as real property that can be foreclosed, banksters believe their money is safer and are more willing to lend on better terms, With the co-op the collateral is not as readily available to the lender should things begin to go badly... and you will probably have to present a much larger down payment. In either case, a property constructed on leased land may be more of a hindrance to desirable financing.

Since co-op shares represent ownership in the entire building, controlling boards, which can be elected or a board of the whole, take a more active and energetic role in the approval of new residents. Of course they do the normal credit check and background report that you would find in either building, but there is an interview process where fairness and legality are not so highly regarded as compatibility with the existing social culture. This can be good if you are a good match, but woe to the poor soul who wears a MAGA hat in the presence of Clinton supporters... or possibly the reverse. While all share holders are equal, often the owners of the larger units are more equal in that they have more voting power.

This leads to a closer, more uniform community if you are a good fit. The fit is less of an issue with condos as if you meet the published criteria you are generally accepted to purchase a unit. From that point on, it is up to the buyer to live peacefully with their neighbors... and they can't throw you out simply because they don't like you.

If you are looking at the property as a part year resident, either is particularly well suited despite the ongoing monthly fee as there are always people around more or less watching your property while you are gone.

If you are looking at the purchase as a rental property you are more likely to be able to do so with a condominium. However read the bylaws carefully, don't just take the smiling salesman's word. Some associations do not permit rentals. Some permit them after you have owned the unit for a year or more. Others have no restrictions. While not quite as possessive as co-ops, there are often attempts to retain a desired culture.

Either type of building has some sort of governing board and either type can be led by an a chairman, president, Fuhrer or whatever title they have chosen. Some look out for the good of the residents and others look at the position as being in charge of their own private domain. This is just one more thing to check out as you talk to your prospective neighbors.

There are conflicting reports about which one has higher monthly fees. However there are general guide lines for a well run association. No matter which one you decide on you should be given an information packet including the bylaws and detailing the financial status, including reserves for such things as roof replacement, elevator maintenance, etc. Keep in mind that you are looking into them as much as they are looking into you.

Like the man says: you pay your money and make your choice. Either one can be good. While finishing work on a condo we had one of those things that comes around Florida occasionally called a hurricane. I went over to check out the situation the next day and found the residents pitching in, working together, gathering the downed branches and other debris, getting the place back to normal. Either choice will most likely give you more a sense of community than a single family house. But then, that is one of the choices you get to make.