The Gag Reflex

Last month, Kim and I were part of a panel discussion at Dustin Griffin’s Atlanta REIA monthly meeting. The topic was about how we’re structuring our deals in the current real estate market. A lot of time was spent answering questions about hedge funds and how they’re driving up home prices.

Because hedge funds are gobbling up an ungodly number of properties – and are willing to pay at or above a property’s CONSERVATIVE fair market value – many “investors” are no longer able to be high bidders at the foreclosure auction. And because many of these so-called investors know of no other way to buy property, they simply quit showing up – or worse yet, pay WAY too much for a property.

Frankly, Kim and I don’t give hedge funds much thought – other than thinking they’re making one giant mistake that’s gonna bite them in the butt one day soon! Sure, these days we’re rarely the high bidders on the steps, but that doesn’t mean we’re not doing deals. Just the opposite is true!

April was the month Kim and I realized that the foreclosure auction was no longer the best place to find deals. However, we still managed to do four deals! Three were found by knocking on sellers’ doors; our realtor told us about the fourth one.

Here’s the hedge fund’s primary problem: Hedge funds are run by Wall Street people, not by folks who understand single-family houses and landlord-tenant relationships.

Some folks think that when it comes to real estate investing, Wall Street people are the cat’s meow. They point to the big returns promised by the hedge funds and say, “I gotta get me some of that!” We say, “Silly rabbit, tricks are for kids!” Do you remember how successful the Wall Street folks were with real estate from 2002 to 2006? Remember how THAT dance turned out?!

Let me tell you a story: There was a very wealthy man in Macon, Georgia. He wanted his son to be a financial success. The son was very young and had zero real estate experience. Still, the dad told the son to go out and buy thirty single-family rental properties for cash over a ninety-day period of time using the dad’s money.

Buying ten houses a month, for three straight months, is a very difficult task – especially for someone not versed in real estate. How many of the thirty homes do you think were eye-popping deals? How many “big mistakes” do you think the well-meaning son bought?

After the properties are purchased, next they have to be rehabbed. How much rehabbing experience does the son have? Finally comes the BIG job: Finding and managing tenants. Can you say train wreck?

What do you think of the dad’s hair-brained idea now? After this little real estate investing picnic blows up, how badly do you think the dad – and the son – will want to chew their arm off to get out of these deals?

OK…there’s no “dad” in Macon doing this for his son. However, this is EXACTLY what the hedge funds are doing every stinkin’ day – but with a lot more zeros! What do you think about those “sharp” Wall Streeters now? Don’t you know that soon they’re gonna gag on all the goofy deals they’ve done, taking the fund investors down with them!

And when the gagging happens – and it will happen – who do you think will be there to put Humpty Dumpty back together again? Real estate investors who know how to creatively structure and finance win-win deals, of course!