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Category: Inspirational Current Grade: A Total Views: 1126 Member Comments: 0 |
Posted on: 12/16/2008 Posted by: JohnCorey Blog Points: 1666 View all blogs >> |
"Madoff Ran Vast Options Game"
WSJ.com
http://online.wsj.com/article/SB122938212422208613.html
You might need to be registered with the Wall Street Journal to read the full article.
The moral of the Madoff story is to think before investing. All the warning signs were there. Many investors passed on investing with Madoff because things just did not make sense. The same due diligence applies to real estate so listen up.
A number of people who manage money refused to invest with Madoff's firm because of things that just did not add up. They took the time to look into the details and they walked away. Do Your Own Research - DYOR applies.
Some real estate investors are so focused on finding a pot of money they forget to ask why it is possible. They want to believe so they will take any story told to them. When faced with doubts from others they reply and then go hostile if their logic is question.
There are times when people asking you why you can get rich from real estate just do not understand. Other times the questions are indicators that all might not be as you think it is. That there are risks you do not understand. It is hard to separate the wheat from the chaff, to figure out when the noise from friends and family is to be ignored vs. when they might have a point.
Here are two suggestions that will almost always help.
1. Run the numbers. Numbers have to add up. Figure out where the numbers are coming from and if there are any assumptions behind the numbers. Look at the extremes. If there was never any maintenance would the property service its debt. If the place could only rent for 60% of the market average what would happen? If interest rates were to jump (up or down) how does that impact things. Test the edges by putting in numbers that are very much at the extreme and see how the investment will behave. Also trace back all numbers provided to you by the seller or others to see if there is a strong reason to believe the numbers are correct/conservative/reasonable.
2. Talk with people who are experts in the same field and at the same time they have no conflict of interest. This suggestion is easy to do with the forum here and local REIA groups. Finding other RE investors who know the drill, understand the strategies and are willing to punch holes in your thinking. If you speak to a few folks and they keep raising concerns, listen.
One or more people will ask seasoned investors for advice and then argue with them if the advice is not what they wanted to hear. The closed minded investor will label the seasoned investor as not positive enough (dream stealer). Little does the starry eyed investor realize that they are heading for a fall and the people providing feedback are just trying to given them a heads up before it is too late.
When someone is an expert in a specific field and they have no vested interest in the deal be very careful when you just ignore the negative news. Maybe you did not explain things correctly or fully. That is your fault. Or maybe the deal is bad. Move forward as planned and that would still be your fault. Do not shoot the messenger just because you want the pot of gold that you believe is at the end of the deal.
Positive thinking and hope will never make a bad deal (with bad number) suddenly a good deal. Positive attitudes can only help in the search for a good deal or a search for a good solution. Tin is tin and gold is gold. Wishing for one to switch into the other does not work.
DYOR. Ponzi schemes (http://en.wikipedia.org/wiki/Charles_Ponzi) and other forms of fraud only work when greed replaces logic. Some MLM deals are Ponzi schemes while others are real businesses.
Think before jumping. You can still jump after you have done your homework. Or tie the deal up with a contract. Make sure there are clauses in the contract that lets you DYOR after you have an agreement in principal.
It is standard business practice for M&A deals (mergers and acquisitions) to agree a deal subject to due diligence. That is exactly what you are doing when you agree to buy real estate subject to financing, inspections, clear title, partner approval, etc. Just make sure you DYOR when you have what looks to be a deal. Be very willing to back out if the research shows you have a problem. Or renegotiate with the seller under the threat that you will walk otherwise.
John Corey
www.ChelseaPrivateEquity.com/blog
WSJ.com
http://online.wsj.com/article/SB122938212422208613.html
You might need to be registered with the Wall Street Journal to read the full article.
The moral of the Madoff story is to think before investing. All the warning signs were there. Many investors passed on investing with Madoff because things just did not make sense. The same due diligence applies to real estate so listen up.
A number of people who manage money refused to invest with Madoff's firm because of things that just did not add up. They took the time to look into the details and they walked away. Do Your Own Research - DYOR applies.
Some real estate investors are so focused on finding a pot of money they forget to ask why it is possible. They want to believe so they will take any story told to them. When faced with doubts from others they reply and then go hostile if their logic is question.
There are times when people asking you why you can get rich from real estate just do not understand. Other times the questions are indicators that all might not be as you think it is. That there are risks you do not understand. It is hard to separate the wheat from the chaff, to figure out when the noise from friends and family is to be ignored vs. when they might have a point.
Here are two suggestions that will almost always help.
1. Run the numbers. Numbers have to add up. Figure out where the numbers are coming from and if there are any assumptions behind the numbers. Look at the extremes. If there was never any maintenance would the property service its debt. If the place could only rent for 60% of the market average what would happen? If interest rates were to jump (up or down) how does that impact things. Test the edges by putting in numbers that are very much at the extreme and see how the investment will behave. Also trace back all numbers provided to you by the seller or others to see if there is a strong reason to believe the numbers are correct/conservative/reasonable.
2. Talk with people who are experts in the same field and at the same time they have no conflict of interest. This suggestion is easy to do with the forum here and local REIA groups. Finding other RE investors who know the drill, understand the strategies and are willing to punch holes in your thinking. If you speak to a few folks and they keep raising concerns, listen.
One or more people will ask seasoned investors for advice and then argue with them if the advice is not what they wanted to hear. The closed minded investor will label the seasoned investor as not positive enough (dream stealer). Little does the starry eyed investor realize that they are heading for a fall and the people providing feedback are just trying to given them a heads up before it is too late.
When someone is an expert in a specific field and they have no vested interest in the deal be very careful when you just ignore the negative news. Maybe you did not explain things correctly or fully. That is your fault. Or maybe the deal is bad. Move forward as planned and that would still be your fault. Do not shoot the messenger just because you want the pot of gold that you believe is at the end of the deal.
Positive thinking and hope will never make a bad deal (with bad number) suddenly a good deal. Positive attitudes can only help in the search for a good deal or a search for a good solution. Tin is tin and gold is gold. Wishing for one to switch into the other does not work.
DYOR. Ponzi schemes (http://en.wikipedia.org/wiki/Charles_Ponzi) and other forms of fraud only work when greed replaces logic. Some MLM deals are Ponzi schemes while others are real businesses.
Think before jumping. You can still jump after you have done your homework. Or tie the deal up with a contract. Make sure there are clauses in the contract that lets you DYOR after you have an agreement in principal.
It is standard business practice for M&A deals (mergers and acquisitions) to agree a deal subject to due diligence. That is exactly what you are doing when you agree to buy real estate subject to financing, inspections, clear title, partner approval, etc. Just make sure you DYOR when you have what looks to be a deal. Be very willing to back out if the research shows you have a problem. Or renegotiate with the seller under the threat that you will walk otherwise.
John Corey
www.ChelseaPrivateEquity.com/blog
