Dean Dretske’s Blog

I have moved to a new blog.  Please read my posts at http://www.RealEstateForFunAndProfit.com

Thanks!

Yesterday, I posted an article about the pros and cons of Seller Financing - check it out and let me know what you think!

Just wanted to let you know about my new video!

I plan to improve production quality on future videos!  Let me know what you think. You can also see it on YouTube, Yahoo, MySpace, Metacafe, Google, DailyMotion and Veoh.

Thought I would let you know about a house that I am holding open this Sunday.  Here is the link to the flyer.

President Bush just gave his speech on the ‘economy bailout’.  From his description, it sounds like the federal government will buy up the mortgage backed securities – up to $700B worth of them.  This amount was calculated by taking 5% of the total amount of mortgages nationwide – assuming that the nominal default rate is 5%.

I have some questions – to be fair, his speech was only 12 minutes long and the subject is complicated.

Let me setup an example for use in our discussion.  Let’s say that Fred bought a house a few years ago and financed it with an 80-10-10 program through Countrywide.  Suppose the house sold for $500K, so the mortgages were $400K, $50k, and $50K.  After 2 months, Countrywide sells the second position note to GMAC and the third position note to SunTrust.  Each of these companies assembles packages of 1000 notes each and sells them to the market. 

Let’s further speculate that Mary’s retirement fund bought partial ownership of each of these mortgage backed security packages for a $1 million investment.

Fast forward a bit and Fred loses his job and stops paying on all three of his mortgages.  A few months later and we have reached today.

Nobody is trading mortgaged backed securities anymore and supposedly Mary’s retirement fund has lost $1 million in value.  The still own the packages, but they don’t have any sale value – although they should still have payment income.

Let’s say that Fred’s house is now worth $350K because the market has turned bad in his area.  If the first note forecloses, the starting bid at the auction will be what is owed to the lender (a bit over $400K because of fees and arrears owed).  If there are no bids, title will transfer to the first note holder and the second and third position notes will be wiped out.

If Fred tries to sell his house and gets an offer for $350K, then the lenders will need to agree to accept less than they are owed – this is known as a short sale.  Often, the first will want the majority of the money and the second and third note holders will agree to accept nominal amounts (better than being wiped out at auction).

So, here are my questions:

• When the packages were assembled, my understanding is that a variety of notes were included – different positions, different qualifications (credit score requirements, loan to value ratios, etc.).  If so, then why has the value of the package gone to zero?  Isn’t there still a cash flow (payments) from the performing notes in the package?
• Is the government going to buy entire packages or instead extract the ‘toxic’ defaulted notes out of the packages?
• Bush indicated that the government is one of the only entities with enough patience to hold these securities until the time when they will again have value.  Does that mean that they are going to foreclose and hold the houses?  Does that mean that in the case of junior position notes that they will prevent the sale / foreclosure of the property?  Will they participate in short sales and take nominal amounts for junior notes when the offer requires it?  If they prevent the foreclosure, do the ‘owners’ get to continue living there for free?  Do you think that would be popular?
• Anybody who has been involved in short sales can tell you that part of the problem is the long delays by the lenders.  It is not uncommon that Fred’s offer would take 4-6 months for the lenders to approve.  This limits the ability to sell the property since a lot of buyers do not have the patience to wait that long.  Streamlining these processes would increase the pool of potential buyers, increasing demand and therefore increasing the potential sale price of all of these properties.  Will the federal government process short sale requests quicker?  How about loan modifications requests?

Anybody else have questions you want to add? 

I wanted to let you know about a new service that I have started.  I am now finding great property deals in the Seattle area and the Tulsa area.  You can subscribe to each of these to get the first notice on these hot deals.  Subcribe to either at:

http://www.SeattlePropertyDeals.com

http://www.MoneyMakingProperties.com/

This is a great investing market!

I’ve just sold a Single-family property at 11826 105th Ct in Kirkland. Come and visit my site to see other properties in that area. If you are interested in looking for or selling your home, please Contact Me.

Check out this new Single-family property that I just posted on my Web site. It is at 9707 Slater Ave NE in Kirkland. This Single-family property has 4 bedrooms and 2.75 baths. Great opportunity to own this High quality home in the heart of highly desirable Rose Hill neighborhood. You will be impressed by the features and materials. Brazilian cherry floors, stunning staircase, gorgeous millwork, central A/C, cat-5 & speaker wiring throughout the house, granite slabs in the kitchen and all bathrooms, walk-in pantry, security system paid 3 years upfront.

Check out this new Single-family property that I just posted on my Web site. It is at 9226 147th Ave NE in Granite Falls. This Single-family property has 4 bedrooms and 2.5 baths. A country dream home! This immaculate home was built only 2 years ago and is in perfect condition. You will love the many amenities this custom home has to offer. Enjoy the large soaking tub, vaulted ceilings, ceiling fans, walk in closet, walk in pantry, french doors and many many more.
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Rob McKenna (WA state Attorney General) was the main speaker at the REAPS meeting on Thursday night.  He came to talk about the Distressed Property law that became effective on July 12, 2008.  The law was also known as HB 2791 as it passed through the legislature.

Rob started by describing the history of the law and also a bit about the Consumer Protection Act.  The AG office originally wrote suggested legislation to address certain types of real estate transactions that were frequently fraudulent. 

In all of these types of transactions, the homeowner was in default and were approached by people offering them assistance.  The fraudulent transactions involved ‘equity skimming’ - which is defined as buying the home and leasing it back to the original owner with an option to allow the original owner to buy back the property at some later date.  In the fraudulent cases, the terms of the lease were setup in such a way that the orignal owner was not going to be able to succeed and get their houses back.  This is, of course, fraud.  Every case that Rob described was actually prosecuted under the existing Consumer Protection Act (CPA).

I later asked Rob why new legislation was introduced when the CPA was sufficient to prosecute these cases - he indicated that the purpose was to regulate these types of transactions to make it clear to the investor how to legally / ethically execute this kind of transaction.

The problem was that the Senate committee chair decided to drastically change the proposed law and add a lot of extra badly written ‘crap’.  This included language to define a ‘distressed home consultant’ and a ‘distressed home conveyance’.  The language is so bad that Rob admitted that his office does not understand it and is focused only on the part of the law that they originally proposed.  Unfortunately, the law allows for civil penalties as well, so we all need to try our best to puzzle this out so that we can help the unfortunates that are trying to sell their house to avoid foreclosure.

Rob told us that the AG office is going to push the next legislative session to remove the bad additions to the law and return it to the originally proposed language.  The Realtor association is also pushing to change the language since real estate agents are not exempt from the liabilities of this badly written crap.

As you can tell, I do have an opinion about this law!

Please write your congress-critter in Olympia to encourage them to restore the original language!  [08/28/08] Joe added a comment and I read his blog and watched the video of the testimony.  It sure looks like Rob lied to us about not supporting the new language.  I have never liked any part of this legislation but thought that the original sounded better than what passed.  When you call your congress-critter, please suggest that the entire law get repealed.
 

On July 16, 2008 at 11:00 AM, you are invited to an Open House at 11826 105th Ct in Kirkland. If you are looking for a Single-family property in this area, don’t miss this rare opportunity to visit this magnificent property. For a preview of this Single-family property, check out my site at www.deandretske.com. Please do not hesitate to Contact Me if you have any questions or wish to schedule a private showing.

I’ve just sold a Single-family property at 20427 61st Ave NE in Kenmore. Come and visit my site to see other properties in that area. If you are interested in looking for or selling your home, please Contact Me.

I’ve just sold a Resale - single family property at 12227 NE 136th Pl in Kirkland. Come and visit my site to see other properties in that area. If you are interested in looking for or selling your home, please Contact Me.

My wife gave birth to our first child on Wednesday morning.  She had a ceasarean section delivery and all went well for both her and the baby.  We came home on Friday and I have now gotten some pictures transferred from the cameras.

We will be adjusting to new schedules for a while!

Check out this new Single-family property that I just posted on my Web site. It is at 20427 61st Ave NE in Kenmore. This Single-family property has 4 bedrooms and 2.5 baths.

Check out this new Single-family property that I just posted on my Web site. It is at 10525 SE 232nd Pl in Kent. This Single-family property has 3 bedrooms and 2.75 baths. Great potential in this split level 3 bedroom, 2.75 bath home on a quiet cul-de-sac. Close to schools and shopping. New 30 year roof, newer gas water heater, new flooring throughout. Great investment opportunity. Subj. to lender approval - short sale, as is.

Thought I would share a posting I received from Real Estate Investors Association.  Here it is: 

REIA, with support from our friends at NWRIA and real estate investors throughout the State, is working toward some semblance of reason on SHB 1843, the “new” Contractor Registration requirements that affect real estate investors and property managers. We plan to make a strong showing at the upcoming hearings.  Plan to attend ALL THAT YOU POSSIBLY CAN.  This is not up to someone else–it is up to YOU to voice your opinions.Remember, this Substitute House Bill has already been passed into law.  That means that we have to work that much harder! REIA will do our part if you will do yours.  

The hearing schedule is:

• Tuesday, February 26, 2008, 10:00 AM
  Dept of Labor & Industries, Tukwila Service Location
  12806 Gateway Drive, Tukwila, WA
• Thursday, February 28, 2008, 9:00 AM
  Dept of Labor & Industries
  7273 Linderson Way SW, Tumwater, WA
• Thursday, March 06, 2008, 10:00 AM
  Dept of Labor & Industries, Moses Lake Service Location
  3001 West Broadway Ave, Moses Lake, WAA text of the bill as it was passed into law is on the Washington Legislature’s website.  To view the Bill Click here.

The new law isn’t the end of world and absolutely SHOULD NOT STOP ANYONE FROM DOING DEALS!  Until this is resolved, it is just another cost of doing business.  A cost that we want to see removed from our rehab budgets!

For more information, please review the other articles on this website in the Contractor Law category.

 The 26th annual Bellevue Home Show will be held this weekend at the Meydenbauer Center from Friday through Sunday, January 25-27. The show opens daily at 10 AM and closes each day at 6 PM. This year’s Bellevue Home Show is sponsored by New Face Kitchen Systems, Inc. Adult Admission is $8.00, juniors (13-18) and seniors (60+) $5.00 and children 12 and under FREE! Free Guest Passes are available at all Aqua Quip locations.

Ice Sculptures from the Fairbanks Ice Festival, Fairbanks,Alaska.  I think that these are amazing!

Do It Yourself (DIY) projects are great ways to improve the value of your property - and they can be fun!  Here are some tips to make yours go smoothly:

• Be Prepared. The best DIY help that you can give yourself is to be thoroughly prepared.  Study the instructions of the DIY project that you plan to tackle.  Be sure that you have all the necessary materials and equipment and know exactly what you need to do.  You don’t want to be halfway through the project and then realize that you need to run to the hardware store for a tool you don’t have.
• Get to Know your Home Improvement Store.  Your local home improvement store becomes your best friend during a DIY project.  It can provide great DIY help with its knowledgeable staff and endless supplies.  You might even be able to take an instructional class and get free DIY help for your project through your local store.
• Don’t skimp on materials.  You are already saving money by doing the project yourself, but don’t think that you can save even more money by cutting corners on materials.  If you decide to buy materials for your DIY project that are inadequate or cheaply made, you may regret it later.  Go ahead and get the materials that not only look the best, but also work the best.
• Know your limits.  You can provide yourself with a lot of DIY help by being careful not to overextend yourself.  Don’t attempt a DIY project that is beyond your limits.  It is great to try something new, and to learn a new skill for DIY work, but attempting a project that only professionals typically do is probably not a good idea.  Go with a DIY project that you know you can handle.
• Check to see if the cost and effort are worth it.  When you do a DIY project, you not only invest money but also time.  Add up the cost and the hours that are involved and compare that to the cost of a professional doing the same job.  Sometimes it’s not worth it to do the project yourself.  It may be better to pay a professional to do the job.

With these DIY tips in mind, your project can go very smoothly - and can be fun!

I attended the Real Estate Investors Association of Washington meeting last night.  These are my notes from the meeting.

Two gentlemen from Marcus & Millichap came and presented information about the multifamily and commercial real estate markets.  Greg Wendelken, VP & Regional Manager, discussed the 2008 Ecomonic outlook and Corr Pearce, in the Capital division, talked about the financial elements of investing in these sectors.

Both of their powerpoint slides will be made available here.

Notes on Greg’s presentation:

• Important to know whether we are in a ‘creation of wealth’ or ‘preserving wealth’ phase.
• Condo conversion is effictively ‘dead’ in most areas in the Puget Sound area.  There still are some conversions occurring, but in most places, no new ones are in work.  Condo converters were often paying a 20-30% premium to buy an apartment building, so the reduction in condo conversions will bring down the sales prices of apartment buildings.
• Average home payments in the Tri-city area (King, Snohomish, Pierce) in 2007 were $2150 / month @ 6.75% interest rate.  Condo payments were $1584 / month.  Apartment rents were $1200 / month.  This gap creates a barrier that most renters will not overcome - keeping vacancies low in the region.
• Condo construction is still bullish in King county, but has slowed considerably in the other two counties
• Underwriting is now commonly using 3% vacancy rates in the Seattle and Bellevue, still using 5% elsewhere.
• Likely to be 3-4% rent increases in 2008 and 2009
• King County is seeing approximately $140,000 per unit values for apartment buildings, Pierce county is $80,000 and Snohomish is around $100,000
• Recommends we review the assessed value of any apartment buildings - the assessor may be using comps from a year ago which will still show the condo conversion premium.  If comps are restricted to near months, the valuation may come down which will save on the tax bill.
• Recommends we also review the insurance on the building - if the value is lower, then the premium will also be lower.
• Utility costs should be in the $55-70 / unit range.  If higher, check for the reason and save money!
• Cap rates for apartments in King County are approximately 5, Snohomish is 5.5 and Pierce is 6.  He thinks that these may rise a bit, but will not ever get back to the 9 - 10 range that we had in the past.
• Return on equity (after tax) is in the range of 2.5 - 4.5% in the tri-county area.  This number is based on the 600+ buildings that they analyzed in the office last year.

Notes on Corr’s presentation:

• Vulcan estimates that 135,000 people will move to this area next year.  Vulcan has put a lot of money in the South Lake Union area and has done a lot of research to mitigate the risk of this investment.
• In 2001, approximately 11% of the mortgages issued were in the Alt-A/subprime market.  By 2006, this had grown to 34% - which is certainly unsustainable.
• Urged us to
  1. Create a strategic plan - we need to know our end game vision.  What do we want to be when we grow up?  We need to run this as a business.
  2. Ask questions - maximize profits intelligently.
     • Raise the rents as long as the vacancy created does not reduce the overall revenues.  When the rent is raised, renters will complain, but few will move.  If the rent revenues gained by the rental increase are not more than the new vacancy losses, then the rental increase was not worth it.
     • Inteligently reduce expenses.  Keep the value to the tenant.  For example, if you renegotiate the landscaping services and the curb appeal (from the tenant’s perspective) falls too low, then it may affect your vacancy or ability to raise rents.
     • Makes sure that you pay yourself for your time and energies.
     • Generally expect an overhead of $3800 - 4100 / unit / year
  3. Take action - does the returns earned match the strategic vision?  What needs to be done to more likely align the return to vision.

Contractor Law

After the presentation, the floor was opened to questions.  There was a discussion about the change in the law that defines ‘Contractor’.  Shirley indicated that they had made some progress in starting the push to change the law, but that real announcements would come later.  I indicated that I would mention the law again here in this blog (see Law PDF and Contractor Law posts).

On January 10, 2008 at 10:00 AM, you are invited to an Open House at 12132 Shorewood Dr SW in Burien. If you are looking for a Single-family property in this area, don’t miss this rare opportunity to visit this magnificent property. For a preview of this Single-family property, check out my site at www.deandretske.com. Please do not hesitate to Contact Me if you have any questions or wish to schedule a private showing.

Check out this new Single-family property that I just posted on my Web site. It is at 12132 Shorewood Dr SW in Burien. This Single-family property has 4 bedrooms and 2.5 baths. Lovely home with panoramic view of Mtns & Sound.Prof Ldscaping with beautiful outdoor pool & patio. Shorewood on the Sound Comm. Club incl beach privileges & boat launch. 2 car garage with add’l storage space. Upgrades incl 40 yr architectural comp roof, Natural Gas furnace w/Honeywell air sys. El hot water heater, heated tiles in kitchen & utility. Lg spacious Living & Dining rm, Library & office. Lg Dble Pane windows thru/out allow light-filled Lifestyle of Grace & Comfort.

Source: The Bellevue Chamber of Commerce - Greg Johnson, President of Wright Runstad & Co. will discuss their new 36-acre development in Bellevue’s Bel-Red Corridor, dubbed “The Spring District” at the Bellevue Chamber of Commerce’s membership lunch on December 12th. According to Mr. Johnson, the development “symbolizes a new beginning for a transforming corridor.” Mr. Johnson will discuss how the developers plan to build more than 3 million sq. ft. of offices, 800-1,000 homes and retail space on the former Safeway distribution site, at 124th Avenue Northeast near Bel-Red Road. They expect to finish the first phase in 2010.

The Bellevue Chamber of Commerce lunch will be held from noon to 1:30 pm on December 12th at the Hilton Bellevue. Call 425-213-1205 to register or visit The Bellevue Chamber of Commerce website.

I won’t be able to attend - if you make the event, I would appreciate it if you would share your notes

I want to encourage you to partake of some of the winter events in Bellevue.  There is ice skating, nightly music on ’snowflake lane’, dance peformance, and craft activities.  You can check it out at the Bellevue Magic Season website.

For the holiday season, some general tips on Candle Safety.  A sad number of homes burn down over the holidays.

• Keep candles a minimum of 1 foot, in all directions, from flammable and combustible items such as curtains or bedding.  Make sure curtains cannot be blown over the candle by wind.
• Place candles on secure furniture and out of the reach of children and pets.
• Only burn candles while under constant adult supervision.
• Keep matches and lighters out of the reach of children.
• Trim wicks prior to each use to within 1/4 inch from the top of the candle.
• Extinguish the flame if it burns to close to the container side.
• Place burning candles away from drafts and vents.
• Do not allow candles to burn down to the bottom of their container.  stick candles should not be allowed to burn down below 2 inches from their holder.
• Extinguish all candles before leaving the house or when going to bed.
• Avoid burning candles for more than four hours at a time.
• Avoid walking while holding a burning candle.  do not move a glass container when the wax is liquid.
• Use a flashlight rather than a candle during power outages.
• Do not use a condle for light when fueling equipment such as a kerosene heater or lantern as the flame may ignite the fuel vaports.
• Secure candles in holders made of glass, ceramic, metal or other noncombustible material.
• Avoid using candles that have combustible materials embedded in them.

On Thursday morning, the Bellevue Chamber of Commerce presented the Eastside Economic Forecast Breakfast at the Meydenbauer Center.  There were several hundred attendees from all over the Puget Sound area.  The presentation consisted of an overview of the current economic picture by Chris Falco, the Chairman of the Bellevue Chamber followed by presentation by each of the three members of the panel.  The panel members were:

• Joseph Quinlan - global economist - currently with Bank of America
• Kristina Hudson- Business Development Manager for the Interactive Media and Technology cluster at EnterpriseSeattle
• Glen Hiemstra - Futurist.com founder and owner

Overview

Chris presented a lot of information fairly quickly, so my notes are sparse.  Fortunately, most of the statistics presented can be seen in two PDF files that you can download from the Bellevue Chamber.  The two documents are:  Eastside Economic Indicators Hot Sheet and the Eastside Economic Forecast Breakfast Survey Results.

In general, the forecast for the economy on the Eastside is good - over 60% of the business leaders that were surveyed indicated that they thought their business would be hiring more employees during 2008.  The longer forecasts through 2040 show continued growth in jobs and population. 

Joseph Quinlan

He expects Q1 and Q2 of 2008 to be a bit bumpy nationally, but does not expect a recession.  He indicated that the current turmoil in the economy is the result of Greenspan’s policy of easy money - which was kept in place for far too long a time.  Joseph kept making references to now being the time we need to ‘clean up after the party’.  The housing industry provided a lot of the fuel for the party and it is now the sector that will require the most clean up activities.

Exports are strong and will continue to be so.  We currently export $140B per month - more than India exports in a year.  Joseph talked about the news media’s fascination with China and India being competitive with the USA in terms of exports and position in the world economy.  I got the impression that Joseph did not agree that this would be an issue in the near future - too many internal pressures in each of those countries.  He listed several pressures - one of which was that 40% of India’s population cannot read or write.  China also has a very low per capita income that will put pressure on the government as they accelerate their position on the world economic stage.

We currently have an unemployment rate in the range of 4% - and only 2% for college educated workers.  This is amazing low and puts a real limitation on our ability to grow our economy - you can’t just hire more people, you need to increase productivity to get any real gain in production.

Joseph talked about a set of deficits that will be our challenge for maintaining our national economy:

• Energy - we need to become less dependent on foreign sources of energy.  He mentioned that it costs approximately $4 / barrel for the Middle East countries to extract the oil from the ground, but the cost to the refiners is approaching $100 / barrel.  This margin is a wealth transfer from us to people who do not like us.  We need to be aware of the ramifications of continuing to transfer wealth this way.
• Capital - we are currently attracting investment from overseas.  Our government deficits are funded with some of this investment.  When these foreign sources are diverted to build capital improvements in their own countries, how will we fund ourselves?  We need to look at how much we are continuing to spend and cut back where possible.
• Brain - our own population does not produce enough highly educated workers to support our place in the global arena of innovation.  We bring foreign students here to educate them, but many of them return to their homelands.  We need to push our own population to higher standards in education.

Kristina Hudson

Kristina presented the results of a study on Interactive Media within the Puget Sound region.  The study was funded by the King County Economic Council to show the economic contribution of the video game market to the region.  The anchors of the video game market within King Country are Microsoft, Nintendo, and Real Networks.  Some of the results of this study are:

• 150 companies or divisions are participating in the video game market
• 15,000 jobs in these companies - which supports 50,000 - 60,000 total jobs within the region
• 33% job growth
• $77,000 average salary for these jobs
• $4.9B revenues per year

Kristina is very pleased with the study and the results that show the video game market does contribute significantly to the region’s economy.

Glen Hiemstra

Glen published a new book in 2006 - Turning the Future into Revenue.  He wanted to give us a ‘random view’ of the future by presenting a set of ideas that we can use to think about future business opportunities.

• Aging Curve - the baby boomers are aging and will start to retire in 3 years.  Boomers are defined as having been born between 1946 and 1964.  Retirement at 65 can start happening in 2011, but retiring at 62 can start next year for those early boomers.  At the current time, 1 in 10 people that you see are over 65 - by 2020, this number will change to 1 in 4.  How will this affect the economy?  How will housing choices change?  Will there be more demand for low maintenance housing?  More single level housing?
• Global Warming - if true, is there something we can do about it?  What changes will it cause that will present opportunities - he gave an example of the arctic ice cap being smaller - so can we more easily drill for oil under the sea in those locations?  He gave another example of an electric car manufacturer that he recently visited - this market will be stronger because of issues of foreign energy and global warming.
• Distribution of wealth caused by technology - in the industrial age, turning an idea into a product took many people at different levels of education / skills.  This resulted in all levels of wage to grow more uniformly.  In the current age, a fairly small set of people, often only in one category of skill / wage, can turn an idea into a product.  This results in all of the wealth / growth occurring in that one category.  The billionaires created by Microsoft, Yahoo, Google, etc. are all examples of this.  What pressures will result from this?

It was an interesting meeting - not completely what I expected from the title of the event.

I attended the Real Estate Investors Association of Washington (REIAWA) monthly meeting tonight.  The subject was an update about the flipping law 1843.  Robert Penfield, or Kelly Penfield PLLC, is licensed in Washington and Oregon.  He has expertise in Real Estate litigation, entity formation, and foreclosure litagation.

Robert indicated that this law change has given quite a bit more power to the Director of Labor and Industries.  The Director nows has subpeona power (to review business records to determine intent and details of the deals done) and can request search warrants.

Robert, Shirley and Fox Henderson, and Sue Schindler (all representing REIAWA) attended a meeting with Pete Schmidt and Sally Elliot (from Dept of Labor and Industries) to discuss this law change.  Pete Schmidt is the Chief of Contactor Compliance.  I did not catch Sally’s title.  Sue had compiled a list of 100’s of questions which they left with L&I for answers.  Pete and Sally indicated taht they thought most of the questions could be answered by applying some rules of thumb

Intentions

• L&I charter is to protect the consumer - in this case, that would be the eventual homeowner.
• L&I supposedly had intention to close loophole in the law that allowed a homeowner to do work without being required to be a general contractor.  They had the idea that a homeowner that does this kind of work, and then sells, is leaving the eventual homeowner ‘unprotected’ - and this needed correction.
• They wanted to pursue independent business people who should have been licensed but were not (unlicensed contractors)
• They indicated that they were not primarily targetting flippers but that they knew that they were going to catch up some of the flippers in their changes.
• They wanted to pursue the underground economy

Rules of Thumb

If your answers are no to all of these, then you probably don’t need a contractor’s license.  If yes to any of them, you probably do.

• Are you keeping the property for less than 12 months?
• Are you pursuing an independent business venture without living in the property?
• Are you renting?  L&I considers leases less than 12 months of duration as ‘rental leases’ and leases over 12 months as ‘permanent leases’
• Is your intent to sell the property within 12 months of completion of the work?

If you have a particular question or situation, you can post it on the L&I website.

Violations of this law result in a charge of gross misdemeanor and a fine for each day of infraction.  The fine is $1000 for the 1st day, $2000 for the 2nd day, $3000 for the 3rd, and so on.  So, this will very expensive very fast.  There was some discussion that the fine will grow at a different rate.

Applying for a contractor’s license rquires the following:

• UBI # - either as a sole proprietorship or licensed entity ($175 fee)
• Bond or proof of deposit of $12,000
• Insurance for the contracting business
• Must list previous businesses with which you have been involved - to insure that they are in good standing
• $113.43 fee for the application

One of the major benefits of asset protection is anonimity - isolating the things you own into groups that don’t interact.  unfortunately, this new law will require us to reveal a lot of information that will ties our entities together.  This information is then available to a wide range of individuals through the clerks at L&I and bonding agent and insurance carrier.

The session was openned up to questions from the audience. 

A question was asked if a partnership had a member that was a contractor, would that cover the requirement for the partnership.  Robert indicated that it probably would - though there was some dispute whether the name of the contractor has to be on title to the property. 

A question was asked about the other side of this law - if a new homeowner is to be protected with this new law, how does the new homeowner attach to the bond of the flipper.  For example, if I bought a house, fixed it up legally (permits and I am a contractor) and sell it - and the new owner has a problem, how does the new owner attach to my bond.  The bond is only attached through a breach of contract - but I have no contract with the new owner.  The purchase and sale contract would only have been for me to transer title for the agreed compensation and that has not been breached.  Robert will research this and get back to us.

I got behind in transcribing my notes - we had a Ninja Group Coaching session on 10/31/07 with Walt Frey.  There were about a dozen of us in this session.  It was held in the Keller Williams Realty Bellevue’s office.

Accountability

Each of us is supposed to be tracking our time using the PIN system, the count of new contacts we are making and the number of FORD calls we are making.  The PIN system tracks the number of hours spent in Productive, Indirectly productive, and Necessary activities.

• Productive activities - face-to-face sales activites - eg Listing presentations, buyer’s consultations, offer presentations, etc.
• Indirectly productive - activities whose result should be the generation of Productive activities - eg marketing, FORD calls, networking events, newsletter generation, open houses (as long as there are guests), etc.
• Necessary - things that we need to do, but don’t generate production and won’t lead to it - eg continuing education classes, paperwork, previewing houses, open house where nobody comes, etc.

FORD calls is making contact with people you know and like to continue to be part of their lives.  The focus is on Family, Occupation, Recreation, and Dreams.  During these calls, the goal is not to bring up real estate - instead it should be about connecting to your friend.  We need to be in their lives enough so that when they think of real estate, they think of us.  We can’t make them think of real estate - it is not important to them until it is important to them!

We had a long discussion about how well we are doing - our ratios of I to P and amount of I time spent.  Each person’s business style will determine their desired ratio - but higher ratios will force the agent to either put in more time or limit their income.  If the ratio is higher than desired, then you need to look at how you are spending your I time and try to perform activities with more leverage.  For example, spending 4 hours hand addressing envelopes will cause a higher ratio than outsourcing that activity or using labels.  Walt gave an example of an agent that plays golf every day for 4 hours and uses that time to stay connected to his contacts - his ratio is 4 to 1, but that matches his desired business style.  Another agent has a 15 minute to 1 hour ratio - she prefers a higher leverage on her connections.

We also talked about the resistance to making the FORD calls.  Procrastination, fear, disbelief, etc.  Also, lack of accountability.  When we pick an accountability partner, that partner needs to really push us to fulfill our goals.  If we don’t make our calls, we should get real grief from our partner - and we should give it when they don’t accomplish their goals.  The goal is something they wanted - we should help them attain it!

A system is like a recipe - following the ingredients in the right proportion and in the proscribed order will give a predicted result.  We all want the result without the work of following the recipe!

Walt suggested a few books:

When things aren’t going well - we need to ask ourselves “what is the win for me with this situation?” or ”What is the benefit that makes me create this situation?”

Goal Setting

Reasons we don’t set goals:

• Herd Instinct - nobody else is, so why should I?
• Success Exception - find an example of somebody that did succeed without goals - so wh should I?
• Fear of Failure - if I set a goal, then I could ‘fail’
• Unclosed Sale - never been sold on goal setting
• Lack of Knowledge Alibi - need more information to set goals
• Satisfied Life - life is okay, why set goal for more?
• “Chevy” Syndrome - don’t want to appear more successful than others
• “Fire Fighter” Role - like having crisis in life
• “Big” Score - waiting for the ‘big deal’ or lottery

Harvard did a study on incomes of their MBAs over 25 years.  They found a definate relationship between goals and higher incomes

• No goals - 82% of those studied - this was the baseline income for the study
• Vague goals - ‘want to make more money’ - 14% of those studied - these folks made 3 times more money than those without goals
• Specific goals - ‘want to make 100K more next year’ - 3% of those studied - these folks made 10 times more money than those without goals

It does not require a large change in performance to greatly affect the result.  For example, in 1990, Curtis Strange made the most money on the golf circuit.  He had a 70.56 shots / round of golf average. He made almost a millions dollars that year.  On the other hand, the 98th highest income golfer had a 71.61 shot / round average and made just under $100K.  Just over 1 shot average changed the income by an order of magnitude!

Goals should be written in the form of an affirmation - in present tense, personal, and in positive terms.  For example, ‘I am healthy and fit’ is better than ‘I want to be healthier’ or ‘I don’t want to be sick anymore’

Major Goal Areas:

• Financial
  •  Earnings
  •  Savings
  •  Retirement
• Professional
  •  Education
  •  Achievement
  •  Contribution
  •  Advancement
• Material
  •  Family Necessity
  •  Family Luxury
  •  Personal Necessity
  •  Personal Luxury
• Personal
  •  Physical
  •  Social / Family
  •  Experience

Goals should be:

• Written
• Believable - the goal to reach the top of the mountain may not be beleivalbe right now, so set your goal to the top of that ledge, then when close, move the goal higher in believable steps
• Specific
• Measured - how do you know that you reached it if it is not measurable?
• Visible
• Shared - limit your sharing to those who support you, not those who would ridicule you or the goal
• Short / Long Range - should have both kinds of goals
• Deadline - more measurement but in time!
• Overhauled - as you approach a goal, move it farther out  Strive for more!
• Luck - Laboring Under Correct Knowledge - tell the truth about what you are doing and you can adjust it.  Lie to yourself and you can’t improve.

Robert Penfield (of Kelley Penfield PLLC) will be speaking at the Real Estate Investors Association monthly meeting on November 12 at the Hyatt in downtown Bellevue.  The meeting starts at 6 pm and you can register here

From REIA’s website description of the event:

The November REIA Monthly Meeting will focus on changes to Washington State’s Contractor law under SHB 1843 for investors purchasing flips and holds, and serving as lenders, through their entities and through Self Directed IRAs.  This REIA Monthly Meeting follows REIA’s meeting with the Department of Labor and Industries, attended by Bob Penfield for REIA, Sue Schindler, REIA’s Legislative Liasion and REIA Founders Fox and Shirley Henderson, and offers direct opinions from L & I that relates to our Members and Guests.  

A small portion of the November REIA Monthly Meeting will be dedicated to this year’s donation recipient, Phoenix Hope.  Phoenix Hope was founded by fellow REIA Member Julia Williams in honor of her late son, James Williams, because of his overwhelming sense of giving back and making A DIFFERENCE in people’s lives.  Phoenix Hope helps people who desperately need help but may not have woven their way through red tape in time to serve their most pressing needs.  One of the best examples that are recipients of Phoenix Hope is the King County Domestic Violence program.

We will be collecting NON-PERISHABLE FOOD, NEW UNWRAPPED TOYS AND DONATIONS.  Many of the recipients are victims of domestic violence, including children who range from 0 to 18, so please bring “toys” for boys and girls of all ages.  The food collected at our meeting will be included in Thanksgiving and Christmas baskets for as many families as we can provide for.  REIA will GLADLY furnish a meeting room to MAKE the baskets if Members and Guests would like to ready them for delivery!  Meetings we have conducted in the past have FILLED AN ENTIRE SUV with toys and food AND we have provided enough cash and check donations to buy LOTS of holiday turkeys and hams!  Please bring your donations and checkbooks and join us as we give back to the communities that we ALL make our profits in!

The first 50 REIA Members or Guests who donate non-perishable food, toys or money for those in need will receive a FREE CD from rehabbing expert Paul Esajian of A & E TV’s “Flip This House”!  You can give back to your community and learn a thing or two about rehabbing from Paul so…
                                                          DON’T COME EMPTY HANDED!

Check out this new Single-family property that I just posted on my Web site. It is at 27029 SE 164th Pl in Issaquah. This Single-family property has 3 bedrooms and 2 baths. Beautiful Lindahl Cedar Home on 1+ Acres, A master suite with a walk-in closet, and full bath, A dramatic living room with soaring cathedral ceiling, 2 full baths with tubs, large loft with cedar walls. Great light from the outside streams through the skylights, solarium and the cedar framed windows. The garage has 2 doors, but is deep enough to hold 4 cars. Great investment opportunity! Subject to lender approval - short sale, as-is.

Here are some suggestions for maintaining your home through the winter:

• Remove screens from windows and install storm windows
• Clean out gutters and downspouts
• Insulate pipes in your home’s crawlspaces and attics
• Store firewood at least 30 feet away from your home
• Familiarize responsible family members with the gas main valve and other appliance valves.
• Clean the clothes dryer exhaust duct, damper and space under the dryer.
• Make sure all electrical holiday decorations have tight connections.
• Check the attic for adequate ventilation.
• Clean the kitchen exhaust hood and air filter
• Check the water hoses on the clothes washer, refrigerator ice-maker and dishwasher for cracks and bubbles.
• Test all ground fault circuit interrupter (GFCI) outlets.

On October 28, 2007 at 12:00 PM, you are invited to an Open House at 12227 NE 136th Pl in Kirkland. If you are looking for a Single-family property in this area, don’t miss this rare opportunity to visit this magnificent property. For a preview of this Single-family property, check out my site at www.deandretske.com. Please do not hesitate to Contact Me if you have any questions or wish to schedule a private showing.

On October 27, 2007 at 12:00 PM, you are invited to an Open House at 401 100th Ave NE #311 in Bellevue. If you are looking for a Condo property in this area, don’t miss this rare opportunity to visit this magnificent property. For a preview of this Condo property, check out my site at www.deandretske.com. Please do not hesitate to Contact Me if you have any questions or wish to schedule a private showing.

On Thursday, October 11th, I attended a lunch held by the Bellevue Chamber of Commerce at the Hyatt in Bellevue.  Jim Stanton, Microsoft Senior Community Affairs Manager, was the speaker for the lunch talk.  He talked about Microsoft’s expansion on the Eastside - both past and plans for the future.  I took some notes and will pass along the highlights here.

Microsoft has approximately 78,000 employees globally - 40,000 workers on campus here (5000 are vendor/contractors).  Last year, Microsoft hired 12,000 globally.  Microsoft had revenue of approximately $50B last year, $10B more than the year previous.  This expansion has pushed them to acquire more space. 

Microsoft and Redmond have created an agreement to support this expansion.  Each party contributes some set of actions for this goal.  The slide that showed the pieces of the agreement went by too quickly for me to write down all of the elements - and the slide no doubtedly was a synopsis of the major elements.  The pieces i noted are:

• Microsoft agrees to continue using the current campus as their corporate headquarters for at least 20 more years.  Microsoft expects to complete the majority of campus construction in the next 5 years.
• Both parties will support the construction of more infrastructure elements to support the campus expansion
  • 520 on / off ramps
  • At least 6 intersections will be upgraded to support more traffic
  • an extra bridge across 520 in 2008 to link West and East parts of campus

Recently, Microsoft purchased the Safeco campus, the Eddie Bauer site, and the Nintendo site.  This gives them the real estate they need to fill thier expansion plans for the next 5 years.  Those sites are all on the West side of 520 and will benefit from the new bridge scheduled for 2008.  Microsoft expects to house 4400 employees on that part of campus.

 In 2001-2004, the campus ocupancy reached over 100% - employees were put in kitchenettes, bathrooms, lobbies, and every other place they could find.  This compression was required partly for real estate reasons and partly because of some market economics.  In 2005, Microsoft started acquiring more real estate and accelerated hiring.  Now, the building boom in Bellevue has opened up even more office space for expansion.

Jim showed the distribution of employees housing in the Puget Sound area.  He showed a map that plotted each housing location - showing some very popular locations around Greenlake, Fremont, Redmond, etc.  The breakdown in distribution was:

• Redmond - 22%
• Seattle - 17%
• Bellevue - 13%
• Sammamish - 8%
• Other - 20%

Approximately 80% of the employees live on the Eastside.  The average employee is 36 years old and has kids.

Microsoft is expanding into the new office space in Bellevue and Seattle.  The sites are:

• Lincoln Square (Bellevue) will provide office space for approximately 1400 employees in 318,000 square feet
• Bravern (Bellevue) will provide office space for 2700 employees in 750,000 square feet
• Advanta (Bellevue) will have 2400 employees in 601,000 square feet
• Westlake Terry (Seattle) will have 575 employees in 127,000 square feet
• 505 Union Station (Seattle) will have 25 employees in 4000 square feet
• 110 S Jackson (Seattle) will have 140 employees

Microsoft has a preference for new construction because of their high requirements for power and bandwidth.  The current campus uses 45-50MW of power per day.  This level of power / bandwidth is difficult to acquire in older buildings.  most of the off-campus employees are in operational groups or marketing groups that require somewhat less infrastructure.

13-17% of Microsoft employees commute in carpools.  Indeed, some 35% of the employees commute in some way other than their own personal car.  Less than 5% telework - though Microsoft is creating what they call ‘touchdown stations’ to allow an employee to go someplace nearer their home, with an environment close to campus level.

It will be interesting to watch the development of the new bridge and campus elements over the next couple of years.  It was nice to get a glimpse of their plans.

Check out this new Condo property that I just posted on my Web site. It is at 401 100th Ave NE #311 in Bellevue. This Condo property has 2 bedrooms and 1.75 baths.

I attended the Real Estate Investors Association of Washington meeting on Monday night.  This meeting was about Landlord / Tenant law presented by Verna Cameron of L/T Services.  The first meeting was, however, dedicated to a discussion about the SR 1843 revision to the contractor law.

There were several people who were asked to talk a bit about the law and its effects:

• Dean Dretske (Me) - I related a story I heard from another realtor (’Steve’) in my office.  Steve was talking with a client (who I will call ‘Bob’ for clarity) about a property that Bob was interested in buying.  Steve thought that Bob might be thinking about flipping / leasing the property and asked Bob it he was aware of the SR 1843 changes in the law.  Bob said that he was very aware because he had been recently visited by a representative from the Department of Labor and Industries - L&I is responsible for enforcing the contractor laws.  This representative visited a worksite of Bob’s and reviewed each person on site to make sure that tey were all licensed contractors - including Bob since he was the owner of a property being updated with the intent of selling.  The representative had already visited Bob’s personal residence and other properties as well.  Bob did not know what brought him to L&I’s attention - whether it was a complaint from the ‘public’ or just the amount of property transactions with which he has been involved.  The L&I representative told Bob that he was going to be fined $1000 and needed to take steps to comply with the law.  Bob is currently consulting with his attorney to see what steps he is required to make.  There are some people who have been saying that L&I will not enforce this law until some clarity is reached on the intentions of the law - this anecdote indicates that L&I is already enforcing the law.
• Larry Restalrig-Logan from Farmer’s Insurance talked about the insurance / bonding requirements for getting licensed as a contractor.  A general contractor needs a $12,000 bond (or equivalent) and insurance.  Larry indicated that for a person with good credit and fairly small amount of transactions per year (sales volume), this will probably cost approximately $2500 per year (for each entity that owns property that it ‘flips’).  The bond will cost around $350 - $4500 depending on the persons credit rating.  The insurance premium will depend on volume of sales and type of work that the contractor will attempt / perform.  He also noted that most people do not understand how a bond works - the bond supplier pays on the claim and then comes to the contractor to recover the payment (the bond supplier does not lose money).
• Clayton Hall from Choice Lending talked a bit about financing these kinds of properties.  I did not hear much of his presentation - I got quite a few questions from surrounding audience members.  My impression is that there are not any changes to financing from this change to contractor law.  The big aspect will be how the change affects entity structuring for the purposes of asset protection.  Since financing is dependent on what kind of entity owns the property, the way it is structured will have an effect.
• A couple of blogs were mentioned that have more information on these contractor changes.  Rain City Guide has several posts (including Eileen’s) as does Eastside Business .  Check them out.
• Two lawyers then came up to give their opinions on the changes to contractor law.  Robert Penfield (of Kelley Penfield, PLLC) and Mike Essig (of O’Brien, Barton, Wieck & Joe, PLLP) have both been reviewing the changes.  They both indicated that until the law has been taken to the appeals court or WA supreme court, there will be various attorney opinions.  Robert indicated that he reads the law as applying to homeowners who update their property prior to sale - which applies to almost every sale of real estate in Washington.  He also agreed that the law will probably apply to all of the examples that I listed in the earlier posts (Law Against Flipping and September REAPS and the Law against Flipping).

Verna started her presentation - unfortunately, I missed almost all of her presentation while I took part in follow up conversations regarding the contractor changes.  These conversations took place outside of the room.  I will watch for notes on Verna’s persentation and will link to them.

Update (10/9/07):

I just got an email with a link to another lawyer that agrees that this law will apply to many homeowners who are selling their residence.  The article is titled: Attention Washington property owners and developers: You may be a general contractor without knowing it

Reach Returns

I attended a free 2 day seminar that was put on by Reach Returns over the last weekend.  Greg Pineo was the only speaker on both days.  He has been a real estate investor in the Seattle area for the past 30 years.  The seminar was advertised as education on the art of negotiation.  Instead, it was like most free seminars - an overview of the constellation of subjects that Reach Return’s education products cover.  They did encourage us to buy those products at every break.  I think Greg is a very good teacher and has a firm grasp of real estate investing.  He has owned several hundreds of buildings over the years and is very creative about how he structures the deals.  I have spent quite a bit of money on education from other ‘gurus’ - I think I would have been much better off if I had saved that money and bought Reach Return’s material.

Greg Pineo is a philosopher at heart - he often quotes Thoreau, Whitman, Ruskin and others.  If you have seen the movie Carpe Diem, then you can hear Robin William’s character in Greg.  Both revel in the words that inspire you to be.  To be all that you can.

Here are the hiighlights of my notes.  I recommend you attend this seminar if it comes to an area near you!

Greg started with a story from his youth - selling almond roca for his little league baseball team.  He learned important lessons (The Tao of Almond Roca):

• Be Bold - step up and do new things
• Always Bring References - your chance to close the deal is higher if they know somebody you know.  Saying ‘no’ says ‘no’ to both you and the referrer.
• Do Not Set Ceilings on the Possibilities in My Life!
• Ask Questions of Proposition - ‘would you consider selling?’, ‘do you want to rent this unit?’.  Questions that lead to a yes/no decision.  If you don’t ask for it, the answer is already ‘no’ - asking gives a chance for a ‘yes’

To live the Tao, we need to know what we want.  Not what the committee of voices in our heads say we SHOULD want.  Change the voice that limits our choices to one that encourages us to be everything we can be.  Henry Ford is quoted as saying that he was looking for a few people who did not know what can’t be done.  Look for those possibilities in life that lead to success.

John Ruskin - “Dream lofty dreams, and as you dream, so shall you become. Your vision is the promise of what you shall at last unveil.”

To be wealthy in real estate, we need to hold high-demand property over time.

There are three categories (chess metaphor) of properties that we can own:

• Pawns - these are owned for a short term for the purpose of increasing our capital.  Generally we want to assign these deals or get excellent financing
• 2nd row - owned for a real estate cycle (7-10 yrs) and sold at the right time in the cycle
• Back row - owned for the rest of your life.  These are the gems that you want your grandchildren to own.  There should be no reasons not to buy or rent (for you and potential tenants)

Toolbox (skills and techniques) + mindset = success

Greg talked a bit about the Seattle area geography, neighborhoods and market demand.  The developed city center (between Lake Washington and Puget Sound), some specific neighborhoods on the Eastside (Bellevue and Kirkland) and North (Edmonds) are all high demand.  Back row properties should be in these high demand neighborhoods.  Greg Pineo talks about the ‘romantic’ aspect of the neighborhood - this is a large part of the demand.  There is a lot of development going on outside these neighborhoods - there is a lot of land East, between the city and the Cascade mountains.  The challenge with this development is that it means that our property will always be competing with new construction.  We have less of this kind of competition in the existing high-demand neighborhoods.

The very best deals often come to us at the very worst times.  Greg theorizes that this is because the best deals should be in the hand of those brave enough to handle them.

Greg Pineo says that each day in the life of an investor is involved in searching for 3 things:

• Birds - property that fits our criteria for purchase
• Money - funds that we can use to buy these properties
• Buyers - people who will buy either our deals (wholesaling) or our properties (flipping).

We need to be prepared - before we encounter a property that we want to purchase.  We need to:

• Know our market
• Know sold comps
• Know rent comps
• Understand tax law - Estate tax and Capital Gains tax
• Understand area zoning and expansion potentials
• Understand construction and rehab costs

Negotiable Terms in any property deal:

• Purchase Price - what do they need to get to their next location
• Down Payment - How much?  When?  Over time or all at once?  Monetary or will something else work?
• Ernest Money - Cash?  Paid to seller or escrow?  Cash or note?
• Time - when do payments start?

When we get financing from sellers or private sources, we should have some special clauses to give us the most flexibility in our portfolio

• Substitution of Collateral - this gives us the ability to move the note to another property.  This gives us the ability to free up one of our properties so that we can sell it and keep more of money.  It also allows us to keep the best financing in our portfolio.
• Slice and Dice - this gives us the ability to exchange one set of notes for another set of equal value and terms.  In combination with the previous clause, this makes it possible to split a large note into a couple of smaller notes that can be moved to different properties.
• 1st Right of Refusal - this gives us the ability to payoff the note at a discount when the beneficiary decides to sell it to a note broker. Sometimes, a high purchase price with seller financing will result in a quick attempt by the seller to get cash by selling the note.  This clause can save us a large amount of money!

Banks make money 4 ways:

• Margin - difference between the amount they pay to borrow money and the amount they earn by lending it
• Fees - they charge us to do business with them
• Penalties - late payment penalties add a large amount to the bank’s bottom line
• Servicing - amounts earned by handling the payments and administration of the loan

We need to be a bank - if we buy on one set of financing and sell with a different set of financing, then we can earn money the same way a bank does.

I did not want this post to turn into a book, so I will close it up.  I got a lot out the seminar - Greg’s stories are very motivational and his deals are very creative. 

On October 06, 2007 at 15:00 PM, you are invited to an Open House at 21430 114th Ave SE in Snohomish. If you are looking for a Single-family property in this area, don’t miss this rare opportunity to visit this magnificent property. For a preview of this Single-family property, check out my site at www.deandretske.com. Please do not hesitate to Contact Me if you have any questions or wish to schedule a private showing.

On October 07, 2007 at 12:00 PM, you are invited to an Open House at 12227 NE 136th Pl in Kirkland. If you are looking for a Single-family property in this area, don’t miss this rare opportunity to visit this magnificent property. For a preview of this Single-family property, check out my site at www.deandretske.com. Please do not hesitate to Contact Me if you have any questions or wish to schedule a private showing.

I attended the Real Estate Association of Puget Sound’s monthly meeting last night.  The meeting featured a panel of attorneys who answered questions from the audience.  There were a variety of questions that got answered - unfortunately, a lot of the issues around SR 1843 (the redefinition of ‘contractor’ that severely limits flipping) remained unclear (see below).

The attorneys who donated their time were:

• Jeff Wells - Bankruptcy
• Randy Redford - Evictions and landlord defender
• Rick Gregorek- asset protection and host of KVI radio show on legal issues
• Chris Benis - legal counsel for Rental Housing Authority
• Steve Anderson - real estate attorney and long time member of REAPS

Each of the attorneys started by talking about an issue of which they thought we should be informed.

Jeff Wells talked about using bankruptcy in a strategic way and as a solution for the ‘bump in the night’.  He gave the example of a mortgage with a balloon payment that comes due just when the market turns down - bankruptcy can allow you to renegotiate the balloon as payments over time.  For the first hour of so of the panel, Jeff joined in several answers to questions with praise to bankruptcy as yet another solution to the question at hand.

Randy Redford talked a bit about the importance of using a professional to do your evictions.  The eviction process is stringent and if you make a mistake, it can often not expose itself until the end - and the only remedy may be to start over.  He performed over 8000 evictions last year.

Chris Benis talked a bit about his experience investing in real estate.  His view is that small scale investing (as opposed to large developments) has been a kind of ‘wild west’ frontier.  The problem is that various groups and governmental entities have seen it as lawless and dangerous and are moving to ‘correct’ this.  This will be hard on us as investors and we will need to educate the groups to keep them from lumping us together with the real outlaws.

Steve Anderson warned us that distressed transactions are getting more litigious.  The media and some lawyers are training the people that seller’s remorse can be profitable.  So, if you buy from a distressed seller and they later decide that you were greedy, they may sue to get some of those profits.  He advocated being very careful about disclosing your profit and using standard escrow processes to prevent charges of collusion.

I did not take complete notes during the question session - several issues turned into discussions and I do not have the note taking skills of a court stenographer!  I will describe here the several of the larger issues raised.

SR 1843

You can read some background in one of my earlier posts - Chris talked about testifying against the changes.  He was the only person to testifying in opposition, though he later told me that the Realtor’s representative was in the room and had been told to not get involved.  Chris said that the panel discussing the law told him bluntly that they ‘were out to get those flippers’ but that he would be allowed to add an exemption for a landlord maintaining their units.  Chris felt that he would not have been allowed to add any language that would favor flipping.  He did agree that the law as written is unclear.

Sue Schindler (audience member) added some information to the discussion.  She is a contractor and learned about the law when she renewed her own license.  She has contacted the sponsor of the bill in Olympia and got some additional background.  Evidently, the push for this law was a development project in Lacey that resulted in some sinking foundations.  The concern was that the new owners could not seek a remedy against the bond of the contractor because the contractor worked for the developer, not the new owners.  I don’t know why anybody thought the $12,000 bond of the contractor would be enough to cover sinking foundations, but that was the incentive to change the law.  Sue has had several discussions with the Department of Labor and Industry about this law and they have not been clear about when a contractor’s license is required.  She has gotten some assurance that they will be able to give a definite answer soon!  Sue is collecting ’scenarios’ that she will submit to L&I - they have agreed to give an answer for each as to whether the property owner will need a contractors license. 

Sue and I had a discussion after the meeting which highlighted another issue with this law and prudent investing.  To mitigate risking all of our investments, most investors will use different entities (LLCs, corporations, etc) to hold different properties.  This way, if a lawsuit attaches to a given property, it does not also attach to every property the investor controls.  Unfortunately, this law describes that the entity that owns the property must be a ‘contractor’, so each of the entities that an investor uses will need its own contractors license, bond and insurance.

This subject was tabled so that we could get on to other questions.  The audience was asked if they would like to be more informed of this subject through an email blast and the majority raised their hands in favor to this.

Fastest Eviction in Seattle

A question was raised as to the fastest method to evict a tenant in Seattle.  Randy talked about the 15 reasons for legal eviction in Seattle and all of these require time.  The fastest method the panel knew of was ‘cash for keys’ - basically pay the tenant to move out and give up the lease.  If the tenant refuses, or demands more than you want to spend, then you will need to find one of the 15 that has been violated and go through the normal eviction process.

Birddogging

A birddog is someone who finds property deals and sells the lead to an investor - they are not a principal in the deal.  Paying the birddog is illegal in WA - only real estate agents/brokers can be paid for facilitating the sale of real estate.  It is commonly done, but it is illegal.

Private Lending and the SEC

The question was about under what condition was it required to file with the SEC when you get private financing.  Private financing is whenever a non-commercial entity loans you the money for a mortgage / deed of trust.  The most common form of private financing is seller financing (where the seller of the property takes some of their sale price in the form of a note).  Another common form of this is to borrow money from a friend or relative to finance a deal.

The SEC requires you to file whenever you offer a ’security’ to the public.  So, the panel’s opinion was that the question you need to ask yourself is ‘how did you solicit the money?’  If you had a previous relationship (friend, relative), then it is likely a private transaction and would not require a filing.  If you did not know the person before, then you are soliciting the public and would require a filing.

Subject To

Property can be purchased subject to underlying financing.  What this means is that the seller gives the new buyer a deed to the property subject to the deeds of trust that insure the previous lenders.  So, if the lenders are not paid and they foreclose, then their claim on the property supersedes the new owner’s claim.  Normally, the new buyer is also agreeing to make the payments on the underlying financing.

The question is whether this is legal and ethical when the underlying financing includes a ‘due on sale’ clause.  Yes, it can be done both legally and ethically.  There is no law broken when the sale occurs because the ‘due on sale’ clause is a contractual agreement that the lender MAY call the note due when the sale occurs.  The lender is not required to do so, and most often will not as long as the payments continue.

The ethical part of this has to do with whether the lender is informed of the sale.  That is part of the agreement between the lender and the seller of the property - it is really the responsibility of the seller to inform the lender of the sale subject to the financing in place.

Conclusion

It was an interesting meeting.  Good questions were asked and I think a lot of people walked away with some good information.  I also think most of attendees had not previously known about the SR 1843 issues and will be watching for more information about it.

I apologize for not covering every question that was asked during the meeting.  If you attended and took note of an important question, please add a comment!

This may seem extreme, but the legislature in Washington may have passed just such a law!  The Department of Labor and Industries proposed some changes to the section of law that defines ‘contractors’ - this is RCW 18.27.010.  The changed legislation is described as 1843-S.SL. 

I heard about this issue at the Flipping seminar that I attended on Thursday (see notes on that seminar).  A lawyer was brought in to discuss the law and the implications of the changes.  He pointed out that the text is very vague on several issues that will make it much harder for property owners (not to mention investors) to stay legal.  One example of this is Section 1, which defines ‘contractor’ and is modified in several ways - including the following:

• Suppose a teacher inherits a house from their parent.  The teacher does not want to keep the house and it is need of repair to bring it up to market condition.  With the above definition, the teacher (licensed by the state) will need to register as a ‘contractor’ with bonding and insurance to repair and sell the property.  The list of professions licensed by the state is quite long and all of them have the same exposure to this kind of violation.
• Even if the teacher hires a contractor to do the work, they will still violate the law if they do not THEMSELVES register as a contractor.  The definition (and later paragraphs) do not give exemption to the owner when a contractor is hired to do the work.
• If an investor buys a house for flip and forms an LLC / partnership with a general contractor to accomplish the work, then the LLC / partnership will also have to registrer as a ‘contractor’.  The definition does not allow entities which contain a ‘contractor’ member to use that registration.
• A landlord evicts a tenant who damaged the property - this is their last straw and they want to stop landlording and sell the property.  However, if they fix it up prior to selling, then they need to be registered as a contractor or they have violated the law.  They might be able to fix it up and hold it for another year before selling, but that means they have a vacant house that must be insured at higher rates and they must still pay the mortgage and upkeep.  Also, the property is more likely to be vandalized when vacant

The law also changes the Exemptions section (RCW 18.27.090) - here are two of the sections affected:

The law went into effect on July 22nd, but the Department of Labor and Industries will be holding meetings in November to draft rules for this ‘proposed legislation’

Sandy Nelson has also written a article on this issue on her blog.  I completely agree with her comments that the elected officials have let us down by unanimously passing this lousy law.

I am surprised that the various lobbies did not oppose this more strongly (if at all).  The Realtor lobby should have opposed this on the grounds that it adds barriers to keeping neighborhoods in good repair.  The contractor lobby (Master Builders Association, etal) should have realized that if every flipper needs to get registered as a ‘contractor’, there is less incentive to actually hire those who currently have contractor licenses.

I can understand the desire to protect the public from shoddy work by novice flippers.  However, this is a bad solution that is going to hurt everybody.

I attended the Flip Seminar today.  The main speaker was Gene Rivers who is a KW agent / team leader / operating principal from Florida. Gene is the only presenter of this seminar and has had extensive experience flipping properties in his market.  He has met the authors of the book  and speaks highly of them.  The authors have participated in over 1000 flips in their market in Texas.  With all of this experience, they have systemitized the finding / analyzing / buying / fixing / selling process.  Gene indicated that one of the most amazing things about meeting the authors was that he realized how un-systemized his own process of flipping had been.  I agree with that sentiment - I have done several flips and this material brings the process into a easily reproducable whole.

The seminar started with a reference to a new law in WA state that requires any flipper to have a contractor’s license.  The discussion of this issue was tabled until after lunch and there is so much I want to say about it that I will move that subject into its own post.

We then started covering the material in the book.  The presentation is tightly connected to the book - indeed, each slide referenced the page number in the book that dealt with the information on the slide.  You can download many of the figures and lists that were presented from the Flip book website.  As I recommend reading the book, my notes will focus more on the pieces added from Gene’s explanations.

Flipping is essential to a community’s health.  There is a spectrum of homeowners - the level of maintenance goes from immaculate to none.  As time goes by, the deferred maintenance on the homes with no maintenance drags down the values of a neighborhood.  The depression of values can be bad enough that it drives out those that maintain their homes - these neighborhoods eventually become combat zones.  Flipping - buying for the purpose of fixing and seling - is the only process that rejuvenates these neighborhoods.  It increases property values, tax revenues, and keeps a community attractive to incoming homeowners.

Real estate agents have an advantage in flipping - they can more easily recover some of the costs of buying and selling because of their commissions.  Additionally, the commissions can be used as part of the downpayment.  A seller contribution to the downpayment is not acceptable to a bank financing the rest of the transaction.

The 80/20 rule tells us that 80% of the real esate business will be handled by 20% of the agents.  The rest of the agents should consider flipping as a way to supplement or earn a living.  It should be apparent that any agent that is doing the work to find people who want to buy or sell is going to also run into properties that are good flipping candidates.  Every one of these agents should invest when tney can and also cultivate a list of investors who can pick up these opportunities when the agent can’t (due to limited financing or time to manage the job).

We covered the book’s description of how to determine the profile of candidate properties - what kind of neighborhood and kind of house.  Schools are the biggest driver of desirability of a neighborhood, so pay attention to them when looking for a candidate.  The range of prices per square foot in a target neighborhood needs to be at least 30% to allow enough room to buy low, fix and still make a profit.

The FHA cap is the benchmark of affordability in any community.  Therefore, it would be a good price target for your After-Repair price of homes.  This allows the greatest number of buyers to be able to buy your flipped house (40% of the market is made up of first time home buyers).

A target neighborhood should have a turnover of more than 10% per year.  Additionally, the ratio of listed to sold houses in the neighborhood should be less than 20% - this results in a neighborhood inventory of less than 3 months.  For example, a candidate neighborhood of 500 homes would have more than 50 sales per year and currently have 10 listings or less.  Also, there should be some ‘pending’ sales - this shows that houses in the neighborhood are currently attractive to buyers.

The material covers ‘must do’, ’should do’ and ‘can do’ types of work.  ‘Must do’ is those systems that make the house habitable and safe.  ‘Should do’ is work that brings the house upto market value.  ‘Can do’ is work that takes the house above market value - this is work that decreases profit because it does not result in more value than cost.  These types of work are discussed expansively in the book and lists that can be downloaded.

I highly recommend attending this seminar if it comes to a city near you!  Gene does a great job teaching it and the material definately will help you with your flips!

I attended the monthly meeting of the Real Estate Investors Association of Washington on 9/10/07.  The meeting opened with a short announcement from Greg Pineo about the free seminar coming up.

Mobile Home Parks

The majority of the meeting was a presentation by Corey Donaldson discussing investing in Mobile Home parks and Self-Storage Facilites.  Corey is part of the Mobile Home University and is a good speaker.

Corey told us a story about Mr. Violi - he arrived in this country in 1961.  He could not speak English at the time.  He started buying duplexes and renting them out.  By the time Corey met him (Corey knew one of the Violi daughters), he lived in a large estate and was living very comfortably.  If Mr. Violi can do it with those limitations, any of us in the room can do it.  It is just doing it with perserverance.

We then heard about Lonnie Scruggs, the author of Deals on wheels: How to buy, sell and finance used mobile homes for big profit and cash flow.  Lonnie specialized in buying used mobile homes at a discount and selling the mobile home on lease-option terms.  Each of these deals resulted in some positive cash flow and the recovery of all or most of the initial investment.  With enough deals (cash flow), Lonnie would leverage his way into a mobile home park.

The mobile home industry has had the worst down cycle in history since 2000.  As the single family home market has trouble, it may cause some recovery of the mobile homes. 

Corey recommended the book:

Evidently, Warren Buffet has recently been investing in mobile home parks.  His rules for investing in MH parks are:

• Buy parks in desert areas with at least 20% vacancy
• Place late model (no more than 10 years old) or new homes on vacant lots in park
• Sell these homes with seller financing

With MH parks, there are 4 profit centers:

1. Rent from lots within the park.  Each lot rented adds directly to the bottom line.  Increases in lot rent do not really change the turnover in the park (moving a mobile home costs $3000 for single wide and $5-6000 for double wides - so hard to justify moving for $5 - $10/month increase).
2. Mobile home sales.  Goal is to buy repossessed mobile homes that are no more than 10 years old and resell these for a profit.
3. Financing.  Goal is to borrow the money to buy the homes and sell the homes with seller financing that has higher interest rate than what we are paying.  This difference in interest rates is financing profit.
4. Increase in property value.  Most parks are eventually turned into single family home neighborhood developments.  This is because as the surrounding areas develop, the value of the park’s property grows high enough to justify converting the park.

Evaluating the investment - Corey usually analyzes parks at a cap rate of 12.  This results in 2 pieces that are summed up:

• Occupied lots - take average monthly rent x 60 x # of lots
• Vacant lots - take average monthly rent x 30 x # of lots

This total is the value of the park.  Average expense of a park are in the range of 35 - 40% of the revenue.

There are about 40,000 parks in the USA.

Things to watch out for:

• Single wide homes are 16 x 80′ today.  However, they used to be much smaller.  So when buying an older park, check on the size of their ’single wide’ lots to be sure that you are correctly counting the number of modern units that you can fit into the park
• Older parks often used 30 amp meters for each lot.  Current homes use more power and if you need to upgrade this, it will not just be the cost of meters - you will also need to update the wiring infrastructure of the park
• Water leaks in the park can really increase your expenses - get the last 2 years of water bills for the park to figure out if there are leaks that you will need to address.

Self Storage Facilities

There are 41000 facilities in the US - 25% of the market is held by the ‘big boys’  (Shurguard, Public Storage, etc.)

There are 3 or 4 generations of facilities - our goal is to deal with 2nd generation facilities.  The prior generation is too hard to upgrade and the subsequent generations don’t have enough profit to cost for their upgrades.   Corey talked about being able to list over 35 profit centers at one of these facilities.  He incentivises his onsite manager by offering a percentage of profits on any additional profit centers that they invent.  Examples of these profit centers are:

• Large portion of revenue can be late fees - be sure to charge them!
• Charge admin fees to sweep unit after clean up / move out and to process paperwork
• Rental trucks or tools
• Moving supplies
• Records storage / destruction
• Fulfillment center - FedEx / UPS / etc.
• EBay consignment
• Car wash
• etc.

Corey manages his facilities (MH and self storage) with remote cameras and GoToMyPC to access the admin computer on site.

Corey’s last recommendation was the book

On September 15, 2007 at 12:00 PM, you are invited to an Open House at 12227 NE 136th Pl in Kirkland. If you are looking for a Single-family property in this area, don’t miss this rare opportunity to visit this magnificent property. For a preview of this Single-family property, check out my site at www.deandretske.com. Please do not hesitate to Contact Me if you have any questions or wish to schedule a private showing.

On September 16, 2007 at 12:00 PM, you are invited to an Open House at 21430 114th Ave SE in Snohomish. If you are looking for a Single-family property in this area, don’t miss this rare opportunity to visit this magnificent property. For a preview of this Single-family property, check out my site at www.deandretske.com. Please do not hesitate to Contact Me if you have any questions or wish to schedule a private showing.

Interested in plans to build a light rail line through Bellevue?  Here’s how you can get on board!

Sound Transit is proposing to extend a light rail line across the I-90 bridge through Bellevue and on to Redmond. Funding will come from the Roads and Transit package on the November ballot.

The purpose of this “best practices” study is to learn what works, and doesn’t work, elsewhere and apply those lessons in Bellevue.

City staff at the open house will explain the study’s purpose, provide information on light rail and east Link, confirm and clarify issues/opportunities heard to date, and receive additional public comments before beginning the case study work.

The open house will be on Sept 13, 2007 from 4-7 pm at the Bellevue City Hall Concourse. 

For more information, please take a look at Light Rail Best Practices

I thought I would pass along this announcement for Fashion Week - though I should probably go to get some advice, you will probably find it hard to find me there.  Enjoy the events!

Source: The Bellevue Collection - No, this is not New York. This is Bellevue, Washington and it’s Fashion Week! From September 14th through September 22nd head to the Eastside for nine days of runway and trunk shows, seminars and fashion-forward nights out for both women and men. Events will be held at Bellevue Square, Bellevue Place and Lincoln Square, collectively known as The Bellevue Collection.

Proceeds from the events benefit a great cause, Susan G. Komen for the Cure Puget Sound .

To see a schedule of events and find out more, The Bellevue Collection

Lime and Mineral Deposit Remover

Hard lime deposits around faucets can be softened for easy removal by covering the deposits with vinegar-soaked paper towels.  Leave the paper towels on for about one hour before cleaning.  The end result will leave chrome clean and shiny.

For Plastic and Metal Showerheads:

To remove deposits which may be clogging your metal showerhead, combine 1/2 cup white vinegar and one quart water.  Then completely submerge the showerhead and boil for 15 minutes.  If you have a plastic showerhead, combine 1 pint white vinegar and 1 pint hot water.  Then completely submerge the showerhead and soak for about one hour.

Hope this helps!

We had dinner tonight at a new restaurant in the Crossroads area of Bellevue - the Black Bear Diner.  It is a chain out of California (www.BlackBearDiner.com).  This location just opened.  We were looking for a simple sit-down dinner and certainly found that here.  The place had a nice friendly, “homey” feel.  Plenty of food - be ready to take home a doggy bag!

The menu looked like a newspaper from 1969.  In addition to dinner, they also have a pretty good breakfast and lunch selection.  We’ll be back to try those.

Oh, they also make fresh bear claws - plain and fruit filled.  I got one to go for breakfast tomorrow.

Give them a try and let me know what you think.

Update:  Jen and I tried this restaurant a couple more times and were disappointed.  The service was quite bad - to the point of not getting the meals ordered - and the food was not good.  We will not be returning.