Monthly Archives: November 2007

This post could have been titled Why You Cannot Trust Your REALTOR.  But either way, I thought we would take a moment and look at a classic case of serial incompetence or dishonesty.  I don’t know which it is.  You be the judge. 

Editor’s Note:  It’s interesting to me that this photo will no longer post.  Hmmm.  I erased the photo on my hard drive after having posted it.  But now the WordPress version will not show no matter what I do.  Of course, I could redo the photo.  But why bother.  The point is still the same.   If you are working with a real estate agent regarding real estate investments in Kansas City, or anywhere, work with an agent that understands real estate investing.  Simple as that.

Let’s look at this actual listing on the Heartland MLS that serves the Kansas City area.  I’ve marked through the address, agent name and info that doesn’t concern you.  Suffice it to say that the agent is one that has been in business for years, sells numerous duplexes, fourplexes, etc.,  Yes, the agent works mostly in the investment side of real estate and still does crap like this.

You will see Gross Income is represented at $31,900, Gross Expenses at $2,640 and Cap Rate as 9.  (To see a good definition of Cap Rate go here.)  If I were an investor looking for a Cap Rate in Kansas City between 8 & 10 I’d be all over this.  I’d give the guy/gal a call.  Heck, if I was from out of state I might even make an offer sight unseen to make sure I got it under contract. 

But is the Cap Rate really 9?  If you followed the link you know that Cap Rate is simply the ratio between cash flow & cost.  Cash flow is determined by adding all the income and subtracting all the expenses.  Let’s concentrate on the expenses here. 

Look at the top right hand corner next to the arrow and check mark in red.  You’ll see HOA dues are $220 per month.  That’s neither good nor bad.  Depends on what you get.  But if you multiply that times 12 you come up with the $2,640 the agent has marked as Gross Expenses.  So we’ve already hit his/her expenses total and we haven’t added repairs, maintenance, capital improvements, property management, insurance, etc. 

What’s worse is we haven’t even totaled all the other expenses he/she has listed!!!  What are those you might ask?  Look at the taxes check marked in red at the top right at $2,856.  Then, just to the left, you will notice vacancy listed as 95%.  Probably not exactly true, either.  But an un-producing unit is considered an expense in my book. 

Just by adding up HOA of $2,640, taxes of $2,856, vacancies at 5% for another $1595, insurance probably around $1,800 and let’s say at least $2,000 for improvements (I’m being kind, very kind – remember the building is 41-50 year old) and we have expenses of $10,891.  Subtract that from $31,900 and you have $21,009 income before debt service. 

Now divide that $21,900 by the asking price of $339,990 (we’ll hope the seller is paying all closing costs) and you have a Cap Rate of 6.2. 

How does that sound compared to 9? 

Listen.  I hesitate to call anyone dishonest or incompetent.  But it can only be one of the following considering this agent isn’t new to the business:

1. A fundamental misunderstanding of how to calculate returns.
2. Choosing to remain ignorant of how to calculate returns on investment property.
3. A desire to bait & switch a potential real estate investor.
4. Dishonesty.
5. Using an untrained assistant to enter information therefore showing a lack of oversight ability. 

I’m not nitpicking here.  This is big stuff.  And it’s consistent through all of this agent’s listings.  Plus, I’m still pissed off the agent didn’t ever call me back on one of their listings despite the fact that I called 3 or 4 times over the course of a 48 hour period several months ago. 

If you are a real estate investor you need to be darn sure the agent you choose to work with is both competent and honest.  You cannot possibly know the latter for sure.  But you can quiz on the former.

I’ve been driving since I was fifteen.  My first car was a 1971 Ford Maverick.  Straight six with three in the tree.  When I bought it the color was primer and all the wheels had standard factory issue.  Well, this wouldn’t do for a 15 year old who already had his driver’s license.  (Actually, it was restricted license for school, work and emergencies.  Since my mom was single and had to work from 9-7 each day and I had two younger siblings, everything was an emergency.)   Some mag wheels, the shifter moved to the floor, fresh paint and holes added to the muffler for that “loud” sound and I was off!

Now, my 15 year old son is learning to drive.  We currently have an automatic Nissan Quest minivan and, of course, my standard transmission MINI Cooper.  He’s learning to drive both.  But the standard transmission is causing him some fits.  He can get it into gear and get going…jerky and bucking all the way.  But go he does.

However, the other day he killed it, again.  Frustration showed on his face and “will I ever master this?” escaped from his lips.

Chris, not to be rude, but you are doing it again!  Real estate investing is the reason both myself and others come to this blog.  We want to learn the in’s and out’s of investing our hard earned cash into an asset that will appreciate and maybe even make a little money along the way to our retirement worth having.  Can you please get to the point?

Okay.  If you insist.  And since you interrupted me I’ll use you as the example.  You are like that young man of mine learning to drive the stick shift.  You’ve read about driving.  You’ve listened to me and many others talk about how they drive.  You’ve even heard of people who can help you short cut the learning process and just plop you down in a new car with little or no effort that will do everything for you. 

However, you haven’t done it yourself, yet.  And furthermore, you’re getting confused as more an more people tell you how they do it.  Adding to that is the fact that you’ve learned and experienced just enough to think you might know what you are doing.  That’s danger time.

Side note, and I apologize for this.  Did you know that most plane crashes occur with pilots who are between 80-150 hours of experience?  They think they know what they are doing.  What they really lack, however, is experience.  

Fine.  Fine.  Fine.  You’re kid is driving.  Planes are crashing.  I just want to invest in real estate!  Can you help me??!!??

Yes.  I can.  And the first lesson is patience, young grasshopper.  Just because you have money doesn’t mean I have just the right property for you at this exact moment.  But I’ll turn it up. 

Why just yesterday I met with a banker who issues new construction loans for residential builders.  He knows of builders in financial straits and he’s going to pass my name along to them.  Maybe there is an opportunity in there, somewhere. 

I also know of pre-packaged properties in the Texas area, if you are so inclined.  Just drop me an email to learn more about that.  Real estate investing is about making a profit.  Whether you are a flipper or rehabber or pre-foreclosure person or better yet, a buy & holder.  The key is to find the right property that meets your criteria for a multitude of categories. 

Don’t rush into your next purchase.  If you are going to do that you can use any residential real estate agent.  I’m here to help you, as an adviser, make the best real estate investment possible at that particular time.