But still, there are some key, noteworthy shifts we should all be aware of. So I’ve decided to post a few of them in a series I’m calling “New Market Rules”.  I hope they’re helpful to you, and I’d love to hear a comment from you at the end if you don’t mind.

So (ahem) here’s part 1…

Why MAO Can Be a Moving Target

If you’ve been around the investing sphere for even a little while, then you know that MAO is most certainly NOT a tasty white sandwich condiment (or French fry dip if you’re from across the pond).

It’s a staple formula investors have used for years for calculating the most you can offer on a residential flip deal.

The classic and widely accepted MAO formula is:

ARV x 70% – Estimated Repairs = MAO
(ARV is “After Repair Value” & MAO = “Max Allowable Offer” )

And of course, if you’re a wholesaler, you’ll want to slice your wholesaler’s fee off that amount too.

But in a squirrely market like today’s, things aren’t so cut and dry anymore, are they?  Some longstanding rules are being bent or broken, and formulas (like MAO) are often being retooled to reflect the realities of a staunchly buyer’s market.

Specifically I’ve noticed more and more of us investors (myself included) are now tweaking the 70% in the MAO formula to be 65%, 60% or even less.  And it’s basically because we’ve gotta be more conservative these days.  To put it simply, you need a better buffer, and if push comes to shove, you gotta be able to liquidate at a lower ARV and still make some coin.

The “moving MAO” became glaringly obvious to me during the REI Deal Evaluation Intensive, as I grilled a bunch of my investor-friends from across the country about how they’re currently analyzing deals in this market.  It was really interesting to see the array of MAO variations they used in their own local arenas.

The Enhanced “Localness” of Real Estate

You’ve probably heard it said before that, just like the weather, all real estate is local.

What this means is, you’ll never hear the weatherman say “The average national temperature is 65 degrees today!” or “Today’s high in California will be 82 degrees!”  True as it may be, that’s just crazy talk.

In the same way, there are unique real estate micro-climates in every city and town across the U.S.  And whatever the national trends may be – whether booming or busting – what should matter most to you is what the market conditions are in your region, town, or neighborhood of choice.  Never ignore the local market place.

This is not something new – real estate has always been a very local and relationship driven business.  But it’s truer now more than ever, my friend.  And because of this, in today’s arena your MAO formula may well need to be tweaked and adjusted based on what your local market (or even the neighborhood/school district) requires of you.

Said another way, you gotta get to know what your market is asking for…which means knowing the numbers in your market really well (recent comps, pendings, average DOM, etc.) and then also knowing what other local investors are successfully accomplishing in your market.

If you know your market numbers well, and what other investors are successfully doing in the arena currently, then it becomes a matter of reverse engineering a killer MAO for yourself.

The Bottom Line

Beware, the classic MAO may not be the sure bet it once was for you.

I wish I could gaze upon my crystal MAO ball and tell you exactly what formula your local market is asking of you.  But you, my friend, will need to uncover that for yourself.

Use the classic MAO as a starting point, do the work of asking your market what it truly wants of you, and tweak it from there.

What’s Next?

Well this is my first “New Market Rules” post.  I’ve got a few more in mind, such as…

• New Market Rule: Slow and Steady Gets His Clock Cleaned
• New Market Rule: Knowing Your “Fast Sale ARV”

But ultimately I’m not sure how many I’ll end up doing – Honestly it kind of depends on how many “new rules” I can systematically think of when I’m in blog-writing mode.

But hey, I’m wide open for your input!  I’d love to hear your thoughts on this post, and also if there are any other major “New Market Rules” you’ve identified, please feel free to share them with us in the comments below.

My best,

a

And by “noobs” I mean newbies.  I.E. anyone who’s been at this real estate investing thing for a couple years or less. If that’s you, then this post’s for you.

Truth be told, there’s is there’s a heap of things I wish someone had shot straight with me about when I first got started in this game back in Y2K.  And ah boy, the headache and heartache it could have saved me.  Oh, and money.  And the TIME.  I sure as heck would have gone a lot further a lot faster if I’d had a clue on some things.

So if you’re a little green – God love ya – let me do you a solid and share with you a few things I wish I’d have known. I can think of a bunch more, but I’ll start with three things for now and go from there…

Thing #1 - Avoid First Deal Desperation

Here’s something I’ve heard from new investors over and over through the years…

“Heck, I just want to do a deal!  Even if it’s only for the experience and to show myself I can get one done.  I’d even be OK just breaking even on it – it would be worth it to have the experience of doing a deal!”

Nope.  (BUZZ!)  Sorry, wrong answer.

Man, I remember all to well the wonder years of being a green, wet behind the ears investor. So eager…so hungry to get out there and slay my first dragon.

That hunger is awesome.  Embrace it.  Be motivated by it.  Let it drive you to taking action.  But watch out, because it’ll also totally mess with your head and cloud your judgment if you let it.

Let’s be crystal clear about something: You’re not in this business to do deals, you’re in this to make money.  

Don’t let your hunger to “just get a deal done” fool you into stepping into a marginal (or even bad) deal just for experience’s sake.  Over the last decade plus, I’ve been friends with, mentored, partnered with and otherwise crossed paths with many, many new investors.  And trust me, this is a mistake and will almost always end up biting you in the butt.

Moral of the Story:   Yes, work hard to get that first deal done.  Notching that baby into your belt feels super, and it’s a huge milestone.  But make sure you have a clear picture of what a good deal is, stick to that picture, and keep “making money” top on your list of priorities, second only to “maintaining integrity”.  Learn your market and the fundamentals of analyzing profitable deals, and then stick to the wisdom of good, common sense numbers, even on your first deal.

I’m not saying don’t take risk…but don’t let hunger make you fool-hearty.  Trust me, you want to feed yourself some wins early on, and that means making money, and not just breaking even for the sake of “experience”.

Thing #2 – Choose Your Local Mentors Very Cautiously

If you’ve been around here for a while, you may have heard from me before about my first local mentor, and how he took me “under his wing” to the cleaners.

Understand, I take full responsibility for my own actions; I’m not looking to blame others for my mistakes.  But also the fact of the matter is, I was so green that I just didn’t know what I didn’t know.  And that makes for a fairly easy target.

Yes, I learned a lot from him.  And for this, I’m earnestly grateful. But I also got taken to the cleaners……

• As it turns out, those patch-n-paint rehabs he was letting me “steal” from him at 80% of appraisal – well they weren’t rehabbed all that well after all, attested by how they started falling apart within a few months of buying them.
• And all those second mortgages he took back and assured me he’d simply forgive?  Turns out that was loan fraud.  Yeah, OK, wow.
• It also turns out $600/month rent minus $400/month PITI does NOT really equal $200/month “positive cash flow”.  Go figure. Repairs? Maintenance? Reserves?  Nah, who needs ‘em…
• Turns out buying his poorly rehabbed houses all over God’s creation was not actually the overall best investment or property management strategy.

I could go on and on.  Long story short, I cozied up to the first real investor I met who fogged a mirror and seemed to genuinely take an interest in helping me.  And in the end he saw me for exactly what I was to him: A naive noob he could “take under his wing” and sell a bunch of his crap to under questionable (sometimes illegal) terms, until I finally one day figured out the difference between my butt and a hole in the ground.

It took me literally years to recover from this one, seriously tough class in the school of hard knocks.

Moral of the Story: Don’t get starstruck by the first real-deal successful investor you meet.  Just because someone’s a successful investor and is willing to “take you under their wing” doesn’t mean they’re a good mentor or even have your best interested at heart.  Don’t get in bed too quickly and if something seems unclear or even a little off to you, don’t be embarrassed press into it until you really understand it.

No , I’m not saying “trust no one.”  What I’m saying is, “Trust cautiously, and verify well.”

Thing #3 – Don’t Be an Education Junkie

We’ve all heard it a thousand times by now: “Smart investors invest in their education.”  And it’s true.  As the great Brian Tracy aptly said, “If you think the cost of education is expensive, try the cost of ignorance.”

But sadly it’s also become the enchanting mantra of everyone who’s got the latest and greatest course or bootcamp to sell you.

Here’s another important truth to consider:

There’s a big stinkin’ difference between wisely investing in your education and buying, BUYING, BUYING whatever the latest bright shiny object happens to be in front of your REIA group or on your computer screen.

Yes, investing in solid educational products can absolutely slash your learning curve and hand you the keys to the castle.  But it can also totally overwhelm you, suck your life away and drain you dry of thousands and thousands of dollars if you let it.

Ah, bright shiny object syndrome…

As hard-wired entrepreneurs, we’re all prone to it.  And oh, the horror stories I’ve heard from far too many who’ve been to a “free seminar” only to be convinced to drop $25,000, $35,000 or more on “education” they can realistically pick up at their local library.  It’s a crying shame.

My advice here is simple: Yes, be willing to invest in your education, but have a plan, set a specific education budget and have some self-control.  Know that most REI product are expertly marketed (and nothing’s wrong with that) and that they’ll most likely hit every greed gland and pain button you’ve got.  But even still, resolve to resist the endless temptation of the next bright shiny object.

My general rules of thumb are… 

• Watch out for the “free seminars” held in hotels:  They’re almost always following the same formula, designed to lead you down the same type of sales funnel…one that gives you as little as they can get away with, while extracting as much as possible from your wallet, for as long as they can keep you hoping and dreaming.

• Watch out for the credit limit scam:  Don’t ever buy something from someone who shared with you the secret of how to raise your credit limits as part of their presentation (hint: they’re going to be asking you to pull that freshly raised credit limit out for them a little later)

• Watch out for obscenely high priced education:  Never give in to the guys who price their stuff in the $10,000 and up range.  I mean seriously… that’s just too much.

• Start cheap and slowly move up: Start with books you can get the library or Barnes and Noble/Amazon.  That’s where I started, and you’d be surprised how much you can learn there.  Then gently move up to courses in the $97 to $497 range.  Then, once you’ve found your niche to focus on, go ahead and invest a few thousand into something you’re really going to commit to focusing on (i.e. bootcamps, large courses, etc.)

• Consume quickly, then give yourself 90 days:Once you’ve made a noteworthy investment into a piece of core or continuing education (in the hundreds or thousands), DO NOT let it sit on the shelf.  Don’t procrastinate.  MAKE YOURSELF GO ALL THE WAY THROUGH IT AS QUICKLY AS POSSIBLE. Then (next) give yourself 90 days to actually give it a fair shake…meaning actually give the concepts you’ve learned a try and see how they suit you.  Then you’ll be in a much better place to judge whether or not you need to invest in more education yet, or hunker down with blinders on for a while.

Moral of the Story: Again, I’m 100% in favor of investors paying for quality industry education.  But I’m also tired of seeing so many of us addicted to buying courses and endlessly pulled along by the ring in our noses to whatever today’s hot offer happens to be.  There IS a better, wiser way, and it involves some self discipline, common sense and frankly, putting on blinders when it makes sense to do so.

Anything You’d Like to Add?

Heck, I could go on and on, but I’d love to hear what you think.  Leave a comment and let me know your thoughts, and if you want me to follow up with more things like this I wish I’d known early on.

a

And while there I got the chance to go see a bunch of Craig Fuhr’s rehab projects one afternoon.

Let me just say…

.

There’s nothing like spending a day with the Fuhr.

I say this because…

1. Craig is hands-down the BEST rehabber in Maryland…
2. He’s ridiculously entertaining…
3. His beaming smile and shining bald head gleam like the morning sun…
4. And he’s a dear friend.

So anyways, here (below) is some video I grabbed of his “Haunted House” project (he has pet names for all his projects) I think you’ll enjoy and might even learn a little something from.  Stuff you’ll hear us talk about includes:

• How he’s dramatically changed a functionally obsolete layout
• Why he turned a kitchen into a laundry room and a bedroom into a kitchen (wha?)
• Why it’s called “The Haunted House”
• Which “Craig Fuhr Special Touches” have been added, and why?
• The pièce de résistance (probably sells half his houses)
• Hardwood vs. Carpet? (and why)
• How to get the “subway feel” with your tile
• How to drop your iPhone in a shower
• The numbers on the deal (i.e. how much he’s gonna make)

We also cover “The Big Three” for today’s market:

1) Buy houses where people want to live
2) Create overwhelming value
3) Understand your pricing strategy

Yeah admittedly we’re both a little corny, but hey, that’s really just the way we are. You’ll probably chuckle a couple of times at least, even if only out of sympathy.  So this is his Haunted House rehab…

http://www.youtube.com/watch?v=NabNJyAd35Y

Now please do this next:

Now that you’ve beheld the clip above, please leave a comment below with 3 things:

1. Ask any questions/comments you have for Craiggers about the deal. (I’ll make sure he answers)
2. Give something you double dog dare him to do when his TV show starts shooting (Oh, didn’t you hear?  He’s just signed on for a big, fancy TV show…so we can all say we knew him before he got famous
3. Find a way to somehow mention a forest creature in your comment

Don’t ask me why. These things just entertain me. Craig will most definitely be stopping by to see your comments…so be creative. Heck, be insulting if you like. Let’s all have fun at Craig’s expense for a bit.

OK…GO!

a