NAREI or RealSource.net?

[Nords]

Yesterday I enjoyed three hours escaping a torrential downpour in Waikiki. We had fresh hot coffee, yummy macadamia nut chocolate chip cookies, & entertaining speakers sharing valuable information with us presumed high-net-worth investors.

Well, maybe the audience wasn't all HNW investors. One guy was heard to ask "What's a REIT?" But surely we were all highly motivated to pay our money to RealSource free ourselves from the cubicle by investing in real estate.

I love a good sales pitch and I wasn't disappointed. RealSource claims to have indexed the nation's rentals by ZIP code and analyzed them by 200 quantitative factors & 100 subjective factors. (300 factors are much more credible than just 200 factors.) They've identified eight areas where rental real estate is ready to give a monthly 8-10% cash-on-cash return plus annual appreciation of at least 13%. (Hint: It ain't Hawaii.) IOW they've already done the analysis and all we need to do is bring money. Guns, lawyers, & Warren Zevon are not required.

RealSource acts as middleman with a few enhancements. They promise to find these deals before the general public (or local insiders) have snapped them up. Most are "not on the market yet" or have been "languishing for the right buyer financing". Some are "C" class rentals in need of rehab to attract "A" class renters. Because RealSource enjoys such a great reputation ("In Salt Lake City since 1989!") they can hook you up with seller's agents, mortgage brokers, 1031 exchange experts, property-management firms-- whatever you want!

Once you've bought a rental property, either on your own or with a TIC group, they're here for you. You're free to go your own way but they're happy to help! They'll find you a property manager and you two can use the RealSource website to enter/review monthly QuickBooks reports. RealSource will mount a camera at your building with a broadband connection to allow you to "keep an eye" on the landscaping & exterior maintenance. Your property manager can even walk around with a camcorder showing you the apartment repairs & improvements (as far as you can tell from three time zones away). All these enhancements are available for a "low monthly fee" that presumably is barely noticable alongside the torrent of cash flow.

After a couple years, hypothetically when you're confronted with a 50-100% appreciation in your properties, RealSource will take you on a tour to a new "top eight" area where you can put your equity "back to work" with a 1031 exchange into something bigger, better, and even more likely to appreciate. The speaker actually had the chutzpah to show "real-world performance" of a $100K investment growing to $1.3M in 10 years (28% APY).

For $8250.00 you're a member with access to their website data and a week-long "property tour" to an area of your choice. You pay airfare & lodging (plus an additional $785 for your spouse) while they provide food, bus tours, & meetings with your new team members.

The realtor who "invited" me to this meeting went on a tour in March 2005 as an observer-- he wasn't going to invest. By the end of the week he couldn't take it any more and he put $200K into a TIC with seven others to rehab an apartment building. They were in business by June and receiving 10% cash flow when Katrina hit. Now he has a different batch of insurance/construction problems and, since the project was 80% financed, an entirely new set of cash flow issues. OTOH $200K is a tiny fraction of his net worth so he's not exactly laying awake nights.

He shared his compensation arrangement with me. He owns one of the island's busier real estate agencies and has turned over the day-to-day operations to his kids-- one handles the listings and the other the property management. He & his wife have spent the last decade or so traveling to realtor conventions, training/sales meetings, and college reunions. (He's never going to retire, but that's a topic for a separate thread.) When RealSource came along it fit right into their traveling lifestyle. For every customer he brings to RealSource (one who actually buys a property, not just pays the $8250) he gets a $1000 finder's fee plus a chance to sell that customer's Hawaii property, perhaps even handled via his agency's 1031 exchange staff. He says he's already earned $14K plus a dozen listings, so the sting of that $200K Katrina hit is healing quickly. RealSource is rumored to get 22% of the property's sales commission as well, so they make a bit more of their money from the realtors selling those rental units than from the membership fees.

The RealSource staff briefly mentioned the National Association of Real Estate Investors, which appears to be a guy named Marc Garrison who wrote a book & gives presentations. I'm not sure if RealSource is a Garrison company or just one of many busy NAREI members. I saw one NAREI logo before the RealSource publicity machine took over.

Has anyone invested with RealSource or NAREI or a similar group? I heard plenty of success stories, but I'd love to hear from the other side of the experience.

 

[Arif]

Nords,
There are tons of other companies doing 1031s for clients without the hard sell and 8k in up front fees.

I love a good sales pitch and I wasn't disappointed. RealSource claims to have indexed the nation's rentals by ZIP code and analyzed them by 200 quantitative factors & 100 subjective factors. (300 factors are much more credible than just 200 factors.) They've identified eight areas where rental real estate is ready to give a monthly 8-10% cash-on-cash return plus annual appreciation of at least 13%. (Hint: It ain't Hawaii.) IOW they've already done the analysis and all we need to do is bring money. Guns, lawyers, & Warren Zevon are not required.

Currently TICs are returning less than 7% with good quality tenants. So if they are getting 10% cash on cash return (per month) then I'd have to ask where is the risk at. Believe it is there somewhere and it's the investors job to find it. BTW- Are they basing those figures on the recent run up in RE appreciation? Do they expect that to continue?
Their scrub by zip code is suspicious as well. When I do comps for my rehabs I rarely look at homes that are over a quarter of a mile from the subject property. I don't know about other areas in the country but in GA you can have 500k properties in the same zipcode as 50k shacks. Not sure if you can quantify the expertise that is needed to invest in a particular area even if you are using 200 factors. Did they go into detail as to what will drive the returns they are anticipating?
I like to do my own due diligence on properties especially when I'm personally guranteeing it.

So did the agent lose his property in the Katrina? If so how is he making mortgage pmts on it with no tenants?
Funny thing with RE, after you figure out all the right questions to ask by then you could be knowledgeable enough to find your own properties without the help of these snake oil salesmen guys

 

[Nords]

Nords,
There are tons of other companies doing 1031s for clients without the hard sell and 8k in up front fees.

Yeah, but I'll bet that every one of them would love companies like RealSource to bring them more trusting clients. Stott does them, of course, as did the "guest" 1031 broker from OREXCO-- she parachuted in, spoke for 10 minutes, and then scampered away to "another meeting". She left behind plenty of business cards & glossy brochures.

Believe it is there somewhere and it's the investors job to find it. BTW- Are they basing those figures on the recent run up in RE appreciation? Do they expect that to continue?
Their scrub by zip code is suspicious as well. When I do comps for my rehabs I rarely look at homes that are over a quarter of a mile from the subject property. I don't know about other areas in the country but in GA you can have 500k properties in the same zipcode as 50k shacks. Not sure if you can quantify the expertise that is needed to invest in a particular area even if you are using 200 factors. Did they go into detail as to what will drive the returns they are anticipating?

One of the attractions of these guys to Hawaii-- where the claim to have been no sooner than 10 years ago-- is that most local owners (including us) are only seeing 5-6% cash-on-cash return. George said that most owners who ask Stott to manage their properties are barely getting 2-3% before they seek professional help.

Remember the Janus commercials of the '90s, showing their fund managers crawling through fiber optic conduits checking out their potential telcom investments? That's what came to mind when these guys talked about their national data analysis.

One of their examples was a Tulsa suburb near a medical center. RealSource learned that the med center was expanding and would create more jobs. Investors bought several nearby (conveniently available despite the expansion plans) rental buildings with "C" & "B" quality amenities (& presumably tenants) for $50K/unit and then rehabbed them. (RealSource helpfully located expert contractors, managers, etc.) The rehab was so successful that it not only attracted medical center employees but many high-quality tenants from nearby "A" (but older) rental buildings. When Tulsa peaked just 3-4 years later, the owners sold at $150K unit and presumably parked their paper profits at OREXCO's 1031 accounts while they moved on to other RealSource deals.

The software is a screening tool followed up by their research weasels. It's their hard work (and their contacts with the local realtors, property managers, civic authorities, development agencies, etc) that locate the good deals and then drive the returns. The NAREI website also goes into the thoughts behind the exquisite timing with which these deals are brought together and then subsequently sold at humongous profits.

So did the agent lose his property in the Katrina? If so how is he making mortgage pmts on it with no tenants?

We didn't get into the details, although I'm going to have to follow up on that. I don't know what a mortgage company does when one of their customers is wiped out by a hurricane-- back off and give the insurance companies time to work it out? If George was one of eight guys putting in $200K for a property bought at 20% down, I'd hate to be liable for that mortgage payment. Although I suspect George could probably handle a $6.4M mortgage with the collateral in his brokerage account.

Funny thing with RE, after you figure out all the right questions to ask by then you could be knowledgeable enough to find your own properties without the help of these guys.

Yeah, but then you'd have to do your own research and fly all over the country and talk to people and work out the details all by yourself and maybe even get your hands dirty. It's so much easier to get rich when you can just write one check to RealSource now, sit on a bus & sip pina coladas for a couple days, and then start cashing your rent checks a few months later...

I remember a couple other posters were involved in TICs and I wondered if this was a RealSource deal or if there are a bunch of companies flogging type of investment. RealSource brought at least eight people to Hawaii to talk to no more than 50 of us (plus maybe another 20-30 on Kauai) during a week of meetings and I saw zero publicity except through Stott's company, so it seems as though they hardly lack for clients.

I was also impressed that the sales guy's second slide-- five minutes into the three-hour presentation-- simply said "$8250". There wasn't any suspenseful buildup or "What would you pay for?" crap or even any "If you act now we'll knock $2500 off!". They laid out the price, told us what we'd get for that, passed out the forms, and then tried to catch all the credit cards that were thrown at them. Maybe they recognize a hard sell when they see me (or maybe they didn't trust a ponytailed surfer who was available at 9:30 on a Wednesday morning) but there was no fuss or pressure. Their attitude was "Take it or leave it".

Frankly, after seeing the response across our small crowd's demographics, the only question I really wanted to ask was "Is your company publicly traded on a major exchange, or are you looking for equity investors?"

I don't know what concerned me more... seeing 20-somethings who didn't know what "REIT" stood for, or elderly (late 80s) investors who clearly should be putting their money in anything else.

My father-in-law will be sorry that he doesn't get moving before 10 AM. He would have enjoyed this one!

 

[cute fuzzy bunny]

We didn't get into the details, although I'm going to have to follow up on that. I don't know what a mortgage company does when one of their customers is wiped out by a hurricane-- back off and give the insurance companies time to work it out?

Most mortgage companies offered a few months 'grace' period. I heard a month or two ago that the grace period was over.

I guess a lot of folks will just tell them to foreclose on the lump o' mud and call it even...

 

[brewer12345]

  I don't know what a mortgage company does when one of their customers is wiped out by a hurricane-- back off and give the insurance companies time to work it out? 

It depends. Residential lenders have been heavily pressured by the authorities to back off and give everybody some time to work things out, especially with it unclear in many cases if homeowners insurance will actually cover much of the losses. For commercial properties, I suspect it depends a lot on the lender. If we are talking about a conduit lender, foreclosure is probably a couple of months away from the last payment made. A bank might be inclined to work things out. A life insurer that has been doing this for a while and sees a happy ending might be even more patient.

 

[Martha]

My experience for commercial properties is if there is insurance coverage the lender will be bugging the insurance company to pay up. Lenders also require insurance, including flood insurance so there should be coverage. Losses that are total tend to get paid quickly. If the loss is not a total loss, things really can drag out. Lenders are generally patient provided that it looks like they will be paid in the end.

When I write commercial mortgages I have detailed provisions dealing with destruction and partial destruction of the commercial property. Depending on a number of variables, the lender often allows or even encourages rebuilding. Generally the mortgages I write allow the borrower to decide to repair damage if the damage is not over a certain dollar amount and the loan to value ratio is maintained. If the damage is large, the lender has the right to deny consent to rebuilding and the lender can then take the insurance money. Neverless, often the lender allows the property to be rebuilt or repaired, holding the insurance money and distributing it to contractors much like a constuction loan as repairs are made.

If there isn't insurance coverage or iffy coverage because of no flood insurance, then all bets are off.

 

[cute fuzzy bunny]

http://www.bankrate.com/brm/news/mortgages/place3.asp