What is the ’Greater Fool’ Theory and how does it impact today’s market?
The prices of houses are going thru the roof in many markets. How will it affect flippers? Lou shares a recent property deal he did which was ‘double-flipped’. What is the ’Greater Fool’ Theory and how does it impact today’s market?
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Timestamps:
0:01 – Introduction – “ What’s happening in this flipping crazy market?
0:34 – Happy Independence Day!
1:51 – Massive Passive Income Event
4:00 – Wins of the week – 3 new members of PTHO
6:44 – The Greater Fool Theory
11:56 – One-day event for $1 on July 10th – https://www.WealthBuilderWorkshop.Online
16:20 – Street Smart Tuesdays at 5 pm ET – Tell us the things you want us to talk about! Questions for Lou:
16:35 – Is this the right time to buy?
20:08 – If we have a property management company to manage the properties then how does the money flow?
21:50 – In Washington state, the real estate market is very hot and it’s been years now. There is a law put into place so people can’t do what we used to do. How can we make money like that? People don’t give houses away in WA state. Have you developed any other strategies? What are the best states to do the work you like to do?
25:24 – Is it better to flip or hold in today’s market?
31:09 – Lou’s parting comments: Always be ready to learn and get new information.
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https://streetsmart.mypodcastworld.com/11196/the-flipping-real-estate-market-is-crazy
The Flipping Real Estate Market is Crazy!
Lou Brown
00:06:09
We had several other things happen. In fact, I’m going to call this one, the greater fool theory.
So the reason I’m saying that is because we sold a home on Friday and this home, let’s just say, has seen better days. We bought it cheap years ago and we’ve rented it to an elderly lady and she paid and paid and paid and paid. She was on our Path To Home Ownership. And eventually the house just got into such bad shape in terms of the floors were full of rocks and what have you. And she had the thing packed and packed. And we finally decided, “Look, we don’t feel good about you living in this home anymore.” So we just encouraged her to find another, which she did. She found another place to go. And we got in and started working on the house, shoring it up. We put it on our Path To Home Ownership Program. And we knew that it was in a regentrification neighborhood. Prices were going crazy in these neighborhoods.
Most people were either tearing down the houses or they were taking the house and adding on square footage and what have you. So we knew that the time was right and ready for either one of our Path To Home Ownership people that would come in and do all the work on the property or that someone would come along. Well, sure enough, a wholesaler came along and bought that house from us for what we wanted for it, for one of our Path To Home Ownership folks. Sometimes you don’t turn down money when they wave it in your face. We sold that home. And I got notice from the closing company that said, “Now, hold on, Lou, there’s actually several closings on that home that day.” I said, “What do you mean? There are several closings? I mean, we’re selling it to this wholesaler.”
And I knew that he was going to flip the contract. They said, “Oh no, that’s not what’s going on. They said he has sold it to someone else who sold it to someone else who’s actually closing off alone. And so their new loan is going to pay the one who’s paid. The other party, who’s paying the other party, who’s paying you.” I said, “Son of a gun.” This is a crazy one market we’re in right now, just a crazy market. So I sold the house for $150,000 and the next one sold it for whatever he sold it for. And the final buyer paid $171,000 for it. So that’s just the sign of the times. The greater fool theory. Maybe I will tell you that we’ve seen this before, where houses were just jumped, jumped, jumping like crazy. And then all of a sudden when they cut out the lights, when they pull out the chairs and the music stops on the musical chair in the game, all of a sudden it crashes and burns and there’s no financing and there’s nothing that can be available.
So you got to know, I’m going into my fifth real estate cycle. So I know what to look for. I know what I’ve seen before, and I just want everybody to be prepared for what’s coming. There’s definitely going to be an experience where they’re going to turn out the lights and cause us to look at things from a different point of view. So I just want you to be aware of that. And I want you to know that there’s an opportunity that’s around the bend, but in the meantime, there’s great opportunities as well. I’m working with several people to get them into homes right now. We’re actually finding properties for them. And I’m having real estate agents bring me customers, and they’re finding the properties for these customers. So these are amazing times and it matches exactly what I’ve been teaching for years that you do need an exit strategy.
You need a plan that can work extremely well. If you are aware of what the market is and what the market does, then you position yourself in such a way that your risk level is the lowest it could possibly be. And right now I’m strongly advising people to pay attention to their risk. Because once this thing changes, boom, it’s going to be like, they cut out the lights. You’re not going to get any warning. It’s just going to be all of a sudden one day, it’s not working and everybody’s going to be looking at everybody will say, “Well, I didn’t get the memo. I didn’t get the memo.” Well, just know that there is no memo. It just happens. And once it happens, then we shift into the new market and you can be guaranteed that what goes up can come down and will come down. So be prepared for that. Be prepared for the opportunities that are definitely coming our way.
Scott Paton
00:16:24
So we had a question from Ms. Queen, which I think is excellent: “Is this the right time to buy?” And that was actually something I was thinking about, too, because I know a number of people who bought Bitcoin at 30,000 and then it dropped to five and then somebody else bought it at like 59, 9, and it dropped to 30 something or twenty-five, and of course they’re crying all the way down. So is this the right time to be buying houses? Like, are we at the top of the market?
Lou Brown
00:17:05
It’s a fabulous question because I had a wonderful conversation with a real estate agent just on Saturday. We had such a great conversation and she, her client, and I had a conversation by phone and it turns out her client has $200,000 to put down. I thought it was a hundred thousand dollars, but I went back and read her application. By the way, she’s already submitted her application. We’ve already been able to screen her application. So we know where she stands financially. And the answer is, this is a great time to buy when you have a customer. So imagine you have a customer with $200,000 to put down and you can verify their income. And you find that this customer can actually qualify for a million dollar home.
Now, imagine that you can buy that million dollar home for say 7, 8, 900,000, just some number below a million dollars. I’ve already explained our business model and explained that, “Hey, we cannot buy it for one price and sell it for the same price.” We do have to have a markup in there and listen, as long as I’ve been doing this, nobody has a problem. Nobody has an issue with it and you are their lifeline. You’re their safety net. You’re the ability for them to purchase a property and have write-offs that they can use on their tax returns. So it makes perfect sense for them to do it. Well, sure enough, the agent that brought the buyer is now finding a property for me to purchase for the buyer to move into. So just think about that. I’m not worried about this market at all because the way we do business is different from a traditional real estate investor.
Traditional real estate investor goes and finds the property first. They fix it up to their own tastes, second, and then they put it on the market and hope they find a buyer who likes their taste and likes the location that they’re in. We do it completely differently. We go find the buyer first, and then we look at their complete financial situation. Then we go find a property. In this way, you’ll be able to take advantage of that in your own world because you’re going to be shocked and amazed how many customers there are out there that you can serve. You can make a big difference in their lives, simply by finding out what they want, how much they can afford, and then going and finding the property for them.
Scott Paton
00:20:04
Lou, we have a follow-up type of question from Mary Owens. “If we have a property management company to manage the properties, then how does the money flow?”
Lou Brown
00:20:18
Ah, well, Mary, you can have a property management company. And in fact, a number of my clients are property managers. So they love our model of management and they actually offer that to their clients and they say, “We can manage your property the traditional way,” which means a rental. And we can collect the rents and take out for our fee and also take out for property taxes, insurance, and your mortgage. And whatever’s left over, we send that to you. Now, that’s typically how the money flows. With our model though, we have boosters in there, profit centers. And I think a lot of property managers are very, very attracted to our model because it makes perfect sense for them as a manager, they can make a fee on that. And it makes sense for their clients because their clients can make so much more with our model than the traditional rental model. So, Mary, that’s how the money flows. And hopefully that answered your question.
Scott Paton
00:21:44
I think that was a great answer, Lou, and we have another question from Evie. “In Washington state, the real estate market is very hot and it’s been for years now. There is a law put into place so people can’t do what we used to do. How can we make money like that? People don’t give houses away in Washington state. Have you developed any other strategies? What are the best states to do the work that you’d like to do?”
I guess that you don’t have to work in your backyard with your system. You could be working in ideal markets, even if you’re not living in those ideal markets.
Lou Brown
00:22:24
Exactly. Not only can you do that, but a number of our licensees do exactly that, whether it’s in another part of their state or any other state, because we don’t put restrictions on our licensees, which are Certified Affordable Housing Providers, they can be anywhere in the country and they can offer their services and their benefits anywhere in the country. So it’s a really great question – Can you invest in other parts of the country? The answer is yes. Are there more attractive markets? Well, I would say it depends on what you’ve done locally first, because locally you certainly can find people that can qualify for loans. You can find people that can’t qualify for loans. You can find people that have significant down payments like I was just sharing with you. So certainly finding those folks locally and serving them can work and does work. Now, as far as laws go, let’s read the law, let’s see what the law says. It may or may not be possible. And what we found is in states where there’s adjustments that we need to make, we make those adjustments and we can make those adjustments for folks. So we just need to look at what restrictions you would have and then act accordingly.
Scott Paton
00:23:48
Just to follow up on that, Lou, you’re in the beginning process of a potential Washington state deal and you’re in Atlanta, Georgia. So I guess if you went over maybe one or two states, you’d be as far away from Washington state as possible to be in the continental United States. Obviously you can’t finish that deal, right. Because it’s just too far away.
Lou Brown
00:24:17
Well, I’m about five hours away from there. I got referred to someone that is in Washington state. We were working on this deal, literally, last night and this morning. And certainly there is the opportunity to serve them and they have the ability to put a significant down payment. In fact, their down payment is a hundred thousand dollars and they have sufficient funds to do a closing and what have you. So definitely, and I guess this is what’s so fascinating about the model that I’ve put together is that the customers that love you will go find the properties and bring them to you. And that’s exactly what’s going on right now. Now in that example, with that significant of a down payment, hey, they’re going to be getting the deed to the property. They’re going to be getting a mortgage on the property. So it’s certainly going to fit any laws that I’m aware of. And yes, we can do that in Washington state.
Scott Paton
00:25:20
We have a question from Erica – “Is it better to flip or hold in today’s market?” And before you answer that question, we had someone else ask a question just before her, “I’m not sure what a flip is. So can you explain flipping versus holding?”
Lou Brown
00:25:39
That’s a great question. What’s a flip? Well, that’s where you are putting a property under contract. You may close on it, but you’re going to flip that sale quickly to a new buyer and your whole game. Your whole plan is simply to make that difference between what you put it under contract for and what you sell it to a new buyer. Well, generally that means that you have left some equity, sometimes a very significant amount of equity, on the table for the new buyer to enjoy. That’s why whoever bought mine, flipped it. And then the next person flipped it out to their buyer because there was enough equity in that deal, in that neighborhood for that particular buyer to buy. And I guess their numbers made sense to them, which is great. But that’s what a flip is.
It’s the difference between what you put it under contract for and what you sell it for traditionally that there’s enough equity above that for them to make money as well. Is this a good time to flip or is this time a good time to hold? Well, I’m always looking at every deal with that in mind, because it’s a danger that people actually tell the deal what it is instead of letting the deal tell them what it is. The customer, my client, tells them what it is. Well, don’t do that. Don’t tell the deal what it is, let the deal tell you what it is. And in my world, that means that a lot of properties that could be flipped, could also be held and holding to me, is the key to the kingdom.
Now that house that I sold for $150,000, well, that’s not the whole story. Over the years, we collected $900 a month or whatever the number was for years and years and years and years on that property. And we only paid, I think, $60,000 for it. And then we held it for years. We received income for years, and then we flipped it for $150,000, but I would have been just as happy if somebody had come in and said, “I want to buy this property on your Path To Home Ownership Plan. And will you be the bank for me?” because that’s what we do for our clients. I would have been just as happy with that as with the flip.
Scott Paton
00:28:18
So what you’re really saying is, is that you need to be flexible and adjust to the situations, whether the market is going up, the market is going down, whether you have this, or someone wants to buy it off of you in a way that you hadn’t really originally planned because you’d been planning on that 900 for many, many years and then continuing on that would have been great. I think that’s a really important part of it.
Lou Brown
00:28:42
Absolutely. Anytime you can hold, you’re better off.
Scott Paton
00:28:47
Yeah. So Ron says, “Looking forward to hearing what is new in the business that I need to look out for and where to put my money to keep it working positively and not let the government get it.”
Lou Brown
00:29:02
I love Ron. Ron Jacob has been with me for decades. He and his wife, Jane, are great. They’re fantastic. And I love what they’ve been able to do because they do exactly what I’m talking about is to buy it right, buy it cheap, hold onto it, give people an opportunity because that really is the exit strategy, right? Imagine that you have a business that is actually with an exit strategy built in. So in our world, we offer the Path To Home Ownership to 100% of our clients. And the reason is they are our exit plan and it’s happening, it’s happening, my friends, it’s amazing. We’re seeing people moving up the Path To Home Ownership. They’re getting to owner financing, or they’re cashing out. I’ll be telling a story next week. I just had too many wins of the week to put into this week. But I’ll be telling that story next week about someone, an immigrant from Vietnam that just closed on a property that we put him into three years ago.
And I’ll be telling you some numbers and things like that. I think you’ll be very impressed with it, but what’s interesting about that is it’s all part of our exit strategy. So that property, we could have sold it. We could have paid all the closing costs. We could have paid everything that went with that and we’d have had that money. But imagine that you got the property, you’ve held it. You’ve collected money for years and now somebody moves in. In fact, the story I’m going to tell you is this guy’s going to make over or did make over a hundred thousand dollars on this property. So it gives you a good feeling that they made money. It gives you a good feeling that you earned money over time. It gives you a good feeling that you got a bunch of money back that you can reinvest in this new market that we’re going into. So the exit strategy built into your business is the keys to the kingdom.
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