My friend was about to buy a million-dollar house with no research

January 7 52 Comments latest by Shaun Rosenberg

Note: I’ve created a new category called “Real estate” (see the other categories on the right side of the blog).

One of my friends is 28 and she’s looking to buy a house in San Francisco pretty soon. Now, as you know, I’m not a big fan of real estate for investment reasons, but because I’m not an expert, I’ve been researching it more and more (see my links here). So when she mentioned wanting to buy a house, I asked one question: “Why?”

This is where things fell apart.

Her responses included things like:

“I don’t want to waste money paying rent.” I’m convinced this awful phrase was invented by Realtors BECAUSE IT’S SIMPLY NOT TRUE FOR EVERYONE. YOU ARE NOT WASTING RENT IF YOU LIVE IN AN EXPENSIVE AREA. Here’s a good article with more details.

I asked what she thought about the real-estate market right now, considering many of the ARM resets are still coming. One response: “The market is already bad, so there’s upside potential when I sell? what do you think of that logic? Prices are supposedly lower right now as a result.” I don’t think logic is enough to justify the biggest purchase of your life.

I also pasted a couple of the best articles on real estate: This one (Yahoo Finance) and this one (New York Times).

The result was interesting. She hadn’t seen these, so she asked me what I would do with my money. At this point, I was at a coffee shop and one of them lived near me, so she came over to talk about this in-person. I looked over her finances and realized she had tens of thousands of dollars just sitting around, earning hardly any interest. Even putting it in an ING savings account would have gotten her hundreds of dollars a month (open an ING savings account in 10 minutes).

The first thing I did was suggest three books to her on investing (more books I recommend). We talked for a while, and I suggested some things she could do to improve her finances and start earning more. After about 20 minutes of back-and-forth, I asked her what she was going to do for her next steps. “I’m going to be honest,” she said. “I’m not going to read those books.”

I thought this was really fascinating. Here’s someone who has tens of thousands of dollars earning 0.5% interest and she’s so resistant to the idea of reading investment books that she almost bought a million-dollar house instead. Five years ago, she had a significant amount of money. What if she had invested it in the stock market?

And five years from now, wouldn’t she be happy that she spent 5-10 hours reading a few books to get her finances in order?

Why young people still think of real-estate as an investment
One of the best things to happen from the real-estate bust that we’re undergoing is to make people think twice about real estate as an investment. That’s right — to actually consciously think about why they’re making the biggest purchase of their lives, rather than just buying a house because “it’s the next thing to do.”

And yet, I’m still stunned when I hear about my friends “investing” in real estate, especially in the Bay Area. (Yes, real estate can be profitable and great, but in some areas of the country there are far better investments).

I thought about it over the weekend, and I think there are a few reasons why real estate still seems to appealing to my friends:

1. They have some money lying around and know they should be doing something
2. They don’t know anything about investing, and the barriers to knowledge seem high
3. Real estate represents something tangible — and something their parents probably keep reminding them about
4. Society still explicitly and implicitly rewards homeowners (just think about a young friend who owns a home — are others impressed?)
5. THEY HAVE BEEN IGNORING EVERYTHING IN THE NEWS EVERY DAY FOR THE LAST 1 YEAR ABOUT REAL ESTATE (???)
6. It’s easier to do new things than to look back at old things, like reading books or handpicked articles about real-estate (Seriously, how many people will click and read through those links?)

Research for gargantuan purchases = good
Here’s the point: Buying a house is the biggest purchase you’ll ever make. When you do it, you need to understand exactly why. That means an extensive amount of research. When I bought a car, for example, I spent months learning about every trick under the sun. I had 17 dealers negotiating with each other to get my business. And that was to save a few thousand dollars! Now, I’m Indian and I’m weird, but I did that for buying a car. When I buy a house, I expect to enlist the help of several third-world researchers for months of research and, when I walk into the final negotiation, I will be accompanied by a large hairy man, a metal baton, and a chimp. IT’S THE BIGGEST PURCHASE OF YOUR LIFE. WHY WOULDN’T YOU SPEND TIME UNDERSTANDING THE PROS AND CONS OF IT?

You know, on one hand, much of this site is about getting started and not spending too much time doing endless research. But there’s a balance, as I describe in my article on conscious spending — you need to know the basics, and you need to know much more for real estate, which you can’t just sell the next day if you decide you don’t like it. When I pointed out sites like Patrick.net to my friend, she had never heard of them.

As usual, there are lots of ads and media influences to buy, but ultimately we make the decision on how much to research our real-estate purchases. I’m not saying it’s a bad decision — although my real-estate colors are clearly showing — but when I read a real-estate blog like SocketSite, I realize I’m not nearly as knowledgeable about real estate as others.

The 3-Book Solution
For many, what seems like an intimidating amount of research can be broken down by buying 3 books and reading them. Instead of coming in with a blank slate, you go to Amazon, find the highest-rated books in your area, and read them in a couple of weeks. I’ve done this with books on marketing, venture capital, and psychology. I keep a notepad and write down my questions. After 3 books, you’ll have very targeted and specific questions to ask someone. (Instead of “what should I do???” you might say, “Should I choose a Roth IRA or Roth 401(k)?”)

In July, I wrote about how asking targeted questions can get you targeted answers. To get the right answers about investing, pick up a few books — whether these ones or other ones — and get started by asking the right questions. Here are the three best books to get started investing.

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52 Comments latest by Shaun Rosenberg

Homeowners are taking the risky route and I am confused

December 13 25 Comments latest by Brian Brady

Does anyone else find this weird?

…a one-year ARM, at 5.8 percent on average, now costs only a third of a percentage point less than a 30-year fixed-rate mortgage, at 6.2 percent. And ARM holders still face the risk of paying a higher interest rate down the road.

But while there’s a new refi boom in swing, not all borrowers are rushing for the security of fixed loans. One in three homeowners refinancing today is choosing the financially riskier interest-only and payment-option ARMs, according to data from Loan Performance.

Many who are doing so may have chosen those mortgages not because they want them but because they can’t afford the payments that would come due under a 30-year fixed rate, said Keith Gumbinger, HSH’s vice president.

(ARM = adjustable rate mortgage, a mortgage with an interest rate that can change over time.)

Wow. So these homeowners are simply betting that (1) home prices will continue to rise, and/or (2) interest rates won’t rise very much? I’m still learning about real estate, so am I missing something?

“Some may be speculators who want to flip their property when prices improve and want to keep their costs as low as possible in the meantime,” the article adds, which could be a good alternative explanation for what’s going on.

I’m from Sacramento, which has been one of the hottest housing markets in the country for the last few years (here’s some data from 2003). I had lots of opportunities to buy houses with prices that were going up $10,000 per week, where I had to put my name in a raffle just to get the opportunity to buy a house, but I didn’t for a few reasons:

1. I don’t understand real estate (sounds familiar)
2. I don’t understand investing in something when people are getting irrationally excited about it and there’s time pressure, which I pointed out earlier this week usually causes bad decisions. Maybe I’m just not that cool
3. I didn’t want my cash flow going into real estate. Instead, I took it and invested it in myself and my own businesses, which I’m betting can produce a better return than the stock market or real estate. More on that later

Now, with foreclosures and people stagnant growth in real estate, there are blogs like http://thehousingbubbleblog.com where lots of people are gleeful about the impending doom of the homeowners who made bad decisions. I don’t really care about saying I-told-you-so, but I do want to share what happened when I told people I wasn’t going to invest in real estate.

“What?” people said. “You’d be crazy not to buy now. You can put $0 down!” People also thought I was misguided when I told them that I’d consciously decided not to invest. ‘You must not understand’ was a common sentiment I received, along with a pitying look. And more than one person said, “But real-estate prices don’t go down.” True, over the long term, the real-estate market has done well (not as well as the stock market, though). But the short term can really affect you, especially if your ARM payments jump from $1000 to $1900/month. That’s very likely for lots of people when their ARM comes up–and do you think the average family can afford a doubling of their mortgage?

Yet another point for long-term outlook and not investing in stuff you don’t understand. I think. Unless I’m missing something.

(Btw, I’m far from an expert in real estate and I’m still learning a lot, so last year I brought in Owen Johnson to write a series of real-estate posts last year on iwillteachyoutoberich.)

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25 Comments latest by Brian Brady

Meet the 24-year old with $2.2 million in debt

November 1 35 Comments latest by fanofsteel

Regular readers know that I’m not especially enthusiastic about investing in real estate (see here and here for examples of why), so this post won’t come as a big surprise.

But it’s not just about why I think stocks are better. Many of you have been hearing about the blog http://www.iamfacingforeclosure.com, written by a 24-year-old guy named Casey Serin who “bought 8 houses in 8 months across 4 states with no money down” and is now facing foreclosure. He has openly admitted to lying on his loan applications (to get more in loans), and to bringing his total debt to about $2.2 million ($140,000 of that is in unsecured debt like credit cards). In the meantime, he’s been blogging about his situation. His blog has gotten the attention of USA Today, the San Francisco Chronicle, NPR, and more.

There’s a twist to this story that nobody else knows: I know Casey Serin. We went to high school together. In fact, we ran the computer club together, which is how I got to be the cool guy I am today.

That makes this a weird post to write–not only because he’s done some really shady stuff that really pisses me off, but because he’s not just a one-dimensional character who deserves our scorn: He’s actually doing a lot of good, too. And that makes it hard to describe what I really think of the situation.

* * *

The story with me actually begins about a month ago, when I got an email from Casey out of the blue. I hadn’t heard from him since high school 6 years ago. (Emails reprinted with permission.)

From: Casey Serin
To: [BCC list]

Hi Ramit

I hate SPAM too! You’re receiving this because you’re in my personal mailing list. You’re a friend, family or an acquaintance or past co-worker or client. If you don’t want to receive occasion updates from me please use the automatic unsubscribe link at the bottom. Thanks!

Long time no talk! Yes I have not been good at updating everybody and keeping in touch. So here is a 1) quick update about what I’ve been up to, and 2) an opportunity to put your money to work with us in the real estate business

[…]

This January I quit my job to do real estate investing full-time. Together with partners in the area we buy and sell houses for fast gains and we also hold property for appreciation. In the first part of the year I personally bought 7 houses in 4 different states. It’s not all easy - there is definitely a learning curve. It helps to have experienced associates to help me along.

Now what??

We have a unique opportunity to continue to expand the real estate business. Because of the market reversal in California there is going to be many people in trouble with their loans. People have been buying more home then they can afford or refinancing like crazy. Foreclosures are already on the rise and they are going to sky-rocket in the next several years.

There is an opportunity to 1) help people out of trouble and 2) make some money. Service and integrity comes first though. I know what its like to be behind payments and face foreclosure. I refuse to be a “shark” investor.
It must be win-win, or no deal.

Want to participate?

Do you have money that’s sitting in an account somewhere earning an embarrassing 1-3%? Are you comfortable with your retirment money sitting in a volatile stock-market?

Maybe you’re not investing at all. Are you comfortable trusting social security to take care of your retirement?

Invest your money with us and get 24% fixed return secured by real estate.
We use your money to buy and fix houses improving the area and helping sellers in distress.

Benefits to becoming our private lender:

* we pay fixed 24% interest on your money - reliable returns

* compounded monthly - your interest is making interest and it grows exponentially

* secured by real estate - just like a bank, YOU get a mortgage against our properties to protect your investment

* start with as little as 10,000

* may use your 401K or IRA account - get tax advantages

* your money doubles every 3 years

* 10,000 grows into 100,000 in 10 years

Worst case scenario…

If we can’t pay you back, you get a good property. We only put your money into a house that has at least twice the equity as the amount you’re investing. We only invest into nice properties in good neighborhoods. If something were to happen to our business you can normally just sell the house at a discount and get your money out. What stock or mutual fund is going to give you THAT kind of security?

Limited opportunity…

We can only take a certain number of private lenders. Get back to me soon so I can explain in more detail.

Also please forward this to anybody else who may want to get a high return on their money. We pay referral fees!

Anyway…

I would love to hear from you either way. Lets catch-up!

You can imagine my disbelief in getting this email. Here’s an old acquaintance who I haven’t heard from in years, and he pitches me the shadiest-sounding financial “opportunity” I’ve ever heard of. “Fixed 24% interest on your money - reliable returns”? Oh really? Give me a break. When I read that, I immediately knew this “offer” was BS, but just to play along, I asked him what the risks of his idea were. He replied:

From: Casey Serin
To: Ramit Sethi

1) Getting into a bad deal. Minimize with experience. I’ve been investing full time since Jan of this year and dabbled part time for about a year before. I’ve already made my share of mistakes and learned from them. (Good blogging material!) So I’m still pretty new but not BRAND new. To fill in the gaps in my knowledge I work with other experienced investors who help me and partner on deals with me. That’s the “we” part.

2) Private lender needs his/her money out early. Minimize with having other lenders on stand-by. I would not try to keep a private lender locked-in. If I can find another lender to take their place then I’ll give back the money plus interest without any fees.

3) Seller is afraid we won’t make their payment. Minimize with education.
First of all, most sellers I deal with are about to loose their house and already have 2-5 late payments on their record. They don’t have much to loose, especially since I’ll give them money for their equity. Better then loosing the property, getting a foreclosure and getting no money. Second, if I’m investing 10K+ into a deal why would I not make the payments and loose my investment? I’m catching up their loan, improving their credit and helping them get a fresh start. The seller has much more to gain then they have to loose

Ok, now I knew for sure that this was definitely a scam. I said no thanks and politely passed on the offer.

Here’s where it gets even more interesting. THE VERY NEXT WEEK, I received another email from Casey.

I haven’t told everybody the full story about the recent problems in my real estate business. I feel like I need to share my experience and tell it how it is. So I started a blog:
www.IamFacingForeclosure.com

As I learn my lessons and find solutions I will be writing about it. Hopefully this will help others out there who may be going through the same thing.

Also let me know if you have any buyers for my properties. I’m ready to sell them below what I owe via a shortsale to avoid foreclosure.

Those who received my email about Private Money - please forgive me for giving you a false impression. Getting high returns lending on real estate deals is a good thing - you should do it. However, I didn’t fully explain MY situation. I made it seem like I had everything together. Well, as you can see, I’m not a very safe bet right now. As I recover from this thing and rebuild my business I hope to gain your trust over time. Then if you still want to get great returns we can talk. In the mean time I can refer you to other investors who already have a solid track record.

Thanks for your support.

Now this really made me mad. Casey had tried to sucker people into a scam real-estate deal less than a week before he admitted he was going through foreclosure. I was fortunate enough to recognize his pitch as bullshit, but what if someone had gotten conned into it? Financial scams on unsuspecting people make me furious. So I read through his site. It turns out that he had bought multiple houses in different states (hoping to flip them quickly), lied on his applications to get his loans approved, and had grossly miscalculated how much it would cost to renovate and flip them. Bad move. His debt is now over $2 million.

But this isn’t just a 1-dimensional character who deserves our scorn. I know Casey and he’s actually a very nice and sincere guy. We met at a Starbucks a couple weeks ago (he had been invited to give a talk at UC Berkeley), and he filled me in on the details. If you read through his blog, you’ll see that he’s being completely honest about what he did wrong, and he’s accepting responsibility for his situation–despite the thousands of angry comments on his blog. It seems that there are lots and lots of people angry about the housing bubble, both from the people who made stupid choices and screwed themselves by being greedy and the “I told you so” people.

Things have been going all right for him. He’s managed to sell one of his houses, and his press attention has been sending thousands of people to his blog. In fact, Robert Kiyosaki (author of Rich Dad, Poor Dad, which I reviewed here) heard about Casey’s story and invited him to meet in Phoenix.

Will Casey get out of debt without having to declare bankrupcy? I don’t know. I honestly don’t know what to make of this situation. But I do think a few things: First, Casey really messed up by trying to con people into joining his stupid real-estate “opportunity.” That was a scam, pure and simple, and every single one of you needs to beware of that in the future–no matter if your age-old high-school friend pitches you, or your best friend. A scam is a scam. Second, Casey did at least acknowledge his wrongdoing a few days later and invited people to his blog to view his progress. He’s been remarkably positive despite the horrendously negative comments he’s getting. Even when I met him, he knew exactly the situation he was in, and he was still positive about the future. I think that’s pretty impressive. And I’m pretty amazed by what he’s done in 2 months: He’s created a great blog to share what he did wrong, and he’s gotten massive media attention to spread the word.

Is it really right to be starting a blog when you’re over $2 million in debt? Honestly, I wouldn’t be doing it. I’d be doing every single thing I could to sell those properties and (this may be the only time you ever hear me say this) get a stable job. Sometimes, you need to bite the bullet. But he’s chosen a different path and I guess we’ll see how it goes.

For now, I don’t really have any more conclusions or thoughts. Just check out his blog and see for yourself: http://www.iamfacingforeclosure.com (you can start at Why I am Facing Foreclosure).

–
This is a blog on personal finance and personal entrepreneurship for young people. To see more articles from iwillteachyoutoberich.com, check out my table of contents (over 300 posts), my RSS feed, and my newsletter.

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35 Comments latest by fanofsteel

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