Flipping Houses Part 1: Circus on the Courthouse Steps

Posted by on Jun 28, 2013 in Blog, Featured, Real Estate | 0 comments

“Dominate your real estate market”

“No Money Down”

“No Experience”

“Flip your way to wealth and security”

Business #12 was an experiment in following the news and the hype.  The collapse of the housing market made waves across the world.  Several TV shows popped up showing people scooping up cheap real estate for next to nothing.  With foreclosures all around, the business of buying, fixing, and selling homes for a big profit seemed possible. We thought it was a good fit because many of my companies did residential work like electrical, HVAC and gutters.  I could give these businesses more volume and save money on hiring outside subcontractors.  We also thought our wives could help us with the interior decor like fixtures, paint, kitchens and carpets.  So, we tried it.

We started by creating an LLC and funding it with enough money to buy our first house.  Then we pursued our real estate licenses in order to save the commissions when we sold the homes.  It is not hard to get your real estate license, you just need to buckle down and study for the test.  There was some useful information, but it was mainly a “cram and exam” process.  We signed up under a broker in southern California that would allow us the freedom to do our deals the way we wanted.  The broker charged a fixed fee (very reasonable) per transaction for assisting with the paper work and providing errors and omissions insurance.  It was a great deal and his office was very helpful.

We started by tracking foreclosures in neighborhoods we knew well.  We tried to purchase foreclosures from the banks, but found most of them were very hard to work with and they did not price their homes properly.  We then went to the court house steps and find out what buying homes at auction was like.  For those that don’t know, the courthouse steps is where daily auctions are held to quickly sell foreclosed properties.  There did not seem to be a rhyme or reason why some houses found there way to the court house steps.  It seemed like the banks had foreclosure reduction quotas and if they could not sell enough houses the traditional way, they would auction off some of their inventory.

Everyday we would do drive-by reviews of the houses coming to auction.  The rule of law is you should not trespass or cause damage to the home as you inspect it.  We mostly looked for cosmetic fixes: carpets, paint and some drywall issues.  We did not want major structural problems or serious plumbing or electrical work.  Sometimes we would come across other bidders doing inspections in a very aggressive way.  If the house was empty they would break in to get a close look.

The experience on the courthouse steps was a trip.  When we showed up there was a whole cast of characters.  There was the gangster, baggy pants, cap turned on 45 degrees, Bruce Lee, Danny boy (doing an Irish gig), Lindsey Lohan and Charlie Sheen look-alikes complete with his tiger blood.  Here is the deal: all of them were packing a million dollars in cashier’s checks.  All of them had a neighborhood they were after and they were very protective against outsiders.  When newcomers arrived they would often start telling horror stories to deter would-be buyers.  They would say things like “Do you remember when that guy won the bid on a house only to find out it burned down the day before?” Or, “I just saw someone that bid over $100,000 on a 3rd mortgage thinking it was for the first mortgage!” Admittedly, it was a little intimidating.  The dishonesty of the bidders carried to the auctions.  We saw obvious bid-fixing, secret deals and signal calling from the McDonald’s across the street.  Over time, the authorities began catch on to these illegal activities and people across the country began to be charged with fraud.

We stayed focused and did buy some homes, but it was no slam dunk.  In the next article we will cover the fix and flip side of the story.

Keys To Success

The everyday players have deep pockets

They regulars are educated on values, liens, judgments, and loans

Know your costs to purchase, fix, and flip.

Come ready to play and when your houses come up,  jump on them

Operate with a strategy, i.e. resales, rentals, lease to own

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Startup Stories – MotoSmart: Part 1

Posted by on Jun 21, 2013 in Blog, Featured | 0 comments

Lincoln Spencer and I met during a summer internship at the Wal-Mart headquarters in Bentonville, AR.  We both attended BYU, but had no previous contact before becoming roomates.  Our mutual interests in motorcycles, computers, and the co-eds at the University of Arkansas made us instant buddies.  He is incredibly driven and will be starting an MBA at the University of Michigan in the Fall of 2013.  Here is the story of Motosmart.com, in his own words:

Some think that owning your own business is living the American dream. For me, the reality has not always been so dreamy – but without a doubt it has been the experience of a lifetime.

At the age of thirteen, my passion for entrepreneurship became quickly apparent as I started buying and selling dozens of motorcycles. After turning my first beat-up $10 Honda into a great running $300 machine, I was hooked. My older brother helped me learn the basics of carburetors and engines, and plenty of library books filled in the rest of the details. I got my second bike for $100, and sold it for $450 after minor repairs. Business was good!

After a few years of this, my mom worried that I wouldn’t go to college because I was doing so well on my own. I reassured her that I would go, and both of us were surprised when I decided to get a bachelor’s and master’s degree in Information Systems. I loved the idea of combining my passion for business with a more technical background in computers. The motorcycle sales continued all the way through graduation, and at that point, I estimate I had bought and sold over 100 motorcycles.

I felt I should try getting a “real job” like the rest of my classmates, even though it was obvious I was an entrepreneur at heart. After a couple years working as an IT consultant and auditor, I felt I had gotten my fill of “real jobs” for the time being and wanted to start a business I had been thinking about since high school.

The business need I had seen in high school was to sell discontinued, used motorcycle parts in a more efficient manner than what was currently available. I had spent countless hours as a teenager looking for parts for old bikes, usually driving across town to the single local salvage yard only to come back empty-handed. The parts I needed had usually already been removed from the bike by someone else, or were damaged by the elements from sitting outside. Rather than follow the traditional junkyard approach with rows of bikes rusting into the ground, I wanted to store everything indoors, barcoded and shelved so each part could be listed online and easily found by customers around the world.

I knew there was demand for these hard-to-find, older parts, but I didn’t yet know how profitable the business would be. I started by making my own estimates and doing research online, but quickly realized that there was little data available about this niche market and I had to find much of the details out on my own. I figured a good place to start would be talking with motorcycle salvage yards, especially any that were for sale as the owners would be more willing to tell about the details of the business.

I found a salvage business for sale in Colorado, which was a complete mess and a great example of what not to do. Less than 1/4 of the parts were labeled with the model of bike they were removed from, and the parts were laying outside being damaged by the elements. The thought of taking over a business like that made my stomach turn, since it was such a mess and went against my ideals of organization and efficiency.

Shortly thereafter, I came across a warehouse full of parts for sale in Utah. I flew from Colorado directly there to take a look – and it turned out to be a gold mine (especially in stark comparison to the mess I saw in Colorado). Every part in the warehouse was labeled with the model information, and the parts were in good shape since they were out of the elements. I negotiated a great price on the lot, and before I knew it I had jumped into a completely new life and series of challenges.

I quit my consulting job within the next few weeks, and moved to Utah to start getting the thousands of parts inventoried, photographed, and listed online as quickly as possible to start generating some cash flow.

Stay tuned for the next installment of Lincoln’s incredible story.

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Rise and Fall

Posted by on Jun 14, 2013 in Blog, Featured, HR | 0 comments

The following is a fictionalized version of real events at one of Ken’s businesses.

Rise and Fall

By Ryan Carter

It was a hot, dry day in California’s central valley.  Steve was skateboarding with his friends on a Saturday afternoon.  While sipping on sodas, they sat down on the curb.  “Steve, when are you going to get a real job? It’s been two years since we graduated high school,” one of his friends inquired.

“Actually, I just heard about a beginning job with a local electrical company. I think they install the large pumps to irrigate the valley,” he responded.  “I am supposed to meet with a guy on Monday.”

Steve, though young, was enthusiastic and driven.  He had a certain charisma about him that was hard to ignore.  Catching the eye of Bob, the regional manager, he was hired on the spot.  He reported for work the next day.  The work was hard, the days were hot, but he liked it.  It was rewarding to see the water flow through the fields and he felt like he was learning a meaningful trade.  Under the tutelage of a more seasoned journeyman, Steve quickly learned the ropes.  He absorbed new information quickly and had a knack for figuring things out.  After two years he was promoted to a technician and could perform work from his own truck without any direct supervision.

In his new role Steve excelled even further.  He liked having the extra responsibility and did well under pressure.  He understood that the business relied on getting the company’s name out in the public and he did well at finding new customers.  The regional manager started to hear good things about this budding star in the company.

“Tom, how is Steve coming along in his new position?” Bob asked his branch manager.

“Bob, he is doing great.  We took a bit of a risk on him in the beginning, but I think the potential we saw in him is starting to show.  He has already brought in 3 new jobs this month,” Tom replied.

Four years after Steve started, the branch manager decided to leave the company to take another position.  Despite having the least experience, the other employees in the shop expected Steve to take his place.  They’re assumption was correct and the regional manager called on Steve to take over.

“You know, there will be a lot of weight on your shoulders.  You have shown that you care for the company and I believe you have what it takes to be a leader,” Bob told Steve.

Along with his new responsibilities as branch manager came a healthy pay increase, which Steve was glad to receive.

During Steve’s first year as manager things were going great in the company.  The economy was good and there was a lot of work to do.  The branch even had to hire a couple of extra people to keep up with the demand.  Steve’s charisma helped him motivate the crews and he was well liked by the other employees.  They started having company barbeques on Friday evenings after work.  Steve treated everyone like family.

Steve continued to bring in new customers and bid on even bigger contracts.  He successfully completed several large jobs, netting the company some healthy profits.  Bob was pleased with his choice of branch manager.  Shortly after his first year, Steve had a meeting with Bob.

“Things are going pretty well at the shop and I feel like I am helping the company make quite a bit of money.  I think I deserve a raise,” he told Bob.

Bob recognized that Steve was doing well, but he also recognized that Steve’s compensation was already very competitive in the market.

“I think you are doing a great job, I think it’s time we talk about some type of bonus structure and profit sharing,” Bob stated.

He then went on to explain that a certain percentage of Steve’s compensation would be tied to volume and profitability at the branch.  With the way things were going in the company, Steve was very happy with the amount of money he would be making.

A year later, the economy began to slow and the branch began losing profitability.  Bob met with Steve to show him some of the numbers.  An investigation in the accounting books showed that the number of billable hours had declined, yet the employees were still taking home full paychecks.

“We need more billable hours to support the number of staff we have.  Either you find some more business or we will have to start cutting back hours,” Bob said.

Steve was dismayed by the fact that some of the employees might have to reduce their hours.  He was also frustrated that his compensation had diminished due to the falling profitability.  He had difficulty understanding why he was being paid less because the branch was not doing well.

As time passed by, things did not improve.  The economy and the subsequent amount of work continued to plummet.  Steve was not able to find enough customers to create sufficient billable hours to keep all of his employees busy.  Rather than cut hours, Steve would put two or three people on a job that only required one person.  This would result in going over budget on large contracts and the company would lose money.  Additionally, he would bill smaller customers more hours than necessary because the extra manpower was inefficient.

A series of monthly meetings convened between Bob and Steve.  Bob was very concerned about the financial state of the company.  During one meeting he said, “We are losing a lot of money.  We just can’t keep all these employees.  In order to cut cost we need to lay off the part-time secretary.  One of the secretaries from the other branch can take over her duties.”

Nearly infuriated, Steve shot back, “We can’t lay her off!  She is like family.  What will she do now?”  Steve understood the situation, but he was starting to feel a lot of animosity towards Bob.

Unfortunately, things at the branch went from bad to worse.  The poor economy had all but halted any new work from coming through the door.  Likewise, the company was losing a few of their valued customers from the overpriced labor charges.  Steve reluctantly reduced some of the hours among the employees, but he had not completely done away with all of his questionable managerial practices.  Things came to a head when Bob informed Steve that the company was losing too much money.  He had to lay off a particular employee that was underperforming.  This employee was brought on by Steve himself, and happened to be his roommate.

For Steve this was the final straw.  He did not want to see another employee let go.  Steve knew that there was no one else in the branch that could take over as the manager.  He also knew that his knowledge of the branch and its customers was extremely valuable.  His rapport with certain high-dollar customers was understood and Bob knew it would be tough to replace someone like Steve.

Steve called Bob into the office for a meeting.  Putting all his chips on the table, he looked Bob in the eyes and said, “If he goes, I go.”

Bob had no choice but to call his bluff.  Steve and the company parted ways.  The company eventually moved on and made it back to pre-recession volume.

About a year later the secratary answered a call.  “Michelle?  Hi, this is Steve.  How are things going at the shop?  Are you guys looking for extra help?”

 

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Free Cash Flow and Financial Ratio Quiz

Posted by on Jun 10, 2013 in Blog, Featured, Finance | 0 comments

This is a selection of True/False questions from a corporate finance course I took.  The questions are designed to be tricky, so read them carefully.  If you dont recognize certain terms, use this as a good opportunity to learn what they mean and how they can be used.  I have found Investopedia.com to be a good reference for this.  You might want to start with what ‘free cash flow’ is.  In future articles we will try to explain some of the answers and how these ratios are important to your company and general investing.

1. (T/F) An increase in ‘accounts receivable days outstanding’ will reduce free cash flow to the firm (FCFF).

2. (T/F) Reducing debt balances will decrease free cash flow to Equity (FCFE), all else equal.

3. (T/F) An increase in dividends paid will reduce free cash flow to the firm, all else equal.

4. (T/F) An increase in ‘accounts payable days’ will reduce the length of the ‘cash cycle’.

5. (T/F) An increase in interest expense will reduce the Return on Invested Capital.

6. (T/F) Comparing two firms with identical operating performance and size, the company with the higher debt ratio will experience greater variability in its Return on Equity, all else equal.

7. (T/F) Holding other factor constant, if a company increases its accounts payable balances and uses the cash to repurchase its own stock, the Return on Invested Capital will improve.

8. (T/F) The Return on Assets is unaffected by a company’s financing choice of debt versus equity.

9. (T/F) If two companies have the same level of current assets and current liabilities, the Quick Ratio will identify the company with more inventory as having lower liquidity risk (greater liquidity).

10. (T/F) A problem with using net income as a performance measure is that it is likely to lead to over-investment.

Answers: (1. T, 2. T, 3. F, 4. T, 5. F, 6. T, 7. T, 8. F, 9. F, 10. T)

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