In the movie, corporate raider Gordon Gekko makes untold millions of dollars buying companies, breaking them apart, and re-selling them for more than he paid. He doesn’t really invest in or add value to the companies—he simply speculates on the price appreciation. He convinces his eager-to-get rich quick protégé Bud Fox that hard work and playing by the rules is for the poor, weak, and ignorant. Under Gekko’s wing, Bud also experiences the quick profit potential of buy-low sell-high and begins to lead the life he dreamed of. The dream is short-lived, however.

The movie made famous the expression “greed is good”, and many consider that line to be iconic of an entire way of thinking, at least for the Baby Boomer generation. I, however, think the real moral of the story is in the words that Bud’s father used as Bud was being hauled away by authorities for insider trading: “Create something instead of living off the buying and selling of others”.

Like Bud’s father, I have always resisted the here-today gone-tomorrow income associated with buy-low sell-high, especially with real estate. It’s not that it never works. It’s not that it’s never a win-win. It’s just that, like poor Bud realized, it usually doesn’t work so well.

With real estate flipping, the “system”, for lack of a better word, doesn’t want it to work so well. And where there’s smoke there’s fire. You have to question the underlying legitimacy of any transaction that is so hard to push through because of all the roadblocks put up by the system and the people who are affected by it. It’s obvious the real estate industry doesn’t want it to happen.

Banks, for example, clearly try to prevent real estate investors from profiting through quick flipping by their strict underwriting criterion, like requiring the owner to hold the property for a length of time before agreeing to lend money against that collateral, a condition known as “title seasoning”. Many title companies or real estate attorneys want nothing to do insuring or closing a transaction where the property is being sold more than once in a short period of time. Sellers resent the idea that the investor can make money off buying their house without the investor’s long-term commitment to fixing, managing, or otherwise adding value to the transaction. Buyers think they are overpaying when they find out how much money the seller is making for doing almost nothing. Many national speakers and authors go to great lengths to teach “investors” (and I use the italics for good reason) how to prevent buyers and sellers and their real estate agents from even discovering they are making a profit!

At GLSI, we hold properties for the long-term, not try to sell properties for a quick profit. This implies full-time management of the property and the people, which spills over into benefits to the neighborhood, the community, the tax rolls, the tenant, the contractors, and certainly for investors who lend money against the property. This is not for the faint of heart. It is hard work and can be quite stressful. We have many constituencies to please. But the result? You as lender are not speculating on price appreciation. Because all the parties benefit, there is a monthly income benefit that has the ability to repay the interest on the debt. No smoke, no fire. Gordon Gekko may be a flash in the pan, but our steady revenue stream provides security and high income without speculating on unknowns. This is the only tried-and-true formula in real estate that will stand the test of time.

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3. “EQUITY INDEX” ANNUITIES

And yet every day of the week we hear about a supposedly simple purchase of a house, the cursory clean-up, and a quick, painless sale which yields the “investor” a healthy profit. But upon closer inspection it’s never really that simple. We ask “which bank will do the financing” and they act like it’s a trick question. In fact, it often never happens and the person simply doesn’t sell the house. Just like with Elvis sightings, it’s the next few questions that are hardest to answer.

Lot’s of attention is being paid to the price. People have even gotten smart about location. Not too tough to estimate construction costs, either. There are even comps out there now, albeit low ones. But the fly in the ointment—that thing which will prevent the flip from happening—is the new buyer’s bank.

It’s a simple thing called title seasoning. It’s a restriction that banks and Fannie Mae place on financing of properties whereby the current owner hasn’t been an owner more than six months (90 days in the case of FHA loans). In other words, if you buy the house, do a cursory clean-up to it, and then try to sell the house immediately even for a small amount more than you paid, you’re going to run into trouble with the buyer’s bank. They probably will refuse to approve the loan or even accept the application.

It’s supposedly a little easier if you do a full re-model of the home. In such cases, it is said that banks may waive the seasoning requirements, because you can justify the higher value of the home with receipts showing how much money you invested into it. But what if you’re doing some of the work yourself—will they allow you to price your own labor? And what if the house really doesn’t need that much work? And even if you completely transform the house, you may have to sit on it for many months before a bank will even look at a buyer’s mortgage application.

With the kinds of mark-ups traditionally expecting with wholesaling, it’s gonna be pretty tough to justify sitting on a house for 6 to 12 months longer than you have to. That adds a whole bunch to your cost basis and kills most of your potential profit.

So once again, there is no magic bullet called “wholesale” or “flipping”. Once again, despite all the romance and drama given to the idea of flipping houses, it is still not the one-size-fits-all solution. If you plan on buying houses and cashing out within the first year, at least for the time being, you should be looking for CASH buyers.

Great Lakes Secured Investments holds and manages property for long-term cash flow. By eliminating the unknowns of flipping, we share in the cash flow with investors. Because the cash flow of the property far exceeds the interest cost and operating costs, the investment feeds itself. The income can always pay the investor up to 10.0% fixed!

Related posts:

1. REAL ESTATE FOR THE SECURITY CONSCIOUS INVESTOR
2. MORE SIGNS OF UPCOMING DECLINES IN TREASURY AND SAVINGS BONDS
3. So You Want To Be A Real Estate Investor?