Review of Jim Collins' How the Mighty Fall

Jim Collins' How the Mighty Fall (http://www.amazon.com/How-Mighty-Fall-Companies-Never/dp/0977326411) is a gem with a lot of lessons for real estate investors.

We never want to think about it but Collins reminds us that just about every great company eventually has a severe decline.  According to Collins' research there are five stages of decline:  1. Hubris Born of Success; 2. Undisciplined Pursuit of More; 3. Denial of Risk and Peril; 4. Grasping for Salvation; 5. Capitulation to Irrelevance or Death.  

Companies can take varying times to work their way through these stages and many turn around during this period of decline.

The Undisciplined Pursuit of More is particularly relevant for real estate investors.  Let's be honest, doing a deal is really fun and it is easy to imagine how much money we are going to make by accumulating more properties.  When considering your next purchase though remember some of what Collins says:

Big does not equal great.  Do not become addicted to scale.  Don't try to grow at an unsustainable rate.  Leave some growth on the table.  Ask yourself these three very important questions:

1)  What is the upside if events turn out well?

2)  What's the downside if events go very badly?

3)  Can you live with the downside?

If you weigh these questions carefully, make your decisions based on empirical evidence, and keep some  cash to get you through the lean times you'll make wise acquisitions.  

If you have any book suggestions that would be helpful for real estate investors we would love to hear your advice.

Entrepreneurial Qualities

            Dozens of articles have been written on what it takes to be a successful entrepreneur. Some list three essential characteristics, some as many as twenty-five. Oddly, few agree on the mindset one needs to succeed in a business of one’s own. But, because an entrepreneur must take the lead in starting a new business, I’ve adapted a favorite definition of leadership from Stand up, Speak out, Take the Lead by Mary Ann Livingston and applied it to create a profile of an entrepreneur. 

     “A leader must have:

·      A vision;

·      A concrete plan or road map to achieve that vision;

·      The ability to communicate that vision, and to persuade other people to buy into the vision.

·      And the persistence to lead them step-by-step through tough challenges until the vision becomes a reality.

Above all: Leaders must care.”

            Certainly an entrepreneur has to have a clear vision for his business. He has to have a concrete business plan to achieve his vision.  He has to communicate his vision and persuade others to back his plan.  He has to have the persistence to keep on through tough challenges – leading others – until the vision becomes a reality.  And above all, an entrepreneur must care about his business.  He must care enough to work hard and work smart – sometimes around the clock.  He must care about his customers. He must care enough to be willing to listen, adapt and change to meet customers’ needs better than anyone else. He must care about the product or services he offers.  He must care enough to be always working to improve.

                 And extremely important, as Charley Gould reminds us, “Entrepreneurs must have access to adequate financing.”

                 If you add to the mix the mindset that learns from failure, insists on success, and enjoys the journey – you’ll find a business owner who is unstoppable.

Guest Blog by Peter Accolla - Closing Tips

Don't Make That Big Deposit or Transfer 
What You Need to Know If You're Buying a Home!

You've probably heard the saying, "When you fail to plan, you plan to fail." That is especially true when it comes to buying a home today. Underwriters are following strict guidelines–and that means even things like bank deposits and transfers are under scrutiny.

Here's some insight on how underwriters analyze bank statements...and what you need to know and do (or not do) during the loan process.
Today, many banks require an explanation and proof of source of funds for any large non-payroll deposits that are listed on a bank statement. What is deemed a large deposit is largely determined by the underwriter and can be as low as a few hundred dollars. The reason for the underwriter's concern is that an applicant may be borrowing money from individuals, or accepting money from an interested party to the transaction, to help with the settlement costs.

It's easy to see how this bank requirement can create a lot of frustration, especially for people who are used to moving money between their accounts, which many of us do today. The key thing to remember is that anyone applying for a mortgage should avoid transferring money between accounts or making large non-payroll deposits during the home buying or selling period. While that may feel like an inconvenience, the time and headache you'll save yourself from having to account for all your deposits will be worth it.

Let me know if you have any questions at all about this or if there's anything I can do to help you at this time!

Sincerely,


Peter S. Accolla II
Mclean Mortgage Corporation
paccolla@mcleanlending.com

Phone: (703) 738-0912

When Buying Property Don't Pay Closing Costs

Just when you thought you have enough money to buy an investment property you learn about the closing costs you have to pay at the closing date.

These costs can be substantial:

1) Title insurance for the lender and the owner can add up to almost $2,000;
2)  Transfer Taxes (yes -- local governments tax you for merely buying property) vary but can be 1-2% of the purchase price;
3)  There is a government recording charge of $100 to record the required documents at the registry of deeds;
4)  A House location survey of $275;
5)  Termite inspection of $35
6)  Loan origination fees and appraisal fees can total close to $840.

The average title, insurance, and lending charges at closing in Virginia is $3,000

Your transfer taxes and recording fees can add up to several thousand dollars more.

In addition, you need to prepay a number of things for the lender including a mortgage insurance premium if you are required to carry mortgage insurance, homeowner's insurance, property taxes, and homeowner's association or condo association fees if there are any.

The bottom line is that you have to bring a lot more cash than you are expecting to closing to pay all of these costs.  It can be a real barrier to buying a property.  So one way to minimize this expense is to have the seller pay as many of these closing costs as you can convince them to.  When you are negotiating the seller down from their listing price ask them to pay the price reduction out of closing costs instead of actually reducing the purchase price.  This is because you have to bring cash for the closing costs and a higher purchase price just means a slightly higher monthly payment on your mortgage.  You won't really notice the higher mortgage payment but you will definitely notice giving up thousands of dollars at closing.  So avoid it at all costs.

Four Reasons that New Businesses Fail and How to Avoid Them

Small businesses are the backbone of the US economy. Just how important are they? According to the Small Business Administration, small firms:

·               Represent 99.7% of all employer firms

·      Employ half of all private sector employees

·      Generated 65% of net new jobs over the past 17 years.

And in 2009 during the current recession: an estimated 552,600 new employer firms opened for business. But the story doesn’t always end happily. Thirty percent of new employer firms fail within two years, 50% within five years, and only 25% stay in business for fifteen years or more.

A close look at key reasons new businesses fail reveal important steps entrepreneurs can take to make sure that they are among the survivors.

Writing in Financial Edge, Michael Deane describes how to address six main reasons that businesses fail (Financial Edge October 29, 2010).  Let’s examine the four reasons that most clearly apply to real estate investing.

1.     Poor market research.  It is key to carefully investigate your market. For investors in rental properties that would include learning the occupancy rates, rental rates, average yearly rental increases, employment statistics in the area, and worker demographics.  And also to assess any trends or future plans such as large employers moving in or out of the area, government programs, new public transportation (metro or commuter train stops), to name a few.

2.     Inadequate business plan.  It should come as no surprise that poor planning is a key cause of business failures. To be effective your plan should include financial projections as well as your target customer, how to reach them, what differentiates you from the competition.  You should develop short term and long range goals, envisioning where you want your business to be in five, ten, fifteen years.

·      The SBA website has tools for filling out a solid business plan.

3.     Too little financing. You will need enough money to cover problems such as unexpected repairs or assessments, tenants who are late paying rent, and vacancies.

4.     Expanding too fast. When it’s time to expand, Deane points out “you should treat the expansion as if you’re starting all over again” with the same careful planning, financing, and long range goals. Otherwise, the expansion could threaten your original business.

One other factor that can make or break your business is whether or not you have an entrepreneurial spirit. Are you a risk taker? Can you cope/function when things go wrong? Are you willing to do whatever it takes to make your business a success?

Soon we’ll be looking at the key qualities of a successful entrepreneur.  In the meantime send in your ideas on what you feel an entrepreneur needs to succeed. 

Great Book: Drive by Daniel Pink

Occasionally, we will digress from traditional real estate topics to review some truly revolutionary books.
Drive by Daniel Pink fits right into that category.  He turns traditional thinking about how we motivate employees on its head.  In his book he shows that traditional carrot and stick motivators do not bring out the best in employees and in fact may have a detrimental impact on their productivity.

Equally as important as compensation are qualities like autonomy, control over your work, purpose, and creativity.  Along with these insights, Pink introduces the reader to concepts like Flow - when we reach that state of joy and focus through work.  Anyone who has played a sport can connect with that concept also referred to as being "in the zone."  When you lose track of your surroundings and perform your task with ease.

Pink also suggests some other great books that explore this topic, which is a very thoughtful gift.  They all sound very intriguing and he is generous to share this additional wisdom with the reader.  You can tell he genuinely cares about the reader's development in this new area of motivation.

This book has a lot to teach us about the entrepreneurialism involved in real estate investing.  So much of what makes doing this worthwhile are the autonomy, control, creativity, and purpose that come from running your own small business.  It is amazing but you can lose track of time doing the accounting for your small business because it is yours and you are investing in yourself.  Take a look at Pink's book.  It is a quick and enjoyable read that will enrich your life and your business.