Home How To's For smaller individual investors, how we tested and dived into a chaotic...

For smaller individual investors, how we tested and dived into a chaotic distressed market 10 years ago.

Whether through the financial markets or in Real Estate, our cardinal rule of looking for our “edge” or “advantage” over the mainstream conventional-thinking public is the key to our success at Oasis Global Partners. Anticipating how a story will unfold in the next year or two or longer and then looking for the proper asset, vehicle or instrument to ride the trend is critical to more professional profits and lower risk.

Today’s case study will be focused on the smaller-sized real estate dimension of the investing world. We are going to dive into the real life version of how we at Oasis Partners bought, rehabilitated and sold inexpensive properties ($200,000 to $500,000 to $5,000,000 USD) for a profit when we were testing and learning the market back in 2010.

I will tell you the secret upfront: the key was aggressive speed, overlapping all stages of the flip and investing time to secure sources of undervalued properties. Back in 2009 and 2010, just after the economic crash in the United States, we started Cactus Fund to take advantage of incredibly low priced residential properties before other investment managers copied our strategy. After generating solid returns for our investors, we took all our experience and local resources we accumulated to now to grow our new fund called Land Partners Inc.


Above: small properties are good money makers even for professional funds

STEP ONE: BUILD MORE SUPPLY CHANNELS

We are constantly on the lookout for sources and channels that can lead us to assets that have practically immediate profit potential. The traditional way is to develop a wide network of agents who can bring properties who can bring properties of interest to us on a regular basis.

Our experience has been that typically it is challenging to find real estate agents who can reliably locate true distressed or undervalued properties. Agents who have a passion for investing in flip properties themselves are typically far better at locating properties with suitable profit margins to make it worthwhile. If you are looking for such agents, ask them to show you what flips they have done in the past. The only caveat here is, agents who are actively flipping properties do have a conflict of interest with you, though if they are good, they should be able to find you opportunities beyond their own financial capacity.


Above: Our top performing agent in Phoenix, scouting a house

Beyond developing an agent network, explore sources of motivated sellers, including auctions. Though the United States real estate market has recovered considerably since the crash, there remains a steady supply of properties showing up at local courthouse auctions. Typically there people who are professional bidders, waiting around all day to win auctions where the hammer price is sufficiently below expected market price. Auctions are fast paced, with houses cheap or expensive selling in a matter of minutes to the highest bidder. Auction lists are typically released only a day before, and we have to send scouts to a dozen locations to do an exterior inspections, climbing over fences, looking in windows to ascertain the condition of the property. With tight time constraints, even when bidding has started, we will be online by cellphone with our scouts still at the property site to confirm the maximum bid price.


Above: Las Vegas Courthouse auction of foreclosure properties.

Corporate sources such as banks and insurance companies will periodically have blocks of properties they want to liquidate. Corporate sources may require outright purchase of blocks of properties, sometimes costing millions of dollars for dozens of properties. Sometimes you can pick and choose individual properties in the portfolio offered, often you cannot so we much bid accordingly to ensure target profit margins are not squeezed.

Doing your own marketing is yet another method to source opportunities. Advertising locally, and holding seminars to locate prospective sellers with properties in need of repair, or in need of financial restructuring due to excessive mortgages are good opportunities. In these cases, as an outside investor or fund, the best thing to do is to sponsor the seminars or events and include a local agent with expertise in helping homeowners exit their situation. Bringing a lawyer with expertise in debt negotiations with mortgage companies is usually required where debt restructuring and forgiveness is required.

On the sources above, developing and strengthening relationships with the widest spectrum of contacts is necessary to having visibility to undervalued opportunities.

STEP 2: COLLECTING DATA TO MAINTAIN PULSE ON MARKET.

Having invested sufficiently in our opportunity/channel sourcing, next comes acting on prospective distressed opportunities (in this case, small property flips). All channel/information sources are trained to alert us by instant message or email preferably with automated notifications. Knowing the market well will help both yourself and your source/agent to funnel assets/properties that meet your requirements. If your channel/agent sources are confident in your ability to make an informed decision quickly on the info they sent to you, the pace of transactions will undoubtedly rise..increasing volume is desirable!


Figure 1.0 – Collect data as frequently and from as many areas as possible.

A typical day looks like this: Automated emails and instant messages arrive in bold lettering into our inbox. We immediately chart the location and know what we can sell the property for. We in fact even from the exterior imagine the interior layout of the property from the thousands we have looked at before. If the price is at least 15% below market price (as we know it) we will begin to give it priority. Is it a house that is above or below average desirability in that community? Is it in need of significant repair? Thereby allowing us negotiation room for profit? Do all the kitchen appliances still work? Does the expensive Heating and Furnace system still operate properly? Is landscaping required?

We send back paperwork with a specific price we are willing to pay and put the decision back to the selling party. Deposits are wired. We request only one condition, which is a property inspection that allows us to cancel our offer if we find something fatal to our profit margins. We send in our contractors to have a look as soon as we have access to the property and get a detailed estimate, often within 36 hours.


Above: Arranging for a contractor to come with us on first visit to save time.

Once the selling party (Bank, Lender or homeowner) accepts our offer, we take a guestimate of the closing date as these are often variable. We start marketing the property as soon as we take ownership, overlapping the sales stage with our repair stage. Showings to prospective buyers or renters may happen before we finish the rehabilitation but we don’t care, speed is of the essence.


Above: A Las Vegas project where a property bought for $155,000 with $30,000 of improvements yielded a profit of $50,000 in 3 months.

We add some professional touches to help the property stand out among others, practically as good as new if possible. End-users (housewives/mothers/parents) should be impressed with the kitchens and landscaping. Men familiar with property repairs should be impressed with some of the materials we chose, acquired at wholesale discount prices of course! Faucets and water hardware, sourced online at far cheaper prices than retail give the house a luxurious and serious feel. Blinds and window treatments? Let the buyers take care of that ::) Those ARE expensive and typically not in the equation of many home buyers.


Above: What a finished (entry-level) Kitchen should look like

Once the property is sold, we already know the next property the profits are going into. Aggressive speed is of the essence. Although we’d like to claim that we have secret weapons and powers that no one else has in this business, the truth is that focusing on the bottomline profit is the only important factor. Being rational, following the data and delivering what the market wants to buy at the right price is the key to a steady stream of profits with little risk. Multiply the above process by dozens to hundreds of properties enables us to spread our risk even wider, reducing the impact of any errors.

In the Land Partners Fund, we used the same process on parcels of raw land. Either buying locations right next to prestigious existing communities, or within the growth path of new neighbourhoods (yet well within city limits)

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