The Results Of Ignoring Risk

[Stephen Masek]

My wife and I recently attended an investment seminar / meeting and were simply amazed at many things we heard. They all fit under the general category of ignoring risk. You could also call it creating houses of cards.

The event started very well, with a nicely prepared review of current market and economic conditions. One of the points made then was that cash purchases are now a high percentage of overall purchases.

One speaker, supposedly an expert, flatly stated that people buying with cash are stupid or lazy. My wife and I are now cash buyers. The data presented at the start of the event indicated that there are many, many others now buying with cash. Are all of us stupid or lazy? I think not!

One of the schemes mentioned by that same speaker was a wrap lease. It is done by leasing a property, then subletting it. He mentioned one person taking in $1,000 per day profit doing it. That means they have leased and subletted numerous properties, probably in violation of most all of the original leases. How many of them have to go vacant at once for them to go BK? What combination of vacancies and units being badly damaged by sub-tenants would make them BK? How many actual owners enforcing the lease terms and requiring that the subletting end would put them under? Perhaps they have plenty of reserves, or perhaps they are hoping that noting goes wrong.

Both speakers were advocating using SDIRA funds to operate as a lender to investors. The second supposed expert indicated that flipping could not be done within an SDIRA, as it would be subject to the unrelated business tax. Neither addressed the obvious issue that operating a lending company also seems to be an unrelated business.

It seems that very few "experts" pushing investment approaches advocate dealing with risk in a professional manner. First, by determining the probabilities of various negative events and combinations of events. Second, by determining the impact of those events or combinations of events. Third, by then developing a matrix of risk vs probability. Calculated risks vs wild gambles that nothing will go wrong are two very different things.

By the way, we have used loans, but always had plenty of reserves to handle various combinations of vacancies, multiple vacancies, rent reductions, and repairs. We sold when we saw rents going down and real estate prices going crazy. We had no idea of the extent of all of the crazy things which were happening on Wall Street and all of the big banks, but it was not luck. We gathered what information we could, and determined that the risk had gone beyond our maximum limit.

[Joe Bertolino]

Selling reality is hard (Time, Money, Hard Work, etc) but selling the dream (quick easy money while only risking OPM) is relatively easy when you have a broke, desperate group of people wanting to believe. If you are going to try to sell a $1000+ program or coaching service at the end of the presentation then it is a lot easier if you are pitching the dream. Unfortunately the reality of real estate investing (getting rich slowly OR taking significant risks) isn't sexy enough to get people to whip our their credit cards at some hotel meeting room.