The Real Estate Espresso Podcast

Kara from Ottawa Canada asks. I have a firm agreement with a buyer for the sale of a property. Two weeks before closing the lender for the buyer indicated that they want to order a new appraisal and therefore the closing date cannot be met. The Buyer is proposing that we close the transaction with seller financing, or that we simply extend the closing date. I have very real carrying costs for the property and I don’t like the idea that this delay could cost me money. What do you suggest? Kara, this is a great question, and an extremely common situation. You’re based in Canada and closings generally happen on time. In the US, it’s much more common to have delays on closing. A failure to close on a transaction in Canada usually results in litigation. In the US, delays are part of the fabric of real estate investing. In my experience, more than half of the transactions I’ve witnessed over the past decade have been delayed for one reason or another. Sometimes the cause is a delay with the title insurance. Sometimes it’s a delay with the lender. I’ve even seen delays at the closing table when the lender for the buyer requests additional documentation on closing. You’re correct to be concerned about carrying costs. The daily and monthly carrying costs are real, and you should be compensated for the delay. The agreement for purchase at this point is not conditional. So it stands to reason that the buyer should pay for those carrying costs because they were going to own the property from the closing date anyway. I don’t know exactly how much extra time the buyer will need, but let’s say for the sake of argument that they need an extra 30 days to close. Let’s imagine that those costs are $2,000 a month. I don’t know the exact numbers so I’m making them up. You have a couple of choices. You could increase the purchase price to compensate you for the added costs. But that runs the risk of causing the buyer to prequalify for a new loan amount. That could introduce even further delay. But you would be within your rights to ask for that. The second option, which I prefer is to ask for an increased deposit. You could agree to, say, a 30 day extension under the following conditions: If your carrying cost is $2,000, I would as for a little more because you’ve probably forgotten something. I would ask for something between $5,000 to $10,000 in additional deposit monies. The Buyer should increase their deposit amount. But in this case, unlike the original deposit that was placed in trust with the real estate agent, this deposit will be non-refundable, and released immediately to the Seller. The purchase price won’t change, but you will get a chunk of cash immediately. The added deposit will be deducted from the cash the buyer needs at closing since it was pre-paid. But it is reducing your risk. I’m not a fan of closing with Seller financing. It puts too much of the risk in your hands. Let’s say that the lender for the buyer backs out of the deal. Now you’ve conveyed the property and you would need to go through a huge and expensive legal process to get the property back. This would involve a foreclosure or a power of sale, depending on where you live. In Ontario this would be a power of sale, but could only happen after the Buyer is in default on the terms of their Seller financing agreement. Meanwhile you’ve got a ton of cash tied up and you’re working with a buyer who is not capable of closing. You don’t have the flexibility to simply put the property back on the market. I want to thank you Kara for a great question. I hope this gives you some ideas on how you can negotiate the situation.

On today’s show we’re looking at another economic indicator that might signal a weakening economy. Truckers have for months been sounding the alarm about a "bloodbath" in their $800 billion industry. This year alone, some 2,500 truck drivers have lost their jobs as trucking companies large and small declare bankruptcy. That is a small number considering the scale of the industry. However, major public carriers like J.B. Hunt, Knight-Swift, and Schneider have been forced to cut their annual outlooks. Trucking is often looked at as a leading indicator of where the rest of the economy is headed. As 71% of America's freight is moved on trucks, companies foreseeing needing fewer trucks is typically an omen of an economic downturn: If manufacturers are producing less and people are buying less, there's less of a need to move goods. Trucking participates in all phases of commerce, everywhere in the supply chain. It increases as manufacturing starts to ramp up, giving it leading indication on economic growth. When the rest of America is headed for a downturn, freight usually dips first, a new published report from Convoy's economic research division said. The industry went into a recession in April 2006, more than a year before the rest of the economy was clobbered by the Great Recession, starting in January 2008. Rail and air cargo are also suffering. Air freight has declined year-over-year for eight consecutive months, according to the International Air Transport Association. The IATA head has said the China-US trade war is dragging down business. Fuel is a massive expense for truck drivers — and the companies that employ them. Fueling up a truck fuel costs can easily total thousands of dollars per month; truckers are driving up to 11 hours a day in vehicles that get at best 6 miles per gallon.  So, most companies give their employees gas cards to pay for the diesel fuel. Unless, of course, that company can't afford the fuel. The internet is full of stories of truckers who were laid off and their employer owed them for fuel. In the first quarter of 2019, 100 more trucking companies failed compared to the same period in 2018. Truckers large and small are likely to continue to feel the pain of bankruptcies. Diesel rates are expected to surge following IMO 2020, a new set of environmental standards slated to have "large and disruptive effects" on the oil and gas industry. We did a segment on the impact of new sulfur emission standards that are due to come out on January 1. If you missed that show, it was episode 462 on April 23 of this year. According to the FreightWaves report, the surge in trucking bankruptcies has been historically linked to a jump in diesel prices. For smaller trucking companies, such increases in cost can't be passed down to their customer base of retailers and manufacturers - who can just go to a cheaper trucking company in the ultra-competitive space. And now it appears clearer than ever that the economy is headed for a slowdown if not an outright recession. Remember, the definition of a recession is two consecutive quarters of negative growth. Only a few years ago there was a shortage of independent truck drivers in the US, and they were being imported from India to make up the shortfall. Now that trend appears to be reversing. On Wednesday, investors everywhere were spooked by an inverted yield curve, in which the spread between two- and 10-year Treasury yields fell below zero. We have had a few yield curve inversions over the past couple of years. They can sometimes accompany economic slowdowns, but not always.

Realogy Holdings Corp the largest full-service residential real estate services company in the United States, announced a couple of weeks ago a collaboration with Amazon. The new program is called TurnKey, a new homebuying program that simplifies the process of finding and settling into a new home. Now available in 15 U.S. cities, TurnKey combines Realogy's real estate expertise across its brands, including Better Homes and Gardens Real Estate, Century 21, Coldwell Banker, ERA and Sotheby's International Realty, with the ease and convenience of Amazon's Home Services and smart home products. The program has two parts. The first is the connection with a real estate agent who is one of the designated TurnKey agents, and who are affiliated with one of Realogy's trusted residential real estate brands. The second part of the program involves a free move-in benefit for the customer. Upon closing on a home, Amazon connects the buyer with services and experts in their area to help make the house a home. Amazon is playing the long game. Imagine for a moment that Amazon is actually registered as a Real Estate brokerage that is entitled to the broker referral fee. Let’s imagine for a moment that Amazon credits 100% of that referral fee back to the customer in the form of Amazon credits that the home buyer can use to furnish their new home. What they’re building is a new set of habits. Imagine, you’ve got $5,000 to spend on new stuff for your house. What are the chances that you’re only going to spend $4,999 dollars and stop, never to spend money with Amazon again? Chances are good that you’re going to establish a new set of buying patterns at a time when you are already facing disruption and need to establish a new set of buying patterns. You’ve moved into a new area and will probably change grocery store, hardware store, furniture store. Imagine that Amazon is disrupting that process and you’ve got $5,000 to spend. You’re probably going to continue to use Amazon beyond the first wave of spending to use up your credits. Amazon wants you to think of Amazon first when you need to buy something. By sending you on a shopping spree, they’re helping establish a new habit. There is a fundamental conflict when a platform owner competes with its customers. Some people think that the end consumer are Amazon’s customers. But the users of its platform who sell through the amazon marketplace are also its customers. Competing with your customers can be considered an anti-competitive activity because it not a level playing field. Numerous companies have encountered this problem over the years and this has been the subject of numerous justice department probes into anti-competitive practices. When a single company becomes dominant in the marketplace, it becomes a target for accusations of anti-competitive behaviour. This happened to IBM when it dominated the computer industry. Microsoft has been the target of a probe. Now Google, Facebook and Amazon are increasingly under the microscope. Certainly, the EU has put the dominant platforms under the microscope and they are in jeopardy of facing billions in fines from EU regulators. So what does this mean for us as real estate investors? The most difficult part of any marketing funnel is the wide part of the funnel. It’s not the fulfillment end of the process. Those who control the widest part will achieve dominance, since that’s where the majority of the eyeballs are looking. For now, Amazon is not at all involved in the world of commercial Real estate. They’re focused on the retail consumer end of real estate. But this is a shift of massive proportions that stands to tip the balance in the world of real estate brokerage. You can assume that Amazon will bring a lot in the way of consumer analytics that few other companies can match.

Today’s show is a very special edition where I came across a lesson in marketing that was simply too brilliant not to share with you. We’re talking about taking a commodity, a commodity that is traditionally sold by the pound, and elevating it to another level, by wrapping a few key concepts into it. I’m coming to you live from Portugal where the economy here has been through its ups and downs over the years. This is my third trip to Portugal. My father owned an apartment here and spent the winters for a number of years. The roots of this story started in 1926 with a military coup d’etat that resulted in a fascist dictatorship in 1933 under the direction of Antonio de Oliveira Salazar. Life was difficult under the Salazar regime, and many local people turned to the sea to find food and economic survival. It was during these years that the sardine fishery expanded dramatically. At the peak, there were 400 canneries in operation. Canning of fish started in Nantes France in the year in 1824. By the 1850’s Portugal too had started canning fish and the abundant supply of high quality sardines combined with the extensive coastline and rich fishing tradition eventually turned sardines into one of Portugal’s main exports. But folks, we’re talking about Sardines. They’re sold by the pound. We’re talking about $3-4 per pound. Let me introduce you to Il Mundo Fantastico De Sarindha’s Portuguesas. Translated it means the Fantastic World of Portuguese Sardines. But the name itself doesn’t convey the image. Imagine a store where the motive is the brightest circus tent colors and the decoration is like that of the flashiest carnival or perhaps even Willy Wonka’s Chocolate Factory. Inside the store, tins of sardines line the walls from floor to ceiling. There is an entire wall of sardines organized into columns where each column consists of a birth year. The tins are all painted in a period design and there is a custom design for each decade. There is a wall of tins with different types of fish including tuna, Octopus, smoked salmon, mussels, and eels. The sardine cans have dates since 1916 until present day, with a relevant event from the year in question and signalling the birth of the most prominent personalities of that year. For example, in 1927, the very first motion picture movie to have sound “The Jazz Singer” was released. Each of these tins are a work of art. I can imagine people buying a tin and never opening it. It’s almost too beautiful to consume. Now I have no interest in buying a can from 1931. That date bears no significance to me. But I might consider buying a can for the year I was born, or perhaps a gift for someone for their birthday. When you go into the store, the staff tell you the story of the cannery, and how even today, all the cans are packed by hand, the same as when the factory was founded in 1942. They tell you about how the generations of people have made the sardine cannery their livelihood. Understand, it’s not about the sardines. I don’t even eat sardines. But my wife and I were so taken with the store that we had to go inside. My wife informed the shop keeper that we would love to hear the story, but would not be buying anything since we have a Vegan diet. You’ll never guess what happened next. The shop keeper showed us two cans with Vegetarian and Vegan contents. Of course we purchased a tin. I don’t even know what’s inside, but I paid 7 Euros for a hand painted tin with some kind of edible contents. So as you think about your real estate offerings, what are you doing that connects uniquely with your clients that makes them feel special, like the product was designed specifically for them? If it can be done with a commodity like sardines, you can customize anything to fit your client.

Chris is based in Newport Rhode Island, where he runs a family business investing in single family homes across four states. His recession proof strategy has positioned him extremely well for any economic conditions. He also has a free book for our listeners at freesrecbook.com. Mention that you heard him here on this show. 

Linda from Katy Texas asks: "I’ve been considering buying an apartment building in a depressed area with the hopes that I can fix it up and increase the value significantly. Even at today’s rents, the property is being marketed as a 10% cap rate property. I can’t seem to find properties that deliver that kind of rate of return in a more desirable area. Why would I pay that much more for a property in an expensive area and get a lower rate of return?"

The year was 211BC and ancient Rome introduced the denarius as its money. The coins were nearly pure silver and the coins had a theoretical weight of about 4.5 grams.  The standard, although not usually met in practice, remained fairly stable throughout the Republic, with the notable exception of times of war. The large number of coins required to raise an army and pay for supplies often necessitated the debasement of the coinage. An example of this is the denarii that were struck by Mark Antony to pay his army during his battles against Octavian. These coins, slightly smaller in diameter than a normal denarius, were made of noticeably debased silver.  The denarius continued to decline slowly in purity, with a notable reduction instituted by Septimius Severus. By the year 274, the denarius contained virtually no silver.  On today’s show we’re taking a closer look at the latest collapse of the Italian Government and what it might mean in the future.  Now I know what you’re thinking, I’m investing in real estate in the heartland of America. What does the resignation of an Italian Prime Minister have to do with my life? Italy has had 61 governments since WW-II, more than any other nation on earth. Part of the problem is that Italy’s electoral system is based on proportional representation. That means that if there are a large number of parties, which there are, it’s virtually impossible for a single party to get enough votes to form a majority government. They almost always end up being a coalition government between parties with differing ideologies.  Italy is the 8th largest economy in the world and they rely heavily on exports for their economic sustenance.  Now Italy has had numerous failed governments in the past. Their electoral system appears a bit dysfunctional.  Prime Minister Giuseppe Conte resigned on Tuesday after Matteo Salvini, leader of the League Party withdrew support for the government.  Now none of this matters to real estate investors in North America. This is nothing more than a power struggle. But the issue runs a bit deeper, and here’s why we care. Italy is part of the European Union, one of 28 countries, soon to be 27 after the Great Britain exits later this year.  The European Union is like a family where each member of the family has their own personality and values. Oh, and like a lot of families, they fight about money. Italy has never really recovered from the 2008 financial crisis. When I was there a few weeks ago, the news media were still talking about the financial crisis like it was something new. But we’re 11 years later. It’s no longer a crisis. It’s the new normal and the Italian people have not yet woken up to the fact that they need to adapt.  Italy is trying every trick in the book to try and jump start their economy. They haven’t realized yet that some of their policies are in fact responsible for the anemic economic growth. It’s easier to print money. But wait, that’s in contravention of EU rules.  You probably remember a couple of years ago when all the financial markets were spooked over the possibility of Greece defaulting on their national debt. Greece is one of the smaller members of the EU. They only have 12M people. They’re a rounding error on the side of Europe.  I’ve been saying for some time that the next financial crisis is going to be a sovereign debt crisis. I still stand by that. I just can’t tell you which country is going to be the trigger. Will it be Greece, Turkey, Italy, Argentina, or the good ol US of A.  The headwaters of the next financial crisis are wrapped up in governments that believe spending their way to prosperity is the path to economic growth. 

Today’s episode comes to us directly from Simon Black. If you don’t know Simon Black or know of him, he publishes the wildly popular Sovereign Man Newsletter.  Today's episode is the story of Tom's Diner in Denver, Colorado. It's about how some local activists nearly stole $5M in real estate value from the owner of a piece of real estate.  I want to thank Simon Black for writing today’s piece. If you don’t subscribe to Simon’s daily newsletter, I highly recommend it. He offers a perspective that few other in the world have. Simon’s a smart dude. He’s a former US intelligence officer and he served his country in Iraq during the Iraq war. Given his role in sending military intelligence information back to Washington, he was naturally surprised to see the news about Weapons of Mass Destruction. Simon and his colleagues looked at each other and said “What are they talking about? What Weapons of Mass Destruction?” That seminal moment put him on a quest to dig deeper and find the real story behind the story that is so often glossed over in the media, or mis-reported altogether. 

On today’s show we’re talking about one of the hidden costs, and therefore one of the hidden values of a parcel of land. This has to do with access to fresh drinking water. Water is emerging as the master resource that will determine the very survival of the human species. We tend to think of our water needs in terms of drinking water for human consumption and for washing and bathing. That for sure is a very real need. What we don’t see is the water consumed to produce the food we eat.  Some forms of food production consume incredible amounts of water. For example in the state of California, 15% of the state’s water consumption goes towards the cultivation of almonds. That’s a huge number.  We are seeing erosion of the water table in many parts of the country. When Las Vegas was founded about a century ago, it was a valley in the desert. The people at the time drilled relatively shallow wells that seemed to flow without limits. The early users of that ground water did not pay any attention to conservation. Today, most of those wells are dry and the city of Las Vegas gets its water from the Colorado River. The water level in the Colorado River has fallen steadily over the years and today, the final stages of the Colorado river that flow into Mexico no longer reach the ocean. The river bed is bone dry. There have been multiple diversions of the mighty Colorado river to service agricultural and municipal water needs of the communities along its path. The Central Arizona Project diverted the river into the city of Phoenix to provide fresh water for a metro of over 4.3M people.  India is running out of water. Saudi Arabia is out of water. They have used their oil wealth to build the most elaborate desalination systems in the world. There’s no question that the cost and efficiency of desalination have come down dramatically over the past 50 years. The older evaporation based systems were the most power hungry of all. Today’s modern multi-stage reverse osmosis systems use 1/10th the energy of those original systems. Depending on the salinity of the source water, you’re looking at somewhere between $0.75 per cubic meter of water to $1.30 per cubic meter of water, that’s about 250 gallons. That assume that you have a large capacity municipal grade system. When you look the breakdown if these costs, about 45% of the cost of producing the water goes to direct energy costs. The remainder is tied up in the life cycle costs of the equipment and the operation of the plants.  Let’s look at how much water it takes to produce food. It takes 15 gallons of water to produce a pound of lettuce and about 22 gallons to produce a pound of tomatoes.  At the other end of the spectrum, it takes about 3,000 gallons to produce a pound of beef. So when you have that 8 ounce filet mignon steak, you should be mindful that you’ve just consumed about 1,500 gallons of water. If you have steak 7 days a week, and I know a few people who do, you’ve just consumed 10,500 gallons in a week for just your steak. That’s half a million gallons of water a year.   I’m not telling you this to advocate a vegetarian or Vegan diet. That’s entirely up to you. This is just the hidden resource consumption that goes into our personal consumption of the one master resource in the world. So when you purchase a parcel of land, you want to pay close attention to the water rights and responsibilities that come with that parcel of land. In North America, the water rights generally date back to British common law and are based on the concept of riparian water rights. Generally speaking, you own the ground water under your property. You have no ownership of water that flows across your land and you have significant responsibility to protect and maintain the water that flows across your land.

On today’s show we are examining the difference between two prefixes  A prefix is the start of a word that modifies the meaning of a word. In the word anti-septic, anti is the prefix that changes the meaning of the word septic.  In today’s show we’re examine the prefixes Inter and Extra. These prefixes are used to create the word interpolate and the word extrapolate. Both involve predicting a point on a graph. But the math behind these two is different.  When you take an existing set of data points and you lack data in the middle of your data set, you can use interpolation to determine where on the graph this data point would reside. It generally results in a pretty good prediction of the outcome. For example, if you know what your profit was a 5% vacancy and at 10% vacancy, and you now have 8% vacancy, you can predict with a high degree of accuracy what the property performance will be at 8% vacancy. You have good data on either side of 8% with which to predict what the result will be at 8%. Mathematically, interpolating is pretty safe.  Extrapolating on the other hand is fraught with risks. Take the example of Social media side tumblr. At the peak, they had more users than Instagram and Pinterest. In 2013, they sold to Yahoo for $1.1B.   They were just sold to the owners of Wordpress for less than the price of a modest home in silicon valley.  The problem isn’t that Tumblr is only worth a couple of million dollars today.  Tumblr was inherently ill-suited to advertising. Today, Google and Facebook suck up 57% of all the digital ad spending. Back in 2013, social media advertising was not well understood, even though most financial analysts knew that the path to revenue would be through advertising.  Tumblr’s billion dollar plus valuation was based on a forward looking financial model of the kind of income it might be able to generate in the future.  That meant that the valuation was based on another metric which doesn’t correlate directly to revenue. In those days, the number of users or eye-balls was the metric of choice. But you can’t extrapolate eyeballs into dollars directly.  Interpolation is using past and present day information to calculate things in the present. Extrapolation involves predicting the future.