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John T. Reed' review of Robert J. Abalos" book Investing in Land 2 FNMA seller program At one point, FNMA offered to buy at current market discount rates any seller home mortgage originated in accordance with their guidelines. I urged readers who were doing seller finance to qualify for that program. The problem is that when you comply with the rules, and make the loan the way a loan should be made, you lose much of the puff-up-the-sale-price effect. In other words, originating the loan in a professional manner"”credit check, appraisal, etc."”wipes out the delusionary component of the typical seller finance deal. Financial basis Abalos has an odd way of analyzing many deals. He seems to say that if you buy a parcel, then sell off enough of it to recoup all of your original purchase price, you have no money ("financial basis") in the remaining parcels and therefor any sale of them is all gravy and you should treat them differently from properties where you still have part of your original purchase price in the property. In the 7/99 issue, I reviewed the book Why Smart People Make Big Money Mistakes by Belsky and Gilovich. To them, putting money into various mental categories is a mistake they call "internal accounting." A dollar is a dollar The correct view is that all of your assets are equal. A dollar is a dollar. The amount you have in a property is its current market value less any debt secured by it. None of your properties that have equity should be treated differently than any others. Whether you have received back your original investment in a given property is irrelevant ancient history. Use ROE (return on current equity) not ROI (return on original investment) when evaluating your properties. Abalos also proves that some yields are far lower than investors think by deducting opportunity cost, inflation, and other things from the apparent yield. This is arguably double penalizing the yield. Plus, we are used to treating inflation and such as ambient. Therefore it is likely confusing to start adjusting for inflation. Theoretically, you could do it as long as you adjusted everything you were comparing it to for inflation as well, but I fear than this process may result in readers comparing the knocked-down yield to unadjusted yields of alternative investments. That would make the investment being disparaged look inappropriately bad by comparison. "Intrinsic" value Abalos advocates bargain purchases which he describes as buying for less than "intrinsic value." His definition of "intrinsic value" is a bit fuzzy. I think it' simple. A bargain purchase is when you pay 80% of fair market value or less. In securities investing, from which Abalos acknowledges getting much of his approach to land investing, "intrinsic value" has a different and in my opinion, dangerous, meaning. There, it is a value that the stock market does not now recognize, but will in the future before you sell. I believe that is a distracting concept in any investment category. In real estate, you can buy at a bargain price and sell for market by removing the cause of the bargain"”like an ignorant heir who is hungry for immediate cash. You can also often spot unrealized value in property"”like the ability to get zoning improved. But these are very specific mechanisms for making a profit. "Intrinsic"' value, which Abalos says is definitely not market, is too vague for me. Abalos generally talks about bargain prices and improving property values in ways that I agree with, but I think he muddies the waters by bringing in the stock market

notion of "intrinsic value." Bad credit Abalos dissents from the typical current guru by admonishing those with bad credit to straighten it out before investing in real estate. I agree. Singles, not home runs In a baseball analogy, Abalos recommends that you try to "hit singles not home runs" in land investing. By that he means seeking significant, but not spectacular, profits by moving a property one or two steps toward development. "Hitting a home run" would be trying to take a property all the way from raw land to a finished, occupied building. Abalos is adamantly opposed to your doing that. I agree, although I have know a number of very successful developers, including Landlording author Leigh Robinson who has developed several motels in recent years"”also, the developer who built my home. He may overstate it a bit. Circle over developers He accurately notes that developers have more than their share of bankruptcies and lesser financial difficulties. Indeed, he advocates the interesting and likely successful strategy of getting to know small developers so that you can buy into their current deals cheaply when they get into their frequent difficulties. I wrote about one such investor who is a contractor who deals with developers. Over the years, he has bought hundreds of brand new homes at bargain prices from developers who could not sell their last few homes fast enough at market prices. Corruption I have long believed that land was significantly more corrupt than investing in buildings because of the government/political permit processes. Abalos says that is a myth in his 18 years of experience as a land investor and land lawyer. I am glad to hear it. But I must note that I have seen more than a few news stories that seem to suggest otherwise. Abalos says those are the exception. Income from land Abalos tries hard to kill the "myth" than land produces no income. But one such argument involves a land owner who operates a string of businesses with little relation to the land"”growing herbs, selling them and a book on them to restaurants and through the Internet and a retail store in the local town. Too much credit is being given to the land and too little to the entrepreneurship of the land owner. Types of buyers Abalos says there are two types of buyers: "financial" and "franchise." He defines a "financial" buyer as one who seeks cash flow or bargain purchase. That' the only kind I advocate. "Franchise" buyers He defines a "franchise" buyer as one who seek a property because it complements some property they already own. Abalos says they pay more than market value. My first duplex sold to a "franchise" buyer"”an adjacent savings and loan who needed my property to end their status as the only bank in town that did not have a drive-thru. The classic franchise buyer was Walt Disney assembling the land for DisneyWorld. I agree that such buyers will often pay more and that you should seek them out. I started to write a book once called the Owner' Guide to selling Investment Real Estate. Among other things, it contained a checklist for searching for such "franchise" buyers as one of your initial marketing steps"”adjacent property owners, similar property owners, similar business owners, and so forth. Planning Abalos has some planner type views. He sometimes uses words or phrases like "sprawl," "out-of-control" growth, and "moderate" growth. I regard those sorts of words and phrases as anti-growth spin. But these discussions are only occasional digressions in his book. "Geologic quality" Abalos says the land you buy must have "geologic quality" and says not to buy land that is under water at high tide, earthquake faults, or steep cliff faces. I would say that you should think twice about buying such land, but I have lived too long in California and on the Jersey Shore to agree 100%. Some of the most valuable real estate in Wildwood, NJ is under water at high tide. Those properties are called piers. The land on earthquake faults in California is probably worth quadrillions of dollars. You need to be careful what kind of structure you place there, but knowledgeable California real estate people would never agree that you should reject it out of hand. The same is true of steep land. In California or any other place where land has very high value, it is worthwhile to build on steep slopes. As with building over water, the costs are higher, but when the location has very high value, you can economically build there. Abalos lives in the Richmond, VA area, although he has travelled to California and elsewhere. Absolutes In my old age, I have few remaining absolutes. For example, I used to say never buy property with a bad foundation. Then I talked to the world' biggest residential foundation expert and became enlightened. Abalos still has a bunch of such absolutes, like never use a home mortgage to finance an investment or business. I generally agree with the advice to never say never. There are a great many success stories in both business and real estate that had their start with a home equity loan. Like anything else, home equity loans have advantages and disadvantages. Botany There are a great many very interesting things in Abalos" book. One is that botany can help you evaluate land better. A knowledgeable person can look at what' growing on a parcel of land"”or what' not growing there"”and draw many Sherlock Holmesian conclusions about its history and soil composition. Makes sense. Local opposition I have always shuddered at the thought of fighting with locals about my development. Abalos does not deny that is a pain that can kill the profit on a land deal, but he notes that there are many ways to avoid that problem, mainly by avoiding changing the character of a residential area. He says there is far less resistance when you are dealing with commercial or rural neighborhoods. Physical danger Another interesting and unexpected"”to me"”point Abalos makes is that inspecting land can be very dangerous"”so dangerous that you should never do it alone. Why? Isolation-facilitated crime of the Deliverance variety. Also, there are natural and man-made hazards like poisonous snakes, mountain lions, bears, cliffs, wells, and mine shafts. Land inspectors may suffer exertional heat stroke, heart attack, or getting lost. Nowadays, growers of illegal drugs are a serious danger. Here in the West, we hear stories about people falling prey to these sorts of hazards routinely. You need not only a companion, but also a cell phone that works on the land in question and a GPS receiver and map to know your location. Natural dangers Tromping through the woods can also be dangerous with regard to infection, insects, rabid animals, puncture wounds, and so forth. If you are not an expert woodsman, you need to research the proper clothes, what not to eat or drink, and other outdoorsmen knowledge. Ranger School I know I learned a ton when I went through Army Ranger School. For example, never step on a fallen tree. They often contain bee hives and the bees will attack you. They did not teach us this. We learned it from painful experience. Other Ranger lessons: wear heavy clothing and glasses (even if your vision is 20/20) to protect you from thorns and branches, and immediately spray any cut with Bactine to prevent infection. Abalos says leaving your vehicle in an isolated spot can be dangerous with regard to theft of the car or its contents or alerting violent criminals that you will be returning to that spot at some point. Rural police regard unknown vehicles with great suspicion. Let' be careful out there. Boundaries Investors in improved property tend to take boundaries for granted. Usually, the boundaries of an improved property are fairly obvious, although you can get fooled on occasion. But with land, it can be really tough. Landowners often tell you incorrect boundaries, either on purpose or by accident. Abalos says most land owner statements regarding boundaries are wrong"”often by 100 yards or more. You must be a great map reader to avoid this problem. Nowadays, you can be greatly aided by global positioning system receivers. I would think they would be mandatory for land investors. Easements, streets, etc. Abalos says that there are often old easements on land that can be removed. He says that in his home area of Richmond, VA, you can close a street and thereby convert two blocks into one larger one for a $50 fee. He did not say who owns the former street. He also says many easements can be ended with a letter from the owner of the benefitted land. Coopetition Abalos chastises investors who shy away from sharing thoughts on land with other local land investors. He says that' a mistake. But he also tells of times when other land investors try to steal your deals. What I come away from his book with is the notion that you should try to share and get information from fellow local land investors, but not when it comes to a pending bargain deal that you do not yet have locked up. Free field In one of his first deals, Abalos was shown a home that had a large field next to it. The agent said the field was not part of the property. But when Abalos checked the property description, it was part of the property. A misleading picket fence separated the two parts of the lot. Abalos had just graduated from law school and consulted with his ethics professor about whether he had a duty to tell the seller. Abalos went ahead and did the deal, but says he has regretted it ever since. Cash, silence on value My advice on such matters has been as long as you pay all cash"”including the use of institutional financing"”and make no false representations regarding the fair market value of the property, there is no ethical issue. I also say that you must apply securities market suitability standards to any deal where the other party is being asked to accept something other than cash"”like a lease option or seller mortgage. In this deal, Abalos paid all cash. I think the seller had a right to recover her lost property value from the agent and any other so-called professionals who advised her in the deal, but not from Abalos. He was an arms-length buyer. He made a cash offer and she accepted. End of story. I recommend Abalos" book although I disagree with some of its big-picture investment analysis. The only previous good land books I knew of were Finding and Buying your Place in the Country by Les Scher and How to Make a Fortune Investing in Real Estate: The Land Game by Albert Winnikoff. Order form | Real estate investment books John T. Reed, a.k.a. John Reed, Jack Reed, 342 Bryan Drive, Alamo, CA 94507, Voice: 925-820-7262, Fax: 925-820-1259, www.johntreed.com

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