www.sfgate.com/columnists/lloyd -> www.sfgate.com/columnists/lloyd/
Get expert advice 09/08/2006 In politics, journalism and other image-conscious businesses, insiders know full well how to "craft a deal" in Congress or "frame a story" for the front page, but an uninitiated public often can't tell where the truth ends and the spin begins. Real estate, also a world where appearances often trump content, operates according to a similar couching of reality. "Putting together" a loan package, for instance, or "writing up" an offer or "leveraging" your investment -- all these practices have their customary manipulations that many insiders give the nod to -- even when the practices are illegal, unethical or sometimes just stupid. ka "liar loans") to the over-leveraged portfolio, all collapsing in multiple foreclosures -- it's a confession worth listening to.
If Robert Kiyosaki was the pin-up patriarch for the real estate boom, Casey must be the poster child for its fall. "I've had a business ever since we moved to the US" Serin, whose family emigrated from Uzbekistan to Sacramento when he was 12, exhibits the untarnished faith in American capitalism characteristic of some immigrants. When still a teenager he marketed his abilities as a Web designer, but over the years he chose real estate as his path to higher income. After spending a year and upward of $15,000 (borrowed on credit cards) going to real estate seminars and buying home education courses from everyone from Russ Whitney to Bruce Norris and, of course, the aforementioned Robert "Rich Dad Poor, Dad Robert" Kiyosaki, Serin embarked on his brilliant career as a real estate flopper, er, flipper. "I wanted to move toward financial independence," he told me by phone from his home in Sacramento, referring to "passive income," a key tenet of the "Rich Dad, Poor Dad" scriptures ("Don't work for money, allow money to work for you"). Taking a page from the no-money-down gurus he had already ruined his credit scores learning from, he didn't let the fact that he was under-employed with no financial assets slow him down. He bought one house at a discount and sold it for a profit of $30,000, which he used to wipe out his credit card debt and bring up his credit scores. The next house purchase wasn't quite so lucrative -- it had a negative cash flow, but this didn't dissuade him. In fact, the negative cash flow only convinced Serin to think he needed more investments "to keep me busy with profit in the pipeline." In January 2005, he took a three-week leave from his job to get "enough deals in contract" so that he could give his employer two weeks' notice. He quit his job and in the next four months he acquired six more properties.
But (surprise, surprise) the profit didn't appear in the pipeline as planned. "I didn't manage my cash flow and the market changed on me," he told me. Young, computer savvy, with the sense of full-disclosure masochism typical of our age, Serin didn't cut his losses, file for bankruptcy and get a job. The ins and outs of his deals, how much he paid, what went wrong and how he is now going begging to the banks for approval to do a short sale (to avoid foreclosure by selling the houses at less than the amount of the debt). He expresses worry about whether he will go to jail for mortgage fraud and posts the distress letters he's written to his lenders. He even explains his strategies for avoiding creditors' nagging phone calls. What Serin reveals about himself is that he's a sucker for every real estate myth that the industry has been feeding us for the past 10 years: that the market will always go up, that if you buy at a discount you're safe from financial risk, that gurus are doling out useful advice for the beginning real estate investor -- and that if you make enough deals, you're sure to come out ahead. But he also exemplifies the way in which real estate has become a spin factory of hedging and hype. Serin bought eight houses in eight months in four states with no money down.
admission, he applied for and got no-money-down, stated-income loans by inflating his income, sometimes getting primary residence loan rates by claiming he would live in the houses himself. The offers, he said, often had "cash back" clauses, in which he would get money back from the seller after closing, which the bank didn't know about. His experience as a 23-year-old novice with no assets going out and getting not one but eight home loans in four different states shows just how eager the insiders have become to look the other way when things look fishy. Mortgage brokers are happily packaging applications filled with bogus information. Bank officers are allowing lending guidelines to become as flaccid as wet noodles. Too many real estate agents are willing to do anything to close a deal, and too many appraisers will pony up the numbers expected of them. Most pressingly, the use of liar loans -- once a tool for seasoned investors with high credit scores and low loan-to-value ratios -- has become epidemic. In 2005, Dominion Bond Rating Service reported that mortgages underwritten with minimal documentation sometimes account for as much as 50 percent of subprime (high-risk) mortgages. According to a new report by the Mortgage Asset Research Institute, almost 60 percent of the stated-income amounts are exaggerated by more than 50 percent. A 2004 MARI study maintained that a majority of FBI fraud-related cases on mortgage applications involved buyers lying on their loan applications about their income, their assets or their residency status. Of course, the pundits of the blogosphere seized upon Serin like hyenas on fresh meat. Many of them are infuriated by the fact that he was unabashedly attempting to make big money in real estate by flipping properties. Others find it irritating that he keeps blogging instead of getting a job. But by offering himself up as a penitent whipping boy of real estate, Serin has unwittingly offered us a glimpse into the fast-approaching future in which those high-flying real estate trade secrets come home to roost. Still, he doesn't seem to see those birds crashing to the ground. Serin estimates that even if he can sell all of his properties with short sales, he'll still be $200,000 to $400,000 in debt. "It's pretty scary," he concedes, sounding not at all scared. "I could go back and get a job and just work for a living, but even if I get a Web designer position that pays $50,000 to $70,000 a year, my payments on my debt are still going to be $3,000 to $3,700 bucks a month. "Or I could see if I can do a few more real estate deals." "To succeed in real estate you have to have the right knowledge and the ability to take action.
Carol Lloyd is currently at work on a book about Bay Area real estate. She teaches a class on buying your first home in the Bay Area, and another class based on her best-selling career counseling book for creative people, "Creating a Life Worth Living."
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