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Florida’s Beach Property Boom: A Real Estate Lesson

This article was written by Dr. Dean Burke in Real Estate and Home. 29 comments.

This is a guest article by Dr. Dean Burke, author of The Millionaire Nurse Blog. Many years ago, someone I knew was fascinated with the real estate market in Florida, and he set up an investment company to allow others to invest through him. He promised his investors 20% returns. Needless to say, I didn’t participate and I thought he was a little nuts, but this is what the market was like during the bubble. Thanks to Dr. Dean Burke for sharing his experiences and lessons learned.

Unless you were there, it is impossible to visualize the Gulf Coast of Florida’s beach property boom just a few short years ago.

The Redneck Riviera was making a lot of people rich beyond their imagination. This area known for Spring Breaking bikini babes and beer-buzzed bozos was hotter than a teen at his first wet t-shirt contest.

Realtors were flipping or subdividing tracts of sand and scrubby shrubs and making hundreds of thousands in profit. To hell with 6% commission!

Everyone I knew was playing the game. The talk from the beauty shop to the coffee shop was not about Millionaire Housewives, high school football, or American Idol, but about 1031 property exchanges, setback zones, and building codes…

You might be saying, “Where were the grown-ups?”

Well the bankers were lending money to anyone with a pulse and a signature. In this case, “no doc” didn’t mean being without a physician, it meant no paperwork or proof of income required to qualify for a mortgage. “Step right up!” the carnival barker yelled!

My story

I had been visiting the Gulf Coast since I was a kid. My family rented a small concrete block home for a week every summer. My brothers and I had great fun digging fox-holes, waiting 30 minutes after eating to swim so we wouldn’t die of cramps, and building bonfires at night. When I was teen I kissed my first girl and had my first sip of Boone’s Farm while strolling these same beaches.

When I was able 15 years ago, I bought a vacation home in the same area, and I traded up three times since then.

The property boom hit in the early to mid 2000s. Prices began rising overnight. All my friends were making spectacular money! After watching their success, I wanted a piece of the action. The lot across the street from my beach place went up for sale and I jumped on it. No money down, interest-only, baby! Just a couple of months later with prices rising daily, I put that lot up for sale.

Later that same day, while I was nursing a cold one on the beach, a real estate agent trudged across the sand with a contract in his hand. With only the sweat equity involved in digging two holes to place the for sale sign and a signature, I had a pile of money! As I wanted a place on the bay so I could dock a sailboat, I tripled my money by selling my beach front home. (Sorry kids!)

Six months later I had three other properties, nearly worth a million bucks in all. One of these was my dream lot, a bay-front, with deep water dock — a perfect sailboat parking place!

Flexo suggested I include the details of my thought processes, whether there were any financial calculations that went into my purchases and how the decisions were made to sell. I laughed when I read that. The only calculations were greed on my part, making money. The idea that the lots might go down in value never even entered my mind.

Most of you are probably thinking, “I know how this ends: The Lehman Brothers bankruptcy and a spectacular crash.” You’d be wrong.

The needle that pricked this bubble was born in a little low-pressure weather area off the western coast of Africa. Once the levees broke from the Category 5 power of monster Hurricane Katrina, the nation’s spotlight was on how fragile the man-made dwellings on the Gulf coast were. We were 300 miles from the storm, but it might as well have been in our back yard.

Property values plummeted and the lives of everyone connected to that area of the country were changed forever. Businesses closed. Bankruptcies, foreclosures, and shattered dreams were common stories, all a couple of years before Lehman Brothers fell. The subsequent second-round real estate body blow was like pouring alcohol on an open sore.

I was only a bit player in this theater of the absurd and the sand. I had not mortgaged my future on my real estate venture. I learned many valuable lessons from those heady times. I’m reminded of it every month when I make my payments on land that is worth 30 cents on the dollar now.

I’m not looking for sympathy. I’m a big boy. The more cynical among you will think, “He got what he deserved!” I’m glad to say I have survived those days, and I am a much smarter investor today because of it.

Now I ask myself these questions before any major investments, particularly in real estate. They’ll help you too if you will let my pain be your gain.

How does this investment relate to my overall goals? If buying a home in two years is your top goal, investing in gold futures may not be the safest place for that money. Make sure you weigh your time horizon and risk tolerance when you are saving for a large investment.
Is this investment low-risk or speculative? If speculative, make sure it is only a very small portion of your net worth. In my case even with a 60% loss on the value of land I was and am able to make my nut as they say. Make sure your speculative investments won’t take you down with them if you suffer a total loss.
Who will I sell to? When everyone seems to be making the same investments around you, stop and think who the next buyer will be. If you encounter people making the same investment or gamble as you are, that normally aren’t a part of that world, your alarm bells should ring. You owe it to yourself and your family to consider potential negative outcomes. Can you say, “Bubble?”
What are the steps and potential outcomes during each step of the project/investment? If large investments makes you nervous, when you consider the investment, create a mind-map on a whiteboard outlining your potential good and bad outcomes. Do this for each step of the project. Get expert help. You can’t predict hurricanes or tsunamis, but when you live on or near a coast, they need to be considered. When you purchase a rental, consider the possibility of a fire or going months without a lessor. When you are investing in an oil company, what happens if oil prices drop or rise by 50%, or in the worst case, there is an oil spill? Think of as many outcomes as you can and weigh them appropriately.
What is the reward potential? Make sure you understand the possible gains and compare them to possible losses. Is that risk worth taking?
When will I divest myself of this investment? Know when to cash in your gains or minimize your losses. You know the old saying: Bulls make money, bears make money, but pigs get slaughtered. Don’t be a pig. (Oink oink!)

You will never bat one thousand when it comes to being successful with your money. Losses will happen. The secret is minimizing your catastrophic losses that take you down or take decades to overcome.

I have been an active investor through two investment bubbles. The dot-com bubble of the late 1990′s and the real estate bubble.

Investment bubbles are like being a married guy at a party without the wife, and having J Lo and Katie Holmes all over you. Resisting temptation can be almost impossible, but not giving in is what makes a successful marriage. Resisting the siren call during the peak of a bubble will make you a more successful investor, but it’s damn hard!

With luck maybe I’ll have those lots paid off by the time my future grandkids are grown. They will enjoy their beach property. When I get sand between my toes hopefully I’ll be able to remember the good times I had as a kid and not let my adult stupidity get in the way of those great memories!

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ING ShareBuilder Review

This article was written by Flexo in Investing, Reviews. 11 comments.

Read to the bottom of this article for the latest ShareBuilder bonus.

I’m not a frequent trader. With my long-term view of investing, looking at stocks every day and executing costly trades does not make sense for my approach to my own finances. My strategy does not involve trading stocks or ETFs, timing the market in search of better returns. That being said, once in a while, I set aside a relatively small portion of money to test some theories. Here is an example from about a year ago: After a company received some bad news, I purchased about 10 shares of its stock, with the thought that the recalls were temporary problems that shouldn’t significantly affect the overall value of the company over time.

The stock price has recovered since then, but after the fee to buy the stock, I’m only ahead about $20 right now. If I had to sell, my profit would be even less. These fees cut into profits and should be minimized as much as possible. If you want to play in the stock market, it makes much more sense financially to use a discount brokerage than a full-service operation, due to the smaller fees. The accounts that hold my small investments in this company, as well as similarly small investments in an ETF and two other companies, are held at ING ShareBuilder. Here’s my ING ShareBuilder Review.

Opening the account

It has been a while since I’ve opened my account at ShareBuilder. I did so before the company was acquired by ING. ShareBuilder offered a variety of bonus codes to invite new users to join. In fact, they allowed the same individual to open several accounts, earning a bonus for each. The Internet went crazy, and there were reports of people opening as many as 50 accounts, earning a $25, $50 or $75 bonus for each account. This was apparently, not against the terms, but some customers who took excessive advantage of the offers were asked by the company to consolidate or close their accounts.

The typical personal information is required when you apply for a discount brokerage account with ShareBuilder, but current customers of ING Direct will have a streamlined process where some of their information is ported directly.

Transaction fees

Many discount brokerages offer roughly the same set of tools. Each company may have a few bells and whistles, but for the most part, this type of service is a commodity. Many of the resources offered by discount brokers, like charting and analysis tools and access to some analyst reports, can be found in other locations for free. When it comes down to it, the most important aspect of a discount brokerage is the cost. Paying a $20 fee to sell $100 worth of stock immediately and significantly cuts into any profit you may have had or amplifies a loss. For this reason, look carefully at all the costs involved in buying and selling.

ShareBuilder has two tiers of membership, Basic and Advantage. The Advantage plan requires a monthly fee of $12, but with this membership, you receive 12 free trades each month, if those are done by automatic investment. Each automatic trade in excess carries a fee of only $1. Real-time online trades, on the other hand, are $7.95. Real-time trades are executed as soon as possible after you place the order. Automatic trades are less expensive because they are bundled together with other customers’ automatic trades and effected only once a week. In other words, ShareBuilder gets the benefit of combing your sale of 30 shares of Microsoft with another investor’s purchase of 30 shares on Microsoft. ShareBuilder does not need to go into the open market to settle these trades, so everyone gets a better price, including ShareBuilder who still collects the same fee as the would with other automatic trades.

With the Basic plan, automatic investments carry a fee of $4 and real-time trades are $9.95.

ING ShareBuilder offers real-time market orders, limit order, stop-loss orders, and several types of options. Some customers might also qualify for margin trading.

One of my favorite features is the lack of an inactivity fee. Most brokers want to make money off of you, which they can only do if you trade. The more actively you trade, the more money the broker earns from you. When they are not earning money from you through trades, many companies want to find other ways to make holding data for you on their servers worthwhile. That’s the beauty of the inactivity fee from the broker’s perspective. Active trading is not generally a sound investing strategy, so buy-and-hold investors are discouraged when charged a fee just for leaving an account open. Perhaps it’s wrong to assume that any company should hold money or investments for free, but since some do, those who charge fees appear to be unfair.

As long as there still are brokers who don’t charge fees for an inactive account, I’ll continue seeking them out for my business.

None of the above can be said without pointing out there is another important fee that often goes unmentioned: the account transition fee. If you decide to close your account and transfer your investments to another without selling and triggering tax ramifications, ING ShareBuilder does charge a $75 fee. If you’re not closing your account and transferring only a portion of your assets, the charge will be $15 per security, up to $75.

Linking accounts

A nice benefit of having an account with ING ShareBuilder is the ability to link your ING Direct savings and checking accounts with your ShareBuilder account. This ensures that you can easily and quickly transfer money from your ING Direct account whenever you want to trade, even if you don’t have cash in your ShareBuilder account. You can link other bank accounts as well, but this “Express Funding” service costs $6.95 if your linked account is not held at ING Direct. Sometimes it’s better not to have cash available because you’re prevented from making rash purchasing decisions. Active traders or those who want to aim for a certain time on a certain day do not need to worry about having cash in their ShareBuilder account if they are a customer of ING Direct.

Bonus

Currently, ShareBuilder is offering a $50 bonus for new accounts. This is perfect for people who are interested in getting their feet wet with stocks or ETFs. This is the type of deal I took advantage of to get started with ShareBuilder. Open a ShareBuilder account, and fund the account with $50 of your own money from a linked ING Direct account or another bank account. Buy $46 worth of stock or ETF using ShareBuilder’s Basic plan for $4. You just used a total of $50, the same amount of your bonus. When you receive the bonus within a few weeks, transfer $50 back to your savings account. In effect, you’ve made your first trade with free money. If you’re willing to spend some of your money, transfer more to ShareBuilder and see how your investments perform. The bonus is available only for a limited time, and will currently no longer be offered following March 31, 2011.

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Make More Money By Sleeping More

This article was written by Flexo in Health. 20 comments.

Although I’ve always been a proponent of the value of getting a full night’s sleep for health, this is something that I haven’t been able to do for myself for many years. The people I know who are most committed to their careers and those for whom anything other than success is unacceptable have had a bad relationship with sleep.

I’ve heard some CEOs say that there will be time to sleep when they die, and other managers who expect their employees to forgo a good night’s sleep during the most important times of the year when presence at work is required for nearly twenty-four hours a day. I had a boss who, even during slower times, often worked in his office twenty hours a day and slept at his desk for the other four hours. This was many years ago, but I wouldn’t be surprised if he still does.

Studies have long shown the benefits of getting a full night’s sleep, and seven to eight hours each day seems to be the magic amount. Researchers continue to study sleep. A few years ago, sleep deprivation was linked to serious illness, and now it’s been found that there are superficial benefits, too; sleep makes people more attractive. There’s truth behind the phrase, “beauty sleep.”

It seems somewhat intuitive, but now we have the data to back up our assumption. Getting a full night’s sleep keeps you looking good. Anyone who is interested in earning more money should be interested in doing anything possible to seem more attractive to others because other studies have shown that, on average, people considered attractive earn more money.

As I’ve been basically working two full-time jobs for the past few years, I have not been able to live by my philosophy of the importance of a full night’s sleep. As of today, however, I am making my own hours, dedicated solely to the projects that I want to work on (such as Consumerism Commentary).

I don’t think I need to force myself to remain awake in order to build a successful business. In fact, I seem to have better ideas when my brain is operating well-rested. As I design and schedule my life without a corporate job in addition to the work I want to do, I will try to incorporate a good night’s sleep. I’m primarily motivated by the health benefits, but it wouldn’t hurt to lose the circles under my eyes, appear more attractive to others, and perhaps statistically earn more money.

Do you get a full night’s sleep? Do you think sleep has any noticeable effect on your attractiveness?

Want to look hotter? Hit the sack, MSNBC
Surprise! Pretty people earn more, CNN Money

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Amway Class Action Lawsuit Settlement

This article was written by Flexo in Consumer. 67 comments.

I have a business opportunity for you. For the most part, you’ll be a salesman. You’ll sell overpriced, mediocre products to your friends and co-workers, people already in your trust network, with whom you can use their guilt and their desire to maintain happy relationships.

The truth is the products don’t matter. It can be jewelery, kitchen tools, or beauty products. What you’ll really be selling is the system, because you earn money when those you recruit to the system earn money. The scheme itself earns money by selling the tools that allow you to participate, but participants earn money by recruiting. While using guilt to sell products to your friends and co-workers, it’s much more difficult to convince people to become sellers — especially when there are start-up costs to contend with. As a result, almost all who participate in pyramid schemes never earn a profit.

Amway, a pyramid (multi-level marketing) system that fits this description, has recently agreed to settle a class action lawsuit by paying $55 million to members who lost their own money through this particular business opportunity. Two important points were raised in the lawsuit:

Amway (which now goes by the name Quixtar) offered a “typical income” from its program in its marketing materials, but this income measurement was the mean, which means it is skewed by the few big earners at the top.
The company used gross income in its figured, not profit, and by not making that clear, misled recruits into believing they would earn more than they did.

Part of me wants to fault recruits for allowing themselves to become victim, but I understand that the quest for income can be desperate sometimes, and it’s worthwhile to consider every opportunity. Slick marketing materials help mask the truth. While some research is all it takes to avoid these programs, but cognitive bias plays a role, too.

It bothers me that multi-level marketing schemes have become such a force on the internet, as well. Rather than hard items, the products are digital, like e-books. Customers are asked to recruit other customers and paid to do so. The product is irrelevant because the income opportunity is in the recruiting. If you read between the lines when your friend offers you an “opportunity” and see there’s more money to be made by convincing your friends to be part of your team than there is substance to the product, then turn around and walk away.

And tell your friend to stop trying to make money off you.

Hat tip: @EverydayFinance

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All The Ladies Are Interested Now

by Financial Samurai

This is a guest article by Sam, the author of the blog Financial Samurai and the founder of the Yakezie Challenge and Network. He writes a column for Consumerism Commentary every other Tuesday. What a difference a couple weeks makes! Craig has gone from depressed online dater to someone with a ton of self esteem. ... Continue reading this article…

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Recent Changes in My Personal Finance Plan

by Flexo

It’s easy to fall into financial habits. Even people who consider themselves inflexible can grow accustomed to a financial change after time. That’s the beauty of automation — an automatic 10 percent transfer to a high-yield savings account every time you receive a paycheck eventually becomes painless. Habits aren’t always perfect; just as you adjust ... Continue reading this article…

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The American Opportunity Tax Credit

by Flexo

Last week I offered some last-minute tax filing tips, and the IRS deadline is looming. I’m happy to tackle tax questions, and Consumerism Commentary reader Eric has one. Eric was a full-time student through May 2009, and he, like many former students, is dealing with the cost of a college education. Eric is looking for ... Continue reading this article…

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Am I a Jerk at Work?

by Smithee

Last Thursday, Dallas/Fort Worth got more snow in one day than had ever been recorded before. People who had never seen a snowman before were suddenly able to roll their own, traffic was terrible, and offices were closed. The next morning, when nobody was going anywhere, my employer (who is the second-best employer I’ve ever ... Continue reading this article…

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