Rags to Riches: From Barely Qualifying for a Loan to $50 Million in Home Sales

Six Lessons for a Weak Real Estate Market.

by Jennifer Openshaw, AOL Family Financial Editor



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My friend Stuart Liner remembers the days in 1990 when he was panicking, holding his head, thinking, “I can’t take a $100,000 loss on a condo I bought for $300,000.” The house, thanks to Gulf War economic disruptions that hit California’s hot real estate market, was then worth only $200,000.

What did the now multimillionaire do when facing his first major real estate downturn? He did what I think most people should in a wobbly market -- he held on and rented the condo at a modest loss. He even made another ill-timed move not long after that one. He bought a home, this time in Tarzana, near the epicenter of the soon-to-happen Northridge earthquake of 1994. He barely broke even.

What happened from there is spectacular and well worth sharing. Sure, I’ve seen a lot of folks make money at buying and selling real estate on the side. But Stuart and his wife Stephanie, whom he married in 1991, have set a new standard. They've gone from real estate losers and barely squeaking by, to living in and then selling fixed-up homes that fetch as much as $12 million. Their current home on the Westside of Los Angeles is now for sale for $15 million. In all, Stuart has lived in, fixed up and sold homes generating more than $50 million in sales – all while working full-time as an attorney.

As analysts across the country warn that the real estate bubble could burst, I think there is still an opportunity to make money if you follow lessons learned from the Liners (and try not to make some of the mistakes they made in their first real estate ventures). Most important: You’ve got to be extra careful when choosing properties. Sellers are still demanding high prices, which can make it tough to buy a home, fix it up, and still make a profit that’s worth all the time you’ve invested.

For Stuart, the current slowdown doesn’t mean he’s abandoning his strategy. It just means he’s spending even more time rummaging through newspapers, visiting open houses and searching through private listings to find a home that will eventually yield a dramatic profit. You can see why his strategy of sticking to one major housing project at a time is a smart one. Here are six key lessons for a slowing real estate market from the Liners:

1. Hold on if you can
Keeping a bad real estate investment might sound crazy, but it may be a heck of a lot better than cutting your net worth by a third. In Stuart’s case, the loss he was facing was not one he could stomach – a whopping $100,000 -- so renting out the condo until he could sell at a decent price made more financial sense. “If the check I had to write to get out of that property was $10,000, I would have done it because I was already losing about $500 a month in rent,” he recalls. “But instead I was facing a $100,000 loss with the real estate downturn.”

Holding onto a property in a weak market can also make sense if your property is in an area where there is a high demand for rentals. You may be able to get a higher rent than you’d expect. Remember that you don’t need to collect enough rent to cover the full mortgage payment to break even. Your goal should actually be to cover 70% or so of your monthly costs (mortgage payment, interest, and insurance), since the bulk of your mortgage is tax-deductible.

When does it make sense to sell? When you can’t financially handle the monthly loss or when you have a clear game plan for reinvesting that money and generating a higher return than by keeping it in the home.

As Stuart put it, the real decision about selling or holding on comes down to this: “Your ability to handle the negative cash-flow from both a financial and emotional standpoint.”



2. Live in the properties while you fix them up
If you can live in the properties like the Liners did and sell them after some stylish remodeling, you can easily become a millionaire in a strong market. In a slowing market, the strategy will reduce your chance of losing money.

Here’s how the Liners did it: After selling their first home, they were able to build a better home – more square footage, plus the benefits of new construction as opposed to basic remodeling. They were able to use the cash they had made from the first home to finance the improvements, rather than taking out a second loan. “I wanted to be prepared to live in it,” says Stuart. “I never wanted to feel pressed that I have this big mortgage hanging over me.”

But there are two other big benefits to living in properties while you fix them up. First, since the home is owner-occupied, you’ll qualify for an owner-occupied mortgage at rates that are typically about one-half percent lower than a home non-owner occupied or investment property. Second, by living in the home for at least two of the five years prior to selling, you can enjoy the profits free of taxes, up to $500,000 as a couple. In the Liners’ case, they could simply roll their profits into the next house and do the same thing over again. Only now, they could afford a larger home and even more improvements, thanks to the profits they had made.



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