Is Nouveau Riche a Scam?

February 1, 2008

Are the Investor Concierge Deals any good?

Investor Concierge
What is the Investor Concierge?

In a nutshell, the Investor Concierge is a private website for the Nouveau Riche community members offering real estate investment deals with supposed positive cash flow. These deals are found by franchises called The Real Market Experts and are fixed up and placed on the Investor Concierge website. Each deal gets its own page filled with pictures, numbers and a breakdown analysis of how they arrived at the positive cash flow figure.

Let’s take a deeper look at the Investor Concierge to see if the deals are really any good. If you are like me, then you might have read other blogs that have made assumptions and claims saying the deals were overpriced, used interest only loans, and after the subsidies had expired that the deal will no longer cashflow.

Probably the most popular blog promoting these claims is nouveauscam.blogspot.com (read quotations below).

So let’s break apart “Nouveau Scam‘s” article about the Investor Concierge to see how close he/she truly is with their claims:

“Upon closer examination, the flaws in the deal begin to surface: that $2400 a year in annual pre-tax cash flow is only $200 per month, and doesn’t include any maintenance or allowance for any vacancy of the property. As long as you don’t have any big maintenance needs, you might possibly break even– and all the while, you’re building equity while your tenants pay the mortgage, right?”

He/she is correct that the investor concierge deals did not include any vacancy or maintenance factors in their listings. Most real estate investors usually factor in 5%-10% for vacancy/maintenance depending on their specific strategy.

Without an official company statement on this, it would be difficult to know for sure, but the obvious factor that stood out to me was that many of the properties were newly built homes with a recommended strategy of a lease option (lease with option to purchase) tenant. In this scenario the maintenance fees can be significantly lower because the home is new construction, and a lease option tenant contract often passes on the repairs and maintenance to the tenant rather than the landlord. The flipside is if the house is older, and the investor chooses a traditional renter rather than a lease option tenant. Then there would be a greater need to factor in maintenance and vacancy.

Summary: It makes sense that the Investor Concierge does NOT factor in vacancy and maintenance because the investment strategy of choice on many of the properties is a lease option tenant that covers those costs. Perhaps in the future the Investor Concierge can feature a calculator right on their deals that allows users to factor in percentages based on their investment strategy.

“Wrong. The deal Nouveau Riche shows to you invariably is built around an interest only mortgage– you won’t build any equity at all for the first 10 years, after which your mortgage payment will jump up to a much higher amount. If the deals were structured with conventional principle and interest loans, none of these deals would have any positive cash flow at all.”

Now this is where I started to question this person’s credibility and motives. This paragraph starts making an overall assumption that every deal on the investor concierge is the same and the writer illustrates his lack of mortgage knowledge. A quick search on the Investor Concierge pulled up several deals that did not fit in the claim above. In fact, I wonder if the writer just totally made it up!

First of all, it is a never-ending debate in itself to decide which type of mortgage is right for which type of deal. I have had very successful investors all arguing this exact topic in a room and none of them could agree on it. A more conservative investor will choose the approach of a 15 or 30 year fixed loan with a large cash down payment and a goal to own the home free and clear in the shortest time frame possible. A more aggressive investor will choose a leveraged approach where they strip the home of its equity when possible, and reinvest into more properties to build a bigger portfolio.

Regardless of your preferred investing strategy, I think it is safe to say that every deal is unique and there is not ONE magic mortgage product to fit everyone’s needs. So let’s address the writer’s specific claim that all the deals used Interest Only Loans. Did they? No! I am curious how the writer even came to that conclusion!

Each deal featured on the Investor Concierge had an EXAMPLE loan that the borrower could potentially get if they met the example requirements (credit score, doc requirement, reserve requirement, debt to income ratio). The example loan types would vary on each deal that I looked at, thus PROVING that not every deal used an interest only loan.

But I decided to take it one step further.

I called my loan officer and had her run a few scenarios for me on a potential deal to see if it would still cashflow. I had a 720 credit score, full doc, enough reserves, a reasonable debt to income ratio and a 10% down payment. I factored in an additional 5% for vacancy and maintenance, and I also factored in closing costs and a tenant placement fee into the down payment since the property would need a tenant. I gave her 3 different types of loan scenarios:

  1. Neg-am loan
  2. Interest-only loan
  3. 30yr fixed loan

All three loans got me positive cashflow! So I had her run two more properties to get a more rounded perspective, and sure enough, one of the other two deals would not cashflow in my specific situation with a 30yr fixed loan. She said if my credit score was higher I would be able to get a better interest rate and would cashflow.

Summary: The writer made a very bold accusation and was proven wrong! Not every deal is an interest-only loan, and it is up to the investor to choose a loan product that is right for them. They have the freedom to use their own loan officer, or they can go through a mortgage company that is partnered with Nouveau Riche. The other accusation was that the deals would not cash flow with traditional principle and interest loans, but in fact there was positive cash flow in two of the three scenarios that I ran. Basically each deal on the investor concierge is unique and is an example only. It is up to the Investor to determine a loan product and run their own numbers.

“‘But I still have instant equity, right?’ Probably not. The “Estimated Market Value” is not an appraisal, but rather just someone’s guess at what the property might be worth. And if it is worth that, why isn’t it being sold for that? Can you really buy these properties and immediately sell them for 10% more? I doubt it.”

At this point I think it is pretty obvious that the writer has gone beyond logic and turned to uneducated opinion. I spent 15 minutes searching through deals trying to find at least one that met the description above and I couldn’t! 100% of the deals that I viewed, including deals visible in the “guest” view, all had documentation of the estimated market value. Now we all know that nobody can ever claim to know the market value of real estate for sure, which is why the Investor Concierge clearly claimed an “estimated market value”.

What I found interesting was that the writer suggested that the Investor Concierge would just “guess” the market value and that they didn’t use appraisals. The majority of the deals that I viewed documentation for showed comps by a licensed real estate agent (comparable real estate deals recently sold) . A few of the deals offered a BPO (Real Estate Broker Price Opinion) to determine market value, and 2 of the deals used real estate appraisals! So what on earth was this writer talking about?

Are comps, bpo’s and real estate appraisals considered valid? Of course! There is not one successful real estate investor that I personally know that would argue that. However, depending on how skeptical/cautious you are on your deals, you may want to analyze the potential market value from several angles. But again, now we are talking about individual real estate investing strategy rather than the specific claims by the author of the Investor Concierge article. He/she was clearly false in their claims and any novice researcher would have easily proven that.

“‘Okay, but the market will go up, and I’ll be rich!’ If the market continues to skyrocket, it’s true, you will be rich. But across the country, in nearly every housing market, this is not what is happening. The correction has begun. The real estate “bubble” will deflate, and then likely stay constant for a while. All the while you’ll be paying interest only on a property that is slowly becoming worth less than your loan is for– a loan you have to pay off if you want to sell.”

This writer holds a strong personal opinion of the national real estate market and it’s future. Given the author’s track record so far with their investigation of the Investor Concierge, I really only took this paragraph with a grain of salt. There is not much need to debate this paragraph, but this writer has obviously shown that they feel real estate is a bad investment right now. I wonder what investment strategy they would recommend? Mutual funds? Play the stock market? Personal savings account in a bank? A safe at home full of money?

Of course there is risk with any investment, and there is also reward. Generally, the greater the risk, the greater the reward. I have had the privilege of networking with many successful investors, and every single one of them is in favor of investing in real estate. One of the main benefits of positive cash flow is that it allows you to ride the up and down waves of appreciation without as many stressful moments. It is people who purchase on speculation alone that are hit the hardest if the market turns on them.

With a lease option tenant, there is already a set purchase price that they are agreeing to purchase the property for. If they do not purchase the property, then you can keep the lease option fee, and lease the house back to them again for another year or two, or simply find a new lease option tenant. Many investors feel that this is a great hedge against an unstable market. I just read a statistic recently through the NAR showing that over the past year 2/3rds of markets in the united states showed appreciation. I wonder sometimes if it is just the media that always reports the doom and gloom to us filling our heads.

So what exactly is the current appreciation in our country? According to the Office of Federal Housing Enterprise Oversight (OFHEO), several states saw great appreciation, while several other states had declines:

The states with the greatest rates of appreciation between the third quarter of 2006 and the third quarter of 2007 were: Utah (12.9%), Wyoming (11.8%), Montana (7.7%), New Mexico (7.4%), and Washington (7.0%). The states with the largest depreciation for the same period were: Michigan (-3.7%), California (-3.6%), Nevada (-2.4%), Massachusetts (-2.3%), and Rhode Island (-2.2%). – OFHEO, 11/29/2007

A savvy investor knows how to read market trends and analyze deals to add to their portfolio, but many of us are not that savvy and require some education to learn this process. Of course we could always get our education through Nouveau Riche, or through some quality Books from the bookstore, or perhaps we are lucky enough to know a successful investor that would be willing to take us under their wing. The fact is that money can be made in an up market, a flat market, and a down market. The only thing that changes is the strategy.

The final statement the writer leaves us with is this one:

“After all, if these were truly good deals, why would the founders of Nouveau Riche want to train you to take advantage of them? Why not just invest in the properties themselves? The sales presentation claims that the founders made their fortune and now altruistically want to help others make theirs. If altruism is the motivation, then why charge $16,000?”

Now this is a question that I can relate with because I asked it myself when I first looked into the investor concierge. I asked a very wealthy friend what he thought about it. He asked me if I understood Wholesaling from a real estate perspective, and then explained why wholesaling real estate is so popular among investors. Here was the question asked to me:

Would you rather make a fast nickel or a slow dollar?

When an investor comes across a deal, and puts it under contract, they have several options available to them. They can hold on to the property long term, or they can fix it up and flip it, or they can turn it over to another investor for a quick turnaround, and any potential strategy in between. A wholesaler is someone who prefers the fast nickel over the slow dollar. A rehabber might prefer to hold on to the property and fix it up and then try to sell it closer to a retail market value, choosing the slow dollar.

Nouveau Riche is using The Real Market Experts to find properties and feature them on the Investor Concierge to wholesale them to the Nouveau Riche community members. At the end of the day, all parties involved should be happy with the process. The Real Market experts earn a portion for finding the deal, fixing it up and managing it. Nouveau Riche earns a portion by providing the community of investors as potential buyers for each deal. And the community earns a portion by purchasing the deals for positive cash flow and potential appreciation.

There are still going to be some readers that are skeptical of this process no matter what, and that is ok! Skeptics add a great value to our country, and so do optimists. We have balance and harmony through a variety of opinions and personalities. I am simply offering my perspective as an individual who enjoys real estate investing and is not turned off by today’s national market. I wrote this article in an attempt to give a fair look at the Investor Concierge from a critical standpoint. I hope that some readers have found value in this and hopefully it has helped you in your investigation of this company.

By the way, Nouveau Riche teaches 30+ classes, each on unique real estate investing strategies. Only one of those classes teaches students how to purchase homes off the Investor Concierge. And that class is FREE!

The majority of education offered at Nouveau Riche is towards teaching individuals how to find and locate their own deals, analyze their own markets, and use the right investing strategy to execute the transaction. The Investor Concierge is primarily for investors who have good credit and money to put down, but don’t have the time or don’t want the headache of finding and managing these deals themselves. So I find it interesting for people to be so critical of a service tailored towards a specific niche market.

There is obviously a need for a service like this, and Nouveau Riche does a pretty good job at putting it together for their investors.

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