If you are easily offended, please click away now.

OK, don’t say I didn’t warn you…

Earlier this week, a friend of mine, Shae Bynes, told me that she was finally quitting her day job to pursue real estate investing full time. It was a big decision for her as it is for all of us who jump ship to go out on our own and join the ranks of the self-employed.

In my email discussion with her she mentioned that she struggled with the decision for three months and, even though there were many signs, she was debating with her husband if the signs were indeed signs.

This reminded me of the sign that finally pushed me to go into business for myself several years ago.

Here’s the whole story…

I began investing in real estate in 1994 while I was working at Hertz Rent a Car. I had been in the car rental business since 1986 and was working my way up the ladder at Hertz when I found myself at the corporate headquarters in 1998.

I’d been “at the top” 18 months when I finally decided that the east coast wasn’t for me and that I wanted to come back home to Denver and find something “fun” to do.

I took a job with the first company that offered to pay my moving expenses home and found myself managing the call center for RTD, the public transit agency in Denver. That sucked.

I left RTD to start an internet travel company with some friends. It was the height of the dot com craze and we were certain that we would all get rich on stock options when we sold the company for a trillion dollars.

Then came 9/11.

Travel pretty much came to a stand still in this country and my dot com went dot bomb.

I went to work for Pulte Mortgage (my sister got me the job) in the secondary marketing department because, by this time, I was noticing that the one thing that kept tripping me up in my real estate investing was getting mortgages.

I figured this would be a good way to learn about the mortgage business and Pulte had employee discounts on mortgages so it was a pretty sweet deal.

I’d been there for about a year when my entrepreneurial juices started flowing again. I had figured out how to work with lenders to create loan programs and my brother in law Clifford (a mortgage broker) and I convinced a credit union in Pueblo to create a loan just for rehabbers in Colorado.

I was originating loans for the credit union part time and working my Pulte job full time but soon my part time commission checks were adding up to a LOT more than my full time paychecks.

I had a feeling it was time to quit and open up my OWN mortgage company but I was scared.

The cash flow from my rentals (all single family homes) at that time didn’t even come close to covering my monthly expenses and I was worried that if I quit my job I’d be broke. Or starve. Or get behind on my mortgages. Or [enter irrational fear here].

I don’t come from a family of risk takers or entrepreneurs. My Mother and Grandmother have long extolled the virtue of the Protestant work ethic. The one that says you must work hard for someone else for a long time and if you’re lucky you may be able to retire someday with a nice pension.

So that’s two votes against quitting my job and going out on my own. (My Grandmother passed away in 1997 but evidently gave my Mother her proxy.)

My Uncle Bill is the only entrepreneur in the family and the first millionaire and he told me when I asked for his advice that I’ll “never get rich working for someone else.”

So, that’s two votes against and one vote for going out on my own.

So, like Shae, I wrestled with my decision for several weeks. I made the pros and cons lists, ran my budget right down to the penny, got the blessing from my unconditionally loving and always amused better half and it was a tie vote – two for the Protestants and two for the Entrepreneurs.

But I still wasn’t sure.

One day, I was at work and went for a drive at lunch to clear my head. I usually eat lunch at my desk or at that time would sit in my parked car and work my part time gig. But on this particular day, I was driving and thinking.

I was in the car at a stop sign thinking I *have* to do this but *how* do I know it’s the right thing to do? And I was praying for a sign.

Just then a black midget crossed the street in the crosswalk in front of me and gave me a big smile and a wave.

I just sat there in disbelief with a huge grin on my face until someone finally honked to get me going.

I literally said out loud, “Thanks for the sign, Lord!” and drove back to work and gave my two weeks notice that day.

Best. Decision. Ever.

I’ve worked for myself ever since and even though there have been some lean times, I wouldn’t go back for anything. I think, at this point, I’m what my friend Allen calls “unemployable.”

But looking back on it, I wonder how many signs I missed before I got the hugely obvious one? I mean, I have to believe that there were many more subtle signs before the black midget came strolling along.

You’re probably on this blog because you want to be (or already are!) self employed, too.

How long have you been thinking about it? How many opportunities are you going to let pass you by before you finally make that leap of faith?

How many signs have you missed? Not everyone gets a black midget; you might have to start paying closer attention.

As an entrepreneur, it means that I need to constantly try new things but if something isn’t working I would rather that it fail fast. It’s less expensive and I don’t expend as many much needed brain cells.

In my main business, the conventional residential mortgage broker business, things are very volatile right now. I built my business to work exclusively with real estate investors in 2002 and the “pool” of investor clients back then was huge.

With the new Fannie and Freddie rules the pool of investors that I can work with as a conventional broker has shrunk by 80%.

Plus, the number of lenders left that I can broker loans to has been reduced by more than 80% and the lenders that are left are scrutinizing investor loans harder than a father screens his daughter’s prom date.

It doesn’t mean that I can’t still place financing for my investor clients. It means that I have to place the loans with lenders that don’t traditionally work with OR pay mortgage brokers. Lenders that are “off the grid”, so to speak.

Private Lending
In 2004, I began raising money from private lenders to broker to local rehabbers. The lending business model was great. We would loan up to 70% of the as-repaired value and roll in all the closing and constructions costs, too.

The lenders made 14-15% return on their investment and the loans were usually paid off within 4 months by either the investor refinancing to keep it as a rental or the rehabber selling it to a retail buyer.

And we always had another deal to put the money back into as soon as we received a payoff.

I went 4 years and funded $24,000,000 in loans without a single default in that program.

Since September we have had 4.

The rehabbers either couldn’t qualify for refinances themselves or their buyers couldn’t qualify for financing because of the new conventional mortgage rules.

We took the properties back deed in lieu of foreclosure and the lenders say they are fine with being landlords now instead of lenders, but it forced me to take a long hard look at that lending model and the liability that comes with it.

Especially since my state, Colorado, recently adopted a rule that mortgage brokers who are raising money from individuals to broker to borrowers must have a Series 63 securities license. I don’t have a Series 63 and am not particularly interested in pursuing one.

I have always run my businesses on two important precepts:

1. Don’t go to jail
2. Don’t lose the house

There are a few more but those really are the main ones.

My Decision
It seemed like no matter how hard we tried to conduct “business as usual”, it just wasn’t working. Albert Einstein said that insanity is doing the same thing over and over again and expecting different results. And he was a pretty smart guy.

Based on the volatility of the conventional mortgage markets and the difficulty in getting the short-term rehab loans “taken out” with refinances or new loans from conventional lenders, I made an executive decision that opened a major rift with my loan officer employee, Kevin.

I sent a letter to all our private lenders saying that I was discontinuing the rehab loan program as I feel that the loan model is obsolete. Because I cannot reasonably guarantee the loans they make will get paid back, I cannot ethically continue to broker them.

Kevin was offended and will continue to broker the loans through his own newly-formed company. He will continue to contribute to The Investor Insights but will chart his own course as a loan officer.

The Lessons
Here’s the thing…

Just because something has always worked and has been extremely profitable doesn’t mean that it will always work.

Things happen. Rules change.

In September I found myself with a million square pegs when all the holes were round. Nothing was working. And the stress was brutal; keeping me up at night pacing and worrying about the loans that we couldn’t get approved with conventional lenders.

The rehab loan model started to fail FAST and I made an equally fast decision to protect myself, my lenders and my company.

Does that mean that I’m out of business?

Hell, no.

Like many foreword thinking entrepreneurs before me I change the model. I adopt a new strategy that DOES work in the CURRENT environment.

And I already have.

The New Model
Real estate investors need financing help now more than ever.  So, instead of being a commoditized mortgage broker, I am an investment real estate consultant.

With this model, I deliver even MORE value to my clients than ever before and I don’t rely on a third party (bankrupt lenders or underwriters) to “allow” me to earn income.

I can work with thousands more lenders – portfolio lenders – to get the tough deals done and save my clients money in the long run.

Private Money
Now, instead of BROKERING the private money I raise, the private lenders partner with me in acquiring undervalued properties (apartment buildings mostly) and discounted, performing mortgage notes.

Because I am an active partner and not just a broker I have a more active role in the partnership. I, again, don’t have to rely on a bankrupt lender or underwriter to determine the success of the investment.

Now I have round pegs to fit into the round holes. And less stress because I took control of the situation and reconciled it with my values.

The Fallout
Will everyone be on board if you make a decision like this in your business?

No.

If you change course as quickly and as drastically as I did, you will experience fallout in your organization just like I have. Some people hate change. That’s life.

But you know what? My vision is strong, I can sleep at night and my instincts have never failed me. I am certain I made the right decision.

A poor decision would have been to do nothing, try to fool myself into thinking that I could conduct “business as usual” and that things will get better. Fortunately, that’s not my style.

So, let’s raise a glass.

Here’s to the next phase of success and record profitability in the ever-evolving and crazy life of a real estate investor!