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Investment Strategies: Rising prices boost real estate investment clubs

North Bay Business Journal

2005 (Reprinted with Permission)
© 2005 North Bay Business Journal


NORTH BAY — With stories of soaring home prices on the tip of virtually every North Bay denizen’s tongue, real estate clubs are springing up as investors become increasingly eager to profit from the surge.

While similar to traditional investment clubs, these organizations differ in that they are usually for-profit and do not act as pools for members to collectively invest. Instead, founders and members liken the clubs to networking and educational forums whereby active investors and would-be investors acquire and share tools and techniques to get in on the boom.

“Our meetings are focused on education, discussion, and networking, not getting people into deals,” says Michael Morrongiello, program director for Bay Area Wealth Builders.

Based in Sonoma, BAWB is the largest such group in the North Bay. The club, which charges $195 for an annual individual membership or $20 per monthly meeting, does not limit itself to the local real estate market, also exploring opportunities throughout the nation.

“The real estate market is always going to be tricky, but this is a particularly tumultuous time,” says Mr. Morrongiello. “There could be some very interesting developments, good or bad, over the next few years, and we are hoping to be there for people as they move through this uncertain market.”

Although most of the Bay Area clubs do not focus exclusively on the residential or commercial markets, the majority of participants direct their energy to the residential market. Membership demographics vary widely, but some participants note an increasing presence of young people. The clubs are mostly composed of nonaccredited investors, those individuals as defined by the Securities and Exchange Commission as having less than $1 million in net worth.

“Our vision is to help the little guy. And as people grow up in this area, they become increasingly aware of the very high cost of real estate and thus hope to participate in the investment opportunities in real estate,” says Russell Gray, co-founder of Advisor Financial Alliance, a San Jose-based club that began in 2001 with 17 members and now maintains a roster of more than 500 individuals.

A boon to the industry

The clubs can also serve as a financial boon to tertiary real estate market participants, such as lawyers, accountants, contractors, brokers, and other real estate professionals who are able to drive new business through their involvement.

“I have gotten a lot of referral business through my involvement in the various Bay Area real estate clubs,” says Jeff Lerman, an attorney with Lerman Law Partners, LLP, a San Rafael firm that focuses on the real estate industry. “In these situations, you are helping people invest in vehicles they did not previously have access to and providing information and sources to these individuals. I now have many clients who are making more money through their real estate investments than they are from their day jobs.”

Proponents of the entities are quick to note, however, that individuals interested in joining a real estate club need to be careful when evaluating options, as sales, not education, can be the driving goal for some groups. At these organizations, members are often given a lecture about broad opportunities in the real estate market. Following the sermon, they are offered investment opportunities in similar products and told that the offers are below market rates, thus causing frenzied buying.

“Many clubs use a simple formula that rests on the assumption that if enough people are brought into a room and told about the benefits of investing, a group of those people will almost certainly part with money before it is over,” says Mr. Morrongiello. “Many groups prey on naive individuals and get them into investments they shouldn’t be in.”

Benefits in a down market

The clubs can also foster a herd mentality that pushes novice investors into dangerously speculative markets. For instance, sources that spoke to the NORTH BAY BUSINESS JOURNAL noted that Bay Area club members have invested heavily in the Las Vegas market, a once-rapidly rising area that has recently shown signs of price depreciation.

While the Bay Area clubs freely acknowledge that there is risk involved in any real estate investment, the clubs also maintain that any downturn in the market could enhance the benefits of membership. The thinking goes that in a more difficult financing environment, one of the only ways to transact business will be through a reliance on informal partnerships that can grasp complex real estate issues.

“A few years ago, a local bank was trying to get rid of a bad loan, but nobody would take it off their hands,” says Mr. Morrongiello. “Our group was able to cobble together a handful of investors who bought the loan, foreclosed on the property, and turned a bad situation into a profitable one. I believe that if this market goes south, these types of creative escape valves will be essential to the market.”

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