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Make a Plan

What does a plan look like? I’m not sure what anyone else’s plan would look like; I’m only sure what mine looked like when I started. It has been modified over the years as I progressed, as unforeseen circumstances necessitated some agonizing reappraisals from time to time. The key elements, however, are probably similar in everyone’s plan.
First, I believe you should chart your available and foreseeable financial resources. Extrapolating your career path, and charting it against industry norms, can accomplish
this. You should know where you fit into the scheme of things, and, being realistic,
be able to outline this fairly accurately.

Second, start with the desired end result and back into a program to get there. If, for instance, you want to own a building worth $3,000,000 by the time you’re 40, then you know that you will need approximately 25 percent ($750,000) of the purchase price as equity to make that purchase. How do you accumulate this by the age of 40 with your available resources? Your solution could be to invest $25,000 per year until you have a down payment for a smaller investment, then, through astute management,
roll this over with your ever-increasing capital pool until you can exchange into the property you want.
Your plan may be too ambitious, or a little too shortsighted. Don’t worry about it. As along as you set your resource goals realistically, you can fine-tune the plan as you go along.
Where to Start
Start today, looking at what you have accumulated so far. Is it enough to start with? Do you need to readjust your lifestyle to accommodate a pattern of investment? Do you need to sell the Ferrari and buy a Chevy to have the money to accomplish your goals? Are you married? Do you have children? Do you plan to have any, and, if so, how much will they cost? What about saving for their education? Does your wife or husband work? Will he or she continue to do so?
These questions and the corresponding answers will have a vital bearing on your plan and the probability of its successful fruition. If you are married, you will have to get the wholehearted cooperation of your spouse. You will have to agree on the program,
and, further, will have to formulate a plan of dissolution
should you face a divorce in the future. It would Better Believe It! be pointless for you both to successfully implement Your first deal is similar an investment strategy only to find that you will both to a hunter’s first kill. The agony lose it to attorneys in the event of a divorce. Be real-and the ecstasy are all part of istic. These things happen. Plan for the worst, and the deal. you can safely enjoy the present and whatever happens
in the future.
Stay Local
Unless you live in Farmtown, U.S.A., you should start your investment program by selecting an investment locally. Chances are that you are fairly familiar with your local environs, and with a little work can get an accurate handle on its potential for real estate appreciation.

If you live in a small town, chances are that you are part of a larger SMSA (Standard Metropolitan Statistical Area). Any SMSA can be divided into quadrants that can be charted almost uniformly throughout the United States. The NE (northeast) quadrant usually contains the most expensive residential areas, the SE (southeast) quadrant the medium-priced homes, and the SW (southwest) quadrant the “starter” or “blue-collar” homes. The remaining SE quadrant is composed of the old core city area and/or the industrial area of the SMSA. Why is this, and is it consistent throughout the country? The simple answer is that wealthy people do not drive to and from work with the sun glaring in their faces through the windshield. This rule holds true all across America unless there is some natural barrier such as a mountain, ocean, or a river to prevent it. Obviously there are exceptions, and your community may be one of them. The important
thing is that if you intend to invest your hard-earned cash in a community, you had better know what is where, and how and why it is growing or shrinking.

Draw a financial and real estate map of your area, and check your assumptions with the local real estate professionals. Talk to real estate brokers about your program. After all, they will be the ones looking for properties for you to buy.
Enlist the aid of a good investment broker, and take him into your confidence. Convince him that you will stick with him throughout your program if he will commit
to giving your portfolio preferential treatment when buying and selling investment
properties. You will have to pay a broker anyway, so get one on board early, and get him on your side for the long haul.
If you live in a rural farming community, there will be little or no opportunity for investment, and you will have to compete with the local movers and shakers for what limited opportunities there are. You are better off searching in areas of growth and consistent demand. The best examples of this type of area are found in the Sunbelt states, as they are the ones experiencing consistent, annual, net immigration.

Other areas of opportunity lie in states that experience high rates of population turnover, transient areas such as Arizona, Nevada, California, and Florida. Change breeds demand for diverse real estate products.
How to Get There
Having made your plan and done your research, the next step is to actually do it. The first step is the hardest, and the uncertainties are rampant. Remember, real estate investment
is the business of taking calculated risks, and the process is the elimination of as many uncertainties as possible, so that you enter your comfort zone. When you feel comfortable with the resulting facts, understanding the potential problems to the extent that they may be foreseen, then you will be able to pull the trigger with confidence.
The Least You Need to Know

Do the research, as there is no shortcut to knowing firsthand what the shape and texture of your market feels like.

Make a realistic plan, based on your resources, background, and abilities.

Work like mad, keeping in mind that success is a mixture of sweat and common sense.

Stay loose. Don’t become too narrowly focused; the ability to think on your feet and adapt will put you ahead of the competition.

At all times, keep looking for innovative ways to enhance your investment.

Negotiating Deals and Making Offers

To get great deals on property and
buy them without using your own money, you’re wise to learn how to
negotiate well. Often you can negotiate a no-money-down deal if you
are willing to learn how and apply it to many transactions.
You can actually negotiate in all areas of a real estate transaction: price,
terms, closing time, earnest money, contingencies, conditions.
Negotiate for all of it. Most real estate investors and Realtors negotiate
only on price. Learn to negotiate in many areas, using price as the
beginning step.
Rule 1: Negotiate only with the decision maker.
 Go out in the next 24 hours and negotiate for something. Remember, only
negotiate with the decision maker. When you’re at a restaurant, for example,
ask for the manager and build rapport by chatting and start a dialogue
like this:
“How long have you been working here?”
“I’ve been working here two years,” the manager says.
“What a great restaurant; Cindy the waitress is awesome. It’s our first
time here. We’re just wondering, do you sometimes do special things to get
people to come back?”
“Yes, we do. There’s a little discount or sometimes dessert. Do you want
some dessert?”
“We’ll take some dessert.”
“I’ll bring a piece of cheesecake.”
“Well, since there are two of us, can you do any better?”
You might think this is funny and crazy, but if you go out and start practicing,
you’ll get better at asking. When you buy a car, you negotiate with
the salesperson, who rarely can do any negotiating. The sales manager
there might make all the decisions on the pricing of the car, but it’s the
finance manager who makes all the decisions on the financing of the car.
Talk with the right decision maker, no matter what the situation.
Remember, rarely in life does something work all the time. However, if you
try these negotiating tactics many times, they will work some of the time.


Have you have ever gone to a restaurant and seen people yelling at the
waitress? The food is no good, the chicken is cold, the fish is bad, and
the poor waitress is about to cry. She wants to help, but what can she
do? Nothing; she’s not the decision maker. Then she goes to the manager
and the manager comes over to your table. This manager is the person you should complain to . . . the person in charge. Negotiate on a
property only with the people who control it and can make a decision.
Ask them, “In whose name is the property? Is it yours? Are you the one
who can make the ultimate decision to sell?”
Here’s a good example of how a few well-selected words can bring in
thousands of dollars as a result of skilled negotiations.
When you call on a house advertised at a price of $200,000, and if
that’s a good deal, many investors may just offer the listed price. Let’s
say the property is worth $280,000. The seller tells you it’s worth
$280,000, and it is. It is a great deal. Many investors would just accept
that great deal and have $80,000 of potential profit. Not bad!
However, what if you ask, “Why are you selling?” What if they respond
that the mortgage is $150,000 and it’s going into foreclosure. The sellers
need to pay off the debt—$150,000—plus they need $15,000 cash
so they can move. Now you know that they may take $150,000 plus
$15,000, or $165,000 instead of $200,000. That one question could
possibly save you $35,000.
Then you ask, “Can you do any better? What is the least you would
take?” What if they say, “Well, if you could get me $10,000 soon, I’ll
take it.” You just saved or made another $5,000 by asking some key
questions. Perhaps you are skeptical and think that this does not work.
It definitely does not work if you do not try it! This is exactly what happened
to a student of mine, Carl, in Atlanta. By asking those key questions,
he saved or made an extra $40,000 on what he knew was already
a good deal!

Property Owners

I suggest you learn every possible way to finance mortgages and use
them so you are never stuck not being able to do a deal because you
don’t have access to funds.
Normally, when you buy a house, you get a new mortgage to buy it. If
the house costs $1 million, you borrow $900,000 and put $100,000
down. Depending on your credit, income, and the collateral or property,
the bank or mortgage company will determine how much it will
lend you. A homeowner’s loan, meaning you are going to live in the
property, is less risky for a lender than a loan for a non-owneroccupied
property or an investor loan. People are less likely to default
on a home loan and risk losing their residence. Of course, there are
hundreds or thousands of loan programs out there. Here are a few that
may be of interest to you:

■ There are many 100 percent homeowner loans for people with good
credit.
■ For first-time home buyers, there are special city, state, and national
programs that don’t require borrowers to have much of a down payment,
even if their credit is less than perfect: They may need only
$500, $1,000, $3,000, sometimes $0 down.
■ Home buyers with marginal credit who are going to live in a house
can sometimes get a 70 to 80 percent loan to value. That is, if they
find a house worth $100,000 for $80,000, they might be able to get
a loan for the entire $80,000, or 80 percent loan to value. Some
lenders might require them to put in some of their own cash as a
down payment.
■ Home buyers with bad credit can often get loans that are 65 to 75
percent loan to value.
■ Real estate investors or nonowner occupants can often get loans on
single-family homes, duplexes, or buildings with up to four units at
90 to 100 percent of their value. They must have excellent credit
and good verifiable income.
■ Many investors who are self-employed can get 70 to 80 percent
loan to value if their credit is good.
If you negotiate a good deal on a property, you might be able to borrow
the entire amount. If the house is worth $100,000 and you can buy it
for $75,000, you may be able to get a 75 percent loan to value and borrow
the entire amount. However, many lenders want to see you put
your own money into the deal.
You can also suggest that the owner take out a second mortgage. Say,
for example, that the only loan you can get is a 60 percent loan to Using a Second Mortgage to Get In with $0 Down
Value or worth = $100,000
Seller wants sale price = $75,000
Bank will lend only 60 percent = $60,000 first mortgage
Seller takes a second mortgage = $15,000 for five years
$60,000 + $15,000 = $75,000 total
Buy On Owner’s Terms
Many savvy real estate investors and some knowledgeable homeowners
know there is another source of funds for all of their real estate needs.
Instead of going to a bank or mortgage company to borrow the money to
buy a property, they go to the seller or owner of the property. That’s right,
the seller can act as your banker.
If you find a motivated seller who wants $100,000 for the property, you
could borrow the $100,000 from a bank or just get it from the seller. If the
property is free and clear (i.e., no liens on it), the seller can give you a new
mortgage for $100,000, just as the bank would. Instead of paying the bank
mortgage payments every month, you pay the seller. It’s called buying real
estate on owner’s terms.
value because your credit isn’t good. The seller wants $75,000 on the
house worth $100,000. The bank will lend you only 60 percent of that
amount, or $60,000. You could negotiate for the seller to take the
$60,000 and sign a second mortgage behind the bank’s first mortgage
for $15,000—not in cash, but in a note signed by you. This is another
way to borrow the funds without using your own money to buy a
property.

Banking Relationships

A great source for buying property is through banks. If you have some
good deals, a good business plan, and some good credit, getting funds
from a bank may enable you to buy property without putting any of your
own money into the deal.
Here’s how I bought over 100 properties without using my own money:
I went to a bank and got a $100,000 line of credit secured by my own
house. The bank also agreed to do 15-year loans on any property I
owned at a 75 percent loan to value. That is, if a house had a value of
$100,000, the bank would lend $75,000 (75 percent).
For example, I would find a deal that was worth $100,000 from a motivated
seller who would sign an offer to sell it to me for $70,000. I would
use the bank’s money (the line of credit) to pay the seller cash of
$70,000. One month later, when the house looked better and I had
rented or lease-optioned it, I would ask the bank for a permanent 15-
year loan. The house would appraise for at least $100,000. The bank
would lend me $75,000 (75 percent), which I used to pay off the loan,
or put back into my line of credit. Then my line of credit was back at
$100,000 to pay cash for another house. Not one cent of my own
money was used. Caution: Never borrow money you are not positive that
you can pay back. Also, be careful about borrowing against your own
home; if the loan is not paid back on time, you could lose your home.
If you do not have great credit or the ability to do this, find someone
who does have that ability. Whatever you lack in business, find someone
who can help you. You probably know or can find people who want to make money in real estate and have great credit, but who don’t have
the time, energy, or knowledge to make it happen. You can develop the
knowledge and use your energy to find the deals. Let others borrow
the money. You can partner with them 50-50, 60-40, 70-30, or whatever
works for both of you.
Always make sure you have a good deal lined up before you borrow any
money. Have a built-in cushion, too, as well as an exit strategy. If someone
else is borrowing the money for your deals, make triple sure it’s a
good deal.
Also begin establishing good relationships with a bank. When I started
out, I went to the bank almost every month to ask for a loan. Every
month the answer was no. Then, the fifteenth time, the answer was
maybe, and soon after it was yes. The bank gave me a $50,000 loan on
a duplex worth $80,000.
At that time, I had more money on deposit in the bank than I was able to
borrow. But the way banks work, after you borrow once, you can borrow
again—and then again. You may find that when you borrow only
$100,000, the bank doesn’t really care about you. But when you borrow over $1 million, the bank cares! Loan officers start calling—how are
you feeling, how’s business, let’s go to dinner, and so on.

Ways to Source Funds

Most people who invest in real
estate make money in only one or two ways: They buy properties and borrow
money from the bank to do so, or they deal in mortgages. But many
more sources for funding and profiting from your real estate investments
exist. You can use these sources of funds to buy property. Do not use
your own money. Create money from other sources to get into real estate.
Mortgage Origination
If you’re actively buying or selling property, you’re initiating, referring,
or acquiring mortgages. It’s customary to be paid for these services by affiliating with a mortgage company, a mortgage broker, or network
marketing companies that do mortgages.
Affiliate with some good mortgage brokers or become one yourself. Go
to a variety of mortgage companies—at least one main company plus
two or three secondary ones—and research the best deals available at a
given point in time.
Investors (and others) who attract customers needing a mortgage are
called mortgage originators. Originators are paid anywhere from 30 to
70 percent of the up-front fees on a mortgage—just for marketing and
bringing in customers. For example, if a mortgage broker is working on
a $200,000 mortgage that has two points ($4,000), the originator
would receive half, or one point ($2,000), for filling out the application
and helping to start the loan process. I suggest you should get about
half, or at least 20 to 25 percent, of the points for referring mortgages
to a mortgage company. A lot of times, you can actually become an
employee of the mortgage company, so you don’t have to be licensed.
(Since every state is different, check with a local mortgage company
about these requirements. Also note that in some states, paying fees
to mortgage originators is illegal.) Please send me an e-mail if you want
to learn about affiliating with a mortgage company, My email is:
robertshemin@the-beach.net.

Who Are You, as an Investor?

The first part of finding your niche involves you, the investor. Are you a housewife, college student, full-time factory worker, nurse, businessman, or electrician? There is a place in real estate investing for almost anyone who is serious about investing and is willing to work at it. Part of finding your niche is understanding what your opportunity
is, and what needs you can fill. A few examples:

A college student may convince her parents to buy a condo that she can live in along with several of her friends, who would pay rent. The student gets free rent and will also gain an appreciation for the process of attracting quality tenants
who can pay their rent and help maintain the apartment and pay the mortgage
(build the equity).

The full-time factory worker might buy a house on contract and then lease to a co-worker who has yet to establish a credit rating.

A nurse might consider buying an old building and dividing up the space to rent to doctors for record storage, who therefore would save expensive hospital and clinic space for medical uses.

An electrician might use his experience to rehab an industrial building that has suffered from deferred maintenance. He may end up leasing that building to other contractors with whom he has worked over the years, as well as using the space for his own shop and office.

A college teacher could look at an old house and decide that, with a little renovation,
it would make an excellent small apartment building to rent to students.
If you are looking for something to invest in, it is best to look at areas that are familiar
to you based on your background.

Who Are These Mysterious Investors?

Since the advent of the REIT, the public has become more aware of the possibilities of real estate development. The notion persists to this day, however, that the real estate investor is, by necessity, a very well-heeled individual. This can be true in many cases, but it is by no means the rule anymore. Many people, primarily professionals, have pooled their pension plans and formed small self-directed REITs of their own. These groups have not really formed a publicly traded REIT, but rather, have formed partnerships and companies to own and operate these assets. They build, buy, sell, and exchange these investments regularly to maximize their portfolios, much the same way any investor does with a stock portfolio.
In every building project there are different functions for both owner and occupant. One person or entity may fill all the available functions in a transaction; however, in some cases, many different participants get involved in the various functions. The owner/investor may be the initial developer or someone who buys it after completion.
Some buildings change hands many times during Buzzwords their useful life. The initial occupant can be the developer, the owner, or the tenant. In the case of
Premises are legally defined pieces of real property multi-tenant buildings, the tenants may be, and usuthat
can be the subject of a lease ally are, unrelated to the owner. The tenant could be
or a sale. the developer, but not the eventual owner. There are many roles in any scenario for everyone. All involve
real estate investment. For the tenant, the lease is also an asset as well as a liability. The right to occupy a specific premises can, under certain conditions, be assigned and, therefore, sold.

Home-Saver Program

You can help homeowners save their homes if they get behind in payments
and face foreclosure. You can help the homeowner/seller catch up
on payments, buy it using owners’ terms, set up a lease option, or flip it.
Using a home-saver program, you work with mortgage companies,

credit counseling companies, housing authorities, and nonprofits. Here
is how to talk to potential sellers.
It’s important to ask these questions before deciding to take action:
“Why are you selling?”
“How long have you been trying to sell the property?”
“Is the property in your name?” (Make sure you negotiate with the
decision maker.)
“What is the mortgage amount on the property?”
“What’s the least amount you would take for it?”
After a price is stated, ask how they came up with that number. You’d be
amazed how people come up with their values.
In this process, pretend you’re Colombo. Whenever they say anything,
ask another question. Why? How? If they’re reluctant, remind them
that the purchase price, when they bought it, and the amount of the
mortgage is public information. By now, you’re taking on the role of a
real estate doctor. In order to help someone, you need information, so
keep asking more questions.
“How old is the house?”
“Are mortgage payments current or in arrears?”
“If in arrears, by how much?”
“What are the taxes?”
“How much is the insurance?”
“By what date do you have to sell it?”
“How much would the house rent for?”

“Does the house need any repairs? How are the roof, ceilings, windows,
walls, floor, plumbing, stairs, carpet, kitchen, bathroom,
basement, yard?”
“How much would repairs cost?”
And the million-dollar question: “Do you have any others?”
Always ask the sellers if they know about any other properties. You
could even run a classified or display ad like this:

Home-Saver Program—Save your house
from foreclosure. Call now, 000-0000.

Short Sales

Let’s say that a bank or mortgage company has written a loan for
$100,000 on a house that now qualifies for foreclosure. The loan is
$100,000, but the financial institution does not want to take back the
property. Sometimes, especially with the high foreclosure rates occurring
in many parts of the country, the institutions will discount, or short,
the amount of the loan to get rid of it. If the house is in the process of
foreclosure or has been foreclosed on, the bank may be willing to take
only $70,000 to $90,000 on the $100,000 loan. Often, you must
present an appraisal on the house as well as a repair list so that the institution
can justify taking less money. Be persistent, especially in finding
the right department and decision maker at the bank.
Right now the foreclosures in some areas of the country are up 100 to
200 percent. When the economy slows down, people who overborrowed
and overspent during the good times have a financial hangover that
leads to foreclosures. And the banks that have lent too much money
have to take back property. It’s an ongoing cycle.
No matter where the economy is in the cycle, there’s opportunity to
make money. In the current climate, banks have foreclosed on so many
properties that if they are owed, say, $250,000 on a foreclosed property,
they’re tremendously eager to move that property off their books, and
they’ll short-sell the mortgage. That means you could offer less than the
mortgage amount and buy the property as a short sale.
First, you need to determine which bank owns the foreclosed property
and negotiate with the head of the real estate loan department or
someone who can make a decision. (The clerks who answer the phone can find out what the property is worth from the loan amount, how long
the bank has owned it, and so on. Then ask if the bank will sell the
house at a discount.
Many investors have been able to buy properties from 20 to 60 percent
below what they’re worth by doing short sales with the banks. Many are
wholesaling these great deals to other investors, or they may have partners
with good money or credit who help them buy and hold these great
deals. This is another way to make money in real estate without using
your own capital or credit.

Tax Sales
Say you own a house that you purchased for $200,000 some years ago,
putting $20,000 down and borrowing $180,000. You have a first mortgage
of about $175,000, and the house is now worth $500,000.
This level of appreciation has taken place in many markets. Say you go
to your bank and get a second mortgage for $100,000. Now you have
a first mortgage of $180,000 and a second mortgage of $100,000.
Your bank calls and says, “We suggest you get one of these secured
credit card equity lines and pay off your car loan and your Visa bill,
which will make your debt tax deductible, because Visa payments and
your car lease or car payments are generally not tax deductible.” You
follow the bank’s suggestion and take out an equity line on your
house, secured by real estate, which now becomes deductible, and pay
off your other debts. You now have a third mortgage on the house for
$40,000.

Then you decide to go into real estate and want to borrow $50,000
from your mom to get started. She says, “I want a written loan contract
and security.” You go ahead and acquire a fourth mortgage for $50,000.
Unfortunately, you get divorced. The court decrees that you owe money
to your ex, which you can’t pay, so your ex gets a judgment against you
for $30,000 and files it against your house. You owe $8,000 in property
taxes, but you forgot to pay them last year and you can’t pay them this
year, so the city puts a $16,000 tax lien against your house. If you don’t
pay these taxes, the city will foreclose on it.
Now things are really getting bad and you can’t pay any of the debts.
Who is first in line for the debts owed? The city. Property taxes are
always paid first. Now the mortgage company could show up and pay
the $16,000 in taxes to protect their $180,000 or $100,000 mortgage.
But banks and finance companies sometimes don’t do the smartest
things. Often the properties go to tax sales and are foreclosed on. Call
your local tax collector’s office and get a list of properties with tax liens.
Then call the owners; they may be motivated. Also, go to tax sales and
start learning about them. The tax office may have property that no one
bought at the sale. See if you can get a good deal. Contact a local title
lawyer to learn the ins and outs of your local tax sale rules.

You Are Surrounded by Real Estate Investments

Real estate investors come in two varieties: the professional who does it for a living, and the investor who is looking to increase his or her net worth over a lifetime. Given a reasonable rate of success, the investor soon starts thinking seriously about turning professional.
As an example, seldom does the grocery chain own the grocery store. If it started out that way, it was most likely purchased at a later date by an investor group formed for the express purpose of owning quality, investment-grade real estate. Most companies in the grocery business need all of their money to improve and enhance the business of putting groceries in the hands of the buying public. Their emphasis must be on the volume of sales and the profitability of those sales. The buildings become leased investments whose desirability as investments depends directly on the creditworthiness
and diversity of the tenants in residence on the real estate.
This process creates two types of real estate investors: those who develop the properties,
and those who later purchase the properties as investments. In both instances, opportunity exists for profit. The profitability in each instance will be a function of the expertise of the party involved. In the case of the developer, his entrepreneurial talents will be involved, and in the case of the investor, her skill and knowledge will enhance the outcome.

Surrounded by Real Estate

Unless you are a cave dweller, you are surrounded by other people’s real estate investments.
People who keep up with the economic news are familiar with the names Donald Trump, Del Webb, William DeBartolo, The Rouse Company, Gerald Hines, and The Taubman Company. They have built some of America’s most visible, well-publicized projects within the commercial real estate development industry. However, what these people do for a living is no different, except in scale and notoriety, than what local developers do, every day, in every city and town in America.
The entrepreneurs who build and/or own neighborhood bank buildings, office buildings,
and local grocery stores are working at the same trade as Donald Trump and company, only on a more practical and local level. Without these people, our towns and cities as we know them would not exist.

Using Leverage
Commercial real estate development is defined as the creation of real property investments,
“realty,” as opposed to personal property, or “personalty.” When buildings are built they become permanently attached to the land and, therefore, forever part of the real estate. Commercial real estate development is the business of creating this income-producing real estate. Why and how is this done? What prompts builder, buyer, and tenant to get involved is the attraction of using leverage to increase their profit. Leverage is the reason real estate investment can work for everyone.
A simple example of leverage occurs when people use a mortgage to buy a home. If you buy a property for $100,000, using a conventional down payment of 20 percent, you need to borrow $80,000 to complete the purchase (also known as 80 percent loan
to value). Simplistically, if you sell the property in one year for $120,000, you have made a gross profit
Buzzwords of $20,000. However, the deal is better than it
Leverage is the principle appears, as you have used the leverage of the borby
which we use other people’s rowed $80,000 to increase the rate of return from 20
money (OPM) to increase the rate percent on the gross price of the property, to a 100
of return on our capital investment. percent rate of return on the $20,000 cash down payment
you originally invested ($40,000 from $20,000).

Why Is the Small Investor Switching to Real Estate?

During the late 1990s, the traditional stock market changed dramatically. Traditional P/E ratios increased to 50 or more times earnings, with seemingly no upper limit. People no longer purchased stocks with the expectation that they would get an annual return on investment. They counted on the “bigger fool” theory to make money. This theory rests on greed as well as supply and demand, overriding investment considerations
and turning people into speculators rather than investors. A modern-day holder of stock is counting on someone else to come along who will pay more for the stock than he or she did. Due to this increasingly insatiable demand for a place to put capital, the stock market of the new millennium has dramatically reflected the bigger fool theory.
In the new millennium, investors got a harsh
awakening as they started to realize their
Buzzwords
stocks had become dramatically overpriced.
The resulting bear market has helped to
In the past, the price
evaporate many a paper profit. The daily paid for a share of stock was a
volatility and lack of clear direction of the stock multiple of its per-share earnings.
market are indicative of this increasingly preva-The price-to-earnings ratio, or
P/E ratio, is the price divided by
lent, unsound reasoning when buying and sell-
the earnings per share, either
ing stocks. Ironically, the stock market does not proven or projected.reflect the real health and competitiveness of the companies involved. The country’s industries
are in great shape, cycles included; it’s just that their stock value needs to be put back into an investment mode. Once we return to a real and sustainable P/E ratio, stocks will again become a viable alternative investment. People working in the market
are constantly trying to hype the market values, but since the readjustment, stocks in the Dow Jones Industrial Average have been up an down between 10 and 11,000, with no appreciable long-term gain.
When individuals want to go back to being legitimate investors, they must take a good look at real estate as an investment; it still trades on a multiple of cash flow to establish value. It retains the added attraction of appreciation, with the interim tax benefit of depreciation. In short, it is a more constant and reliable vehicle for investment.
In some cases, it can be a vehicle for speculation as well. One very poignant advantage that real estate has over stocks and other investment vehicles is that it is a finite commodity. Other than volcanic eruption at sea, there has been no real estate created for several million years. The continued growth of the world’s population virtually
ensures appreciation as the available land is absorbed.
Real estate investment can give you monthly income, tax shelter, and long-term appreciation. The stock market used to provide only income and appreciarion,
today it has lost sight of the fundamentals of value. Real estate is easy for most people to understand. Not only can you make money with it, but also you can see it, change it, and use it. You live, work, and play in it. It surrounds your entire life. Unless you are a cave dweller, you cannot go through a single day without using someone’s real estate investment. Why not make it one of yours?

What Happened to the Stock Market?

The traditional investment for most Americans not actively involved in the investment
industry falls into two major categories: stocks and notes. Stocks are shares of ownership in companies, and notes are debt instruments issued by a borrower. They differ in fundamental ways. Stocks can pay a dividend, and the per-share value of the stock may go up or down in price. Notes pay only interest, based upon the purchase price of the note; the interest rate may vary from investor to investor. Other investment
choices are futures, hedges, currency trading, and a plethora of derivatives of the above. The modern investor has so many choices that it becomes confusing unless a deliberate study is made to sort it all out.

Most people have neither the time nor the inclination
to sort out this menu of investment choices.

They prefer to leave the work to the self-proclaimed A mutual fund is a com-experts. For the individual with no desire or time topany formed to hold stock in analyze all these choices, this multiplicity of invest-
other companies, providing a mix
ment vehicles has given birth to yet another class of
of stocks and mutual funds that
investment called the mutual fund.
theoretically give an individual a choice between high-, medium-, There are funds that trade only certain stocks, such and low-risk investments. A REIT is as high-tech companies, single industries, foreign
a Real Estate Investment Trust, a
companies, foreign currencies, certificates of deposit,
mutual fund whose assets are real
or treasury bills; the list is endless. Suffice it to say,
estate properties or real estate–
backed, debt-based securities there is something for everyone. Someday there will
(mortgages). It is usually publicly be a fund that holds shares in other mutual funds.
owned. With the resulting management overhead and brokerage
fees, the net result is that dividends get pretty thin by the time they reach the investor.
Miraculously, there is even a type of security (a certificate of ownership issued against an equity) or mutual fund, if you will, called a REIT. This type of fund was first formed in the 1970s for the purpose of allowing the public to invest in real estate. Its shares provide the investing public with an undivided interest in a variety of large, commercial real estate projects.
Other than buying a home, American investors have always looked to the stock market
as their primary way of achieving a piece of the American dream. Their only other hope was to start a business of their own. For those who work for wages, the only viable venue for equity investment has been the stock market.

Landlords and Landladies

Those who have been in business for a long time, especially, may be
motivated sellers. Being a landlord can be tough, tiring, and stressful.
Often, small-property owners don’t have systems and management policies
and procedures in place. They may have been lax about collecting
all the rent; maybe they haven’t been raising the rent; perhaps they
haven’t been keeping up with the maintenance and the property is in
disrepair. They likely bought it 20 or 30 years ago for very little money,
and they may not understand today’s real estate market as well as they
should, so they’ll sell it for below market.

“For Rent” Ads
When you call on For Rent ads, you get in touch with landlords or landladies,
real estate investors, property managers, or Realtors acting as
property managers. Landlords and landladies are excellent sources for
investment property and lease-option deals. (See Chapter 4.) Everyone
who owns rental property knows that all of the tenants pay the rent on
time and never call about repairs, right? Wrong.

Landlords have rent collection problems, repair problems, vacancy
problems; they can be constantly dealing with headaches, but they can
be highly motivated to sell. If you talk to 20 to 30 small-property owners,
managers, landlords, and landladies, you’ll probably find some
deals, and they often have more than one property to sell.
Auctions
Auction companies announce that they’re auctioning a house, a commercial
property, or a farm 30 days from now. You want to call that
auction company, gather all the details, and get on its list to be invited to
the auction. You also want to meet dealers at the auction company
because they’re out to find deals like you are. They find motivated sellers
who are willing to auction their property. Sometimes those sellers
say, “I don’t want to auction; I don’t want to advertise; I don’t want to
pay your auction commissions. But do you know of anyone who will
buy property quickly?” Many auctioneers are also brokers and sell a lot
of property, so try to develop good relationships with them.
Other Investors
You can meet other investors at auctions because, when you buy at an
auction, you usually have to close within 10 or 20 or 30 days with cash.
Would you like to know a lot of investors who are looking to buy properties
with cash? Absolutely, because when you find a deal, you can
wholesale it to them; you can partner with them; you can use their
funds, their cash, their credit. They’re your real estate partners. Again,
as in any business, networking is invaluable. Go to every auction, meet
everyone, and add them to your database.

Legal Notices
Newspapers post legal notices of divorces, bankruptcies, and foreclosures.
Follow all of those and get to know who the players are. Call
them; look at the deals. Find attorneys who are representing people in
bankruptcies, divorces, and foreclosures and see if you can contract any
of their deals. Call a few lawyers and ask where they advertise foreclosures
and bankruptcies. Get a copy of that paper and go to work.
Obituaries
This may sound a little morbid, and I prefer not to do it, but some of
you might. In the newspaper, look for a list of people who have just
passed away. These people may have owned property, but their family
members often live in other communities. You can perform a service for
that family by helping them liquidate the real estate. They don’t want it;

they usually don’t know how to sell it; they certainly don’t want to take a
lot of time to make decisions. You could offer them a quick sale and
they might be motivated.
If you contact them, of course, be sensitive to what they are going
through, saying, “I’m sorry to hear about Rose passing away. Is this a
good time to talk?” Ask them whether property is involved and what
they plan to do about it. Could you help them by offering to get rid of it
quickly? If you call on enough obituaries, you’ll probably get deals.
Small Newspapers
You can also run classified ads to find deals. You can run them in newspapers,
on radio, TV, and billboards. Do you have any local neighborhood
shopping newspapers, community weeklies, or even the Thrifty
Nickel? Putting ads in these small papers doesn’t cost much—$10, $20,

$30, or $40. One of my students did a study in Memphis, Tennessee,
and found that—per time and per dollar—people get a much better
response out of the smaller neighborhood newspapers than they do in
the larger papers.
Use the following sample “I buy houses” ads:

DO YOU NEED A MONEY MIRACLE RIGHT NOW? If you have a
house in any condition that you want to sell, I’ve got cash, know-how,
and banking connections. And I’m eager to buy your home. Please call
[investor’s name] at 000-0000 right now for an extraordinary no-risk
proposition.

Legal Newspapers
Every major city has a legal newspaper in which people advertise bankruptcies,
foreclosures, divorces, estate sales, probates, and related
events. Get a copy of this newspaper and look at it at least once a
month. Then follow up with phone calls.

Foreclosure Attorneys
In every area, you’ll find two or three attorneys who specialize in foreclosures.
Find out who they are and talk to them They may not be able
to give you a lot of information because of client confidentiality, but
they might be interested to know someone can buy their properties, pay
off the banks, or help their clients get rid of their properties.

Driving for Dollars
Pick an area that’s in transition: one that is getting better or an area
where people are fixing up houses. Watch for lots of activity—houses for
sale, houses for rent. Then start driving around looking for signs of possible
motivated sellers: vacant homes, needy homes, condemned homes,
For Sale signs, For Rent signs, For Sale by Owner signs. You ought to
get excited if you see gutters hanging off, 10-foot-high grass, garbage

piled up, holes, junk cars. There’s a basic premise to follow: The worse
shape the house is in, the better the deal. These are the signs of opportunity.
Write down the address, locate the owner through the property tax
records, and phone or write them to see if they want to sell.
One of my students in his early twenties, a young man in Memphis,
Tennessee, just sends letters to homeowners of vacant properties he
finds driving around—about 50 to 100 letters a week. He had been
making $25,000 a year working part-time on the night shift, but he
made that much on one real estate deal. He has now made about
$200,000 in 12 months just using this idea consistently. He doesn’t
work the night shift anymore.

Signs of Motivation

You can look for signs of motivation by getting the Sunday newspaper
and looking in the real estate section for places for sale. More specifically,
look for the following sources of motivated sellers.
“For Sale by Owner” Ads
If people are trying to sell property and don’t want to get a Realtor
involved, it shows motivation to sell. Maybe they can’t afford a Realtor,
don’t have time to get a Realtor, or simply want to sell it themselves.
This can lead to getting a good deal quickly because you can negotiate
directly with the decision maker.
Some investors just work with a list of properties; others work only with
Realtors and make a fortune. Everyone is different. It all works.
However, about 80 to 90 percent of the deals I do never go through a
Realtor. They’re never listed with the Multiple Listing Services. In the
newspaper, you have nonlisted properties for sale by owner, and you
also have listed properties that are for sale by real estate companies. You
may be able to make a living by responding only to For Sale by Owner
ads and asking them why they’re selling.

“For Sale” Ads
These lead you to Realtors or to people who just listed their house for
sale with Realtors. They’ll likely try to get full price. These are probably
not the best sources; sellers working through Realtors usually aren’t
motivated to sell at a discount, although you might find some motivated
sellers in this group if you are willing to make enough calls.
Expired Listings
Expired listings can be a good source of deals. Contact some real estate
agents and ask them to help you make offers on all of the listings that
have expired or are about to. For example, let’s say someone listed a
house for sale with a Realtor for $300,000. The Realtor listed it for six
months and it has not yet sold, but the agreement expires at the end of
six months. Chances are the seller might now be more motivated. Do
you see how this list could be a source of some good deals for you?
Investment Properties Ads
Who would list properties for sale under the category of investment
properties? The following describes several possibilities.
Investors and Their Brokers
Investors can be understanding toward other investors, so sometimes
they sell the property for below what it’s worth. Or maybe the property
was purchased 30 years ago and hasn’t been fixed up or managed properly.
You might be able to buy it for less than market value because the
seller is motivated.

Avenues Leading to Motivated Sellers

If you do not find a motivated
seller, you can’t begin to make money in real estate.
When people are selling a house and are eager to get rid of it, the only
thing they care about is solving their problem. You may think they care
most about the money involved. That’s simply not true. You may think
they want to sell a house. That’s not true, either. This goes back to the
most important question: Why do people buy a home? To spend a lot of
money? No. Because it’s good to buy a home? No. It’s important to
understand why people buy homes; then you’ll understand why they sell
them, and then you’ll also know how to negotiate with potential motivated
sellers.

Owning a home involves paying mortgages and spending money for
taxes, insurance, and repairs. Many people could rent something for a
lot less and live in a nice place with everything taken care of. But they
buy homes based on the emotions of security and status, which is why
some people live in houses that are too big and expensive for them. They
also buy houses to get into better school districts for their children. But
mostly, their decision has to do with emotion, not rationalization.
People also sell homes for emotional reasons. They either have a problem
or they’re avoiding problems. They have pain they want to “fix.”
They’re getting divorced; they’re getting remarried; they have to move
out of the city or state; they’re starting a new job. Sometimes, they have to sell their homes quickly. They may have to pay off the mortgage to
have money to buy another home. Or they’re in over their heads financially.
Or they’ve had a change in their life—a divorce, a family debt, a
job change, or money problems.
Your job as a real estate investor is to discover their problem and solve it.
Loss of job. Financial problems. Estate sale. Job transfer. Illness and no
health insurance. Recent divorce or remarriage. Overextended credit,
tax problems, tired landlords. These events can all lead to motivated
sellers, because here’s an example of what happens.
A homeowner has $400,000 in debt and the bank is demanding payment;
the house may be worth $555,000, but the homeowner may not
be able to get the money to pay off that debt or stop foreclosure. It’s
possible the home will be foreclosed and the owner’s credit wrecked.
You can help turn this into a win-win situation.
Perhaps all the sellers really want is to get $5,000 cash to pay off the
bank and move. If not, they could be foreclosed upon and end up in real
trouble. You could help the seller and the bank by putting the house
under contract for $405,000—$5,000 to the seller and $400,000 to pay
off the loan. Contact your network of buyers, investors, and real estate
agents; perhaps you could find a buyer who would pay $455,000 for the
$550,000 house. If it is a good deal, the buyers will come. At closing,
the bank has its loan paid off, the sellers have been saved from foreclosure
and have $5,000 to move, the end buyer gets a great deal, and you
earn $55,000 (less any closing costs you had to pay) for finding a good
deal and putting a buyer and seller together.

The Terms of Your Lease Option

If they miss a rent payment or are late by one day, they lose all their
option money. If you rent out an apartment, what’s the tenants’ incentive
to pay on time? Not much. If they’re late, they pay a measly little
late fee.
What’s the number one complaint all landlords have against renters?
They damage the place and don’t take care of it. Are you shocked? Have
you ever rented a car? You are no doubt nice, honest, and ethical. When
you rent that car, how do you treat it? Do you drive over the bumps in
the parking lot, take the curb, do some donuts? Let’s floor it, see what
this little rental car can really do, drink a Coke, throw it in the back seat,
right? Don’t we all tend do the same? Why? It’s not that we’re bad; it’s
just that it’s not ours.
SECRETS OF BUYING AND SELLING REAL ESTATE

Perform Regular Inspections
How do you make sure that the property is not being destroyed and that
your tenants are doing the repairs they are supposed to do? In every lease
and lease option, you have the right to inspect the property every 30 days.
I predetermine my inspection date in writing. For example, I say, “On the
second Tuesday of every month, during business hours, I have the right to
go in and inspect for repairs, check the air-conditioning filters, spray for
bugs.” Inspect it every 30 days; if you don’t, you could be shocked at what
you find.

When you lease-option, tell your tenants they’re on a home-ownership
program, that this is their house. They’re going to fix it up. It’s theirs.
Way to go. They own it. They’re buying it. They’re lease-optioning it.
They may plant some flowers, paint, maybe put a porch on the back. If
they’re homeowners, they take care of it.
■ If they’re late on the rent, they lose the option money.
■ If they don’t buy within a year, they lose the option money.
■ If they do any damage or don’t do the repairs, they lose the option
money.
■ If they don’t close on a new mortgage within a year, they lose the
option money.
In my landlord course, I explain that all my rent is due on the first of the
month, late on the fifth, and we evict on the eleventh. This is my policy
and procedure. I promise you if tenants can’t pay this month’s rent, they
probably can’t pay three months’ rent if you let them stay in your rental
property.
Do you remember when, during the Vietnam War, the Chinese captured
some patriotic, red-blooded, dedicated Americans and put them on television
and forced them to say “America is not a great country”? How did
the Chinese torturers get them to do it? They used the psychological
technique based on the idea that if you put it in writing, you can’t deny it.
They’d start out very generally and have them write a report detailing
problems in America, and, of course, the valiant American POWs said
there were no problems, no way, they wouldn’t write, they wouldn’t
cooperate. Then the Chinese said, come on, there are race problems,
poverty problems, some type of little problems. Just a little one, write it

MAGIC PATHS FAQs

Before you read about how to put the five “magic paths” to work,
take a moment to look at these frequently asked questions.
Is this book designed for the experienced real estate investor?
Absolutely not. Although anyone with real estate experience could
benefit by reviewing the material here, what is presented is primarily
for the beginning investor.
Will these strategies work in my area?
Certainly. Although markets vary, opportunities abound in each area.
The book contains a discussion on how to evaluate your local market
for using the best strategy.
Do I create a lot of debt in real estate investing?
Not necessarily. Creating debt is not your goal. Just remember what
debt you do take on is backed up by a tangible property that is worth
more. And when these debts are paid off their value will have gone
into your pocket.
Will all the techniques discussed in the book work?
Yes, they comprise the major techniques used to practice investing in
real estate in the United States today. Although some have more
popularity than others, none are minor or insignificant.
Do they involve “no-money-down” schemes?
Not at all. Some require more money than others. But often several
techniques are used to build up cash reserves for their use elsewhere.
What is this so-called creative financing all about?
Creative financing is a catchall term that usually involves financing
other than or beyond a traditional mortgage loan. When used in this
book it refers to the seller’s participation in secondary financing and
the conservative use of a home equity loan.
Will using the techniques described here take much time?
Some take longer than others. You certainly don’t need to give up
your present work to get started with using several of the techniques.
Securing and arranging the work on a fixer-upper can often be done
easily on a part-time basis. Correspondingly, however, something like
Magic Paths FAQs 9
the operation of several apartment buildings may take a larger commitment
in time, unless professional management is used.
If I’m buying a single-family house or small apartment building do I have to
swindle the seller?
Of course not. Great profits come from dealing fairly in the marketplace.
Note that all prices come from comparable sales in the marketplace;
even a damaged fixer-upper has a reason for its low price.
Is this book comprehensive and all I need to know?
No, your study of real estate should be lifelong. Although the techniques
presented here are thorough and intended to get you started,
each is its own field with a distinct fraternity of followers, books,
courses, and gurus.
Are negotiations with sellers difficult?
Not at all. Even when you need to offer a seller less than what he or she
is asking, a seller is generally persuaded by the factual material and
comparable selling prices that you will gather regarding a property’s
value. You can make negotiating pleasant if the seller knows that you
want to take some of the responsibility of the real estate problem off his
or her shoulders. Note that you can often come near the seller’s asking
price if you name the terms; that makes it win–win for you both.
I’m not sure about my credit. How do I go about qualifying for a mortgage?
Two observations: First, consider that many investment properties,
both single- and multifamily, are financed in whole or in part by the
seller; second, many lenders base their mortgage decisions more on
the value of the property and less on the borrower. Once you have
real estate, regardless of how it’s financed, you will have gone a long
way to repairing any credit problem.
Do I need a real estate license?
Not to practice as an investor, you don’t. In fact, having a license may
compromise your investor status with the Internal Revenue Service
(IRS), as well as be a hindrance in working with sales agents. Further,
many sellers simply don’t want to talk to brokers, so don’t license
yourself to become one. Note that wholesaling a property may
feel like it requires a license, but even here you’re selling a contract
to buy a property over which you have a measure of control—and
not for a fee, but for a markup, or difference in price.
10 Five Magic Paths to Making a Fortune in Real Estate
Do I need to incorporate?
Generally, no. In fact, you will lose important tax advantages if you
do. Incorporating is supposed to limit liability, but if individuals
within a corporation act irresponsibly, the corporation will not shelter
their liability. As far as liability for someone having an accident on
your property goes, you should always cover yourself with the
proper insurance, and liability insurance is relatively inexpensive. As
for liability for the mortgage, even if you have a corporation you are
likely to be required to sign personally on the mortgage. (In this regard,
you should always make sure the mortgage is less than the
value of the property.)
What are the main ways in which I will spend my time?
Oh, yes, I didn’t tell you yet? It’s not so much about bricks and mortar
(although there may certainly be some of this). You will spend
most of your time contacting people, and the second biggest investment
of your time will go toward establishing value by investigating
comparable sales.
Will it take persistence?
Yes, definitely. It will also take indefatigability, stamina, determination,
purpose, grit, and, of course, pluck. Yes, lots of pluck.
In the next chapter, we’ll begin setting out the way you make money
with fixer-uppers.

TAKE SOME MEASUREMENTS OF YOUR MARKET

Before we leave our overview and go into details of our first strategy,
take a moment and evaluate your own marketplace. Here are some
characteristics you could investigate about your marketplace and the
neighborhoods in which you will look for property:
■ Establish the territorial area in which you will prospect for
property.
■ Determine territorial divisions of neighborhoods in which you
will do business.
■ In each neighborhood determine if the number of home sales
as well as the value of their prices are rising or falling, and look
at trends for the past several years.
■ Look at the number of single-family houses in contrast to the
number of multifamily dwelling units, and find whether the
trend for the past several years is increasing or decreasing.
■ For single-family houses, determine the ratio of tenants to
owner-occupants, and the trend there for several years.
■ Determine the profile of the typical buyer in each of the respective
neighborhoods.
Don’t let this list intimidate you. Investigating these characteristics
isn’t meant to be a demanding task. You probably already
know much of the information. Whatever you don’t know can be
learned from local real estate agents, property appraisers, assessors,
or other investors. A check at the county registry of deeds office
may also be helpful. The purpose is for you to start gaining a sense
of what’s happening in real estate in your marketplace. This will
start you thinking about whether the value of single-family properties
is going up and whether the tenant mixture is moving toward
owner-occupants—two important points in using the real
estate techniques in this book.

A Walk through a Lease-Option Deal

How do you find good lease-option deals? What’s the best source?
Look under Properties for Rent in the local newspaper. Every landlord
or landlady who is renting properties has major complaints. They say,
“Tenants bug me; repairs, repairs, repairs; it’s a lot of work; there are
lots of headaches.” They rent properties for $1,000 a month but never
make $1,000 a month because they’ve got to spend a lot of time and
money fixing them up. They might be empty right now because the last
tenants ran out on them. It’s frustrating. Anyone in the landlord business
has plenty of problems, headaches, and repair expenses.
If you could get them out of the repair business—and could ensure that
they receive their checks on time every month so they can go on vacation—
would they be interested in talking with you? Definitely.
Start by talking with them and finding their pain. Ask questions. How
long have they had the property? How’s the rental going? What do they
rent it for? What have the repairs cost over the years? If you found the
landlord through a For Rent ad, then the property is empty. If so, you’d
ask these questions: How long has it been empty? One month? Two months? Three months? Last year, how often was it empty? What were
the repairs? Have they enjoyed being a landlord or landlady or manager?
Have they had any problems? What don’t they like about it? What
would they change about it?
Then work the numbers for the landlords you talk with and show them
a solution in writing. For example, it they rent a property for $1,000 a
month but it’s been empty for two months, that means they’re not collecting
the full $1,000—they’re really collecting about $700 prorated
over the year. How much did they spend on maintenance and repairs?
Say they spent $1,000 cleaning it and painting it. That means they’re
not making even $700 a month; they’re making only $600 a month.
Work the numbers backward, both annually and monthly, for the past
two or three years. Then ask them how much time they spend working
on or worrying about the property. They might say about four hours a

month—they had to drive over there and fix the commode. Is their time
worth $10 an hour, $30 an hour, $50 an hour? Now the income isn’t
even $600 a month; it’s $500 a month. Show them that, with all the
work, all the headaches, all the problems, all the bills, they’re really making
only $500 a month as landlords.
Work the numbers. Say that landlord is making only $500 a month, and
the market rent is about $1,000 (which you verified by calling some
other property managers and landlords). Ask this question: “Mr.
Landlord, if I could get you out of the repair business and get your
money to you every time, what’s the least amount you’d take per
month?”
“Well, I rent it for $1,000, but it’s clear I’m making a lot less than that.”
Okay, you negotiate, negotiate, negotiate. Let Mr. Landlord speak first,
but mentally know your ceiling price—the top price you’re willing to
offer. Maybe it’s $650, maybe even $700, because you know you can
rent it for at least $1,000.
Let’s say your negotiations are weak and he insists on $700, that’s it.
You lease it from him for five years for $700 a month. That effectively
locks in the rent amount for five years, too. Maybe you can lock it in for
10 years, even 20 years.
Now ask the least amount he’d take to sell this property, because you’d
like to make an offer to buy it. Let’s say you think the house is worth
$100,000 and he responds to that question by saying, “I just had an
appraisal. It’s worth about $100,000.” Because you’re both investors,
he might say, “I know you’re going to make a lot of money, I’ll sell it to you for $88,500.” Well, that’s not a good deal; it’s is a bad deal because
it’s only 12 percent below what it’s worth.
This could be a dangerous deal, but let me show you why it may not be
such a bad deal. You could continue the negotiations by saying, “Mr.
Landlord, if I pay you $700 a month, give me $150 a month credit
toward the purchase price. That way, every month you make a payment,
you get a bit of equity buildup or debt payoff, just as you would if you
had bought it and borrowed the money.” Also remind him how much
the little repairs drove him crazy—the broken sinks and commodes and
all that (which tend to be 70 or 80 percent of the repairs). You’ll take
responsibility for those repairs off his shoulders; the landlord will still be
responsible for the big repairs, anything over $500 or maybe $1,000 or
maybe $300—whatever you can negotiate.
In cases like this, landlords will ask for money down. Every property
needs repairs, so let’s say there are $3,000 worth of repairs. We’ll get
that taken care of, so instead of giving them $3,000 option money,
you’ll do the repairs. Who’s really going to do the repairs? Your end
buyer, not you; you are out of the repair business. You’ve gotten a landlord
out of the small-repairs business. You have a five-year option to buy
the property for $88,000, and it’s worth $100,000. Horrible deal, $150
a month credit. Protect yourself: The question in your mind is, what if I
can’t rent this or sell it quickly? You’re stuck. The property is currently
empty, so negotiate delaying the first payment for 90 days or 100 days.
What if they don’t go for that? Try 60 days. What if they don’t go for
that? Try 30 days. Make a business decision.
Disclose everything you do in writing. Tell them you’re a real estate
investor—that you don’t represent them or their interests, that this offer is based on your being able to remarket the property in the next 60 or
90 days. If you can’t rent it in 60 days because the market is terrible and
the house is horrible and you made a big mistake, you walk away.
They’re not any worse off, it’s empty anyway—they’re not making any
money. Not everyone will agree to that disclaimer or contingency, but
you’ll get it most of the time if you ask properly.
Let’s say you have 60 days. They signed a lease for five years at $700 a
month, giving $150 a month credit, and you also have an option to buy
it for $88,000 within the next five years, with some of the rent going to
knock down that purchase price. How much money do you put down?
Zero. How much money have you borrowed? Zero. How many contractors
have you hired? Zero.
Clean up the yard and give the house a coat of paint to make it marketable.
Then run an ad in the paper: “Easy qualifying, become a homeowner,
stop throwing your rent dollars away, no banks involved, won’t
last.” Create a sense of urgency. Have a voice mail people can call that
describes all the attributes of the house. You think the house is worth
$100,000. You think the market rent is $1,000 because you’ve done
research—gotten comps and verified figures with property managers.
Your phone might ring off the hook because now you can sell a house
with easy qualifying.
The first responders call and say they’d like to buy this house; they’re
familiar with the neighborhood. The number one qualifying question to
ask a potential lease-option candidate is this: “How much money do
you have to put down?” Ask additional questions like these: “Do you
have anything to sell? Any tax refunds coming? Any other sources of funds?” People often don’t think about some of these things. Tell them
you might get back to them and put their information in a file.
The second responders call and say they’re looking to buy a house, but
they don’t think they can qualify. They don’t have a big down payment,
they have only $6,000. You can screen them over the phone.
Do a credit and criminal background check on everybody. Also screen
them by sending them to your mortgage company and getting them prequalified.
Explain how your home-ownership program works: They
don’t have to have perfect credit. They don’t have to have a big down
payment. But you need to check them out. Sometimes the mortgage
company calls back and says your candidates are prequalified. Say the
mortgage company has a 95 percent loan program for them, and they
have enough of a down payment to proceed.
How much are you selling the house for? You thought it was worth
$100,000. What’s the actual difference if they pay $105,000 or
$109,000 for 30 years at 7 percent? About $8 or $10 a month. So you
write a contract for $107,000, in which they pay all the closing costs
and fork over $6,000 as a down payment. They’re happy. They didn’t
think they could buy a home, and you showed them how. Now you’re
ready to close.

Call the original seller. He wanted $88,000 but you can renegotiate
that amount. As of now, $107,000 minus $88,000 means $19,000
profit in your pocket. And you already have $6,000 in option money.
So you’ve received $6,000 plus $19,000 and you’ll make another
$13,000 at closing.

How would you like some extra money? Call up the original sellers and
say, “Hey, I have five years.” Always count it out, 2003, 2004, 2005,
2006, 2007. You’ll give them $88,000 in five years; however, you’re
paying off some of the loan as you go, so it won’t even be that much.
Ask this question: “Would you like the money sooner?” They might say
yes. If they receive the cash in the next 30 days, they tell you, they’d take
a vacation, pay off bills, and so on. Great. Next ask them, “If you get
that cold hard cash in your hands in the next 30 days, what’s the least
amount you’d take?” If they say $87,000, what do you say then? “Can
you do any better?” If they won’t, you agree to $87,000. You go to closing
and sell it for $107,000. You just made $20,000 on a bad deal that
you put no money into because you learned how to lease-option and do
credit financing. You learned how to hustle, market, and take action.

GUIDELINES FOR GETTING STARTED

Here are some guidelines for choosing which method you might begin
with:
1. Study your local market. The technique you use will be determined
by the opportunities available. You have to work with
what people want in your area. In Chapters 2–6 on fixer-uppers
you will see more on measuring your local market.
2. Note what’s going on in your regional economy. Will fixerupper
opportunities be better in a few years when the local
manufacturing plant relocates? Or will apartment buildings
rise in value, as more people are coming into your area than
are leaving?
3. Try to find the technique that appeals to you, something that
not only fits your market but fits you.
4. Note that some techniques require more money, at least to
put down initially, than others. Specifically, the lease/option
allows you to put little down to get the deal started, but the
apartment building purchase may require 10% to 20% down
unless you can finance it creatively.
5. Gauge the amount of time you have available to get started.
And be aware of when that time is free. Generally, real estate
allows you control over your time. You can probably manage
and maintain a small apartment building in the evenings or
on the weekends, but working on a fixer-upper may require
some weekday time when tradespeople are available.

NOW IT’S TIME TO MAKE REAL MONEY

Success can come from using any one of the five “magic” techniques,
or a combination of several. The idea is not to jump from one technique
to another indiscriminately, but to begin by focusing on one, to
specialize in that area, and then add to your growing expertise by undertaking
one of the other methods. However, too many good opportunities
can come up at a moment’s notice not to be able to take
advantage of them. Therefore, you may need to be versatile enough
to shift gears at any time into another mode. It certainly would not
be unusual to have a lease/purchase in process when the chance
comes up to buy a distressed single-family.
Now that we’ve said it’s best to begin with one technique, we will
also say that while it’s true that specializing in one niche improves
your expertise in that area, the opportunities available in any given
property market may not be in your area. Besides, if openings in any
one niche area were in abundance the competition would be fierce,
driving up prices beyond reason. It’s best to stay flexible and be prepared
to learn another method—again, one method at a time—so
that you can take advantage of varying opportunities.
If you work only in a narrow area, like buying and holding
single-family houses, you will miss much of the picture because
you are concentrating on a small part of real estate investing. Perhaps
you should consider buying and selling without holding over
a period of time, or becoming a landlord of a building designed for
long-term use, such as an apartment building. Specifically, buy low
and resell a few properties to build up some cash before holding a
few, or sell with owner financing for a cash flow. Unless you have
lots of money in the bank, don’t think just of holding, but of buying
and selling.
The bottom line is that while you will be learning and gaining experience,
you will also be making money and building a financial
base that will make you wealthy. And, yes, it may seem easier to
hone your skills in a single area and develop such expertise there, but
you want to be able to take advantage of whatever the case is in your

market. It’s a lot of work, particularly when you must anticipate several
avenues of investment techniques, but it is rewarding.

Lease Optioning

People dream of owning their own
homes. Lease optioning can make it possible.
The Idea of Lease Optioning
If you rent a house or an apartment for $1,000 a month, what do you
have at the end of the year? Well, $12,000 worth of canceled checks,
right? Zip, zilch, zero. Everyone can use lease optioning. Even if you
don’t make a lot of money or don’t choose to be a real estate investor,
you can do one on your own house and stop throwing away your rent dollars. Would you like a vacation home? A house in the mountains or
condo by the beach? You have a choice. You can pay $200,000, but
what if after a year or two you don’t like the place or you want to go
somewhere else? You’re stuck because you bought it. You might have to
sell it, and what if the market has gone down? However, you could
lease-option a vacation home. Stop throwing your rent dollars away,
and stop using your own money to buy property.
Let’s talk about cars for a minute. There used to be only two ways to
buy a car. One way was cash: If you wanted the Camaro with the mag
wheels and the flared fenders, and it cost $12,000, you could pay
$12,000 in cash. Alternatively, you could borrow $12,000 from the car
company or the bank if they’d lend you the money, but your payments
would be high.
Today, about half of all cars are sold using a lease with an option to buy.
You can get the new BMW for $42,000, or put $499 down and pay just
$399 a month. People don’t care about total price; they are more interested
in the down payment and monthly outlay. We get excited when we
see we can drive a Porsche for $2,000 down option money and $599 a
month, because we tend to think of a $90,000 Porsche as unaffordable.
Now, all of a sudden, it is.


Some wise businesspeople figured out they could lease-option cars.
That means you drive it for two or three years and, if you like it and
want to keep it, pay it off at a reduced price because some of your payments
have already gone toward buying the car. It’s a win-win situation.
If you don’t want to keep the car, you simply return it. Lease optioning
offers the best of all worlds. Indeed, a whole industry has emerged out
of this concept.

What Makes Real Estate Unique

If you’re serious about your money and serious about investing, you’ll
consider all the advantages of real estate investing that don’t exist in
other forms of investing.
Contract Real Estate for Less Than Its Value
Houses worth $100,000 can actually be found for $75,000 or $80,000.
Some real estate worth $1 million can be found for $700,000; other properties
worth $450,000 can be found for $350,000. You can contract to
buy a property and control it immediately, even though you haven’t given
the seller money for it yet. Then, between 30 and 100 days later, you go
to the closing and give the seller the agreed-upon price. You borrow
money to pay for the property, then close on it, and, voilà, you own it.

Make an Infinite Return on Investment
If you find a house worth $1 million for $500,000 and your credit isn’t
great, there are some lenders who would lend you $500,000 for a property
worth $1 million. In fact, they’d hope you’d miss a payment so they
could take over the $1 million property for $500,000.
These lenders are called hard moneylenders (see Chapter 5, “Avenues
Leading to Motivated Sellers,” for more details). They don’t pay attention
to your credit; they care about the asset, the property itself, when
they make their lending decisions. If it’s 60 to 75 percent loan to value
(see accompanying explanation), they might lend the funds regardless
of your credit. Some of the big banks and mortgage companies make loans to people who have been in bankruptcy, who have made late payments,
who have bad credit, and so on. They may still lend you 60 to 80
percent of the sale price on these properties. That’s why you can find a
property worth $100,000 and get it for $75,000, then borrow that
$75,000 without putting your own money into the property. You rent
the property for $1,000 a month, and your payment on the $75,000 you
borrowed is $700 a month. After all of the expenses—taxes, insurance,
vacancies, repairs, and overhead—you make some cash each month.
Let’s say you make $100 profit a month from the rent after paying all of
the expenses. You’ve still invested zero in the property. Your return is
infinite: $X for $0 invested.