Group Q & A
Good day everyone and welcome back to another Street Smart Q and A where you’ve asked a lot of very intelligent questions over the last couple of weeks, and I’m excited to answer these for you. As we get started, I wanted to give you an overview of where I see the economy over the last couple of weeks and over the next couple of weeks. A few things have come out since the last time we spoke, which is very interesting.
One of them is the government’s new two-step housing proposal to get things restarted in the economy and in the housing industry. Basically the philosophy is it’s housing that got us into this mess, and it will be housing that gets us out of this mess. So, there’s a couple of things that you should be aware of in the new proposal.
First of all, there are about 55 million mortgages on American homes today, but only about 4 million of them are actually slightly behind or in some stages of foreclosure process. So, that means 51 million Americans are paying their mortgages, which is important for us to remember as we hear all this gloom and dome.
Remember that the media’s job is to provide news, and where there is no news, they create news. So, what the media always does is give you the worst case scenario of everything that’s going on. The trap that most humans fall into is that that is the news and that there’s nothing else to say. Well, there is something else to say. There are a lot of folks that are paying their mortgages.
Now, they do say that about four to five million homeowners who have never missed a payment but are struggling to make ends meet may not be able to hold on much longer. This is important because this is the group of folks that credit was considered good or is good now, but they’re going to be prevented from refinancing for an important reason. The value of their home has gone down. When we say the value has gone down, it’s because of the new appraisal that would come in would be much lower than what they even paid for it or even owe on the property.
The administration has proposed a homeowner affordability and stability plan, and it’s a two-step approach to help stop foreclosure and stabilize our neighborhoods. A couple of things that you should be aware of about this. There are two major aspects of it, refinancing and loan modification.
Now, in the financing arena, what they’re saying is that they’re going to allow the value of the home to be calculated at 105% of the current appraised value. Now, that’s important because that’s actually more than the house would appraise for right now. What they’re saying is we’ll take the risk over here that this is a good borrower and a good payer who has been caught with this issue of the lowering of the values.
So, if we’ll just take a look at that for a moment that could be a solution for a lot of folks that do have good credit, but simply don’t have the value on the property that they have right now. That may be you. You may be in a situation where you could take advantage of a lower interest rate today, and because of this new stimulus package, they will actually allow you to include the cost of refinancing into the loan. So, you won’t have to write a check at all for the refinance costs. All you’ll have to do is agree to make those payments and be able to make those payments under the new financing.
Take a look at what your current interest rate is on the home you have today. If that interest rate is higher than today’s rate, it could make sense to do this particularly if you’re planning to stay in your home for at least three more years. That’s important because the cost of refinancing is a cost and it will show up when you go to sell your home. So, let’s make sure that we’re not just trading dollars here, but it actually makes sense to do it.
The second part of this is loan modification. This is for folks that are currently behind on their payments or are in imminent danger of becoming past due. This is the Homeowner Stability Initiative. This program seeks to lower payments to an affordable level for a five-year period, allowing the borrower to become stabilized and the housing market to recover. According to this plan, this allows the loan to be lowered to a rate at which the total housing expenditure and the budget would be no higher than 31% of the gross monthly income.
You’ve seen this as I teach you about the rental side of your business that when we look at someone’s income, we’re looking for about a third of that to be available for housing. So, if they’re bringing 3,000 a month, I want to rent to them for somewhere around $1,000 a month, not much more than that because they could get in trouble and not be able to make those payments.
So, be careful as you look at this because this has some interesting benefits to us. First of all, we could work with someone to modified their existing loan, then take that loan over subject to if it is the choice of the homeowner to leave their home. In some cases, that is exactly where they’re at. They’re saying look, I cannot any longer afford this home. I’ve made other arrangements. I’m moving in with someone. I’ve inherited a house. My parents are moving into a nursing home. I’m taking over their house. Whatever the case may be, you have a chance to work with them to modify that and then take it over subject to the existing financing.
So, that’s a real opportunity for us under the Street Smart System and working with homeowners who would like to keep their credit and would like to keep their situation but don’t want to keep their home.
Now, another aspect of news over the last few weeks is something that we’ve seen for years. We’ll switch gears a second from existing financing into those folks that have already gone into foreclosure and maybe even bankruptcy. There’s a little known situation that exists out there right now where lenders who have bought loans from other places and then bundled them together and resold them on Wall Street, now have a problem. They cannot produce those notes. They’re in some warehouse somewhere in some giant hemp of paperwork, maybe in file drawers, maybe not, maybe all bundled together as file after file after file in boxes, not even with labels on them.
The concept that was used in the old economy was that there was a value to those mortgages and that people would take their IRAs and 401Ks and they would give that money to Wall Street who would then take that money and invest it in a big pile of mortgages. When they bought that big pile of mortgage, they pulled them altogether into a trust, and that trust is a secularization.
So, let’s say they bought a whole big pile of mortgages that had a certain type of borrower in there, a certain type of home, a certain type of loan, a certain type location, a certain type of home be it used homes or new homes. All kinds of different variables went into the purchase of these packages. So, then they took one from column A and two from column B and three from column C. They pulled them altogether into the big pile that fit the guidelines that that particular investor or investors were looking for.
Then they put that together and offered it to Wall Street and said here’s a pile of mortgages that are like this. Wall Street having already lined up its investors, said fine. We’ve got billions of dollars for that particular type of package. So, that package will return three, four, five, ten, 11, 12% return and depending on the quality of mortgages that were in that package, they would then get that kind of return. Of course, riskier ones got a higher rate of return. The ones that were pristine houses and pristine neighborhoods with pristine borrowers got the lower rates of return.
In any case, that was all then pulled together. Those monies _____(9:37) changed hands and what backed the whole thing up was paperwork. Well, that’s where the sticky part is. Once the deal was done and that type of loan that was on a spreadsheet got put together and offered to Wall Street, and Wall Street gave the money back to the people that controlled those mortgages. It was kind of like the deal’s done. Let’s go to dinner.
The backup to that is all the paperwork that needed to come behind that. No one really got paid to manage all that paperwork. So, now judges are looking at this issue with an interesting slant. The judges are saying okay, Mr. Lender, you want to foreclose on these nice people who haven’t made their payments, and we can understand that and it’s backed by this property, so you want to get that property back and get your money back. We can understand that. So, show us the paperwork. The paperwork is the mortgage itself and the note.
Now, what’s interesting for most of you, you don’t understand how this works. There are actually two documents. There’s a mortgage that’s a lien against the property and that’s recorded on public record. Then there’s a note that’s signed by the borrower. That’s most times, not recorded on public record. That itself is actually the evidence of the debt and it has the original signature of the borrower.
All the judge is asking is where’s the paperwork. Show me the paperwork to back up your demand to foreclose on this property. The lenders are not able to do that. In many cases, it’s in that big pile in some warehouse somewhere, two deals back, after having packaged and repackaged and re-secularized and sold out and refunded. They just can’t prove the ownership of these mortgages. So, the judge is saying fine. Show me that you own this and I’ll be glad to allow you to go ahead and foreclose, and they can’t do it. So, judges now are starting to demand the paperwork number one, and hold off on the foreclosures number two, allowing people to stay in their homes.
Now, why am I telling you this? So you can be aware of it. It may be that you’re working with a borrower and you’ll need to use this tactic or it may be that you have a situation yourself. You could actually stay out of bankruptcy and foreclosure and give yourself some time to put some money back into your bank if you knew that this is one of the issues that’s out there.
I share this with you not to make you irresponsible for what you owe. I share this with you so that you are aware, and you can use this to whatever benefit you need in order to buy time if that’s your situation or if you’re working with a client that has that situation. I hope that was valuable for you.
Q: Okay. We’ve got a question here from Milan Chalupa on short sales. Milan Chalupa says hi Lou. I would like to ask you how to approach lenders at a short sale situation when the second mortgage needs the short sale and the first just needs to modify and not to let the lenders know about each other. Thank you.
A: Well, Milan the first thing I would do is approach the second mortgage lender and work with them on the short sale, wouldn’t even mention the first. If they ask say yes the first is also going to foreclose as well. So, what we’re looking to do is get the property sold before they can foreclose. Does that work for you? In that situation, that’s exactly what they can do.
It’s important that you recognize that there’s a lot of different opportunities our there for you. When you have the chance to step in to a property, get rid of the second mortgage altogether, and then take over the first mortgage, then you’ve just financed the purchase of that property. With the cooperation of the seller and that’s very, very important. You’re going to have to have the seller’s cooperation throughout this entire process. With their cooperation, you were just able to acquire an asset that would likely have gone to foreclosure and perhaps even bankruptcy. Now, you are putting a customer into that property, returning it to the tax roles, returning it to a performing status for the first mortgage lender, and making yourself a spread in between. That’s the real goal here.
Now, as far as keeping the first mortgage lender away from the second mortgage lender, let me explain to you the magnitude of the issues that the lender has right now. The lender has to deal with the fact that they have a stack of these on their desk right now. Truth of the matter is, most lenders will never contact, most second mortgage lenders that is, will never contact the first mortgage lender. Why? They simply don’t have time to. It’s not in their business plan. They have very little to gain from that conversation. All they have to do is look at the situation, look at the numbers, and make a decision. Does it make sense for them to go forward and get rid of the second mortgage or does it make sense for them to go forward and actually payoff the first mortgage and be in first mortgage position with their second mortgage. In 99% of the cases a second mortgage lender is getting paid anywhere from high to very high interest. Frankly, that income makes up for all the mistakes that they’ve made.
You heard me say earlier out of 55 million mortgages in the country, only 4 million are in default. So, those second mortgage lenders are playing a number game. They’re saying this is fine. We’ll go ahead and take the hit on this particular deal because Milan has come to us, and he states that there is a buyer for this property. He states that they have a contract, which is absolutely true by the way. You are the buyer for the property, and you do have to buy it with a contract. So, our decision as the second mortgage lender is just to go ahead and take a hit on this $50 thousand second mortgage. Go ahead and accept the $1,000. Get something for our trouble and move on because we’ve got all these other folks out here that are paying the tab on this particular loss. That’s exactly what we’re up to here, Milan. So, don’t worry about the second mortgage lender contacting the first mortgage lender.
In some cases, you’ll even run into a situation where the second mortgage and the first mortgage are both serviced by the same lender. Keep this in mind. That does not mean that they work for the same people. In other words, the first mortgage is held by one group of people, the second mortgage is held by a different group of people. So, while they’re servicing that loan, they’re servicing it for two different investors. They service it under two different sets of guidelines. So, even when it’s with the same servicer of the loan, that doesn’t mean that you’re going to have any problems because they won’t necessarily raise the specter of it being an issue for the first mortgage lender.
Now, your second step in this process is once you get the short sale agreed to on the second mortgage, you’ll also simultaneously want to be working on getting a loan modification on the first mortgage. Why? Because it’s going to take months to get it done. The average is four months on these things, and we’ve seen them happen in as little as a month and in many cases, it’s five months. So, just keep that in mind as you work through the process that you’ll want to go ahead and get that ball rolling as soon as you possibly can.
Q: Okay. Now, we have a business management question from Dick Rosen who says hi Lou. My single most important question today is how I should expand my business. I feel I need an assistant in order to keep my buying machine going as well as filling my properties. Not to mention all the admen that goes with it. I’m considering taking on an assistant, but I work in my home and don’t feel comfortable setting up a stranger to work in my home. What do you suggest? Give me some great, outstanding ideas to contemplate.
A: Well Dick, what I would suggest for the situation that you have right now is a concept called Virtual Assistance. Now, a virtual assistant doesn’t have to be across America or in the Philippines or in India. They can be right down the street from you, but they actually work out of their home. What’s great about this is you can pay them as an independent contractor, so you don’t have to work about FICA and FUTA and all the other nonsense because you can hire, not them, but their company. If they don’t have a company, you can help them get a company merely by going to your Secretary of State’s website and having them apply for an LLC or a corporation. They can even do that in an out-of-state entity.
What I’m suggesting is that the first step is to go to Craigslist and put an ad out there. Tell the marketplace what you’re looking for. Busy real estate investor seeks knowledgeable, support person who can handle a variety of real estate needs including setting up closings, showing properties, meeting with buyers, doing paperwork, filing that type of thing. So, now you’ve got your job description essentially in Craigslist. Then let’s see what shows up.
First of all, I suggest you don’t start with a telephone call. I suggest that you require everyone to either e-mail or fax their resume in to you. Then you narrow those down to the ones that look like the kind of qualifications that you’re looking for. Then you call and chat with those folks over the phone and interview them before you meet them face-to-face. Then narrow that list down and meet with at least three people. Then narrow that list down and meet with two of them at least twice. Then hire your person. That’s the process I would suggest going through.
Now, I go into a lot more detail on that in the Mastering Business Advancement Boot Camp, but here I want to just suggest to you that you follow the guidelines that I just laid out for you. Go ahead and get it at least in Craigslist, see what shows up. If you don’t like those responses, then I would suggest let’s go ahead and take it a step further. Then go to monster.com, careerbuilder.com and a lot of the other free sites out there, and get your job posted. Let’s see who shows up. I think you’re going to find that a fairly qualified person who may want the flexibility of working out of their home. Maybe they have children. Maybe they have an invalid parent and they have issues, but they want to have income as well. Could be the right match for you to begin with.
Now, ultimately as you look at expanding your business, you want to have an eye towards having an office and having on-site staff because when you start gearing up to buying three to four properties a month, it’s really going to take that kind of infrastructure and support system. It’ll drive you too crazy to try to do that out of your own home. I realize that there is a process as you’re going through the growth of building your business and that’s what we want to deal with is to step you up step-by-step anywhere from zero to growing your business, purchasing assets, making those perform, then purchasing more, getting those to work, making those perform, and then purchasing more. While you’re doing a layering effect and now you need back fill to have these folks come in and support you in doing all the things quite honestly, Dick, you should not be doing. You really can train others to do the wrote tasks and put yourself more in a position to work on your business than in your business.
As one of our coaching students, you are devoting attention to your business and you’re putting yourself in a position to work not only in your business but on your business. That’s a key factor simply getting the tasks done and nothing is about advancing the business. You’ve put yourself in a position to go above that and beyond that. I encourage everyone listening to this to really pay attention that that must be an aspect of your overall growth plan. Coaching program, how quickly you can advance your business and your pocketbook as well.
Q: Mark King asks did I hear you correctly when you said you sell on a 40-year mortgage.
A: Mark, absolutely I do. We offer it at 40 years for several different reasons. One is that it does lower the payments, but to be honest with you not a lot, but what it does for you is set you up to have a very good retirement. If you set folks up on a 40-year mortgage that means a 40-year pay out. Some banks even came up with 50-year mortgages. So, understand that with the longevity of human beings these days, 30-year mortgages were born right after World War II. 30-year mortgages didn’t exist prior to World War II, just interest-only loans actually occurred before World War II.
After that, they created the 30-year amortizing loan, which is kind of interesting, but remember that people used to die before they were 65 years old for let’s say a generation after that. Now, people are living a lot longer, so you start adding years to people’s lives and, you know, 65 is the new 35. You see that with replaceable parts and all the other goodies that are created by mankind out there these days, you say okay, this is interesting. People are living a lot long, so therefore, they can hear a conversation about 40- and a 50-year mortgage. So, the 40-year idea is to expand your portfolio, make it longer term, and give you plenty of time to pay off the underlying financing.
So, let’s say that you took over an existing loan that had been paid, say five years, and it started as a 30-year loan. So, now there’s 25 years remaining. You’ve bought the property subject to the existing financing. Now, you take that and put a new customer in there at say 40 years. Now, recognize that through their past history, they probably have some kind of credit issues, and we understand and know including the person with the bad credit, that when you have bad credit, you pay more. You pay more points. You pay higher interest, and you have other lack of benefits because of your behavior.
That is our customer base frankly, folks that have some kind of credit issues. We offer then another way to be able to someday own a home. Now, there are two choices. Either they don’t, or they do, but we find that people resonate to our program because we are giving them a second chance, and it is a great second chance. Our second chance involves a 40-year mortgage.
The can choose to take advantage of our 40-year mortgage, then they can refinance whenever they want to. So, let’s say that they get moved in. They start taking advantage of our program. They get to write off their interest expense, live there, enjoy the home. They also get to write off their property taxes against their Federal income, and now they’ve got the benefit of living in a home that they own. They begin to increase their take-home pay because now they have all these write-offs.
Now, they can start to work on their credit and improve their credit and it gets better and better and better after that. So, at some point, they can now go to the traditional marketplace, get a brand new mortgage, 30-year loan at a lower interest rate and pay us off, and that’s just fine with me. Thank you very much. They also let us know that they’re doing that gives you the chance, at that point, to then recalculate and change the mortgage and lower it if you chose to keep that customer and keep that loan in-house.
Q: Now, Mark’s second question is if buying subject to with PITI payments, do you also get a separate insurance policy for yourself.
A: The answer, Mark, is absolutely. What we’re going to do is have the buyer of our property obtain a new insurance policy and they’re going to name us as the mortgagee in that insurance policy. So, let’s say that for example if there was a fire and the house burned down, then the insurance company would send the check to you as the mortgagee, and you would be able to control the money as the house is repaired or rebuilt.
Q: Mark’s third question is tell us about a time when someone asks you do to something unethical, and what did you do about it.
A: Well, Mark, I’ve been approached many times to do things regarding mortgages that I don’t suggest you do. Here’s the main thing. As long as it’s disclosed to the lender, I’m willing to do anything. So, if someone says hey, we want you to sell us the house for this price and do a $20 thousand kick-back to us after closing. I say fine, we’ll be glad to do that as long as the lender is aware of it and it’s disclosed right on the closing statement. So, keep that in mind, Mark, whenever someone asks you to do something like that, and stay in the coaching program, because when something like that comes down, sometimes you ask yourself, well now wait a minute, is this right, or is this not right and sometimes it is right. So, just run it by us and we’ll tell you the right direction to go in.
Our basic philosophy on running our business is how is this working. Are we helping the seller in this transaction? Are we helping ourselves in this transaction? Are we helping the lender in this transaction? Is everyone going to win in this transaction? I mean the word everyone. Is everyone going to win in this transaction? If so, then that gives me the green light to go forward. If not, if we’re going to hurt someone in the transaction, then we need to look at that and say wait a minute, how can we do this differently so that no one loses and no one gets hurt in this deal.
Q: Now, I’ve got some questions from the event I just was involved in this past weekend that were some interesting ones. Can you describe what a short sale is? Christine Watts asks.
A: The answer is a short sale is when the lender accepts less than they are owed for their mortgage. So, let’s say a lender is owed $100 thousand. You come to them with an offer to purchase a property at $50 thousand. The lender can agree to accept the $50 thousand and they are paid off in full. Great question, Christine.
Q: All right. We have another from Marge who says when starting with little money, how does one get started.
A: That’s a great question. Marge. You’ve really got to recognize that this is a business. This is a business. This is not some hokey MLM thing where you spend $300 and then everybody else is going to run out and do the work and you’re going to do no work, and you’re going to get a big pile of money. It just doesn’t work that way. Sorry, it just doesn’t work that way. I know they make it sound like it, but what I really want you to learn and follow is that this is a business. It requires investment. It requires investment in several areas.
Number one, your tools. Your Street Smart System for example. All your paperwork, your forms, your forms disk, your marketing, your marketing materials, everything that’s needed there. Your training coming to the live events multiple times in order to get the background and understanding and fill in the blanks of the things that you don’t really understand or that don’t connect quite for you.
Third, you need the technology. Your websites, your buying, your selling, your borrowing websites. You need a presence in the marketplace, and you need a way to manage all the leads and all the little details that are coming in and out of your business on a daily basis. You need to be able to click on your business from your computer any place in the world and be able to track everything that’s going on.
You need a support team. You need to be able to ask questions when you have them, and to have people to follow up with and know that they got your back and know that they’re telling you the straight skinny and know that they are successful doing exactly what you’re trying to do as well. Not that they did a deal last week and suddenly they’re telling you how to run your business. No, this is something completely different. This is taking you to a completely different level and that’s what I want you to do, Marge, because if you are underfunded, you’re going to have a very hard road to hoe. By that I mean, that it’s not that you can’t do this business, you can. It’s just going to take a lot of your own personal energy and you’re going to have to exchange energy for what would have been what you would have spent money on.
I’ll give you an example. In Millionaire Jump Start, I train you that there are two types of leads. There’s incoming leads and there’s outgoing leads. On your incoming leads, those are the leads that you set it and forget it. You plant some kind of marketing and that generates that lead coming in. Your outgoing leads are the ones where you’re getting on the phone. You’re meeting with people and you’re creating other folks being lead generators for you. So, you really want to do both and commit time and energy to both.
The magic is you can get rid of all of the energy you have to spend in marketing simply by spending money. So, if you have money to invest in your business, now you’ve moved yourself up the chain of command and the totem pole because you’ve got other folks doing what you would normally have to do. So, set your business up in a way that has the least amount of energy coming from you and the most amount of energy coming through this expenditure of money.
You’ve heard the old adage you have to spend money to make money. That’s true or you have to spend energy to make money. So, the sad truth is you’re going to have to spend energy in order to generate leads. That means driving neighborhoods to find a for sale by owners or dilapidated or vacant properties and then doing the research online to find out who those owners are and doing the research to find out what their address is to send them a letter. Doing the research to find out what their telephone is to give them a call and just doing that over and over and over again.
You can save a fortune in marketing costs if you do it yourself. The only problem is you don’t get many done. What we found with marketing is that the more marketing you have out there, the more leads that are coming to you. Then you move yourself up the totem pole to just work the leads that are coming to you instead of you having to generate those leads.
I hope everyone got value from what I just said because that’s really a critical understanding for everyone that is working on this.
Q: Here’s an interesting one from Bill. What is a day in Lou Brown’s life like?
A: Well, Bill, that’s an interesting question. I have my day segmented. So, first thing I do in the morning is I look at communications from my staff. I have a BlackBerry phone and my staff communicates with me through a special e-mail that’s set up for my BlackBerry. Also, all of my top level coaching students, my platinum level coaching students communicate with me through the network that we’ve set up for our top level students. I read those every morning and respond to them. Any questions that are there, anything that I have to research and get back to them on. That’s what I do at the first part of my day.
Other folks that communicate with me there are we have packages of properties coming in on a daily basis, and I look at those packages right on my BlackBerry every morning, so that we can make responses back if we’re going to buy those packages.
The fourth thing is the communications with my realtors that are out there in the market right now finding deals for us at these very, very low prices. So, I’m responding back to them, counteroffers things like that. All right, once I’ve got that out of the way, then I communicate typically with my property manager. Typically by phone to followup on what the day is going to be like and what properties are being focused on. What’s being billed and what other issues that my property manager may have.
Then the third aspect is to communicate with my sales staff and find out what’s going on in terms of any kind of new properties that we have coming in and communications with you guys. So, anything on the Street Smart side with our clients there. Any issues they have. We work with our website technicians and we’re constantly looking to improve your websites, so I communicate with them on a regular basis. Also, communicating about marketing for Street Smart as well, and then I come into the office.
When I come into the office, there are things for me to sign. There are contracts. There are different things for me to review. I do that. I try to move those things off my desk as quickly as possible. I have a personal assistant, and she puts those things on my desk for my review and signature. I take those back to her and she takes it from there. Getting it back to the appropriate people and keeping me out of those kinds of things.
Then in the afternoons our telephone calls. Either outbound telephone calls that I have to make to people or inbound from my coaching clients. Our premium level or platinum level clients have booked times on my calendar that we communicate with them about their business on a monthly basis and any other issues that have come up from my silver plus coaching staff. I deal with those as well and any of their clients that they have a question about rather than them making something up, I deal with those as well.
Then the final aspect of my day is to plan tomorrow. What is it that we’re going to be doing over the next day, next week, next month, and in some cases, even next year. We start putting the foundational pieces in place to have those things happen. Then tomorrow is another day. Anything that we didn’t get done today, moves forward typically because there was another piece or particle of information that I needed before I could answer the question or sign the contract or do some other aspect. So, my day is, quite frankly, very busy.
Some weeks we also schedule me going out into the fields and looking at properties. Meeting with contractors is a rarity for me. That’s typically handled by my property manager who meets with them or the realtor who is managing the intake of a property meets with the pre-hab crew who takes care of the initial clean up and maybe priming of the property. Getting it ready for our Work for Equity Program and then once it goes through that process, if we don’t find a work-for-equity buyer, then we transfer it to our ongoing maintenance program and hire the staff to be able to go in and take care of it, bring it up to complete speed. Then sell it on our Rent-To-Own Program or Owner Finance Program or our For Sale Program.
So, as you can see, Bill, I’ve got an interesting and full day and I enjoy the heck out of it. Another thing that I enjoy is teaching, so I’m constantly looking at the way I bring my message to you guys and review things that I want to put on the platinum site, our inner circle platinum students have communications that are very to the minute of what’s going on in the marketplace. I like to stay abreast of what’s going on, so I read different blogs and posts and newspaper articles and all kinds of things to keep you up-to-date on what’s happening in the marketplace to help you and us.
Q: All right. This is from Lil. I am a full-time student recently discharged from the military, honorable. I qualify for VA loans, received the GI bill for school, and cater on the side. I live in an apartment, and in my situation, how could I buy a house for myself or should I consider a lease with the option to buy. With limited funds, how can I get started with your program?
A: Well, Lil, that’s a great question. You’re absolutely right to consider yourself first and say wait a minute. I could actually go ahead and use a program like this to buy a property at a greatly reduced price and be able to get myself into the property and even manage my situation. Well, you might want to think about this, Lil.
Let’s use my program to find a property that is four or five bedrooms. Let’s find a larger property, and then actually consider having roommates. If you don’t need, you’re already living in an apartment, if you don’t need a lot of space, share that or find a property that has a basement that has a kitchen in it even and rent out the lower level. Sort of kind of like a duplex. You can either do that through a roommate situation or you can do it by closing off the doorway to the basement and renting out that lower level at a number that helps support your mortgage.
Now, add in our slant of being able to take over the existing financing on the property. You don’t even need your VA entitlement and you don’t even need credit, which is great. You don’t even need down payment money if you make an offer to the seller that works for them, and you can merely take over the existing financing on their property and take over their deed. Then you can step in, move in, and have an income stream off the property.
Secondly, you can do that over and over and over and over again. So, that’s exactly what I suggest for your situation. Take advantage of what we do. Another aspect of it is to stay in the apartment, continue to rent, and then build a portfolio of properties. Then move into a property when the income is right for you to do that.
Q: Here’s a question from George who says what is the real value and benefit of having a land trust as well as a personal property trust.
A: Great question, George. All right. Let’s go with the concept of a land trust. It is real estate. So, anything that has a legal description attached to it, goes into a land trust. By the very nature of that type of trust, you could not put your stocks, your bonds, your mutual funds, your bank accounts, your cars anything else, you could not put those into a land trust. You could only put those in a different kind of trust, like a living trust or alternatively a personal property trust, which is my rendition of a personal property trust, which is an entity for you to place individual properties like vehicles and stocks and mutual funds and accounts at the bank and so on.
Each one of those can be divided into separate pockets or separate asset bases. So, now a personal property trust is a great type of entity because what it allows you to do is set up a separate trust for each one of your assets. Your bank account for example. Your vehicle for example. Your stocks and stock account. That can be placed into a trust. So, each one of these has its own name and its own trust, which is a pretty great thing. Now, we take that and put it to work separating and segregating your assets into separate pockets. If anyone went to look to find what you own, they can’t find it on public record. That’s one of the great benefits that you get from the Street Smart System is that you do have some privacy of ownership and some privacy on public record so that you’re staying away from those folks that are merely trying to get what you’ve got but not do what you did to get what you got. They just want to take your stuff. That’s really why we do it that way.
Q: Edith asks, I have a property and don’t know how to profit from it, ten acres of land, has a well and a septic on it. I don’t have any money to do anything with it. My father’s deceased and there are heirs to the property, 2 siblings, plus children, about 20 children. My uncle is causing problems. What do I do?
A: Well, Edith, you have a situation that could have been solved if only your father had known about the magic of trusts. If this property had been placed in a trust and the identification of who gets what had been laid out in the trust, all your problems could have been avoided, but they’re not. So, now we have to deal with a situation.
One thing you don’t mention is whether the estate has been probated yet. That’s the first step in the process. You have to go to the county in which the property is located, and you have to get letters of administration from the probate court. That gives you the authority to then find who all the heirs are, notify them, market the property, get it sold, and distribute the money and make some decisions among the heirs. Bring that back to court and get the final authority from the judge to sell the property. If that process is already occurred and now you have the letters of administration and you can go forward with selling the property, you’ve got an opportunity except for all these heirs.
If the judge gave you the sole authority to sell the property, you can do so without any further involvement of all the heirs. You sell the property and distribute according to the letters of administration. If on the other hand, the letters require that you have the approval and consent of all of these heirs, there’s where your problem is going to come in. Because you’re going to need the signature of all these heirs on the deed that deeds out to whoever buys it, which is a real pain in the neck particularly if everyone’s not on the same page.
So, what I would suggest is do a freeconferencecall.com and you notify all the heirs to get on the conference call together. You say look, you guys either get onboard and help me row or get off board. I don’t really care what you do. I will mail each of you a quitclaim deed. Quit. Quitclaim deed if you don’t want to pony up the money to advertise and market this property for sale, and pony up the money for the property taxes and insurance, liability insurance. If you don’t want to pony up any money, that’s okay with me. Sign this quitclaim deed and mail it back to me and I’ll take if from here.
If on the other hand, you want to play, then let me tell you what the costs are going to be. First of all, it’s all the costs that I already have involved in this plus this, this, and this. If you want to play, then 30 days from now, I’m going to count up all the deeds that I got back, and those folks are out of the game. So, then it’s whoever is left, let’s say that 10 people send the deeds back, and 10 people don’t. So, that means you’re willing to pony one-tenth of the cost of getting this done. As soon as I receive your check, then I’ll go to work.
If on the other hand, you don’t sent a check, then everyone else is going to be notified, all nine other people are going to be notified that you didn’t send your check, and I’m going to give them your telephone number. All nine of them are going to call you. Whoever is prepared to write a check, then you’re welcome to stay in the game. Whoever is not prepared to write a check, then please sign the quitclaim deed and let’s move forward as a family. This is the only way this makes sense. If we don’t do this, the property is going to be lost to a tax sale. Every year taxes come due. If you don’t pay those taxes, the county sells those taxes to investors. The investors give the county their money so they can proceed with schools and roads and garbage collection and they’re not worried anymore about your problems. So, now the investor can foreclose, take the property back because they put up money on this property. So, what are you guys want to do? Edith, that’s what I would suggest in a situation where you really got not all the same people on the same page.
Q: Now, William asks while the house is awaiting repairs and it is not in a state to be occupied, aren’t you responsible for all the mortgages. If so, how do you make that work without it hurting your wallet?
A: Well, William that’s a great question. First of all, it comes with how you made your offer in the first place. So, if you offered the seller that you would take over payments when the property is occupied by a paying customer, then you’re not going to be responsible for those payments. On the other hand, if that’s not a program that’s going to work, then you have to be prepared to make those payments during the process.
Now, what I would also suggest is that you get my Work for Equity Program. It’s available through Street Smart. I would suggest that you learn my Work for Equity process because what we’ll do is take over a property like this but put it out on my Work for Equity Program, and have a customer move into it and take on those repairs, some or all of those repairs as it is negotiated. So, it’s really a powerful way to be able to go ahead and work with a seller who cannot make the payments, and work with a buyer who will take it in a as-is condition. You have little to no costs along the way. How’s that for a good suggestion? William, I really encourage you to take advantage of that because that’s something that can work right now today.
There are plenty of folks that would love to get rid of their home. If you structure the offer right, will be glad to give you the deed on their property. By the same token, there are plenty of folks that’ll come in and take that property as-is if you give them a good deal, and if you give them credit toward the purchase of the home for them doing the work. That’s really what the Work for Equity Program is all about. So, I encourage you if you haven’t got it yet, call 1-800-578-8580. That’s 1-800-578-8580 and get that because it really does work. In fact, we’ve built our buyers list based on work-for-equity buyers. So, we already have people that are interested in the program, already been sold on the program and they wait for us to get properties that fit the program.
We send it out to them. If they like it, they will take it. We’ve got one mother now who has taken a property on work for equity. We’ve now moved her into her property. Since then, she brought us her daughter. Her daughter wants a home. She’s saved some down payment money, and we’ve now placed the daughter in her home. They have two other relatives that are moving to Georgia. They love our program and want one too. So, out of that one contact for work for equity, now we are going to have probably three to four customers out of it. It’s a program that absolutely works. Be sure that all of you guys, be sure you get to MPI this summer. I’m going to give the Massive Passive Income event. I only give it once a year. It’s the whole holding and selling side of the business.
If you’re not registered for that already, call the office at 1-800-578-8580 and get yourself registered for it because it’s absolutely critical to your future. Let’s go ahead and get you on the payment plan for it, so you’re all paid up by the time the event comes up. That’s a critical piece of your training that you absolutely need.
Q: Now, I got a question from Jim Forbes who says how can one implement compartmental depreciation on existing property.
A: Well, Jim what I think you are referring to is actually componentized depreciation on existing property. What’s great about it is that the IRS allows you to take a house and break it up and break down into pieces. What that means is you can take the cabinets, the countertops, the plumbing, the electrical, the roof, the carpeting all these component pieces that make up a house. The IRS said those component pieces break down a lot faster that other things do.
Actually, it’s Congress that said this. So, what we’re going to do is allow you to write those off on your taxes much faster than a house. So, Congress said that a house depreciates over 27½ years, but those component parts depreciate much faster over 5, 7 and 15 years. So, they created a publication called Publication 946, and it’s how to depreciate your property. Section 179 depreciation, special depreciation allowance and listed properties. This is covered in detail in IRS Publication 946 “How to Depreciate Property”, and is actually reported on IRS form 4562, and you can take those component parts.
Now, there are other forms that allow you to actually go back and take houses that you haven’t been doing this with and recapture them. So, you’ve got a lot of extra ways that you can increase your income on your properties if you just had extra profit centers in the business you’ve already got. That’s one of the Street Smart ways that we look at your business is where are all the profits and how can we capture those. Not just isn’t that fantastic theory.
Now, why don’t you go look it up, but here’s exactly what you do. Here’s exactly how you do, and here’s how you capture those profits that are available to you in your business. It’s a combination of things folks. It’s not just I bought the house for this and sold it for that. It’s I bought the house for this and the seller paid the closing costs and I got the seller to carry back financing and I got the seller to pay me to buy their house. I was able to sell it like this and I was able to carry back the financing and I was able to put it on a 40-year mortgage. I was able to be 10.99% and I was able to buy it subject to the existing financing, so I’m paying off debt with the income I’m getting from my new customer. I was able to get the lead from Craigslist and save cash on investment. You see, there are so many profit centers available to you. It’s the combination of all these that make you successful in real estate.
Q: Now, we have a question from one of our silver plus coaching clients, Ryan Gillespie, who asks a question regarding owner financing. Are there any issues with the IRS if we buy from an owner and don’t pay him any interest? I thought I remembered that there is a context where the IRS expects interest to be paid, e.g. a loan, but does that apply to owners carrying back financing. If not, do you know why not, since it’s a loan?
A: Well, Ryan you’re absolutely right. It is a loan and when the owner carries back financing, the presumption is that they would typically charge interest. Years ago people used to sell their properties to their kids on zero interest financing. The IRS didn’t like that and Congress decided to create something called imputed interest. Now, what that means is if there is not an interest rate expressed in the loan, then the IRS has the right to pretend there was one and to base taxes upon the income that would have come if there had been an interest charged.
So, let’s take an example and say it’s $100 thousand property. Let’s says the imputed interest rate is 5%, which I think is in the range of what it is right now. I haven’t looked it up. So, that would be what, $5,000 a year in interest, okay. Now, what the IRS is saying is now we’re going to apply whatever that taxpayers rate is against this $5,000. So, that may mean that the taxpayer’s rate is only 15%, which means that the tax that would result is $1500. So, if you’re catching the drift of what I’m sharing with you, we don’t want to pay interest merely because it could cause imputed interest to our seller. If it comes up as an issue, what I’ve done in the past is say look, here’s what I’m willing to do. If the IRS every audits and if the IRS imputes interest and if the IRS charges for that, then I am willing to pay that amount.
Now, the taxes that result from that imputed interest not the interest, but the taxes that would result from that. Now, I would say for all of you listening to this that this is such a nonissue that I don’t want you to get your mind around it, get yourself concerned about it because there’s really not a big issue here. I know of no one that has ever been charged imputed interest. It is so rare that I think most IRS agents probably don’t even know about it. Or if they know about it, they don’t know how to apply it. So, I would not let that influence my decisions about offering owner financing and offering it at zero interest. Again, if there’s an issue, we’ll deal with the issue and just offer to pay the income taxes that result from it. I hope that was valuable to you, Ryan, and all of you who are in the session today.
Folks, it has been a real pleasure to teach you and train you this session, and I look forward to hearing you and seeing you on the next session.