Bruce Beasley:

I’d like to welcome all of the Street Smart licensees to our group Q and A session for May 13^th, 2008.  And you can tell already that this isn’t Lou Brown.  This is Bruce Beasley.  I’m sitting in for him while he vacations in Mexico.  I thought I would start out by giving you a little bit about my background.  I’ve been working with Lou since 1992, so that makes this our 16^th year together and helped Lou develop the entire Whole Enchilada Series and am a real estate investor in my own right.  I’ve bought as many as 82 properties in a single day and I currently hold 34 properties, most of which are…well, they’re all single-family houses.  About two-thirds of them are out on Lease Option and 11 of them are out on Agreement for Deed.  I am co-author with Lou on the Lease Option course and on the Agreement for Deed course and I’m a contributing editor.  And that gives you a little bit of a background.  I spent 20 years as an airline pilot and so checklists are a way of life with airline pilots and that’s where a lot of our checklists philosophy comes from.

Okay.  We’re going to move on here starting out with a question from Mark Medlan and he’s asking what resources are available for vets and active duty military personnel to avoid foreclosure. And for those of you who don’t know, the Soldiers’ and Sailors’ Civil Relief Act of 1940 will help a lot of active duty military.  And by that, I include the Reservists that have been called up to active duty.  And it caps out the interest rate at six percent.  But the military personnel must apply for relief and they must have been materially affected by their call-up or even their enlistment in the military.  And the Soldiers’ and Sailors’ Relief Act requires that the lenders cap out that interest rate at six percent.  Now Mark goes on and says, “I’ve recommended folks to contact their Military Liaison officer if active and the VA if they’re a vet.  Now I’m vaguely familiar with Sailors’ and Soldiers’ Relief Act, and what else am I overlooking?”

Well, the main thing that I’m getting out of your question, Mark, is the military folks and the vets that are getting…that have gotten themselves into trouble. The Soldiers’ and Sailors’ Relief Act won’t help them out if their interest rate is below six percent.  However, with the current subprime mortgage situation in this country, there are many other resources and this doesn’t just apply to the vets and military people.  This actually applies to most people that have gotten themselves into some trouble.  And the mortgage companies are…in fact, some of the mortgage companies are not even instituting foreclosure proceedings when people have been…haven’t been making their payments for many, many months.  And the solution, here, is to act as a financial advisor, in essence, just as we teach with the Short Sale program.  To contact their lenders, enter into a forbearance agreement, in other words, roll that arrearage onto the back of the loan or work out a repayment plan that the lender is acceptable or is willing to work out with you.

And the other thing that we’re seeing a lot of is a lot of modification…loan modifications, where in some instances they’ve even lowered the principal amount due and they look…and in most instances they lower the interest rate so that the people can afford to keep the houses.  Because right now, the lenders have so much REO properties, that’s properties they’ve already taken back in foreclosure, that they’re not being able to move.  And those that they haven’t…have taken back, they are taking some very, very steep discounts trying to move them out of their portfolio, so to speak.  So working with your military, active military and vets both, is a very workable solution.  But this doesn’t just apply to those folks on military duty.  And it applies all the way across the board.  Anyone who has gotten themselves into trouble.  And we act as financial advisors and try to work out a forbearance and even a modification of the loan.  And this will get a lot of people back on track and it actually helps the mortgage companies, too.  Because right now, they do not want to foreclose.  They’re just not in a position that they continue doing those foreclosures.

Okay, moving on.  Miguel Garcia.  I talked to Miguel the other day on the phone.  Keith Mock and I talked to him on the phone on a deal he was trying to do.  And Miguel asks, “I’m trying to increase my leads through marketing and want to advertise using Craig’s List or word of mouth to mailmen, utility people, etc. and to attract bird dogs.”  He says, “I’m a bit wary because I’ve been told that it is illegal in the stare of Florida to pay referral fees to someone in a real estate transaction if you’re not a licensed broker.”  He continues that he’s checked the Florida statutes and find the rules are not clear in regards to the offering of referral fees.  “Can you clear this up?  I don’t want to violate any state laws if this is in fact illegal in Florida, especially since my Street Smart website advertises a cash referral program.  Always, thanks for your assistance.  Miguel.”

Okay, let’s broaden this out and talk about just about everywhere because most every state that I’m aware of has a law on the books, but it’s generally in the laws that pertain to real estate professionals.  And when I’m talking about real estate professionals, I’m talking about real estate brokers, real estate sales people.  And under those laws, the states prohibit those real estate professionals from paying referral fees to non-real estate professionals.  However, they can pay, and this is the brokers and the sales people, they can pay advertising and marketing expenses to non-real estate professionals, to, you know…well, the local newspaper is not a real estate professional, but they pay for advertising and, in essence, isn’t this what you’re doing?  So even if you are a real estate broker or a real estate agent, are you breaking the law if you’re paying a marketing fee?  I don’t believe you are and I, for the most part, I don’t believe you are in violation of the law because you’re not subject to the particular law that you’re quoting as being illegal to pay referral fees to non-licensed people, particularly if you’re not licensed.  So I think that…and I hope this has cleared up that situation, Miguel.

Okay, moving on to Joanne Musa.  How do you deal when you’re buying properties working with a realtor?  What if the house is a foreclosure and is bank owned…a bank-owned property and you’re working through a realtor?  Okay, I’ve worked through realtors for years and in many instances, I’ve had realtors bring deals to me because they haven’t been able to work _____ (0:09:06).  They either haven’t had enough equity in them or they haven’t had enough time to which they could…they felt they could market them.  A particular one that comes to mind right off is a property that was two weeks away from foreclosure and the agent said, “There is no way I can work it.  See if you can help out the folks.”  So I bought the house, and referring back here to Miguel Garcia’s question, I paid the realtor a referral fee of $500 when I bought the property.  And now some realtors are not real comfortable with that and, again, you can call it a marketing fee if that’s what makes them happy.  Because a lot of brokers want that…any money coming to that agent to come through them so that they get their split.  But I’ve done this in many instances.

In fact I bought another house from some folks.  They were moving out of town and I talked to them, I don’t know, three months earlier I guess, and they subsequently listed the house and the realtor that they had on the listing agreement had been a national trainer for one of the major real estate companies in the country.  And when I laid my program out to him, I got him to take a reduction so we could make the numbers work and he, at the end of the deal, said that he was really happy with it.  That the sellers were actually ending up getting more net out of the deal with my proposal than they would have if he had had to sell it on a short notice.  It had a really good interest rate and I was more interested in getting the terms on the mortgage than I was in getting a huge discount below market.  And at that time we were in a pretty good appreciating market.  But realtors, if they are the listing realtor, will many times take a reduction in their commission as if they were doing a co-op sale with another agent and so they split that commission 50/50.  Well in many instances, they’ll just make 50% of it go away if you’re dealing with them and they’re not having to split with another realtor.

And so whenever I work with a realtor, I try to work with them on their listings rather than on listings through the MLS system.  Now when the realtor…in fact, this is a very good point that just came to my mind.  Certain realtors specialize in foreclosure properties and you actually want to enlist these people on your team to bring deals to you that are foreclosure deals.  Because when they get them from the lender, in many instances if they have somebody that is a regular buyer of foreclosures, they won’t even list them on the MLS.  They’ll just call you and say, “Joanne, I’ve got a property over at _____ (0:12:14) Main Street.  I just got it from the lender and here’s the deal.”  Now you don’t have to take that deal, but you can go over the numbers and you can come up with a different set of numbers that will work for you and make that offer.  And a lot of that depends on the condition of the property and so on and so forth.  And if the property needs a lot of repairs, you can come back and you can actually offer the bank more if they will set aside escrow for the repairs.  Because they do an accounting of the net for the sale, but they also have a gross for the sale.  So they show the…the offer comes in and the REO officer at the bank says, “Okay, this is what we’ll gross, but we would have had to do all these repairs.  And so our net is about what the same we would have gotten if we had had to do the repairs ourself and we haven’t had to hold onto the property as long.”  And remember, also, when you’re working with realtors, you, indirectly…yes, you are paying for the commission because it’s your purchasing the property that allows the seller to have the money to pay the realtor their commission.  So you still want to negotiate those commissions.

Another thought on working with realtors.  Many times realtors, in fact, particularly in today’s market, realtors are…well, they’re hurting a bit.  They have a lot of listings that are not selling.  And I would not be surprised at all if more than half their listings are going through the entire listing period without selling.  And as that listing comes closer and closer to expiring, they’ve had a lot of effort and they’ve had some expenses just having the…just taking that listing.  In many instances they will put you together with the seller.  And if you can work out something, they can get something out of that listing.  So working with realtors…oh!  One more story.  Several years ago, I had a realtor friend of mine call me and say, “Hey, Bruce.”  Her dad is getting ready to sell his house to one of these we-buy-houses guys in the newspaper and because he just needed to move on with his life.  He’d been in the house for 27, 28 years and so the mortgage was a beautiful 5-¼ % fixed rate.  But it only had a couple years left to run on it.  I ended up buying the house from him and giving him everything he wanted in it, and I still walked away from the closing with $13,000 in my pocket and I still owned the property.  So and my realtor friend was happy that I was able to help her dad out.  Hope this helps you, Joanne.

Okay, we’re going to move on now to Cherithy Hager’s question on lease options.  And Cherithy says, “I have an agreement on a brick apartment building for a short-term lease with the option to purchase in six months for $78,000.  I have another buyer wanting to purchase the apartment building at $90,000.  This property will gross $1700 per month and these are very motivated sellers who do not want to be landlords anymore.  Repairs required are new vinyl and carpet and paint.”  I’m presuming that’s on the inside.  “I do not have my name and/or assigns on the agreement.  How do I sell it to the new buyer?”

Okay, Cherithy.  I’m certainly hoping that you used our Option paperwork because we have two different versions.  One is a straight option that is not tied to a lease and the other one is an option with a lease.  Those are Option Form Number 9102 and OPT9103.  Now both of these, in paragraph 13, gives you the right to assign the option agreement.  This says the agreement is binding upon all parties, heirs, administrators, successors and assigns.  So this gives you that perfect out and, you know, it’s not much of a spread there.  It’s $12,000 though.  And so the way you do this is you…there is an Assignment of Option agreement, also in the Lease Options course, that you can assign your option and you can collect a $12,000 assignment fee.  This can be just for the straight Assignment of Option agreement or you can be showing on the HUD-1 as an option release fee of $12,000.  And so you are releasing your option and someone else is exercising that right to buy the property that you have assigned to them.  I hope this is…has got your question cleared up.

Moving on now to Janice Labraun.  She’s got a number of questions here.  The first one:  If a person owns two houses.  One is rented because they could not sell it before they purchased their new home.  They have a tenant in the property, but the tenant’s leaving, and they’re going to go backwards financially very fast without a tenant in that…the original property.  She doesn’t believe they have much of any equity in the home.  Well, it always helps if I know these…if we know these things in more detail, but let’s see what we have here.  Is it possible to get a short sale on the original home even if they are totally current on their primary residence?  Absolutely.  And you just basically say, “Listen.  It’s going to go foreclosure” and you’re acting as financial advisor.  You do not tell the lender that the borrowers have bought a second house.

Right now, let me tell you, short sales in the recent past, in the last few months, have gotten so much easier to deal.  The lenders are just…they’re just so overwhelmed with defaulted loans and so just the threat of a foreclosure…in fact, we have done a short sale on a house where there was a first and a second mortgage.  Both mortgages with the same company and they’ve shorted the second and reinstate the first.  The lender didn’t…wasn’t even aware that the first was their own company.  And so it is very, very possible to do that.  And you need…you just need to submit the short sale on the…on that original house of theirs using the Short Sale Package and the latest version, by the way, on the Short Sale Package now comes with autofill.  And so you fill out basically one page of all the paper work, and it autofills all the rest of the paperwork for you all automatically.  Isn’t that wonderful?

Okay.  Janice’s second question is, would you please review how we should do insurance for a Subject 2 deal?  And she says she’s read through my notes and she’s still a bit confused.  Well, we get this question come up all the time.  And a lot of the mortgage companies that have escrows, they want to see their original borrower listed as a lost payee on the insurance policy.  Now you don’t want to leave the homeowner’s policy that your seller currently has on the property, because that is for an owner-occupied property.  This is not going to be an owner-occupied property.  And leaving that insurance in place if there should be something…some problem with the property will not cover you.  And you will have a huge loss if there’s anything like a…well, we’ve had a lot of tornadoes cross-country.  Let’s say a tornado goes through and totally demolishes the house.  You’re totally out.  Now many more traditional insurance companies will write a landlord’s tenant policy.  But we also have Insurewiz, which you can get through the office.  Insurewiz is probably a little bit more expensive for the landlord tenant policy, however, it’s fairly hassle free.

The other product that I really like, though, is their Builder’s Risk Policy, which is a month by month.  Most insurance companies will want to charge you for a full year for Builder’s Risk.  And if you’re going to have a property vacant for one, two, three, four months while you do the rehab or do a fix-up and sell, or even if it’s a pretty property and you’re going to have some marketing period there, you can be covered with their Builder’s Risk Policy even though it is vacant.  And it’s a very reasonable premium.  You’ll call Helga in the office at 1-800-578-8580.  She can give you all the information for our Insurewiz.  Oh, and Insurewiz.  They underwrite their policies through Lloyd’s of London, probably they’re the oldest insurance company in the entire world and they pay out.  And you can even get them in coastal areas of Florida.  That’s my understanding.  Hope this helps you, Janice.

Okay, moving on here to a question from Shawn Tran.  I have a lead that has a $160,000 first and a $60,000 second loan, which is a HELOC.  And a HELOC is a home equity line of credit.  The house has been on the market for a year with being listed with two realtors and nothing has happened.  The owner has gotten a new job and…oh, actually she got a job transfer a year ago.  A year ago and she’s been sitting there with a vacant house for a year.  I hope she has insurance on that vacant house.  And cannot keep making payments anymore.  She has dropped the price down to $179,000 and said that she’d be very happy to sell the house and just end up continuing making the payments on the $60,000 HELOC.  Well, I’m going to stop there and talk about HELOCs.  Many times, in fact we have found that about half the time a home equity line of credit, which technically is a personal loan because they are lending on your personal credit report…on the strength of your personal credit report, has not even been recorded against the property.

So I think one of the very first things you need to do is to do the research and see if that HELOC is even recorded.  If it’s not recorded, then we don’t have any problem at all with this portion of the deal, you know, taking over the Subject 2 the first and letting her continue making the payments on the HELOC.  Okay, here’s the problem though.  The ARV, which is after repaired value, in Shawn’s opinion, is at her asking price of $179.  Well, $179…you say that the first mortgage is $160.  Now probably the best bet is not to do a short sale on the second because it is a HELOC, and because your seller probably is not going to be very cooperative in assisting you doing a short sale on that HELOC.  And if it’s not recorded, this is a moot question anyway.  If it is recorded, we want that seller to continue making those HELOC payments to you directly.  We want to freeze the HELOC so that it is no longer a line of credit, and it’s just now just a locked-in second so that no further withdrawals can be made from it.  And have your seller continue making payments through you so that you are sure that the HELOC is being paid.  That’s only if it has been recorded.  Okay, now.  Negotiate down the first, which still requires a hefty chunk of money, like the $90,000 range if it’s successful.  And it is…is it possible to get rid of the second, do a Subject 2 on the first?  Okay.  Well, at $150,000 is what you’re saying the balance is here, Shawn.  And have her pay me a combination of cash and a promissory note.

All of these scenarios are very, very doable.  The one thing you haven’t told me, though, is the terms.  And on your seller questionnaire, right there in the middle of that first page on their seller questionnaire, there’s a big box.  And it’s got the most important questions that you have to get answered from any seller.  What is the mortgage?  What is the interest rate?  Is it current?  What are the taxes?  What are the insurance costs?  Is there a homeowner’s association, and are there fees associated with that?  And is the mortgage fixed rate?  Is it adjustable rate?  If it is adjustable rate, what terms are the adjustable rate on?  Without this information, you can look at the numbers all day.  And unless you’re buying for cash where you have to get a tremendous deal and, you know, even at this doing a Subject 2 on the first $150,000 only leaves you about $30,000 of equity.  That’s a…that’s…it’s an okay deal.  It’s not a tremendous one, but you’d have to get it all the way down to $90,000.  And is the property in good condition?  Has it been vandalized in the year that she’s been gone?  I don’t know.  These are a lot of questions that I can’t answer with what the information you’ve given me.

Okay, now, as far as taking it Subject 2, the $150,000.  If the terms are good, it can be a very good deal.  I will buy houses all day long that don’t have very much equity if they have a very good loan in place on that underlying mortgage.  Because I can make that property cash flow without much problem at all if it has good terms.  Yes, she can give you a promissory note.  She can give you cash.  If she doesn’t have cash, one of the questions that I have always is, “What else of value do you have?”  I’ve taken other houses…an additional house in on deals.  I’ve taken automobiles.  I’ve taken a baseball card collection.  I’ve taken a stamp collection that this seller’s dad, when he was a small boy, started and it was…it had some pretty good, valuable stamps in it and it was good security for a promissory note.  That seller wanted that stamp collection back very badly, as did the baseball card collection the other seller had.  It had a Mickey Mantle rookie card in there and just that card alone was worth far more than what the promissory note was written for.  So, unfortunately, in both those cases those people paid their promissory notes.  Because I would have made a whole lot more money if they hadn’t.

Okay, now the exit strategy is to either a straight rental at $1100 a month and, again, I don’t know if that’s a good deal or not because taking over $150,000 at $1100 a month sounds awfully light.  I don’t know that you’d get any cash flow out of it, there.  And so I would be looking at a higher monthly income on that property than that.  And many times…well, you can do that with a lease option where you…as a straight rental.  You just cannot get many of these properties today to cash flow in that price range.  So, I hope that covers you pretty well, there, Shawn.

Going onto another deal-structuring question from Keith Ren.  What do we do next with the net over cost of sale?  And I’m presuming you’re talking the Cost to Sell Worksheet.  The seller said that they cannot afford to pay us anything, and she just wants to get out of the house.  A lot of this question comes back to the same things we were talking with Shawn about.  What are the terms of the mortgage that you would be taking Subject 2?  If the terms are good enough, we might be able to do a promissory note.  What else do they have of value?  And you know, there’s a lot of things that people have that they no longer use, no longer even value as anything that could make up some of that difference, and it could be over time that they pay you back.  And conversely, even if there was some equity in there, we can take it Subject 2 and promise the equity when we sell the property.  When we sell the property.  When will that be?  Well, it could be two months from now.  It could be two years from now.  It could be ten years from now.  We’re not saying what it is if we can possibly keep from committing to it.  When people really hog tie me down and really want…really need to say, “Well, I can’t go on forever with you owing me all this money.”  And so many times I negotiate, “Okay, well if it doesn’t sell in the next ten years, I’ll pay for it.  I’ll pay it to you in ten years’ time whether it’s sold or not.  Would that work for you?”  And many times they’ll say, “Oh, okay.  I just didn’t want it to go on forever.”  So there are a lot of ways to do that negotiation.

The other thing you don’t tell me on this one, Keith, is on the net over the cost of sale not being anything where they can’t afford…what holding costs did you use?  Did you use holding costs of a hard money loan?  One of these things where you have to pay five or ten points and 12 to 15 percent interest rate?  If you have done that, then you can back up and say, “Well, there’s another way we could possibly do this.  We could make the payments on your loan until we get it sold.  Would that work for you?  Because that will reduce our costs considerably.”  And many times they’ll say yes, whereas if you just came out and said, “Well, we’ll just make payments on your loan until we get it sold.”  They won’t see the value of that.  And that’s the power of the Cost to Sell Worksheet is they, the seller, buys in and sees your reasoning and sees why you’ve structured your offer the way you’ve structured it.  And it’s just such a powerful negotiating tool, I can’t tell you how many times I’ve worked it.

In fact, one of the best deals I ever did where I made over $100,000 on a house that didn’t have any equity in it, I didn’t even use the Cost to Sell Worksheet.  Because my seller was an executive vice president for a large insurance company, and he told me it was going to cost him too much to sell the house.  And so I ended up making $100,000 profit on that one deal _____ (0:34:05) over a 33-month period.  Loved that house.  Unfortunately, my buyer cashed me out because I lost a nearly $1500 a month positive cash flow on that one.  And sometimes you can keep them going, sometimes you can’t.  And this is one that my backend buyer cashed me out on, and so had a good day.  I may have had a better day later on if we’d been able to keep on going.  Okay, hope that’s covered your question, Keith.

Moving on to Donnie Tran.  Donnie from New Orleans.  Hi Donnie, how you doing?  Donnie’s question is where can I find Compwiz to valuate the homes I’m going to buy?  And Compwiz is our exclusive Street Smart Property Evaluation tool that is available on the back office of your Street Smart Investor websites and it costs as little as, I want to say…don’t hold me to this.  Tell you what.  I want you to call Helga at 1-800-578-8580 to get the current pricing on Compwiz.  And Compwiz gives you access to all the public…and this is a tool that a lot of appraisers throughout the country use to pull up their comps, their comparable sales, and to try to establish the value of a particular piece of property.  And the access from the backside of your websites will give you access to all the counties in all the 48 contiguous, continental states.  It does not include Alaska and Hawaii.  And so there are several different plans available on it, so I’d be much more comfortable if you called Helga at the office at 1-800-578-8580.  There’s also another product out there that we sell and that is Prop Stream.  And Prop Stream also gives you a lot of information, and these two databases don’t necessarily agree.  But it gives you a lot more…I generally like to pull comp information from at least two different resources.  And if there’s a large differential between the two resources, then I’m going to dig even deeper before I come up with a value.  And Prop Stream, again, is available through us.  Call Helga, 1-800-578-8580 and she can get you set up with that.  And what information do I need and how much should it cost me?  Again, it is really relatively cheap when you consider the tools it gives you and all…listen, Donnie.  All you have to do is one deal where you made an extra $10,000 on the deal because you had good comp information and it’ll pay for both Compwiz and Prop Stream for the entire year…no, it’s even worse than that…I mean it’s even better than that.  For the next several years, if you just make one deal where you make an extra $10,000 because you have good information, it just, as far as I’m concerned, is a no-brainer.  You’ve got to have the information to do this business.

Okay, now we have another question from Janice Labraun and this one’s a two-parter.  What type of credit checks do you perform when selling Subject 2?  Well, first off, I do not…and Lou and I, neither one of us sell Subject 2.  Subject 2 is too good of a deal and if you’ve spent the time to build a rapport with your seller and, as far as I’m concerned, you have a moral obligation to them to make sure that they don’t get hurt because they trusted you enough to give you a property subject to the mortgage that was on there.  So there’s no way that I’m ever going to let somebody else, that the seller doesn’t know from Adam, take over my responsibility to make sure that that mortgage stays current.  So just don’t sell a property Subject 2, sell it with Agreement for Deed.  This is seller financing, owner financing.  And the Agreement for Deed, if you’re going to sell it, gets you more down payment.  You stay in control of the property.  You get a monthly spread between what you’re paying out on the underlying possible Subject 2 mortgage that you took title to the property Subject 2 on and what your buyer is paying you.  And I told you just a few minutes ago about the house I made $100,000 on.  The reason I made $100,000 on it is because I had a very, very good spread between my underlying mortgages and what my buyer was paying me.  Because, literally, there was only maybe $20,000 of equity in that house and so, by staying in the deal and making a monthly cash flow…now, it didn’t start out quite at that almost $1500 a month positive cash flow rate.

It was good right from the get-go, at the very beginning and it just got better as time went on.  And if you come to MPI as Janice says she’s going to, you’ll probably see that deal and see all the particulars and see the house.  And, by the way, that house was a house that was about a $320,000 value when I bought it.  I sold it at $349,900.  So to make a $1500 a month positive cash flow on a house that’s worth $350,000 is pretty good.  Okay, do you ever do them on Agreement for Deed when you are the buyer, she goes on.  And, yes, I do.  But it’s not my favorite way to take or to get control of a property.  My favorite way, of course, is Subject 2 or owner financing where I get the title.  Whereas Agreement for Deed is I don’t get the title, but I have an agreement to get the title, but I get the tax advantages.  And so when I say buying on owner financing, that’s where the seller has agreed to take $90,000 in payments of $500 a month for 15 years.  And those of you who are real quick on your math, you’ll say, “Let me see.  Five hundred a month for 15 years is exactly $90,000.”  So there’s no interest there, is there?  No, there is not any interest.

So that…those are my favorite ways to buy.  But if I cannot get the title to the property, get the deed on the property with either a Subject 2 or some seller financing.  Even if I take Subject 2 on a part of the mortgage and…or, you know, a small mortgage that’s left there and that the person has a lot of equity, I…I’ll do that all day long.  But I will also backup to the Agreement for Deed if I can’t get that deed itself.  And then the least favorite way to buy a property is actually taking an option to buy the property, and I do this quite frequently, as well.  So it doesn’t give me the tax advantages, but there are some other advantages, which we’ll go into at MPI.  MPI is our Massive Passive Income event, which is coming up here in Atlanta June 7^th through the 10^th.  Call Helga.  We have just a couple spaces left, I know.  1-800-578-8580 and she’ll probably be able to get you a seat in the event.

Okay, now what credit situations…Janice goes on here, what credit situations do you stay away from?  And Janice, by this I’m presuming you’re talking about credit situations of the seller.  Okay, if the seller has some major credit issues, I only want to take the deed.  I don’t even want to buy the property…buy the property Subject 2.  And if they’ve got strong credit, they’ve got a strong desire to maintain that good credit rating, then we can do that backup to the agreement.  And generally if they have some credit issues, there’s no problem getting that Subject 2 deal and which, again, is my favorite way to do it.  But if they do…don’t have that, they’ve got real strong credit, I will backup to that Agreement for Deed or the option when I’m buying.  And so, those are the situations.

Okay, Janice goes on.  When using the Work for Equity Program, do you check a handyman’s credentials?  Yes, we do.  Or we want to…in fact, our Agreement for Deed paperwork requires that they…if they don’t have the good construction skills, they basically don’t work in the construction industry, we’re going to want the major things to be done by a professional that they pay for.  It may be that their brother-in-law works in the construction industry.  We had one Work for Equity Program property that we gave to a nurse.  Had no construction background, but oh my God, she’s made this house absolutely gorgeous.  She’s gone way, way above and beyond what was called for in the Agreement for Deed, or called for in the Work for Equity Program and has actually made it just gorgeous.  So, it’s going to be kind of one of those situations where you want someone who has got that pride and constantly we are surprised by…well, maybe not surprised.

We’ve almost come to expect it now.  That the people we put into our properties on the Work for Equity Program are actually going way over and beyond our expectations as to the repairs they’re doing…the fix-up they’re doing.  We had one gentleman totally replace all the cabinets in the kitchen, which was not called for in his Agreement for Deed.  It was not called for in his Work for Equity agreement.  He just wanted new cabinets and he did so happen to…he was a hardwood-floor installer.  Now, don’t ask me where he got his cabinets from.  I’m not going to go there.  I do know that it’s got a gorgeous new kitchen, gorgeous new counter tops and it was far, far more than what we called for in the Work for Equity agreement.  So, Janice says, “Thanks so much.  Can’t wait for MPI in June.  See you there.”  And I hope I’ve covered everything here pretty well for you here, Janice.

Going on, another question on owner financing.  I’m not sure who this is from.  It really helps me out if you could include your name on your questions.  But it says, “I would really like to get a good understanding in structuring financing by owner…financed-by-owner deals.  It is something I do not yet have my head wrapped around and I’m hoping that you can help me wrap it around.”  Okay, owner financing is the owner acting as the bank.  You promise to pay the owner X number of dollars and this is the terms under which you offer to make those payments.  You write it up in the form of a mortgage or a trust deed, depending on what state you’re in.  And that gets recorded as a lien against the property.  When you make those payments and fulfill your obligations to that seller, then they release it just like any other mortgage.  They, the seller, has not gone to the bank and gotten the cash.  The seller has agreed to wait until you sell it or take $500 a month or $5,000 a year or whatever terms you’ve negotiated with them, and you have the obligation to make those payments to that seller and meet the terms of that note.

Now how do you structure that?  Now if you are the buyer, you have to negotiate that deal with your seller.  Now the vast majority of the general public do not understand the power of interest.  They do not understand how much more they could get if they just understood the time value of money.  Most of us in the business of being the real estate entrepreneurs, we have some inkling because we make payments on a lot of mortgages.  And we see that our monthly payments or mortgages are almost all interest in the early years of that mortgage.  A huge amount of that monthly payment goes into the interest and a tiny portion of it goes to principle.  We understand that.  Our sellers don’t understand that and, quite frankly, I’m not going to be the one to educate them.  Now if we are the seller, then we want to be the bank.  We want to act like a bank.  We want to get that huge interest portion of that payment and the small principle payment of that…principle portion of that monthly payment and so we become the mortgage company for our buyers.  Now our buyers generally have some credit issues.  The house I was talking about earlier where we had a $1500 a month…nearly $1500 a month positive cash flow, my buyer had great a great credit report…eight-page credit report.  Everything was paid on time.  It had one glaring problem.  My buyer owned three businesses, and he was in trouble with the IRS for withholding taxes for his employees in one of those businesses.  And the IRS had placed a tax lien on his credit report.  He could not go to a conventional financing source like the bank or any mortgage company.  They wouldn’t lend money to him because of that one single blemish on that great credit report.

So he had a major credit issue that I gave him the solution for because I offered him owner financing in the form of an Agreement for Deed.  He did not go on title until 33 months after we entered into the deal and he got that IRS problem straightened out and he was able to get conventional financing where he cashed me out, unfortunately.  Hope this answers your question.  And we cover all this stuff more in-depth and the structuring of deals at Millionaire Deal Maker, MDM.  And that’s coming up in October…October 23^rd through the 26^th here in Atlanta.  Hope to see you there.

Okay, Cathy Henderson has a question here.  When selling on Lease Option, is the only form you use is the Lease Option form?  No, you say Lease Option form.  Now our Lease and our Option are two separate documents.  We do not tie them together.  We make a reference that, in essence, says if any other agreement has been entered into, a default on that agreement is a default on this agreement.  So it’s kind of a cross-default clause that is contained in both the Lease and the Option.  So that they default on either one, then they’re in default of both and so…and also, if you do end up in an Eviction Court, then the monies that they have paid you on the Option are not considered part of rent because you have a separate agreement on that.  And if you tie the two documents together, most courts…most judges will say, “Oh, well that was rent, and so they’re current.  Get out of here.”  If they’re in separate documents, in separate agreements, then they don’t do that.  Okay, others have advised also doing an Option form, a Lease form and a Purchase form all separately.

Okay, in actuality that’s what we tell you to do; a separate Option, a separate Lease.  Now the Option form has the terms of the purchase actually contained in it, so when they exercise the Option agreement, that is when you would formalize the purchase and enter into a Purchase and Sale agreement so that the escrow company or the real estate closing attorney will know the terms of the agreement.  But during the term of the Option or Lease Option, we don’t need that until such time as they are exercising the actual Option where they have some credits towards the down payment and they have the price may have changed in accordance with our Option Agreement.  So that’s when we enter into the Purchase and Sale agreement.  And so you go on to say, “I believe the reasoning was to keep the judge from possibly ruling equitable interest in a dispute.”  And they really do not have equitable interest because under the terms of our Lease Option agreement, they are a tenant and so they do not have that full bundle of rights giving them an equitable interest.  Hope that has helped you, Cathy.

Moving on to a question from Tom Formier.  Lou, I want to hire someone to come into my office to stuff envelopes for my direct mail campaign and I need them to work on…but I only need them to work a few hours a week, and I want them to make it as simple as possible.  If it’s possible, I’d like to stay away from hiring them as an employee and all the paper that goes along…paperwork, taxes, etc. that goes along with that.  Is there any way I can have them be an independent contractor?  Tom, yes you can.  And we have a full discussion on this in Volume Seven, our Street Smarts Business Management Course.  And we recommend that you do hire them as an independent contractor rather than as an employee.  Now there are certain aspects of hiring them as an independent contractor.  They get to set their own hours as long as they get the work done, and you cannot say, “You must be here at such-and-such time and you must stay this long” or anything like that or otherwise they cross over from being an independent contractor back into that employee.  And we have that full discussion there in Volume Seven in the Business Management Course.  You go on to ask, “Can I just pay them cash and then not have the ability to write off their hourly wage as an expense?”  Well, what I suggest is that you hire them to do the work and you pay them for the work accomplished, regardless of how much time it takes.  And this is an advertising expense, a marketing expense and it is fully tax deductible and it goes onto your tax return as an expense.  So again, Tom, that’s all covered there in Volume Seven and that’s available through the office.  Call Helga at 1-800-578-8580 and she can get you all set up with the Business Management Course.

Okay, now that brings us…okay, moving on we have a number of questions here on trusts.  And we’re going to start out with Valerie Desalvo, and she’s in the Trenton, New Jersey area.  She says, “My attorney here tells me that it is easier to pierce a trust in New Jersey.  There are no layers of protection in New Jersey like there are in some other states and that this is because you cannot escape personal liability for negligence.  And he advises me to take title to property in an LLC and obtain a good umbrella policy…umbrella insurance policy.  Says that most lawsuits will be settled within the limits of the insurance policy.  What do you think?”  Well, first off, land trusts are one of the best ways to keep out of court in the first place.  Let’s take a look at the reason a lawsuit might be filed, and the reason might be something as simple as a tenant that is mad at you.  And they go to an attorney and say, “I want to sue Valerie and here’s why I want to sue Valerie.”  And the attorney goes in and looks up all the assets that Valerie owns, and Valerie appears to own a lot of stuff.  Well, the attorney is going to tell the tenant, “Oh, you got a great lawsuit and I’ll take it on contingency fee” because the attorney can figure out how he’s going to get paid.  Now let’s come back to the point where Valerie, your information…the fact that you own this and you own an LLC that’s got all sorts of these assets, and that’s part of public record if you own an LLC.  And that’s right there on the Internet where anybody, not just an attorney, but anybody can get at it.  I’ll get at all that information and I’ll go into some more disadvantages of holding title in LLCs here in a minute.  But if everything is held in trust and you’re not trustee on any of these trusts, then the attorney goes into the Internet and looks up what Valerie owns.  Valerie doesn’t own a thing.  In fact, she doesn’t even own the property that the tenant’s living in.  And so the attorney doesn’t know how he’s going to get paid for doing this lawsuit.  So he goes back out to your tenant and says, “You got a great lawsuit.  It’s just going to take a $1500 retainer.  We bill at $500 an hour and 25 cents a copy, and you can stop up there at the front desk and see Jane, and she’ll get you all set up, and we can get this lawsuit started.”  Well, the tenant doesn’t have $1500 to get started with the lawsuit, so she doesn’t stop by the front desk on the way out.  She just walks straight on out the door and doesn’t stop and talk to Jane.  So is that a lawsuit that didn’t happen?  Absolutely.  And it didn’t happen because the attorney couldn’t see how he was going to get paid.  Now are land trusts pierceable?

Yes the are.  However, to my knowledge, none of our…and when I say our, I mean the Street Smart Land Trusts where they have been adequately defended, none of them of them have been successfully pierced.  We’ve had trustees give up the…they’ve just kind of crumbled at the first question and gave away all the information, but that’s not the problem with the Land Trust.  Now an LLC gives you some liability…now, let me back up here.  Cannot escape personal liability for negligence.  Well that is true in most states.  However, unless you are acting or your trustee is acting in a negligent manner and intended to be acting personally not in as a trustee, most states they are not liable, okay?  And another problem with holding title in LLCs is you’ve got to hold…how many LLCs  you’re going to have?  How much does that cost you to run an LLC?  You have to have an individual bank account for each LLC.  You have to file a separate tax return on each and every LLC.  That’s going to be very, very expensive to run.  And how much is that attorney going to get for setting up each LLC?  That’s another question.  So trusts are not your ultimate line of defense.  A land trust is your first line of defense.  And as that first line of defense, the trusts separate and segregate all your properties into separate entities and this in of itself is a very effective asset protection tool.  And now the beneficial interests eventually can flow down into an LLC and, in fact, this is one of the things that we teach at MAS, which is Maximum Asset Shield Training.  MAS is coming up August 21^st through the 24^th here in Atlanta and we go into much, much more depth at MAS on just exactly this question right here.

I hope that’s answered most of your concerns.

Moving on to another question from Cheryl Whitman.  “Hi, Lou.  My question is about forming Land Trusts in Missouri.  I have a number of investment properties there and found that Missouri does not recognize Land Trusts as a legal entity.  Do you have a solution for this issue?”  Well, Missouri, like probably about half the states, does not have statute laws setting down the…does not have statute laws setting the legal entity up as a Land Trust.  However, there’s plenty of case law delving into Missouri, like probably 50 percent of the states, do not have statute laws for Land Trust as such.  In fact, Illinois, where the Land Trust was originated in the late 1800’s, also doesn’t have statute law for Land Trusts.  But there is a multitude…a huge body of case law that talks about the assets of a trust being real estate and so, therefore, it just goes right on into…and you can’t read it per se as a Land Trust in most states.  But if you delve into the law of a state, and delve into the various segments of the law that talk about trustees and the trust has as it’s asset real estate, it becomes abundantly clear that the intent of the laws governing trusts that the state does have on their books do cover real estate being an asset of a trust.  Now our Land Trusts…the Street Smart Land Trusts that are set up, are an inter vivos type trust. And you’ve gone on and your question here say that they…people are recommending a living trust instead to hold your investment properties.  Well, a living trust is an inter vivos trust.  Our Land Trust is a inter vivos type trust.

Now in Missouri…I spent a little bit of time here doing some research on Missouri law, and Chapter 456 of the Missouri Revived Statutes actually covers…pretty well covers trusts as a whole for the state of Missouri.  And in Chapter 456 they do talk about real estate being the asset of a trust.  Therefore, I would say that land trusts, because it’s an inter vivos type trust, and it holds title to real estate, and it holds real estate as it’s asset fall right into the Revised Statutes of the State of Missouri.  So I don’t think there’s any concern there, Cheryl.  And you shouldn’t have any problem at all doing that in Missouri.

Moving on to another quick land trust question here from Neal Mahone.  Neal asks would it be better to keep your personal residence in our personal name or move it into a revocable living trust?  And he and his wife live in Florida and the house is valued at about $230,000.  Well Neal, I want to say that we are going to move all of our properties, every single one of them, even the one we live in, into a land trust.  Now the state of Florida, there are some issues in land trusts and your homestead exemption, and we do have a clause that you can insert into our Land Trusts for your personal residence if you want to have homestead exemption on your personal residence.  And if you’ll call the office we can get that sent to you, okay?  Now one more issue about trusts that I wanted to cover here…

Okay, one last trust question.  Last question comes from Edith Mock and she has an investor friend that emailed her a report that is going around on the Internet, and it pretty much says that land trusts are illegal.  And it so happens that I have seen the report, and it’s called Death of the Land Trust.  And you start reading it, in fact you read it in depth, they are talking about a trust that is out there circulating and they credit in that report that the trust has been circulated by a real estate guru.  And I read the trust and it’s one of those that’s been floating around the Internet for quite some time.  And there are definitely some portions of that trust could conceivably be interpreted to be illegal.  And when you read the entire report, they talk about…in fact, one of the clauses in the particular trust that this report is referring to, says that the grantor is granting the property free and clear of all liens.  And particularly since most of the time we’re taking property subject to current encumbrances, that would be an illegal act to have the grantee, or in this case our seller, certify that there are no liens on the property.

So yes, in that respect, that particular trust has got some major flaws in it.  Now the essence of the report when you read it all the way through to the end, and it’s about 30-some-odd pages long, is that he’s talking about using land trusts in a short sale situation where the property is going to be flipped out.  In other words, it’s going to be resold to an end user at the time that the short sale has been completed.  And so that is…and the author’s conclusion is probably pretty accurate.  If that is your intent in doing a short sale is to buy the property and sell it immediately to the eventual homeowner, then the land trust is probably not the best vehicle to use for that, and a lease option is a much better way to structure that sort of a deal.  So yes, in some respects, the particular land trust that they are talking about in that report has some illegal aspects to it, but it is not the Street Smart Land Trust form that you, all the Street Smart licensees out there, are used to.

Well, that brings us to an end of another group Q and A session.  I’ve run a little bit long here, but then I’m not Lou and he can cut through things much more rapidly than I can in many respects.  I hope that you’ve found this Q and A session to be of value to you.