Question:
Joe was asking a question; I’ve looked through everything I have but I didn’t notice the answer if it was there. What percent of the monthly rent and option fee go toward the payoff of the house? I’m working on a lease-option deal now for one of our houses. The house is worth $250,000. He’s willing to pay a 5% option fee, but wants to know what percent goes toward the purchase price. Thanks.
Answer:
All right, Joe, here’s the deal. I want you to pay very close attention. We look at the value of the property and then we determine how much we’re going to credit them toward the purchase of the home. Many times anywhere from $100,000 to $200,000 that’s a $100 per month credit. Depending on my customer and in your case you’ve got a 5% down, which is a pretty nice lick for you; what does that work out to be…over $10,000…what is that…$12,500 in down payment money? That sounds good to me. Why don’t we give that customer a $200 per month credit since it’s a $250,000 value property. That means that every month that they pay their rent on time they’ll earn a $200 credit toward the home. Why would that be a good deal? Obviously they’re going to pay a lot of attention because if they don’t pay their rent on time, Joe, then they lose that $200 credit toward the purchase of the home. There is an incentive in there for them to pay on time. Not only that, but on their rental agreement they also lose their rental discount; if they don’t pay on time they lose the discount. So, there are a lot of incentives in there for them to pay on time.
And the third thing that happens to them is they now have to pay a daily additional rent and of course, you might call that a late charge, but every day that they don’t pay on time they have to pay that additional rent and as a result you have a very strong incentive for people to pay on time.
One more thing I want to say Joe is if they are satisfied with the deal, why don’t you just start with $100 per month credit and see if they react. If they don’t like that, you can always increase it, but in the meantime at least you’ve got them some kind of credit going. By the way, if we did a mortgage today – and you can do this – you can actually create an amortizing loan say at 8% and find out what the monthly credit is toward the principal. When you give them a $100 per month credit toward the principal that is likely a more than what they would be getting if it was a mortgage. Again, that $100 is going to sound like a good deal to them if you explain it the way I just described. Great question Joe.
Question:
Here is one from Brian Mussa – Hi, Lou, here is an additional question for the Q and A on a subject-to property if I’m the hired manager, hired by the land trust trustee for a property, can I sign a cancellation request policy release form if it’s in the name of the previous owners?
Answer:
Okay, let’s start with that one. You are the manager. You want to cancel the existing insurance policy on the property and you want to be able to get a refund on that probably. You didn’t say that, but let’s just say that that’s exactly what you’re up to. Can you do that as a manager? It depends on who the insurance company is. Many times they will accept that, however, if not in my package in Volume 4, in section 4 of the Land Trust Guide Book, there is information about buying properties subject to the existing loan. One of the forms in there is the Power of Attorney. You can create a Power of Attorney hopefully you did that when you had them sign everything and you already have a Power of Attorney, then you can just merely give the insurance company the Power of Attorney signed by them authorizing you to do anything related to that property.
First I would just ask for it. If they give you any resistance then I would provide the Power of Attorney.
Question:
The next question is, if my landlord-tenant policy has been in force in addition to homeowner’s policy for than a year, what should I put as my cancellation date? Essentially I’ve been paying two premiums.
Answer:
Oh, that’s a bad thing Brian. That first policy, the homeowner policy, should have been cancelled right away when you bought the property subject-to and at that time you put on a landlord-tenant policy. In this case you don’t have that. What we want to do is find the date that you bought the property subject-to and got the new insurance. You want to provide that to the old insurance company showing them that you do have insurance on the property and what the effective date was. What that means Brian is they will cancel the old policy and hopefully refund all of those unearned premiums because you actually had other insurance on there. Just implore them, you know, call them up and say, oh man, I’m a property manager and I’m about to lose my job. I have made the biggest mistake. I forgot to cancel this other policy. We put tenants in the property. I’m the property manager and I forgot to cancel the homeowner policy. Oh my gosh let me fax over the Declaration page for you right now. Take a look at that, you’ll see the date, and please, please cancel it as of that date and send us the refund.
Good news Brian and I want to see a testimonial on that from you when you do that, because I just made you some more money. You know that’s what I love to do for you Brian is to make you money. I love having you as part of our coaching program because you always give us good interesting questions. By the way, we do have a direct Q and A program so you can fax or email your questions any time during the month and be assured of receiving an answer on those rather than waiting for the call too. You get the benefit on the Group Q and A of hearing everybody else’s questions and answers and in the direct Q and A you get the benefit of being assured, number one, that you get your question answered; and number two, much quicker than having to wait for the group Q and A. That’d be a good idea for you Brian.
Question:
John Mettle has a question. I am developing my farming areas for subject-to deals. I have road signs, monthly mail-wiz campaign mailings and out calls to phys-bos and low rent. What additional actions would you recommend?
Answer:
First of all, so that everybody on the call understands what’s going on, let me explain mail-wiz. Mail-wiz is our direct mail marketing tools and we’ve developed several different marketing pieces. One is post cards, another is letters, another is a newsletter, and another is a brochure. What happens is, one of the things that Lou Brown teaches you, is how to build a business in your own back yard. So I have…as John is asking me…I have you select two different neighborhoods that you like, or two different areas that you like, depending on your budget, and then you begin marketing to them on an ongoing basis. So, John says that he’s just gotten his monthly mail-wiz campaign going, he’s got his road signs out which of course some people call them bandit signs, and he’s also making outbound calls to for-sale-by-owners and also for-rents, to try to buy their properties. What additional actions would you recommend?
John, it really depends on your mail-wiz campaign. Because if you are buying out of town owners or out of area owners’ lists through mail-wiz, then another campaign you can put together is, it’s very highly effective to contact out of town owners or out of area owners. The way you do that is many local jurisdictions will actually sell you a list of out of area owners who have a different address than the property address. You can buy a list from the local jurisdiction or sometimes they’ll give it to you that gives you a list of all the property tax payers and owners and where they’re mailing the property tax bill versus the actual address of the property. That can be a very valuable list to you, because we do two things with that list. One is, market to that list to buy the property; and the other is to market to the occupants of the property to sell them a different property. Maybe they’ve got it rented out as a rental property, now you can go poach – I mean – you can go market to their customer and actually try to sell them a different property if you have a chance to. So that would be one definitely I’d go for John. Also Clipper magazine, if you have a Clipper magazine in your area we’ve heard very good responses from the Clipper. Another is a two to three line add in your local newspaper. Local man – or you’re a father and son team John, local father-son buys houses, apartments and land – cash; then your telephone number and also your web address. I know you are one of our web customers, so you definitely want to go ahead and put your web address on there as well. Get really good response from that.
Question:
We’ve got a question here from Brian. Hi, Lou, I just closed on a house and would like to reinvest a large portion of my proceeds into my business. What’s the best way to reinvest in my business in order to buy two more houses before year’s end?
Answer:
Brian, there are two answers to that. Number one; let me tell you something – education. Now is the time for you to get – if you don’t already have them – you need to get to the Millionaire Deal Maker, which this is your last shot to get to it because it starts on Thursday and I definitely, definitely recommend everyone on this call to get to Millionaire Deal Maker because we create deals live right there. It is such a mind expanding experience because all kinds of deals that you’ve never thought of before get created right there. You get to see exactly, how they get created and the words to say to present them to the seller. It’s absolutely incredibly important training.
Education is one of the important ways to reinvest in your business to be able to get an abnormal return. For example, you spend a few thousand dollars on education; you get a $30,000 return on that education. It’s really phenomenal and fundamental. Let me just express this to you, our platinum clients, or platinum coaching students right now many of them market every month and they spend $3000 to $4000 per month on their marketing and they get three to four deals per month. The reason they’re able to have such a good result is because of education. They know exactly how to craft those deals and put them together. You see, leads without education are just wasted money. You really want to know exactly how to put those leads together. With that said, with the proper education, then I would say market, market, market, market, market. We’re going to do as much as we possibly can to generate those leads. When you do, you’re going to be shocked. Like I have discovered by trial and error and also testing through our platinum program, we find that $1000 equals one deal. Two thousand dollars equals two deals, three thousand dollars equals three deals, and so on.
You really can catapult your business up by just investing in your education and investing in your marketing and yes, I highly recommend Brian, you do that very thing. Do not blow the profits, build your business and now is your opportunity to do that.
Question:
What are your thoughts on a TV commercial? What type of shows and what times would you recommend? Are there standard commercials out there that investors can buy?
Answer:
Well, I would recommend that you…well, let me ask this. Are you prepared for the volume of calls that will come in? Have you set up your phone service? One of the things that we teach and our technology is we teach you to set up a phone system. Now this phone system captures the lead, the telephone caller’s number, and it enters it into your system. Then you have a chance to call it back any time you want to. When the buyer or the seller calls in they are taken through a series of voice mail messages that are set up to answer all their questions before they ask them of you. What happens is, you are able to sell through your phone system, you client, your potential customer on exactly how you do business and exactly why it makes the most sense to do business with you.
Have you set up your phone service to be that? Do you have routing for that phone service? Do you have script; by the way we do provide those scripts as part of our voice-wiz service. We’ve already written and recorded all your voice scripts, buying scripts and selling scripts. What I recommend is that you have two telephone numbers. One for buying and one for selling. Those scripts take either your buyer or your seller through exactly how to do business with you.
The next question I would ask is Brian, do you have a live operator who once they press zero, if you’re not available, can they now access somebody? What does a live operator do? They instantly, because you’ve got them set up this way, pull up your website. What do they do – they interview your lead and ask them all the pertinent questions and fill out the questionnaire. Then they press submit, the whole deal comes to you by email and it auto loads your back end database where you can sift and sort your leads. It’s absolutely incredible and absolutely the way to set up your business.
Then finally, do you have a website? Do you have a buying website and a selling website? Again, I want you to split your business into two parts a buying business and a selling business. We have two completely different websites designed for that purpose that we do share with our StreetSmart licensees. This gives you an opportunity to set up your business and then be able to manage the call volume that will come in. That is where I would invest my money first before you invest your money in a TV commercial, because I’ve seen it happen too often where people get deluged with leads because they never thought about the fact that they had to have the infrastructure to support all of those leads coming in. Build your business as you have infrastructure to support that business. One of the great things about technology is it’s like having a staff person who does not drink your coffee, does not steal your pencils and does not come in with a bad attitude. I love it when you just have the opportunity to have some technology working for you instead of live people. It’s a lot more manageable and a better idea. Great question.
Question:
Here we have from Cindy Benson. She says, Dear Lou, I live in Los Angeles and this is my question. When a person is facing foreclosure and I go to their bank and short sell their mortgage and then I buy the property from the homeowner, who gets 1099’d, me the investor or the homeowner facing foreclosure? We’ve got a related question here from Fred Federoff who says, Hi Lou, I know that when some portion of a mortgage note is forgiven i.e. on a short sale that the forgiven amount is taxable income to the mortgagee. Does the write-down of the mortgage cause any hits to the credit score of the mortgagee? Thanks, Fred in Raleigh, North Carolina.
Answer:
Here’s what I’m going to share with both of you and I think everybody on the call is going to be very, very interested in this. My friend Al ____(25:12) who is a master at taxes; he is a CPA, he is a real estate investor and he understands what we’re up to and he understands what we’re trying to do. We’re trying to create a profit center out of taxes. We’re trying to save money by not paying taxes if we possibly can. One of the things that happen when you do buy a property from a seller is that when the bank takes a discount that’s actually income to the seller. The reason is, is that what they owed is now less than what they borrowed. That difference is actually income to them. I’m going to read to you from a report that Al has in his goldmine package – by the way if you’re interested in the goldmine package and you should be – we have it available through StreetSmart Systems. Call 1-800-578-8580 and we’ll give you all the details on it. It’s called Al ____(26:16) Gold Mine of Magnificent Tax Strategies, and boy does he give you a ton of them. This report comes with his package called How Property Owners in Foreclosure and Short Sale Can Avoid Paying Taxes on 1099 Forgiveness of Debt.
I’m going to read you just one portion here and tell you that this is absolutely a must if you’re going to be in the real estate business because he teaches you little known facts about how to cut down on taxes dramatically that I can almost guarantee your CPA does not know. These are just very pertinent information and he really gives you every detail to be able to actually apply what you’re learning and even shows you how to take it off right on your taxes.
Here he says; a foreclosure repossession of property is like a sale of property and therefore any gain is eligible to be excluded or deferred through certain provisions in the tax law such as Section 121 – Exclusions for Homeowners, or the 1031 – Exchange for Investment Property Owners. First off, when you have a foreclosure repossession of property you have what is called in tax law a disposition, which essentially is the same tax treatment of a traditional sale of property. That is, the tax law says that a gain or loss is recognized on the sale or disposition of a property. IRC 1001, a traditional sale of property is not the only type of disposition and is therefore not the only way to incur a gain. Another type of disposition that would result in a gain or loss is the foreclosure repossession of a property where there is forgiveness or cancellation of debt, Internal Revenue Code Section 61-A12. Did you get that? I hope so. A traditional sale of a property is not the only type of disposition. Another type of disposition that could result in a loss is foreclosure repossession.
Foreclosures involving cancellation of debt have their own special rules of gain or loss computation along with special exclusions from debt cancellation income for homeowners and investors. Wow – now I have just given you two paragraphs of a 13 page report. That tells you how valuable that report is and yes, you can get it through our office. We’ve got a great discounted price if you are a StreetSmart licensee as we do with all of our compadres who augment and add to the StreetSmart System. By the way, you will meet Al at the MAS. The Maximum Asset Shield Training which is coming up in January in Atlanta. I highly recommend that you get yourself registered MAS Maximum Asset Shield. If you want to know more about it call the office, 1-800-578-8580. Al is a visiting professor at that event and he will be sharing over several hours many different tax strategies that you guys will absolutely want to know about.
Question:
What do you do if a second won’t discount? Can you represent yourself as a financial advisor? Another short sale question here.
Answer:
The answer William, absolutely you will be able to do that. Here is what I recommend that you do. When you realize that…well, I actually recommend that you do this first off the bat, you say that they won’t discount and can you represent yourself as a financial advisor; well, I would have done that from the beginning. What you do is you just start talking to the lender and say, my name is Joe Wilson, I’m working with the Joneses over here. They’ve got a problem. If we’re able to get the property sold, we have found a buyer of the property; unfortunately they will not pay what you are owed for your mortgage, would you be willing to do a short sale. If so, I can help my clients and not recommend that they file bankruptcy. Can you help me with that short sale today? Boom, all of a sudden you’ve got the opening for them to be able to listen to you carefully because you’re about to give them the way out to not have all the problems that many other investors do and the lenders do to because they can’t get rid of the properties. Guess what, you can help them get rid of their properties. Great question, William.
Question:
Brett has a question. Let’s see, it’s a short sale. I have been having them sign several purchase and sale agreements blank. Is that okay?
Answer:
Yes, Brett, that’s a great idea and it gives you the opportunity to negotiate up with the bank although, I don’t do a lot of that. Basically, I’m going for the jugular – I mean I’m going for a plan and I’m already going to offer exactly what I want to get out of that bank. I’m going to make my offer and then I’m going to stick to that offer as much as I possibly can. But to answer your question, yes I do get one actually blank, because ours is a multi page document. It’s my buying, purchase and sale agreement, and the first page is blank. The last page is signed so that means you can make several different copies of the first page and still keep the last page which is blank. One thing you want to do is definitely get an agreement to purchase the property. What I recommend you do if you do feel like there is value to pursuing the short sale – and I want to recommend, and I know you didn’t ask me this question but let me just say it to everybody on the call – short sales are a pain in the neck. They are a lot of work. If you’re not equipped or you don’t have the demeanor to put up with calling people back over and over again and putting up for the last five times that you’ve called that they’ve lost your paperwork and you have to fax it or overnight it again. If you’re not willing to put up with that kind of nonsense then short sales are not for you. There are short sale services out there but there are varying degrees of success with those services. I would say that it’s kind of a hit and miss type situation and I would say that you have to get adept at doing it yourself if you want to make a lot of money by getting the banks to discount what is owed on the property.
You just heard earlier that one of the things we do is we call it as a financial advisor not as an investor; that opens doors. Then we continue to work with them to get as much done as we possibly can if we can get an agreement out of them. Again, you’re going to have to be patient. You’re going to have to set your sellers’ expectations. You must explain to the sellers that this is not a slam dunk. This is not an easy process. This will take some time. You will need their cooperation. They cannot disappear on you. There will be times that you’ll have to call them. You may have to get them on the phone with the bank in order to get the bank to listen to you. There are so many different ways that we need the sellers. That’s the way that I want you to set yourself up. I’ve already told you what to do about the contract. A good question and good answers to questions that weren’t asked, too.
Question:
Here’s another short sale question. How do you make a short sale work when the first and the second are held by the same bank?
Answer:
Well, that is a challenge isn’t it. You want to make sure that the bank…let us just back up for a second. The bank is not the lender. The people you’re working with are servicers of the loan and in this case they’re servicers for two different lenders. Typically the first mortgage lender is not the same as the second mortgage lender. Also, the bank has been empowered, let’s call them the servicer, has been empowered to make certain deals on behalf of the second mortgage lender that they have not been empowered to make on the first mortgage lender. What we want to do is attack the deal if it is worth less than the first mortgage that is owed then we’re going to have to attack both mortgages. But if it’s worth around what the first mortgage is owed, then we’re going to attack that second mortgage. We’re going to go for a discount of some kind down to some reasonable number which is equal to or less than 10% of what’s owed on that second mortgage and I know you didn’t ask that, but that’s another answer for you. I know that comes up a lot too.
Question:
Here’s another one. How do you negotiate with a loss mitigator?
Answer:
The answer is that we start off by being financial advisors, not investors. We have our only vested interest is in our customer and helping our customer. We do not have a vested interest in getting a deal. If we can help our customers, fine, but there are multiple ways we can help our customers. One is that we can get a discount from the bank and sell the property to a buyer who might be you, or your trust is my preference. There are other ways we can help our client too. Such as recommending that they do into bankruptcy. Another is we can mitigate their losses by doing a loan modification and we actually get the lender to change the existing loan through loan modification into something else with different stripes on it. That gives the lender the ability to keep the loan in place. We negotiate a reinstatement, often putting the arrearage on the back end of the loan and then actually talking with the lender to get them to adjust the rate from 9, 10, or 11% down to 6%.
I’m going to be teaching a whole session on this at MDM so if you’re not signed up for Millionaire Deal Maker you absolutely need to be, because this is where the rubber meets the road. You can make so much more money if you just know what the lenders are willing to do and then you know how to make the offer to get the lender to do what you want them to do. I hope that makes sense.
Question:
The next question is how much do you pay your friendly realtor to do BPO’s?
Answer:
Well, me Richard, I pay nothing. The reason is because I do business with this realtor, I do other business with this realtor. I’m a good customer of this realtor and therefore, they are motivated to do BPOs for me at no cost. Would I pay them ? Absolutely. I would ask them what do you want. I would tell you that I don’t want you to spend any more than $75 and many people will do BPOs for $25. In fact they do that for the banks all the time. The banks negotiate a rate with appraisers, realtors, with different people who do the BPOs. They pay them, again, anywhere from $25 to $75 for that BPO. Of course, they get a volume discount for doing a bunch of them, so you may have to pay slightly more, but not…I don’t want you to go over $75 because my philosophy of a short sale is that you do not spend money until you have a deal on the table. That means any kind of money until you have deal on the table. That means that you’ve received a letter from the bank accepting less than they’re owed and you like the number that they are accepting now you’re talking.
Question:
We’ve got a subject-to question. Is it true that someone who is a licensed realtor in Illinois cannot buy a property subject-to?
Answer:
Well, Janine, I don’t know why you can’t do that because basically, you’re a realtor acting for your own account. People ask me all the time, if I’m a realtor do I have to use the real estate agreement or can I use yours. The answer is you can use mine. All you have to do is go to paragraph 17, that’s our special stipulation section of the contract. You add the following verbiage; the purchaser is a licensed real estate agent acting for their own account. Another way you can work around these issues is perhaps your spouse purchases the property and not you. You merely act as a conduit or go between but you don’t get anything out of the deal. Your spouse does and your spouse buys it in trust and your spouse is the primary beneficiary. You perhaps are the successor beneficiary to your spouse. That’s one way also to work around the requirements of being a realtor, but I see absolutely no problem with disclosure. In fact I like disclosure. I like to disclose everything that we…in my contract it’s already preprinted in the contract, but it says specifically that the intent of the purchaser is to make a profit. It’s actually printed right in the contract. Nobody can say they got hoo-dooed out of their property and that they thought you were a homeowner or that you were moving into the property. No, that’s not what my agreement says and those of you who have not reviewed my purchase and sale agreement definitely need to. If you haven’t been to Millionaire Jump Start, that’s one of the things we do at MJS is actually go through that purchase agreement, the buy version in class, step by step and line by line because it’s just absolutely loaded with profit centers and protections. If you have not been through that training you need to call the office and get on board. We give that training six times per year some place in the country. Our next one coming up is in November 17th and 18th in Las Vegas. If you have not registered for that, definitely get yourself registered. Call the office 1-800-578-8580.
Question:
We’ve got another question on subject-to. If you have a deal subject-to and the monthly payment is more than you can get for rent, do you walk away from the deal?
Answer:
This is really a deal structuring question and Devon I’m going to tell you exactly what we’re going to do. You’ve got an opportunity here. If the property is…in other words the payment is more than you can get for rent, guess what, the seller is the bank again. The seller can pay you to buy that property. They can either pay you a lump sum of cash or they can pay you monthly for you to buy the property. It’s a beautiful income stream when sellers pay you on a monthly basis and it really adds to your overall cash flow on the property and on the business. It’s a wonderful way to set yourself up.
But let’s say that your seller has no cash and they’re not willing to sign an agreement. What’s the next step? Possibly a short sale. We get the bank to discount the loan. But there is also another alternative. There is getting the bank to modify that existing loan so that you have a cash flow. You don’t go to the bank and say, I need a cash flow, will you modify the loan. You give the bank the reason to lower the payments and it’s because your seller cannot afford the payments. We use that as a thing. Again, I’m going to be teaching all of this at MDM. Do not miss this training because it’s just so important for you to understand all these little elements. Then finally, we look at…let’s say that it was a beautiful loan with a beautiful interest rate; everything was right about it. The only problem was that rents were low in that area. Would I walk away from it? It really depends. Can you afford the negative cash flow? If so, then you look at the pay down on the loan. For example, if you have a 30 year loan and its 15 years into that loan, now the principal that’s going towards paying down that loan is a significant number at that year. You want to look at the amortization on that loan and that also is a profit center for you. While you may have excess cash going out every month you also may be paying down that mortgage very rapidly and that’s another way that you can get rid of debt as well is to rapidly pay down the mortgage. I teach you that at the MDM as well. There is a lot of opportunity for you in this one Devon.
Question:
Lisa Horton has a question. She says; Lou, you spoke about purchasing blocks of REO homes from the banks and selling them to us. I want to know when and how I can buy several of them.
Answer:
Lisa, what you’re talking about is ASG. That is a company called Asset Solution Group that we created for the purpose of going to people like Countrywide that I started off this conversation with. We actually are able to go to Countrywide and lenders like them and say, hey, you know those 195,000 properties you have on your website this week – how would you like to get rid of 500 of them right now, all in one fell swoop. That gives us an opportunity to come in and buy at great discounts and gives us a chance to redistribute them to StreetSmart licensees. How do you get on board? I recommend that you build yourself a network of buyers and I want you to…I call them .90 buyers, .80 buyers and .70 buyers. Your .90 buyers are the ones that want the nicest houses in the nicest neighborhoods. Your .80 buyers are ones that will accept houses with a little bit of work such as paint and carpet and cosmetics. Your .70 buyers…let’s call it .70 and below…they’ll take any house in any neighborhood, any war zone, any type of renovation and any amount of headaches.
Now that you’ve got those kinds of buyers and you set yourself up a spreadsheet of potential buyers and you categorize them as .90 and .80 and .70 buyers, then in talking to those potential buyers you have them give you a proof of funds letter. You see, just because we get a list doesn’t mean anything. We want this list to be valuable. We want it to be actually made up of people who can buy properties and won’t waste your time, because unfortunately when we are buying in huge pools like this we have to act extremely quickly. We have to be able to take them down within seven days and close within seven days after that. We are expecting the same from you. What you’ll do is submit your buyer qualification form which can be found at AssetSolutionGroup.com. You’ll fill out your buyer qualification form and then you’ll also get the proof of funds letters from your various customers made out to Asset Solution Group. You submit your buyer qualification form along with your proof of funds letters. What we do then is we turn around…and by the way you can have your own proof of funds letters as well. If you’ve got personal funds, IRA funds; you’ve got funds that are company funds; you’ve got lines of credit rather, any of those things can be used as verification of your proof of funds.
The next thing you do is submit that to Asset Solution Group and we include you in our buying. What happens then is we’re going to the banks and actually going equipped with buyers and we’re setting ourselves up…we’ve already got ourselves set up with a multitude of lenders throughout the country. Currently we’re working on nine pools of properties a very significant number of properties. I just want you to be aware that this is a real thing and all of you can participate in it, but you’re going to have to do some homework in order to take advantage of this opportunity that presents us for the next 18 to 24 months and then it will all be gone for about another 20 years. Just understand this is a once in a lifetime, or once in a generation opportunity for most of us and we want to be able to take advantage of it now.
Question:
Vicky Blayco has a question. My question is regarding my Dad’s house on 75 acres. Mark is rehabbing his house and then we are going to sell it. Because of my Dad’s health we are afraid he won’t get it sold in his lifetime and I don’t want to have to pay all the taxes on it if he doesn’t get it sold while he is still with us. What can I do to avoid taxes? Lou, I don’t think I would even be asking this question if I had attended one of your boot camps on trusts, right.
Answer:
You’re absolutely right Vicky. We do answer all those questions at MAS, which is Maximum Asset Shield. But to get you through right now today, the answer really depends on when your Dad is going to pass away. If he passes away in 2007, then his estate gets a $2 million write-off and that means that is a State tax exemption. In 2008 it’s a $2 million write-off. In 2009 it’s $3.5 million. In 2010 there are no – zero – estate taxes. In 2011 it drops all the way down to $1 million. So, Vicky, it really just depends when is he going to pass away.
Another thing that could happen is a trust could purchase this property from you Dad at some number that is below that $2 million. Then that trust could turn around and sell that property at whatever it wants to and that would give your Dad some income now and it would give the trust the rest of the income. Of course, that would be capital gains to that trust, so of course, how do we avoid the capital gains? Why don’t you keep it? If you can afford to pay your Dad, why not put a mortgage on there and…now just think about this for a second. Let’s say that you bought this property…excuse me in a trust, you know…bought this property for $2 million. In order to purchase that property you had to get a $2 million loan. Let’s say that it got the loan, purchased the property and now the debt is owed by whom – by the trust. Your Dad just got $2 million cash. Now what happens is that cash goes into the bank and then when your Dad passes away whatever is left could be used to pay off that very debt that you got to buy the property in the first place. That could be a way to escape the taxes and be able to get it out of his estate so that the growth is not there beyond the $2 million.
You say it’s a house and 75 acres. It’s very fathomable that it’s worth in excess of $2 million, so just take a look at that as a potential solution.
Question:
Now we’ve got a private funding question from Joan who says; you keep mentioning you provide funding. What is the cost and how do we apply?
Answer:
We do have a place for you to apply Joan. You go to www.streetsmartinvestor.com/Lending, with a capital L. It is case sensitive so it would be lending with a capital L. What’s there? There’s an application form. It’s a one pager that pretty much asks you everything I need in order to be able to help you. What’s going to happen – the process works like this? Once you submit that application to us along with the supporting documentation, then my assistant, Judy, goes through that application and makes sure that you have everything that’s asked for. Until you provide everything that’s asked for, I never see it. By the way, everything I ask for is everything you should know. If you don’t have those things that should be a lesson that that is the proper due diligence on a property whether you or anybody…because essentially when you borrow the money you are borrowing money. You’ve got to be able to do exactly what the lender needs you to do. That means that you’ve got an opportunity to give them everything they’re asking for and that gives you the opportunity to borrow the money. Hopefully, that makes sense to you. I said that a couple of times differently. Whether you are borrowing from me or anybody, the cost of funds depends on what you want to do. There are two options. One is if you want to partner with Lou, then the cost of funds comes off the top typically at the end of the deal. I borrow from my sources and then there are no payments throughout the deal, which is very advantageous if it’s a partnership deal.
If it’s a borrowing then you will have payments on a monthly basis and it’s usually 5 points and 15%. It does depend on the deal itself – these are typical hard money things and of course, I teach you how to borrow money at lower rates, however, there are other ways that you can…I understand it’s the availability of the funds not the cost of the funds that is important when you’ve got a deal. So, if you haven’t raised those alternate sources or you don’t have the money, come on, talk to Lou, we can get you the money and we can get that deal bought for you. You just have to answer the appropriate questions. Hopefully, all of you learned from that as well.
Question:
We’ve got a selling question. Let’s see. On renovation how can I still do the labor work on the houses because I like it, and make money; or is that even possible?
Answer:
Well, Phil, let me tell you. Here…how can I do the labor work on the houses because I like it and still make money? Listen to me. Here’s my formula for renovations. Let’s say that you want to make $20,000 on a house. Let’s say that you’ve got a perfect house in a perfect neighborhood that you have to spend very little on to purchase, and you’re going to make $20,000. Let’s put that next to a house that you have to do $15,000, $20,000 worth of repairs on in order to make $20,000. Which would you rather buy Phil? I know I would rather buy that one on the left; the one that’s the pretty house in the pretty neighborhood that I don’t have to do any work on and still make the same money as if I had to do a big renovation.
What is say is that if you’re going to have to do a renovation, you’ve got to be paid for doing the renovation as well. If it’s a $20,000 renovation I want you to get $2.00 for every $1.00 that you spend. That would be $20,000 times two or $40,000 plus the $20,000 you would have made if it was a pretty house in a pretty neighborhood. Yes, that’s a total of $60,000 off that you have to be able to account for in profit on a deal where a renovation is involved. Again, it’s $2.00 for every $1.00 of renovation cost plus your $20,000. I hope you appreciate that Phil. That’s a very good question.
Everybody on the phone by the way, if you want to do renovations, get paid for it and still get your typical profit anyway.
Question:
Here’s a tenant question. Can you keep the reservation fee if during background checks they give you false social security number and other lies?
Answer:
What are we going to do? No, you can’t keep the reservation fee. Here’s typically what I say to a customer. What we’re going to do is take your application and your reservation fee – now that does not mean we won’t take other applications – but that means that you are the first in line. If we approve your application and later for some reason, you don’t move in, your money is non-refundable. However, if we do not approve your application, your entire reservation fee is fully refundable; your application is not refundable. So that way anybody who’s going to be very comfortable to give you the money for the reservation fee because they know they’re going to get it back if you turn them down. Yes, if they give you false information that’s a reason to turn them down, and yes, I want…people who do things like that sometimes they have guns and it’s not pretty. I just don’t want you to put yourself in a position to create any backlash for yourself. Let’s go ahead and give them their money back and tell them you never want to see them again. Then report them to all of your investor friends so that nobody else gets them either.
Question:
How do you dress for court? Does a suit help or hurt?
Answer:
Well, Wilma, the idea is this. I want you to definitely dress up and make yourself look good if it’s that kind of court. You’ve probably all seen People’s Court and you’ve seen Judge Judy and if you notice, most of those people are dressed kind of like in street clothes or dress casual. Dress casual is fine, but if you want to look important then you’re going to have to dress important. So, you have to look at yourself and say, how do people normally take me? Do people take me as a slob? In which case you do not dress like a slob, because a Judge is also taking you as a slob. You have to look like you’re a professional and if you are the Plaintiff, which most of the time we are as property managers – we’re the Plaintiff to bring an action against a tenant, then we want to look like professionals. We want to look like business people. So, yes, a suit or a dress or something that looks professional is good. It also shows respect for the court and the Judges appreciate how you dress as well. You don’t have to overdress, but please don’t underdress ever for court.
Question:
How many property folders do you have per property or tenant? Is it listed in the Enchilada?
Answer:
It is listed in the Enchilada regular. Many of you on the call have Enchilada juniors, which is Volumes 1 through 5; and then as your business grows and as you have more properties we grow you up with the tools that you need to be able to operate your business. We have in Volume 7 – Business Management, it’s actually all the ways of setting up your office. In terms of the file folders we have, for each property, we have you get a six-part file folder. There’s a section for buying, there’s a section for your trust, there’s a section for property taxes, a section for insurance, there’s a section for details about the property and then there’s a section for selling the property. So, there are six different sections of that property file. Then we have a cover sheet for each one of those sections that are a checklist of what should be in that section or what might be in that section if it’s available from the closing agent or whoever related to your property.
Now separately, we have you do an 8 ½ by 11 tenant file. The other is an 8 ½ by 14 property file, and then the 8 ½ by 11 tenant file is usually a different color and it’s usually based on the tenant. My philosophy is the property doesn’t change; the tenants do. We keep the tenant folders in a separate drawer all related to tenants, and the property folders are kept in a drawer all – many drawers actually – all related to properties. The property files do not have tenant files in them. Alternatively, the tenant file again with the two-prong thing at the top that holds all your papers down, on one side of that folder – and this is only just a one-part folder but it has two prongs. One on the left side and one on the right side – on the left side are all the details about your relationship with that tenant and details about their getting set up with you. That means, how much they gave you down, how many keys did you give them, what is all their contact information, that’s on the left-hand side. On the right-hand side is all the documents that they signed, their lease, their option, their rental agreement, their application, all the details. I said rental agreement and lease, but rental agreement and lease are the same things. Your application and the lead-in-your-home disclosure and all those things are signed off by the tenant and kept in that tenant file.
So, you can always put your fingers on the things that relate to the property. We never put the tenant information or applications or anything in the property file. That is kept separately. By the way, in that Business Management System, I also have you set up five different binders. One is on expenses, one is on income, one is on tenant communications record, one is on business action plans, and one is on your banking records. It actually prints out the covers and the spines for each one of those binders. It also gives you all of the filler for each one of those binders so that you can keep track of your properties whether they are lease-options, whether they’re agreement for deeds, whether they are cash sales, whether they are weekly rentals, monthly rentals; all the different things that we face as property managers. There is a ledger, a year-long ledger for each one of those that are kept in those binders. Then at the end of the year, you take those ledgers out, you collect them all together and now you’ve got all of your stuff for your taxes all nicely totaled for each property.
It’s a wonderful way to create sanity in a business where there is so much paperwork and there are so many details to have to keep up with. By the way, if you don’t have the Business Management System you can get that by calling the office at 1-800-578-8580. Great question.
Question:
We’ve got an Agreement for Deed question, and this is the last question we can do tonight. I’m not going to get to all of them, but boy have we gone through a lot of them. We’ve got, selling on Agreement for Deed, do you use an attorney and do a HUD One on an Agreement for Deed sale?
Answer:
Really it depends. If I feel that the buyer is confused, if I feel like they are going to be a problem in the future or could be a problem in the future, if they’re not completely cooperative, then I’m going to use an attorney. If instead they have been 100% cooperative, there’s been no problem collecting the down payment, there’s been no problem with the application process and they’ve checked out and everything has checked out, I might do that myself. In fact, I probably would.
Am I going to do a HUD One Closing Statement? I typically don’t. We typically do the Agreement for Deed by itself along, of course, with their application and the other things and then we set that up.
