Question:
The first question comes from William Edwards who says: How do you start part time.
Answer:
Well William, here’s what I’m recommending. I understand that you’ve got all these commitments and all these distractions in life particularly when you’re working with someone else, so what you want to do is be able to calendar and commit a certain amount of time on a daily and weekly basis to allow yourself to be able to have the time to build your business.
Now, if you have not yet been to Millionaire Jumpstart, I am going to tell you must go. Any of you on this call who haven’t been to Millionaire Jumpstart, just pick up the phone, call 1-800-578-8580 and get yourself registered for the very next one, which happens to be November 17th and 18th in Las Vegas. Do not miss this opportunity to get yourself in a position to do things that you have never done before. One of the things you’ve never done is to put together a business plan. We’re going to do that together at Millionaire Jumpstart. We’re going to make sure you have everything you need to be able to be a success in this business. One of the things that’s going to happen there is you’re going to commit a certain amount of time to your business and then we’re going to put together your marketing plan and your marketing budget. Based on those two elements, you’re going to be able to get your business started.
Now, the other thing I want you to do William is to identify a couple of neighborhoods that you want to own and those are going to become our target markets where you’re going to be able to buy properties on an ongoing basis in those neighborhoods.
Question:
Next question is from Jeremiah Stover who says: I am just starting in real estate and I’m trying to find good communities to target in my immediate area. I’m in a rural Connecticut town where most people own 1-10 acres and there is a low house turnover rate. About a 15 minute drive is a center of low-income downtown Norwich, which is seeing revitalization. Between these two areas are some middle and working income communities. What things should I look for when picking a community and how many houses are you thinking I should have in my target area?
Answer:
Well Jeremiah, let’s think about that for just a second. First, lets talk about where you’re focused. When you say that in your immediate area there’s houses from 1-10 acres and there’s a low house turnover, that’s fine. But we first need to determine what is the middle of the market? What is the price point that is most common in your area and what can people afford in your area? How are you going to find that out? One way is through your local real estate commission and many realtors have this data. Another place is your chamber of commerce. Another place is the US Census Bureau. Taking a combination of your research, you’re going to determine what is the median income in the area and what is the median house prices. Based on that, you’re going to determine where you’re going to market because, you’re going to look for those price points and that becomes your target market.
Now you say about a 15-minute drive is low-income. Are we going to focus on low-income? Well, that depends. I don’t want you really focused on low-income if you can avoid it. That means, if you can find middle of the market housing that is affordable, then that’s where our market is and that’s where we want to focus. If not, then we can go lower income and yes, the streets are paved with gold in those lower income neighborhoods, so it can make sense for you to pick a community with some lower pricing, but just make sure that you’re picking the right kind because you also are looking at people’s ability and intent to pay. We want to make sure we get good customers in good areas.
Question:
Now, Joe Wilson asks: What is the best way to find a target market area, the areas that appreciate?
Answer:
Well Joe, what we’re going to do is we’re going to get addresses. Once you determine, as I was describing before for Jeremiah, you’re going to go to those particular neighborhoods, determine the street addresses and then get a list of all those names and street addresses. How are you going to do that?
One thing I recommend is that you work with our mail whiz. Our mail whiz is a mail house that will help you to determine your mail lists. What they do is once those lists are obtained, then they manage the lists for you. So, if any mail comes back, they take that off the list and they continue to manage that list for you. Then next month, when another mailing needs to go out, they just simply mail from that list and they manage that and maintain that for a long period of time for you. So, I’m recommending that we set up a campaign, one month it’s a postcard, next month it’s a letter, next month it’s a newsletter, next month it’s a brochure. Every month, something goes and touches your market for at least the first six months. Once you do that, then you can do a sustaining mailing after that, but first we need to establish you in that market area. By getting those neighborhoods, mail whiz can help you obtain those lists and do the mailings for you.
One thing I always say to my licensees is that it is very, very important that you manage your time and you value your time. So, putting stamps on postcards, going to the printer, getting things printed, all that sort of thing is a complete waste of time. You need to pay others to do that so that your time is focused where it needs to be focused and that’s in the lead generation area.
Just think for a moment if you will, about how much time you’ll spend designing a postcard, calling printers, getting prices, getting things printed, going and picking it up, getting labels, sticking the labels on, putting the stamps on, taking it to the post office and getting all that done. Now take that same amount of time and ask yourself, how many outbound calls from the newspaper could I make in that same amount of time? This is very much a number’s game and I want you to maintain and manage your time accordingly. Therefore, anytime we can outsource reasonably, where the numbers make sense, you always, always want to lean toward your not doing that work. Especially if over the next year, you want to make a million dollars. That’s $500 an hour. So, we’ve got to value you at $500 an hour and build a business accordingly. Therefore, using outsourcing is just a critical piece of what I teach.
Question:
Ben Smithy says: How do we compensate for today’s real estate market?
Answer:
Well, as I was saying in the beginning Ben, the best advice is to buy low, with financing, plan to hold it and sell it with financing. That’s a combination of either your lease option or owner financing or a combination of the two.
I teach you how to do that in Volume 9, lease options and Volume 10, owner financing. If you don’t have those volumes and you plan to build a business around this, then definitely you need those tools and they are designed around both buying and selling using the lease option and the owner financing agreement for deed technique.
Question:
Next question is on REOs, from Brian Mussa. He says: Hi Lou. I’m beginning to work with a realtor. I’ve asked her to look for bank owned properties and plan to make offers. Should my offers be more of a package similar to your short sale package, such as construction estimates, crime reports, low comps or is that too much wasted time?
Answer:
Well Brian, I’m going to tell you that before you make your offer, you’re going to need to get that information anyway. You need to have the comps; you need to know if the area is valuable or if it is a high crime area. You need to know about construction estimates and what it’s going to cost to fix up that property anyway. So, it wouldn’t hurt you to include all of that as justification along with your offer. Show the realtor exactly what you came up with and how you came to it. Get the realtor on your team. Get the realtor on your side. Don’t merely just throw an offer out there. Get the realtor to truly, completely understand what the offer is so that when the realtor makes the offer, then they can logically and ethically explain exactly why this is a good offer for the seller and why it makes sense for them to keep it. I think illustrating that to the agent is a key point to all of this because many people today are very, very busy and everybody is looking for sound bites. They’re looking for just pieces of information, don’t give me the whole story, just give me a piece of information and let me move on it. The REO department at the bank is the same way. Just what’s the offer…get to the bottom line. That’s what I want to know and the agent’s got to be able and equipped to step in and say, let me tell you, got an offer, but you might not like it until I tell you what I’ve got to tell you.
You’ve got to train people to folks. As you’re listening to me, you’ve got to understand that the world out there does not operate in a way that is logical. You’ve got to use your own logic and reason and understand that you’re in a sales process anytime that you’re buying or selling or borrowing money. So, as a result, you need to be equipped to say the right words in a way that gets them to want to do business with you and that’s sales. Just as Brian described, he needs to sell the bank on how he came up with his offer.
We do the same thing in my short sale package. We have it all designed so that you are selling the bank on how to do the short sale. And by the way, if you don’t have the short sale package, call the office and get it because it’s all the forms you need to put together a package that’s not the bank’s package, it’s your package and it’s you showing the bank how you came to the numbers you did and why it makes sense for them to want to do business with you. Absolutely critical piece if you’re ever going to do short sales with the bank accepting less than they’re owed for their mortgage, you’ve got to illustrate to them exactly why this discount makes perfect sense for them and why they should do it.
Question:
Jonathon Wiley who asks: Is subject to financing illegal? Yes or no.
Answer:
Well Jonathon, it is not illegal.
In fact you go on to say, if yes, how can we put subject to in the contract and the contract be valid?
Well, guess what Jonathon, I wouldn’t teach you something that was illegal. What’s beautiful about a subject to is that we’re protected by the Garn-St. Germain Federal Depository Institutions Act of 1982. That act gave the banks the right to put a due on sale clause in the mortgage, however it has exceptions to the rules. One of the exceptions if when an individual places their property into their own trust for estate planning purposes. In so doing, the bank is prohibited from calling the loan due. Because lots of congress people place their properties in trust and they didn’t want to be in a position where the bank was empowered to call the loan due, so they made an exemption to the law.
So, what do we do? We assist the seller in placing their property into their trust for estate planning purposes and thereby they are prevented from calling the loan due. It’s a powerful thing.
You go on to say, if no, why is everybody so afraid of them?
Well, the reason Jonathon is because people are not understanding just what a subject to is all about and they are afraid that the bank has the power to call the loan due because they don’t know any better. They don’t understand the law, they don’t understand the process, they don’t understand how we avoid the lender calling the loan due. So, don’t worry about what other people think Jonathon, just understand what it takes to be street smart and the way that we do business allows us to do this.
Now, I wouldn’t just be telling you this is I’d only done a few of these. I’ve done hundreds of these and my licensees in all 50 states have done tens of thousands of these. So, this is not a small little sideline opportunity for you. This is something that is a mainline way for us to be able to take over existing financing without having to go to the bank and without having to qualify for a loan. It’s very, very valuable and just be aware, all of you on the phone, what we do when we take over subject to financing.
Do we help the bank or do we hurt the bank? We help the bank because generally we’re taking over a loan that is in default or is about to go into default. We’re taking over that financing so the bank is actually enhanced and improved by our involvement in the transaction. It is absolutely what I believe in. The banks, if they truly understand who we are, they absolutely love us. They don’t hate us. It’s the few, the very few out there that don’t do this the right way that give us all a bad name. So, we’re looking to change that by teaching and creating ethical behavior in the real estate industry and ethically buying, selling and holding properties and having our sellers and our buyers absolutely thrilled to do business with us. That’s the kind of business you want to build and we teach you how to do it that way.
Question:
Next subject to question is: Why would a current mortgage holder allow someone to purchase their mortgage, keeping it in their name.
Answer:
Because we are solving a problem for them and today we can take that property off their hands. Now if we bought the house the traditional way, we would have to put it under contract, we would have to wait 30-60 days to get qualified by a traditional lender, we would have to go through all kinds of gyrations to get qualified. There would be high costs involved in that qualification process. All of that can be avoided; Mrs. Jones and I can actually pay you more for your property if I’m able to take over your existing financing. Doesn’t that make sense to you? And you get a commitment from the seller and that’s why nobody has a problem with it. It’s a beautiful thing.
Question:
Jim Hartman asks: When purchasing to subject to existing financing, the loan is transferred into trust. Once this is done, what steps are needed to help the seller clean up their credit and wipe this loan off so that they can purchase another home?
Answer:
Good news here Jim. It can be taken off their credit report. It’s a lengthy process, so what I recommend you do is don’t make that offer. Don’t make that promise if you can help it. But if, Jim, the only way you can buy that property is to go through the process and have this taken off their credit, otherwise they won’t do business with you, then here’s the steps.
- You are going to have the seller order a credit report. We’re going to see, of course, on the credit report that that loan exists.
- We’re going to have already recorded changing the deed over from their name into the trust name.
- We’re going to notify the lender that we’ve taken over the property as the manager. We’re going to have lender change all of their records, all their contact information, their information about the account, change of address. All of that will be complete. It will be accepted by the bank. We’ll be done with that process.
- We’ll notify the bank, after all that is done, that we want the interest reported under the trust ID number. The interest from their loan reported under the trust ID number for estate planning purposes.
- Once that is accepted by the bank, then we have our seller order another credit report. They are usually available for free, depending on the state you’re in and the credit bureaus will provide them free of charge. So, now again, that loan will be shown as an open loan. We will have the seller protest that, telling the credit bureau that loan is no longer mine.
- The credit bureau will contact the lender. The lender will find that they’re not reporting under that social security number anymore. The lender will report back to the credit bureau _____(22:08) by another party.
- The credit bureau will then enter that on the credit report and boom, shack-a-lack-a, you now have accomplished getting that off your credit report.
By the way, I hope everyone is paying attention because you can do the same thing with your own loans that are currently in your name. You can use this process to get it off your credit report. Isn’t that a wonderful thing? Now of course what happens is if you do go to the bank and violate Lou’s rules and go qualify for loans, then you’ll be able to do it a lot easier when all those loans are now taken off your credit report. Isn’t that a wonderful thing?
Question:
Does a subject to hurt the seller’s chances of obtaining anew loan for a new home?
Answer:
It could. But we can help. The way we’re going to help them is to get that loan, we’re going to go through a process and let me just explain the process.
We’re going to tell the seller, when you are ready to buy a new home, here’s what I want you to do. Have the mortgage broker contact us. Tell the mortgage broker that you have sold the home and here’s who bought the home. Mortgage broker calls us, we fax the mortgage broker a copy of the recorded and executed deed, deeding it out of your name and into our trust name. We will fax that to your mortgage broker. They will check that off the list, they will ignore the entry on your credit report and now you can go buy another home.
And to answer Jim’s question, that’s exactly what we can do too, when you’re working with someone who needs to get it off their credit report. Don’t worry about getting it off their credit report, worry about what they need the credit for. They need to be able to buy another home. What I’ve just described bypasses the lengthy process that I described before on how to get it off of someone else’s credit report.
Question:
Jerry St Lorent asks: Hi Lou, my question is, when an agreement with the seller has been made and you take over his house with seller financing and his old mortgage is in place, when do you transfer that property into a trust?
Answer:
Well, Jerry, it was good seeing you at the last MDM and we really appreciated you being there, we hope you had a great time and learned a lot.
You absolutely will not have to worry. When you take over his house with seller financing and his old mortgage in place, you’re going to transfer that property into trust up front, immediately, as soon as possible. You’re going to go ahead and do your trust paperwork. In fact those of you who have graduated the MAS, which is Maximum Asset Shield, we actually give you an auto fill disk, which allows you to be able to fill out one page and it automatically fills out all the paperwork including subject to paperwork to be able to take the property into trust.
So, Jerry, you’re going to do that because I know you’re one of our website customers too and by the way you can access that on the backside of your Street Smart website by just going there and just clicking on the MAS disk and open that up and right there you’ll see your subject to paperwork. You just click on that, fill out one page and it auto fills all your paperwork. Press print and you’ve got everything done for you instead of having to move from field to field to field.
As soon as you create that paperwork and have the seller sign it, you’re going to record that deed. Why? Because the seller could be getting a lien against them or they could have a lawsuit filed against them, so we want to get that property out of their name as quickly as we possibly can to make sure that nothing else could come against us and them too.
Question:
Another subject to question. This is from Tim Casey: Hi Lou, Karen and I saw you last month in Orlando. That was a great weekend. I’m sorry we had to miss MDM this past weekend, but I’m an entertainer here in Naples, Florida and our season is just kicking into gear. We do plan on attending the next one. We need your knowledge. It’s just the best that we’ve ever heard out there on the circuit. Here’s our question: We picked up our first subject to a couple of weeks ago and this week the seller contacted me and informed me that she was going to have to declare bankruptcy. I told her to tell the attorney that this property was sold and to leave it out of the bankruptcy proceeds. I wanted to ask, if there is anything else I should do? Should I go ahead and get a tax ID number for the trust we bought it in to transfer it off of hers? Any help would be appreciated. Thanks again Lou for everything.
Answer:
Well Tim, here’s exactly what you’re going to do. Regardless of what you do it won’t help. Your clients’ bankruptcy attorney is going to tell her to include that home in her bankruptcy. The reason is, he’s going to want her to divorce that debt from her name and the only way to do that is to include the home in the bankruptcy. But, she doesn’t own it anymore. That’s the good news. She is merely to tell her bankruptcy attorney that she has sold the home. Now the bankruptcy court may have an interest in that transaction. They want to know for sure and certain that she hasn’t just transferred that to a friend to hold for her until she completes her bankruptcy, then she comes back to get it. We want to make sure that’s not going to be a problem.
It’s not going to be a problem because you’re going to be the one that takes care of that. You’re going to be the one that proves that you’re a third party and there is no reason that they can come back and take that and pull that back into to the bankruptcy. It’s very, very rare of the bankruptcy court to do that unless they think that this was done to avoid the proper equity going to the creditors in a bankruptcy.
I would also ask her what’s her reason for filing bankruptcy. If she’s got lots of other debt outside of this home and she does have to file bankruptcy, it would be great if she would wait 90 days. That would be the best of all worlds if enough time has passed, the bankruptcy court doesn’t even look back to see about prior transfers as closely because they think a recent transfer in anticipation of the bankruptcy, so longer is better if it’s possible. If it’s not, you’re not going to have to worry about her being able to reach and take it back.
Question:
Now, Brian Lavesk asks: I am very interested in finding more subject to deals and putting tenant buyers in them on lease options instead of rehabbing them. Your “Come Fix Me Up program sounds like a great way to cost effectively rehab these properties. However, after seeing some seriously bad work being performed by so-called experts in their field, I am a little concerned that some people may cause more harm than good to the property which may result in lost profits from having to have the work redone and also any losses associated with having to remove the tenant from doing any further damages. How do you protect yourself from this sort of situation?
Answer:
Great question Brian. You are right. You must intervene and know exactly what capabilities your customers have. Make sure that they have the skills to do the work that you want them to do or access to those skills.
The way we’re going to do this is make an agreement as to exactly what work they will do and then we’re going to break that job down into pieces so you can approve it along the way. Let’s take for an example that we wanted $5000 down on a property and we’ve got a customer that’s got $2000, and we’re going to give them credit for $3000 worth of work toward the house. Let’s say that the house needs an interior paint job, needs carpet, needs some drywall work, exterior needs painting and it needs some carpentry work. We’re going to break that job down into three $1000 increments. So, lets say that you take the exterior paint and we’re going to give $1000 credit for that. Okay, Joe, when you’re done with that, give me a call and we will credit your first $1000 towards your promissory note.
Now, Brian, what we’re going to do, as you know because you’ve got my Work for Equity program, is that they must sign a promissory note for that missing $3000. In other words, they owe us that $3000 if they don’t do the work. So, we’re going to credit in increments as they do the work to our satisfaction. We are going to contract with them to do this work. You’re going to use my “Independent Contractor Services Agreement”, you’re going to use my promissory note, you’re going to use my rental agreement and you’re going to use my option agreement. So, we’re going to use four different contracts to tie this relationship together. It’s going to clearly state who’s going to do what and under what circumstances they’re going to do it and when.
Based on that, we’re going to credit them when they show us that they’ve done the work that they agreed to. Then, when let’s say that the next segment of the work is going to be the interior paint and drywall work. That’s another $1000. So, they call us once they’ve done that and then the next is the carpet, let’s say and they call us when that’s complete. So, each one of those $1000 segments does not get credited until that work has been done.
Now, quite frankly Brian, do we really care if they do the work? Because the fact of the matter is, we still get the income whether they do the work or not and we’ve got a customer in the house and that’s really what we were up to when we created that relationship.
The way you’re protecting yourself, as always, it’s with the paperwork. Your paperwork always provides profit centers and protection. So, we never do anything without the proper paperwork in place and Brian you’re going to be able to have all of that with the appropriate paperwork.
Those of you who are on the call who do not have my Work for Equity program, this is an absolute Godsend. It’s only $299.95 and includes all the forms, a filled out version, so you can see exactly how you fill them out, a forms disk and all the guidelines. Even the ad that you run in the newspaper to attract buyers that will do the work for you. When you do it the way I tell you to do it, you’ve got heaven on earth because you don’t have to spend the time to fix up the property, which is one of the greatest things because when they come in to fix the property, they’re paying rent while they’re fixing up the property. When we’re fixing up the property, we’re not receiving rent, so it’s far better to have someone else fix up the property and you spend that time valuing your time like I started off the call with and making outbound calls, knocking on doors and doing other lead generation that will build your business. That’s far better than going and painting walls.
Question:
Jeremiah Stover has a trust questions. He says: I have not purchased any property yet, but I will be flipping and holding in Connecticut. Right now, all I have is bank accounts, a stock brokerage account and Roth IRA with stocks. I don’t think any of the assets are on public records unless my personal banking accounts are. What would you recommend I set up in the way of trusts and a business entity before I purchase my first property?
Answer:
Well, right now Jeremiah, I’m going to tell you, don’t worry. You already have what you need and it’s my Volume 4, land trusts and Volume 5, personal property trusts. You do not have to worry about setting up another entity or spending any more money before you go make some money and before you go buy some real estate.
So, what are you going to do first? Well, you’ve got some stuff, right now you’ve got a bank account, I want you to open a trust bank account and you won’t need that personal bank account any more. Stock brokerage account; let’s create a trust and transfer that stock brokerage account into a personal property trust. You said you’ve got a Roth IRA, well, let’s transfer those stocks into a trust that’s a personal property trust and we’re going to have your Roth IRA as the beneficiary of that personal property trust. Then when you do buy a piece of real estate, you’re going to buy that into a land trust. Later, as your assets grow, and as you have more to lose, then we’re going to add an LLC as beneficiary and I’ll teach you how to do that at MAS.
By the way, if you haven’t been to MAS, you absolutely need to come. We’re going to have two in January, in fact. One on the west coast and one on the east coast and we’re going to make it simple and easy for you guys to get everything you need because what we do is start off by teaching the land trust writing class. You bring your own deed with you to class and right there we actually do the paperwork. Then we create a personal property trust and I teach you how to open a bank account in trust. I also teach you how to transfer your vehicle into trust. And then, finally we create your living trust, well it’s not finally because we’re going to do more. This will actually be estate planning while you sit there. You’re going to know what you did, know how you did it and you’re going to have the paperwork to prove it. Then we’re going to go into LLCs, corporations and limited partnerships and how they fit into this overall structure. It’s going to be a magnificent way to get your estate taken care of. So, if you have not yet registered for MAS, Maximum Asset Shield, call 1-800-578-8580.
You go on to say, Jeremiah also concerning bank account personal property trusts, could you explain how the bank account trust works in connection with my business entity once I get one and do you recommend that I set up a bank account trust now?
Well, I think I already answered that, yes I want you to set up a bank account trust right now. And how does it work with your entities? Well, this bank account trust is going to pay all the bills related to the properties and all your bills too. Then any left over money that is due, let’s say you create an LLC as beneficiary of your land trusts later, once you’ve got more equity. Then we’re going to insert that LLC as the beneficiary of the land trusts. Then, we’re going to have that LLC actually have it’s own bank account. Any money that the LLC earns by being beneficiary of the individual land trusts will come to it by check from the bank account trust. The bank account trust writes a check for any net figure, in other words after expenses figure, that is due to the LLC and that’s how the money gets from the one trust to the other entity.
Now, if you remain the beneficiary of these various trust, then guess what, you just get to leave your money right there in the trust bank account and spend it accordingly. It’s a wonderful way to set yourself up.
Question:
Ellie Johnson: What happens when I have been filing tax returns and paying taxes and I now open these trusts and no longer have income? What does the IRS do? Please elaborate on this.
Answer:
Well Ellie, the IRS is not going to be bothered in the least that you transferred your properties into trust. Here’s why. When you place your properties in this kind of trust, this called a simple trust. This simple trust it flows through to your personal tax return or the tax return of whoever is the beneficiary. So, if you have an LLC as a beneficiary, it files the tax return. If you are the beneficiary, you file the tax return. The IRS doesn’t even care how the title is held. They care who is the party who has an interest in this and the interest in the avails, earnings and proceeds. That’s all they care about. They don’t care about title, so you’re not going to have any kind of problem at all Ellie.
Question:
Can you obtain insurance in the trust name or do you have to obtain insurance first in your name and then transfer it?
Answer:
No, you’re going to obtain the insurance directly into the trust name. Depends on who the insurance carrier is, but the way I prefer is that the title be issued in the name of the trust and the name of the trustee. Also, I have you listed as an additional insured because you’re going to be the manager of the property. ATIMA, as their interest may appear and that makes sure and for certain that it’s exactly where it needs to be.
Question:
Judy Latchford says: Hi Lou, this question is regarding a condo I purchased in Tampa, Florida in July 2006 for investment purposes. I live in St. Petersburg, about 30 miles away. The opportunity to invest in the condo conversion development was promoted by a guest speaker and my local _____(43:20) and it sounded like a great long term opportunity given the number of baby boomers who are expected to be coming to Florida in the next several years and who will want to live in condos. It was a 734 square foot, 1 bedroom plus den, 1 bath unit. The purchase price was $187,490. I used personal funds for the down payment and the balance is financed with an adjustable option ARM and HELOC. After the closing, I received a $15,000 builder’s rebate, which I used to repay the down payment and used the rest to make monthly mortgage payments. My current monthly payment on the option ARM, which was already increased since the purchase ranges from $871 negative amortization to $1907 for 15-year amortization. Of course, I also have the option of interest only or 30-year amortization payments.
For everyone on the call who doesn’t understand what we’re talking about. Some lenders offer what is called an option ARM and that means that you have the option of choosing what kind of payment you want to make this month. The payment can be a negative amortization payment, as was described here for $871 or 15-year amortization at $1907 or 30-year amortization. So, basically based on the amount of money you have in your bank account this month, you can choose which kind of payment to make. What a disaster. It’s the worst thing you could possibly do. It makes no sense what so ever for your long-term future. It is a stupid move and I highly recommend that you do not buy that kind of product because it has not real financial thinking behind it. It just is a bad move on anybody’s part. I understand why you would do it because it makes perfect sense when you hear it explained, but it makes absolutely no sense when you look at it from a purely financial stand point. Bad finances are not a good place for us to go.
Judy goes on to say: Of course, the he-lock monthly payment is $185 interest only. In addition, there are condo fees of $121, which are expected to nearly double this coming year. Although I advertised in several newspapers and online, I was unable to put a tenant in until October 1, 2007, so I have paid out of pocket the negative amortization and HELOC payments and HOA fees since August 2006. My new tenant is a HUD, Section 8 tenant and the most rent we can get is $870. Believe me, I advertised it for much more over the past year, but could get no takers. For this tenant, HUD required it to be a two bedroom, so I have added a door and a closet to convert the den into a bedroom, so it now officially is a two-bedroom unit. According to the property appraiser, the just market value for this unit is $111,535.
Now everybody, did you just get what happened? She paid $187,490, it’s now worth $111,000. Welcome to the current market that we are in. $76,000 loss is what Judy you are facing right now on this one property.
Now to the question. Is this a keeper, even with all the negative cash flow, assuming I get more properties with positive cash flows to offset it. If not, what can I do to get out from under this? Thanks for your help.
Answer:
Well, Judy, I tell you what. This is a horrible situation for you. Obviously, it’s going to take many, many, many years for this price to ever recover to what you paid for it. If this is truly correct and that’s all you can get, and the $870 is all you can receive in income, I hate to tell you this sugar, but this is really an indication that the value is about $87,000 using the 1% rule. 1% of value would be $870 and what we generally look at as one rule of thumb, although it’s not the only rule of thumb is 1% of value is the rent. I know that’s not true in many markets, such as in your St. Petersburg area and Tampa area where things went way up above market. They went for far more than they really should and in fact, we found out very quickly that the market found it’s way back to what people could really afford and that’s the reason that the value has gone down.
So, unfortunately Judy, you have a horrible situation. There’s only really two ways to handle it. One is to call the lender up and say, you can no longer make the payments and you would like to offer them a deed in lieu of foreclosure and just deed the sucker back to the lender. If they say no, then stop making payments and start collecting this $870 for a while to recapture some of your costs. Eventually the bank will foreclose. When they foreclose, that will go on your credit report and that will be a horrible thing.
But you know, I don’t like to recommend that anybody gets hurt in any transaction, and I want you to understand that it’s very, very important that I would never make this recommendation if I could see another way for you, but if these numbers are correct, based on what you’re telling me, you’re my client not the bank, I cannot say that it makes sense for you to loose six and seven hundred dollars per month endlessly. Because that’s exactly what’s going to happen here.
Instead Judy, what do I teach you to do? I teach you not to go to the bank, not to qualify for loans. I teach you that you’re going to be able to, in the future, you’re going to be able to take over existing financing in someone else’s name, on someone else’s credit report, that someone else paid the closing cost for. I teach you that you’re going to be able to raise money privately to be able to buy any cash deals that come across such as short sales and I teach you that you absolutely do not need credit to be in this game.
So, if this does in fact implode your credit, I want you to understand that you may not have hurt yourself as bad as you might think. Now, what I would do however, before you do this, is lets look at your credit. Hopefully you’ve been to Millionaire Jumpstart and if you have, I give you a credit contest and that is to improve the credit that you already have, to decrease your interest rates, increase your credit lines, increase your ability to transfer balances to a new card and do all of those things before you default on this loan. After and if you can apply for any additional credit or credit cards, do so now before you default while you still have good credit. Then call the bank and tell them the situation that you’re in. Explain to them that value has dropped so much, ask them for guidance on what else to do and I can tell you that I’ve guided several of my licensees that are in our higher level coaching program, we’ve gone through step-by-step exactly what they could do. We had one just a couple months ago, Victor had one that he had unfortunately before he got involved with Lou Brown, he purchased a property on a preconstruction deal, he got it committed and then he got himself trapped because later of course, it was ready to close, just a couple of months ago and he said Lou what am I going to do? The property is worth less. He said, I am just in a terrible fix. I had him go back to the builder and back to the lender and they lowered the purchase price by $60,000, lowered his interest rate, took it from an adjustable rate loan to a fixed rate loan, gave him a cash flow position and he went ahead and closed on the transaction.
So, Judy, unless your bank is willing to lower the interest rate and put it on a fixed rate loan where you can make a cash flow on it, there is no other alternative than for you to default on this thing and try to recapture and regroup and unfortunately you made a bad decision there, but we’re not going to do any more in the future.
By the way, everyone on this call. I just want you to pay attention to me for a second. Coaching is the key. We’re going to make sure that you guys don’t make these kinds of mistakes in the future. Now, we’ve got several levels of coaching. We’ve got our group Q & A, which we’re doing now, we’ve got our direct Q & A, which you can do any time during the month, any questions, deals your working on, problems, anything. We’ve got our one-on-one, where I am coaching you on your business and your business plan and we’re actually working it on a month-by-month basis and then finally we’ve got the platinum level coaching. Regardless of which level you can afford, I want you to get involved in coaching. It is so critical that you do not make mistakes such as Judy just outlined for us. I really feel bad for Judy and frankly if she had been on my coaching, she would have never done this deal in the first place and that’s a lesson for all of you to learn. You’re not going to make bad deals if you can be coached by somebody who has 30 years experience.
Question:
Brenda Romero has a question on taxes. I own property net, net, net, leased in Wisconsin and Arkansas. I pay federal and state income tax in California. Should I file in the state the income is generated in?
Answer:
First of all, let me explain to everybody on the call what net, net, net, leased is. Triple net, leased means the customers who are using and renting the property is paying their portion of the property taxes, their portion of the insurance and their portion of the maintenance on the property, which basically means Brenda’s income is pretty much real money when she gets it.
Now Brenda, here’s the good news. You pay property taxes in those states where you have those properties, so you are paying taxes there; you’re just not paying income taxes there. The owner files in their state of residence, whether that be the LLC, the corporation or you, related to the real estate. Besides, you have depreciation offsets on this property as well, so therefore, your income is probably not as great because of that wonderful thing called depreciation, where the property is going down in value while it goes up in value. I call it voodoo economics, but the federal government doesn’t. They give us all kinds of credits for being in this wonderful game called real estate.
Question:
Jim Anderson has a question in forming a new real estate business, how much loss, business set up expense and for how long can it be reported on my taxes? One year, two years before owning any real estate?
Answer:
That’s a good question Jim; it really depends on your personal situation. You can’t write it off forever. You do have to have some kind of income in the arena that you get in, however, you can have some losses for research and development, just as any corporation does. As they research a new business, and they look at it, they can write off the costs of researching and developing that new product or that new line of business and you can do the same thing. But generally, you’ve got to have income to offset expenses in our arena, so what are you going to do? You’re going to look at your personal situation and you’re going to look at how long you’ve been in the arena without making money. What I want to do is help you make some money very, very quickly in the real estate business so you won’t ask me a question like this. Because if you were buying real estate you’d have something to offset any expenses that you’ve made and it’s absolutely critical that you get into this business and land with both feet.
Question:
Website question from Lynn Beason: I don’t understand the bandit sites. What if they find you on the nonbandit site? I think I’m missing something.
Answer:
Well Lynn, the way this works is we give you the opportunity, if you’re one of our website owners, and by the way, those of you who don’t know about the websites on the call, we have designed websites, both buying, selling and borrowing websites that tie in with our overall Street Smart program and it matches all of our paperwork, it matches all of our methodology, it matches what we say to customers using our script. It matches to the seller presentation kit, the buyer presentation kit, the lender presentation kit. Everything matches. That’s exactly the kind of business that you want to have. You do not want a patchwork quilt business, you want one that all of the elements of the business match.
So, what Lynn is talking about is we offer our customers the addition of two additional websites, we call them bandit sites, that allows you to be able to market, kind of risky marketing, such as bandit signs, where you place those on the right of way and on telephone poles and things like that. But you can get in trouble with the sign police. So, what we want to make sure of is that you don’t get in trouble and the reason is, you’re going to use a completely separate domain name from your general buying domain name or your general selling domain name and that other domain is the one that’s going to take the hit, so to speak, if any body calls to fine you on putting out signs or something like that. You can call in and get a tour of the sites and they’ll explain more about that. Call 1-800-578-8580 and they’ll explain more about how that works. It’s an amazing thing to be able to build your business the way I tell you to build your business and if you’ll do what I tell you to do, you can’t help but win.
