Lou Brown:

Hello ladies and gentlemen, and welcome back to another installment of our Street Smart group

Q and A, where you ask the questions and I give you all the answers.  I’ve had an exciting last couple of weeks.  We had our Millionaire Deal Maker event, also been to Ohio for a three day stint there.  Lots of great turned on investors that say, “If you’re not turned on about today’s market, you’re missing the opportunities that exist.”

Right now, should not be a time of concern for you, except for how many properties can I buy in the shortest period of time.  The reason I’m saying that is, because people are literally giving away their properties.  We just witnessed it during our Millionaire Deal Maker.  Where folks brought deals to the event, and they worked deals during the event.  We saw folks making money left and right.

So, that’s exactly what I want you to be doing here now during this market.  People are sometimes concerned that in today’s economy you’re not sure if you can rent it.  Let me tell you something, we’ve got a number of folks on our Platinum and Gold program where we are one-in-one together on monthly coaching calls.  One of the things that I have been hearing over the last month is that a lot of folks are completely full, 100% occupied.  Whereas, one year ago, the market was completely different.  They were struggling to get their properties filled.

Today, my advice is to start raising rents, because we are seeing that there’s lots of folks in the market place.  They do have down payment money…they can afford the monthly rent.  Those are, exactly, that kind of customers we want long term.

So, that’s where we’re striving ourselves and paying attention to where the market is today.  Remember that one of the reasons you want to be on a continual coaching program is to get the latest based on the current market.  The current market place that we’re involved in.  It’s so critical.  So, lets all pay attention and take advantage of this, and not be in fear, but be in action to take advantage of it.

Now, let’s turn to our coaching calls and the wonderful questions that you guys have been submitting.  Got a lot of them this week.  Adjustable rate mortgages on home currently owned.

Velva from Florida has sent me a question.  “Great seeing you at MDM.  Before becoming Street Smart, I obtained an adjustable rate mortgage on my primary residence.  It seemed to be my only option at the time.  I spent a fortune on the wrong seminars.”

I think she means, otherwise I wouldn’t have done that.  I agree with you a thousand percent Velva.  Of course the Street Smart system is that we don’t go to banks.  We don’t qualify for loans.  If at all possible, and I give you so many reasons that it’s possible not to, why don’t we just go there and stay there?  In your case, we have got a situation we’ve got to clear up and it’s this adjustable rate loan.

It says here, “That it is about to adjust and is currently upside down.  I can’t re-finance due to no proof of income.  Recently, when the president froze interest rates, I contacted Bank United, the lender in Miami.  Have you heard of them?  I asked how it affected my loan.”  They said, “It didn’t.  That it was not a sub-prime mortgage and that I had good credit.”

“I am ready to call again.  The loan is more than the property is worth.  I won’t be able to pay a high increase.  Should I act as though I am the financial advisor or myself?  Please advise, I will let you know the outcome.  Thanks so much.”

Well Velva, here’s what I would do.  First of all, the president did not freeze interest rates.  So, I’m not sure what you’re referring to.  What they did do, was lower the federal rates.  That can have an affect on bank rates.  However, bank rates are based on bonds and mortgage backed securities and sale of those.  So, that doesn’t really have a direct correlation to mortgage interest.  However, mortgage interest these days is fairly low.

Now, what we do know is a few things to be true,  Number one, lenders are doing loan modifications these days.  They are doing them in droves.  So, one thing I would have liked to have known in your question…is who your lender is.  I can quickly say that EMC, Select Portfolio, and a number of others are doing what I call loan modifications.  In fact, it’s a forbearance agreement and a loan modification, if the loan is behind in payments.  If it’s not behind in payments, it’s merely a loan modification.

What I would recommend, is that…it is better when someone calls the bank as a financial advisor, rather than themselves.  Because of your knowledge, you can probably present yourself a lot stronger than if they were approaching you as an owner.

So, let’s think that either you, or someone you know, will be calling them as a financial advisor.  Now, keep in mind, that they may also call you direct.  So, keep in mind that it might be good to have a different voice asking these questions.  Or, alternatively, that a different voice is you, when they do call.  Now, if they do call you, I would merely ask them to put every question in ___5:53 a homeowner that you can control as a financial advisor.

Now, with all that said, one thing I would do is to look at the interest rate.  Number one, you’ve got a problem.  You’ve got a loan that’s an adjustable rate.  Secondly, it’s, probably, at a higher rate.  So, what I want you to do…is begin by asking them to modify the existing loan, to a fixed rate, at 5% interest.  That you’ve advised your client that based on their entire financial picture, it is advisable that the rate be fixed at 5%.  Can you handle that?

If they come back and you negotiate a little higher then that would be okay.  At least you’d have a fixed rate loan and one that you can manage.  Yes, they can modify the existing, ___6:48 they’ll do and it merely takes the adjustable rate and makes it a fixed rate for the term, or for the life of the loan.

So, that would be the best way to handle that one.  Do let me know how that comes out.  There’s lots of these banks out there that have their own interpretations of things.  Basically, because your loan is a performing loan, and, because it’s not behind in payments, they have, absolutely, no motivation to cooperate with you.

So, where you have to go is to the area that, “Hey, this loan is not behind right now.  __7:23 What we’re trying to do is mitigate the problem before it occurs.”  That may be why you got the response that…they are not in a position to fix yours.  That they’re telling you that you have good credit.  Well, tell them that’s not going to last long, because all the loans are about to go into default.  Credit won’t mean anything, and further the option of re-finance is, simply, not an option in this case.

Okay, hopefully, that cleared it up and all of you who are listening, how does this affect you?  Well, you may be able to take an adjustable rate loan and make it a fixed rate loan as well, for you own property.  Secondly, when you’re working with clients who are selling their property, you can do exactly the same thing.  Negotiating with the bank to adjust the rate, or adjust the term of the loan to a number that you like.  Remember that one of the ways that we create equity in deals is by working with lenders.

Okay, the next question is from Beau Jesperson.  That’s our friend from Maine.  Who says, “He has a deal structuring question.  Thanks for taking the time to answer some questions on this beautiful evening.  I have the hardest time in this business with deal structuring.  I cannot get to MDM until the fall.  I love using your cost to sell form.  It not only simplifies things for the seller, but helps me determine a good offer to make.”

“My first question is, after the form is filled out completely, can I just add in my profit to the bottom line… and then make that number my offer?  This seems too simple to be true.  Am I missing something?”

Absolutely Beau.  You’re missing a great opportunity.  Let me explain.  We have two forms in our system.  One is the cost to sell worksheet.  The other is the property acquisition worksheet.  Now, they differ.

The cost to sell worksheet is designed as a tool to show the seller what it’s going to cost you to sell their home if you were to sell it the traditional way.  Your property acquisition worksheet, on the other hand, is where you’re going to calculate, exactly, what you’re numbers are based on your exit strategy.  Obviously, our exit strategy is not going to be to exit with the traditional exit plan.  We’re going to do some things differently.

Now, here’s what I would do.  When you’re working with the cost to sell worksheet, you’re, absolutely, right, it simplifies things.  It makes things very clear.  When you put your profit down at the bottom, don’t let it be a number that you select.  Let it be a number that they select.

So, here’s how it works.  You go through the cost to sell worksheet; you are working with the seller, in this case, to come up with numbers.  The numbers are not the sellers numbers, the numbers are your numbers.  What it’s going to cost you to sell their home…when you go to sell their home.

Now, with that in mind, you’re going to have some costs.  One of the costs you have is your costs of funds, and all the other aspects of it.  Now, with that in mind, what do we do when we get down to the bottom?  We turn around to the seller and we say, “Now, would you agree that these will be my costs when I go to sell the home?  Would you also agree that these will be your costs if you sell your house the traditional way?”

You get agreement there, then you say, “If I can go, obviously, I haven’t made any money, if these are my costs and your costs.  So, let me ask you another question.  “What do you think would be fair for us to earn, to solve your problem today, make this headache go away for ever right now?”  You ask the question, let them answer it.

Sometimes it’s 2,000.  Sometimes it’s 5,000.  Sometimes it’s 10,000.  Sometimes it’s 5%.  Sometimes it’s 10%.  It really doesn’t matter…whatever they say, you say, “Thank you.”  You write that number down, you add all the numbers up, deduct it from your asking price at the top of the sheet, and that gives you the final number that is the final offer price.

Now, that number gives you the opportunity to, significantly, discount an existing value of a property.  It’s a wonderful and extremely powerful tool.  That if anyone of you who are listening today do not use it, you absolutely should.  It really makes the process of presenting to the seller, and also getting an offer on the seller’s table much easier to do…as Beau says.

Now we have a purchasing property question from Janice.  Who says, “Hi Lou, first let me say I love these Q and A’s and find them extremely helpful.  Here’s my question.  If you take over a first mortgage subject-to, and short sale a second mortgage, how does that affect the sellers credit?”

All right, let’s start there.  In the example that Janice is asking about, by the way, this is not my wife Janice.  This is Janice, it doesn’t say whose last name, but it’s welcome aboard Janice.

Now, let me say this.  In the example that you’ve given here where we have got an existing first mortgage and we’ve got a second mortgage.  What you’re describing is we’re going to short sale the second mortgage.  Then we’re going to keep the first mortgage in place.

So, let’s use an example.  Let’s say that it’s a $100,000 property.  There’s an $80,000 first mortgage.  There’s a $20,000 second mortgage.  In order to create our equity, if the property’s only worth $100,000…there’s really no way we can buy that property unless we get rid of that second mortgage.  So, what we do is work on a short sale to discount that second down to 500, $1,000 and then take subject-to the first.  If the first has a good interest rate.  Say, five, five and a half, six, six and a half, those are all good interest rates up to as much as eight percent interest.

So, I will take over that existing financing and get rid of that second mortgage.  In your question you’re asking, how does that example affect the seller’s credit.  After all, we are discounting the second mortgage down to zero and the bank’s going to take a hit on this thing.  They’re only going to get about $1,000 on a $20,000 loan.

So, first of all, it will show on the sellers credit report as a charge-off.  Or as a pay-off.  In some cases, it says pay-off at a discount.  Don’t worry about that.  We’re going to use the fact that you’re also taking over the first mortgage as leverage for the seller and benefit to the seller.

Here’s why.  When you make the monthly payments on that first mortgage, having bought the property subject-to the existing loan…then that gives you the opportunity to build, guess whose credit?  The sellers credit, because remember, the loan remains in their name on their credit report.

So, every month that you pay your payments on time, it helps the seller.  It doesn’t hurt the seller.  There’s a wonderful little spread there for them.  Its going to show up on their credit report as having been paid as agreed.  This gnarly second mortgage is going to show up and it’s going to say whatever it says.  I would simple say, “That we can cross those bridges when we come to them.”

There’s several steps you can take to overcome the sellers fear.  First you say, “Well, let me ask you a question.  When where you planning to go buy another house?  Several years from now, that’s fine.  Why don’t we do this?  When, if this were to come up as an issue then, please let me know and we can work with you to clean up your credit.  We can even have this removed from your credit at the right time.  It’s easier when some time has passed to get things removed from credit.”

“So, what we want to do is go ahead and work with the property you have here.  We’re going to get the issue dealt with.  Then over time, we’ll be able to remove this from your credit report.  Would that work for you?  Yes, good.”

Remember that the other issue that sometimes come up, because you’ve asked a second question. “Additionally how do you respond to the sellers when they ask these types of questions?  One of the other questions that they will ask is about taxes…and will the fact that the lender has written of this second mortgage affect their taxes?  Will they have to pay taxes on the income from the lender writing this off?”

The answer is no.  You see, folks have the right to sell a property and take their exemption.  Therefore, if they take their exemption, then there’s going to be no taxes.  They have the right to sell a property for any price.  It doesn’t have to be higher than they paid for it.  It can be lower than they paid for it.  In that case, it’s a sale or disposition of the property, and the IRS says, “That’s fine.  You can sell it at whatever and there’s not a tax involved.”  Good stuff.

All right, we have a question from Carol.  “Hi Lou.  This is the most beautiful time of year in Atlanta.”

I agree with you Carol, it sure is.  In fact, my friends in the north, you should just know that Atlanta is blooming all over.  It’s, absolutely, utterly gorgeous.  In the next few months, you’ll see it too, where you live.

“My question is from a seller concerned about a loan that is non-assumable.  I understand the subject- to process, and how the paperwork protects both of us.  I just want to know what to tell the seller.  Thanks for everything.”

Well Carol, the best way to really do this is as I was answering Beau’s question earlier about the cost to sell worksheet.  When you re filling out your cost to sell, fill out in the cost of funds section, how much it would cost you to if you were to go to borrow the money from a traditional hard money lender.  Five points, fifteen percent.  In other words, it’s a very high rate, much higher than their existing loan.

Then, when you add up all your numbers, you show the huge number down at the bottom.  Then you can tell them, “That there is one other way that you can give them more for their property…and that’s if you were able to take over their existing financing.  Then, your cost of funds would be so much lower, which would mean you could pay them more for their property.”

“Would that work for you?  Yes, good.” Boom, so we just converted a seller from fear of the subject- to, to embracing of the subject-to, because they, actually, end up with more, because they agreed to it.

Hopefully, that made sense to all of you.  That’s a wonderful question, when we run into sellers and saying the right thing is so powerful.  Well, we, actually, not only say it, but we also show them in writing, exactly, why it makes perfect sense for them to do it.  They, actually, see that they are going to be getting more for the property.  Or have to pay us less, for us to buy the property, because of the way we structured it.  That’s fun stuff.

Janice asks a question, “Hi Lou, this is…thanks for a great MDM in Atlanta.  I will be there for MPI in June.  Here’s a question I have never seen addressed.  How do you deal with restrictions…that is over-55 communities?  I have a few years to go before I reach 55.  Is there some creative way to approach these deals, if they come up?  Does this restriction relate to the age the people who lived there or age of ownership?  As always, thanks for your insight.”

Well, let’s answer the last question first.  It is not the age of ownership; it’s the age of the person, who is living in the property, in the community.  What they’re saying, of course, is they’re trying to restrict the type of folks that live there.

Probably, presuming that it’s going to be a lot quieter community, because there’s no children there.  There’s grown-up people.  In fact, there’s adults there that are passed the stage in life where everybody is acting out, and acting up, and divorcing, and running from home, and all that nonsense is over now.  So, they’re enjoying the different end of their life, where things are calmer.  They want to be with like people in the community.

So, the challenge is this, Janice, when it is a restricted community, those restrictions are in the deed.  Furthermore, they have covenants that have to be abided by in the community.  When you buy into a community like that, you have also bought into everything that they say is how that community is to be governed.  Like minded people have come together and say, “This is how I want to live my life.  This is how I want it to be right now.”  So, when it lays out that way, you really don’t have a choice in trying to get around their rules.

About the only thing that may be possible, is that some communities allow owners within the community to lease their property.  For example, if they had to go to a nursing home for an extended period of time.  Or they had to leave the state for any extended period of time, such as the care of another individual, like their parents.  Then they’ll allow them to rent the property for a short period of time, to allow them to have income, and not have a blight on the community such as foreclosure.

So, my first advice would be…we need to know the rules.  What are the deed restrictions?  What are the covenants?  Let’s read those know what the rules are before we can really figure it out.  Figure out if there’s a way around them or not.  Works with mortgages too, you’ve got to know what the rules are before we can figure out what the solution is.

Now, Keith from Ohio has a question.  “Are there many subject-tos out there given the number of bad mortgages that were sold?  What is your process to determine if the subject-to is a valid option?”

Well Keith, let’s just put it this way.  Every single mortgage on a residential property, from a one family to a four family, is fair game for subject-to.  So, then the way you discern whether you want to take the property subject-to the existing loan or not…is where is the equity?  If the subject-to balance is, significantly, below the value of the property, then that’s the number one criteria.  That number one, there is equity in the property.

Now, number two, what is the interest rate, because after all, the interest rate affects your cost of funds.  Your cost of borrowing.  So, whether you were to get it from the bank, or we take over an existing loan, its still a cost to the property.  We have to make sure that there’s enough money in the deal in order to make cash flow.

So, number one, we’re making equity.  Number two, we’re making cash flow.  If there’s not enough equity, or there’s not enough cash flow, then we’re going to have to create it.  So, the existing loan means nothing.  The only way we will be able to buy that property, is if the seller pays us our monthly income, or a big hunk of money for our equity, that we need to have in order to deal, do the deal in the first place.

Or, we go to the bank, and ask for a discount.  That’s a short sale.  So, either way, as you’re looking at the deals, you’re looking at…how is my equity going to be created.  Then how am I going to fund this deal?

If you’re able to get a low enough price on the short sale of the property, then you can afford to go to a hard money lender.  Say, five points and fifteen percent.  If, on the other hand, it is a higher number, then you will have to wait.  It’s too bad, so sad.  You won’t be able to buy the deal, because there’s, simply, not enough equity.  Or there’s not enough cash flow to make it happen.

So, remember we first look to the seller.  If we can’t get it there, then we look to the bank.  If we can’t get it there, we don’t go forward.  It’s, simply, got to be creative.  So, the equity is either there, or the equity is created.  That’s what your job is.  It’s a great question Keith.

All right, rehabs.  Bernice Stewart has a question.  “I’m in Ohio.  I’m doing a rehab on a house in a blighted neighborhood with crime.  What should I make sure is in the insurance policy?  What type of rehab policy should I get?  What’s the average cost?  Any suggested companies, is the question.”

Well Bernice, lets start with, we do have a relationship.  In fact, all of you that are just getting on board with our program, will be pleased to know that we’ve created about every solution for the real estate investor.  So, yes, we’ve already sought out the very best prices and the very best solution for you.

It’s what I call the power of Street Smart.  The power of Street Smart is that we use you, I mean your buying power, as the ability to get a discount from wonderful suppliers…just like Wal-Mart does.

Wal-Mart uses the power of Wal-Mart, which is their tremendous buying power, to hammer and get the lowest cost they possibly can from their vendors.  We work the same way for you on behalf of yourself and Street Smart.

So, what I’ve done for you, is you can call Renovators Insurance.  Renovators Insurance, 1(800)790-4872, that’s 1(800)790-4872, and what they’ll do is a Street Smart deal with you.  Bernice, in the case of how they determine the value…they do that on a basis of; I believe its ten cents per thousand.  They come up with a, excuse me, ten cents per hundred.  They come up with a number that is the cost on a monthly basis of your insurance.

One of the wonderful things they will do is set up what’s called a builders risk policy.  Then they will allow you to add and subtract properties each month.  That means that you can control your costs and control your cash flow, because you only have to pay for your insurance on a monthly basis.  How does that sound?  That’s a great way to handle rehabs.

Now, you said, “What should I make sure is in the insurance policy?”

One thing they have in their insurance policy is theft of materials on the job.  Its one of the biggest problems and biggest hassles we have with rehab properties.  That folks come on the property and steal our copper, our air conditioning unit.  They steal whatever equipment is on the property.  Any supplies, tools, things like that.  You can mitigate that by having a policy that includes that provision which Renovators does have.

Then you said, “What’s the average cost?”

Well, that’s going to be determined by several things.  You already said, “It’s a neighborhood with crime.”  So, in fact, that, usually, increases the cost.  Let me not say that, let you find out for yourself. When you, actually, give them the address of the property, they can give you a quote.  If you like the number, you go with it.  If you don’t like the number, you keep hunting for insurance.

Now, one thing to keep in mind is that Allstate or State Farm don’t even bother to go in there.  They’re not going to insure this kind of property.  They only like nice houses, in nice neighborhoods, that they are unlikely to have claims on.  So, they are what we call premium insurance and, because they mitigate their risks of loss, then they also can afford to charge you less.  In nice neighborhoods, nice houses, that’s the kind of insurance you get.

When its renovation houses in blighted neighborhoods, the Renovators Insurance is what you get.  Hopefully, that made a lot of sense to all of you, because that’s a great resource to be able to move yourself down the road.

Now, we’ve got another question, “Is using self directed IRA’s to do rehabs doable?  How do you show benefit to the private investor since its short term?  How do you handle the risk factors?  Thanks for responding to my questions.”

Okay, first let’s start with the question of, can a self directed IRA do a rehab?  The answers absolutely it can.  Now, there’s several different ways the IRA can participate.  One is it, the IRA, can purchase the property and then put up the funds and renovate the property.  Then the IRA would own the property.  Now, when the property sells, it would make the profit.  That would all go back to the IRA.

That’s one way it could participate.

The other way it could participate, is that someone buys the property.  Then they need rehab funds, so they go to your IRA.  Your IRA lends them the money, say $15,000 for the rehab.  Then, that money is payable when the property sells.

So, the…typically, in a scenario that I teach you to set up, is that you do not have monthly costs.  In fact, those rates, if accrued on a monthly basis, and then they accrue until you get to the sale of the property.  Then you write one, big, fat, check upon the sale of the property back to the IRA.

So, the question is…next that you have is, “How do you show benefit to the private investor since its short term?”

Well, it depends on how short term it is.  It depends on how, what they are looking for as a return in their portfolio.  Now, quite honestly, many folks in their IRA’s are only earning one or one and a half percent in their IRA.  That’s an annual amount of interest.

Now, just imagine that you can come along and say, “Listen, I will pay you one percent per month for the use of your money.  Or a half percent per month.”  Whatever number is doable, that’s the number you want to focus on.

What I generally say is, “How much are you currently earning on your un-invested funds?”  Then I say, “Well, what if I could triple that for you with safe secure real estate?  Would you be interested?”  They say, “Absolutely.”  Then I show them my lender presentation kit.

Folks, if you don’t have that, it’s a powerful tool, because it really, it takes it out of your hands.  You’re likely to blow it up, and flub-a-dub, and not know the right words to say, and not get the lender comfortable with doing business with you.  Let the lender presentation kit do the work for you.  It’s all there.  All the details, every thing’s built into the system.

So, what you should do with your flip chart is show them what you can do.  In fact, you can even help them set up a self directed IRA account.  You can help them get their funds moved to this self directed IRA account.  Then you can borrow from their self directed IRA account.  That note that you give their self directed IRA account, then gets paid off when you sell the property.

So, make that distinction, are you in a position based on funds in the account to own the property and renovate it in the IRA?  Or are you just in a position to loan the money for the property to be rehabbed?

Now, one thing to keep in mind is you cannot what’s called, self deal.  That means, use your IRA money for your own deal.  So, one way to manage that is to do it third party.  Let’s say that the property was bought by a friend.  That friend held title to the property.  You loaned, to the friend, the amount of money necessary to do the rehab.  Then the rehab gets done, and then you can buy it from the friend after that, for example.

So, there’s ways to work around the situation of an IRA.  It can be extremely powerful to use IRA’s.  Very, very beneficial.

Now, we’ve got a selling question from Beau.  Who says, “Hello Lou, my second question is, if I am going to sell a home on a lease option, when filling out the cost to sell form, how do you handle the monthly expenses and the real estate commission?  I don’t intend to pay for either of those.  Do I just put a zero in those blanks?  Or do you give yourself some vacancy percent?  Thanks again, and I look forward to seeing you in action this fall.”

Well Beau, remember that in the cost to sell worksheet, when you are buying, what you’re doing is illustrating to the seller what your costs would be, if you were to sell the house the traditional way.  Of course, everybody understands that the traditional way is if you sell your house for cash.  The new customer comes in with a new loan.  They pay off the old loan.  They pay off you.  You’re all done.  That’s the deal.

In our example, we are investors, so we pay the highest rates for money if we have to go to a private money sources, such as private money lenders.  So, we have to pay five points and fifteen percent.  In your example, you’re, actually, showing your hand to the seller.  You’re showing them how you’re going to sell the home.

Now, here’s what’s clear.  What needs to be clear.  When you are buying, you are showing the highest cost you could have.  When you are selling, then you are going to reduce those costs as much as you, possibly, can.  That differential is where your profit is.

So, we’re going to be very careful that we do not sell for cash.  We do not sell the traditional way, because it’s so powerful to not do it that way.  It’s so powerful, instead, to be the bank and help buyers to qualify for a loan through you.

The way you do that is you start them off on the lease option program.  Then, you convert them over to the owner financing program.  That’s all built beautifully into my system.  So, you guys are all taken care of there.  That really is helping some folks, I think, to understand how to use the power of the cost to sell worksheet.

Now, we have a lease option rental question from Keith who has, who says, “Rental contract: one how should I, how would I fill out the form so that I don’t charge for one fish tank?  I wasn’t planning to charge extra in this case.”

Well Keith, let’s start off with…how much damage can fish do?  The answer is a lot.  If that aquarium were to burst, the water would go all over your wonderful carpet.  Now, seeping through your carpet, it goes to your wonderful particle board floors.  When your particle board floors absorb the water, it becomes like a sponge.  Have you ever seen a sponge grow once water gets in it?  Well, that’s, exactly, what happens to your underlayment or your floors underneath, unless they’re plywood.  That they don’t stay moist for a long period of time.  The answer is we, simply, don’t know if that could happen.

So, what you might do Keith, you can definitely cut the cost on a fish tank, but I want you to consider the real costs.  I was going to say that what you should do is count the fish and charge accordingly.  You charge $15 for each fish each month.  One hundred and fifty dollars pet fee.  Aren’t fish pets?  Then, they ought to pay pet fee too.  I’ll give you this, at least you charge for one aquarium.  One fish tank, you call it, and depending on the size.

I mean, I’ve had tenants that had salt water aquariums.  I’ve had tenants with big aquariums, and yes, we charged them for that.  We just said, “That, because of the risk of loss and damage that we have to charge for it.  You have a choice, don’t bring the fish.”  That way you’re able to make your point…that there should be always a fee when pets are involved.

Another question, “Rental contract indicates management is not responsible for any maintenance.  Thus, renter is responsible for furnace and air conditioning maintenance, correct?”

You know, that’s, absolutely, right, Keith.  The tenant is responsible to change the filters.  In fact, in our rental agreement, it does talk about these things.  Furnace maintenance, for example, in paragraph fourteen H, furnace maintenance.  Residents shall change furnace filters monthly during the heating, cooling season, right.  They’re not going to do it.  They agreed to it in the agreement and that’s all I care about.  Therefore, they’re responsible for changing out the filters.

The other thing to keep in mind is the way my system is designed, is that we do offer rental discounts.

Here’s what we do.  If the property is rented at $1,000 a month.  Let’s say that my net rent I want, is $1,000 a month.  Then I’m going to write the contract, in paragraph three, for $1,050 a month.

Then in paragraph four, I’m going to give them a $50 discount.  Down to a $1,000 for taking care of minor maintenance and prompt payment.  If they fail on either one of those, then they lose their discount for that month.  You earn the 50, 75, or $100 increase that you’re charging, if they don’t pay on time or take care of maintenance.

So, that’s one way that you can mitigate the risk of minor maintenance.  We explain it to the tenant that way.  That we offer a discounted rent program.  They’re earning the discount every month that they take care of the minor maintenance themselves.  It’s a wonderful thing.

It goes on to say, “Are there any limits to what maintenance means?  What if the furnace, AC breaks and it costs $700?  Should there be a limit specified?  Maybe the difference is maintenance and repairs as such, how can I be confident they will keep the furnace and AC in shape?”

Okay, so several questions here.  First, let’s deal with the $700 question.  When the furnace or the AC breaks, what are you going to do?  You’ve got to have that repaired.  Now, the next question is, does it also include an option agreement?  What we do is we give our tenants the option to purchase the property.  In that case, there’s a deductible built into the option agreement.

For example, that they would be responsible for the first $500 of any repair…we cover anything over that.  That’s dealt with in the option agreement.  In the rental agreement it really doesn’t specify, but I clarify that in the signing ceremony, when I explain to them that we’re going to cover minor maintenance and repairs.  Excuse me; they are to cover minor maintenance and repairs.  We don’t cover any of those.  So, that should clarify that for you, that you’re going to handle the big stuff, and they handle the small stuff.

The rest of the question, “Should there be a limit specified?”

Doesn’t have to be, you’re going to take it on a case by case basis.  If they call you, you are going to fix it.  If they don’t call you, guess what?  You just kept the money in your pocket.

“As such, how can I be confident they will keep the furnace or AC in shape?”

About the only way you can be confident is do routine maintenance inspections.  Where you check it yourself to see what you find.  To be quite honest with you, we don’t spend a lot of money on that part of it.

What I’ve found is…it’s the law of averages.  When you’ve got 50 houses, and one, an air conditioning unit breaks, then you go fix it.  If on the other hand, you try to inspect 50 houses, it would cost you a lot more than an air conditioning unit.  So, I just let things ride, so to speak, and I figure that my properties are going to turn quick enough for me to have a chance to look at them.  I’m just trying to help you guys look at your properties in a slightly different way.

Now, this does not mean that I want you to be slum lords.  I’m not one, and I don’t want you to be either.  What I’m saying is there’s a time and a place.  Generally, when we do all this is between tenants.

Now, if I’ve got somebody that’s been there for years.  They’ve taken good care of the property.  All that sort of thing, then we’re going to cut them some slack.  If the air conditioning goes out and they’ve been a good tenant, my goodness, we’ll handle that.

So, you’re going to take them on a case by case basis.  If they’re a pain in the neck, you’re going to charge them as much as you possibly can, according to the terms of your rental agreement.  See, they earned my favor, I don’t necessarily give it to them…they earn it.

Now, next question is, “My insurance company’s opinion was that the renter should add me as an additional insured on their policy.  I don’t see that in your renter’s contract.  Is that a value?  Is there a gap?”

Well, let’s go to page 110 of your volume two.  This is the fourth page of your rental agreement.  In paragraph seventeen, it says renters insurance.  Resident agrees to purchase comprehensive insurance known as a renter’s insurance policy.  Against all perils including, but not limited to insurance on personal property, and property of other persons, from protection of loss, due to or caused by theft, vandalism, bursting or breaking pipes.  By or from fire, wind storm, hail, flooding, leakage, steam, snow, or ice.  By or from running water, backing up of drainage pipes, seepage, or the overflow of water or sewage on the property.  Said policy shall include liability coverage of $300,000 minimum.

Okay, now that should clarify that we expect them to buy the renters policy.  Yes, you can be named on their renter’s policy.  Yes, their insurance will do it.  You can explain that you may be on the property.  Therefore, you want to have some liability coverage.  That should cover it for you.

“They also noted it should be $500,000 liability, $5,000 medical, where your form notes 300,000.  Is there merit to increasing this?”

Well Keith, the way that I look at it, is it is the tenant’s policy.  I would love for the tenant to have a 500,000 liability, but the problem is the cost.  At some point, it becomes too costly.  I’d rather them pay me rent than to pay the insurance company too much money.  Now, I’m sure it wouldn’t surprise you that maybe the insurance company is trying to sell more insurance.  Get more premiums.  So no, I’m happy with the 300,000.

By the way, that’s just the tenant’s renter’s policy.  My renter’s policy, which is a landlord-tenant policy on the property itself, also has coverage and that is 500,000.  So, don’t get confused, the renter gets renters insurance.  You get property insurance; the property insurance also has liability coverage in it.

Then on top of that, you can even get what’s called an umbrella coverage.  That is general business liability coverage that picks up where the policy leaves go.  So, if the policy leaves go at 300,000 or 500,000…then the other policy picks up and goes up to say a million, two million, three million, whatever you can afford.  All this comes out of your cash flow.

Another question.  “Will performance clause be interpreted in court as a deposit?  Thus, get into paying interest on that amount?  Should there be a clause to that effect in the contract?  That I don’t pay interest on the performance moneys.  There is a law about paying interest on deposits in Ohio.”

Okay, let’s go there first.  Let’s think about it.  If you address this in the agreement, then you’re going to have to pay it.  If someone creates a complaint or grievance against you later that you didn’t pay the insurance, excuse me, not the insurance.  That you didn’t pay the interest, then guess what?  Pay it.  Just pay it then.  If they say that, “You’ve got to pay this, that, or the other thing.”

Let’s look at the law first.  Now, all of you can go to louisbrown.com in the member’s only section.  You go to user name, which is student.  Then you go to password, and you put in the password on your computer disk.  It may say, “W-E-J, followed by a number of numbers.  You’ll insert those numbers, and that is your security system, your social, or your serial number in our system, where you have access to the special member’s only section.

Now, in the member’s only section, you can go and click on Ohio.  You can find a copy of a deed, a copy of a mortgage, a copy of your landlord-tenant law, copy of the foreclosure laws for Ohio, and also the notarization requirements for Ohio.  This allows you to, totally, adapt my system to your state.

Now, with that said…why don’t you go there and read what the Ohio landlord-tenant laws are.  Then you can be informed as to what you need to do.  Sometimes the laws do say that certain things have to be in the rental agreement.  Good, then put them there.  Just go to special stipulations at the end of my rental agreement.  Add them, whatever clause it may be and that way you’ve got yourself covered.

If it’s not required, then one question I would have is…what is the penalty if you don’t do it?  In the case that you just brought to me, it may be that the penalty would, simply, be to pay the interest.  So, let’s look at that.  That may be the best way to just leave it.  Leave it as is.  Good question though.

All right, “For performance moneys,” you ask, “Any rules for setting that amount above or below the rent level?  I have a renter ready to sign.  I just signed up for your whole enchilada and don’t have my kit yet.  My apologies if I am asking questions addressed in the manual.”

No problem Keith, we want to get your money in your pocket as soon as we possibly can.  My rental agreement provides for all this.  So, by now you should have received your package, and then you will be able to use it for this particular tenant.  That’s a wonderful thing.  You definitely want to use my rental agreement adding in the provisions that are necessary for your state.

So, the answer to your question about the performance fee is that I, generally, set the performance fee about $50 higher than I do the rent.  That way, it can never be construed as the last months rent.  In fact, my rental agreement addressees that, and says, “It is not the last months rent.”  It says that, “They are responsible for any damages, repairs, anything.”

In fact, to get any kind of payment, they have to clearly do what’s required in the rental agreement.  So, I would encourage you to read and re-read that.  It may be, exactly, what the doctor ordered for you.

Got a lease option rental question here that says, “Is there merit to offering the renter pre-paid legal, so their attorney can review, if they don’t have one?  Could have them sign a statement whether they want that option.  I wonder if that would prevent issues or delay the process?  I like the idea of prevention coupled with opportunity.”

Well, I do too Keith.  I would not do that.  Be very careful.  When, at the end of my agreement, it says I’m flipping over here.  That, “This is a legal binding document.  This is intended to be a legally binding document.  If not fully understood, please seek the advice of an attorney before signing.”  Well, if that’s not clear enough, then too bad, so sad.

We want them to make their own decisions.  I hope that you’re moving in grown-ups.  Those grown-ups are going to be responsible for their own behavior.  So, yes, they’re going to have to do what they need to do to have that happen.

Now let’s see here.  We’ve got an entity question from Miguel Garcia.  Who says, “Lou, at what point during the creation of our real estate investment business do you recommend we create a limited liability company or corporation?

Also, is there any way to create a business structure…where we don’t have to identify that we are the owner for privacy reasons?  I already use a private mailbox for my business address for privacy.  I am trying to take my name off of public records as much as possible.  The next step is to move my residence into trust.  I look forward to hearing your responses.”

Okay, well Miguel, here’s what you’re going to do.  Move your residence into trust.  That is the first step of the process.  That will create privacy, because you don’t own it anymore.  The trust owns it.  You may be an occupant there, but you don’t own it.

Now, the real interesting question with what you’ve proposed here is, “At what point during the creation of a real estate investment business do you recommend we create a limited liability company or corporation?”

The answer is, it depends.  Once you have used our system, you already have one of the most powerful tools for privacy, and asset protection, and estate planning, which is a trust, to put your properties into.  So, what we do is start to look at equities.  Once you’ve built up a certain amount of equity, then you add in the LLC or the corporation, because that’s going to give you some additional tax benefits that haven’t, or aren’t allowed for in the traditional trust.

So, we plug those in when the time is right.  That means after you have some property, you’ve built up some equity, then its time to start protecting those things.   So, generally speaking, I would say get to $100,000 in equity.  Then we need to add some more entities.  To start protecting some of that equity that you created.

Good stuff, very informative in terms of how you structure yourself, because I say, “There is a time and a place.  Often people over entity themselves to soon.”  Meaning they’ve got more work to do, more follow-up, more chores and more distractions from their real, real estate business.  Great question.

Oh you go ahead and say, “P.S. the Millionaire Deal Maker was everything you promised and more.”  Miguel Garcia.  Excellent, excellent, I’m so glad that you came Miguel; we really enjoyed having you there as well.

Folks, boy it’s amazing, we got through a lot of questions here.  Fourteen, sixteen, got over thirty questions and I’ve come to the end of another group Q and A.  So, let me just say that I know there’s more questions that need to be answered.  We’re going to forward those over to the next group

Q and A, which will be in two weeks.  We will be answering those.

Now, those of you who asked questions, who are on our direct Q and A, those questions will be answered direct to you.  In fact, if you’re just tuning in, and this is your first coaching call, I want to inform you that we have four levels of support and coaching for you.  We have this group

Q and A which is twice a month.  Its two hours a month.  You get to take advantage of Lou.  You get to ask me every question on real estate you can possibly think of.  I’ll get to as many of them as I possibly can during that period of time.

Now, the next level is the direct Q and A which may be for many of you, the best level, because you can ask questions any  time during the month, fax or e-mail and you’ll get a response back.  You’ll also get to take advantage of the group Q and A which happens twice a month.  That’s an additional two hours where you listen to everybody else’s questions.  I don’t think anybody on this call can deny that its very valuable to listen to other peoples questions and the answers to those.

The third level of coaching we have is our gold, or one-on-one coaching.  That’s where you meet with me once a month for 25 minutes about your business.  Now, you have homework to do to prepare for that call.  That is sent in to me in advance of the call.  Then together we steer your business.  Together we work on what needs to be focused on for your business over the next month.  To have results over the next month.  We’ve got some phenomenal results with those in our coaching programs,  its absolutely what you need to do and we do that on an ongoing basis on a monthly basis.

Now, good news, that also included your direct Q and A anytime during the month.  It includes your twice a month group Q and A.

The final level is what we call our platinum level of coaching.  Now, adding to everything we just talked about, we now add three face-to-face meetings per year.  Where you actually come together and as a mastermind team we all mastermind your business.  Help you to move to the next level.  It’s phenomenal, it’s exciting, it’s energetic, and it’s like nothing you’ve ever experienced before.  Most folks, when they’ve been in our platinum program, they don’t leave it.  They stay in it, because they get so much value for themselves, and their business, and their growth.

So, we have two levels in the platinum level.  We have our apprentice level for those of you who are just getting started, done a few deals, then we put you in the apprentice program.  Then the second level is the pinnacle level.  For those of you who are taking your businesses to the next level.  You’re, actually, buying multiple properties per month, and you need staff, you need operations, you need location, you need office space, all those kinds of things.  We deal with those issues, and the growth pains of your business, which everybody has growth pains.  Everybody has challenges, and we work on those in the pinnacle level.

So, regardless of which level you are at, we want to support you.  We know that, because of this coaching program, we’ve seen phenomenal results.  We are expecting you to get on board.  Grow yourself, grow your business, and have everything that you’ve dreamed about in this business of real estate investing.

I can’t encourage you enough to really, totally, focus on your business as much as you possibly can.  We can help you to do that in our coaching program.  Well, folks, it’s been a real pleasure.  I’m looking for to reporting to you in the next couple of weeks what happens in the markets.  What happens in the real estate business and what you aught to be doing.  Good luck, good health, good profits, and may God bless.  Good day.