November 2007
Vol. 31 No. 2
THE AMERICAN DREAM: WEALTH WITHOUT WORK OR RISK
There are two books that I should write if I want to make millions of dollars. One is “Wealth Without Risk” and the other is “Wealth Without Work”. Those seem to be a central theme in the psyche of many Americans. Millions of them pour billions of dollars each year into various State lotteries hoping that lightening will strike. I live in a gambling town. The hopefuls pour in every weekend to try to get rich simply by chance. When they run out of money, the casinos are quick to accept credit cards. Casino ATM machines charge lower service fees as more dollars are withdrawn. Oh, warnings are posted near the machines about borrowing too much, but casinos know that gamblers will bet their financial futures on the slim chance that they will return home winners.
It seems as if a lot of people look at their investments as some sort of game; not realizing that when they gamble away today’s money, they are also gambling away their futures, and those of their families. For some reason, none of these people seem to consider investing their money in something that could provide long-term security. Instead, they gamble it away betting against odds designed by massive computers that have been carefully calibrated to make them lose over the long run. When they can’t win money in recognizable gambling venues, they bet it on the stock market and on real estate.
If you ask those who have a portfolio of stocks about the financial statements of the companies, or the products or services they offer, or the amount of debt they are carrying per share, or where they stand in comparison to their competitors, you’ll get a blank stare. They seem completely detached from the fundamentals of making money, relying on tips and advice from their Broker as to what to buy. You’ll notice that they rarely get much advice about when to sell.
Real estate investors are just as cavalier about where they put their money, how much it will yield, and when they’ll get it back. Judging from the wails of regret from those who lost most of what they made over the past few years, it appears that they know little more than their compatriots in the stock market.
Some people are sore losers who try to recover their losses by taking profit away from those who have won. They use the system to support them without bothering to earn the money that they want. They do this in several ways. They elect Robin Hood politicians who will promise to tax the most productive members of society and give the proceeds to the least productive. They do this primarily by taxing profits in one form or another. Of course, once politicians put the ill-gotten gains into the hands of their supporters, they immediately take it back by taxing consumption through sales and use taxes, licensing fees, excise taxes on utilities, Ad Valorem taxes on homes, etc.
When the political system fails to produce money fast enough, some people resort to robbery. I’m not talking about 7/11 stores; I’m talking about spurious lawsuits that they never intend to pursue in court. I read somewhere that some 96% of all lawsuits are settled out of court. What this boils down to is extortion pure and simple that is aided and abetted by the judicial system. Defendants can be counted on to settle anything under $25,000 or so because it will cost that much to go to court and prove the claims to be baseless. Their insurance company usually pays the expenses; and their liability insurance rates are increased accordingly. Despite the rising costs, people still seem to try to insure as many aspects of their lives as they can afford.
When people can’t gamble or sue to support their lifestyles, they borrow. Rather than budgeting, an entire generation has learned to live beyond their means by borrowing their lifestyles. Most of the time, they have been able to sell their homes and use the cash to repay their debts before initiating a new round of borrowing. When home prices stopped going up, many just quit paying their bills.
YOU CAN’T BUY A MAP TO A GOLD MINE . . .
I know that I’m out of sync with the majority of Americans. I believe that there is a better way to build a financial future in America today without relying on the favor of the Gods, or the courts, or the banks to deliver wealth that hasn’t been created by personal enterprise and initiative. It’s called sacrifice and hard work. That may not be a popular stance, but when combined with working smarter, hard work and the willingness of the individual to bet on himself is what made the American economy the greatest in the world.
I come late to the Internet, but I have to admit that it’s a lot more fun to be able to engage in a two-way conversation with readers and to listen to their concerns. For the past 6 months or so I’ve been posting a free daily Blog to my Website (www.cashflowdepot.com) and writing a weekly investment letter that is posted on Fridays on www.cashflowdepot.com too. The material has covered a host of topics. As readership has expanded, the number of comments and questions has also expanded. From time to time, insightful “how to” questions are asked, but much of the time, people are seeking ways to get back on top of the financial heap with the least possible personal effort or risk.
One person wanted to know which of the various itinerant Gurus’ success tapes would create the most wealth in the minimum time. Another wanted to know which mailing lists of pre-foreclosures was the most valid. Yet another wanted to find a source of form letters that would attract the most investors. For some reason or other, it never occurred to them to develop their own materials based upon their own experience. Those who are out of the market sitting on the sidelines waiting for something or someone to come along and save them will miss out while others who take the initiative will be snapping up bargains that are going to soon be available. I think this is a financially fatal error.
Do you really believe that anyone who had a foolproof investment system would ever sell it? Apparently a lot of people do. A long time ago I learned that you couldn’t buy a map to a gold mine. It’s either going to be a bogus map, or a bogus gold mine. If such a map existed and it was genuine, who would sell it? Many years ago a man and woman who were perennial champion Bridge-players published their system in daily newspaper columns. Despite telling all their secrets, they kept on winning over all comers for years. Finally, they admitted that they didn’t really use the system they were telling others to use. They didn’t want the competition.
The vast majority of people who contact me want some sort of short cut to success. Oddly, people really think they can buy a “success system” that guarantees wealth from someone who can’t use it himself. Have you noticed that many who sell these materials rarely own houses themselves? I haven’t found any so-called Guru who has anything very original to sell, or who has built his personal wealth by using his own real estate system.
Some people are “me too” investors. They won’t make a move until someone else has made it first. You can spot them when, upon hearing a new investment concept, they ask, “Has his ever been tested in court?” or, “Has this ever been audited?” They usually want someone to provide forms for them to use when buying, selling, and negotiating; or field-tested letters to send to homeowners; or research into market conditions, etc. Warren Harding use to call these people “sponges”. They soak up everything they can, but give very little back in return. I know that I feel very proprietary about concepts and ideas that I come up with, and rarely give them away as long as I’m using them. Most of the truly innovative people I know could easily sell their concepts, but prefer to keep them to themselves.
Those who spend thousands of dollars trying to avoid losing money would wind up with a lot more money if they just went out into the single family house market and started working rather than continually trying to buy a sure-fire system that would guarantee success without risk or work. They’d swiftly find that there’s lots more money to be made when real estate is “down” than when it is up. This is because so many people are now willing to consider unconventional financing.
WHEN ALL ELSE FAILS, TRY WORKING HARDER AND SMARTER.
Beware of listening to “street talk” from those who aren’t actively doing what you are doing. When passers by opine as to what the future holds, ignore them along with most of the mainstream media that has absolutely no experience in the house market. The problem is that Investors tend to read the newspapers, most of which are full of bad news today. To find out what’s going on, Brokers tend to talk to each other rather then to active entrepreneurs and landlords. When sales slow, they are among the most pessimistic people in the market. They offer very little advice as to how to cope with a slowing market. Meanwhile, lenders are bemoaning the fact that their sources of easy loan money are drying up. When they forecast ominous future trends, they are probably referring to the money-lending business rather than the market per se’. Builders and developers are inexorably linked to the mortgage market, so their views are equally suspect. Remember, when new homes can’t be built, demand for existing homes rises, and prices recover more quickly.
Instead of listening to nay Sayers, get busy seeing how you can make money today. Start of by assessing the market in which you expect to be doing business. Segregate the market from top to bottom into quarters by price range. Next, decide what you want to be doing today. If you want to be a landlord, you should be focusing on houses close to the middle of the market at the top of the second quartile or bottom of the third quartile from the bottom. In general, these will be older, smaller, and have large equities that will provide a basis for negotiating prices and terms. As a rule, these houses were above the price ranges of houses that were the targets of the fixer-upper brigade, and below the price ranges of houses that were the targets of those who were driving up prices by speculating on appreciation. In the aftermath of the last real estate binge of the late 1970s, I found that many owners of these houses hadn’t even been solicited to sell.
If you want to be in the fixer-upper business, you’ve got to buy houses that you can find buyers and owner-occupant loans for. I found that VA, FHA, and special HUD loans were the mother’s milk of fixer-upper houses I was buying for resale. Most of these take-out loans were available for houses priced between the first and second quartile from the bottom when completed. Houses in this price range ideally will be in good blue-collar neighborhoods with only cosmetic upgrades needed to make them marketable. That’s because your qualified buyers are also going to come from this same market sector.
If you want to speculate on appreciation, aim for the top quartile. As a rule, wealthy people don’t speculate on expensive houses; they buy them to live in. Quite often they pay cash or obtain private loans from corporate resources or retirement plans. When they apply for institutional loans, they usually get them. Harking back to last month’s letter, rather than buying these houses and hoping to sell them for a profit, you should be using Options and Lease/Options on as many of these houses as you can afford. This way, you’ll be able to reap highly leveraged profits on even small price rises. Who have we left out? Lenders.
In any market slow down, a lot of people who expected to use home-equity loans to pay off personal debts are left twisting in the wind. Similarly, a lot of those who hoped to sell their houses to raise money can’t sell them because the few buyers they find can’t get financing. This creates a different opportunity than was available during the housing boom; money lending and loan discounting. Both lenders and borrowers are caught in the same trap, and both need buyers such as you.
Once you’ve isolated your market segment, then advertise to it regularly in weekly newspapers, on craigslist.com, on ebay, by direct mail, and brochures. To generate leads, develop bird dogs in law firms, title and escrow companies, and mortgage and real estate brokerages. Get a list of out-of-town, institutional, and single house owners from the tax assessor and mail solicitation letters to them regularly. Get into the habit of sending out 20 – 30 cards or letters every day. You won’t get an immediate response, but you will get a steady dribble of calls from people who have held your letters until they were ready to sell.
PROFITING FROM PROMISES INSTEAD OF PROPERTY . . .
When there’s high demand for mortgage loans, you can make extraordinary profits by finding private loans and passing them on to borrowers. This isn’t for everyone; that’s why there’s so much profit in it. Don’t try to do this until you have mastered the use of a financial calculator. The heart and soul of the money business is to be able to accurately calculate yield, payments, number of payments until the loan is paid off; and both the present value and future value of any financial arrangement. The HP 12C financial calculator has become as common in the “paper” industry as a claw hammer is in construction. Buy one and study the instruction book that comes with it. Be able to use it before you start making loans. Once you’ve learned to do this, you’re ready to turn into a mortgage lender.
There are all kinds of borrowers in the loan market. When you buy a diamond, the four ”Cs” of valuation are Color, Clarity, Cut, and Carats. When you lend money, the four “Cs” you should internalize are Character, Collateral, Capacity, and Cost. Once in a spate of uncontrolled greed, I bought some discounted Notes secured by used cars from a dealer in Washington, DC. They were purported to yield 65% per annum. He guaranteed them personally and corporately. When the smoke cleared after his bankruptcy, there was no money left to pay me. I learned from this that no matter how high the calculator says the yield on an investment will be, it drops to zero when I don’t get paid. The lesson: Buy Notes cautiously.
Just as you might have looked for motivated sellers and buyers, you should also be looking for motivated borrowers who need to money to avoid foreclosure of their homes and repossession of their cars. Don’t allow sentiment to overcome caution. Make it a practice to only lend money to those who have demonstrated their integrity; who will pay on time; and who can handle their combined total loan payments. Until you gain some experience, start with FICO scores above 700 or so, and loan to value ratios no higher than 60% of YOUR estimate of value on houses that you would eagerly buy for the money you’re lending. This way, you can’t be hurt.
Often sellers who need cash have a buyer for whom, in order to make a sale, they must carry financing. By guaranteeing to buy sellers’ loans at a discount so long as they meet FHA underwriting standards, you can help sellers, buyers, brokers, and escrow companies, so long as the yield is high enough to attract investors. The seller may wind up with less, the buyer may pay more, and the broker may cut his commission, but all will be better off than before.
Where does the money come from to fund all this financing? From investors and from companies that buy discounted mortgages. They are beginning to emerge again and I am beginning to be offered good mortgage loans. So far the yield rate isn’t tempting to me, but as it climbs, money will be attracted from a number of sources. Twenty-five years ago an innovative guy named Mike Meeker developed a terrific loan buying and selling system. He put himself squarely between the sellers and financial companies who wanted to invest in high quality mortgages. Let’s say that he negotiated a 12% annual yield on a $100,000 Note, and then sold it to a small insurance company to yield 8%. Without any more information, you can see $4000 per year in yield that he picked up without any investment at all.
By now, you are probably frustrated because of all the money that can be made by those who know how and I haven’t told you how you can do it too. Remember, at the start of his letter, how I said that profit in this market was going to flow to those who went after it instead of waiting for it to come to them. The first step to take is to learn what you need to know. I think I’ve done my part over the past three decades to offer seminars, books, and newsletters at prices far below the market. I’ve been available for counseling and I’ve tried to warn against future problems. Now, I’m offering Blogs, weekly lessons, audio/visual seminars, interactive discussion forums, discounted e-books, and interviews with experts for less than the price of a cup of McDonald’s coffee a day. If this is too much to pay to learn what you need to know, you may not be serious about your success. See what we have to offer at www.CashFlowDepot.com
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