June 2001
Vol 24 No 10
Sometimes it's hard to cast my mind back to the time that I was just starting out in real estate. I probably can't really conjure up the thrill that building my first house or buying my first investment lot gave me, but I do remember that I got a big kick out of it. In like fashion, when I listed my first house for sale as a salesman, sold it, and walked away with $175 in commission I remember that I was on top of the world. I felt the same emotional high later when I first opened my real estate brokerage in my own name. I recollect that I was awash in self-contentment. I can recall sitting long into the night at my new desk in my own office building reveling in the fact that I was finally in business for myself.
I've been an entrepreneur more or less for most of my life. As a youngster I sold black berries and boiled peanuts on street corners. When I delivered local newspapers, I always bought a few extra to try to sell to people stopping off at motels. After graduating from high school, I worked for tips as a waiter and as a bellhop. While still a teenager, I owned part of a pawnshop, had a dry-cleaning route, and ran a sandwich shop out of the trunk of my car. At times I was a free-lance musician, operated a weekend tour service, and had a mail-order.
But I had a joker in my deck: Even though it might appear that I was highly entrepreneurial, I rarely worked without a financial safety net. I always had something to fall back on. As a kid, I lived at home and as a teenager my food, shelter, clothing and a monthly salary were supplied by the United States Air Force while I moonlighted at various jobs. Thus, I wasn't dependent solely on my outside income to make ends meet. Oh, I'll admit that there were some slim times caused by my own bad financial choices, during which time outside income was certainly needed and welcomed, but for the most part, I was dabbling at being an entrepreneur.
Later, with most of my safety nets gone, except for $249.51 per month of what has laughingly been called a “military retirement pension”, I found myself cast adrift as a forty year-old without a job. Somehow I had to find a way to come up with a source of income to feed a wife, two kids, and a mortgage. That was when I became an entrepreneur in earnest. Unable to find the income I needed as an employee, to stave off financial disaster, I failed into real estate. I hit the ground running as a single family house salesman — without a net.
In order to become a Broker in Florida in the 1970s, a new salesman had to cut his teeth listing, selling, and managing real estate under the tutelage of a licensed Broker for at least a year. The Broker I worked for had no sales training program. No medical benefits. No corporate retirement plan. He provided no real estate documents. No guidance. However, he did provide motivation; either I produced or I was fired. When I did earn a commission, he took half of it. It took me 21 months to screw up my courage and take the giant step to quit being a salesman and start up my own Brokerage office. That's why I was so tickled at having taken what to me was a monster step, and why what might have seemed hard work to others was absolute joy for me. On February 8, 1973 I opened my office and came of age as an entrepreneur.
In this month's letter, I'm going to try to communicate to people who are at several places in their careers and financial lives. I have a message for those just starting out, for those who want to take the next step up from what might be a secure, but boring career; and for those who seek a way to command an extraordinary, highly leveraged yield on investment with little risk. I hope I'll be able to provide some insight into how I was able to complete my passage through these stages on the long upward trek to financial security and give you incentive to start or enhance your own path to. I also want to try to convince those you who might be wavering about becoming an entrepreneur that you can do what I did; perhaps with a little less effort possibly much faster.
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THE LESS MONEY YOU HAVE, THE LESS YOU HAVE TO RISK!
Whether we're talking about major surgery, a career change, or selling a home, people who are apprehensive about embarking on a new course of action look for reasons to put off doing it. Paradoxically, too much intelligence and too much money can work against the entrepreneur. The better equipped one is to analyze and perceive the peril in a new venture, the less likely one is to risk it. This isn't necessarily all bad. Unlike animals, humans are able to imagine the consequences of future actions before they take them. This can both help and hurt us. On the one hand, being able to perceive danger has kept all of us out of hazardous situations, whether physical or financial. On the other hand, the dread of uncertainty is also what keeps most humans mired in ho-hum lobs with less than glowing future prospects.
Fear causes the great mass of people to choose the safety of the status quo over the uncertainty of success. It's what held me down too. I was afraid to bet my financial future solely on my own abilities as an entrepreneur. Even though I felt that I was working beneath my potential, the fear of failure kept me in military service for twenty years. Overcoming personal trepidation is the first challenge a would-be entrepreneur faces. It's always difficult, but conquering fear is the foundation of personal freedom. Being able to take calculated risks that enable one to break out of the cycle of mediocrity is what distinguishes those who rise to the top.
In the immortal words of Franklin Delano Roosevelt, “The only thing we have to fear is fear itself.” One has only to step a pace back and try to place what they're currently doing to earn a living into perspective. Despite what you may have been assured, there really is no such thing as a guaranteed lifestyle. Today, thousands of well educated technicians, managers, and staffers are being “down-sized” into unemployment. There is just as much risk in clinging to a supposed “secure” job as there is in stepping out on your own as an entrepreneur. In short, you're probably damned if you do, and damned if you don't, so why not jump in and test the entrepreneurial water while you still have some choices?
Don't let lack of financial reserves hold you back. There may be all sorts of capital requirements for someone who is planning to go into manufacturing or retailing, but the lack of money is not a valid excuse for not trying to succeed with single family houses. First of all, where it might be impossible for a fledgling entrepreneur to obtain credit with which to launch a new concept, long term mortgage financing historically has been available through thick and thin when used to buy single family owner occupied homes. Because of this, by far, most homes in the United States are already financed and very little additional money or credit is required by entrepreneurs who want to become landlords or dealers. That provides an incredible advantage to those who want to own single family houses.
The more safety that can be built into any new venture, the less anxiety a person feels about committing to it, and the easier the decision can be made to go into it. Buying and selling, or buying and renting houses for the long term, rank as among the safest of any entrepreneurial alternatives. Consider that in most areas it's possible to make a good living merely by buying a few houses; selling some and keeping some as rentals. There would be minimal risk to the entrepreneur. The key is to take title to them subject to the existing debt, or with seller financing. Think about it, a buyer without any other assets or credit who bought 10 houses might finance as much as $1,000,000 in low cost mortgage credit borrowed by other people to help pay for his acquisitions. Furthermore, no personal guarantees need have been given other than to give them back in the event of any loan default.
Borrowing without personal liability for debt is critical for those without financial reserves. Perhaps one of the reasons that Californians seem to be so much more adventuresome in buying highly leveraged, expensive homes is that, by Statute, they have no personal loan liability when they borrow money to purchase' houses. California borrowers thus risk far less when they borrow to speculate on rising house prices than those who personally guarantee loan payments.
THE DUE-ON-SALE CLAUSE NEED NOT STOP YOU
The key to borrowing without risk is to take over existing loan payments rather than to initiate new institutional loans. But fear of the consequences of “Due-On-Sale” keeps many people out of the house-buying game. “Due-On-Sale” clauses in mortgages give lenders the legal right to approve or reject a new buyer who wants to take over existing loans. Bear in mind that there is no law that would make it illegal to ignore the lender and to take over loans willy nilly as often as you can; the law only gives the lender certain remedies. So the battle is joined between those who want to get around lender requirements and lenders who want to enforce them. In the following passages, arrayed from the least to most troublesome, are 10 ways you might treat the Due-On-Sale problem if you encounter it:
1. Only buy houses that you intend to refinance with a new loan.
2. Buy any house you want, but go ahead and apply to assume the old loan.
3. Take title “subject to” the loan and take a chance on being found out. If the lender threatens foreclosure, sell the house and let the buyer refinance it.
4. Have the seller deed the house into a Trust naming him/herself as Trustee, and you as Beneficiary. Make payments with checks bearing the seller's name as Trustee.
5. Buy the house on an unrecorded Contract for Deed, but secure your interest in it by recording a mortgage in the public records as additional security.
6. Pay the seller the full amount of his equity in cash, or with a Note, in return for a Purchase Option. Have the Option held in escrow by a third party, together with all documents required to transfer the property title. Secure the Option with a mortgage recorded in the Public Records. When the Option is exercised, title can be recorded in your name, or in the name of any other assignee you might sell it to.
7. Buy a “Remainder Estate” in the property with an “estate for years” retained in the name of the original borrower. Control access to the property by leasing it for the payments. Keep any existing insurance policy on the house in the seller's name. Buy a second insurance policy solely in your name without naming any lender. If you have an insurance claim, only make the claim on the second policy.
8. If your purchase is discovered and the loan is called, petition the court for injunctive relief to prevent the lender from foreclosing. When your payments have been made promptly and the property maintained, the judge is rarely sympathetic to a lender that is merely trying to make a higher profit at your expense. Case law supports a high probability of success. Martha Wellencamp sued and won her case against the bank in the 1970s. It ultimately cost lenders over $2 billion when people refused to refinance at higher interest rates. An informed lender would certainly not want to establish similar precedent, and would probably back off.
9. If the lender refuses to back down, have a mortgage “audit” performed. Amend your complaint to include “Violation of the Federal Truth in Lending Act”. FDIC has uncovered massive loan fraud being perpetrated by lenders. It is estimated that as many as 80% of all scheduled mortgage payments are in error. Demand the lender produce a month-by-month accounting showing that the balance due on the loan, and all subsequent interest charged were adjusted as of the date each payment was received. Next, depose all the records of all those who have been similarly served. The costs of this will be a strong deterrent to continued foreclosure action.
10.Or, simply lend the seller 100% of what you were going to pay him in cash or Notes. Have him sign a non-recourse Demand Note at a high rate of interest payable on demand. Include the right to swap the accruing debt for the equity in the house at any time prior to the payoff of the Note. Secure this with a wrap around mortgage recorded in the public records to protect your interest.
IT DOESN'T TAKE MUCH MONEY TO GET STARTED .
Almost by accident I discovered how to eliminate both the complexity required to negotiate the Due-On-Sale clause and the need for any new financing. It enabled me to start looking at more expensive properties with greater profit potential that would not have made financially feasible rental properties. It provided me incredible leverage without the inherent risk and expense of debt. Best of all, those with whom I dealt preferred it to other alternatives they might have had. What was it? It was the use of relatively short-term assignable Options to control rather than to own properties. Here's how it worked:
From my first contact as a Broker with an owner, rather than trying to list the property, I tried to buy it with the objective of selling it for a greater net profit than I could have made with a listing. For instance, if I could earn a $7000 Brokerage fee for listing and selling a $100,000 house, I tried to build in a $10,000 net profit after all expenses of advertising, promotion, and other fees. For an Option that usually expired in 6 months, I paid the owner the princely sum of $100 in cash; which didn't count against the purchase price. Owners were delighted.
The $100 I gave them demonstrated several things that real estate Brokers rarely make an effort to do. First of all, it proved that I had $100 in cash, and that I would bet it on my own ability to produce a buyer. Further, it provided evidence that I intended to remain personally involved in the sale of their property rather than to merely pass the property off to the multiple listing service. Plus, it gave the seller's confidence that, whereas a Broker might never be willing to cut his or her commission, rather than lose my $100, I'd be much more prone to bring them an offer with a smaller profit. Thus, there were greater odds that their house would actually sell within the Option period. Of course, I was always willing to point all of these facts out just in case the seller hadn't thought of them.
By substituting control of property for ownership of property, my trusty $100 bill bought me Options on all kinds of houses, motels, apartments, land, and office buildings — kinds and types of properties I would have never listed, nor had the courage to buy in hopes of reselling. It also enabled me to move much farther afield to find profitable opportunities. Here's what I mean:
A real estate license can become a crutch for Brokers that, while it enables them to earn a living, ties opportunities for profit to a particular State. In contrast, those who buy real estate using assignable Options need not be licensed. When I refined my techniques for acquiring more creative Option terms and started using them in other areas, my world opened up considerably. I was no longer bound to my market and my local opportunities. Without having to concern myself with financing or management, I was able to hop scotch around the country buying, selling, and exchanging properties that I didn't have to buy in order to make a profit.
Where I had previously spent a lot of time trying to find investors who would joint venture with me to buy and sell properties, I found that I no longer needed them. As a matter of fact, they needed me. Success acts like a magnet that attracts money like honey attracts flies. Now, instead of having to wait hat in hand hoping a potential backer would approve my transaction, I simply offered others an opportunity to “get in on” a particular property transaction. They had several choices: They could buy my Option for resale, buy my Option and use it to buy the optioned property, or lend me enough money to exercise my Option myself.
There was another major benefit that investors liked: Options don't require management time or effort. Being able to structure and negotiate an Option that could stand on its own legs without being conditioned upon performance on a lease, set those who didn't like management free. In any event, it enabled me to jump-start my net worth in leaps and bounds that other techniques could never have done.
Copyright © Sunjon Trust All Rights Reserved, www.CashFlowDepot.com. (888) 282-1882
Quotation not permitted. Material may not be reproduced in whole or part in any form whatsoever.
