GET READY! GET SET! GO! – 1984 IS THE YEAR OF THE HOUSE.
Pity the poor investor in Gold, Silver, Stocks, Bonds. For the past 5 years or so he's really been whip-sawed by the markets. He's seen fortunes placed within his reach only to have them snatched away before he had a chance to convert them to cash. On the other hand, the lowly single family house investor has continued to plod along toward financial independence. His investments continue to ignore predictions of real estate crashes and his rents continue to rise with record speed. What's more, his plight is going to steadily improve.
Our election year economy is poised on a knife edge. Interest rates relative to inflation rates are at all time highs. Money is pouring into our coffers from all points of the compass as foreigners buy dollars for deposit in our banks. They are financing the recovery, but at the expense of profits used to pay high interest. Government deficits threaten to run away without major surgery on the budget, but no politician dares to risk the wrath of the electorate by raising taxes or cutting benefits. The resulting overvalued dollar is creating uncertainty. Will we have another recession or will we re-flate?
If you're buying precious metals or securities, that poses a critical question. But if you've invested in SFH with viable financing there are opportunities regardless of the direction that the economy turns. Houses can be the perfect double-edged hedge in any scenario. When interest rates rise to the point that markets dry up, house construction and sales slump. Meanwhile, family formation continues to rise as more and more citizens reach that stage of their lives. Housing pressure increases, drying up. vacancies and driving rents upward in a free market situation. We've seen this happen the past 3 years.
But suppose we reflate. Cheap dollars can pay high interest providing that one uses loans to acquire inflatable assets. Gold and stocks will surge. So will houses as pent-up demand joins inflation fears and millions of people rush into the market. Our leveraged SFH will yield a higher return than anything else just as they did in 1980. We can't lose IF we've avoided hazardous financing. And I think inflation will be the name of the game regardless who wins the election in 1984. This may be your last year to buy SFH.
NOW'S THE TIME TO START LOCATING GOOD BUYS.
Over the past year parades of real estate seminars have passed through most of .our cities attracting hundreds of thousands of eager neophytes who have paid out their money for tapes and books. They've been told that they can make millions just by doing a few simple things. No one has explained that success doesn't come to EVERYONE just because they've bought a tape. And these new comers apparently never imagine that very few secrets of success work if EVERYONE is using them to get ahead. It's lonely at the top for a good reason. Success requires imagination, creativity, energy, desire and plain hard work. I don't know of any other way to achieve it. But for the person willing to persevere, there are myriad ways to locate and buy houses. Here are a few.
The bad financing of 1980 is going to bear fruit starting this Spring. That's going to create a market in which perfectly good properties will be offered at distressed prices and terms. IF you've followed my advice over this past year, you've solved your own balloon note problems and either have saved up cash or know others who have. Or you've made arrangements for loans so that your high equity properties can be used to generate cash.
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In the event YOUR assets can't be used to generate loans, then you might think about syndicating your credit needs` Here's how, rake a list of people you know who know you well enough to discuss financial needs openly and freely. They're probably customers or clients with whom you've done prior business dealings. Real estate agent might find that people for whom they've sold property or bought property would fit into this scenario. Prime candidates would be others who are already investing in SFH from different regions. In our classes, students from all over the USA get to know one another. Because of the different opportunities each encounters, it isn't unusual that one area might offer better ranges of properties and yields than another. Merging your capacities in the common goal of buying houses could be a natural. Diversifying your investment can add safety too.
I've been on both sides of the fence – as an entrepreneur who can find good deals but who lacks the cash to buy them – and as an investor who willingly puts up money with entrepreneurs who can pick up properties at bargain prices. When you've learned how to find and buy properties with wholesale terms and prices, you'll find that there's really no shortage of money available from those who can't do it. But you have to find people to talk to and you've got to be prepared to present your opportunities so that they won't be afraid.
The best way to approach this is to let others know that you buy and manage SFH. Take the time to cultivate financial relationships among other owners you meet in the normal course of buying, maintaining and managing your property. I volunteered to write an investment column for a local weekly paper. In my articles I invited interested parties to attend a monthly investment forum. I also offered to address local service organizations on the subject of real estate investment. I became known as an entrepreneur and as an investor. This opened the way for subsequent joint ventures with people who saw or heard my talks. And these same people provided the credit lines I needed to start buying houses.
You'll find it much cheaper to borrow money than to co-venture ownership with others. The problem is that borrowed funds need to be repaid. Or do they? Suppose you were to offer a private lender 15% compound return on his money secured by a mortgage on a property that you were buying. You'd have the right to pre-pay any amount at any time, and you might agree to place the deed into escrow with instructions to convey it outright to him in the event you should default in any way. That would make his loan truly secure. But here's the wrinkle. Structure the loan so that NO PAYMENTS WOULD BE DUE ON A MONTHLY BASIS. By offering above market interest rates and ample security, you'd give your private lender incentive to make the loan. And by allowing payments to accrue, you'd make the loan even more secure since there would be little likelihood of default on any underlying loan that market rents could easily support.
If your lender needed additional incentives, you might increase the interest rate or offer a convertible feature which would enable him to take a “piece of the action“ in lieu of payment. Let's see how that might work. Suppose you could buy a $60,000 house in a distress situation by giving the owner $2500 in cash and taking title subject to a fully assumable loan of $43,000 at 9% and a balloon 2nd loan of $5,000 all due now. If you can raise the cash, you'll be buying the house for a total of $50,500. You borrow the money from someone you've already made arrangements with through prior conversations, and you buy the property. Your rents just about match your payments, so there's no cash flow problem. But your investor loan will cost you $11,730 in 3 years. At the end of that time by agreement, you have the right to let the loan run on for another 3 years or he has the right to convert the old loan into an interest in the house at the original price. What to do?
If he lets it run on for 3 more years, he'll receive $18,344.40 in cash at that time. If he converts it to a proportional interest, he'll own about 15% of the property which represents the fractional interest that his $7500 is of the $50,500 purchase price. Suppose, during that period, that the property increased in value by 5% per year from its original 560,000 fair market value. It would be worth $69,457.50 at the end of 3 years. His 15% interest in the EQUITY above the loan would only be worth about $4000. That would row to about $5650 in another 3 years, hardly enough to interest the lender. In this case, it's pretty obvious that your lender would allow you to continue the loan for another 3 years rather than take an ownership interest. He might convert his loan with a 25% share.
Now suppose the property increased by 15% per year. His interest at the 3 year point would have grown to $12000 or so. And at the 6 year point, it would be $24000+. In an inflationary environment, the prudent lender might prefer to hedge against still more inflation and retain an interest in the property rather than being paid off. Of course you could vary all the conditions of this arrangement by offering a larger interest percentage of ownership, or part cash and part ownership to reach a point of equilibrium between your respective goals. The inflation hedging feature of convertible loans could be pretty attractive to those on fixed income investments such as Bonds or Mortgages.
When negotiating the specific terms of your arrangement, beware of entering too eagerly into joint ownership of property with others without thorough examination of your relative goals, ethical standards, financial obligations, holding periods, third party influences, tax brackets, etc. What do You do on the death, bankruptcy, marriage, divorce, incapacity, disability, default or fraud of your co-venturer? How might your title be clouded by another? How will you divide up tire profits – and the losses? All these factors need to be clarified when dealing with strangers. A new book, “PARTNERING“ by Lois Rosenthal reveals many of the hazards of joint ownership as well as some remedies and agreements which will avoid problems. It's available at your book store for about $15. It would be a good investment in the event you are considering any form of Equity Sharing.
COLD-CANVASSING IS A VALUABLE TECHNIQUE FOR FINDING PROPERTIES.
Recently a spate of traveling pitch men have been extolling the virtues of the foreclosure market as a way to build an instant fortune. No doubt, many fortunes have been started at the court house steps, but there's many a slip betwixt the cup and the lip. As more and more people home in on this approach, the competition becomes ruinous. But there's still lots of opportunity for those who don't mind a lot more work and a lot less money.
Think with me a moment. Who's the first person to know a payment has not been made and that loss of the property is imminent? The person who skipped his payment! He knows before the lender, the lawyer, the paper, the competition. How do you locate him? Let me count the ways. I've bought more properties by walking or calling from door to door than by any other means! My first step is to identify the ideal investment neighborhoods by driving through attractive areas and checking county or city records to verify that they were originally financed with FHA or VA loans. I prefer tracts of homes which were sold with these loans because they are more or less standardized and the loans are assumable.
On a Friday I might walk several blocks in a chosen neighborhood and place a card in the door which says that I'm interested in buying each house. On Saturday and Sunday, I retrace my steps and try to speak to the owners to see if my solicitation card has met with any interest. If the weather is bad, I use the City Directory or Criss Cross Directory which lists telephone numbers in street number sequence. With these, I can let my finger do the walking as I call each owner in turn. I jot down all the information I can glean about the property and the owner's desires for future reference. Most owners are not in the market, but I engage them in conversation to see if they know of anyone else who might be. I follow up on all leads and keep a record. I try to get back into the street at least once each year. And I advise each person contacted to keep my card and to call me.
Over the years I've color coded my cards. Sometimes years pass between my calls and the owner contacting me. But I've found this door to door canvassing to give me an edge over all those people at the courthouse who passively await opportunity. Variations include delivering calendars with your solicitation message at the top. For years I used one which folded out to reveal a place to record telephone numbers. All year long my phone number and message were kept beside the owner's telephone to remind him. A couple of active entrepreneurs in my area fasten metal signs at eye level on telephone poles near highly traveled traffic routes. These signs offer quick cash for house sales. Others regularly offer to buy defaulted notes from small loan companies. You know the kind that advertise on TV to consolidate debts or to finance home improvements. These notes can be bought at deep discounts because the small lender doesn't want to foreclose and have to make payments on the underlying 1st loans. Once purchased at discount, the owners can be contacted to determine the reason for non-payment. Often the solution requires the purchase of their house. Or the payments on the notes can be restructured and be brought current through the process of negotiation. In any event, it can be a very lucrative enterprise.
Here again, a little arithmetic might illustrate my point. Suppose you were able to buy a $3500 note with a $125 payment at 18% which had been in default for 6 months. The loan company might sell it to you for as little at $350. They might ASSIGN it to you, or they might SATISFY it if they were willing to completely release the original borrower. In other cases, they might assign you the note but refrain from releasing the LIEN on the borrower. Now you'd go see the borrower and explain that you were going to foreclose if the payments weren't caught up. In lieu of foreclosure, you might buy the property under terms and at a price which would be acceptable to both parties. Or you might agree to just restructure the note in such a way that the face amount would offset lower payments. If the property were worth considerably more than the combined amounts of both loans, you could arrange a new first mortgage which would provide funds to pay off both loans and make the total payments within reach of the occupant.
All of these approaches are profitable. If you're able to buy the house at distress prices that's one way to proceed. But if you could restructure the loan so payment could be brought current, it would have a value in the discount market. You might be able to sell it by guaranteeing payments for as much as 75% of face value PLUS ACCRUED INTEREST. Remember, your purchase price included all back interest. By personally endorsing the note you add value to it beyond its ordinary market value. Here's what your note could earn: $3500 plus 18% for 6 months' back interest when you bought it would be $3827.05 and 75% of that would be $2870.29. If you paid $350 for it you'd be making a profit of over $2500.
Of course, if you could either sell the property or get the owner to refinance it to pay off the note, you'd be getting 100% of face value and a profit of about $3475 on an investment of $350. You can see how this return on your investment dwarfs those normally associated with precious metals, securities or other forms of real estate. And it shouldn't be too difficult to attract investor dollars from those who can see you earning these huge profits on small investments. There's a way to work with investors too in buying defaulted paper. In the above illustration, suppose instead of selling the note or refinancing the property, you agreed to allow the debtor to REPLACE the note with one carrying the same interest, but with a face value of $5000 and payments of only $75 per month. It might have a balloon payment due in 3 years. That 18% interest would be attractive in today's market especially if you guaranteed it to an investor. Suppose you offered him a ½ interest in it for $2000 cash. Over the next 36 months you'd each receive $37.50 or $1350. Since the $75 payment represents “interest only“ there would still be $5000 due at the end of 3 years. Each of you would get $2500. Your investor would be receiving a total of $3850 for his $2000 investment. You'd be receiving a total of $5850 for your $350 investment. Not bad.
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