June 1991
Vol 14 No 8
During the last decades of the 1700s, Mayer Rothschild, accumulated wealth unobtrusively, living quietly in Frankfurt's Jewish ghetto while he traded in old coins and used goods. Then he started lending money – not only to the needy at high interest rates, but to highly placed influential personages of Prince William's court – at low interest rates.
He fathered 5 sons and upon his death bed, bid them assemble, each bringing with him a stick. Placing all 5 sticks into a bundle, he challenged each of them to break the sticks. They couldn't, even though, individually, they were easily broken. The lesson: together the Rothschilds were invincible, but divided they were easily vanquished.
From this phenomenon sprang one of the most amazing dynasties ever to occupy this earth! Of those 5 sons, simultaneously, Amschel became Treasurer of the German Federation, Salomon rose to the same position in Imperial Vienna. Nathan became the most powerful man in England. Kalmann was financial czar of Italy. Last, but not least, Jacob was the power behind both the Republic and the Empire in France. Collectively, they represented a concentration of economic and political power never again witnessed. They financed both sides of virtually every war during their time as well as international commerce between their countries in times of peace.
So what's all this got to do with us? If you want to be successful study the lives of those who've achieved success and see if you can practice their strategies. What Mayer Rothschild did right was to: (a) keep a low profile and earn his living in an unregulated market niche selling coins and making loans. (b) Make deals which benefited influential people, thereby protecting his family from political oppression in the aftermath of envy. (c) Set long term family goals and motivated/prepared his heirs to increase family prosperity by working together. How can we apply this to our own situation? Let's start by doing the same as Mayer
YOU NEVER EXCEED YOUR EXPECTATIONS OF YOURSELF . . .
I used to sell the Saturday Evening Post. I had uncanny ability in forecasting my sales to the penny. I'd approach a housewife and say, 'You don't want to buy a magazine do you?' I never sold an issue. But that's exactly what I expected! Later, as an adult who NEEDED TO MAKE A SALE to earn a living, I always assumed that I'd sell a house if I worked hard enough. And I found that I could sell quite a few. So each month I raised my quota on myself, and sold more. Earned more. Saved more. I was thus able to expand my business and buy property for my own account.
By having a long term NECESSITY, I couldn't resort to short term quick-fix solutions. I not only had to sell houses, but build up a cadre of satisfied customers upon whom I could rely for repeat business and referrals. So I had to do a good job. Had to learn as much as I could about identifying customer's real needs as well as ways in which a purchase, sale, refinance or exchange could satisfy them. Had to learn to be efficient in my use of time in doing this. So I studied real estate law, sales and listing techniques, appraisal theory, tax law on a more or less continuous basis. I still study every day! I expect to keep on polishing my craft.
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Along the way, I built my reputation for competence within the business community. This network of contacts paved the way for me to attract investment opportunities which I'd normally have missed, and people to put up money from time to time, because they knew that I could keep a secret as to the specifics of both the opportunity and my relationship with them. This is an essential component of estate building – KEEPING THINGS PRIVATE.
Notice that there are two essential components that attract money with which to invest. A reputation for trust and reliability and a track record of being able to seek out and exploit opportunities for profit. Every week I'm contacted by someone looking for money for a special project. Yet, when I look for previous experience and business references, these are usually non-existent. It's as if there were some sort of popular myth that people with money don't know how to make money, so are desperate to give their money to some amateur with no credentials to invest it for them.
This just isn't the case. People who have money, have it because they've been prudent and disciplined about spending it foolishly. They and possibly a whole covey of lawyers and accountants are going to look over any proposition carefully. For some reason or other, it seems that the bigger the deal, the less the promoter knows about it. But that's when the money-man is going to want to scrutinize it the most closely. So, let's see what fledgling promoters should be doing if they want to attract money.
THERE'S ALWAYS PLENTY OF MONEY FOR A REALLY GOOD DEAL . . .
How do you know, when you've got a really good deal? When its price and terms are below market and its long term income yield is above market alternatives. Someone recently called me about a mobile home park in which net operating cash flows were less than a money market fund would produce. That's not a good deal. On the other hand, we're currently trying to buy a 1st mortgage note secured by a land lease which has 13 years of steady payments. It yields 19% with 7 years to go. That's a good cleat!
Just to arrive at the above information, requires that someone be able to audit an operating entity, shake out the ambiguous and misleading information, project the possibilities and compare them to other offerings. I can do that only because I went to special seminars conducted by the National Association of Realtors to show me how to analyze property operating figures. Then I bought a good calculator with which to transform all present and projected income and expense figures into a present value. Without some experience and training, I'd be at a loss to evaluate any deal. I expect anyone who brings me a deal to have done the same homework or to have hired someone else to do it for him. But that just scratches the surface. There's another factor to deal with: RISK! Naturally, there's the risk of investment loss. But there's also the risk to the investor of PERSONAL LIABILITY due to financing or ownership of the property itself.
Almost everyone I personally know who's lost his property was the victim of defaulted full recourse loans or leases that they couldn't pay off. People with assets to lose don't much like risky ventures where all their assets could be lost as a result of a single had project. They like to limit their risk. But that's not all. There's also the risk to the promoter. You may feel that your investor is taking all the risk by putting up the money, but you may be risking more by inadvertent criminal violation of SEC rules when you present the project. This happens when you project earnings and profits which will be achieved through the efforts of someone other than yourself. People who 'broker' deals – acting as middlemen rather than as principals whether or not they're actually licensed real estate brokers – may find it difficult NOT to break the law. An old chum of mine is currently doing 26 years at 'Club Fed' because he INNOCENTLY violated SEC regulations.
The bottom line of putting money together to finance a good deal is the (a) you must know what you're doing, (b) you must engender trust and confidence in your ethics and reliability, and this is best done by building up a reputation for competence and reliability on a case by case, client by client basis. (c) Finally, you're going to stop SELLING a proposition and let the other guy BUY TN of his own volition. Here are a couple of examples.
Once upon a time I was approached by a middle aged lady who had decided to augment her income by investing in some rental properties. I'd been in the habit of volunteering to appear at every local service club I could find as a luncheon speaker (at a minimum, I was eating with a certain degree of regularity). She said she had $10,000 to invest and wanted me to find something suitable for her. After making sure that she knew that anything I bought would either be something off-beat – such as a billboard (these pay handsomely when they're rented) or a mobile home – or that she'd have to use debt to leverage her investment in order to bay a larger property. I said I'd let her know when I found something.
Next, I went looking and found a small house with an assumable loan in an older, but not tatty, neighborhood. It was priced at $26,000 in a distressed sale situation. It was worth about $40,000, but her cash would make the deal and title could be taken subject to the $16,000 loan without any personal liability. Now, here's what I did.
Instead of my 'selling' her on the proposition, I entered into an assignable purchase contract that was conditional upon my being able to raise the down payment within 30 days. Then I showed my contract to the lady and explained why I was willing to buy the property myself. I gave her the choice of either LENDING me the $10,000 at 10% without recourse—so I could buy the property myself – or of lending me $5000 so I could buy of 1/2 it with her. The loan would be due and payable upon the sale of the property. Under this arrangement, I agreed to manage her of the property for a fee equal to the interest due her on my half.
This way, I would be BUYING into the ownership of the property with her (or her money) rather than SELLING her anything – and staying in contact with it until it was sold. Meanwhile, we'd share all income and expenses 50/50. Can you see how much more palatable this might be to her in contrast to my simply selling her the property based upon some vague promise of income and profit, then disappearing in a cloud of dust with the commission check firmly clutched in my sweating palms?
Shared ownership can carry with it a lot of risk for everyone. People die, get married, get divorced, go crazy, file bankruptcy and do lots of strange things that affect title. Considering that co-owners may still not know much about each other's personal affairs, it pays to seek out ways to limit liability and to avoid contamination of any other assets through the actions of either party. There are many ways to do this, but my favorite is the use of TRUSTS and CORPORATIONS in combination. With them, you can procure privacy, asset protection, estate planning.
TRUSTS ARE MORE – AND LESS – THAN THEY SEEM TO BE . . .
Anyone who can legally own property can be a TRUSTEE. Anyone or anything can get the benefit of a Trust hence BENEFICIARY. The POWER of DIRECTION over a Trust can reside in yet a different entity. Think of a Trust as merely a piece of paper – a CONTRACTUAL AGREEMENT. Like any contract, it can't be for illegal or fraudulent purposes and must be drafted to conform to the requirements of the law where it is formed, or where it is to be adjudicated as a part of the agreement. And like any other contract; it can be challenged, voided, modified, provide for specific performance, contain provisions for payment, management and control, penalties. IT IS PERSONAL PROPERTY IF IT SAYS THAT IT IS.
The uses of Trusts have been traced to Julius Caesar who left his property in Trust while he marched off to the Gallic Wars. Roman Law traveled to England and became English Common Law under which from about 1391 on, there were LAND TRUSTS formed expressly to hold title to feudal lands. When English Law became the basis for the United States Constitutional Law, the Trusts emerged intact and remain so.
Florida and Virginia have specific Land Trust statutes, and many other states recognize them in Common Law. Illinois is pre-eminent among them as the source of most case law. Louisiana is the only state in which Trusts can't be traced back to English Common Law, so they're not advisable there. Using them is a piece of cake.
First, you draft your Trust Agreement to establish Trustee, ownership of Beneficial Shares and Power of Direction. Then, reciting the duties, powers and limitations of Trustee activities in a Deed, the owner transfers the property into the Trust which may be identified by name or number, date of origination, and name of the Trustee. That's all there is to it. Now the fun starts:
Suppose my lady investor and I from the previous example bought Joe's house, but had him deed it directly to Bill as Trustee for the 123 Trust. Only Bill's name would be in the Public Records. The Trust Agreement wouldn't be recorded, so would remain completely private. We'd be able to collect all the rents, manage the property, wheel and deal with it as we might agree completely out of public view. Each of us could even sell and/or mortgage our BENEFICIAL SHARES jointly or separately. Since no one would know of our control over the Trustee (provided for in the Trust Agreement), we could pose as mere employees of the Trust rather than as owners.
This greatly simplifies joint ownership. Because Trust shares that represent REAL ESTATE are actually PERSONALTY, they can't be attached by creditors. Heck, they might even be owned by a corporation in another jurisdiction with it's own set of armor against liability. Shares are exempted from laws of devise and descent and carry no spousal rights (except in community property states). In our up-coming C.Y.A. seminar (that could mean 'Consult Your Attorney' but it doesn't) we'll be taking a hard look at a variety of devices for holding joint property and creating a broad arsenal of street-smart strategies to defend your assets.
