September 1991
Vol 14 No.11
Recently, on a visit to Atlantic City I noticed that they've got a new 5 letter word that they use a lot, TRUMP. Its plastered on 3 casinos, a high-rise hotel, on what seems like an endless stream of helicopters that buzz in and out of shore-side pads. They disgorge endless streams of high rollers, who can hold court in a sumptuous yacht also branded with that magical incantation: TRUMP.
I'm fascinated with the rise and (maybe) fall of Donald Trump. Unlike a lot of real estate's soaring stars, he has real credentials as a modern day real estate mogul. He cut his teeth on real estate development, construction, management, finance and even did some rehab work on the side while attending college. Now, his empire is being dismantled by the bankers as a result of reported negotiations to remove his PERSONAL LIABILITY on debts that he signed with recourse. Here we have one of this generation's most daring doers in our field being felled because he signed with full personal recourse.
At the opposite end of the spectrum, I recently spoke to a long time subscriber and friend who's a Mini-Mogul. He just bought a small lot that he's turned into a mobile home space. He's located a used unit to put on it, and he's planning to sell the land and home package and carry the loan himself. This will produce about $400 per month income to add to the other income streams he's carefully garnered over the past 15 years as a small investor. He's doing this out of current rental cash flows from his portfolio of single family houses. Without any debt! If it turns out well he'll do another. And another. He's building his nest egg in the same way that Donald Trump built his. But on a smaller and less risky scale. He won't wind up broke. The jury's still out on Donald. This month we want to show you how to become a Mini-Mogul too.
IT'S NOT HOW YOU START, BUT HOW YOU FINISH . . .
That's the name of the title song from 'The Unsinkable Molly Brown'. It surely applies to all of us in a world of surprises such as we have today. What ever became of all those moguls of yesteryear. They incurred debt with full personal liability! More people are brought down by ill advised borrowing than by litigation, economics or IRS combined! Most of them were too. They KNEW better, but when it came time to sign on a loan, they didn't follow their own precepts. Why do people who know better do this?
They get in a hurry to get ahead! The only thing that institutional financing does for anyone is to speed up the process of getting richer – and, in many cases, in getting poorer. Think back to every time you've gone to the bank for a loan, Wasn't it because you were too impatient to slowly save up until you could afford to buy that which you needed the loan to buy? There's no doubt that the person who uses capital, borrowed at lower-than-market rates, to create after tax PROFITS will surely prosper so long as things go smoothly. If the leverage is obtained based solely on the merits of the proposition WITHOUT ANY PERSONAL LIABILITY TO THE BORROWER, then all that's lost is the time, effort, years, tears, energy and enthusiasm that's been invested.
What could go wrong with a perfect deal? The three largest states with billions of NON-RECOURSE HOME MORTGAGES and the best prospects for the future are all in trouble now! Texas relied upon the energy industry which poured billions into the banks and S&Ls to be used in real estate loans. Easy oil and gas profits translated into easy loans and rising real estate values. When energy prices collapsed, people stopped buying real estate, so it's price also plummeted. As goes real estate, so go the lenders, and vice versa!
The banking crisis has frightened the lenders into a financial fetal position. Every time another lender bites the dust, with appropriate fanfare (and prison sentences for it's officers), other lenders get a little more cautious. Despite the FED's lowering of interest rates and dramatic expansion of the supply of money in the economy, the banks haven't been willing to make real estate loans. This has caught lots of people out on a limb. That's one of the things that has happened in Florida. By current count, it leads the nation in delinquent home mortgages. Of course, the threat of the loss of a couple billion dollars per year resulting from closed military bases certainly doesn't help things. I doubt if our budget cutters have factored in the resulting foreclosures.
California is also enjoying a slump. It's banks still carry large burdens from non-performing third world loans. The Japanese banks are having their own problems on the home front back in Japan, and are retrenching. When major insurers such as Executive Life fail, the ripples are felt throughout the capital markets, and California is no exception. Investor loans are drying up. But added to this are the draconian water conservation measures that are being imposed. Completed projects are being denied water connections. More failed projects, more broken dreams, more FEAR among consumers.
Californians are beginning to realize that the world's greatest consumer market was really driven by REAL ESTATE! Did you ever wonder how Californians with a per capita income of less than $20,000 could afford to live in houses that cost $250,000? Here's how it happens. In 1960 I bought a 4 bedroom, 2 bath 2200 square foot house in Anaheim for $14,500. 30 years later, that same house would have been worth around $275,000. Had I sold it and invested the money at 10%, it would have provided me with a comfortable retirement at a level above the average income in California. But, people are impatient. Had I been a typical Californian, here's what might have been the scenario instead.
In the intense consumer-competitive, image-conscious environment, I'd have spent my earnings and borrowed heavily to buy consumer items that I would have been too impatient to save for. When debt load became uncomfortable, I'd have sold my house, and used the proceeds to pay my debts. Then, I'd have bought another larger home to avoid the taxes on my prior sale. Because by statute, Californians don't have personal liability on debt used to acquire real estate, it wouldn't nave mattered to me that I was now confronting even larger payments and household expenses. Besides, my new house value would have been appreciating and I would have planned to repeat the process as needed to raise money to support my life style.
The 1986 tax reform act codified this procedure all over the United States and the banks couldn't wait to jump in by offering EQUITY LOANS on homes which in 1991 are the only devices by which a person can borrow to buy consumer items and still deduct the interest. 10 years prior to that, the California Coastal Commission effectively removed some of the states most desirable land from the real estate market, so the value of every home in the coastal areas jumped dramatically in value. This just fueled the consumer economy that much more.
Prior to that act's passage, I was teaching single family house investing to groups of 15 or 20 people, but as prices jumped, so did our class attendance, spawning all those guys who are still plying their trade on cable TV. Real Estate millionaires were becoming commonplace in California as a result of easy credit and land use restrictions. Today, there's a darker cloud on the horizon. Prior to the advent of Equity Loans, the SALE of a house was a fairly risk free way to support a lifestyle beyond the limits of one's income. But, BORROWING added a new dimension of risk. Since they were no longer 'purchase money' loans, new EQUITY loans carried full personal liability for the borrower. Both HUD and the VA announced that they intended to pursue deficiency judgments against defaulting borrowers on new loans in spite of California's laws.
For the first time in my memory, Californians are beginning to act like other consumers elsewhere. They're worried about paying their loans. They've slowed their buying. The lenders aren't tending money as easily anymore. Buyers aren't buying like they used to. Every time a lender or insurer fails, people get a little more nervous. Retirees are moving into neighboring Oregon and Nevada in droves. Wage earners are fleeing to Washington, Texas, Florida. And house prices are softening in many areas. Many people are going to pay the piper at a time of their lives when they can least afford to. They've sacrificed what could have been financial security for toys which have long since worn out or been consumed. This looks like a job for Mini-Mogul!
WHEN YOU NEED INCOME, FOCUS ON THINGS THAT WILL GENERATE IT!
The fastest way to generate income is to buy low enough so you can sell at a bargain price. Every weekend my newspaper is full of ads run by car dealers, furniture stores, electronic and computer outlets, drug stores, etc. offering special weekend bargain discounts of from 30% to 50%. Do you really think they're losing money at these prices? As a rule, they're not! They simply make certain that they BUY LOW ENOUGH to be able to discount the merchandise to get the public to buy. You've got to follow the same approach with houses and mobile homes if you want to increase your cash flow.
If you'll develop and employ good negotiating skills, you're going to be able to buy at below market prices. If you're doing this in the distress market, then you'll be able to CONSISTENTLY buy 'good deals'. To sell quickly, the trick is to resist trying to get the HIGHEST PRICE. Attract buyers with bargain sale advertising. Only the distress market can provide enough 'inventory' for you to be able to repeat this process on a regular basis. You've got to learn all you can about ways to buy and to sell in this market. Of course, if you also happen to be licensed, you can augment your normal commissions by acting as a dealer in your own account in the market. You'll have the advantage of MLS insights that non-licensees won't enjoy.
One common complaint that I'm always hearing is that it takes money to make money. That's only true if you don't have any imagination, creativity, skill, drive or ability to accept rejection. If you do, you can try some of the following:
Buy property on Lease/Option and sell on Lease/Option. Or buy on a non-recourse contract or Note and Mortgage, then sell the same way. Build in your profit 'spread' either in the interest rate or the price, or both. Say you buy a $100,000 house for $85,000 by giving the ABSENTEE OWNER $3000 plus a single payment Note for $25,000 due in 5 years or anytime the property is refinanced (rather than sold), and you take title SUBJECT TO an assumable $57,000 loan which has payments of $650/mo. Sell it for $90,000 with $5000 down on a CONTRACT with payment over the same term of $895 per month. The buyer can amend his W4 income tax form to reflect his new home deductions. This increases his take home pay by enough each month to cover the extra $245 you're collecting. You can use similar techniques when wrapping a lease/Option or another installment contract.
With a NON-ASSUMABLE LOAN, you can evade most of the problems simply by LENDING THE OWNER HIS EQUITY. He then signs a non-recourse $85,000 DEMAND wrap-around Note ($57,000 original loan + the $3000 cash + your $25,000 Note which should be SECURED BY ANOTHER PROPERTY OR ANOTHER NOTE.) (Or you might try an unsecured personal or corporate note.) You'll be lending him paper and cash in return for his note, secured by the property! He remains in title. Your wrap around Note can carry a high interest rate which accrues and compounds. Under the terms of your note,
(1) YOU have the Option of accepting the property in lieu of any payment whenever you call the note.
(2) Your Note and Mortgage language will give you an assignment of rents until the note is paid.
(3) As wrap-around mortgagee, you will he responsible for making payments on all under-lying loans, remitting them directly to the mortgagee. And
(4) You'll be reflected on the insurance policies as an additionally named insured mortgagee.
For tax purposes, you'll possess all the incidents of ownership and thereby have equitable title to the property. You get any tax benefits. Subject to your demanding the loan payment and accepting the deed to the property, you could lease the property with an Option, Or, just as soon as you can find a cash buyer who would refinance the property and pay off the loan, you could call the loan and take title. Then convey it to your buyer. This way you can get all your cash out up front with only minimal risk from any quarter. Sure it's complicated. But it allows you to work with all non-assumable financing unless loans specifically forbid any secondary financing.
You can buy high-yielding lower quality 'paper' with deep discounts and pay for it with higher quality 'paper' that has a lower yield. Then use the paper to buy a house or a mobile home, or an Option which you can in turn sell for a profit, if you decided not to hang on to the income stream (and risk) of the marginal paper. Or:
You can buy used mobile homes, put them on nice lots in good parks, then carry back the loans with a spread built in, just like our Mini-Mogul on page 1. Or you can buy the lots and rent them to people who own their own mobile homes. You might rent a lot in a nice park, then move a mobile home onto it and use it as a model. You can sell the unit on the lot; or after selling it, move the unit off to different lot of the buyer's choice. Then you can use the well appointed lot as a setting from which to sell a procession of mobile homes. We'll discuss this in Houston's seminar.
Let's not forget all the permutations of the 'paper' business. You can buy, Option and/or sell discounted paper from others who have originated it and who are now in need of cash. You can go 'cash free' using Mike Meeker's techniques whereby you buy, and sell simultaneously without using cash. Mike can be reached at P.O. Box 1760, Marco Island, FL 33969. Or use Howard Cook's techniques for fracturing income streams and re-combining them into more lucrative packages. Howard's address is is P.O. Box 647, Elfers, FL 34680. Pete Fortunato's techniques for creating your own Notes as a form of private currency with which to buy property is something you wouldn't want to overlook. Write him at P.O. Box 8804, Madeira Beach, FL 33738. All these people either write their own newsletters or conduct seminars. Mini-Moguls need to understand 'paper'.
Don't forget the use of personal property. Americans have an affection for cars, boats and Motor homes which rivals their attachment to home ownership. Just look around and notice how many people with BMWs live in rented premises. Generally speaking, toys are easy to buy, but difficult to re-sell. Buying them low – then either selling them or using them to trade in as down payments on houses – creates a comfortable spread.
One person I know used the Auto/Boat/RV Trader – a magazine commonly found in 7/11 Stores all over the country. She'd either show a picture of a car that she wanted to use as a down payment on a house or sell for paper, or she'd show a house that she wanted to use to buy a car. Failing in everything else, she'd try to buy cars, boats and RVs with mortgages she'd bought at deep discounts. This replenished her stock of personal property with which to repeat the process.
She'd also call all the people selling free and clear $10,000 cars in the newspaper and offer them $10,000 equity in a house. By subtracting that amount from her 'asking price', then creating her own Note and Mortgage to fill in the balance of the equity, she was creating pretty decent owner-occupied single family house loans that produced cash flow income to her. She was a Mini-Mogul in the making. Why not you too?
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