Unlimited Riches Making Your Fortune In Real Estate
ROBERT SHEMIN
Unlimited Riches
Making Your Fortune
in Real Estate Investing
John Wiley & Sons, Inc.
Unlimited Riches
ROBERT SHEMIN
Unlimited Riches
Making Your Fortune
in Real Estate Investing
John Wiley & Sons, Inc.
Copyright © 2003 by Robert Shemin. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Cataloging-in-Publication Data:
Shemin, Robert, 1963–
Unlimited riches : making your fortune in real estate investing / Robert Shemin
p. cm.
Includes index.
ISBN 0-471-25062-7 (cloth : alk. paper)
1. Real estate investment. 2. Investments. I. Title
HD255 .S486 2002
332.63'24–dc21
2002068990
Printed in the United States of America
10987654321
To Alexander: Everything that I do, I do thinking about you.
ACKNOWLEDGMENTS ix
INTRODUCTION Getting Started 1
CHAPTER 1 Real Estate: The Best Wealth Builder
in the Universe 7
CHAPTER 2 Putting You into Real Estate Deals 21
CHAPTER 3 All Types of Real Estate: Their Advantages
and Disadvantages 29
CHAPTER 4 Every Possible Way to Find Great Deals
in Real Estate 37
CHAPTER 5 Now That You Found It, Analyze It 65
CHAPTER 6 How to Control Your Real Estate Holdings 77
CHAPTER 7 Multiple Real Estate Profit Centers 91
CHAPTER 8 Do Not Pass Up These Sources of Income 109
CHAPTER 9 Protect Your Real Estate Assets 133
CHAPTER 10 Legal Protection and Another Income Source 149
CHAPTER 11 Systemizing Your Avenues of Income 161
CHAPTER 12 Your Action Plan 171
CHAPTER 13 The Twenty-Five Costliest Mistakes That
Almost Every Real Estate Investor Makes and
How to Avoid Them 175
vii
CONTENTS
APPENDIX Tools for Running Your Real Estate Investment
Business 189
1. Legal Forms 192
Agreement for Deed 192
Agreement of Trust 196
Contract to Purchase Real Estate 209
Contract of Sale 211
Quit Claim Deed 213
Mortgage Purchase Agreement 214
Offer to Assign and Sell a Note and Deed
of Trust 216
Land Installment Contract 217
Warranty Deed to Trustee 221
Promissory Note 224
Power of Attorney 226
2. Sample Forms and Procedures 232
Property Acquisition Worksheet 232
Hiring Contractors: Policy and Procedures 233
Rehab Worksheet 237
Procedures for Contractors 239
Loan Qualification Worksheet 240
Information Sheet for Notes (Loans) 241
Lease-Option Prospect Qualification Form 242
Letter to Potential Investors to Sell a Property 243
Letter to Insurer to Put Owner’s Name on Policy 245
3. Guidelines for Success 246
Guidelines for Successful Negotiating 246
Negotiating Keys 247
Property Business Plan Example:
Greenwood Court Project 248
Formulating a Winning Strategy 251
INDEX 257
Contents
viii
Thanks so much, Michael Hamilton, John Wiley & Sons, Inc., for
allowing me this great opportunity to write Unlimited Riches:
Making Your Fortune in Real Estate Investing.
There is no way that this project would be possible without
Barbara McNichol, who assisted in writing this book, and proof-
reader Faye Q. Heimerl.
I would also like to thank my parents Jules and Lillian Shemin for
their help and support. Thank you, Dad, for being the smartest
and most inspirational businessperson I have ever known.
Once again, here is to you Janie Hataway. Thank you Paul Bauer,
without whom my real estate speaking career would not be what it
is today.
I also must express my appreciation for Jack Bufkin, who starts
each of my business days with a lot of laughs.
And to the readers: Happy investing.
ix
ACKNOWLEDGMENTS
Getting Started
Indecision is the thief of opportunity.
—JIM ROHN
When I started in real estate, I
thought there was only one way to do real estate: Borrow money,
buy property, put my name on the title, rent it, put up with ten-
ants, have the tenants pay off the costs, and make money over
time. With luck, I would make money every month.
Then I learned how to flip property, fix it up and sell it, or lease-
option it. I also learned that I did not have to use my own money
or credit to buy homes. Most people, including myself sometimes,
have no hands-on experience in the subject matter about which
they are giving advice. You should seek advice only from experts.
Even my mother would say, “Robert, this no-money-down stuff, I
don’t buy it; I don’t believe it can be true.” Now, every time I go to
my mother’s house for dinner, she says, “Robert, I’ve seen you on
1
INTRODUCTION
TV and [in] newspapers and books. Why do you keep telling peo-
ple you can buy property without using your own money or
credit? Stop it!” She still will not believe me. She’s an excellent
expert at being a mom. However, she hasn’t done any real estate
investing. Yet, for the last 200 properties that I have bought, sold,
and made money with, I have not used one penny of my own
money or one point of my own credit. That is true. You are going
to learn ways to do that, too.
The concepts I present here work for everything: houses,
duplexes, land, commercial buildings, apartment buildings, trailer
parks, whatever you are interested in. Small properties, big ones,
cheap ones, and expensive ones. There is a big difference between
a $1 million property and a $100,000 property, but the process
and paperwork for buying and selling them is exactly the same.
As a full-time real estate investor, I have bought or sold about 500
properties in the last five or six years. At one time, I had more than
300 tenants whom I managed for years, and I still manage some. I
constantly buy, flip, lease-option, and manage properties.
I decided that working at a job for 50 years and waiting for retire-
ment in a nice place was not for me. I therefore recently purchased
some nice places in South Beach, Florida, where a lot of people
vacation. People are flipping expensive properties there. I also have
some real estate deals in Costa Rica and in Latin America, where I
like to travel. Once you learn how to do this, you can go anywhere.
My students have demonstrated that the concepts in this book work
in the two most expensive real estate markets in the world: San
Francisco and Manhattan. They also work in your town. If they do
not work exactly where you are, just go 35 minutes up the road.
Overnight Successes
I am from Nashville, Tennessee. My papa plays the banjo, and my
mama plays the fiddle (just kidding). Nashville is where talented
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people go and sometimes become overnight successes. Garth
Brooks, my neighbor for 5 years, became an overnight success
after getting kicked out of every record company and having to
play on street corners for 12 years. That kind of overnight success
applies to me, too.
About 10 years ago, I did not know a thing about real estate and
did not want to. I was a financial consultant working for a New
York financial planning firm. Our clients had to have $3 million or
$5 million to invest with us, which meant they had $9 million or
$10 million total.
What Changed My Mind
One day while working for a financial planning firm, I was sent to
visit an older couple living in Nashville. They had a beat-up old
office and drove a dumpy pickup truck. They looked like poor,
uneducated bums. It appeared that they could not even read or
write well. I talked with them and learned that they did not have
computers, they did not understand advanced finance, and they
did not even understand a term like return on investments.
“Obviously, you are not qualified to work with my firm,” I said as
I started to leave the old gentleman’s office. He replied, “Come
over here, Sonny.” He picked up a book and paused, “When I was
working about 25 years ago and making no money, I started buy-
ing little houses without using any of my own money. I’d fix them
up, rent them, and sell them.” Then he opened his big old
accounting book, the kind with old ledger sheets and the lines
going across the page. He kept all of his own records using just
that book and a pencil. (He still does.) He owned 125 houses, all
paid for, and showed me he had $65,000 a month coming in. He
and his wife would go on vacation for six months every year. He
looked me in the eye, “Robert, how’s your job?”
All of a sudden, young cocky Robert got very interested in this
man’s profession: real estate. In the back of my mind, I thought,
3
Getting Started
“If this 80-year-old guy can do it, I can too.” He still picks up rent
checks every day and still goes out and makes more deals. He cer-
tainly does not have to. For him, real estate is fun.
This really got my attention, so I followed him around for several
months. I also interviewed 200 other investors and 200 tenants. I
put together a big plan for my real estate business, and guess what
I did with it for several months afterward? Nothing! As the expres-
sion goes, “I was a thinkin’ about it. I was a fixin’ to do some-
thing.” That went on for about eight months. During that time, I
looked at about 150 properties. Of those, at least 50 were great
deals, but I did not understand flipping and lease optioning, so I
did not take action. I passed by several hundred thousand dollars
in profits.
What kept me from going after those profits? Fear. (More pre-
cisely, I was scared to death!) However, I did finally make an offer
on a duplex, and it was accepted. That scared me, too. How would
I close on it? ...I borrowed the money and bought that duplex. At
that time, my written plan was to buy 12 duplexes and retire. I fig-
ured each one would draw from $300 to $500 a month in cash
flow, which I could live on. That old couple’s success got me
started.
My First Investment Duplex
Because I have a form of dyslexia, I cannot do a lot of things that
people take for granted. For example, I cannot follow directions to
put together a four-year-old child’s toy. I cannot read maps.
Certain mathematical things I cannot do. Even though I have
rehabbed at least 500 houses, I know absolutely nothing about
construction or repairs. When contractors talk about roof trusses,
drywall, and wires, it is like they are speaking Chinese or Greek.
That language simply makes no sense in my brain.
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4
When I bought my first duplex, I could not find it because I can-
not use maps. People still do not understand that. For a day and a
half, I drove around Hermitage, Tennessee, looking for my duplex.
They all looked the same. I called the broker and said, “I can’t find
the property I just closed on. Where is it?” I was so embarrassed.
He actually met me and drove me to it.
Fortunately, however, I did find my first duplex, rented it out, and
that worked. Then I bought my 12 duplexes. After a year and a
half, I quit my job and retired; for one year, I did not do anything
because I had about $4,000 or $5,000 of tax-free money coming
in every month. Then I thought, “Gee, if it works with 12
duplexes, it’s got to work with 24 or 25, and if it works with 25, it
should work with 50, and if works with 50, it has got to work with
100, 200, and 300 properties.” (I do have help, one person who
helps me manage all of my properties, along with a part-time sec-
retary.)
Instead of learning 1 way to make money in real estate, you will
learn about 10 ways. You may not use them all, but pick up a few
of them and get started.
Why Real Estate Investing?
Maybe you want to buy your own home and learn how to save
thousands of dollars on the transaction. Maybe you realize there is
no job security in the United States (layoffs, reengineering, and
early retirement all equal being fired), so you want to create your
own business. Even if you have a great job and things are going
well, if you are wealthy and successful, I still challenge you to do
real estate investing on the side.
You live somewhere right now. If you pay rent, you are probably
making someone wealthy. You are contributing to someone else’s
5
Getting Started
investments and security, not yours. You pay your rent on time
and thank your landlord, but at the end of the year, you have
nothing to show for it except 12 canceled checks.
If you own a home, you are already a real estate investor. You
probably know somebody—a friend, a relative, a coworker, a
grandparent, an uncle, or an aunt—who has made a lot of money
in real estate, often by accident. Most people spend 40 to 50 hours
a week stressed out, working to make $40,000 a year and then,
with one real estate deal, they make $40,000 almost by accident in
a short amount of time.
If these results appeal to you, you can do it, too! You simply need
three things:
1. Desire
2. Basic knowledge and information
3. Persistent action
This book can give you all of the basic information that you need
to get started. Make this book the catalyst to get you started and to
find within yourself the desire to succeed. I hope this book
encourages you to start taking persistent actions toward becoming
a real estate investor with various sources of income.
Happy investing!
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Real Estate: The Best Wealth
Builder in the Universe
Act as if it were impossible to fail.
—DOROTHEA BRANDE
Why is real estate investing the
best wealth builder in the universe? The answer is simple:
Everyone needs a place to live, and real estate values usually go up
over time. I can assure you that, in the next 20 years, your real
estate property will probably double, triple, perhaps even quadru-
ple in value. If you are in a hot market, it might even go up 10 to
20 times.
When is the time to get into real estate investing? Yesterday. Real
estate increases its value to build wealth, but there are other rea-
sons why real estate investing, compared with any other investing,
is the best.
7
CHAPTER 1
Income, Wealth, and Advantages
Here are five advantages of investing in real estate, the best wealth
builder in the universe, as it leads to wealth for you.
1. Real estate increases your net worth. One of real estate’s
biggest advantages is how it can increase your net worth
instantly because you can buy property below market value.
For example, if you find a property that is worth $500,000
and a motivated seller who is willing to let it go for $300,000,
you put it under contract for $300,000 (about 60 percent of
its worth), then borrow all $300,000, close the deal, and
become the owner of this property. You borrowed all of the
money to make this happen; you did not use your own. The
minute you own this property, your bank and your financial
statement say you have an asset worth $500,000 and a
$300,000 loan against it. Congratulations. Your net worth
just went up $200,000.
Here is a more conservative example. In my first real estate
deal, I bought a duplex that was worth $60,000 for $40,000—
not a home-run deal, certainly not a grand slam—but as soon
as I bought the duplex, my net worth went up $20,000.
Property value ($60,000) minus property cost ($40,000)
equals gain in net worth ($20,000).
This concept is hard for most Americans to understand
because usually when they buy something big (e.g., a new car,
television, jewelry, stereo), their net worth goes down instantly.
The $30,000 car I bought goes down in value to $20,000;
therefore, my net worth decreases by $10,000. However, if you
buy real estate correctly, your net worth goes up because it
appreciates over time, unlike most items that depreciate.
2. Real estate generates income from holding properties. Rental
property (a house, commercial property, or an apartment
building) is unique because your tenants pay off your debt on
that real estate. If you own rental property with $500 monthly
mortgage payments and $800 monthly rental income, you
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end up with a cash flow of $300, which is extra money in
your pocket. The cash will likely be tax-free because of depre-
ciation and write-offs. Your tenants actually pay off your
mortgage debt and, in 10 to 30 years (depending on the
length of your loan), that debt will disappear and your net
worth will go up again.
Residual income creates happiness (RICH) is the concept in
which you, your family, and your estate (after you die) will
benefit from residual income because the rent keeps coming in.
3. With real estate, you can pay less than what the property is
worth. By looking for deals, you can buy real estate that is
priced at 20 to 50 percent of what it it is worth. This means
you seek $100,000 properties that you can buy for, say,
$70,000. Compare that with the stock market. Can you find
stock that is worth $100 and pay $70 for it? No. You pay $70,
the market value, then pray it goes up to $100. It could hold at
$70 for a year, then go up, or it could go down because that’s
the nature of the stock market. You cannot buy stocks below
market value like you can real estate.
4. Real estate offers tax advantages. The third big advantage of
real estate investing is how it affects your tax obligations. If
you have a traditional job with a traditional paycheck, you are
entitled to very few tax write-offs or deductions. However, in
real estate or any business you own, you can write off a wide
array of expenses, including phone calls and a portion of your
business meals. Owning real estate provides the opportunity
to write off most of your mortgage interest and property
depreciation.
5. You do not need cash or credit to get into real estate. In the
stock market, you require most or all of your cash up front to
purchase stocks. If you want to buy a $100 stock, you have to
pay $100 cash. Some banks or brokerage houses will lend
you half of the money to buy stock, but you will still have to
come up with the other half.
In real estate investing, if you find a property selling for
9
Real Estate: The Best Wealth Builder in the Universe
$70,000 that is worth $100,000, you can borrow the entire
$70,000. If you have good credit, almost any bank or mort-
gage company will lend you 70 percent ($70,000) to buy the
$100,000 property. If you do not have cash or good credit, you
can find hard moneylenders who will lend money—in return
for charging a high interest rate. They will lend you $70,000
for a property worth $100,000 without caring if you pay them
back, because if you do not pay them, they take your property.
In any business or investment, especially real estate, you can
use either your own money (YOM) or other people’s money
(OPM). Owner’s terms is an example of OPM. If you buy a
house and the owner lends you money to purchase instead of
your having to go a bank, you are using the owner’s money.
What if you do not have enough money or credit to invest,
but have enough knowledge to be a successful real estate
investor? Then look for investors (i.e., people with money or
good credit) who can borrow at great rates. These investors
may have a lot of cash or retirement accounts that they are
tired of putting into stocks and are seeking other ways to
invest. You might convince them to invest with you if you
have a good business plan and have already had some busi-
ness success. Investors put in the money while you put in the
knowledge and time.
An Overview of the Road
to Unlimited Riches in Real Estate
During my first several years of real estate investing, I knew of
only one way to make money in real estate—buying and holding;
that is, buying and renting property, and collecting rents. Then I
learned about flipping, lease optioning, referring contractors and
legal services, and so on. I started getting little checks, then
medium-sized checks, and finally big checks.
You can do the same. All you have to decide is how many checks
you want from how many sources. Open your mind to not only
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one, two, or three avenues of income, but to multiple avenues of
real estate income. Start with one way and, as your career pro-
gresses, you will want to add more.
Being a Real Estate Agent
What source of income first comes to mind when real estate is men-
tioned? Making money as a real estate agent or broker, the people
who put buyers and sellers together and carry offers between them.
The average real estate commission in the United States is generally
between 5 and 8 percent of the sale. For example, if a sales price is
$100,000 with a 6 percent commission, the agent or broker earns
$6,000. Often, however, there are two agent/brokers, one repre-
senting the buyer and the other representing the seller, so the com-
mission gets split, dispersing $3,000 to each.
The disadvantages of being a real estate agent/broker include a
requirement to be licensed, meet educational standards, pay fees,
and carry liability insurance coverage.
Of course, being an agent/broker has an advantage. You have
access to the multiple listing service (MLS), which lists all houses
11
Real Estate: The Best Wealth Builder in the Universe
Examples of OPM Financing
Mr. R. in Florida says his entire family works in real estate. He him-
self owns hundreds of beautiful properties. However, Mr. R.’s name
is not on any deeds, and he does not have any liability, because he
has partners and investors (e.g., doctors, lawyers, accountants,
bankers) whose names are on the deeds. He discloses every agree-
ment in writing. He does not owe a cent to anyone. When he sells
his houses, he earns from $20,000 up to $100,000, and the investors
get their money back plus one-half of the profits.
I know a full-time student who makes between $80,000 and
$120,000 a year as a part-time real estate investor. He digs up a
good deal, puts a property under contract, finds investors, buys the
property with their money, fixes it up, then sells it for a profit any-
where in the range of $5,000 to $12,000.
for sale in the retail real estate market. You might have access to a
real estate office and its up-to-date technology, and also have con-
tact with other agents and resources who can lead you to sales.
Buying and Holding
Most people associate real estate investing with buying and hold-
ing property—a great wealth builder. If you buy wisely, your net
worth will go up, and you will have monthly cash flow, property
appreciation, and some tax advantages.
Certainly, a disadvantage to the buying-and-holding strategy is
dealing with a lot of tenants, many of whom cause problems. I
always say that if you do not have problems being a landlord, you
do not have enough tenants.
Holding property is a management headache. You have to deal with
contractors, constant repairs, liability, insurance, taxes, ongoing
costs, and overhead. Still, it is one of the best wealth builders in the
world. Because of all these variables, I advise against buying and
holding property for your first 6 to 12 months of real estate invest-
ing, but buy and hold it as time goes by. Most people should start
by flipping property so they don’t put their capital or credit at risk.
Buying, Fixing, and Selling
A lot of people start in real estate investing by buying, improving,
and selling property. Often, beginning investors make the
improvements themselves. They work for six months—what I call
hang and bang, drywall, paint, and clean—then they sell it. You
can make anywhere from $12,000 to $30,000 on a property, espe-
cially if you fix up three or four homes a year. It can be a great
business, but understand that it takes a lot of time and work.
Quick Turning, Flipping, or Wholesaling
With quick turning, flipping, or wholesaling, an investor finds a
good deal, such as a house worth $100,000 that an owner will sell
for less than that amount. Suppose an investor puts this $100,000
home under contract for $70,000. If he or she writes the contract
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properly and puts in a disclosure and contingency clause, he or
she will have little or no risk of losing money over this transaction.
Shortly after buying the house for $70,000, the investor sells it for
$80,000. He or she makes $10,000—a basic wholesale, flip, or
quick-turn deal.
The advantage of this income source is that you do not use any of
your own money or credit—you get paid for finding deals. The
disadvantage is an uncertain future, so you cannot rely on the
residual income you would have with the buying-and-holding
strategy, and you will have to keep buying and selling property.
(See Chapter 7 for more about this strategy.)
Lease Optioning
One of the best ways to control or rent property is through lease
optioning. Consider leasing commercial property, houses, vacation
property, duplexes, land. Instead of borrowing money to buy a
property, thereby getting your name (and all the liability that
comes with it) on the deed, consider leasing it for 1 year, 5 years,
possibly 50 years.
Think of it this way: If 10 years ago you had locked into 10-year
leases on every house in your neighborhood, what leases for
$1,000 a month now probably leased for $200 a month a decade
ago. Therefore, if you originally leased property for $200 and
rented it today for $1,000, you would be making $800 a month.
When you lease with the option to buy, you are locking in the lease
for a set number of years as well as having the choice to buy it.
Remember, you are not obligated to buy the property, but you do
have the right to. When you lease-option property, you control it.
You can re-lease it, buy it, option to buy it, or sell it for more than
what your option price was. The sky is the limit.
Mortgage Brokering
A long time ago, I was told real estate is not real estate; rather, it is
actually finance. This is because with proper financing, a bad real
13
Real Estate: The Best Wealth Builder in the Universe
estate deal can become a good real estate deal. Likewise, a great
real estate deal with bad financing can become a horrible real
estate deal. So anyone in real estate is forced to get into finance—
loans, money, debt, mortgages. (Chapter 7 shows ways to make
money with mortgages.)
Consulting
After you have been investing in real estate for a few years, you
become an expert and can actually earn money from others (e.g.,
bankers, other investors, newcomers) for your consulting. People
will ask you questions all the time anyway, so consider developing
a stream of income that helps you profit from sharing your advice.
Partnering
Partnering (people with different skills and assets working to-
gether to form successful real estate ventures) is another path for
making money in real estate. You can partner in almost limitless
ways: with money, capital, credit, expertise, repairs, and manage-
ment. Decide what your skills are and stick to them, but also find
partners to fill in areas where you lack expertise.
One of the biggest mistakes people make in any business, espe-
cially real estate investing, is trying to do everything themselves.
Are you prepared to be a finance expert, a real estate acquisition
expert, a contractor, a property manager, an accountant, a book-
keeper, and an eviction agent? Are you an attorney or an ap-
praiser? You are wise to get to know those who can help.
Managing Real Estate
You can make money in real estate as a manager mainly by manag-
ing tenants. In residential or commercial management, managers
generally earn a percentage of rents collected and sometimes a
percentage of repairs. Alternatively, they can get commissions
(anywhere from 3 to 15 percent) for locating tenants, signing
leases, negotiating new leases, and signing and leasing property.
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I must warn you, managing properties requires a tremendous
amount of detailed work and can be stressful. Unless you do a lot
of it, it’s not even very profitable. If you enjoy managing people,
then do it, by all means. If not, you can always hire a manager,
then manage the manager. Use this approach as another source of
real estate income.
Tax Liens
Tax liens usually have to be paid off first when a piece of real estate
is sold or foreclosed on. The government has the first claim on the
property, even above banks or lenders who have financed a mort-
gage. Tax liens pay good rates of return, so you might want to
familiarize yourself with this concept. (See Chapter 4.)
Judgments and Liens
Investors who are active in real estate or landlords who have a lot
of tenants will experience times when people owe them money and
they have to collect judgments and liens.
To save on expenses, you could learn how to collect your own
judgments and liens. To create another avenue of income, you
15
Real Estate: The Best Wealth Builder in the Universe
Robert’s Business Philosophy
Ask yourself why you want to get into real estate investing. Sure,
you want to make a lot of money, but real estate investing is more
about freedom.
I urge you to follow my business philosophy, which is to do
nothing. That is right—nothing. If I have other professionals doing
their jobs properly, I can do next to nothing and profit from it.
For instance, you may have money or credit but little time. Why
not locate partners to find deals for you; use their time and energy
and your money or credit. What if you do not have money or credit
but have lots of time to look for deals? Partner with people who
have money or credit. In the same manner, you can partner with a
contractor for your rehabilitation projects or with a management
company that manages the rental properties it finds for you.
could take it a step further. Here’s how it works. If someone owes
$50,000 on his or her property, a judge has put a lien on it, and it
hasn’t been collected on for five years, you could possibly negoti-
ate the option or the contract to buy that property for $5,000,
which is the amount of the judgment. You would approach the
owner and say, “Look, you owe $50,000 on this house, but if you
pay us $15,000 next week, we’ll wipe out the remaining debt.
We’ll forgive it, forget it, extinguish it.” If you did that, you could
earn more than $10,000.
Foreclosures
One of the most popular sources of income in real estate is fore-
closures. When a house is foreclosed on, it means that a home-
owner has borrowed money that he or she cannot repay. The
lender takes possession of the property, but in most cases the
lender is really interested in recouping the loan’s principal balance
and expenses incurred.
If a property is worth $100,000 and the principal balance plus
expenses due the lender is $100,000, stay away from that deal!
However, if that property is worth $162,000 and the lender only
wants $100,000 to cover costs, I suggest that you get control of
that foreclosure and find out how to profit from it.
You can go to a number of places to find out about foreclosure
deals: banks, mortgage companies, government agencies, private
lenders, and tax agencies. Remember, though, real estate investors
are not out to take advantage of anyone. If you cannot help the
person being foreclosed, you do not want to get involved. You are
not in the business to get people to sign over houses they do not
want to sign over. That would be a bad deal—you never want to
get involved in one.
Title and Escrow Closing Fees
Some savvy real estate investors and Realtors have started generat-
ing income from title and escrow closing fees. When they get
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16
involved in numerous closings, they can make legal and ethical
agreements to get marketing or consulting fees for their efforts.
Investors might even be able to use another company’s computers
or office space in exchange for bringing customers on board. This
often-overlooked source of income can add significantly to your
fountain of wealth.
Buying and Selling Discounted Notes
When you buy (or broker at a discount) a note, you give those
people holding notes on properties the opportunity to get their
money without waiting the full term of the loan. You might know
someone who made arrangements to sell his or her house for
$100,000 and took back an $80,000 mortgage. At 30 years at 10
percent interest, he or she may be making $700 a month on that
note, with 25 years left to pay. Here is what you say: “Instead of
waiting another 25 years to get the rest of your $80,000, how
would you like $60,000 in cash in the next few weeks?” Someone
needing funds might go for that offer immediately.
A number of people make money by buying notes, so why not
make some sales commissions by bringing together buyers and
sellers of those notes?
Maintenance and Repair
Owning real estate inevitably involves repairing and maintaining
property. If you regularly contract for lawn care, roofing, new
appliances, and carpet cleaning and installers, you know which
companies provide good prices and service. You are probably will-
ing to recommend those companies to your associates, but it makes
sense to make money by setting up a system of referral fees first.
Generally, before I refer a good contractor or maintenance person,
I make a contractual agreement that guarantees me from 10 to 20
percent of the bid for a job. Because I am providing work that per-
son would not have had without me, I should earn a commission
for that service.
17
Real Estate: The Best Wealth Builder in the Universe
Legal Services
If you are in any business in the United States, especially real
estate, you are going to need attorneys. Using prepaid legal ser-
vices, you can profit from other people needing attorneys by par-
ticipating in a national legal referral system. By selling prepaid
legal expense plans, you can develop another source of income.
Appraisals
Generally, any time a property purchase is being financed by a
loan, it needs to be appraised. You could become a professional
appraiser—provided you are careful about conflict of interest.
Also, you might refer appraisers and, when it is legal and ethical,
earn commissions from those referrals.
Insurance
Never buy property without proper insurance, which may include
title insurance, liability insurance, fire insurance, and insurance
plans specific to commercial property. Someone has to broker and
make commissions from all that insurance. Perhaps you could get
an insurance license or develop a marketing and referral system
with certain trusted agents. That will lead to still another avenue of
real estate–related income.
Ancillary Services and Profit Centers
Ancillary services are part of buying, fixing up, and renting prop-
erty. They can include furniture rental, cable TV rental, Internet
service, tenant services, even restaurants. You could generate dif-
ferent forms of income from all of these services by charging refer-
ral fees for anything your tenants or clients could possibly need.
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Word to the Wise
Get everything in writing! Disclose everything to everyone in writing.
Be sure that all of your business arrangements are legal and ethical
in your state or wherever you are investing. I suggest you always
consult with your attorney and accountant to avoid costly lawsuits
down the road.
For example, if your tenants and clients need a satellite or com-
puter hookup, a moving service, a rental truck, or whatever, you
would likely refer them to service providers you know; you might
as well get paid for it. You will learn more about these various
sources of real estate income in the chapters that follow.
19
Real Estate: The Best Wealth Builder in the Universe
Putting You into
Real Estate Deals
Vision is the art of seeing the invisible.
—JONATHAN SWIFT
Before we get into the actual
mechanics of finding deals, analyzing them, and making money off
of them, let us talk about you. Every one of you is absolutely dif-
ferent. You have different skills, different assets, different worries,
and different goals. You need to decide what you really want to do,
how much you really want to make, what you are good at, what
you are not good at, what you are scared of, what you are not
scared of, and what you feel comfortable with, then start develop-
ing a business plan. Whether you are going to own 1 piece of
property or 1,000, you are going to have a business. Every busi-
ness needs a plan. Every business needs goals. Every business
needs to decide who its key people are.
21
CHAPTER 2
If you start a computer company, you do not hire people who are
good at raising horses. If you need sales, you do not find people
who do not like to talk to people. Likewise, if you go into real
estate investing, you want to assign yourself the jobs you are good
at, the ones that inspire you.
“Know Thyself”
Write down the real estate activities that are attractive to you.
Maybe you love to talk to people and sell things; you will likely be
good at getting tenants, putting deals together, and selling the
deals. Perhaps you love detail and finance; you would be excellent
at doing mortgages and financing deals, but not good at selling
them. If you become irritated when people talk to you, you proba-
bly do not want to manage property.
Like Socrates said, “Know thyself.” Early in my business, I learned
quickly what I am not good at—accounting. I stashed receipts in
shoeboxes for the first nine months of the year. The other three
months, I tried to figure out what I did the first nine months. I
used to balance my checkbook by calling up the bank and asking
what my balance was. That is no way to run a business. I now have
a service that takes care of my bookkeeping and accounting, activ-
ities that stress me out today. My checkbook balances, and I know
exactly where my financials are. This leaves me free to do what I
love—finding and putting deals together.
What do you like to do? What kind of people do you like to be
around? What kind of deals would fit your personality? What
aspects of real estate investing fit you best? Conversely, what do
you not like to do? Determine that and partner with someone who
does what you hate to do.
This may sound too touchy-feely, but it is important because you do
not want to buy property and then agonize because you don’t like
doing repairs, working with contractors, or dealing with tenants.
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Forming Your Team
Whatever aspect of real estate investing you get into, you need a
team. You can build your board of directors or your team starting
now. To whom do you go when you have finance questions? Legal
questions? Contract or repair questions? Whom do you call when
you have deals to sell? Start now by asking, “Whom do I want on
my team?”
Writing Your Plan
When most real estate investors start out, they have one goal: to
get one property. However, they have absolutely no plan. They set
out to find that property and, after they buy it, they figure out what
to do by accident. When tenants do not pay the rent, for example,
they react quickly to evict them without researching alternatives.
Let me save you a lot of time and headache by insisting that you
write a plan. Remember the famous study about Yale graduates: It
determined that the 3 percent of those graduates who wrote down
their goals for the future financially outperformed the other 97
percent three to five times.
23
Putting You into Real Estate Deals
Questions to Answer for Yourself
■
What do I really like to do?
■
What in real estate is attractive to me?
■
What do I believe I am best suited for?
■
What do I absolutely not want to do in real estate (e.g., finding
deals, putting in offers, analyzing deals, financing deals, getting
partners, selling deals, managing tenants, doing repairs, book-
keeping, making cold calls, looking at properties, talking to a lot
of potential buyers, talking to a lot of potential renters, talking to
a lot of potential sellers, talking to investors, finding money, bor-
rowing money, legalities, contracts, writing contracts, writing
leases)?
I challenge you to, in the next 48 hours, sit down with your loved
ones and write out your goals. Decide what you want to have for
your 30-day plan, followed by your 60- and 90-day plans, your
6-month plan, and your 1-, 5-, 10-, and 20-year plans. Schedule a
couple of hours to record these goals and structure your plans.
Remember, your plan does not have to be very long—I suggest
between two and six pages. It should include the following items:
■
How much property you want to have (in each time frame)?
■
What type of activities you want to be involved in?
■
How much money you want to make (in each time frame)?
■
How much net worth you want to develop?
Most important, write down how you will reach each of your
goals—your plan of action. How many phone calls will you make?
How many properties will you look at? It is one thing to say, “I
would like $10 million worth of real estate,” but it means nothing
if you do not say how you will get there.
Planning Your Perfect Day at Work
Tie your goals into creating a perfect day at work. How would
your perfect day go? Would you have a big office, or a little one?
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Make More Offers
A gentleman named Hal lives in my town, owns a lot more property,
and makes a lot more money than I do. Another gentleman named
John in Ohio owns more than 900 properties, and he makes a lot
more money than Hal. Why is this? Here is the secret: Hal makes
more offers than I do, and John makes more offers than Hal. If you
never make an offer on a property, you will never get one. I promise
that if you make enough offers, some of them—not all of them—will
be accepted. Therefore, if you are not happy with how much prop-
erty or income you are generating from your real estate business,
the solution is simple: Make more offers.
Would you work out of your home? Where would it be located—
in a city, on the beach, or in the mountains?
Beyond the physical setup, determine the nature of your business.
What kind of deals would you make? What would your portfolio
look like? How much money could you make that day? What
would you do to bring in money? Who would you work with?
I planned my perfect day at work a few years ago in Nashville,
Tennessee. I saw myself by the beach. I would wake up and exer-
cise, ride around, take some phone calls, do some deals, have
lunch, rest in the afternoon or go to the swimming pool, check my
messages, do more work in the afternoon, put some deals
together, and go out at night or spend time with my family and
friends. I would also travel a lot.
I made that plan when I lived in a half-room office in Nashville.
Today, I live in a beautiful condominium apartment overlooking
downtown Miami and the beach. I ride my scooter and my bicycle
around. I wake up early to work out or do yoga on the beach. I
come home, check messages, make some phone calls, listen to a
few angry tenant requests on voice mail, go to lunch, work some
in the afternoon, hang out, and travel a lot. Most of my days are
just as I pictured.
Planning Your Perfect Day at Play
Besides your real estate goals, be sure to make overall financial
goals, personal goals, family goals, and spiritual goals. How much
vacation do you want to have? How much time do you want to
spend with your loved ones? How do you want to relax?
When you know this, you can plan your perfect day of play. Write
down what that perfect day looks like. Where are you going to be?
What are you doing? Who are you with? When you make that first
wholesale deal or do a lease option or buy, fix up, and sell a prop-
25
Putting You into Real Estate Deals
erty, reward yourself. Take a small percentage of your profit and
get that perfect day of play under way. Maybe you want to take a
balloon ride, go on a picnic, go to the mountains, go to the beach,
or go on a cruise ship—whatever it is, first set your goals by writ-
ing them down.
If you do not have the energy to write down your
goals, I can assure you that you won’t have the
energy to make your real estate deals happen.
Let me give you an example. At a workshop, one of the partici-
pants came up to me and said, “Robert, I am going to learn this
stuff. All I want to do is make $6,000 and pay off my credit card
bill. That is my goal.” He went out, flipped one property, earned
$6,200, and paid off his Visa bill. He met his goal. He was
thrilled.
Another student said, “Robert, I have a lot of overhead. I used to
be a corporate executive making a lot of money. I need to make
$20,000 a month, no less.” He wrote that down as his goal. To
make that amount, we agreed that he would have to do a couple of
flips a month, buy rental property, broker mortgages, and get
active. He really likes doing these activities and now makes
between $20,000 and $30,000 a month, just as he pictured.
Your Money and Your Credit
My parents, who brought me up well, always said, “Do not ever
talk about money, sex, religion, or credit.” I love to talk about all
of these things because I find them fascinating; most people do
not. However, if you are going to be a successful real estate
investor with various income sources, you do need to talk about
money and credit. You need to get them under control, or at least
get started on them. Most real estate investors who have been
supersuccessful have also been superbroke.
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Start by taking a financial snapshot of where you are today. How
much cash do you have? How much credit? What is your credit
score? Requesting a copy of your credit report and obtaining a
financial statement from a bank or mortgage company will help
you to determine what you want to do with your real estate invest-
ing as you put these activities into practice. Six months or a year
from now, you can compare your snapshot then with now. Realize
that you have to know where you are today to be able to get to
where you want to be tomorrow.
If you take time now to answer the following questions, you will
have a much better idea of what you want to get into. In addition,
you will avoid a lot of headaches and frustrations that most
investors never take the time to think about.
■
How much can you borrow (if you need to) to make real
estate investments?
■
How much access to cash do you have?
■
What are your assets?
■
What do you own? (Houses? Cars? Investments?)
■
What are your liabilities?
■
What are your debts? (Mortgages? Credit cards?)
■
How much is your life insurance? Your retirement account?
Take the next two days, the next 48 hours, to make a plan. Decide
where you are and where you want to be. Write down your goals
and share them with others. You are on your way to developing
numerous sources of real estate income.
27
Putting You into Real Estate Deals
All Types of Real Estate:
Their Advantages and
Disadvantages
To win without risk is to triumph without glory.
—PIERRE CORNEILLE, LE CID, 1636
New real estate investors always
ask me what type of real estate is best: land, houses, duplexes, and
so on. Should they get into high-end property? Low-end prop-
erty? Middle-income property? Commercial property? Apartment
buildings?
My advice is to pursue whatever you are interested in. Do not ever
listen to someone who says, “Only do this type of real estate. Only
get into houses. Never do commercial. Only do commercial. Do
not do houses. Big apartment buildings are better than little apart-
ment buildings. Trailer parks are the best, better than houses.” The
truth is it all can work.
29
CHAPTER 3
Your job is to find a good deal in real estate, whether it is a $3,000
trailer, a $30,000 house, a $300,000 luxury home, a $3 million
apartment building, or a $30 million commercial property. Find
properties you are comfortable and familiar with at first, then
expand. This chapter gives you an overview of different types of
investing, so you can consider the advantages and disadvantages
of getting into them.
Rental Property
Rentals can be an excellent wealth builder. You buy and hold prop-
erties, pay off the debt, and watch the value appreciate. Rentals
give you some tax advantages, too. Here are some of your choices.
Trailers and Weekly Rentals
I know some people who will not rent anything if they cannot wheel
it around. When I got started in real estate, I would buy a house or
duplex for $50,000 in Tennessee and rent it for maybe $700 or
$800 a month, at the same time paying off a note of $400 or $500
a month. I was making $200 to $400 every month. For $4,000, my
friends would buy a trailer that was 10 or 15 years old. They would
fix it up and rent it for $100 or $150 a week. They recovered their
initial investment in eight months or less and earned $500 or $600
a month in rent after that. In these two examples, which deal is bet-
ter? The last one is . . . on paper. However, as with anything, there
are advantages and disadvantages.
Advantages
■
The cash flow is great.
■
The amount you have to invest to get started is minimal.
■
The return that you get on your cash flow is good.
Disadvantages
■
You deal with a lot of management hassles, transitions, and
turnovers.
■
You will spend money to keep the cash coming in.
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Analyze the situation well, and make sure you count your time and
money so you can make a good return on your investment.
Single-Family Homes
What about basic, single-family bread-and-butter homes rented to
low- and moderate-income families? You do not need to have a lot
of money to get into them; you can leverage out of them; you can
buy them for less than what they are worth. They are in high
demand, so they are fairly easy to rent and sell if you take care of
them.
Advantages
■
They are easy to rent.
■
They are easy to sell.
■
They appreciate fairly nicely.
Disadvantages
■
If you own a little house here and a little house there on scat-
tered sites, they are management-intensive.
■
If your tenants are low- and moderate-income (or at any level
of income) and you do not screen them well, you may face
plenty of repairs when they move out.
Condominiums
Renting condominiums has advantages and disadvantages too.
Advantages
■
Condominiums are fairly easy to rent. Sometimes they are
easy to sell, but not as easy as single-family homes.
■
Condominium owners are only responsible for the interior;
common areas are kept up by the management association.
Disadvantages
■
Condominiums have maintenance and management fees that
range from $60 to $300 a month to cover insurance and
31
All Types of Real Estate: Their Advantages and Disadvantages
upkeep of common areas. These sometimes eat into your cash
flow.
■
The condo association needs to be well funded and not facing
any big expenses like a new roof or parking lot. Always do
your research first.
Duplexes, Triplexes, and Quadruplexes
Here are some pros and cons of renting duplexes, triplexes, and
quadruplexes.
Advantages
■
They are easy to finance most of the time because they are
deemed residential real estate. This means that anything with
fewer than four units can be financed through a residential
loan, so they are easier to finance. Remember, properties that
are easy to finance are easy to buy and sell.
■
They have more than one unit bringing in rent, which helps
the cash flow.
■
They are fairly easy to rent because people would rather live
with just 1 or 2 neighbors than with 400 in a large apartment
building.
Disadvantages
■
They are harder to sell than houses in a slow market. Single-
family, three-bedroom homes are the easiest group to sell.
■
They are harder to finance than single-family homes.
■
Their biggest disadvantage is also one of their advantages:
Because more people are paying rent, collecting rent becomes
complicated. Rent-paying situations create more turnover, more
repairs, more phone calls, and more management headaches.
Small Apartment Buildings
Smaller apartment buildings, containing between 5 and 100 units,
are part of a fragmented market. A lot of mom-and-pop owner-
operators run small apartment buildings.
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Advantages
■
You receive great cash flow.
■
You can usually hire an on-site manager to take care of things
because all of the tenants live in one place and are not scattered.
■
You can have economies of scale because all of the apart-
ments are in one place.
Disadvantages
■
As the number of units goes up, vacancy and repair rates go
up, which translate into more turnover, more repairs, more
people, and more headaches.
■
It is harder to sell an apartment building than a home if the
market goes bad because it is an investment property.
■
It is more difficult to find financing for an apartment building
than for a home. Rarely will a bank or mortgage company
loan more than between 60 and 80 percent of the purchase
price of a small apartment building.
Large Apartment Buildings
Large apartment complexes are usually run by large organizations.
This market requires a lot of capital and can be very competitive.
Advantages
■
Large apartment buildings provide economies of scale.
■
Large apartment buildings are easy to manage with all tenants
in one place. Finding great deals on apartment buildings
becomes more competitive with 100- to 200-unit complexes
because many large commercial companies invest in these.
33
All Types of Real Estate: Their Advantages and Disadvantages
A Rose by Another Name
In certain areas of the United States, duplexes are called doubles,
triplexes are called triples, and quadruplexes are called fourplexes. In
my opinion, it doesn’t matter what you call them if they make
money for you.
Then you may be competing against large real estate compa-
nies and institutions with tremendous amounts of capital.
However, many real estate investors profit well from the
smaller complexes that have from 10 to 50 units.
Disadvantages
■
They can be hard to finance because of size.
■
They can be tough to sell in a down market.
Commercial Property
Commercial property here refers to strip centers, office buildings,
and commercial warehouses.
Advantages
■
The tenants generally take care of all the repairs, unlike in res-
idential properties.
■
The rents can be lucrative, especially for big spaces.
Disadvantages
■
Commercial property is more difficult to finance than residen-
tial property.
■
Commercial property often requires time to find another ten-
ant that suits the space. This means that you have to be willing
to pay the note or pay the costs, taxes, and insurance while the
space becomes rented and retooled for a new tenant.
■
Commercial property stays empty longer than residential
property when the economy is down.
Land Developments
Land developments involve investors finding land, getting it under
control, improving it with roads or utilities, then selling it for a big
profit, either through a residential developer or a commercial
developer. It is a great business.
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One of my favorite sayings: The two best businesses
in the world are buying whiskey by the bottle and
selling it by the shot, and buying land by the acre
and selling it by the lot.
Advantages
■
A land development gives you the potential for a tremendous
profit because you are dealing with a bigger chunk of land.
■
A land development will likely increase in value, especially if
you improve it with roads and services.
Disadvantages
■
You have to have real money because the land does not pro-
duce any income.
■
You have costs (e.g., mortgage, taxes, insurance) while you
are holding the land.
■
You can sell land easily in prosperous times; however, in hard
times, you may have difficulty selling it.
35
All Types of Real Estate: Their Advantages and Disadvantages
What Options Suit You Best
Your main job in developing unlimited riches in real estate is to find
good deals. Once you learn the tools (e.g., for wholesaling and lease
optioning), it does not matter whether the property is a piece of
land, a house, a duplex, or a giant apartment building. Use the
methods in this book to learn what options suit you best.
Every Possible Way to Find
Great Deals in Real Estate
Patience, persistence and perspiration make an unbeatable
combination for success.
—NAPOLEAN HILL
This book shows you how to ana-
lyze deals; contract deals; lease option deals; wholesale property;
buy, fix up, and sell property; rent property; and determine many
other possible avenues of income you can get from real estate
investing. However, one critical detail must be covered first: how
to find a good deal.
If you cannot find a good deal in real estate, you cannot make
any money. You cannot develop all of those sources of income
without finding good deals. (Unfortunately, this is the critical
part that a lot of books, seminars, and conferences about real
estate leave out.)
37
CHAPTER 4
What Is a Great Deal?
Let’s say a friend of yours is getting divorced, has to move away,
needs cash quickly, and says, “I have this Jaguar worth about
$50,000. It’s in great shape. If I could just get $30,000 for it, I’d
be okay.” The car was brand new the year before, purchased for
about $55,000.
Could you figure out a way to make money off that Jaguar? You
could call dealers, who are wholesalers, and ask, “What is a 2001
Jaguar worth today?” They might reply, “About $50,000.” So you
would ask, “What would you pay for it?” and they might say,
“We’d have to make something on the resale, so we’d pay $42,000
for it.”
If the dealership gave you $42,000 and you gave your friend
$30,000, you would make $12,000. Alternatively, you could run
an ad in the newspaper offering the Jaguar for, say, $45,000. You
would make even more money. Or you could take $30,000 from
your savings or borrow from a bank, lease the Jaguar for $600 a
month, and bring in money every month for it.
You have these choices in real estate, too, but first you have to find
a good deal like your friend with the Jaguar handed you. If you
find a good deal, you will make good money. If you find a great
deal, you will make great money.
Finding Motivated Sellers
To find good deals, find motivated sellers. If a property is worth
$100,000 in the marketplace and the seller wants $99,000 for it,
the seller simply is not hungry to sell. So what motivates some peo-
ple to sell at below-market prices and how can you identify them?
Let me give you an example. I once called about a house after see-
ing a newspaper ad that stated “Must Sell.” I called the gentleman
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who placed the ad and he said, “It’s a five-bedroom, three-bath,
with a pool and tennis court in a great neighborhood.” I knew that
house had to be worth $400,000 to $500,000 because I was famil-
iar with this neighborhood in Nashville, Tennessee.
I asked, “Is it in good shape?”
“It’s in perfect shape,” he replied.
“What do you want for your house?”
“I want one dollar.” Was he motivated to sell? Yes.
I generally do not try to figure out why people do what they do,
but I asked him, “Why are you selling it for a dollar?” He
answered, “I’m getting divorced and I’ve got to split the assets
with my wife. I can’t wait to give her fifty cents.” What was his
motivation? Revenge. I had no desire to know more about their
relationship. It was none of my business. But I did want to buy this
home for a dollar.
39
Every Possible Way to Find Great Deals in Real Estate
What Is One Deal Worth?
What if you find that great deal—a house you can turn over, flip, or
wholesale? You make $8,000, or $12,000, or $20,000 in a short time
by selling it shortly after you buy it. What is one deal worth to you?
(See Chapter 7.)
What if you find one great deal—a house you could buy and hold?
You borrow $100,000, rent the house out, and pay for it in 15 years.
By then, it is worth $300,000 and you have made thousands on it.
(See Chapter 7.)
What if you lease-option a house? With this method, you get three
paydays. The tenants pay you up front with option money. You lease
it out every month and make $300 to $500 extra cash flow coming in
every month. And when they actually buy the house, you make
another $15,000. (See Chapter 8.)
Returns like these are possible with good and great deals. If you
are not searching out these deals, you could be wasting your time
in real estate.
Unfortunately, the judge in divorce court would not approve the
contract (which I wrote under the seller’s guidance) to buy the
house for a dollar. The judge threw it out, but I got the house for a
lot less than it was worth (though it was more than a dollar).
Here are some additional indicators for identifying highly moti-
vated sellers.
■
Poor health
■
Divorce
■
Unemployment
■
Estate sales due to death
■
Moving on to a new location or a new lifestyle
Sometimes people face a health crisis, a divorce, or the death of a
loved one. They lose their jobs or their desire to care for their
property. Through their transitions, they have difficulty paying
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Stop Trying to Understand Why
If you follow this advice, you will save a lot of time, headaches, and
psychic energy in real estate investing.
Stop trying to figure out why people do what they do.
Why do people smoke? They know it is going to kill them. Why do
people not go to the gym? Why do they not take care of their
health? Why do they not donate money to charity? Why isn’t every-
body happy? Why do people spend ridiculous amounts of money on
ridiculous things?
This book is not about teaching psychology. If you are reading it,
you want to be a successful real estate investor, not a counselor.
Your job is to find good deals, not to understand why people do what
they do. However, it is wise to find out the circumstances people
face. Their life events certainly affect their motivation to sell at
below-market pricing.
their expenses, including their mortgages. Although the circum-
stances may be sad, if you can help them prevent foreclosing on
their property by getting cash into their hands, you have done
them a service.
Please realize I am not saying to take advantage or rip people off.
If you ever have a transaction in which every party is not com-
pletely satisfied with the deal, move on.
You can experiment with a variety of ways to find sellers, including
going through newspapers and brokers. Be sure to use these
approaches consistently so you know which ones work best for you.
Reading Newspaper Ads
I got started in this business Sunday mornings while enjoying my
favorite hot drink at home and reading the newspaper. About half
of all the deals I have ever found, even the great ones, have come
from newspaper ads. Calling on ads at least every Sunday or more
often will get you started. If you follow sports, you read the Sunday
paper religiously. You learn about the heights and weights of the
athletes, their playing statistics, even their arrest records in some
cases. If you study the real estate section in the same way, you will
become an expert in real estate like you are in sports. It is similar to
how some people follow stocks. They know every detail about them
and watch their movements 15 times a day. If you did one-tenth of
that activity in real estate by steadily going to the real estate section
every week, you would become an expert in real estate.
When you read the newspaper, what are you looking for?
Suspects—highly motivated sellers who become prospects. The
following nine ideas suggest where to look to get started.
For Rent Ads
If a property is for rent, it is often empty and the owners have
a mortgage on it but are not collecting rent. The landlord or
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Every Possible Way to Find Great Deals in Real Estate
management company may be tired of renting it out and keeping it
repaired. Sometimes you can get some great deals and help the
owner get out of the business altogether.
For Sale by Owner Ads
If people are selling their houses by themselves, that might mean
they cannot afford a Realtor, do not want to get a Realtor, or are
in a hurry to sell.
For Sale Ads
Look at For Sale ads to quickly learn what property sells for in
specific neighborhoods. Search for phrases such as “Must Sell,”
“Make Offer,” and “Won’t Last.” I circle those ads and call to find
suspects who might become prospects.
In the process of calling, you will learn which Realtors are active in
those areas. Get to know them because if you ever find a deal in
their territory, they could help you locate buyers or sellers.
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“Must Sell”
A student of mine, Don, saw a “Must Sell” ad in the newspaper for a
commercial property in Miami, Florida. He did not know much about
Miami, but he called the broker listed in the ad and asked this critical
question: “Why are you selling?” The broker replied, “The woman is
selling because her husband was the landlord. He just passed away
and she doesn’t want to manage it. She’s tired of it. She wants to
dump it. The building is worth as much as $1.4 million but it needs
$200,000 of work. She’d take $500,000 for it.” Don offered a lot less
than that and got the building under contract for $290,000. He wants
to wholesale it and stands to make between $100,000 and $300,000.
The end buyer will also get a great deal because Don is asking
$700,000 to $800,000 for this $1.4 million building.
Who wins? Everybody. The widow is happy to let go of the prop-
erty after making money with it over the last 30 years. The broker
will make a good commission; Don will see a large profit; the end
buyer will get an incredible deal. And it all started from answering
an ad in the local newspaper.
Investment Property Ads
I like to call ads under the heading “Investment Properties”
because I know investors own these properties being advertised.
An investor or landlord has either purchased a property years ago
and wants the profits from the appreciation in value, or has bought
a bad deal and is tired of messing with the property. In both cases,
the owner could be highly motivated to sell.
When I call, I always ask, “Do you have or know of any other
properties for sale?” I recommend always asking that question
when you call. Here is why.
I once responded to an ad from this section and the older gentle-
man who answered said, “I’ve got this property and I’m selling it
at 30 percent below what it’s worth. I’ll do owner’s terms. I have
pictures of it and I really want to sell, so I’ll be more than glad to
work with you.” Then I asked that important question. “Do you
have any others?” He said, “I’m so glad you asked. I’ve got 88
more, all with pictures and documentation.” I ended up buying all
of them and flipped about 50 in about a year.
Lease-Option Ads
Check for a Lease-Option section in your paper. Investors looking
for deals or putting deals together usually place ads here.
Remember, they are investors. And if you are also an investor who
is going to be wholesaling, you not only want deals that you can
buy but you want people you can sell to. Always get their names,
addresses, phone numbers, fax numbers, e-mail addresses, and
what type of property they like. Another critical question to ask is:
“Do you know of any good sources of financing?” Build your lists
of people who can get you money as well as get you deals.
Every time you talk to an investor, you are looking for three things:
1. A deal you can buy
2. A deal of yours that they can buy
3. Good sources of financing
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Every Possible Way to Find Great Deals in Real Estate
Auction Ads
Auctions, listed in the back of the real estate section, are becoming
a popular way to sell property. Some estimate that in the next five
years, about 40 to 50 percent of all property may be auctioned.
Auction companies advertise, conduct the auction, sell the prop-
erty, and close the deal 10 to 30 days later. If they have deals they
cannot auction, they sell them at a discount because auctioneers
are always finding motivated sellers who want to off-load their
properties quickly.
When you go to real estate auctions, whom do you meet? Buyers
who have cash. (Some deals offer owner’s terms or financing, but
many require cash.) So go to an auction as if it were a cocktail
party. Meet everybody there and build your list of buyers. Get
names, addresses, phone numbers, e-mail addresses, and fax num-
bers. These investors find deals that they could pass on to you, and
vice versa. All the while, you keep your eyes open for a great deal.
Legal Notices
You will find legal notices in many newspapers. They announce
bankruptcies, divorces, foreclosures, and estate sales. You might
find highly motivated sellers in any one of these areas, plus you
can find a lot of great deals and work with your attorney on the
technical details. These deals can be worth the effort.
Every major city has a legal newspaper. Call a local attorney or go
to a magazine shop, find out the name, and buy it. It is full of fore-
closures, tax liens, bankruptcies, estate sales, and divorces. You do
not have to understand the legal mumbo jumbo. You simply call
the attorney listed or get an address off the legal notice and send a
letter asking about suspects for good deals.
Obituaries
If an obituary is in the newspaper, what does that mean to you?
The deceased usually leaves behind real estate, furniture, cars, and
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often family members who live all over. You could be doing their
relatives a service by writing or calling them and saying, “I am so
sorry to hear about your loss, but if you have any property you
want to dispose of quickly, I can help you. I might be interested in
taking it over.” In a lot of instances, people say, “We don’t want to
mess with this house. The children and cousins have moved across
the country. Just take the house; you’re doing us a favor. Yes, we
know we’re selling way below what it is worth, but we don’t have
time to deal with it. Too many memories. Just take it.”
I have been teaching this method for years and one of my students
has been extremely successful. He responds to all the obituaries in
writing and usually gets about 10 to 20 deals a year in a very small
town. Many times, the people write him a letter thanking him after
he has put the property under contract, flipped it, fixed it up, and
sold it. They say, “Thank you so much for taking that property off
our hands. We didn’t want to have to deal with everything.” So
sometimes he not only gets the houses, but also acquires cars, fur-
niture, and collectibles.
Neighborhood Newspapers
Some of the best deals can be found in the Thrifty Nickel, the
Shopper’s News, and other neighborhood papers because people
who place ads there cannot afford to advertise in the big paper. I
have experimented and found that if you have $200 to advertise
with, you will likely get better results from advertising in the
smaller papers. Not only are they good sources for finding deals,
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Every Possible Way to Find Great Deals in Real Estate
Get to Know Law Firms in Your Town
Generally, in any given town, a couple of top law firms handle most
of the foreclosures and bankruptcies. Get to know the people in
those firms and work with them. Understand that they care about
client confidentiality, so they cannot tell you certain things, but they
do know about pending deals. They will call somebody about them,
so it might as well be you.
but you also get more bang for your buck in advertising. (More
about advertising later in this chapter.)
Driving for Dollars
Driving for dollars. Doesn’t it sound like a game show? “Good
evening, ladies and gentlemen. In tonight’s edition of Driving for
Dollars, we have two contestants.” But you can make a lot of
money at this game, which is my favorite way of finding good
deals. It is fun to go with someone who will write down the
addresses as you find promising properties.
Pick a neighborhood that you are interested in: one that is in tran-
sition, is being fixed up, has houses that need work, and so on.
Drive around it slowly and try to find at least 20 addresses you can
write down for neglected, vacant, or condemned homes, ones with
signs saying For Sale, For Sale by Owner, or For Rent.
Be persistent. You may have to call and call and call to find the
owners. Start by calling the Registrar of Deeds, getting on the
Internet, and going to the local tax records office to locate the own-
ers. Ask a Realtor friend to look them up on the MLS computer.
Then call or write to the owners once you find them.
As you drive around, how do you tell if a house might be owned by
a motivated seller? Look for the following characteristics.
Neglect
Needy homes have gutters that hang, roofs with holes in them, and
horrible-looking yards with trash lying everywhere. A general rule
in real estate is this: The worse disrepair, the better the deal. As an
investor, begin to love houses that have black goo dripping out of
the ceiling, animal dung on the carpet, holes in the wall, broken
windows, and 14 feet of garbage in the yard. The more work the
house needs, the more motivated the seller will be. The more moti-
vated the seller, the better the deal will be.
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The best deal my friend John ever got involved a house that had 35
feet of garbage in the front yard. Drug addicts had lived in it.
When he walked into the house, he could not even get access to
the basement because of the garbage.
But the real estate market was hot in this neighborhood and 50
people looked at the house during its first two days on the market.
Everybody who saw it walked away in disgust. Most people insist
on buying a house that looks like a new present with a bow on it.
So John went into the trashed-out house, took a big breath in the
smelly environment, and declared, “Ah, Paradise. Eureka. The
mother lode.” He figured that house was worth about $350,000
fixed up. He determined it needed about $50,000 of repair. So he
put it under contract for $140,000 (less than half of its value) and
got the deal done. This example proves my point: The worse the
house, the better the deal.
Undeveloped Land
My friend Bill, an investor in Nashville, Tennessee, finds big
chunks of land—20 acres, 50 acres, 200 acres—negotiates the
price, and puts the land under contract. I asked Bill, “Where do
you find most of these deals?” He said, “I drive around, find land
on the edge of town, and either talk to the neighbors or write a let-
ter and find the owner. I have never used a Realtor because the
property is rarely listed.”
Bill finds owners, asks if they would like to sell their land, and gets
an option to buy it. If it is unimproved farmland, he reads the
property codes for that area and often gets the land rezoned to
make it more attractive to future buyers. He might borrow money
from a partner or from the bank, then puts in roads and utilities to
increase the land’s value immediately. Three months to two years
later, he sells this land (under option at $800,000) for $1.5 million
to $3 million. You can do that, too.
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Every Possible Way to Find Great Deals in Real Estate
Vacant Homes
If houses are empty, the grass is high, the bushes are overgrown,
and the properties look deserted, could those sellers be motivated?
Absolutely. Put them on your list of suspects.
Condemned Homes
Look for that yellow tape that says, “Unfit for human habitation.”
This signifies a code violation. That is exciting for investors
because owners who have already been to court might be highly
motivated to sell. The codes enforcement area of the Housing
Administration has fined them. The fines are equivalent to saying,
“If you do not fix this house, we will fine you more, and if you still
don’t fix it by a certain time, we will bulldoze your property.”
Some condemned homes require a tremendous amount of work to
fix up, maybe too much. The windows could be broken and the
electricity or the heat may not work. You always have to ask if it is
a good investment.
Not only can you spot these “diamonds in the rough” while driv-
ing for dollars, you can access a list of addresses for condemned
homes posted by the Housing Administration.
For Rent Signs
If a house is for rent, you might locate a highly motivated landlord
who bought the property 20 years ago for one-fifth of what it is
worth today and is tired of it. The best ones are the empty ones.
Call about these, too.
For Sale and For Sale by Owner Signs
As you drive for dollars, look for For Sale and For Sale by Owner
signs. Some of these signs might say, “Make Offer,” so pay close
attention. Because you are still driving neighborhoods, learning
about the neighborhoods, and getting suspects, make a point of
meeting the Realtors and brokers who are active in that area. You
will learn a tremendous amount from talking with them and from
carefully reading the signs.
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Auctions
In addition to the auctions listed in the newspaper, look for other
auction companies in the Yellow Pages. When you drive around
for dollars, you will see signs about upcoming auctions. Call all of
the auction companies and get on their announcement lists, so
whenever they do an auction, they send you a notice for auctions
of a commercial property, house, apartment building, land, and so
on. Attend all of those auctions that have properties; you might
find a great deal.
Locating Owners
What if you can’t find owners? One investor was driving for dol-
lars and found some vacant homes, wrote the addresses down,
went to the Internet, and looked on the tax rolls, but still could
not find the owners.
It is almost always certain that someone almost always owns a
property, whether it is an individual, a corporation, or an estate.
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Every Possible Way to Find Great Deals in Real Estate
The Smaller the Sign, the Better the Deal
Mary, a student of mine, was once driving around (you have to go
really slow when you are driving for dollars) and almost missed a lit-
tle bitty sign behind a bush. She got out of her car, jumped over a
low fence, moved the bush, and saw one of those little For Sale signs
available for 90 cents at the hardware store. She could hardly even
read the phone number. In fact, she wrote down eight different
phone numbers she thought it might be, and found the seventh one
to be correct. On the phone call, she asked the man who answered,
“How long has your house been for sale?” He replied, “Six months.
You’re the first caller.” How would you like to be a market of one?
Mary bought that house for about half of what it was worth, whole-
saled it, and made about $20,000.
She also asked that magic question, “Do you have any others?”
He replied, “Yes, I have another one. It’s a few blocks away. No one
has called about that one either.” She drove by that house and saw
the sign there had completely fallen off. She was able to make a
good deal on that house, too.
There is a name on a title at the tax records; it might even belong to
someone who died 10 years ago. Or it might have been a factor in
some kind of lawsuit. To find out what happened to the title, hire a
title searcher and get the names of people listed, then locate them.
You could also hire a private investigator. For between $100 and
$500, private investigators can find owners and probably learn
what happened to the property. (My web site, www.shemin.com,
gives names of private investigators we recommend.)
Now, what if no one owns that property and no title exists? Then
you go to court, hire an attorney, and file an action to “quiet title.”
A judge will decide what is necessary to clear up the title or get a
good title. Sometimes the judge will ask you or your attorney to
advertise and see if anyone has an interest in the property. You will
then be required to contact by certified letter anyone who has an
interest in the property. This often occurs when there is a death
and there is subsequently no proper passing of title.
If you have a problem getting good title for a property, you need to
contact a good title attorney who can guide you as to what it will
require to clear up the title for a property. This is a very difficult
process, though. If no one owns it, it becomes hard to acquire the
property. So you have to decide if the deal is potentially worth the
work and expense it would take.
Also ask, “What seven or ten numbers can I dial to get the
answer?” Personally, I would call my local title lawyer and say, “I
have found this property and cannot find the owner. What do you
recommend? In our jurisdiction, how do you get proper title?”
Foreclosures
A foreclosure occurs when someone lends another person money to
buy property and the money is not paid back. Because the property
provides the guarantee for the loan, the lender has the right to take
it back, usually through a first, second, or third mortgage or tax lien.
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Who lends money? In our country, mostly banks and mortgage
companies provide property loans. Some governmental agencies
have the authority to get a lien or judgment for nonpayment of
funds owed (usually for taxes) and can foreclose on a property.
There are generally two types of foreclosures: (1) a judicial fore-
closure, in which a lender has to go to court and get a judge to
order the foreclosure, and (2) a deed foreclosure, or deed of trust
foreclosure, in which the deed to the property is put in trust after
the loan period is over. The unpaid mortgage is advertised for
about 30 to 60 days. After that, the attorney or trustee forecloses
on the property and takes possession of the deed through the trust.
It does not really matter to which type ( judicial or deed of trust)
you go. The important part is to understand the technicalities of
foreclosure. For example, is the judgment final or is there a right
of redemption? (That is, can the homeowner come back within six
months or a year and pay off the loan and get the house back? In
most states, that is not possible; when they get that property back,
they have to pay the lender all the money back plus interest.)
Legal Newspapers
Foreclosure deals are generally listed in the community’s legal
newspaper. In most cities and counties, foreclosures have to be
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Every Possible Way to Find Great Deals in Real Estate
Make Sure That the Title Is Good
Can you be sure you will get a good title at the foreclosure sale? On
whom do you rely to give you answers? I recommend you work with
experts from a reputable title company. Also, get an attorney who
understands foreclosures and does research well. You do not have to
understand title and foreclosure law; you do have to know how to
talk to people who can answer those questions for you.
I understand foreclosures; I am an attorney by training. However,
before I buy any property, I always get a title search done or consult
with my title or escrow company to make sure I am buying what I
want to buy.
advertised in the legal or regular papers a few weeks before the
sale occurs. You could also call the tax assessor’s office or go to
the Registrar of Deeds and ask for the list of the properties going
into foreclosure.
Foreclosures can be excellent deals. Some people make tons of
money. Unfortunately, they come with some disadvantages. For
example, often you cannot have access to the property before you
buy it because the bank may have sealed it. So you have to make
sure you understand the risks when you buy those foreclosures.
Tax Sales
If people do not pay their property taxes, the government taxing
entity will demand payment and force a tax foreclosure. You can
buy the property at a tax sale, or, in certain states, you can buy a
tax certificate for the amount of the back taxes. By using a certifi-
cate, you get interest on your money or on the property. Some tax
certificates pay anywhere from 10 to 30 percent interest. People
buy at tax sales for two reasons:
1. They hope to get the property for the price of back taxes. For
example, if a $200,000 property has $8,000 of property taxes
not paid and goes to a tax sale, they want to buy it for
$8,000, the amount of the back taxes. Of course, others may
bid against you and raise the price. Still, you can find good
deals at tax sales.
2. Many cities, counties, and states by law demand that the
taxes owed and the amount bid collect a good interest rate. In
certain areas, every taxing authority has rules and laws for
how sales are run. Some require as much as 20 to 30 percent
interest paid.
For example, the owner of a house worth $200,000 owes $8,000
in back taxes. You bid $8,000 with the intent to acquire the house
for the amount of taxes only. However, your city has a one-year
right of redemption rule. This means the homeowner has one year
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to pay back all of the taxes and interest due and redeem the prop-
erty. For example, if your area’s interest rate for tax liens is 20 per-
cent, then the homeowner pays you $8,000 plus 20 percent to get
the house back. If the homeowner does not pay you off within one
year, you get to keep the $200,000 home. However, you cannot
sell that house until the year is up.
Alternatively, you could get a property for the amount of the tax
lien. You can also acquire properties by bidding on them by auc-
tion at foreclosure sales. The IRS also puts tax liens on property.
After you hear of a pending tax sale or foreclosure and before it
happens is when you should to talk to the property owners
affected. Are they motivated to sell? Yes. Are they hard to talk to
sometimes? Yes, because people have a psychological defense
mechanism called denial. Sometimes people say, “No, I don’t want
to talk to you. I’m going to win the lottery. Someone will show up
at my door and give me a million dollars. I know it’s going to hap-
pen, so leave me alone.”
So they are difficult to talk to, but in most cases, the things that
are hardest to obtain are the sweetest. So work these foreclosures
and preforeclosure tax sales, and develop a good source of income.
Department of Veterans Affairs
The Department of Veterans Affairs guarantees loans for veterans
and publishes a list of houses it is foreclosing on. Sometimes they
are good deals and occasionally they offer very favorable financ-
ing. Check with mortgage brokers for details about good deals
from the Department of Veterans Affairs. (See www.shemin.com
for recommendations of government real estate agencies.)
Housing and Urban Development (HUD)
HUD also guarantees loans that banks make. It takes properties
back for unpaid mortgages and you can bid on its foreclosed prop-
erties. Most real estate brokers and agents have access to lists of
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Every Possible Way to Find Great Deals in Real Estate
HUD foreclosures in the area. They could be a great place to find
deals. (See www.shemin.com for links to HUD lists.)
Questions and Answers
Q: I do not have a Realtor’s license. Can I still make money in
foreclosures?
A: Yes. You do not need a real estate license in most cases. I have
bought and sold a lot of properties. I can put them under
contract or option and sell them to somebody else. A real
estate license only lets you go to the Multiple Listing Service
(MLS) and make commissions off the sales of properties that
are listed. This book outlines other creative ways to make
money in real estate besides using MLS.
Courts
Some real estate investors always complain about the government:
the IRS, courts, regulations. But I love the government. As a real
estate investor, you should love the government, too, because it is
hard at work making hundreds of thousands of motivated sellers.
All types of courts exist to help create motivated sellers (even when
they did not think they were motivated). Here are some of them.
Codes Court
Go down to your local housing administration office to find out
scheduled dates for codes court, where landlords and investors go
to defend their interests. The codes court enforces the codes and
can issue fines. It can even condemn homes and have them bull-
dozed. Do motivated sellers come to these courtrooms? Yes.
The proceedings are all public record. The docket for the day is
usually posted outside of the courthouse. You can talk to the peo-
ple while they are there and meet with lawyers, landlords, and
investors who come. Every time I go to codes court, I usually find
a good deal. Chances are you will, too.
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Eviction Court
In every major city, evictions go to court at least a few days a
week. Who shows up there? Tenants, attorneys, landlords, and
managers. Owners who have a conflict on their hands and go to
court to resolve it could be in the market to sell for a good price.
Know that when you go to eviction court, you may find some great
deals, and you will also find better entertainment than any TV sit-
com. You will also network with people you want to know. If you
do not want to spend time there, you can get names, addresses,
and phone numbers of people on the docket. Send them a letter
that asks, “Do you have any properties you’d like to sell?” and fol-
low up.
Environmental Court
People who have too much junk on their properties wind up in this
court. It fines people for not removing trash and not cleaning their
yards. Owners of these properties can be highly motivated to sell.
Go meet them, get their names, and contact them afterward. They
could turn into good deals.
Divorce Court
Because divorce records are public, you can actually look up case
files and see what a couple owns. Many have a home that they
must sell and are often willing to take a discount just to settle the
assets to get out of the marriage quickly. Get to know some
divorce attorneys and show up at divorce court. You might find
some good suspects there.
Estate and Probate Court
You can look in the public records where deceased persons’ assets
are listed. Contact the attorneys and the families and say, “Would
you like to unload these properties quickly? I can help you out.”
Do you think you can find some deals that way?
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Every Possible Way to Find Great Deals in Real Estate
Advertising
Most real estate investors do not like to tell people what they do.
They tend to be laid-back types who drive nondescript cars. If you
have a quiet personality, you can get over your shyness through
advertising. In my experience, businesses that have a mediocre
product or service but advertise a lot bring in plenty of customers.
Fast food restaurants are a good example of that—they have poor
food and mediocre service, but people spend money there every
day because they see the advertisements constantly.
In real estate investing, the more you advertise, the more the word
gets out, and the more deals you will get. Here are some inexpen-
sive forms of advertising you can use.
Business Cards
Make your card stand out by printing your information on a
shocking-bright paper. The wording on your card should get
attention and tell people what you can do for them. “We will pay
cash for your house. Can close quickly. Call me first. Call me last.”
You might include wording like, “If you are in trouble through
foreclosure, bankruptcy, divorce, need to raise cash, need to raise
money, need to sell your property quickly, call me now.” Put your
cell phone number on the card in a prominent place. Hand out
your cards to everybody.
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One Good Probate Deal
When the grandparents of a real estate investor I know passed away,
they left behind a condominium in Florida. The family members did
not want to spend time getting rid of the property and dealing with
the memories, so they sold the condo to a gentleman who contacted
them through a letter. He got the address from the estate probate
record. The condo and other assets sold for about 60 percent of
their worth. This gentleman saved the family a lot of trouble and got
a great deal in the process.
Flyers
Make flyers—and distribute lots of them. They might say, “We
will pay cash for your house. Can close quickly. Call me first. We
will buy your house. We will make an offer on every property.” You
want your phone to ring so you can find great deals.
Ads
Place an ad in your local newspaper that states, “We will buy
houses. We will pay cash.” Typically, these ads generate two to
three calls a day and lead to about one deal a week. Is it worth
$190 a week to run an ad? Yes, because one deal can be worth
a lot.
Run your ad consistently and for a long time. This is critical. If
you run it for three months to a year and the wording attracts
attention, you will get calls and, eventually, good deals.
Direct Mail
Sending direct mail through the postal service usually gets a
response rate of 1 to 2 percent, so do not expect a high-volume
return for your efforts. However, if you mail a large quantity, you
will get activity. Monitor the numbers carefully, and be consistent
with your direct-mail campaign, so you know which mailings work
well for you.
Door Hangers
When you come home at night, sometimes you see hanging on
your door advertisements for carpet cleaning and pizza specials.
You can use this idea and pay the same people to hand out your
door hangers. Your message would read: “We pay cash for a
house. Can close quickly. Do you know of any houses for sale that
are a good deal? Call me. Referral fees paid.”
Signs
Put signs in your targeted neighborhood on every corner and you
will get calls. The largest real estate franchises attract their
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Every Possible Way to Find Great Deals in Real Estate
prospects by running billboards that say, “We will buy any house,
ugly or pretty. We will pay cash. Call now.” These signs generate
lots of calls and the companies make tons of money.
Car Signs
I flew to Ohio one time to speak at a real estate association. I
noticed the fellow who picked me up at the airport had put a big
plastic sign on the side of his Jeep Cherokee that said, “We will pay
cash for your house. Call me.” I thought, “I don’t like the way this
ugly sign covers up a beautiful truck.” Nonetheless, I asked
Dennis if he got calls from this sign. He replied, “I get about five
calls a week and one deal a month. I made about $8,000 on one of
them last month and $25,000 on a fixer-upper.” That ugly sign
becomes a beautiful one when motivated sellers call you.
Co-op Advertising
You can partner with businesses that are already advertising
through flyers, door hangers, even pizza boxes. Instead of adver-
tising alone, you combine your efforts with others and spread your
message farther for the same amount of money and time spent.
Think about all the people advertising on restaurant menus, on
shopping carts, on street signs in your targeted neighborhoods. If
you can cooperate with any of them, you will generate calls that
can lead to deals.
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To Advertise or Not to Advertise
My experience is that if you do not advertise, nothing will happen.
And if you do advertise, something will happen.
An investor named John in Ohio owns more than 900 houses. Why
does he have 900 houses while you and I do not? Because he places
signs on park benches, on street corners, on pizza boxes. He prints
and distributes flyers, door hangers, and business cards. This kind of
advertising works where John is, and it will work where you live, too.
Networking
I once attended a seminar in which I learned some information that
will save you lots of time learning it yourself. It is this: When people
get into financial trouble—heading for bankruptcy or foreclosure—
they follow a predictable pattern of behavior. They run to their
accountants, mortgage brokers, and financial planners. In despera-
tion, they may call a Realtor and say, “Can you sell my house in
three weeks?” As a last resort, they call a bankruptcy attorney.
Because of this pattern, you want to build a network of mortgage
bankers, Realtors, attorneys, and accountants so that when des-
perate people call, they will send them to you. You can pay them
cash for their house, quick-turn it, make money yourself, and pos-
sibly stop them from going bankrupt.
Investing is a lonely business. Go meet other people, talk to them,
and help each other out. Here are some categories of people who
can refer good deals to you.
Real Estate Agents
Real estate agents have access to the MLS and to buyers and sell-
ers. Get to know the active agents in your targeted areas. When
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Every Possible Way to Find Great Deals in Real Estate
Three Steps to Start
What will you do in the next 30 days to get some deals? Here is a
three-step formula to follow:
1. Go to three auctions.
2. Make a point of meeting five investors there.
3. Take each of them to lunch and ask how they began, if they have
any deals, what they are looking for, who they use for financing,
and so on.
Tell them you are getting started and they will love to help you out.
good deals come their way, they will call someone, and that some-
one should be you. Make sure they get paid when they find deals
so you keep your relationships golden. By the way, if I use agents
and brokers but do not close on a property with them, I give them
a check for their time until they find me something. It keeps the
relationship solid.
Attorneys
Attorneys do a lot of things that can help your business: estate
sales, divorces, bankruptcies. Find several active attorneys in your
area and network with them.
CPAs, Accountants, Bookkeepers
When people want to do financial planning, settle their estate, sell
some property, raise money, or get out of financial trouble, they
turn to their trusted accountant or financial planner. These profes-
sionals often help clients dispose of their property, so get to know
them and build your network.
Bankers and Mortgage Brokers
Bankers and brokers make loans to real estate people and often
know where good deals are. Because they have access to funds,
they can possibly finance the good deals you find. They also know
lots of other investors and can help you expand your network.
Bird-dogging
Bird dogs are the white dogs with brown spots that flush out rab-
bits and quails in a hunting situation. In real estate, bird dogs are
people who can flush out deals for you.
Most successful businesses rely on many people to get things
done, and everyone in the organization benefits. It is hard to be a
lone wolf in the investing business; you can only look at so many
deals, drive around so many neighborhoods, write so many letters,
and make so many phone calls yourself.
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Who can act as your bird dogs to spot good deals for you?
Everyone you know, because everyone knows someone who has to
sell a property at a discount or is dealing with an estate, getting a
divorce, having money problems, going into bankruptcy, and so on.
Did you know that if you are a Realtor, it is illegal to pay a finder’s
fee? But, if you are a real estate investor, you can do what you
want within the confines of the law. That means you can pay refer-
ral fees. And when you pay people, they keep coming back with
more deals.
Following are several categories of people whom you can ask to be
your bird dogs.
Contractors
Every contractor, big or small, is going out looking at properties
that need work. They know owners and some of those owners will
be motivated to sell. So contact every contractor and repair person
you know and say, “If you bring me a deal that I close on, I will
pay you a finder’s fee.”
Utility Workers
Utility workers—from the gas company, electric company, or
water company—are walking and driving through neighborhoods
every day. They know a lot about houses, neighborhoods, and the
people with whom they deal. They may be able to say, “Hey, I
know about a house that needs a lot of work. We shut the gas or
the water off. And here is the owner or the address.” Utility work-
ers can be your bird dogs.
Post Office Workers
Often postal workers know more about you and your neighbors
than you think they do. They know who is getting divorced, who is
moving, who has to sell a house. In fact, some successful real
estate investors are post office workers. Ask them to help you
identify good deals.
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Every Possible Way to Find Great Deals in Real Estate
Police Officers
Police officers have a tough job in the neighborhoods. They get to
know about houses or property that can be sold, especially ones
they just locked up because somebody did something naughty in
there. They can point you to motivated sellers.
Nursing Home Workers
Our population is getting older and more people are moving into
retirement, assisted living, and nursing homes. Often, people are
forced to sell their property and their assets to qualify for financial
assistance before going into a home.
One of my students hangs out at nursing homes to find good
deals. He makes friends with the administrators, who call him and
say, “Mrs. Smith has to sell her home, and the family doesn’t want
to deal with it. Can you help them out?” He gets a lot of good
deals that way. He is not taking advantage of the situation; he is
truly helping them. He discloses in writing exactly what he is
doing.
Three More Ideas
I have found the following three ideas to be among the best ways
to find good deals in real estate. Pick any of them, work them con-
sistently, and you will make money.
Call Retail Finance Companies
Located in malls and shopping centers, these companies make
high-risk loans to high-risk borrowers. Look them up in the
Yellow Pages under finance companies. Some of their names are
Associates, Beneficial, and American General. They make all kinds
of loans, but also lend money to people who may not have perfect
credit. Some will have local, regional, or national foreclosure cen-
ters where you can call about properties available. Often, they will
sell them for the outstanding amount of the loan.
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Write Letters
Whenever I send a letter to a prospect, I always follow up with a
phone call. That alone triples my response rate. Write first, then
call and ask questions like, “How long have you had the property?
Would you be interested in selling? Can I help out?”
Join Real Estate Associations
Most major cities have a real estate association and/or a landlord
association. Who attends the meetings? Investors, landlords, and
people who find good deals. Associations are great sources of edu-
cation, too. At www.shemin.com, we provide a list of real estate
associations. Network at their meetings and you will find every-
thing you need to become a successful real estate investor.
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Every Possible Way to Find Great Deals in Real Estate
Now That You Found It,
Analyze It
A prudent question is one-half of wisdom.
—FRANCIS BACON
Do you analyze a property for
buying, for selling, or for renting?
The answer is yes...for any property. You need to make an
analysis with any sale. More important, you need to build in a
margin for error. Determine how much money is coming in and
going out, but do not buy strictly based on cash flow. You still
need to buy a property for less than what it is worth today, so you
have room to sell it when you want to.
In addition to margin of error, be aware of the property’s finance-
ability. The bigger the deals you chase, the more difficult it may be
at certain times to get financing. You might have to put what I call
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CHAPTER 5
real (that is, your own) money into it. In fact, on large commercial
or investment deals, lenders may insist you put in some of your
own cash.
Analysis Paralysis
One of the biggest stumbling blocks of successful investing (and
this applies to me, too) is called paralysis of analysis. You stumble
into a good deal and then you stop dead in your tracks. You think
about purchasing, worry about the decision, and never do anything.
In my first six months of real estate investing, I looked at hundreds
of great deals and I did nothing. How did I know it was a good
deal? How did I know I could make money? I was scared to death
to make an offer because if I did, I might have actually gotten the
deal. Then what?
As we learned earlier, a great deal in real estate is something you
can really make money on. There are two approaches to making
money in real estate: (1) speculation and (2) investing.
With real estate speculation, you buy property that is priced near
market value, or put it under contract. For example, you buy some-
thing worth half a million dollars for $499,000 and pray that it
quickly goes up in value to $550,000 or $600,000.
With real estate investing, you look for something you can either
put under contract or buy for 20 to 40 percent lower than what it
is really worth. That means a property worth $500,000 today
would be put under contract for $400,000 or less to make it
worthwhile. Face it, if you had to sell this property for $475,000,
you would still come out okay because you had a 20 percent mar-
gin of error in this deal.
To protect your income source and overcome any analysis paraly-
sis, (1) make sure you have a good deal (because even if it is not
as good as you think, you still have a margin of error to work
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with), and (2) get lots of information. If I said, “Let me tell you
the exact cards that will come out on the blackjack table: Without
a doubt, your next hand will be a 19 and the dealer will have 18.
The next one, you are going to have 21 and the dealer 18,” you
would be inclined to play because you would have information
about what will happen. This can also happen in real estate invest-
ing when you gather lots of meaningful information.
Analyze in Less than 90 Minutes
To analyze any property deal in less than 90 minutes and not get
bogged down in analysis paralysis, find the answers to these three
questions:
1. What is the property worth today?
2. What repairs are needed, and how much will they cost?
(Most properties, even brand-new homes, need repairs.)
3. What can you get it for?
What Is the Property Worth Today?
Remember, to develop a successful real estate investing career,
your job is to find deals and put them together. Your job is not to
become an appraiser, a closing attorney, a management expert, or
a repairperson. Use professionals!
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Now That You Found It, Analyze It
At Least 20 Percent below Market Value
Rule of thumb: Do not buy property that is not at least 20 or 25 per-
cent below what you really think it is worth today in its current con-
dition. I am not talking about a property worth $100,000 that needs
$20,000 worth of work and sells for $80,000. I am talking about hav-
ing it at least 20 to 25 percent below what it is really worth in
today’s market.
If you look at enough deals, you will find some well below the
value of comparable properties. If you never look and analyze deals,
you will not find any.
Say we parachute you into Naples, Florida. You have never been
there before and your goal is to find good deals. What would you
do? As discussed in Chapter 4, you look at newspaper ads, drive
for dollars, call For Rent ads, For Sale ads, and so on. You are cer-
tain to find prospects that may become suspects, so you call one of
the property owners, who says, “I think the building is worth
$100,000. I will let you have it for $50,000 and it needs very few
repairs.” But you do not know if it is really worth $100,000. So
you call a Realtor who sells a lot of property in that area and ask,
“A three-bedroom, two-bath on Apple Street in Naples, Florida—
what would it sell for?” He replies, “I’ve sold two in the last
month, one for $99,000 the other for $102,500.” You just learned
that house is worth about $100,000.
Still, it is important to call two or three people to verify the infor-
mation you get. Another Realtor might say, “Nothing has sold
there in a year. The last offer we got was for $79,900.”
If you are looking for commercial property, call a commercial bro-
ker or an appraiser and ask, “What would something similar to
this property bring in today’s market?” Follow up by getting a list
of comparable sales in that area from real estate professionals.
How do Realtors, appraisers, and banks determine what a prop-
erty is worth? They look at comparable sales, usually three to five
sales of very similar property close by. Realize that you cannot
compare three bedrooms with eight bedrooms; you cannot com-
pare 2-story office buildings with 30-story office buildings. The
properties have to be similar.
Take it a step further and get a list of comparable sales. You can
actually find lists on the Internet (www.shemin.com) and see the
sales price of every property bought or sold (and when it sold)
for the street you want information about. In addition, talk with
active professionals and ask, “What is the market like?” Then get
the information in writing via fax, e-mail, or letter. Put compara-
ble sales lists and information in a folder for future reference.
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(Remember, you cannot keep hounding Realtors and never do
business with them, so get them to help you and let them have
part of the commission.)
After you have done this 15 times in Naples, Florida, you will know
the comparables by heart and have rapport with several Realtors.
What Repairs Does It Need?
If you have motivated sellers but their properties need repair, you
can find the cost of the repairs from two different sources: from
the owner or the seller (most are truthful; a few are not) and from
a good contractor who is licensed, bonded, and referred to you.
The most important word I just used is referred. Make sure you get
bids from more than one contractor who comes recommended by
respected Realtors or other investors. (Again, you cannot just get
bids all the time from contractors and never work with them.
Likely you will close on some deals, get repairs done, and give the
contractor glowing references. If that does not happen in a timely
way, pay the contractors for their written bids.)
What Can You Get It For?
When sellers are motivated to move a property worth $100,000 and
it does not need any repairs, they may say, “We’ll let you have it for
$70,000.” (Thirty percent below market value.) Would that be a
good deal? Yes. So negotiate an even better deal and get a signed
contract. That is where you make your money in real estate.
Before you had access to this book, you may have gotten excited
and said, “Oh my God, it’s worth $100,000 and it’s being offered
to me for $70,000! I’m going to sign the contract right now.” You
would have made some money on this deal, but you would have
also made a grave error. By not negotiating, you may have poten-
tially left a lot of money on the table.
Every property’s value is in the eyes of its beholder. If you own a
lot of real estate and you are being sued, you might make a case
that your property is not worth much and needs repairs. On the
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Now That You Found It, Analyze It
other hand, if you go to the bank to borrow as much money as you
can against the property, you will want it appraised as high as pos-
sible using the highest comparable sales. And when the tax asses-
sor calls to figure out your new taxes for next year, you will say the
rents are low, the buildings need work, and so on. Since property
has different value depending on who is looking at it, make sure
you talk to professionals active in the market who tell you honestly
what buyers are paying for their properties today.
The best way to determine market value is by attracting an offer
through a newspaper ad that includes details of the property. See
if the phone rings. Likewise, if you want to see how much rent
should be, run a For Rent ad and see if anybody calls. If no one
calls, you may not have much of a market.
Put It under Contract
You have negotiated a good price and put it under contract with
the contingency clause. Now do your analysis. Beginners have a
tendency to analyze for six weeks before putting in an offer. But by
the time they find out the age of the hot water heater and the con-
dition of the roof shingles, and have talked to the neighbors five
times, their opportunity may have disappeared.
Instead, at the beginning, do a quick survey to see if it is a good
deal, document everything, put your offer in with a contingency,
and then do your analysis or due diligence. Remember, if you wait
too long, you will lose a lot of deals.
Get Appraisals
Remember, you can always spend a few hundred dollars and get an
appraisal done on a property. You may even get the seller to pay for
all or part of it. Have a professional appraiser look at it, research
comparable sales, and tell you its value. Sometimes when I go to a
lender to finance a property, I have the appraisal in hand and can
say, “Here’s proof. It’s worth $200,000. Can I borrow some
money, please?”
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Now That You Found It, Analyze It
The Three-Day Deal
When I was asked to be a guest on The Leeza Gibbons Show (a TV
talk show), Leeza Gibbons challenged me to find a good real estate
deal in Los Angeles, California. The producers knew I was from
Tennessee and did not know the L.A. real estate market. They also
knew I liked to give away homes to homeless people, so they said,
“Come out to Los Angeles. If you find a good deal, then you can give
a house to a homeless family right on our show.” They only gave me
three days to put a good deal together.
On my first day, I decided to follow my own advice and drive for
dollars in a particular area. I was driving around at six in the morn-
ing. When people wearing bathrobes came out of their houses to get
their newspapers, I asked them, “What do these houses sell for? I’m
looking for a place in this neighborhood.” I quickly learned that the
worst, cheapest houses in the worst neighborhood started at about
$120,000. A little different from Tennessee values. Next, I chased
down some For Sale signs and made some calls. After two days, I
found three bank foreclosures, one landlord, and four great deals.
The best one was a two-bedroom condominium with a pool and ten-
nis court. It appraised for well over $140,000, and I put it under con-
tract for $42,000 with terms from the bank.
How did I determine what real estate values were in that neigh-
borhood? I asked everybody I met, including Realtors, “What are
these houses selling for?”
I also needed information about repairs, so a contractor (referred,
of course) gave me a written bid for $3,500 to get this condo in tip-
top shape.
Third, I negotiated. The bank that was foreclosing on the condo
wanted $42,000 to satisfy the loan. I was able to take it over on a
short sale because of my good credit. Now this bank can show this
as a good loan on their books instead of a bad one.
Then I called back the producers of Leeza. At first, they refused to
believe me, declaring that “Nothing in Los Angeles sells for under
$100,000. You must be making up stories.” I had to show them all
the paperwork and they finally believed me. We gave that condo to a
homeless family, right on the show.
Inspect the Property
You want an inspector who is experienced and familiar with repairs
to do an inspection of the property. I generally use a licensed,
referred, bonded contractor who can make sure the property meets
codes and can identify major problems. Also, before closing on any
property, I have it inspected for termites.
Get a Clear Title
Make sure you ask the seller, “Do you have clear title to this prop-
erty?” Sometimes, when you deal with highly motivated sellers,
you find out they do not have titles to the properties. They are
handling a deal for their uncle, brother, sister, and so on. Either
that or they have 22 liens against the property they forgot to tell
you about.
Be sure to ask these questions:
■
Do you have clear title?
■
Are there any loans, liens, or judgments against the property?
■
Is there more than one mortgage?
Again, verify everything in writing. And before closing, have an
escrow agent do a title search and provide title insurance.
Crunch the Numbers
Real estate investing is real estate by the numbers. You want to
know what the profit and loss on a property would be if someone
were to buy it, fix it up, and sell it, or if someone should buy it and
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Short Selling
When a bank takes back a property because a loan went bad, often
it discounts the property for the amount of the loan. This is referred
to as a short sale or short selling.
rent it. Answer all tax, insurance, rental rate, and expense ques-
tions. Document all the details so you are an informed buyer. Do
this for any property, whether you are going to keep it, wholesale
it, lease-option it, or finance it. You want to make sure it will pro-
vide cash flow for somebody, even if that somebody is not you.
Gather full details about the transaction costs for buying and sell-
ing the property: commission costs (if you work with a Realtor),
recording fees (to record deeds), and all financial details that apply
to the property, including the terms of any loan (total amount, bal-
ance owed, years to pay, interest rate, and so on).
Analysis Recap
When you talk to sellers, always, always, always ask questions. The
most important questions are: Why are you selling? Why are you
selling? Why are you selling? That will determine their motivation
level. If sellers say, “I can take my time because I don’t really need
to sell,” they are not motivated. But if they say, “We’re moving out
of state. Job transfer. Have to sell it in the next three weeks,” or
“We’re going through a divorce,” or “We’re getting foreclosed on.
We’ve got financial problems,” they are most likely motivated.
Then ask, “What is the debt on the property?” If they owe
$100,000, it is unlikely they will accept less than $100,000 (or
whatever the debt is).
You want to ask, “What are the terms of the loan? What are the
payments and interest rate? Are you current on the payments?”
Almost every loan has a due-on-sale clause.
The next question is, “Do you have clear title? Whose name is the
title in?”
Also ask, “What are the mortgages? Are there additional mort-
gages, judgments, or liens? What repairs are needed?”
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Now That You Found It, Analyze It
Concerning repairs, make a worksheet and write down the condi-
tion of:
■
The roof
■
The gutters
■
The shingles
■
The attic
■
The ceiling
■
The walls
■
The electrical system
■
The carpet
■
The flooring
■
The kitchen
■
The windows
■
The plumbing
■
The basement
■
The foundation
■
The yard
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Real Estate Doctor
What if you ask, “What is your mortgage? How much do you owe on
the property?” and the seller says, “I’m not going to tell you. This is
personal information.”
Respond by saying, “I am a real estate doctor and want to help
solve a problem. To be able to help you, like a doctor, I have to know
your symptoms.”
Always enter into the conversation with that intention. If you
meet with resistance, say, “By the way, even if you don’t want to tell
me this information, it’s all public information. It’s on the Internet.
It’s at the Registrar of Deeds. I can call the courthouse, the tax
assessor’s office, and get it anyway. So please go ahead and help me
help you. I’m a real estate doctor.”
Visualize the house from top to bottom. Ask what work needs to
be done and how much it will cost. Then, if you are interested, put
it under contract with a contingency and send over your contrac-
tor to verify in writing what was found. Get a detailed written bid
from your contractor.
All of these items you look for are important to you if you have to
finance the property, or sell it, or bring in a partner. Keep all of the
details (comparable sales and the repair estimates) in your folder.
Good for Business
By the way, this process reflects how most large commercial deals
are handled with big companies involved. They use accountants,
lawyers, and other professionals to make sure the numbers are
accurate, then close on the deal. That is how you should manage
your real estate business.
Most investors want to know everything up front before they put
an offer in, but in reality, they do not have to. If you smell a good
deal, put your offer in, and conduct your due diligence. However,
make sure you have a good deal in hand, because if you put in a
lot of offers and never close on them, no one will want to sign
another one with you.
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Now That You Found It, Analyze It
How to Control Your
Real Estate Holdings
It is not for us to forecast the future, but to shape it.
—ANTOINE DE SAINT-EXUPÉRY
You found it. You analyzed it.
Now you want to control it.
Let me give you a secret of real estate investing: You have nothing
until you have a signed offer. So many investors, beginners or
pros, come to me and say, “I’ve got a great deal worth $1 million,
but I can get it for $200,000. I’m going to make $800,000. I’m
going to buy it, rent it out, and make so much money every month.
It’s going to be great!”
Then I ask: “Do you have it under contract? Do you own it?”
They say, “No, I’m going to sign the contract next week.” They
have nothing—and you will have nothing but a lot of talk and a lot
of excitement until you get a signed contract.
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CHAPTER 6
The first step in making money in real estate and
developing sources of income is controlling the real
estate.
Note, I did not say buying it; I did not say signing the deed; I did
not say owning it; I did not say borrowing a bunch of money. I
said controlling it. When you are in control of something, is that a
good thing? Yes. When you own something, is that a good thing?
Not necessarily. If you own it, you could be sued, and you are
liable for the taxes, the mortgage, and so on. Owning things has its
advantages, but simply controlling them is almost always better.
Get a Signed Contract
To get a signed contract, the first step is negotiating one. You will
make more money than you have ever made in your life if you fol-
low these simple negotiating strategies.
Negotiating Strategies
When I began in real estate, I found a house worth $80,000 and the
owner said, “I’ll sell it for $60,000.” I thought it was a great deal (it
would provide cash flow). I was so excited, I signed the contract
immediately. I left a ton of money on the table, though, because I
did not know I could negotiate. However, over the years, I learned
these basic negotiating rules:
1. The first person who mentions a number loses.
2. Never mention a number until you absolutely have to.
3. Ask this magical question as many times as you can until they
get upset: “Can you do any better?”
4. You cannot negotiate a good deal until you find out what the
seller really needs—what his or her level of pain is.
People do things for two reasons: One is to get plea-
sure, and the second is to avoid pain.
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They usually sell their property below market value to avoid more
pain than they have now. “We have to move. We owe money. We
need cash. We’re getting divorced.”
When you negotiate with sellers, you want to be like a doctor and
find out about their symptoms and situation. Be sure to ask: “Why
are you selling? How long do you have to sell? When do you need
to sell the property by? What are you going to do after you sell?
What will you do with the money? How long have you been trying
to sell the property? Have you received any offers?”
When you are discussing these points, keep asking questions but
say very little. “When did you buy the property? What did you pay
for it?” If the other person does not want to give you that informa-
tion, say it is all public record anyway, and besides, you intend to
improve their situation.
Ask: “What is the mortgage on the property?” Knowing that helps
you figure out the lowest price the sellers are likely to accept. If the
mortgage owed is $80,000, they probably will not sell it for less
than $80,000. Likewise, if they bought it for $20,000 five years
ago, they are probably not going to sell for under $20,000.
Negotiating Price
Ask the next question this way: “What is the absolute least amount
you would take for this property?” Then pause. Let the silence eat
up the moment and eat at the sellers. People do not like silence; it
makes them nervous. So just wait until they come up with some-
thing. It could be 10 seconds, or it could be two minutes. How-
ever, they will answer.
What do you do next? You pause, look at them, grunt a little, sigh,
act uncomfortable, and say, “Uh, can you do any better?” Remain
silent and look at them. What if they say, “No, $68,000 is the least
we can do. That’s it. That’s the least we’ll take,” then what do you
do? Sigh again and ask, “Really? What is the absolute least amount
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How to Control Your Real Estate Holdings
you would?” They might say, “OK, we’ll tell you what...$67,000.
That’s it.” How long did it take you to make that extra thousand
dollars? Between 5 and 15 seconds. Not a bad return for your time.
Okay, they said $67,000. What do you do now? Start over and
ask the question again: “Can you do any better?” Suppose they
get upset, even angry, because you have asked the same question
seven times. Simply smile, laugh, and say, “Just kidding.”
So when sellers are irritated and say they are at their absolute bot-
tom number, you know you have hit their lowest price. But you are
not finished. You counter with a number that is a lot lower than
their final price. And always use unusual numbers.
Why do I use odd numbers? Because people think I know some-
thing they do not know, that I have a secret formula. So if their
lowest price is $67,000 and they insist, “That’s it,” I come back
and say, “Great. I’ll offer $57,426.”
You may be chuckling and thinking this is cute, but negotiating will
prove to be the most money you ever make in your life—per sec-
ond, per minute, per hour, per week, per year. Because when I say
my number, they ask, “How did you come up with that?” I reply, “I
just have my secret formula.” They might say, “I can’t do $57,426
(or whatever that weird number is), but I can do $63,000. Take it or
leave it.” I come back again with a still lower number and gamble
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Reframe the Situation
If your children have ever become mad at you because you told
them 20 times to brush their teeth, it is unlikely they would show
their frustration by laughing. However, if you say (in a playful way),
“If you don’t brush your teeth, I’m going to spank you, put you in
boarding school, then send you to your grandparents for five hun-
dred years . . .” what will they do? They will laugh. I call this refram-
ing. This technique works well in negotiations because it lowers the
tension, lightens the conversation, and makes people feel better.
that I will save another couple of thousand dollars. If they stick to
their last number five more times, then I quit negotiating.
You want to negotiate, negotiate, negotiate, and if you do not like
to negotiate verbally, do it in writing. Send your offers by mail or
e-mail instead. Mail a hundred offers a week. If someone wants
$100,000, write an offer for $49,872 with a contingency clause
(which I will explain) in it. If you get a signed offer, you have made
a great deal. This is an excellent way to gain a lot of real estate.
Standard Buyer’s Contract
Make your contract a form of income for you. If you are buying
a property, write at the top of the contract “Standard Buyer’s
Contract” and follow these directions.
Buying Property: Seller Pays Closing Costs
In your buyer’s contract, the seller pays for everything, including
title insurance and all closing costs. Usually, closing and title
insurance costs are split between the buyer and seller, but that
does not have to be the case. If it is a rental property, the seller
gives the buyer all of the tenants’ deposits and the entire month’s
rent for whenever it is going to close (e.g., if you close on the 15th
of January, the contract says you get all of January’s rents).
I promise you, if you do not include these requirements in your
contract, you will never get them. Even if you do include them,
you will still only get them some of the time. Negotiating these
costs can save you hundreds of dollars on every transaction.
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Make Offers via E-Mail
I have a student who sends out 100 offers a week via e-mail. About
90 percent of them go unanswered and 5 percent are answered by
recipients (usually Realtors) calling to cuss him out. But 1 or 2 per-
cent make counteroffers, and people often accept ridiculously low
prices. Could you do that, too?
Earnest Money
Do you have to put earnest money in a contract? No. The contract
is valid without earnest money. However, a lot of Realtors will
insist, “I need to make sure you’re serious. Put some earnest
money down.” Again, in most cases, you have a choice—use your
own money, or use OPM.
I just put a house valued at $600,000 under contract. The Realtor
wanted a lot of earnest money, so I asked him, “How much interest
will you pay me on that money?” He said, “I won’t pay any inter-
est.” So I replied, “I earn about 36 to 40 percent on my money
through different real estate investments. That is about 3 percent a
month.” Would a Realtor be willing to pay that much? Not likely.
Selling Property: Buyer Pays Closing Costs
If you are selling property, you still use your standard contract, but
this time, you say the buyer pays the title insurance and closing
costs. If it is rental property, the buyer gets the deposits but you col-
lect the rent for the full month. Type in what you want. You may not
get everything you ask for, but if you never ask, you will never get it.
Negotiating Owner’s Terms
Now that you have negotiated on price, it is time to negotiate on
terms. Whenever you are doing a contract, ask for “owner’s terms.”
Even if you are going to pay cash, even if you are going to wholesale
it to someone else, always get owner’s terms. That means the seller
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I Learned the Hard Way
Often people sign a contract without really reading it. In the early
years of my real estate dealings, someone gave me a standard con-
tract and I went to closing without reading it. Guess who paid for
everything? I did. I certainly learned the hard way. I recommend you
use your standard contract, and you may not even have to negotiate
all of the details.
lends you the money to buy the property. You put the least possible
amount of money down, so instead of coming up with $100,000 to
buy a property, you might put $5,000 down and pay $700 a month.
Most often when you negotiate on owner’s terms, the sellers need
cash. So you ask this million-dollar question: “What will you do
with the cash?” Here is one answer I have heard: “I need $4,000
to pay off a Visa bill, and then the rest I’m not sure about.” I have
learned what that person needs; he just told me about the “pain”
he is dealing with. So I say, “I’ll give you $4,000 down so you can
pay off your Visa bill, then I’ll pay you $600 a month for the term
of the loan.” That met his needs and I did not require much cash
as a down payment.
When sellers say, “We’re going to invest the cash in a CD and
make 5 percent,” I ask, “How would you like to earn 7 or 8 per-
cent?” They reply by saying, “That sounds great. How are you
going to do that?” I respond, “Through owner’s terms. Your loan
is secured by your real estate, which you are familiar with, and I
will pay you 7
1
⁄2 percent, better than the bank.” By structuring a
deal this way through owner’s terms, I help them meet their needs.
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Only Negotiate with the Decision Maker
Always make sure you are dealing with the person who has the legal
authority to sell the property. If anyone else is involved, make sure
you negotiate with that person, too. You will save a lot of time and
hassle when you communicate directly with decision makers.
Try this: Go to a car dealership, a stereo place, a restaurant, or a
major department store and approach the manager. Ask how much
one of the items costs and say, “What’s the least you’ll take?” “It’s
listed for $50, so I want $50.” Respond by saying, “Can you do any
better?” Sometimes the manager will hold firm, but sometimes you
might hear this: “Well, we are going to run a sale in three weeks and
list it for $29.99, so give me $30 today and it’s yours.”
If you do not negotiate, you will not ever get the lower price that
you want. If you negotiate on a real estate deal, you could save thou-
sands of dollars.
Contingency Clauses
On the subject of contracts, let’s talk about how to reduce your
risk to zero, because I know you are thinking, “Wait a minute. I’m
not sure. What if I make a bad offer? What if it isn’t a good deal?
What if it doesn’t rent? What if I am going to lose money?”
Would you be interested in a business if your risk was reduced to
zero? The way you do that in real estate is by writing your con-
tract with a contingency clause. This clause is also called a weasel
clause. I rarely sign a contract without one.
In the contract, the contingency clause may say something like this:
■
“This contract is contingent upon buyer’s inspection and
approval before closing . . .”
■
“This contract is contingent upon buyer’s partner’s inspection
and approval before closing . . .”
■
“This contract is contingent upon buyer receiving favorable
financing . . .”
Their messages are all the same: “This is not what I thought it
was. It does not work for me. I am out of here.” With this clause,
you are not obligated to close on a deal if it does not work for you.
Financing Contingencies
Many contracts include a financing contingency: If you do not get
proper financing, you do not close on the home. Be careful how
often you do this, though. Do not ruin your reputation by putting
in offers on properties that you know you cannot close on.
Most people, after signing a contract, choose to close 30 days
later. I recommend you type 90 days instead of 30 days into your
buyer’s contract. Why? Often people who say they will be able to
close in 30 days do not do so. In fact, half of all real estate con-
tracts fail because buyers do not get their financing in time.
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With a good deal and giving yourself 90 days to close, you can
find something to do with that property, like lining up a buyer. You
risk not closing, but since you have control of the property, you
have reduced your risk to zero.
Contract for Deed
When you are buying a property, your first preference is always to
get the deed to the property. If the seller will not give you the deed
(possibly because the mortgage has due-on-sale clauses), then
turn to a lease option (discussed in the following section).
Here is an example of a contract for deed, sometimes called a land
contract.
Mr. Smith owns the house he bought 10 years ago for $50,000. It
is worth $100,000 today. You say, “Mr. Smith, I’ll buy it from you
for $70,000,” and he agrees. But instead of borrowing the money,
you give Mr. Smith a contract that says, “I will pay you $700 a
month for x number of years until I pay all $70,000. I will have the
house under contract for deed.”
So who owns the house? You do. You get all the benefits of own-
ership, and, after you fulfill the terms of the contract, you get the
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How to Control Your Real Estate Holdings
A Realtor’s Objection
A Realtor in Miami told one of my students, “Wait a minute. I know
you real estate investors like to put in these contingency clauses, but
I’m not going to allow it.” My student countered, “Listen. What if a
hurricane, a flood, a fire, or even vandals come the day before clos-
ing, break all of the windows, tear up the property? You mean to say
I’d still have to buy it even with these problems? So, just please let
me come by the day that we close to check that everything is still
OK. I’m a professional real estate investor who’s going to close on it
if everything seems right, don’t worry about that.” Yes, it is fair to
put in that contingency clause, no matter what a Realtor says.
deed. This is a type of owner’s terms. (Remember, owner’s terms
refers to the seller lending you the money to buy the property.)
Controlling Properties with Options
Most commercial and industrial property is not controlled with con-
tracts, but with options. An option gives you the right to buy some-
thing but not the obligation. So if you see a $40 million office
building and put an option in to buy it at $30 million within one
year, the seller will sign and you have one year to buy it for $30 mil-
lion. Then, whenever you find someone who will pay you $32 mil-
lion for it, you exercise your option and give the seller $30 million.
Sometimes sellers want a down payment before allowing you to
option a piece of property. However, if you are a good negotiator,
you will make the down payment as low as possible.
Remember, a contract with a contingency is almost
like an option because you are not obligated to buy.
Control with a Lease
You can control property through a lease. You also could re-lease
it for more than what you have leased it for (if your lease gives you
the right to sublease). This is another way to make money.
Control with Lease Options
You could lease a property for $500 a month for five years with the
option to buy it. You could also have the right to sublease it for
$800 or $1,000 a month or so.
If you lease a property for five years with the option to buy it, you
do not own it. What if the world goes into a massive depression?
Suppose you bought the property with borrowed money and then
were obligated to pay it back? You would be in hot water because
you would own the property and would have an obligation to pay.
With a lease option, even if a depression hits and the property value
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goes down by half, you still have an option to buy but no obligation.
(Read Chapter 8 for more in-depth discussion of lease options.)
Disclose Everything in Writing
My general rule for everything you do is this: Disclose everything
in writing.
For example, if I lease-option property from Bill, I have a five-year
lease with a five-year option to buy it, then I turn to Susie and say,
“Susie, would you like to become a homeowner? You can lease-
option or buy the property from me. Give me $5,000 down and
$1,000 a month.” She is now a homeowner who has owner’s
terms or some kind of ownership in the property. What if Bill
(whom I got the property from) suddenly goes bankrupt, gets
divorced, or has the IRS chasing him, and he cannot pass clear
title? At the same time, Susie says, “I’m ready to exercise my
option. I want to buy the property.” I would have to say, “I can’t
sell you the property because I don’t have title to it, Bill does, and
he is having some financial difficulties.” Susie is upset and says,
“Hey, I thought you were going to sell me the house.” Through
these actions, I have committed fraud. That is why you always dis-
close everything in writing any time you exchange information
with someone: a mortgage banker, a title lawyer, a buyer, or a
seller. If you do not, you will regret it.
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How to Control Your Real Estate Holdings
Getting Out of a Lease
Do people get out of leases? Yes. However, I am not recommending
you do a lease option just so you can walk away from it. I recom-
mend doing it because you have the freedom of not being tied to the
property like the owner would be. You have less liability and risk.
And if you have done your homework and have lease-optioned it
properly, you will make money. So it is possible to get out of a lease,
but it is not usually smart.
In my standard buyer’s contracts, I write this on the top of the
cover page:
(1) “I am a real estate investor. I am buying your property
and I may resell it or rerent it for a profit. You understand
that.”
(2) “I do not represent you or your interests.”
Have I disclosed everything I am doing?
When I am going to sell a property (using a standard seller’s con-
tract) or lease-option it, I also state in writing:
(1) “I am a real estate investor who invests in real estate to
make money.”
(2) “I do not represent you or your interests.”
(3) “I may or may not have or be able to obtain good title
to this property.”
Most people say I am being overly cautious, but I strongly believe
in disclosing everything in writing.
Three Review Points
1. Negotiate a contract. Negotiate, negotiate, negotiate. You can
always get a lower price. If the seller quickly accepts your
price, you have not negotiated enough.
2. Always try to get owner’s terms.
3. Always include contingency clauses to reduce your risk.
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Proper Title Disclosure
Always make sure there is proper title disclosure for any transac-
tion. Some real estate investors are going to prison for fraud
because they did not properly disclose title information. Learn the
proper way to do this and you will stay out of trouble.
If you cannot do these things, then you have to make a business
decision based on all your information and decide if it is worth it
for you to proceed or walk away. Rule of thumb: Always have
more pending deals than you can do.
Also, be sure to understand how to control properties by contracts,
contract for deed, and putting in contingency clauses, options, and
lease options. Make sure you disclose everything. Never, ever close
on a property without getting the proper title insurance and having
the proper insurance in place to protect you.
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Disclosures Rarely Stop a Deal
You might say, “Wait a minute. If you put these disclosures in your
contracts, no one will sign them.” Not in the real world! Most peo-
ple are motivated for their own reasons. If a buyer wants to become
a homeowner, he or she is willing to overlook that clause. Motivated
sellers want their money. You have found their pain. They are willing
to go ahead. But if you do not disclose everything and something
bad happens, you could be in big trouble. It’s called fraud.
Multiple Real Estate
Profit Centers
Big shots are only little shots who keep shooting.
—CHRISTOPHER MORLEY
Most people think that there are
only a few ways to make money, but there are lots of them, espe-
cially in real estate. For beginning investors, I recommend whole-
saling properties, also referred to as flipping or quick turning. With
this approach, you are not using any of your own money or your
own credit to buy property. In effect, you get paid to find good
deals and have almost no risk if you disclose everything properly.
You can use this approach to get into real estate, learn about real
estate, generate cash, and so on. You can also consider other strate-
gies (e.g., buy, fix, and sell; buying and holding; getting involved in
financing mortgages).
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CHAPTER 7
Quick-Turning or Flipping Strategy
Did you realize almost everything you buy is wholesaled or flipped,
including your chairs, your furniture, your televisions, and more?
In these cases, a businessperson went to companies in China,
Japan, Korea, or even locally and put them under contract to make
items, then sold those items to a retail store for a marked-up price.
Similarly, car dealerships put their cars on a lot for sale. They get
vehicles from the manufacturer without putting any money down.
They have finance plans with the manufacturers for, for instance,
$20,000 per car, then they sell that car to a buyer for $25,000.
That’s called wholesaling, quick turning, or flipping. Most indus-
tries are doing business this way, including real estate.
Here’s an example. Suppose John finds a property worth $100,000.
It needs $20,000 worth of repairs, and John has it under contract
for $40,000; therefore, he plans to put $60,000 into it and sell it for
$100,000.
John has a few choices. He can borrow the money, rely on his
credit, or use his cash to buy the property. He also has to hire a
contractor to do repairs (or do the work himself) for an esti-
mated $20,000. However, he goes into cost overruns, the repairs
end up being $25,000 and take six months to complete. He has
put $65,000 into the property, but it’s still a great deal. He then
puts this fixed-up house on the market, sells it for $100,000
three months later, and makes about $35,000. However, he’s
had carrying costs, holding costs, taxes, insurance, and other
headaches. He has spent nine months worrying about the prop-
erty and dealing with contractors, Realtors, and prospective buy-
ers. He also has had to pay some commissions, so he really only
has made about $27,000. Is that still a good deal for John?
Absolutely. However, he has spent nine months to get his capital
investment back and earn his profit.
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Time is money. Your single asset in business is your time. What’s
your time worth? After having access to unlimited riches in real
estate, John has learned that instead of buying, fixing, and selling
properties, he can wholesale them. Let’s consider an alternate sce-
nario: John puts the property under contract for $40,000. He gets
bids and estimates repairs. He also does sales comparatives. Then
he runs an ad in the paper that says, “Handyman special. Won’t
last. Call now.” His phone rings off the hook with investors who
love to buy and fix up property. John asks them, “This house is
worth well over $100,000. What would you pay for it as is?” One
may offer $45,000, another $49,000, yet another $52,000. He
next asks the investor willing to pay $52,000, “What are you going
to do with it?” The investor replies, “Assuming I can do the repairs
for $20,000, I’ll have $72,000 into it. Then I think I can sell it for
$105,000 because real estate values in that neighborhood are
going up.”
After starting negotiations with this prospective buyer, John asks,
“What’s the absolute most you would pay for this? Can you do any
better? Can you do any better? Can you do any better?” The
investor replies, “Instead of $52,000, I can afford to pay $54,000.”
John returns with, “I was really hoping to get $62,849.” The
prospective buyer says, “This is my last offer. I’ll pay $55,000 and
spend $20,000 fixing it. I’ll have $75,000 in it, sell it for $105,000,
and make between $20,000 and $25,000.”
John writes out the standard seller’s contract stating a price of
$55,000. The buyer agrees to pay the closing costs, and John gives
him 10 days to close. An attorney arranges the closing, called a
collapsed closing. The buyer comes in with $55,000, and the attor-
ney hands $40,000 over to the original sellers of the property. Are
they happy? Yes, they got what they wanted. John gets $15,000
because he put together a good deal that had a lot of margin to
work with. He disclosed everything in writing, told all parties what
he was doing, did some negotiating, and made $15,000.
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This transaction took about 30 days. John spent nothing out of his
pocket and had no risk. He didn’t have to fight with contractors,
drive by the property, make sure everything was fixed right, or deal
with selling it. Instead of making $25,000 or $27,000 over nine
months, he made $15,000 over one month. Better yet, his stress
level was a lot less than the first scenario because he was wholesal-
ing, not financing and renovating. John basically got paid for find-
ing a good deal.
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Get Contracts with No Money Down
When I started in real estate in the early 1990s, a gentleman named
Larry, about the same age as I (27 or 28 at the time), visited owners
of office buildings around downtown Nashville, Tennessee, and asked,
“What would you sell your building for?” If they said, “Two million
dollars,” he’d reply, “What’s the least you’d take for the office build-
ing? Can you do any better?” They’d say $1.8 million and he’d get an
option to buy that building for $1.8 million for six months without
putting any money down.
Then Larry would run an ad in a German newspaper inviting
Germans to invest in American real estate in Nashville. This ad gen-
erated calls from several overseas investors. To follow up, he would
send them a photo of the building with all the details spelled out,
including rents and answers to questions that an investor would ask
about the property. He also included some comparable sales on the
flyer. Then he would ask, “What would you pay for a building like
this?” They might respond with $2.4 million or $2.2 million, or what-
ever. Larry would then get a contract and work with a good com-
mercial closing attorney. After he closed the deal, he would make
anywhere from $200,000 to $800,000 on each building. In just a few
years, he flipped or wholesaled about seven of them and made a lot
of money. However, he had a lawsuit served against him because a
German investor said, “We thought you were representing us. We
did not know you were wholesaling and making money.”
What is the lesson here? You must write into all of your contracts
a statement such as “I do not represent you or your interests.” If
Larry had included that statement in his contracts, he wouldn’t have
been sued, or he would have won the lawsuit.
Turning Properties That You Control
but Don’t Own
These four steps are required to quick-turn, flip, or wholesale a
property. Some aspects have been discussed in earlier chapters.
1. Find a good deal.
2. Get it under contract.
3. Find buyers for it.
4. Close the sale.
Can you close on a property that you do not own? Yes, because
though you do not own it, you control it because you have it under
contract, as in John’s situation. You can accomplish this either
through an attorney or an escrow agent who helps you assign/sell
the contract to the next person or use a collapsed closing.
In general, all contracts are assignable in the United States. So for
the first option, you can say, “I have a contract to buy this house
for $40,000. Give me $15,000 and I’ll give you the right to buy
the house for $40,000.” These days, many commercial properties
are sold and purchased by assigning the option or the contract.
You are simply selling your contract.
The second option, a collapsed closing, requires two closings, two
contracts, and two deeds. The end buyer walks into the closing
meeting and pays the money for the property. The original seller is
paid by the wholesaler (that’s John in the preceding example), then
John sells it simultaneously to the end buyer at the same meeting.
Two closings happen within 30 minutes, and funds go from the
buyer to John to the original seller.
Many mortgage companies do not like flips or wholesale deals, so
you might structure the transaction in a way that requires the end
buyer to purchase the property for $55,000. That way, there is
only one contract on the closing statement and John gets a
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$15,000 finder’s fee. With this scenario, the property has only
been sold once.
Start Marketing
When you have a property under contract, start marketing it
immediately. Create a flyer about the property, including a photo
and description. Say something like, “Will appraise at $100,000,
maybe $110,000. Must sell. Make an offer. Only needs $8,000 of
repairs. Will rent for $900 a month.”
You can even take photos with a digital camera and put them and
your flyer on the Internet. If you cannot do this, have a Realtor
do it. Answer all possible questions on that flyer, then fax, mail, or
e-mail it. Call all of your potential buyers, especially Realtors and
people you met at association meetings. Set a convenient time and
say, “I’ll be at the property Saturday, 12:00 to 12:15.” If 10
investors show up at 12:00, that is good.
One investor who buys properties can purchase all or most of the
deals that you find. You only need good deals. Serious investors
will buy a lot of those deals, so you don’t need to know a large
number of them.
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Make Preapprovals Mandatory
A word of caution: Never sign a contract to sell anything to anyone
unless that person has been preapproved from a bank or a mortgage
company for financing the property. Alternatively, you need proof
that the purchaser has cash to pay for the property. Ask this ques-
tion: “Oh, you’re going to pay cash? I want written proof, a bank
statement, or whatever, of where the cash is coming from. Don’t
sign the contract until you have that proof. Mail, fax, or deliver it to
my office.” I guarantee that you will save yourself from headaches if
you do that. Also, make sure that you verify in writing what people
tell you.
Cure for the Doubting Spouse
Suppose your spouse, loved one, or significant other is scared
about your getting into real estate. He or she thinks it’s risky and
fights you every step of the way. How do you deal with the doubt-
ing spouse and/or any other dissenting family members? Don’t
tell them in detail everything you’re going to do; just do it. Then,
when you flip your first property, tell them about it and give them
the check.
My student Bob has a lovely wife Cindy, who once said, “That flip-
ping stuff’s got to be illegal. It’s got to be wrong. There’s no way
you can do it. Don’t get involved. I don’t want you doing it.”
Still, Bob went out and flipped his first property. He found a
house worth about $80,000, paid $65,000, flipped it, wholesaled
it, and made about $7,000. Then he went to Cindy and said, “I
wholesaled a house and closed on it.” She said, “I told you not to
do that. You can’t do it. It’s wrong. There’s no money in it. I’m
sure that stuff doesn’t work.” Bob replied, “Cindy, I’d like to give
you the check for $7,000 that I made. You take it. You spend it
any way you want to.”
Now, every morning Cindy wakes up and says, “Bob, how many
houses are you going to flip today? Why did you only make $5,000
on that one? You gave away too much. You could have flipped it
and made $8,000. Get out there and find some more deals.”
Bob and Cindy’s example suggests how you can respond to dis-
senting or negative family members: Give them the check. All of a
sudden, they’ll become more interested in real estate investing.
Cindy did . . . and she is still married to Bob.
Buy-Fix-and-Sell Strategy
Think like a real estate wholesaler getting properties ready for retail
sale. Find houses that need painting, cleaning, and fixing, then sell
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them at retail price. On a single-family home, for example, you
should make an average of $12,000 to $25,000 for a house that
would sell in the $50,000 to $100,000 range. If you have a house in
the $100,000 to $150,000 range, you should make $20,000 to
$30,000 after you buy it, fix it up, and sell it. If it is in the $200,000
to $300,000 range, you should make between $20,000 and
$50,000. For commercial buildings that sell between $0.5 million
and $2 million, you could make from $30,000 up to as much as
$80,000, depending on your capital, your time, and the overhead
involved. However, if you can’t make a good amount of money on
the deal, it may not be worth your time. Make sure you get paid not
only for the use of your time, but also for the use of your capital.
Know the Costs
When you buy a house to fix up and sell, you need to know the
following costs:
■
Carrying costs
■
Taxes
■
Insurance
■
Repairs (give yourself room for cost overruns)
■
Transaction costs (closing costs to buy it, closing costs to sell
it, commissions)
Calculate at what price you think you can sell the house, how long it
will take you to sell it, your cost of capital, and your payment to
yourself. If you are spending 20 hours a month working at the house
or running back and forth, what’s your time worth? $10? $20?
$100 an hour? Multiply that number into the equation to decide
whether this buy-fix-and-sell property will be profitable for you.
I have met a lot of real estate investors who have told me stories
like this one: “I bought a house for $50,000, spent $20,000 fixing
it, and sold it for $90,000. I made $20,000. It only took me a year
and a half. I worked on it every day, six days a week, did all the
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painting and carpeting myself.” I say “Congratulations. You just
bought yourself a $6-an-hour job.”
That is not what savvy real estate investors do. Your job is to find
good deals, put them together, and sell them. If you want to be a
drywaller or a painter, then spend time learning how to do these
skills, especially in the beginning. There’s nothing wrong with that.
In fact, many investors start by doing their own work because they
have to hold on to their money. However, remember your goal: Do
you want to be a cleaner, painter, and drywaller, or do you want to
be an investor who makes money?
To summarize, make sure that there’s a big enough
margin in the deal for your profit, your overhead,
your time, and your cost of capital. Also, verify that
your contractors’ bids are accurate and that you can
rely on reputable repair people. Allow extra time and
money for this strategy because repairs always take
longer than you think.
Dealing with Contractors
When people buy property to fix up, their biggest complaint is deal-
ing with contractors. That’s why I suggest you make sure that every
repair bid is in writing, that you have a fixed finish date for each part
of the job, and that you never give your contractors more money
than the work that has been done. Draw out payment every week as
they do the work; never advance them too much. If you do, they
won’t finish the job because they’ve already been paid.
In addition, if they don’t finish by the date they promised in writ-
ing, have a per-day penalty, just as the government has. When city,
county, and state governments build new facilities, they use hold-
backs and per-day penalties because, for every day your property
is unfinished, it is a day you cannot sell or rent it. You’re losing
money, so you need to deduct a per-day penalty from the money
you owe the contractor. Again, have everything in writing, and
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most important, make sure that you are working with referred,
licensed, bonded, and insured contractors.
Use Other People’s Money
The best way to buy and hold (or even buy and fix up) property is
through other people’s money (OPM). You could own 10 houses in
your name and be on the hook for 10 loans at $100,000 apiece.
Alternatively, you could get a partner who puts up the $1 million.
Instead of putting your name on the loan or mortgage and using
your credit, use OPM. Have a silent partner with whom you can
work. You make all of the decisions, use your energy to fix up and
sell the property, pay back your partner’s initial investment, and
split the profits. Your silent partner holds the property in his/her
name, and you receive a written agreement that’s filed at the court-
house. For example, the agreement might state you each have a 50
percent interest in the income and equity of the property. When
that property sells, you are entitled to half of the profit. When it’s
rented, you get half of the rent and pay half of the expenses. How
much money comes out of your pocket? None.
Be sure to carefully analyze any deal you make, running through
all the numbers regarding what comes in and what goes out. That
way, both you and your partner have a clear idea on how the
money will flow. Warn your partner (as I am warning you) that it
is likely that you will spend more money than you think and always
make less money than you predict, as in any business—and espe-
cially in real estate. However, you will make money if you do it
right. Occasionally, a deal will make a lot more money than you
thought. It all works out.
Offer an Incentive
To make the partnership attractive, you can give the person who puts
up the money the advantages of writing off expenses and deprecia-
tion on his or her taxes. You may want to form a legal corporation or
partnership so you can give your partner certain income tax benefits,
yet you still own half of the property and half of the income.
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You might be able to negotiate with your partner for more than 50
percent of the profit and income. Just do what is fair and right.
Remember the saying “Pigs get fat, hogs get slaughtered.” I believe
there is plenty of money for everyone involved, if you are able to
find good deals.
Buying-and-Holding Strategy
When you decide to buy and hold property, you have the advan-
tage of building a lot of wealth because every month the debt goes
down, the property appreciates, and the cash comes in. Would you
like to have several rental properties that generate thousands of
dollars a month so you can use that money to pay expenses, pay
off debts, and have extra cash flow every month? If you don’t want
to manage the property, you can hire a management company and
manage the manager. You can be free from dealing with tenants
and still receive income every month.
Owning property remains one of the best wealth builders available.
It can be a great way to build up an education or a retirement fund
for children, grandchildren, or favorite relatives. You can even buy
a house in their names and, in about 15 years, they will have a paid
asset worth a lot more than you paid for it.
Understand, though, that buying and holding property can be a
roller-coaster ride. Sometimes properties are vacant; sometimes
tenants and repairs create headaches for you. However, over the
long term, if they generate enough cash flow and enough equity,
they will make you rich.
Financing Mortgages as a Strategy
Every time you buy or sell a property, it is likely that there is some
type of mortgage on it. You can profit from these mortgages. For
many years, while I was buying or selling properties, I referred
between 30 and 80 people a year to a particular mortgage com-
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pany. After a while, I decided to become a mortgage originator
(i.e., someone who finds people needing mortgages). This mostly
requires filling out some paperwork. The processor actually pro-
cesses the mortgages, but the originator gets a fee ranging any-
where from 30 to 70 percent of the mortgage amounts for finding
customers. On a $100,000 loan, for example, that fee could be 1
point ($1,000), 2 points ($2,000), or even from 3 to 5 points
(from $5,000 to $7,000).
Start by becoming affiliated with a mortgage company that does
good work and that hires people who are honest and dependable.
By becoming a mortgage originator, every time a mortgage is
completed, you earn those fees.
Remember, any time you make money at something,
be sure to disclose your role to your clients by saying,
“I recommend this mortgage company. I’m an origi-
nator. I get paid for recommending the loan to you.”
Owner Financing
If you live in the world of real estate, you will find people who
either give you or already have owner-financing notes. As an
example, you could put $1,000 down on a $100,000 price, and
the lender would give you $99,000 on a $100,000 purchase for 30
years at 10 percent interest. You can then broker that loan and
earn a fee for doing it. Start by calling on people who buy those
mortgages (they advertise in local newspapers, or ask around for
referrals), and ask, “What would you pay for this type of loan?”
They might reply, “We’re going to discount it. We’ll pay $94,000.”
Then you call the property owners and ask, “What’s the least
amount you would take if we could get that cash in your hands
right now?” They reply, “We’ll take $90,000.” You write up the
contracts, then have the mortgage company that is buying the loan
arrange the legalities and close it for you. They pay you $94,000,
and you pay the property owners $90,000. You will make about
$4,000 on that mortgage transaction.
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Mortgages as a Source of Income
Mortgages are bought and sold every minute in the United States.
In fact, when you first got a loan on your home, the bank or loan
company probably sold it immediately. Stop letting them make all
the money and get into the action, too.
In addition to being a mortgage originator, I also buy loans. If you
have a pending mortgage opportunity, go to www.shemin.com, or
call and tell us what you’ve got. We’ll either make a bid on it or
find others to buy your loans.
Some people make a living brokering notes like this by running
ads and finding owner-held financing. When you’re talking to
potential investors and sellers, simply ask “By the way, do you
have owner-held financing or do you know anyone who has it and
would like to sell it?” When they answer yes, ask for details. Write
down the basic terms of the note [e.g., type of mortgage (first or
second mortgage), characteristics of the property behind it, value
of the property, terms (amount, payment, principal, interest, years
left on the note, who has signed it), and creditworthiness of the
noteholder]. Then ask us for a quote on the note. We’ll help you
determine what your profit can be.
Seven Secrets for Getting Paid
1. Residual income. The beauty of buying and holding property
is that it generates residual income. One of the problems with
wholesaling or buying, fixing, and selling property is the
absence of ongoing or residual income. Therefore, if you turn
a property and make a few thousand dollars, you still have
no money coming in the next month from that property.
Remember residual income creates happiness (RICH)? One
of your themes for real estate investing should be RICH.
How would you like to have the best of both worlds? Let
me explain. A few years ago, a student located 20 duplexes in
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disrepair. The owners were motivated to sell because the
buildings were run-down. They were willing to sell them for
$20,000 each, owner’s terms.
Each unit was actually worth about $40,000 or $50,000, so
my student put the property under contract for $20,000 and
flipped most of the units to me for about $28,000 each. My
student made $160,000 ($8,000 × 20) by quick-turning that
deal. I received a good deal because I got property worth more
than the price I paid. The original sellers got what they wanted,
too. In fact, one of the sellers wrote us a letter thanking us for
taking those horrible duplexes off his hands. We then whole-
saled these units to another investor and made about $60,000
($3,000 per duplex × 20). The end buyer of the duplexes fixed
them up and raised the rents tremendously. In a matter of three
years, the duplexes increased in value to $120,000 each. The
end buyer later sold those 20 properties and made more than
$1 million, all because of the deal my student found. Some
might think I should be upset by that result because I only
made $60,000 and the end buyer made $1 million. That did
not seem fair. I learned from that experience to develop a
strategy of sitting down with prospective property buyers and
walking them through the numbers, saying, “Mr. and Mrs.
Investor, you’re going to buy these duplexes for $60,000, and
they’ll be worth $100,000 or more in a few years. You’ll make
a lot of money. Isn’t that great? One way I get paid for bring-
ing these great opportunities to you is through a fee. It doesn’t
come out of your pocket until you sell or refinance the prop-
erty. My fee would be five percent of the sales price whenever
you sell or refinance these properties. That could be in a year
or two, or even three years from now.
“We’ll put a note against the property and record it at the
courthouse. The lawyer will handle all of this. Whenever you
refinance or sell the property, I get an extra fee for helping you
get this great deal in the first place. Realize that you’ll make
most or all of the money—about $20,000 per building—and
I’ll only get, say, $4,000, assuming it sells for $90,000 or so.”
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This approach is almost like getting a second mortgage
recorded against the property with your name, address, and
phone number. Because of the recording, the buyers cannot
sell that property or refinance it until they pay the fee.
Ask for this kind of deal every time you wholesale or sell a
property. Have your attorney draw up the paperwork. You
will not always get the purchaser’s agreement, but what if you
get it a few times? You then get paid again on the property
you have already received payment on.
Be sure to disclose everything in writing and check with your
own attorney to make sure you can do it. I have done this a few
times and enjoyed getting a call or letter stating, “Please sign
this paper. We need to pay you your $9,000 because we can’t
sell the property or refinance it until you release your lien.”
What if the sale took place 10 years previously and the
property increased in value to $1 million? Five percent of that
would be $50,000—not bad. Suppose you request this resid-
ual income and the prospective buyer asks, “Why should I let
you get paid again when the property sells?” Your reply
would be, “How much do you think this will be worth in five
years from now? If it’s worth $100,000 then and you’re buy-
ing it for $60,000 now, you’re going to make $40,000. So do
you really mind paying someone $5,000 to make $40,000? If
that isn’t a good deal for you, I know a lot of other buyers
who’d like to get into this deal.”
The buyer might say, “No way. I’m greedy; I’m not going
to give you anything. I want to make all of the money.” Then
you make a choice: Either wholesale the property to that per-
son without taking the residual income, or move on to some-
body else. However, I promise you this: If you never ask for
the residual, you will never get it. If you ask for it every time,
you will get it sometimes. That “sometimes” could be worth
$2,000, $5,000, $10,000, or even $20,000.
2. Make three offers. Whenever you make an offer on a prop-
erty, don’t just make one offer. Make three. For example, if
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the sellers want $100,000 for their house, make one offer for
$64,500 in cash. Make a second offer with $1,000 down at
$65,922. Make a third offer with nothing down and $800 a
month for $68,422. You have given them three choices: the
cash offer being the lowest, the second one with terms a little
higher, and the third one with terms higher still. When you sell
a property, do the same thing: Say, “If you give me cash, pay
me a wholesale flip fee, and agree to a residual fee, it’s this
particular price; if you don’t give me that, it’s another price.”
3. Become a mortgage broker. Some states require a license,
certificates, and educational classes to become a mortgage
broker whereas others don’t. The same is true to be a mort-
gage originator. Consult with your attorney or mortgage
company, or call the mortgage department at the department
of commerce and insurance in your state and find out the
requirements.
Generally, you can affiliate with several mortgage brokers
and become an originator without too many regulations.
Mainly, you want to affiliate with reputable brokerage compa-
nies and get referral fees from them. That’s how to develop
another source of real estate revenue. You can get referral
fees from contractors and title companies, too. Just make
sure they are run by honest people who deliver great service.
4. Put service before money. More important than making lots
of money is delivering quality service to your clients. If you
give good service, you will make money; if you give bad ser-
vice, you will be out of business. Remember, always disclose
any referral or relationship fee in writing to your clients.
5. Choose a geographic focus. As a beginner, should you con-
centrate on one small area, view the whole city as your terri-
tory, or consider the whole state or country as your domain?
The answer: Do what you feel comfortable with.
Initially, I picked a moderate-income neighborhood in
Nashville on which to focus. It only took me a few weeks to
know the neighborhood and the prices in it. However, I real-
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ized the people who make the most money have more guts than
beginners, and they make bigger deals. Before long, I expanded
beyond the first targeted neighborhood. I now view the whole
world as my territory, so when I travel and go on vacation, I
often find a deal, then wholesale it or lease-option it.
I suggest that you first concentrate on smaller deals in a
certain area before branching out into, for instance, large
apartment buildings in exotic locations. However, be careful
not to spend all your time chasing elephants—big deals that
never happen.
6. Find the right advisors. How do you find title and mortgage
brokering companies that will do double flips, wholesaling,
and creative simultaneous closings? I share the names of
attorneys around the country who probably will close deals
and/or know others who do. I also suggest contacting real
estate associations for referrals.
I warn you, though, that you will find some Realtors who
know nothing about wholesaling and lease optioning, renting
to own, flipping, zero percent financing, brokering mort-
gages, and so on. These people belong to a group that says
you can’t do these things, because they have never done them
themselves. Do not listen to them! It reminds me of my friend
who has been divorced six times yet loves to give out relation-
ship advice.
Another group of advice givers includes people who have
failed miserably at something and love to tell you how bad the
whole idea was. You may go to a real estate investor or a
Realtor who bought a house one time, did not follow good
policies and procedures, and lost money. They quickly tell
you flipping will not work.
A third group that gives advice is made up of experts who
have successfully worked in a certain field for years and years.
They know exactly what they are talking about; they have
encountered a full range of positive and negative situations.
Listen to them. Make sure your advice comes from people in
this category.
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7. Invest in your own home. Your best real estate investment is
your own home because you now know you can buy a home
for less than what it is worth. Let me give you an example.
You could buy a home worth $100,000 for $70,000. Instead
of having a $100,000 mortgage, it will be $70,000 (or
$68,000 with a $2,000 down payment). Your payment will be
about $550 a month, depending on the interest rate. After liv-
ing there for two years, you can sell it for up to $250,000,
make a profit, and not pay any taxes on it (in the United
States). If you’re married, you can sell it for up to $0.5 mil-
lion after two years or more.
Suppose that after two years, your home appreciates quickly and
becomes worth $200,000. You find another deal, keeping the
same level of mortgage payment but making money each time.
That’s tax-free income.
I believe that one of the best deals going is finding a
good deal on your own home, living in it for about
two years (check with your accountant for residency
requirements), then selling it and making money
tax-free.
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Everyone Makes Money
In the world of investing, you want everybody to make money.
Actually, I like my clients to make a little more money than I do
because the way to really profit in any business is have repeat
clients.
Maybe I only make $8,000 to wholesale a property when I could
have made $12,000. However, if my clients bought it from me, fixed
it up, sold it, and made $30,000, they will come back. My lawyer
friends have a saying: If you’re going to rip someone off, do it once,
do it big, and leave the country. Some real estate investors like to
rip people off in little ways, and that is stupid! They don’t make
much money, and they have unhappy clients.
Do Not Pass Up These
Sources of Income
Opportunity is missed by most people because it is
dressed in overalls and looks like work.
—THOMAS ALVA EDISON
This chapter discusses in detail
several avenues of income introduced in Chapter 1.
Lease Options
A lease option means leasing a property with an option to buy it,
commonly called rent to own. If you are leasing an apartment or a
house now, you are always better off to own it. If you are an investor
who has a property you want to rent, you are always better off lease-
optioning it or setting up a rent-to-own situation, rather than just
renting it out.
The statistics support this approach. According to various real
estate groups around the United States, 97 percent of renters want
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CHAPTER 8
to become homeowners but are not sure how, so a tremendous
market exists for investors or real estate entrepreneurs.
For a comparison, let us look at the automobile industry. About 20
years ago, only two ways to buy a car existed: (1) pay cash, or (2)
borrow money from the car company or your bank. Today, more
than 50 percent of all automobiles are purchased through a lease
option. In the luxury market, more than 60 percent of them are
through lease option. That way, lessees put down a much lower
down payment and make lower monthly payments than if they
borrowed the funds to buy the car. At the end of two, four, or
sometimes five years, they have the right to buy the car at a prede-
termined option price. Alternatively, they can give the car back to
the dealer if it is not damaged and lease-option a newer one. It is a
win-win situation.
In this country, an estimated 1 percent of all houses are lease
option, so it is a wide-open market. You could learn to dominate
this market in your area.
Controlling Property
Lease options are not only good for rental or rent-to-own proper-
ties, but they also provide an excellent way to control properties
without using much of your cash or credit.
Suppose you found a beachfront condominium you could have
either purchased or lease-optioned for $50,000 10 years ago that is
worth $100,000, $150,000, or $200,000 today. If you had lease-
optioned it for 10 years for $50,000, you could have purchased it
within that time frame. (Lease option means you have the right to
buy a home, but not the obligation to buy it.) Today you would
either own it completely or sell it for a handsome (depending on the
market) profit.
What results! Now, suppose every condo house in the neighbor-
hood was available for lease option. How many could you lease
option in the next 10 years for their investment value, knowing the
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market will likely go up? Do the math and you will see how lucra-
tive this income source can be.
How Lease Option Works
To get started, find a fairly motivated seller. With lease optioning,
unlike wholesaling, you do not have to find a supermotivated seller.
The most profitable real estate deals require you to buy properties
or put them under contract for 25, 30, 40 percent below current
market value. That is, if you want to wholesale a property and it is
worth $100,000, you need to purchase it for $65,000 to $70,000
so there is enough room for you to sell it and make a profit. If a
seller says the property is worth $100,000 but he needs $82,000,
many investors would walk away. With lease optioning and rent to
own, however, you do not have to walk away, even at a moderate
discount like $82,000.
The best way to find a motivated seller for a lease option is through
the For Rent ads. Call landlords and property managers. If a prop-
erty is for rent, do you think they might be motivated to lease-option
it? Quite possibly they will be so motivated, and here’s why: In the
world of owning rental property, a For Rent ad signals that the ten-
ant has vacated, probably leaving the place in a damaged state. It
needs paint, cleanup, new carpet, and so on. In many cases, the ten-
ant may not have paid the rent regularly, or neglected or damaged
the property. The owner or manager likely had to drive back and
forth to the property to make little repairs. With these hassles, the
owner or manager is not likely making as much money as originally
thought. He or she could simply be tired of managing it.
Fact-Finding Questions
When you call about the ad, write these questions down and have
them handy when you talk to the landlord, owner, or manager.
1. How many months has the property been vacant in the last two
years? The reply may be, “Someone moved out two years
ago. It sat empty for two months. We rented to a couple who
stayed for a year. Then it was empty for another month.” So
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out of the last two years, it was empty three months. If the rent
was $1,000, that means $3,000 was not collected. Remember,
real estate is numbers.
We have to present some powerful numbers to help
convince the owner to go for a lease option on the
property.
2. How much money have you spent on repairs in the last two
years? This includes painting, cleanup, new carpet, appliance
repair, and so on. The reply might be, “We painted it, and that
cost $800. We had to replace the carpet a year and a half ago;
that was $2,000. We did some yard work, which cost $500. We
also did some work on the roof for $4,000. Oh, and the hot-
water heater broke. That was another $800.” Add up all those
repair numbers.
3. How much time do you spend worrying about the property, or
going back and forth to it, or taking tenant calls every month?
The response might be, “It takes at least five hours for paper-
work and answering the phone. When I have to lease it, I
spend time driving back and forth to the property a lot.” Add
up those numbers.
4. How much is your time worth? If the response is $20 an
hour and the answer to the previous question was, for exam-
ple, eight hours, that is $160 more spent a month.
5. What are the mortgage, taxes, and insurance costs? When
you total all the numbers defined through these questions,
say, “When you subtract all the vacancy and repair costs, you
are really only making about $650 a month and not $1,000.”
They will likely agree with you. You are leading up to making
an offer.
Make an Offer
Start by asking this question: “How would you like to not have
to worry about tenant repairs or tenant phone calls any more?”
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The response will likely be, “That would be great. How do we do
that?” Then ask, “How would you like to not worry about col-
lecting rent money for the next five years? You just have to go to
your mailbox and get your check. You don’t have to worry about
the property anymore.” If you get a positive response, now offer
the possibility of renting to own or lease-optioning the property
to you.
You want at least a five-year lease at $650 a month (the actual
intake). That locks in your cost for five years. (Maybe you will
only get a 2-year lease, a 10-year lease, or more. You are limited
only by your own creativity and ability to negotiate.)
Next, you offer to be responsible for the small repairs up to, for
instance, $300. That covers 90 percent of those piddling repairs
that drive landlords crazy. However, be clear in your contract that
the owner is always responsible for big repairs over a specified dol-
lar amount. In addition, you should carry insurance for any big
repairs. If a storm damages the roof or the hot-water heater blows
up, you have insurance to cover repair and replacement expenses.
The next step is to negotiate an option price by saying, “What is the
absolute least amount you would sell or option this property for
today?” If the response is, “The property is worth about $100,000,
but I’d take $82,000,” you would either accept it or keep negotiat-
ing. You point out it will probably take another 30 to 60 days to
rent it and your first payment will not be due for 60 days. You
explain that you are a professional real estate investor who will
paint and do repairs and make payments regularly. In your disclo-
sure, make it clear you do not represent them or their interests.
Also be sure to disclose that you will sublet the property. Although
the person still owns the property, you obtain the right to lease-
option it for five years at the price you agree on. If money down is
required, find out how much deposit is normally collected when
the property gets rented. Ideally, your down payment should equal
that amount.
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However, you can even negotiate that. Point out that the tenant
receives back the deposit money unless it is needed to pay for
damages. As an alternative, suggest, “Since the deposit money
belongs to the tenant and is really not your money, let me take that
same amount of money and spend it making improvements over
the next few months. You will be much better off because your
property will be improved.”
Once the lease-option agreement is signed, you control the prop-
erty. Be sure to file that option document at the local courthouse
to protect your interests so the owner cannot sell it out from under
you. Both parties are protected that way. (Refer to Chapter 9 on
asset protection for details.)
Move Forward to Make Money
Suppose that you have leased this property for $650 a month with
the option to buy it for $82,000 within five years. It rents for
$1,000 a month, and the market value is about $100,000.
Now that you control the property, you can move forward and
make some money. The beauty of lease optioning is you really
have four paydays. Here is how that works. You run an ad in the
paper that says, “Rent to own. Stop throwing your rent money
away. Become a homeowner. Easy qualifying.” Do you think that
would draw some attention and get some phone calls? Absolutely.
Remember, about half of all real estate contracts fail because the
buyers cannot get financing.
Your phone is ringing and people are saying, “I’d love to become a
homeowner. I do not want to be a renter, and I’m tired of throw-
ing my rent money away. I don’t think I can buy, though, because
I don’t have a big down payment and my credit isn’t perfect.”
The first qualifying question you ask on the phone is this: “How
much do you have to put down as option money?” Now, in your
mind, you know you would prefer to have $3,000 down on a
$100,000 house. That is three months’ worth of rent. That will
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protect you against any vacancy or repairs. If someone calls up
and says, “I have $8,000,” what do you say? “We might be able to
work something out.” What if someone calls and says, “I only have
$300 to put down?” You may not want to work with that person,
because you do not have a big enough cushion to play with for this
transaction.
Remember: Before you rent your property, always do
a credit and criminal background check. Check with
two previous landlords, and verify everything they
have told you. Warning: Never give anyone a key to
any of your properties if you have not done a com-
plete credit and background check.
Then ask them, “How much are you looking to spend a month?”
Ask this as an open-ended question. If you say that $1,000 is what
you need, they could respond with, “Great. A thousand’s fine.”
However, if you ask, “What are you looking to spend?” and they
reply, “About $1,100,” you just earned a $100 rent increase.
That’s $100 a month times 12 months a year, which is $1,200—a
$1,200 idea.
Payday 1. After everything checks out well on the background
check, it is payday number 1. The tenants give you $3,000 option
money up front. That is your money. You are not taxed on that
option money until the option is exercised or a sale on the house
closes. (That option money will go toward the purchase of the
property, so you need to have access to it should they buy the
property.) That is $3,000 in your pocket.
Payday 2. Your first payment is not due to the original owner for
60 days, and your new tenants are ready to move in 30 days. Now,
take their $1,100 rent the first month, and you do not owe any
payment for 60 days. You have payday number 2.
Payday 3. The tenants begin paying you $1,100 a month, and you
owe the original landlord $650, so you are making a profit of $450
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a month. At this point, you should be thinking, “How many lease
options can I do?” How would you like to have 3, 5, or even 20 of
these going every month?
Payday 4. Next, one of two things happens. You give the tenants an
option for one year only to buy the property. They have 12 months
to arrange a mortgage and buy the property. If it is $100,000 today,
in 12 months (the term of the option), it could be worth $107,000.
Always add a few dollars in because property generally appreciates
in value.
Eight months from signing the lease-option agreement, one of two
things will likely happen:
1. The tenant-buyers disappear in the middle of the night like
some renters do. This is not necessarily bad! You can turn
around and re-lease the property. Someone new offers another
$4,000, $5,000, or $6,000 as option money. You start over
again with your four paydays.
2. The tenant-buyers come to you and say, “We’ve gone to the
mortgage company. We’ve been approved and we’re going to
buy your property.” Many landlords get sad about this
because they do not ever want to lose the property. However,
that result is not as bad for an investor. They pay you
$107,000, you pay the original owner about $82,500, and
your profit is approximately $24,000 at closing. This is why
you should not feel bad for yourself or any other landlord
who has lease-optioned.
Give Rent Credits
Consider these nuances. First, always give some rent credit to the
tenant-buyer. Maybe $100 to $400 a month of their rent every
month goes toward the purchase price so your tenant-buyer can
build a down payment. You need to escrow that money should
they ever purchase the property.
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Second, put in writing that the new tenant-buyer is responsible for
all of the repairs up to the amount you agreed with the original
owner (e.g., $300, $500, or $1,000). Also, explain that it is their
home. They now rent to own it and are therefore responsible for
repairs. This is important as most renters have no pride of owner-
ship. Generally, when we rent a car, for example, we do not take
good care of it, because it is not ours. If you instill in your tenant-
buyers’ minds that this is their home, that gives them incentive to
take care of it, plant flowers, and so on.
Third, make sure that you have a separate lease and a separate
option agreement in your documentation. If you ever have to evict
your tenant-buyer, you need only the lease agreement when you go
to the eviction court. Judges in eviction courts understand leases. A
joined agreement that includes lease-purchase or rent-to-own doc-
umentation could confuse the judge and weaken your case.
In Their Own Handwriting
Have you heard of Chinese torture techniques? In the Korean war,
some of America’s bravest, most patriotic soldiers were captured
and led in front of television cameras where they were told, against
their will, to speak badly about the United States. To get them to
do this, the Chinese often used psychological torture techniques.
Specifically, they discovered if they could get their victims to write
down in their own handwriting certain statements, they could not
deny them. The principle is this: You cannot deny what you have
written in your own handwriting.
Therefore, in addition to using documentation for all of your
tenant-buyers, get them to write these four points in their own
handwriting:
1. “I understand I am responsible for the repairs up to the first
$500.”
2. “If I am late on any payment, I will lose all of my option
money.”
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3. “If I do not close, refinance, and cash you out of the property
within the next 12 months, then I will lose all of my option
money and built-up funds.”
4. “I promise to keep the property up to codes and to keep
everything repaired as long as I am in the property.”
So when the sink needs repair and your tenant-buyer calls and
says, “Come fix the sink,” you reply by saying, “Remember that
handwritten paper you signed that said, ‘I promise to keep every-
thing repaired as long as I’m in the property.’ Would you like me
to send a copy of that paper to you?” I believe if people handwrote
their own contracts, we would have fewer lawsuits. If your agree-
ment were contested in court, the tenant-buyer might say, “I
didn’t understand this 10-page lease. It was too complicated for
me.” Then you produce a paper in his or her own handwriting that
states “I’ll lose all of my money if I do not pay the rent on time.”
How could the tenant-buyer argue then?
I recommend that you make sure every tenant-buyer
writes out the key points of their contracts. Give them
copies and attach these to the rent-to-own/lease-
option contract.
Lease-Option Benefits
To summarize the advantages of lease optioning:
1. You can control a lot of property without using much of your
own credit or money.
2. You can get out of the repair business, which can drive you
crazy.
3. You can make money up front with option money differentials.
4. You can make money every month with the difference in rents.
5. You get big paydays when they close on the properties.
6. You can affiliate with a mortgage company and make it easier
for tenant-buyers to get preapproved credit before the lease is
ever signed.
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7. You can help them start on a program to build up their credit
so they can buy your property.
Summary of the Lease-Option Process
1. Find motivated landlords or property owners.
2. Walk these owners through the details outlining their actual
earnings, assess the amount of time they spend on their prop-
erties, and find their pain in operating them. Determine if
you can help them by taking the property off their hands at a
discounted price.
3. Advertise and find qualified, hungry tenant-buyers who have
cash to put down as option money, and who have good refer-
ences and decent credit.
4. Make sure that the tenant-buyers understand all of their
responsibilities for repairs and maintenance while encourag-
ing them to take pride in their homes.
5. Affiliate with a good mortgage company so you can help your
hungry tenant-buyers close on the property.
When the tenant-buyers do close on the property and you have a
check in hand, I recommend congratulating them by giving them
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Star Student
One of my students, Larry B. from Atlanta, Georgia, used this infor-
mation to lease-option 14 executive homes in the $200,000 to
$500,000 range. The average differential between rent money taken
in and his costs was between $500 and $1,500 a month on each
property—his profit. In the first year, three of the properties closed,
so he made almost $100,000. Every time Larry closes a sale, he goes
out and finds one or two properties to lease-option.
You can do a lease option with any type of property—vacation
property, rental property, or commercial property. It is very power-
ful. It works.
flowers or arranging a limo ride to make them feel great about
owning their home.
Questions and Answers
Q: What happens if you cannot rent the property? Do you have a
way out with the original owner or landlord?
A: You can get creative and ask the owner to give you 60 days to get
someone in the property. Put that request in writing and add a
clause saying, “If I do not get a tenant, I can’t go through with
the deal.” If your price and bottom rent are low enough, you
should always be able to rent and market the property quickly,
assuming you know the market. Do your research by talking to
other property managers, investors, and landlords in the area
to find out what the true rents are and how quickly things rent.
Call on For Rent ads to see what the rents are and determine
how long it takes to move a property.
Q: Who pays the insurance and taxes?
A: The beauty of renting to own and lease optioning is that the
original owner still owns it. That person has all the liability
and responsibility to pay for insurance and taxes. As you now
have an interest in the property, be sure to get copies of that
insurance, or even become named as the insured, which is
easy to do. You also want to make sure the mortgage taxes
have been paid, so ask for copies documenting that for every
year you are involved in that property. Sometimes investors
will take over a property, and the original owner stops paying
the mortgage and taxes. It goes into foreclosure, and that
causes problems for everyone. So make sure everything is
current and stays current.
That is why you must disclose to your tenant-buyers that
you may or may not be able to pass on a good title or that you
may not have ownership of this property at this time. If any-
thing bad happens to the deal, you have already disclosed it to
the tenant-buyers to protect yourself. You may want to get
your own insurance to protect against your activities.
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Q: What is a fair commission to set up a lease option and flip it
over?
A: Whatever you think is fair and whatever the deal will bear—the
sky is the limit. I like to work backward and say, “There is
$50,000 of profit in this deal. You’ll make $50,000 if I do this
deal. I should get at least $20,000 of it. If it is $600 a month,
I should get at least $200. Or just pay me. You are going to
make $50,000. Pay me $15,000 today and make $50,000
later.” You can also use partnership equity sharing. (See the
section titled “Partnering” in this chapter.)
Q: How do you conduct credit and criminal background checks
on tenants?
A: Hire a professional firm and charge the prospective tenant-buyer
an application fee, which pays for the expenses for the credit
and criminal background check. (Go to www.shemin.com for
names of good background- and credit-checking agencies.)
Q: How do you determine what that tenant-buyer can actually buy?
A: Remember, any time you consider selling a property to some-
one, get the person preapproved for financing. Put a system
in place that allows tenant-buyers to work with your affiliated
mortgage company to find out what they can afford before
signing any paperwork.
Q: How do you know if a tenant or a tenant-buyer can afford to
pay the rent every month?
A: Generally, the rent should be no more than one-third, or better,
one-fourth of their income. If people want to rent an apart-
ment for $1,000 a month, they should have $4,000 a month
income. Unfortunately, many renters pay almost 50 percent
of their income toward rent, so make sure that your appli-
cants have a safe ratio in place before renting to them.
You can verify their income by getting current pay stubs
and by checking with their employer, and, of course, using
the background-checking agencies. However, I have some
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tenants who do not seem to work but who always pay their
rent on time. If they put enough down and their track record
is good, do you care?
Q: How many lease options would you like to have going?
A: How many do you think you could find? What type of property
do you want to lease-option? Where? If you do not want to
do it in your area, maybe there is a vacation area you want to
be in. The main question is this: How many phone calls and
how many For Rent ads are you willing to handle to find one
lease option?
Generally, I make 15 to 25 calls and talk to 15 to 25 own-
ers to find one or two lease-option potentials. Then I do my
homework and make sure the numbers are as stated, verify
the rents, and verify the market by talking to other profes-
sionals.
You can always run ads in the local newspapers. If you are
doing executive homes, have an ad running constantly saying,
“Rent to own executive home,” and always have people call-
ing you, so you are always having more tenant-buyers than
you have property.
You can also advertise for acquiring rent-to-own property.
“Landlords, sick of doing repairs? Tired of dealing with ten-
ants? Let me help you out. Call now.” You could do a free
special report about how you are going to lease-option their
property and get them out of all those repair headaches. You
could have someone making phone calls for you. You can go
make a presentation to a landlord association and see if you
can get 10 properties all at once.
Q: What about property management companies?
A: You may call a lot of For Rent ads and get management compa-
nies on the phone. Some property management companies
will work with you because they get a fee on the rent they col-
lect. You can offer to take over the management of the prop-
erty, control it, and pay the rent on time every month. They
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can collect their fee, and their repair costs will go down.
However, you or the management company will need to talk
with the owner to acquire an option to buy it.
Generally, when property management companies sell one
of their owner’s properties, they get a commission. You can
offer the manager a commission if you have enough room in
the deal. Do not let the fact that a property management
company operates the property deter you from following
through with your lease-option potentials.
Q: What kind of taxes do you have to pay as an investor when you
sell a property?
A: If you buy and hold property, and your intent is to hold it for
about a year, you can depreciate everything and write off the
interest payments on your taxes. You also have some business
expenses you might be able to write off. If you sell that prop-
erty, generally the depreciation is recaptured, and you will
pay taxes at the capital gains rate (about 20 percent) on your
gain, plus the recaptured depreciation.
If you are wholesaling properties (i.e., putting them under
contract and selling them), the Internal Revenue Service
determines that you have a separate business, just as if you
were buying and selling pictures, chairs, cars, jewelry, and so
on. You pay ordinary income tax on it, plus about a 14 to 15
percent self-employment tax.
Often, investors, and especially beginning investors, talk
themselves out of doing deals because they will have to pay
taxes. Your goal should be to pay $1 million to the IRS because
that means you made $3 million (if you fall in about the 30
percent tax bracket).
You can reduce your tax expense by, for example, incorpo-
rating your wholesale real estate business. This way, you can
get extra benefits and write-offs and thus decrease the amount
of tax you will pay on those activities. You can buy and sell
properties in most cases through your self-directed IRA or do
1031 exchanges on your home properties and not pay taxes on
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them. Ask your tax advisor. These 1031 tax-free exchanges
allow investors who have held property to buy new property of
equal or greater value and not have to pay taxes on the gains.
To learn how to save on taxes, go to www.shemin.com.
In my opinion, as long as the tax rate is below 50 percent,
you want to make as much money as humanly possible and
pay all the taxes you are legally and ethically bound to pay.
Q: Who do I need to have as advisors?
A: You need a team to be successful in any business, especially
real estate: A good accountant (preferably one who owns
real estate), a good attorney, a good mortgage company and
banker, a good closing title company, some good repair
people and contractors, and an excellent insurance broker.
Always go to your team before you make any moves. Be sure
to have them approve and make recommendations for fine-
tuning your business plan, your money, and your tax plan-
ning.
Partnering
Another way to control property, make money, and not use any
of your own credit is partnering. Remember, if you do not have
the capital or credit or do not desire to use your own, get a part-
ner to fund your business. It should never be a 50-50 partner-
ship; someone has to be in control and make decisions, and that
person should be you. Make sure you work with silent partners
who do not interfere and tell you what color to paint the house,
how much to rent it for, and so on. (About 70 percent of real
estate partnerships fail because two equal partners cannot agree
on anything.)
As a real estate investor, it can be difficult to borrow funds because
you are self-employed and do not have much verifiable income in
the beginning. You can overcome this by getting strong partners
whose credit is excellent. Of course, you want to make sure that
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