Bernard Zick's

Advice for the Impatient Investor

For real estate investors who don't have time or money to waste!  

April 2004

Editors: Bernard "Barney" Zick bernard@zick.com, Karen Zick and Amy McIntee

This email was sent to you by REIT Corp. To ensure delivery to your inbox (not bulk or junk folders), please add Bernard Zick [bernard2--9168385@autocontactor.com] to your address book.

In this issue:

Thoughts to Ponder...

Zero Interest

Several Approaches to Consider

Getting Started: Don't You Have a "Super" Contract we Should Use?

Advanced Strategies: Leverage is a Grand Thing!

Q&A with BZ

Home Study Materials Update

Upcoming Events: Bay Area Options Boot Camp This Weekend!  LA Options Boot Camp Dates Changing

Thoughts to Ponder...

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In a recent letter I read, “For myself, I am still walking back and forth in the same rut I have been in for years.  You would think, realizing that, I would be digging myself out of this rut.  Instead, I find my self measuring it for curtains.”

This insightful moment came from Ray Hale, a fantastic artist, dear friend of many, insightful advisor, yellow dog Democrat and my most loved and loving Uncle.

Zero Interest

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Q.  I know you told us in your lecture that asking for zero interest financing was in part for fun, in part a great way to start and that in fact, it sometimes does get accepted.  I am concerned about telling a potential seller I will give them a note that will “...include 8 percent interest".  But on second thought is this grounds for being sued by the seller based on misrepresentation and fraud under tort law and expressed warranty under contract law because the instrument, the written contract, is not being represented to the seller as what you represent it to be, i.e., interest taken out of their equity and not added on to the purchase price.

How do you not get sued if the buyer has an attorney review your contract and realize that you have reversed the interest they are expecting and are now not actually paying them any interest?

A.  The first time I read and answered this question, I missed the main point. The main point is that this student assumes you are trying to keep anyone from knowing that you have made a zero interest offer.  It implies that the subject would never come up.  I don’t do that.

Yes, I will, in an initial offer, not mention or offer interest.  But I would never close a deal without making sure that all the terms and conditions are understood.  You asked what would happen if they took it to their attorney.  Fine with me.  Then their attorney can explain it to them.  In fact, one of the times I got zero interest, the seller did have an attorney look at it.  I held my ground and got my terms.  Also, if I supply the promissory note, it is in there. The note payment schedule that is often supplied at closing will be another way to tell them what is going on.

The expressed warranty part of the law does not apply here.  This is going to be laid out in writing as to what the seller gets.  But I would stand by a buyer’s ability to make an offer that a seller cannot understand.  I have seen many deals with simple interest rather than compounded.  I have seen deals with interest based on an index that did not reflect CD or Treasury rates. There is no misrepresentation with using the term "includes interest."

The words say what you are doing.  In real estate, the words on the paper dictate.  No matter what you say in negotiating (and I am not here suggesting you lie or cheat) the words on paper are where it is at.  I believe the saying is, "all things are merged in the deed."

I will never say that a buyer should not talk to a lawyer.  And what if they object?  If the seller understands and agrees, so what?  I make the seller understand by telling them just what they will get per month and for how many months.

Besides, if you listen to what I said, I used that as an example of negotiating in layers.  I said you would be lucky if 1 out of 100 would agree.  And trust me, if they agree when you present it…the question will come up again.

Remember, my secondary purpose is to start the negotiating.  When they say no, we negotiate other payment plans.

Yes, you can be sued by anyone.  But I think you are more likely to be sued for getting too good a deal on price than zero interest.  Just my opinion…

If you find a lawyer that says otherwise…tell me.  The ones I talked to say no problem as long as it is clear to the seller and written clearly.

BZ

Several Approaches to Consider

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Q. Hi Barney! I'm new to the real estate game, heard you at the Disneyland Hotel and since, in my car on your CDs; not yet understanding the myriad of information and awaiting the boot camp in April. I found a motivated seller of a property in Tampa, Florida. I don't know if it is worth pursuing, and if so, what to do next. Here's what I learned from current investor/owner…2BR/2BA town home (I know you've said you don't go for condos but this is what they've got), 1272 sq. ft, built 2002, bought for $137K, valued now at $148K, tenant is leasing for $975/mo w/ lease expiring April 30, 2004, owners live in Southern California, have other rentals, are current in payments but want out of this one because it's $5-600/month negative cash flow. Property taxes have doubled ($3400/yr) since they purchased plus they pay PMI, HOA, etc. They thought they'd get rents several hundred dollars more and the property management company has not been good at all. Owner said they're willing to sell for $140K, cut their losses, they just want out of this investment. Is there anything here? Please advise...

S.Q.

A. You definitely have a good deal IF the sellers are motivated and flexible. There are several approaches. I don't know what the loan is. My guess, the first choice, to start out taking the loan subject to, may not be a good idea. If the loan is way too high, compared to market rents, then the only answer is to lower the payments. Realvest Funding through All Fund Mortgage has a "Wealthbuilder” loan that only costs a little less than 2 per cent per month. It is a negative amortization loan, but it would solve the cash flow problem. Go to www.zickhomeloans.com to apply. You will need 20% down. If you have a low FICA, let's say around the 580s, we can still do the loan but you will need to have 24 months of on time payments. A second way of buying it is to have the seller let you take it subject to and give them a no interest note for the equity, paid a long time from now.

Next approach is to up the income. With the above in mind, or without it, get the house sold on a lease option. Make sure the buyer pays enough in rent to cover the loan. If the loan payments are high, have them pay options consideration to get the cash flow needed to cover. Have THEM pay the taxes and insurance. Now you have a break even. Hope this helps. If you want more detail, send the numbers on the loan.

BZ

Getting Started: Don't You Have a "Super" Contract we Should Use?

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Q. I didn't see a real estate purchase/sale contract in your agreement set. Do you use the standard realtor contract? Is that because you are a realtor, or do you just like it better?

The deal I am working on has a very small second mortgage. I am going to try to pay it off with a lump or purchase it at a discount. What documentation needs to be filed for the transfer of ownership and/or to release the Deed of Trust from the Title?

Thank you so much for your teaching. It has truly been a blessing for me and my family. I hope I can be of service to you someday.

Sam
St. Louis, MO

A. It gets really hairy using a standard "good all over the U.S." contract with all the local laws. I prefer you use a local one. TREC (Texas Real Estate Commission), for instance, has them on their web site.

The standard documentation that needs to be filed for the transfer of ownership and/or to release the Deed of Trust from the Title is a "release of lien." Ask your title company or your bank for a blank form.

BZ

Advanced Strategies: Leverage is a Grand Thing!

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Leverage is a grand thing. Let's say you wanted to buy into the shopping center we just purchased in San Antonio. If you did, you would get 12% cash on cash return as well as profit. You could get tax leverage by buying that share in your IRA. A Roth IRA would not pay taxes on the gain. However, since the Center has an 80% loan on it, then 80% of your profits would be taxed under UBIT. This is not the worse thing in the world. Remember, it would get the profit into your IRA and once in there, you would not have to ever pay taxes on it again. And it is only on 80% of the profit. If the loan to value ratio was 50% the UBIT tax would go on 50% of the profit. However, if your accountant or close friend wanted to help, you could have that friend start a corporation. Once started, your IRA could purchase all the stock of the corporation. Your accountant, Bob, could also buy shares in the Center in the name of a corporation.

Let's say your $50,000 share in the Center paid you back $100,000 in 18 months (one can hope, right?). Now the Corporation has $50,000 in profits. It will pay out a dividend to the stock holder. That's right…that is our IRA. The tax, I believe (remember I am not a CPA or attorney) is 15% on earning paid out as dividends. So now you have $42,500 cash (after dividend taxes) in your IRA. There is not tax on that in your IRA so there is no "double taxation". Right? The rate of return for your IRA was 85% ($42,500 divided by $50,000.) If you would have done this in your own name, Federal and State taxes could be as much as 50%, right? So this is smarter. But I am one of those people that are thinking of putting Nitro into my 12 cylinder, 180 mile an hour BMW (I got it as part of a real estate deal!) So let’s put some nitro in this deal.

Let's say that Bob can get his cousin, Mocash Thanbrains, to loan the corporation your IRA owns, $40,000 at 6%. Your IRA buys all the shares of the corporation for $10,000. The corporation uses the $10,000 and the $40,000 to buy the $50,000 share that pays off $100,000 in 18 months. The corporation pays 6% interest on $40,000 or $2,400, and has left $47,600. It pays that out as a dividend, so 85% of that goes into the IRA. Now the IRA only has $40,460 in profits, which is fewer dollars. But, old calculator breath, the IRA only invested $10,000, so your rate of return on your IRA is 404.6%! Assuming you also have something smart to do with the remaining $40,000 in your IRA, this is better, right? How long does it take to build a retirement fund at 400% rate of return? On the other side, if your IRA's $40,000 is going to sit there in money market at 1.5%, why go through all this hassle. Just buy the shares of stock for $50,000 and 70% rate of return in your IRA.

Of course, smart folks talk to their IRA advisors about things like this. I did. If you want to get in contact with the guy in Houston that administers my IRA and is smart enough to understand ideas like this, send an email (with a copy to me) quincylong@entrustexas.com.  If you really want to get his attention, send him a big check from your current IRA and open one with him. Tell me so we can do some deals!  My email is Bernard@zick.com.

Q&A with BZ

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If you've emailed Barney and did not get a response, he has had three (!) computer crashes recently and, as you may know, email is not picked up by most email back up systems.  So, please email him again if you haven’t heard from him and make sure the subject line is simple and direct like “real estate investors’ web sites” or “need information on xxx.”  In this age of tons of spam, we have someone that deletes Barney’s junk mail so cute subject lines might end up in the trash!  Barney’s email address is bernard@zick.com.

Q. I've got a question about a pre-foreclosure deal I'm making an offer on. How can I avoid an eviction six months from now? Please see the details below:

The seller thinks the house is worth $350K. I think it's worth $285K. She said she wants to preserve as much equity as possible. Her first question to me was, “How much cash can you give me?” I haven't given her any numbers yet.

She owes $177K on a first, and is $5K behind. She has nine days to pay the arrears, or they file the notice of default. Her credit is deteriorating rapidly because she can't pay any bills. She is interested in salvaging what she can of her credit, and doesn't want the NOD or a foreclosure to appear on it. She doesn't have any idea of where she's going to go when she leaves. I plan to sell with a realtor, and figure it will take 120 to 180 days to sell (I figured 10% of sale price for the sale).

I'm offering the following three alternatives.

1) $5K cash today, give me the deed. $15K cash from escrow when we show clear title (about a week).
2) $30K sale, $12K to escrow today. I take the deed subject to. We close as soon as we show clear title.
• When we close, $5K from escrow brings the loan current.
• She stays in the house for up to six months. We keep escrow open, and monthly loan payments come from escrow (PITI = $1K/month). At the end of six months, she leaves, and takes whatever remains from the escrow (should be $19K).
3) $25K sale. Same as alternative 2) above (close of escrow should be $14K). In addition, I split any sales amount over $285K with her when I sell.

Questions.
A) How do I avoid her digging in and having an eviction on my hands at the end of the six months if she goes for alternative 2 or 3?
B) Do you have any recommendations on tweaking this to make it "smarter" -- aka doing it another way that makes more sense to you based on the information provided?
C) Am I assuming correctly that I can write up the offer for alternatives 2 and 3 on a Standard California Association of Realtors Purchase and Sale Agreement?

Thanks very much!
Paul


A.  1. If you give (gave) her $5000, you need to offer to give it and wait the required waiting time or she can have your hide for not following state right of rescission law.
2. If you let her stay in, there is little you can do if she digs her heels in and wants to stay. In fact, expect it. That is why in all my courses, especially our new "How to Make $10,000 Cash in 90 Days" book, I say over and over, don't buy a house from someone behind on the payments and then let them say there. Period. End of story. I know that will kill half the deals.
3. Since you should not have done this deal, the form is not important. However, in some states there is a special contract for foreclosures…or, so I have been told. I do know, as an example, in California I have seen one for someone that is selling a house out of an estate, so I would not be surprised.

I hope you did not do this deal as laid out. I give them a buck with the rest when they move out.

BZ

Q. I have a group that wants me to buy property for them. How do I get my license in all 50 states?

A. You will never get a real estate brokers license in 50 states. You can, but you won’t. First place, most states cost around $500 a year and many now require a degree in real estate or at least all the core courses you would get with a real estate degree. All require a test, requiring lots of travel. I find the tests are easy; the paper work is a killer. However, most every state law has a “co-op” provision. You work with a broker from that state. Sometimes they will let you run it through them, if they know you, for next to nothing…more or less as a favor. Since I am very well known in the investment brokerage community this is what I do.

If you have a license in your state and never visit the property state, you can collect a commission where you sit… you just cannot “do business” which means visit that state with a client. Of course, having been raised by a lawyer, I have to add, this is not legal advice but an opinion; each state law is different and you should read your own state law with regard to your situation.

BZ

Q. Barney, I am a student of yours in Toronto. I recently became aware of a portfolio of properties (5) apartment buildings (walkup and high rises) for sale. The asking price is $15M and I would like to own, if not all of them, some of them. I would like your insight as to how to tie up the properties and perhaps sell one or two of them to get the down payment to buy the rest of them.

S.C.

A. I hope this does not bust your balloon, but the larger the property, usually, the more sophisticated the seller. I have never, in 30 years, seen a seller of a large apartment, let alone several, that will even entertain an offer for a good property without making sure the buyer has the ability to buy. Put differently, they don't let the “Average Joe” tie up properties. If you don't have a license, and don't have the ability to buy or have a partner buy, they will not give you the time of day. Now if you are rich, let me know and we can talk about solutions.

By the way, if it can be done, it is in "Hidden Profits". Have you listened and read it yet?

BZ

Home Study Materials Update

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We are slow because we like to make it perfect.  The new “Income Properties Boot Camp” CDs with two manuals should be done by the middle of April.  The new “How to Buy and Sell Apartments” text should be done by the end of April.  The Negotiating Boot Camp CDs with manuals will be done in mid-April.  If you have purchased them in advance, please be patient.  If you want information about them, email us at reitbootcamp@kingwoodcable.net and put the name of the materials in the subject line.  If you’ve been sitting on any “pre-publication” offers, they all expired at sundown!

Upcoming Events: Bay Area Options Boot Camp This Weekend!  LA Options Boot Camp Dates Changing

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The Fine Print...

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We will do one newsletter like this one (Advice for the Impatient Investor) and one called the REIT Report (containing Real Estate Education Industry News and a lot of personal opinions), approximately once a month.  (However, keep in mind, our newsletters are free so don't get upset if we skip one occasionally!)  

Advice for the Impatient Investor has been published for fourteen years (but not in a row). The next issue should be out about May 1st.  The next REIT Report will go out on or about April 15th.  

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