Bernard Zick's

Advice for the Impatient Investor

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

August 2003

In this issue:

Getting Started: Picking a purchase price for the option
Advanced Strategies: Valuing an apartment
Decisions: Should I get a real estate license?
Facts to ponder
Q & A with BZ
Sponsor
Upcoming Events: Phoenix - Aug. 9th & 10th and Portland - Aug. 16th
The Fine Print...

Getting Started: Picking a purchase price for the option (back to top)

A student asked, "Do you option the place for a price today or on valuation at the expiration of the term less a discount of say 10%?"

You are best served by getting today's price today forward. This is what will put value to your option. As the property appreciates, you get all the appreciation above the option price.

I suppose you COULD only get a 10% discount when you buy the property. In fact, that might be a good idea to induce a buyer to buy from you on a lease option. But if you are not getting something else, it's not really worth the effort. For instance, if you were able to get the option for very little money and if you had a very good positive cash flow, then the purchase price would be a small carrot but you might still do the deal. Read our course, "Hidden Profits through Real Estate Options" (www.zick.com) and read the book. It gives you four levels of option pricing. The best is today's forever. The next is a slight increase in equity value, etc. and 10% off would be the worst.

That does bring up another concept. In order to get a lease option deal, I have had some students in San Francisco agree to split the future profits with the seller. Again, if you get in with little money and have a slight positive cash flow, it could be good to do the deal.

Advanced Strategies: Valuing an apartment (back to top)

It still amazes me that some people think that you take the gross income of a property, times some magic number and that is the value. The out of date concept, called using a "gross rent multiplier" was used in the 1950 when there was little appreciation and little sophistication.

The key is the pre-tax cash flow. By pre-tax, we mean the cash flow in your hand before figuring how owning this affects your personal income taxes.

Now, you want to ask yourself, what yield do I have to have to make this work? The newer the apartments, the less the management, the more you might be willing to take a lower cash on cash yield... say 7 or 8 percent. If it is a "C" class or working class apartment, you might want projected cash on cash return of 10%. The math is to work backwards. If you want a 10% return, and the annual pre tax cash flow is $64,340, then you could pay $643,300 for the equity and get that 10% return.

There are more elaborate measures that start taking long term results into play. The next might be an "internal rate of return" which figures that yield over a series of years. Or, the next step up, a "financial management rate of return" that takes into account the negative cash flow of fixing and repairing units in the future. But for most of you, for first analysis, capitalizing the cash flow is a good place to start on finding value.

Decisions: Should I get a real estate license? (back to top)

Q.   I'm trying to figure out the best way to crack the nut of starting real estate investing in my area. Here's my situation: I'm currently unemployed and need to generate some cash flow. Have about $50K cash and $200K home equity line of credit. In a couple years time after our daughter graduates from high school, we would seriously consider moving to another area more conducive for beginning investors.

But what's the best strategy to pursue now? Flipping properties? Or would it be better to get a real estate license and generate cash flow through commissions? In my expensive market, would the revenues be about the same? I know a successful real estate agent in my community who is willing to mentor me in the business once I get my license. Would this be a helpful stepping-stone toward real estate investing or more of a distraction? I've also heard that it's difficult to flip properties if you're an agent. True?

M M

A.    Normally I would say skip the license. However, if you have a friend that will give you a leg up, it is not only a great way to learn about real estate, it can be a good living. However, it is a job. If you don't want or need current income, you will limit your ability to buy safely while this holding a license. You will need lots of disclosure, etc. Your choice. Check out your contract and make SURE the help will be there, and for how long, and for what cost.

All new investors that lack lots of cash and lots of credit would do well to learn to flip properties as a starting point. If you live in a major city, learn about the real estate investor associations in your area. It is the fastest way to find buyers that want to buy your deals.

And yes, you open yourself to lots of potential liability when you have a license and flip properties. I do it. But I will not take a listing. No one can show where I ever took a listing for over 12 years. If you do take listing and buy discounted properties, someone can say that they called you to list the property and you advised them is was worth little and they should sell it to you. I know, sounds like a stretch, but those cases do go to court. Also, you will need a very bold disclosure. I say "I am a real estate broker dealing for and with my own account with the intent of making profits. I have not given the owner legal, financial or real estate advice nor have I ever been their agent." That takes some explaining, but I do it!

BZ

Facts to ponder (back to top)

Death and foreclosures don't go together much, but divorces do! Don't think of it as an invasion of privacy, think of it as the possible solution they may be wanting. You can get the list of divorces from the court house. Write them and write them again. If there is a human experience that changes constantly, it is the dynamics of a divorce. I just got one home because I could close in seven days. They were going to court for a finial agreement in eight!

BZ

Q & A with BZ (back to top)

Q.   I met you through an investor conference. I just decided to start in real estate. But I really need help on a personal note. My husband and I have excellent credit but because of various situations...we are drowning. I am so scared we are going to lose our home and worse, lose our credit worthiness. We are looking to retire and move away in the next three years but in the meantime, just keeping my head above water is hard, and I am sinking. We have more money outgoing than we have coming in.

Anyway we live in a town about 50 miles south of Dallas. I was wondering if you had ever worked on a deal whereas someone sold there home with the option to remain in and rent it for say three years for a reasonable rent with the agreement to do all the minor repairs and upkeep themselves? Since we are planning on leaving the area in about three years anyway I was thinking this could be a win-win situation for someone.

Our home is a 3 bedroom with $50,000 in equity and a small loan. What do you think?

E

A.   I tell students NEVER to buy a house from someone and let them live in it! The investor is just asking for a law suit. And in Texas, with our homestead laws, the investor would be in even worse shape with no enforceable rights. Period. You need to get a loan.

My wife Karen is a loan officer with a good firm in Houston. She can help you. I would send you to www.zickhomeloans.com but if you have a difficult loan, Karen might have the answers. Just email her at my address and we will get the process started before your credit stinks.

AND, STOP SPENDING!!! Hide the credit cards, have a garage sale, stop eating out, drop your memberships, cancel the third phone in the kids room, pull in your belt. If you just keep on you may be in a crisis. If you play like it is a crisis now, before it is fully here, you might avoid it. I speak from my experience seeing many people just wait to solve the problem and then they become what I am looking for...a motivated seller who is in no position to bargain!

BZ

Q.   We have access to about 400 names a week that have recently had NOD filed against them. That's a little daunting. How can we pare that down to a manageable number?

M

A.   If the service gives you loan amounts and tax value, as ours does, don't go after the ones that have little equity. Or, start mailing to the older loans first. They most likely have the most equity.

Sponsor: (back to top)

This issue of Bernard Zick's Advice for the Impatient Investor is sponsored by Mark Victor Hansen's new money making opportunity. He has arranged a way for you to get paid part of the points when you place a loan. Go to www.zickhomeloans.com and look at the bottom of the web home page. Click on "join WLG" and for less than the cost of getting bonded as a loan broker you can earn fees for loans placed. It is all web driven and you don't have to do the loan paper work. It is done on the web! Barney has joined with him in presenting this opportunity by running the web site for him. Take a look. P.S. The Glossary of Terms on the first page is an excellent source of real estate education.

Upcoming Events: (back to top)

Join us in Phoenix on Saturday and Sunday, August 9th & 10th for our OPTIONS BOOT CAMP. During this event, we will role play about how to negotiate options. We will have a homework assignment that will allow attendees to make offer and, if we can, close a deal. We will arrange for up to $2,000 to be available to fund a joint venture for the best option deal found! Lastly, time permitting, we will go over the forms and show you how to fill in the blanks.

Limited space is still available. Our two-day Options Boot Camp is normally $1995.00 for pre-registered attendees. However, if you are a current 'Barney' Zick student, you may qualify for a discount! (You are a current student if you purchased one of our major educational sets in the last 12 months. If you're unsure of your status, don't worry... we have all the records.) Call 800-677-3253 to save your seat. Details at www.zick.com.

Portland is the location for our next Getting Started and Staying Motivated & Introduction to Options one-day seminar. Reserve your place today for this "don't miss" opportunity on Saturday, August 16th. These two seminars in one day will outline all the success-laden techniques that work today! Learn how to find the hidden ways to profits unknown to most investors. Call our office today at 800-677-3253 to pre-register!

The Fine Print... (back to top)