Bernard Zick's

Advice for the Impatient Investor

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

January 2004

  

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

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In this issue:

A Sane Moment: Contributed by Bill Kerley

Getting Started: Who Can You Trust?  Buyer Brokers are a Must

Advanced Strategies: How to put Together a Super Income Property Syndication

Legal News: American Dream Downpayment Act Signed by President

Q&A with BZ: Lessons Learned From the Second Mortgage Deal

Upcoming Events: One Time Only!  Income Property Boot Camp Jan. 17th & 18th in Houston

A Sane Moment: Contributed by Bill Kerley

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If you think education is expensive, try ignorance.

Derek Box, President, Harvard University

and…

If we learn to say no to the things that don¹t really matter then we have time to say yes to the things that do.

On the lighter side: When I hear about people making vast fortunes without doing any productive work or contributing anything to society, my reaction is, how do I get in on that?

Dave Barry

Getting Started: Who Can You Trust?  Buyer Brokers are a Must

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I was raised right.  My step-dad was a lawyer.  He never defended a criminal while trying to get him convicted of the crime at the same time.  My one and only “job” in life was as a SEC registered investment advisor for Stein, Roe and Farnham.  My job was to suggest stocks so that the net worth of the client would go up.  If their net worth went down, we lost income.  This was unlike the stock brokers who made money and long as clients bought and sold often, even if they lost money on every move.

 
When I got into real estate as a broker, in the early 1970s, there were problems.  You could represent the seller and the buyer in the same transaction.  Interesting.  Your job was to get the lowest price for the buyer and the highest price for the seller, all on the same property and the same deal.

 
The solution was called “Buyer Brokers” who would only represent the buyer and others would only represent the seller.  I taught courses on that when it was popular in the 80s and 90s.  However the Realtors were worried that their members, (a) might not be able to maximize commissions if their members had to honest and upfront in who the represented and (b) they might get sued if they did things wrong.

 
So what is happening now?  The National Association of Realtors has come up with a pile of bunk called “designated agent” status.  One real estate firm can have one agent represent the buyer and one represent the seller all on the same deal.  Amazing.  And they have this pushed through the legislatures in 25 states.

 
Be careful.  Always ask and get a clear statement as to who the agent you are talking to represents.  And avoid “designated” agents like the plague.  Or, at least, don’t trust a thing they say.  And consider having someone represent you as a buyer’s broker to protect your position.

Advanced Strategies: How to put Together a Super Income Property Syndication

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If you read your email from me, I recently sent off an offer for you to invest with me in a shopping center in Texas.  The way the deal is structured, one person uses credit, the rest use cash.  The structure is a classic and you can use it on your next deal.


The sellers have not been keeping up rents and have allowed some vacancies.  If you know how to value income properties, you will realize that up side potential is the key.  (If you don’t know this, plan on attending our Income Property Boot Camp January 17th and 18th in Houston where we will cover the seven ways to value income properties.  Go to http://www.zick.com/ for the details.) The question is, “Can rents be raised and vacancies filled?” The answer is yes and the game plan is to buy it, increase the income, make a pile of cash and sell in about two years.


One broker found the deal, the other one found a "sort of" buyer.  The original buyer is a man in his early 70s who owns lots of real estate.  He loved the deal and wanted in.  The sale price is just under $2,500,000 with an approximate $2,000,000 loan potential.  The original investor has lots of cash but he is doing some estate planning.  So he said he would put the loan on the property for half of the deal.


So they asked me if I, or I and a student, want to put up the $450,000.  I said "yes" but my Platinum Student decided to only take $100,000 of it.  So we are now getting one more person to come in with us.  (The offer is still open as of 1/1/04.)


Here is the return. The cash investors, that’s us, get a 12% cumulative and preferred return.  That means, if you have $100,000 invested and the rents come in, you get your 12%.  If the rents are lower than that, like in the first month, then the next month you get all the rents until you are even with the 12% cash on cash requirement.  (This, of course, is after expenses and mortgage payments have been made.)


At time of sale, the original investor will get an amount equal to what all the cash investors have already received, then profits will be split 50/50.  So, as an example, if the equity was sold for $700,000, you both would get $350,000.  But the cash investor got $12,000 for every $100,000 invested first and all their cash back FIRST and then the original investor got $12,000 too, before the split.


The neat thing about this sort of set up is that the cash investor is passive and relatively protected.  Those two things usually go together.  They do not have to sign on any loans.  They are first in and first out with cash.  Their only risk is the investment cash.  Thus, this, with the proper paper work, is a great deal for a self directed IRA or a 401k Retirement Plan.  I say "the right paper work" because the liability issue has to be dealt with correctly in the investing document.


The steps in this are simple to list but take lots of legal talent and real estate savvy to put together. 1. Find the deal; 2. Put money up and get it under contract; 3. Get the original investor; 4. Apply for the loan using the original investor’s credit; 5. Bring in the cash investors who put money in escrow to show their intent (you do this by sending them a “package” of information - photos and numbers); 6. Design and write the investment vehicle for them…in this case, a Limited Partnership; 7. Get their approval on the documents and CLOSE.


It took over a month to get through step three.  It took a month to get the loan.  I hope to have all the investors identified by the 15th of this month with ten to twenty per cent of what they are going to invest in my escrow.


Some cautions.  We could go down to as little as $25,000 for a share.  But bigger chunks are better.  Why?  Fewer people to deal with, and the law says that if the investors are smart or rich, you don’t have to deal with securities laws.  Okay, I may let my lawyer in for part of a share… he has asked to get in.  You can always break up a share.  But it is smart to use as few people as possible.


There usually will be some small shares anyway.  The broker that found the deal does not want cash, he wants a small share of the original investor’s side and the broker that brought in the investor wants in too.  (To me, that is always a good sign.  If someone brings me a “super deal” and is not willing to stay in it, I start to wonder about the deal.)


The lesson here is that you could play any one of several roles in doing a deal like this.  You could find the deal and get a piece for putting it together.  The brokerage fee here is $30,000 and you could negotiate with the original investor that puts on the loan for about 10% of his action.  You could be the original investor if you have decent credit and a net worth near or above what you are borrowing.  Or, you could put the entire thing together from the cash investor side and be one of the cash investors.


Income property deals are not out of the reach of the average investor.  Yes, they take more knowledge if you are the one to put them together.  And you might do your first one as a cash investor just to get the paper work!  But with the knowledge and a good attorney to do the paper work, the sky is the limit.  Many of my students do income property deals and you can too.

Legal News: American Dream Downpayment Act Signed by President

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WASHINGTON (December 16, 2003) – Thousands of Americans will enjoy greater access to more housing opportunities under several pieces of legislation backed by the National Association of Realtors® and recently signed into law by President Bush.  NAR President Walt McDonald, on behalf of Realtors® and consumers across the country, attended today's signing ceremony for the American Dream Downpayment Act, a major victory that will help more families achieve the American dream of homeownership.

The legislation, S. 811, will provide an average of $5,000 in grants to approximately 80,000 lower-income families over the next two years to help them pay downpayment and closing costs on their first homes.  Grants will be made to state and local governments through the U.S. Department of Housing and Urban Development's HOME Investment Partnership program next year.  In addition, the legislation will stimulate the production of affordable rental housing by raising the Federal Housing Administration loan limits for the construction of multifamily housing in high-cost areas.

The bill, which was one of NAR's top priorities this year, was introduced by U.S. Sen. Wayne Allard (R-Colo.) and U.S. Rep. Katherine Harris (R-Fla.) and quickly gathered bipartisan support.  President Bush and U.S. Housing and Urban Development (HUD) Secretary Mel Martinez first proposed the idea for the legislation earlier this year as part of the administration's commitment to help low-income and minority families achieve the American dream of home ownership.

"Realtors® commend Congress and the administration for their tremendous leadership and dedication to helping more families achieve the American dream of homeownership through the American Dream Down Payment Act," said NAR President Walt McDonald, broker-owner of Walt McDonald Real Estate in Riverside, Calif.  "This is a major victory for thousands of American families.  Although our homeownership rate is at a record high, one out of seven American families still faces critical housing needs.  The American Dream Down Payment Act works by reducing two of the biggest hurdles to homeownership – down payment and closing costs – for 40,000 families a year.  This bill alone will create thousands of housing opportunities while simultaneously helping sustain the housing market, which has been the pillar of our economy."

President Bush also recently signed new credit reporting legislation known as the Fair and Accurate Credit Transactions Act, H.R. 2622 that includes many of the pro-consumer recommendations advanced by NAR's Insurance Task Force. Under this legislation, consumers will receive one free annual credit report; full disclosure of their numerical credit score and the factors influencing that score; notice of any negative impact on their credit score caused by multiple shopping inquiries; notification when negative information is added to their credit files; prompt investigation and correction of inaccurate credit information; and new tools to combat identity theft such as placing a fraud alert in their credit file.  The legislation also calls for federal regulators to conduct a study of the effects of consumers' credit scores and credit-based insurance scores on the availability and affordability of homeowners insurance.

"Realtors® around the country congratulate Congress and the president for their leadership in passing and signing legislation that will provide increased housing opportunities for more American families," said McDonald, broker-owner of Walt McDonald Real Estate in Riverside, Calif.  "Thanks to these new laws, thousands of families will receive the downpayment assistance and credit information they need to obtain a mortgage and thus realize the American dream of homeownership."


Source: National Association of Realtors®

Go to http://www.hud.gov/offices/cpd/affordablehousing/programs/home/addi/index.cfm for additional information.

Q&A with BZ: Lessons Learned From the Second Mortgage Deal

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Q. A week ago you offered us a second mortgage paying 12 per cent interest only.  I offered to buy it at a discount and you just sent back an email saying “no thank you.”  Shouldn’t we go for the best yield we can get?

Ken Vidders

A. I sent you a “thanks, but no thanks” letter for several reasons.  First, you have to know why I made the offer in the first place.  (You never know a deal until you know the sellers motivation.)

My students are always saying that they can't find good notes with decent yields so I tossed this one out there, as much as anything, as a favor to students.  The property is worth $250,000 and the first and second are only $76,000 or so.  It is a safe note.  I don’t blame anyone for testing the waters to see if there was a better deal, which there is not.

I am a co-signer on the note.  The property will be refinanced soon.  If everyone wanted a better yield than 12%, I would have just paid it off.  (Always keep opportunity cash available…mine is in the six figures.)

Interesting point: of the 14 people that sent me an email saying they would like the note, guess who is number one in line to get it?  A student of mine for over twelve years that emailed “where do I wire the money?”  The lesson here is that the easier you make it for the seller to sell the more likely your offer will be accepted.  We close in three business days.

I have kept the names of the others that wanted the note.  If you want to stay on this list, in case another one pops up, let me know.  Have a GREAT New Year!


BZ

Upcoming Events: One Time Only!  Income Property Boot Camp Jan. 17th & 18th in Houston 

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Below is our Real Estate Investors Training (REIT) schedule. You may enroll for a Seminar or Boot Camp by sending email to reitbootcamp@kingwoodcable.net or, call our office at 800-677-3253.

 

Friday, Jan. 9th -- One-Day Seminar

"Real Estate Financing" Seminar in Salt Lake City, UT.  Part of a Wright Thurston event at the Hilton Salt Lake City Center, 255 South West Temple/801-328-2000.

http://www.zick.com/sem_REF.shtml

 

Saturday & Sunday, Jan. 17th & 18th -- Two-Day Boot Camp

“Income Property” Boot Camp in Houston, TX.  Join us at the University of Houston Hilton, 4800 Calhoun/713-743-2500.

http://www.zick.com/sem_IP.shtml

 

Saturday & Sunday, Jan. 24th & 25th -- Two-Day Boot Camp

“Creative Financing” Boot Camp in Ft. Lauderdale, FL.  Join us at the Westin Ft. Lauderdale, 400 Corporate Drive/954-772-1331.

http://www.zick.com/sem_CFBC.shtml

 

FYI -- We are hard at work planning Boot Camps for 2004.   Look for us in Northern and Southern California, Florida, Phoenix and more. We add events to our calendar frequently, so be sure to check www.zick.com often!

2004 – Platinum meeting - maybe in Maui

Plan on being Platinum by then!!

More details soon…

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 February 1st.  The next REIT Report will go out on or about January 15th.  

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