Bernard Zick's

Advice for the Impatient Investor

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

May 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:

The Real Economy

A Special Message to Students about our R.E. Options Boot Camp

Where is Your City in the Real Estate Cycle?

Getting Started: Borrowing Money

Advanced Strategies: Sell the Option Before You Buy

Q&A with BZ

Lease Option Dilemma

Upcoming Events

The Real Economy

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Nationwide single-family homes are selling like hot cakes. March was up 12.7 percent above March 2003 numbers, reaching the second-highest level on record, according to the National Association of Realtors. Already built home sales hit a seasonally adjusted annual rate of 6.48 million units in March, just behind a record September of September in 2003.

What is next? David Lereah, the Realtor's chief economist, said, "Although interest rates are rising modestly, an improving job market is creating a favorable backdrop for home sales, but at a somewhat slower pace in the months ahead."

What about interest rates? Zick says expect a .6% increase at the end of the year and a total increase of about 1% from now to next year at the same time. If this happens the bargain finders have a better shot at finding deals. Markets will not crumble, Zick says, however some of the speculators will have to let someone else have their bargains.

A Special Message to Students about our R.E. Options Boot Camp

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This letter is especially for our students that bought attendance for a Boot Camp as part of a previous purchase of our home study materials or have attended one of our Boot Camps before...

I want to be sure to let my students know about the upcoming, “not-to-be-missed” two-day Options Boot Camp in the Universal Studios/LA area. As a previous Zick Home Study Materials student, some of you are eligible to attend this $1,995 Boot Camp without additional charge! Some may even have a nominal room charge due for attending of $95. Typically, your right to attend a boot camp expires one year from the date you made your purchase. However, no matter when you bought, we will let you attend either this or the next boot camp for free if you are eligible. We plan extend this offer off and on during 2004 until we are sure every qualified student has had a chance to use their right to attend.

Even if you have attended our Options Boot Camp before, retool let you attend again for FREE in 2004! Our standard rule is you get to come back as often as you want for a year. Now all my past attendees can attend again during 2004. We are building our new program and would love to have your support and are glad to help you refresh and re-tool.

The LA Real Estate Options Boot Camp will be on May 6th & 7th at a fun location. Registration begins at 8 a.m. and the presentation begins at 9 a.m. sharp. (The next event will be in the Dallas/Ft Worth area June 5th & 6th (tentative dates). We will also be doing introductory events May 19th - 22nd in Dallas…if you live in the area, mark your calendar. Tentative cities to follow are Denver, Austin/San Antonio, Chicago and Miami.

Our Real Estate Options Boot Camp can potentially make you more money than any other seminar you have ever had the chance to attend. Email Joyce today at reitbootcamp@kingwoodcable.net to register for your seat. Bring your SPOUSE if you can. They will attend at the same terms as you attend.

Or call our co-sponsor and event producers, Optionetics, at 1-888-366-8264, ext 5. Make sure to tell them you are OUR STUDENT because they will also be registering their students for this event. We will get your name from them and confirm your right to attend in our database. Or email us first and we will contact you to complete your registration.

It is no secret that fortunes have been made by those that know how to use real estate options. Now, details of these financial maneuvers are explained by me.

Here is just a taste of what you’ll learn at this amazing seminar: How to use options with “fixer” properties and to control and resell bargains; common errors in drafting lease options; avoiding lawsuits and getting paid NOT to buy; rolling option & first right of refusal options; how to use options when the seller is in foreclosure; tax tactics & options and bankruptcy; how to change a pro-tenant lease option to pro-owner; profit from a sandwich lease position; how to get zero interest financing; how to control land you may need in the future; seller benefits; power partnership options and much, much more!

Sign up now for the LA Area Options Boot Camp. Email us today at reitbootcamp@kingwoodcable.net to register for your seat. Or call 1-888-366-8264, ext 5.

Barney Zick

P.S. The homework assignment at our Real Estate Options Boot Camp has netted some students up to $40,000. That experience alone makes it worth attending and coming back again! If you need to add an additional person or spouse for a limited time, you can do so for only $495. Or, if you purchase one of our Boot Camp CD sets, which normally list for $1,995 but as a current owner of educational materials, you can purchase during the next 20 days for $995, you will also get a second Options Boot Camp ticket. The new courses being offered are Negotiating for Real Estate Investors, Business Entities, Creative Financing Boot Camp, and the revised Hidden Profits through Real Estate Options. This letter is being sent only to current students with materials and the offer of an additional home study series for $995 plus a second ticket is limited to those people and will be verified. This offer is available only through REIT direct and expires May 15, 2004. (Yes, this is a special deal, but, you need some sort of bonus if you read this far!)

Where is Your City in the Real Estate Cycle?

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Q.  I'm looking forward to your conference call tonight.  An issue I always have is where to get good information on cities and where they are in their real estate cycle.  Any suggestions on how to find the cities around that may be good for future growth, in the path of progress, etc.?  In other words, how do I find cities that are low in the cycle and set to go up?  I am big on charts from my stock and commodity trading, and love charts of average home values (for cities or zip codes), but only occasionally find such information.  Any ideas?  Once I "hear" about a city, I can get some information on the Web, and if it looks interesting, I can travel there.  However, this is leaving a lot to luck and can get expensive.

R.W.

A.  You may find the following information helpful:

NAR's analysis of economic indicators provides its member with the tools to interpret economic trends and apply that knowledge to their business.  NAR Research analyzes the most important economic indicators that influence real estate markets.  In addition to NAR's own existing home sales, nine other indicators that Research monitors include mortgage rates, new home sales, consumer confidence and Gross Domestic Product.  All these indicators are used by NAR analysts to prepare the Association's economic forecast.

To access, go to: http://realtor.org/research.nsf/pages/EcoIndicator?OpenDocument

Copyright National Association of REALTORS®, Reprinted with permission.

Getting Started: Borrowing Money

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There are really three types of financing:  Seller financing, hard money/private money loans or institutional loans.  Institutional loans are so called because they are issued from banks, savings and loans, insurance companies and the like.  All of these folks are credit and asset based lenders.  (Credit cards are only credit based while hard money lenders are only asset based.)

In general, the more you will let them check out your credit and sources of income, the easier it is to get a loan.

A “Full Doc” loan is one where the lender verifies everything. That includes employment, income, and assets. Your credit score is also extremely important. This type of loan always gets the best rate and term possible.

A “Low Doc” or Limited Doc loan is one where they can use alternative documentation, such as bank statements to show income over the last 12 months or other creative forms of verification. This type of loan usually has a higher interest rate than “Full Doc” and will generally require a better credit score.

A “Stated Income” loan is one where you state how much your income is and they take your word for it. They may require that you verify that you’re employed but they don’t ask the employer what your income really is. If you’re self-employed, you may just have to verify that your company exists, etc. This type of loan generally requires a good credit score and always has a higher interest rate for the privilege of “stated income”.

Generally speaking, the less documentation provided, the higher the interest rate and the better the credit score has to be and many times they require more down payment.
 

As an example, our associated office of our mortgage operation can get a California investor a 90% loan to value ratio loan, but it has to be Full Doc.  There is a super loan we have that charges less than 5.9% annual interest, where the monthly payment is less than 3% and the difference is added to principle.  It is great for a California buyer who is in an area that is appreciating at 20% annually but the prices are so high that they can't rent for enough to cover payments.  If you have clean credit for the last 24 months, you don’t even need great credit.  But they will only go 75% loan to value.

(If you live in California, Texas or Florida, we are especially anxious to help you with investor loans.  Go to www.zickhomeloans.com to start the application process.  Karen will look over the application, call for needed documents and interview you to determine your needs.)

So you see there is sort of a “sea-saw” in lending.  The better the documentation, the higher the LTV and the more reasonable the interest rate.  The more reasonable the interest rate and terms, the lower the LTV.  Yes, I know we want it all, but they are handing out the cash and they make the rules.

We are looking for really strong players in the San Francisco area to be loan originators for us.  We want people who can train and motivate folks that we will put under them.  We need the same for LA/Orange County and San Diego.  Loan and real estate experience is great and the more the better for the people that will eventually become our branch office.  We need field Loan Originators too.  So let us know if you are interested.  There is no better “second job” for a real estate investor than being a loan originator.  We have several people who have held up their hands and we will be moving forward on this in May.

We are planning to set up in Texas and Florida next, so you folks let us know if you’re interested too.  We will get to 46 states before we are done.  We are serious about building this next segment of our business; we’re even hiring a National Training Manager this month.  Be sure to watch this newsletter for more details.

Advanced Strategies: Sell the Option Before You Buy

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Q.  Hi Barney -- Hope the world finds you and Karen well!!!  I have a double dumb question.  I was listening to your CD series on Creative Real Estate A-to-Z when you're talking about options.  You mentioned to think "sell the option before you buy.”  I understand in principle the idea of setting the deal up so that my buyer would actually get my lease option I used to tie up the property with the seller assigned to him.  

Here is my question…how does one go about showing the property to my prospective buyer without ticking off the seller?  Do you walk in and ask to show the place, treating my prospective buyer as "my money partner?"  Obviously, the buyer I'm flipping to would have to be keyed into the fact I'm flipping the contract/deal to him and I'm getting paid for setting up the deal, never taking title to the property.  I'm stuck in thought on how to keep my buyer from talking to the guy selling to me....does that make any sense?  Nothing illegal is going on here, but it's got to be awkward trying to get my buyer to check out the place without my seller knowing about it/meeting ahead of time.  Any guidance or a point in the right direction would be helpful.

Thanks!!

B.W.

A.  This would depend on the seller.  If the seller was a motivated seller who was anxious to help you sell their house, then you take an open position.  If you are dealing with the person with the intent of trying to buy it or sell it, just say, “I can close quicker if I can show it to some people that might buy in with me or take some kind of other financial role.”  That would get permission and not tip your hand.  It would be best if you set this up when you buy.  Make sure they know others will be coming by.

BZ

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.  Barney,

My question about a five year lease option has to do with the IRS.  I was told that any lease option over three years can be construed as a sale.  If audited, all five year lease options could be determined to have been sales.  I would then be responsible for the resulting sales taxes, capital gains, recapture, etc.  I would prefer to offer five year lease options, as I have done in the past.  However, this concern compels me to use a less desirable three year term.  What do you think?

D. H.

A.  Good question.  I am not a tax attorney.  But, best I know, ANY lease option can be said by the IRS to be a sale.  Duration would be one issue.  The overall question is, did you really sell and call it a lease option or do you really still own it and they may or may not buy it.  If you had a five year lease option at normal rent rates, $1000 option consideration up front and no monthly consideration and the price went up 5% per year, the IRS most likely would say this is a lease.  If you had a five year lease option, with the price flat and got 10% of the value of the property as option consideration and 1% more every month, all applying to purchase, and at the end of five years there is nothing left to pay to the seller because the balance due was equal to the loan balance, most likely the IRS would call this a sale.  In between is a guess.  Put another way, the term of five years alone would not be enough for a lease option to be judged as a sale.

BZ

Q. Bernard,

Let me first say thank you for that TeleHelp Session, yesterday (Monday, April 5th @ 6:30 pm.)  Barney, every time I hear you speak or read any of your materials I learn something. I will be on the call next week as well. I was one of the people that asked a question last night. I am in need of a little help and I was wondering if I could have a few minutes of your time.

I wrote an offer on a single family home in Chicago near the Midway Airport. The offer is for $130,000 and needs about $5,000 - $10,000 in repairs. The property will sell for $195,000 - $200,000 when finished. I'm financially challenged so I am going to meet with a down payment partner to see if I could interest him in working with me. Should I be asking for a finder’s fee, and if so, where should I begin?

I did not write this as an option (sellers want out and want to take the cash with them). Could you please help me structure this? I would also like some information on your mentorship program. Can we set up a short phone meeting? Thank you in advance.

Dave

A. The mentorship program I have is too expensive for you if you are financially challenged. Regarding a finder’s fee, you have to pick what level of compensation you get but, most importantly, you have to live up to that level. If you get someone to put up all the money and you do all the work, you can get a 50/50 split. But you have to do the work and do it right. If you don't trust yourself to be the general contractor in the deal, you need to just get paid for selling them the contract. You can start high but unless you have several people that are interested in buying the contract, you might only get a few thousand up front for the contract. One way to get more is to take some when it is transferred and more when they sell. You can secure the "more" by leaving your recorded claim against the property in place until you get paid.

BZ

Lease Option Dilemma

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Q.  Hello, Barney!  On one of your CDs you mention a few times “lease option” being a tool for future buyers to buy and help clean up past credit woes.  As a seller, how do I handle this?  I have a prospect on a property I'm giving a lease option on.  He has the option consideration and makes the money to pay the monthly rent.  He was very open with me and said he is fixing bad past credit he has and is planning to do a Chapter 7 which would take effect about six months from now. 

I know you're not a lawyer and all that, but looking at it from an investment risk perspective, how much room is it wise to give prospective optionees?  Can he file me as one of his creditors in six months and have the court protect him making payments to me?  Is it wise to go into a lease option deal with a guy who is working on cleaning his credit, getting under a lease option which can help him, but knowing he will formally go bankrupt in about six months? 

As a newbie, any advice would be helpful.  I guess when dealing in today’s market where prospects are not going to have super clean credit, and as landlords we know that they'd be buying if they had clean credit, the question becomes how far are we willing to go and associated risks?  Thanks

Bill

A.  You are on slippery ground here.  In the first place he should not be doing deals knowing that he is going to declare.  And yes, he can leave you high and dry on past due amounts.  Your safe track is to get a different buyer.  If I really wanted him as a tenant, I would rent to him on a month to month rental.

I would first try to get him in without a signed option agreement.  I would give him verbal assurance that he can buy as discussed but he can not have one in writing without good credit.  Furthermore, having a Chapter 7 will be considered by you to have good credit.  If you are charging him more per month than rent, call that extra amount “rent that will be refunded when the tenant moves out if and only if all rent payments have been paid on time and the property left in the same condition it was rented.”

Tell him, if he does the 7, that amount will be converted to an option consideration.  If forced to do so, you could write up an option calling for say, $2400 option consideration.  And say the option does not become effective until it is paid.  Then he can rent on a month to month, and if he wishes, pay monthly towards the option consideration.  If he does not pay the full $2400, then the money paid in is returnable if and only if he has paid on time and taken care of the property.

I really don’t like the second idea but it is one to consider.  Check with a real estate attorney on it.  Bottom line, if he does the 7, he will not be able to do it again for years and should be safe in that regard.  Most people that do a 7, if they have good jobs and income, are good payers for several years thereafter.  If they have done a 7 he will not be able to do anther one for several years.  If they have done a 7 he will not be able to do anther one for several years.

Hope this helps.

BZ

Upcoming Events:

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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 June 1st.  The next REIT Report will go out on or about May 15th.  

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