Bernard Zick's Advice for the Impatient Investor October 2003 Bernard Zick

Bernard Zick's

Advice for the Impatient Investor

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

October 2003

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

In this issue:

A Sane Moment: Insights from Bill Kerley, Life Expert

Getting Started: Deep in Debt

Advanced Strategies: Maybe You Need More Experience

Fixers Corner: Buying a “Pig in a Poke” or a Termite in a Tunnel

Creative Deal Structuring: Purchase Cash Flow & Notes

Facts to Ponder: Prices go up Then They Slip Sideways

Upcoming Events: Creative Financing Boot Camp Moved to December 13th & 14th in Chicago

A Sane Moment: Insights from Bill Kerley, Life Expert

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In absence of clearly defined goals, we become strangely loyal to performing daily acts of trivia. ~~~ Unknown

Getting Started: Deep in Debt

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Q. I own a home in Spring, Oklahoma, valued at about $125,000. I owe $65,000 on my mortgage and $25,000 on a home equity loan. I am also in debt for $25,000 in credit cards. I have good credit, as I am not behind on any payments. My question to you is how can I incorporate all of my debt into one monthly mortgage payment? Could I sell my home to a relative and buy it back? That way I could use the equity to payoff my debt and buy it back at a low interest rate. I know this would cost money so I'm looking for the least expensive way to do this.

Thank you for your help.

Joe

A. Your total debt is $115,000. I would say your first solution is to get a grip on your spending. Because no matter what you do to solve today's problem, if you do not cut your life style down, you will be in worse shape later. First thing -- can you afford payments on an $115,000 first mortgage? If not, sell the house and move to a cheaper one. Can you get the loan yourself? Too often people find complicated solutions when simple ones are at hand. (In Texas, a borrower can only get 80% LTV on a cash-out refinance.) If you can't, the next question is, do you have relatives that can qualify for an $115,000 loan on a $125,000 house (92% LTV)? Remember, this now would be an investor getting a loan, and the interest is half a point to a point higher and lenders are not as anxious to give high loan to value ratio loans. If you do have a relative that wants to buy the house, we can help place the loan, in that our www.zickhomeloans.com operates in 48 states. Your relatives would have to have excellent credit. The easiest solution is to have them buy it and you lease it back from them with an option to purchase it back. Make timely payments for over a year, save up enough to pay them back their closing costs and take the property subject to the new loan.

Most importantly, you need an analysis of your expenses and capacity to make payments in the future. If we can help you or your relatives with a loan, let us know. Remember, it is simple to get into better financial shape. Spend less and earn more. Get a budget and a real estate investing business plan. The next time our “How to Get Started and Stay Motivated” seminar is held near you, plan to attend. Or buy the home study course with CDs at http://www.zick.com/media.shtml.

Good luck.

(P.S. You HAVE to get started right. You need a business plan, a marketing plan and an exit strategy. I spend eight hours telling audiences all the ins and outs of that process. In one day we give dozens of examples of business plans that have led former students to financial independence. The normal price for this set is $279. We're giving you the down and dirty price of $79 which is available until the next e-newsletter is published in early November. No album, just the CDs. Go to http://www.zick.com/media.shtml to grab your set.

Remember to have your grown kids listen too so they will stop borrowing money from you! It is the first home study item I tell all of my students to review.)

Advanced Strategies: Maybe You Need More Experience

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(Note: This came in from an e-newsletter subscriber who is not my student, does not yet own my materials and has not attended any of my courses.)

Q. Dear Barney,

My name is Jeanne and I need some help. I feel like I keep running into a brick wall. This is fairly detailed, so I'll keep it as short as possible.

In January I happened on an 84-unit apartment building and I ran the numbers and they were okay. Admittedly, this is a lot larger property then I'd imagined myself starting with. I spoke to the Realtor, who sent me some information and the Profit & Loss for 2002. When I called back, I had a lot more questions. It seems that the current owner bought it as a “YUCK” property, and as of December 2002 had put in approximately $20k in upgrades and repairs. The previous owner hadn't done anything. Rent roll in January 2002 was $17,928 and in December 2002 was $37,144. The owner just wants to cash out, but may consider holding a small second of up to $200k.

I told her I'd run it past my partner and get back to her. Then, I called 30 different accountants in the area, including some downtown firms, hoping to find a lead on a partner. To this date, I haven't received any calls back.

That actually has turned out to be a good thing. The asking price in January was $3,350,000. Recently, it became $3,100,000.

It has two commercial spaces that can be converted to apartments, not including an onsite manager apartment that's not being used. It is one mile from the #3 ranked small town college in the nation, and a 1 1/2 hour drive from some of the most beautiful mountains in America.

The property is 30 years old, it needs some updating and currently rents are all over the board. In the five years I've been watching this region, I've seen prices for land and buildings sky rocket, because of the high growth out there.

For nearly two months, I've been racking my brain, trying to figure out a way to finance it, trying to get a partner, or come up with something. At one point, I even decided it was out of my league, but I couldn't get it out of my mind.

Barney, I WANT this!

I KNOW there is a way, but I can't see it. Even with all the new things I'm learning, I just can't see it, and I KNOW it's there. I feel like I'm running into a brick wall at every turn.

ANY input at this point would be GREATLY appreciated!

Sincerely, Jeanne

A. 1. By the way, this is NOT a short email! Short ones are one sentence, long ones are a paragraph, and so, this is a BOOK by email standards.

2. Calling accountants is a dead end. They will never refer you to a client. If they recommend you to one of their clients, and the deal dumps, they will not only lose a client, they may lose their license in a suit. Your only hope there is to get THEM to invest and if they do and make money, they will invite you to their Christmas party and you can meet their clients that way. Same applies to bankers and attorneys.

3. You have very well bitten off more than you can chew. You need to either get more ends tied up first or learn to fill in the missing parts. For this size deal you should have about half a million in the bank or a partner with that much or more. Yes, I have done $2.4 million deals with $25,000, but I have a long list of credentials and a resume in real estate. Big property sellers are very sharp and they can smell a beginner.

Here is what I mean by getting the ends tied up. As an example, if it is a market with lots of buyers, you want the partner or Broker that can find properties. If it is a market with lots of properties, you need to first tie up the buyers. I don't know where you are, but if properties like this are not selling fast, you might have been better served to have worked on getting a buyers list before you started off. Have you tried running ads? Have you called other apartment owners to see if any of them are buying? Have you built relationships with professionals with high incomes that don't have the time but have the desire to invest? Have you learned about who the buyers are in your market place, private investors that could be buyers? Do you have property management experience and if not, have you made a connection with someone or a firm that does? They could be a source of investors too. Have you set up a buyer's broker relationship with a real estate broker? (Get one that has just taken the courses and needs to build his client list. He or she will have more patience with you.) Have you read "How to Buy Apartments and Other Income Properties" yet?

Good deals are done with MOTIVATED sellers, not people who have great places that want to cash out. Is this a motivated seller? If not, move on. There are lots of things that will be sold retail I would love to own; the Marriot downtown is an example. But it will never be a "deal"; it will only be sold retail to cash investors. Really wanting a property is a great motivator, but without knowledge and the missing pieces, it will only be a dream.

I do wish you well with this, even if that means chalking this one up to experience.

Fixers Corner: Buying a “Pig in a Poke” or a Termite in a Tunnel

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Beware of Well Grounded Decks

Once I sent out a letter to those in foreclosure. When I responded to a call, I found a member of my local real estate investment club who had purchased the house on the courthouse steps. She had owned it a month and it was a mess inside. From what she said, she had no idea the interior was so bad when she bought it at the auction. (Another way of saying she paid too much.)

Mind you, she was not a student of mine. For one thing, I tell students not to start out with courthouse steps deals. They take a higher level of knowledge than the pre-foreclosure level. Secondly, she did not know much about structure or construction. You can help yourself here by getting a good property inspector like I do. (Keep in mind, I have been a General Contractor on an apartment complex and have years of real estate experience. I still hire an inspector.)

The hints that the property may be a "fixer" should have been that there was exposed wood rot near the garage door and the roof line had moisture and wood rot showing from under the shingles. If an owner lets things like that go on the outside, you can not expect the inside to look great. Now comes the fun part. The house was worth $115,000. (She said $125,000.) She was asking $100,000 and I offered her $70,000 (in part to check her limits.) She told me she had more than that in it so far and could only go $89,000. Then I took her out to the deck.

The deck was solidly sitting there on the ground behind the house. Great selling point, right? Wrong, old termite breath. If a wooden porch or deck is part of a house, it needs to be on piers. If the piers are wooden 4 by 4's, then the hole they were stuck in had to be poured with concrete before the post was put in, then surrounded by concrete. If not, those fun little termites will bore into the post, then into the deck, then into the house.

But the house is brick, you say. Well brick walls come with what they call seep holes, which allow moisture to get out. This deck was built flush with the brick on the house. That makes it easy. If there was a deep foundation and the deck was next to the foundation, at least there would not be wood next to the seep hole. Termites build mud tunnels over the few inches needed to get from the deck into the house where they move into the wooden frame work.

While we are on this topic, if the deck (or a house) is up on cinder blocks, make sure the blocks are stacked sideways, with the holes showing. Some folks will stack them with all the holes inside (vertical) which does look much nicer. It also looks nicer to the termites. When the blocks are stacked that way you have a natural tunnel up the middle of the blocks! Nice to save them so much time and trouble!

Okay, okay…too many lessons in one article. So, read it a second time!!

Creative Deal Structuring: Purchase Cash Flow & Notes

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(This is an advanced question… skip it if you are a beginner and go to the next article.)

Q. The PCF (Purchase Cash Flow) you talked about at the seminar is stunning; I've never heard of it. I don't know how to present it to the seller in a way that they will understand it. I think they'd have a hard time following just an owner carry back, let alone partial purchase cash back!

I do have some contacts with several institutional paper buyers, though the few that like simultaneous closings are NOT keen on nothing (or near nothing) down deals, especially with a 602 FICO like I have. However, here are the general details: a seller who is motivated has a 1000 sq ft, 3 bedroom/1 bath (ugh!), 40-year-old home for sale for $115k. That seems to be high; I got a property profile and $100k sounds more like it. Their mortgage is only $10k. I'm looking at an offer of $100k with $1,000 down, $99,000 @ 6% for 30 years with a 10 year call. I show monthly payments of $594, and a balloon of $82,849. Assuming a note buyer satisfied with a 15% yield, I show $55,449 cash to the seller by selling the note payments.

Again, how do I present this to the seller in a way that is even remotely understandable? "I'll put down $1,000 while you carry $99,000, but I've got a guy who will buy your monthly payments for $50 grand, and then you get a balloon in 10 years for about $80 grand." I'm sure there is a better way to put that, but I don't know what it is.

Lou Willson

A. You have the PCF course, so, best you read it a couple of times before you make the presentation. Remember, you make presentations like this in layers.

When you talk to the seller, first go for a nothing down purchase. Offer to buy the property with $1000 down and payments. Most likely they will say “no”, they “need a little cash.”

You find out what the minimum cash requirements are, and then remind them that they will have monthly payments with your offer.

They will still want some cash.

Then you say, “If you are willing to trade x number of the payments, I can get you the cash.” Of course, you will be using your calculator and doing the complex math that PCF calls for. (It is our most advanced course.)

But the key here is to 'Keep it Simple.' In fact, the more complex the solution, the more important it is that you tell the seller your solution in terms of what they get and how it solves their problem. Sellers do not understand words like “discounting” and “selling the cash flow stream”. They understand “trade 'x' of the payments for 'y' dollars in cash.

Remember to close like we tell you in the book, totaling all the benefits so that the package of benefits looks really large compared to the original purchase price. In this case they would net over $139,000 in total over the life of the deal. Again, a simple way of showing the benefits.

Facts to Ponder: Prices go up and Then They Slip Sideways

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Some places are crazy; some have real opportunity all around. San Diego is crazy. A notch over three years ago I went there to do some buying. I felt it was ready to pop. I had not been a buyer there since 1986 when I correctly predicted the down turn that followed. I offered $114,000 for a condo in Encinitas. It was full price but I wanted to take “subject to” the loan. They said no. I had four houses under contract but the seller, a Realtor from Carlsbad, backed out of the contract after I got home. So much for that trip. Now my buddy Doug Gillis tells me the same condo is selling for a little over $300,000. I really did not need to hear that.

Creative real estate, nothing down and pro-buyer techniques, work best in soft markets. It is a matter of timing. No market goes straight up forever. Most of the time there is a stair step. On the step, the prices generally stay the same but those that have to sell do deals or take big discounts. Those that are not in a rush either wait a long time to sell or decide not to sell.

I am having a ball right now. I found a supermarket to buy in and it is near enough to me to be easy. It currently has 66 percent more listings then it had last year. I am taking some of my Platinum students there to buy with me. They put up the cash and I do the work. (Send email to Terrie at terrieadcock@kingwoodcable.net if you want to find out more about this program. You will be interviewed by an associate then interviewed by me before we accept you.) I believe that this mini-market will be good for about two or three years then snap back. I am going to purchase as many properties as I can between now and then.

So what should you do, especially if you are in San Diego? Well, you could have me buy you a $125,000 four bedroom brick house that will break even. You could head east until the prices seem better. (I do have students doing that. If you don't go far enough east then properties are still being bid for more than the listing price.) Or you can work very hard where you are.

Just remember this -- markets have cycles. If you are not in a good cycle to buy, for big bucks you need to do deals where it is right to do deals or move cautiously and work hard. But, when the market turns to a deal-makers market, don't pause. Buy all you can like I am doing. There is always money to make but if you play the cycles, you will make big bucks. Who knows, I may take my money out of my current market in two to three years and be a buyer in San Diego. It will keep going up, but if it pauses to take a breath, I will be there to take up the slack!

Upcoming Events: Creative Financing Boot Camp Moved to December 13th &14th in Chicago

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Here is our full Real Estate Investors Training (REIT) schedule for the rest of the year. You can enroll for a Seminar or Boot Camp or ask questions by sending email to reitbootcamp@kingwoodcable.net. Or, call the office at 800-677-3253.

Sunday, Oct. 5th – One Day Seminar

“Getting Started & Wealth Building with Real Estate Options" in Orlando, FL

Rosen Centre, 9840 International Drive

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

Hurry, this one REALLY only has ten seats left!!

Tuesday, Nov, 4th – San Antonio REIA meeting

"How to Get Started and Stay Motivated"

Omni Hotel, 9821 Colonade Blvd.

Call us at 800-677-3253 for details!

San Diego:

Thursday, Nov. 13th – San Diego REIA meeting

In association with the San Diego Creative Investors Association, Barney will address lease options at this event. The meeting location is the Scottish Rite Center at 1895 Camino del Rio South in San Diego.

Call us at 800-677-3253 for details!

Saturday, Nov. 15th – One Day Seminar

“Getting Started & Wealth Building with Real Estate Options" in San Diego, CA

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

You will learn to develop your real estate investor business plan and learn how to get rich with options. This will be a fun and no-holds-bared class since Barney used to live in San Diego. This is our holiday gift to Barney's Students (defined as anyone who owns any of Barney's materials). Students can come for $10 per person but you have to enroll by November 7th! This class will sell out as others have. If you don't yet own Barney's materials, as an e-newsletter subscriber you still get a discount! You can attend for only $49 per person, not the public price of $295.

Email reitbootcamp@kingwoodcable.net to register today or call our office at 800-677-3253 with your credit card information!

Washington D.C. suburbs:

Thursday, Nov. 20th – Capital Area REIA meeting

Lease Options is the topic for discussion with the Capital Area REIA. This event will be held at the Marriott Hotel, 8028 Leesburg Pike in Vienna, VA.

Call us at 800-677-3253 for details!

Saturday, Dec. 6th – Capital Area REIA One Day Seminar

“Getting Started & Wealth Building with Real Estate Options" in Vienna, VA. This is a REIA sponsored event and their rules will apply. Come to the meeting for details or call us. The location for this event is also the Marriott Hotel, 8028 Leesburg Pike in Vienna, VA.

Last Boot Camp in 2003...Chicago:

Saturday & Sunday, Dec. 13th &14th – Two Day Boot Camp

“Creative Financing” Boot Camp in Chicago, IL. This event will be held at the Holiday Inn Glen Ellyn, 1250 Roosevelt Road/630-629-6000.

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 (Orlando or Ft. Lauderdale), Phoenix and more. We add events to our calendar frequently, so be sure to check www.zick.com often!

May 2004 – Platinum meeting 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 thirteen years (but not in a row). The next issue should be out about November 1st. The next REIT Report will go out on or about October 15th.

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