Real estate gurus:
If only it were that easy -- Page 2
Meanwhile, real estate is no longer the dividend-stock type of
investment that it was in 1960s and 1970s. Today it's more of a
growth-stock style, with prices as high as 15 times the property's
annual net. "So 'poof' goes the cash flow, because you make your
mortgage that much bigger and the rent is what it is," says
In fact, the infomercial kings like to skip any mention
that this is a business that requires a lot of investment capital,
he says. "Because with any capital-intensive business, you
are riding on a piece of driftwood in the ocean. You have no sail,
no paddle. If interest rates go up, you'll get creamed and there's
nothing you can do about it," he explains. "It doesn't
matter how competitive, skilled, smart or good looking you are.
You have to have a certain amount of luck."
If your goal is to quickly resell the property without
using your own money, or "flip" the property, the game
has changed since salespeople originally began touting it. Technically,
you use a double escrow to pull this off: Real estate license dictionaries
describe it as an escrow that will close only upon the condition
that a prior escrow is consummated. That makes each deal contingent
on the other. In other words, you are acting as both a buyer and a seller in two deals, using the final buyer's money to finance the deal. It is illegal in many states unless full disclosure is made to the parties.
Reed himself was an advocate of the practice for a
while. But when he began to investigate the specifics for his newsletter,
Reed says that he discovered that "flipping is to real estate
investment what brain surgery is to the medical profession,"
he says. "But the gurus push flipping because it helps them
overcome the objection, 'I don't have any money to invest.'"
The folks he found making money at quick turnaround
deals owned real estate brokerage firms with a staff whose sole
function was to find cheap properties. After the team finds a property,
the investor sends in his team of contractors to bring the property
up to snuff and taps into the Multiple Listing Service to put it
back on the market. Speed is the key. If you can't turn this around
in days, weeks at most, the profit melts away, says Reed.
"We're talking about busting your butt to buy
the property in the first place at somewhere between 60 percent
and 75 percent of value. Then, to get a buyer quickly, you offer
it for sale at 95 percent of market value in order to move it fast
enough not to lose all your profit on carrying costs," he explains.
To toss in another monkey wrench, a lot of title companies
won't do double escrows any longer. The most popular loan originators,
such as FHA and VA, also refuse to get into a deal if it's too soon
after the previous sale. "That's a hell of a handicap,"
Most investors find these properties in the foreclosure
channels. But buying foreclosures, Tripoli says, has landed many
folks in court because there's a fine line between buying a house
in this category and committing a crime. For instance, some infomercial
plans advocate scooping up the foreclosure property by making a
deal with the current owners. You save them from the horrors of
being thrown in the street, by allowing the owners to transfer the
title over to you and then buy back the home.
This part of scooping is OK, no handcuffs are involved,
even if you do get the distressed owner to agree in the fine print
to pay you more than he owes on the house. But if the current resident
thinks he's only signed a promissory note, you're up on fraud charges.
Tell the truth and the deal is likely to fall through on the spot.
"The tactics being touted by a lot
of these [real estate investment people] are equity-stripping," Tripoli says.
"That's how they can say you'll get rich with real estate investing -- by
finding people who are scared, desperate and then rip the equity out of the home.
"I don't think the vast majority of Americans
would feel this is an honorable way to make a living."
advice on a budget
Storms advises the curious to start their research at the library
or bookstore. At least read about some of these approaches before
you go into a seminar to see if you have the stomach for it. "And
know that the first seminar you attend -- the free one -- is mainly
a repetition of the infomercial. You won't get anything unless you
pay for it," he says.
Reed tells his fans to sign up for the local real
estate classes at a community college and earn a real estate license.
The exercise will help to give a good overview of the law, if nothing
else, and it costs far less than the thousands of dollars you could
sink into seminars, he claims. Second, join a real estate investor
club in your area. Here you can meet folks higher up the experience
ladder in what you're eyeing.
This, of course, requires more
time than the infomercial route, and that's music to certified financial planner
Stephen Lovell's ears. After all, one way he tests an offer's legitimacy is by
the amount of time it will allegedly take you to succeed. When a person is on the up-and-up,
he'll likely lean toward a longer time frame. "I have to convince people
there aren't any get-rich-quick schemes that work," he says. "Look at
the wealthy -- they build it over time."
"Real estate is scary and people want someone
to hold their hand. The salesmen don't give you what you need. They
give you what you want, and charge you a lot of money for it,"
he says. "This is like any business. If you're well-suited
to it, study and don't do stupid things. Over time you'll have success."