John Schaub's Strategies and Solutions - 
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(c) Proserve Corporation of Sarasota, Inc. 2000. All Rights Reserved
#9811 

DOING GOOD, BETTER

That is a great book title. A good friend of mine, Edgar Stoesz, Past Chairman of Habitat for Humanity International wrote that book. It is about how to run a better non-profit organization, a subject Edgar knows well. I highly recommend it to you. You can buy it on the Internet through Amazon.com.

We can all do better. This issue will teach you how you can make money, better. You may have mastered the art of buying a house. You may have progressed to buying houses with nothing down, as my 70's student Robert Allen did. However, you may have noticed that buying a house, even with nothing down, does not guarantee you a profit.
In fact, borrowing the total purchase price, (or even more than you paid as the TV gurus preach) can make it harder to make a profit.

LOSING THOUSANDS OF DOLLARS ON EVERY DEAL

Have you ever had a seller take your first offer? How did you feel?
Would you like the opportunity to make that offer over again? If you knew then what you know now, could you make several thousand more dollars on that deal? 

Have you ever bought a property that you wish you hadn't? What could you do different to keep you from making a deal you shouldn't buy? We all make offers that are not low enough, or that do not ask for good enough terms. It is not the seller's fault when we do not make the best deal we could. 

In fact, most house buyers make only a small fraction of what they could make, if they learned a few new tricks. By learning how to increase your profits on every deal, you can work less and make more. 

I focus on running a low quantity, high quality operation. I want to make as much as I can on every transaction, and have as few transactions as possible. By transactions I mean purchases, sales, and renting to tenants.

In November I will teach my first Advanced House Buying class. In that class, you can learn how to take your buying program to a new level. You will learn how to make more money on every deal. Here are some tips for increasing your house buying profits.
7 STEPS TO MAKING MORE PROFIT ON EVERY DEAL

#1 MAKE OFFERS THAT GET YOU WHAT YOU NEED

Ask: Am I buying this house to (a) increase my cash flow today? (b) increase my net worth in 10 years? (c) give me more tax shelter today? (d) make a short-term profit?

Now make the offer that will get you what you need. If you need more cash flow today, consider bringing in an investor to put up a large down payment. Using his down payment you can both drive down the price and get great terms on the smaller, safer, purchase money loan.

If you need cash flow, owning 50% of a house that produces $400 a month is better than owning 100% of a house that breaks even. If your investor needs tax shelter, you can take all of the cash flow and give him all of the tax shelter.

In my early years, I used this formula often to acquire great deals that I could not afford to buy on my own. Eventually, I simply exchanged my half interest (tax-free) in some of my houses for the investor's half-interest and we went our separate ways. 

If your focus is building your net worth, make offers with low (or 0%) interest loans. Look for sellers who own property free and clear. These houses will produce no cash flow for the first few years, but the tenants will pay off the loan in ten years or less.. 

If you need tax shelter, structure high leverage (nothing down) deals, with interest-only loans. If you refinance and discount these loans five years from now when you need less tax shelter, you can have your tax shelter and high profit too.

For a quick short-term profit, look for a seller in distress who will sell cheap if you solve his immediate problem. It is not always a money problem. Sometimes it's a fellow landlord burned out on management. Sometimes it is a spouse trying to escape a bad marriage or a partnership gone bad. You can buy these houses with short term notes, because you plan to resell them in the short term. Be wary of signing a lot of short term notes. I did it in 1975, and bought a lot of property. When those notes came due, interest rates were high, and I had to borrow at high rates to repay that short term debt.

This market reminds me of 1975. The market is strong, but increasing interest rates could cool off the market in a hurry. If you borrow on short term notes, structure them without personal liability so that you will be able to renegotiate the debt, or give the property back if interest rates take a jump and you cannot sell at a profit.

#2 KNOW YOUR ADVERSARY (SELLER)

Never make an offer without knowing what is most important to the seller. Price may not be important at all. He may give away thousands of dollars for an immediate sale. Conversely, he may be fixated on his price, but be willing to receive it over a long period of time.
Try to meet face to face with the seller. Ask many questions, and listen to the answers. If you are like me, and would rather talk than listen, you must train yourself to shut up and listen. One trick is to ask only short questions. Another is to count to 10 after the seller finishes his answer before asking the next question. Often the sellers will start talking again and tell you all about their problems.

Once you think you know what their problem is, ask them to verify your theory. "As I understand your problem, Mr. Smith, losing your job caused you to get behind on all of your bills, and you need some relief from the creditors who are hounding you for their money."

Now make an offer that solves that problem. "If I would agree to pay your creditors, and take over your house payments so you could move out and make a new start, would that solve your problem?" You can then negotiate your best deal with each of the creditors, and buy the house well below the market. 

On the other hand, you should try to learn about your seller's weakness. Does he really need to sell by a certain date? Does he have another property he wants to buy that may get away, or a job he wants to take, or a financial deadline such as a balloon note or a foreclosure? If you ask a few questions and then listen, you will often learn the real reason they are selling.

By knowing these facts, you can plan to make an offer that works for the seller and that is timed to improve your chances of getting it accepted. Many sellers wait until just before their deadline before accepting an offer that solves their problem. Making your offer just when they really need one will help you buy more houses at better prices.

#3 KNOW YOUR MARKET

Before you make your next offer, answer these questions. What did the last four houses in that neighborhood sell for? How does this house compare (bigger? smaller? better lot, less attractive, better construction, better neighbors?)

What will it rent for? Be conservative. Ask: What rent can I get from a good tenant in one week? That amount will be lower than what you ultimately charge your tenant, but it will give you a place to start when you are developing your offer.

What part of the cycle is the real estate market in your town in? Are prices going up, down or sideways? Is the rental market strong? Are prices likely to be higher or lower next year? Is it easy or hard to sell a house? All of these factors will influence how much you offer the seller.

If you are unsure how long it will take you to rent a house, or to resell it, one sure way to find out is to just jump in and buy one. Experience is the best teacher. It can also be the most expensive teacher.

Stick with my formula of little deals, and your mistakes will be less expensive. If you do not rent or sell a house in the first month, lower the rental price. Do it again the next month if it does not sell. You can see that trying to rent or sell a house for too high a price can cost you several thousands of dollars as that house sits empty and you continue reducing your price. 

I have a good friend who is way too smart for little deals. He built a warehouse. It sat empty for nearly two years before he found his first tenant. After paying for a few months, the tenant filed bankruptcy and occupied the building without paying rent for a while. Eventually the attorneys gave them an ultimatum, pay or move. They moved. He now owns an empty building again, only now it needs some repairs before he can rent it again. What an expensive way to learn.

#4 NEGOTIATE FROM STRENGTH

Know your strengths. Do you have money in the bank? Do you know someone who has cash in the bank or from another sale that they would loan to you or invest with you? If so, then use that cash to buy the house at a below-market price. If this seller does not need your cash enough to drop his price, look for another seller. Never use cash without getting a benefit such as a lower price or great terms.

Are you a good manager who can out-negotiate tenants? Look for management problems that you can solve. You can make a great deal with a landlord who is afraid of his tenant. You can buy a house with nothing down, just by giving them relief from management. 

Relief can come in the form of a tenant. Some landlords are so picky that they will not rent to anyone who wants to live in their house. You can agree to become the tenant or manager for half of the profit.

Are you a good salesman who knows how to structure terms that no buyer can refuse? Then look for a seller who does not know how to market his property. Many who try to sell their own home have never sold anything before. Selling is an art. If you understand it, look for sellers who don't

#5 DON'T LET A GOOD DEAL GET AWAY

Do you ever get so busy with details that you don't get around to doing the things that make you money? It is easy to be caught up in the little things that can consume your time. It is usually expensive to focus on small details while missing the important ones.

My friend Warren Harding use to call this mindset swatting at flies while the elephants march by. The elephants are the important things, while the flies are the distractions.

In a real estate deal you can become distracted by the condition of the house, the broker if one is involved, or others trying to get you to do less profitable things than buy a house. Once you find a seller who really needs to sell, then focus your efforts on that seller. If they are going to make somebody a great deal, it should be you.
That does not necessarily mean spending every minute of every day with them. I am now in negotiation to buy two free-and-clear houses. The sellers received one as a gift from her mother, and they live in the other, They are leaving town and do not plan to come back. 

They are not in any financial distress, but they have needs. One is to be rid of their two houses so they can move. Another is generating as much income as they can from the proceeds of the sale. Another is avoiding taxes on the sale. If they sell for cash, they will owe taxes on the proceeds from the house they received as a gift. If they take this after-tax money and invest it in a money market account at 3-4% it will not produce much income.

I am not rushing this negotiation, because my plan is to buy both houses using a small amount of my money, and letting the sellers carry the financing. I have met with them and talked to them several times over the telephone. We are getting to know and like each other. 

If you are going to borrow a lot of money from someone, they need to know and like you, and believe that you are going to pay it back. In my conversations, I mentioned my long career here in town, and have talked about other sellers I have borrowed money from and paid back. I am setting the stage for the offer I want to make.

This deal is at the top of my list right now, and I will follow through to a conclusion.. If another comes along that is better, I will pursue it first. But I am confident that I can make a good deal with these people, so I keep focused on it. I will not let it get away because I got busy.

#6 DON'T CHASE A DEAL FOREVER

Knowing when to cut loose the one that you cannot catch will save a lot of wasted effort. While fishing, I occasionally will watch an inexperienced angler hook onto the bottom and fight it for a long time before he figures out that it is not a fish.

Investors, likewise, can spend too much time chasing a deal they can catch. Make sellers a clear offer with a deadline. If they will not respond, call them back in a month and ask if they are still trying to sell their house. If so, ask them to come see you. By making them come to you, you set the stage for letting them sell you the house, rather then you trying to buy it from them, This is a subtle but important difference. Make sure both husband and wife come to this meeting if they own the house together

When they come to meet you, let them make you an offer. You should have a plan (see step #1) and an offer in mind that you can counter with. Make your offer good only while they are with you so that they have to accept, reject or make a counter offer. 

Don't accept a straight rejection ("We won't do that") . Ask them what they would do. If you cannot make the deal, let them leave on a good note and then call them back in another month. 

#7 LEARN FROM YOUR PAST DEALS

Years ago I had the good fortune of befriending a successful investor. He made most of his money building and selling a small chain of gas stations. He then began investing in real estate and securities. He lost a significant amount of his capital in the stock market, but refused to believe that he could not make money investing in securities. He began keeping a journal of every purchase and sale. He made detailed notes describing why he made each transaction. By becoming a student of his own successes and mistakes, he discovered why he made money and why he lost it. He was then able to stop losing and became a very wealthy man investing in the market.

I am not recommending that you invest in securities. I am recommending that you keep a journal of the deals you make. This is not for your kids to read (although they might get a kick out of how you did it), but so you can learn from your mistakes. Study your journal before you make your next offer, and make your next offer better.

Study your best deals and your worst deals. Write yourself notes about what to do differently next time. Try to make your next deal even better than your best deal. If you are not improving, you are in a rut. Try to improve with every deal you make and you will not only make more money, you will have more fun.

KEEP LEARNING NEW TRICKS 

I stay excited about this business, because I am constantly learning new ways to make money. I write and teach to share those ideas with you. If you ever find yourself in a slump, or a rut, do something about it. I recommend you take one of my classes. If you can't do that, take a class from somebody who will get your mind going and lift your spirits.

Note: The information offered in this letter is part of an ongoing series. This issue builds on the information given in previous issues. The author and publisher are not engaged in offering tax or legal advice. Laws are constantly changing and advice of a competent accountant and attorney should be obtained before implementing strategies suggested in this letter. 

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