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The New Real Estate Bubble

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Article by Lou Brown

The economy couldn’t be better for some people. Why? It’s because they are in a position to profit from the implosion of prices today. The discounts over value today haven’t been this good since the 1980s. For some it’s even better than that.

Think about it. Low interest rates. High seller motivation. Fewer buyers. Low prices. Government rebates. Tax incentives. You couldn’t ask for a better climate to make a lot of money quickly. This is a negative bubble that won’t last forever. Negative news drives prices down and profits up. I’m taking advantage of this and you should too!

Why are people running away from real estate if it is so great? Simply out of fear. They don’t know what is going on. They listen to the news and it is all bad. They don’t look past the headlines to see the opportunity. Have you ever heard that fortunes are made by the contrarians? These brave souls are the ones who look at the fundamentals of the economy then find business sectors with bigger than average losses and buy heavily.

Think Warren Buffet. He’s made fortunes doing this very thing. They know that when the economy returns they will prosper as that sector will recover sooner and more than the rest of the economy.

So what am I doing in this economy? Well I’ve had over 33 years of real estate experience. I’ve bought, sold and held commercial, apartments, single-family and land.  Here’s a couple of points that I follow:

  1. I believe holding is the key to long-term wealth.
  2. Residential real estate is great in that it is the least risky of all real estate. After all, everyone needs a shell. Err…house that is.

So now that you know what to buy to prosper in this economy (and all others forever). Next, you need to know where to buy, what to buy, how much to pay, and where to get the money to do it.

These are key questions that relate to any business. You may even think you know these answers. But what is missing for most investors is a duplicatable plan that addresses all the issues, guides you through the entire process, and delivers the profits.

First, let’s address where to buy. I believe most people can build a business in your own back yard. That is to say that there are at least two neighborhoods within a 5 mile radius of your house that would have good median priced homes. Median price for your market. That’s important because it will yield cash flow.

Second, the what to buy question is what I call our Street Smart business plan. Pretty houses in pretty neighborhoods that pretty people with pretty checkbooks want to own. Ultimately my exit plan is to sell the houses to the clients who live there. More on that later.

Third, how much to pay. This is where skills come in. Sure you can duke it out with all the foreclosure investors and buy at the courthouse steps, but that is a very risky place to start and it requires all cash. Instead, I look for other ways to find the deals which allows me to buy at a discount and be in control of the process. I can evaluate the property, the condition, the timing of the closing and even the financing. Skills and the tools I’ve created for that process delivers the discount I need to make a profit.

Fourth is where to get the money. Welcome to my “The Seller IS the Bank” program. With the proper training you will find that sellers will be your allies in the process. By knowing the right words to say, they will allow you to take over the payments on their loans. Not only that but they will carry back seller financing for the difference. I would never be able to do this if I focused on foreclosure buying at the courthouse steps or short sale deals.

Of course in order to have this happen repeatedly you need a plan. It should include specific education, skill training and the right paperwork to tie down your profit centers and protection. This is a key business strategy many would be investors miss. They wing it and hope for the best and fail miserably.

As to getting the properties sold in this economy, you must have a plan for that as well. Here is the next phase in my master plan to make the most money with the least effort that has a payday for many years to come.

We offer our properties on a Rent to Own program. We give clients up to three years to buy, grant rent credits for timely payments and then do the financing as well if they choose for us to do it. Friends, there is a HUGE market of people who would love to have a home. They have poor, bad or no credit. They will pay money down for the right to build their credit with you. Some people call them tenants. Yes, the same people who would rent are looking to someday own a home if they only had the chance.

Just imagine all the problems this solves. The tenant (we call them clients) feels it is their home and they treat the house and you totally different. Not only that but they pay you first so they will earn their rent credits toward the purchase.

Here’s an example of a real deal. My Street Smart training clients do deals just like this one routinely.

A lady had inherited a house. She lived there. She had a brother and bought his share out several years earlier by getting a loan for 50% of the value then giving the money to him.

Now she was having cash flow problems as her job had cut her hours. She couldn’t pay the mortgage and worse yet every time she turned around the house was costing her money – taxes, insurance, new roof, new water heater, new privacy fence, etc. So she was looking to sell and move into an apartment with no maintenance headaches.

She knew the property was worth at least $160,000. She was willing to take a discount to be rid of it quickly. Using my seller is the bank philosophy and the right words to make her feel comfortable that she was making the right decision, here’s the deal she accepted:

  1. $130,000 purchase price financed as follows:
  2. 75,300 existing loan take over payments of $454.24 per month (5.5% interest rate)
  3. 45,000 payable at $300 per month until paid (zero interest)
  4. 8,000 cash down from which she paid all closing costs

To fully get why this is a good deal you must compare it to a traditional loan. As this is an investor property, typically the interest rates are higher than for a primary residence.  If you could get a loan, let’s say the rate would be a 7%, 30 years fixed rate. Now in today’s market, $8000 down would not be acceptable to a lender. They would want to see at least 20% down. That means you would have to come up with $26,000 CASH (at least) on investment property.

Not only that but you would pay loan points and loan closing costs of about 3%… or $3,660 CASH. So with the traditional way most investors buy you would tie up $29,660 CASH and have to make a payment of $691.92 for the next 30 years, totaling $249,272.42.

Due to my “Seller IS the Bank” program I am able to pay off her loan at $300 per month PRINCIPAL only at zero interest. That loan pays off in 150 payments, or 12.5 years, with payments to begin 3 months after we buy. The loan we took over has 26 years to run. This means my cost of funds totals $197,448.32 or a savings of $81,484.41. Not only that but I don’t need any credit because the seller is the bank and their property is the collateral for the loan. Moreover, there are cash savings and no closing costs. Whew! Lots of numbers but read this through again. Same deal, two different offers. Do you like this plan better?

By the way, just about any typical investor is excited to get a $160,000 house for $130,000 even if they have to go to the bank to get the money. So the cost of funding savings is on top of the equity being earned.

With the right strategy and offer I was able to earn as much extra profit from that one deal as most investors earn in 6 to 8 deals.

Now let’s look at the exit strategy. I sold it on my “Work For Equity” program where I give my buyer credit towards their down payment if they do the painting and fixing up. So I had no further cash outlay.

They put $15,000 down and agreed to a $1,300 per month rent payment. They agreed to a $169,900 purchase price. That’s a beginning cash flow of $546 per month which will increase due to inflation and will increase again when my $300 per month loan pays off in 12.5 years. And of course I recaptured all my cash outlay plus put cash in the pocket as well.

So now you can see the many profit centers when buying:

  1. Zero credit issues. I did not have to use my credit to qualify for the loan
  2. No bank financing
  3. No loan origination fees
  4. No loan closing costs
  5. No 30 year loan
  6. No loan qualification delays
  7. Shorter term cost of funds
  8. Low down payment (many times its no down payment and in some cases the seller PAYS US to buy)
  9. Opportunity for more profit if the seller later chooses to sell their seller financing note at a discount
  10. Pretty house, pretty neighborhood that pretty people with pretty checkbooks want.

Now let’s take a look at the profit centers when selling:

  1. Cash down from your buyer (more than a security deposit)
  2. No refunds. You don’t have to refund the down payment (option fee) vs. having to refund a security deposit
  3. No fix up. Customer possibly is qualified to take property in “as is” condition saving you delay and cost of fix up
  4. Cash Flow as rent income is hundreds of dollars per month higher than the payment to the seller or their bank
  5. No out of pocket costs. You use the tenant rent payment to pay down and payoff the underlying financing
  6. Less stress. You have a happy client who you gave a real opportunity
  7. Increased business. You receive referrals of new potential clients which allows you to build a buyers list
  8. Less repair costs. You have a homeowner in training who takes responsibility for minor maintenance and repairs
  9. Less collection worries. You have a client who has a financial and life improvement INCENTIVE to pay on time
  10. You have the best of both worlds. If they buy…Yeah!! You sell at your price and they pay the closing costs. If they don’t buy…yeah!! You get the asset back and get to do it all over again. Either way you win.

This all fits nicely into my business philosophy… we help people when we buy, we help people when we sell. We are problem solvers and dream grantors.

There you have it. Instead of being in the real estate business I teach you to be in the finance business. We use easy to learn skills to get creative financing from the seller when we buy, then offer creative financing to our buyer when we sell and make a hefty markup in between.

I hope you’ve enjoyed this look at how to prosper in today’s economy. This business model has worked for me in all economic ups and downs. This negative bubble happens to be a time when you can prosper much more than usual because of low interest rates, concern in the marketplace, high supply of houses and willing sellers.

Over the last 25 years I have engineered a process complete with all the Tools, Training, Technology and Team coaching and mentoring to share this method with others. This process works and has led many to become millionaires in a short time because they were wise enough to realize that adopting someone else’s already perfected process was smarter than trying to create their own. I now have users and devotees of this system in all 50 states and 15 foreign countries. You too can build a long-term fulfilling business that is extremely profitable for you and your family. Read this again and see if this is right for you.

To Your Success,

Lou Brown – Founder, Street Smart Systems

Lou Brown is a regular guest speaker at CT REIA. Go here for the current list of upcoming real estate investing seminars in Connecticut.

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