What You Missed November 2014 General Meeting
by Robert Davis
Five Secrets of Wealth Building Using Other People's Money
Presented by: John Parrett
November 4, 2014
John Parrett talked about how to get more deals done with the same amount of money. The way to do this is by using other people’s money, or OPM. Unless you are just born with an unlimited supply of money, you will need to use leverage of your funds to grow your business in leaps and bounds. John gave an example of someone with, say, $100,000 to spend. We could buy one house, fix it, and sell it for one profit sum. However, if we spread their capital over four houses and used OPM for the extra cash needed, we would eventually have four paychecks instead of just the one. In theory, this is right. Even if we have to pay fifteen percent interest on the borrowed money, chances are we will still make a healthy profit, if we flip the house in a reasonable amount of time. He says this will cost about twenty percent of our profit.
Another thing John talked about is when to show the house or houses we are working on. Should we show them before they are finished or wait until everything is move-in ready? In most cases, John believes we should only show a move-in ready house. The vast majority of buyers will only buy a move-in ready house. If the kitchen is still in need of a counter top or flooring, most buyers will pass up our house. We can explain how nice everything will look, but most buyers cannot visualize what we tell them. They will move on to something easier to understand, like a move-in ready home.
He talked about inflation in the US. He believes, on the average, prices will inflate three to four percent per year. John thinks we have to have inflation so we can pay back with cheaper dollars the enormous debt our government has racked up. If we can buy houses now and hold for long term, the value of those houses will go up an average of three to four percent per year. His belief is that we can out-bid wholesalers on houses because we do not have to make an immediate profit. Wholesalers have to buy cheap enough to give themselves some profit and leave room for their investors who will eventually retail the house to make a profit as well. He also mentioned Fannie-Mae is offering relatively low interest rates to finance residential rental properties. If we have held properties over one year, they will base their loans on the values of the properties. An investor can secure up to ten house mortgages with this program.
A good discipline, he said, would be to look at five houses per day (25 per week) and make at least three offers per day (15 per week). Look for the usual things like tall grass, empty houses, overgrown hedges, old newspapers in the yard, etc. In addition, yard sales are sometimes the beginning of someone moving out for some reason. Maybe they are behind on their mortgage, their marriage is splitting up, or they have a better job offer in another state. There are dozens of reasons people will sell their houses below retail. We just have to find the ones who will sell cheap enough for us to make a reasonable profit.
Lastly, John said to have software in place that will allow us to print out an offer in five minutes or less. By making bunches of offers, eventually some will pay off. Make the offers with no up-front money out of pocket, unless an offer is accepted. He also said if we are not a little embarrassed by our first offers, we are offering too much! A lowball offer will offend some people and they will not answer, or they may send us a nasty note. Most may just decline our offer, but occasionally someone will counter with a decent offer. John says to keep track of all our offers and send a second offer maybe a few weeks later to the ones who do not respond. Sometimes, after the second or third offer we send, they will make a great deal with us.
John is the president of Bridgewell Capital, so if you find that great deal, be sure to talk to John about financing it!