What You Missed February 2016 General Meeting
by Rob Earhart
Building the Deal That Will Close
Presented by: Peter Fortunato
February 2, 2016
“Before I was in real estate I was in High School,” exclaimed Pete. “My guidance counsellor was really upset when I told her that I wanted to be unemployed; not like living under a bridge, but ‘comfortably unemployed’ with money.”
The only problem was that, just out of high school, how much capital do you have to invest? Zero. So I decided that I needed some income and became a real estate agent. In 1965, I figured I could do anything I wanted if I had $12,000.
First I had to earn it, then I had to avoid taxation, and then learn how to earn money on my money.
Today, I figure I have to have $4,000 per month to live like I want. In my area, I can get $1,250 per month rent and figure I would net $700 so would need six houses to get the income I need.
If I tried to save up for those houses, I would still be waiting to buy my first house. You can’t save enough money to buy properties, so how do you find the money to buy now? “You have to find someone who has an uncomfortable situation and help them solve it,” proclaimed Pete.
My first property was a triplex that I sold to a couple and they did a lot of work to improve the property. Then, he got a great job offer in another state. “How hard is it to manage a property that’s far away?” Pete asked. That house went from a wonderful home to an anchor. He just wanted to get $3,500 back and the home was fully assumable. All I had saved was $1,900 to that date.
To whom do you go to get the money? You first go to the seller of the house. “Once he turned me down I talked to everyone saying I needed $1,600,” suggested Pete. “The only one who would lend it was my Mom and Dad.” Remember, I have never found any good deals, but I have constructed many good deals.
“What are the three values in real estate?” he asked. Growth is something that will increase your net worth. Amortization will also enhance your net worth. Cash flow is another income stream and wealth builder.
Business people look at profits after the property is sold and investors look at cash flow and the tax benefits of houses.
When I was making $8,000 per year, I was taking courses in taxes, courses in 1031 exchanges, courses in negotiation, etc. I was finding how to build an investment program well before I needed it.
Why are 1031 exchanges allowed? Because when properties were traded there was no money changing hands and the government did not know how much money was being traded. Since we now have “like-kind” trades, the Government now sees how much money is being traded and cannot resist tapping into it.
When you are negotiating with people, the one thing you have to get across to them is how trustworthy you are and that you will be paying them for their equity. Pete explained, “It starts with building rapport. Just talk to them and discover what’s in the deal for them.” The next part of the equation is competence and trustworthiness. Then you have to give them collateral. It has to be a secure deal in order to complete it.
Pete then drew a “T Bar” on the screen and explained how to use it. “The reason people act is that they are better off and happier than if they did not act,” said Pete.
In 1982, I was 35 years old. In 19 years I had acquired 35 houses. When the kids started school, I wanted to spend more time with them. So, in 18 months I sold 13 houses to leave me with 22 houses. I cash flowed $100 per day to live. We got that from the mortgages when we sold the houses. In 1995, my children were launched and our income had dropped, but I did not need the income so I traded it for a really nice house.
Deals are built on what people need and will make them happy. Fast forward to 1986. My daughter was going to a private school and I was there all the time assisting the teachers. They asked me if I would drive some of the 10 year olds to Busch Gardens and I agreed. Once we got in, they rushed to get a coke but I stopped them and explained how for every one dollar they spend, they give away one cent a day for the rest of their lives. There was a long pause until I explained how they could invest in the process and live comfortably.
The school put on an assembly so I could talk to the 10 year olds about financial planning. The principal thought they were a little young but did it. I started by asking them if they would come to my house and cut my grass for $15. They would have to pull the long ones by hand and it would take several days. But then, if they saved some of the money they got, they could buy a lawn mower and cut the grass in an hour. They were using capital to buy the asset, the lawn mower. If they then rented the mower out, they now had income from their assets.
I had a house to sell for Jack Miller and a young couple had a Shelby Mustang but needed a house. I worked the deal and took the Mustang in for my profit for selling it.
I had a Realtor tell me to check out a house. The lady of the house was there and I asked her, “why would you sell a nice house like this?” She tearfully said her husband had just died at 47, unexpectedly, and she could not afford the payment. She was paying $1,000 per month and needed to get the payment down to $700. I found that she owed $5,000 on a car with a $350 per month payment. I paid her $5,000 to pay off the car and got an option to buy the house in 5 years so she could afford to stay there and her daughter could continue to go to the same school.
Expenses escaped are part of their return and get away from people, so you have to check on every expense.
I had four kids that I talked to that purchased houses and one child told me that he and his dad bought a Pepsi machine and went to Sam’s club to get the sodas. He said that he makes $75 per month without having to work.
Everybody says they want cash but that is not the case. They want what the money will buy and you just have to find out what they really want to do with it. “In the event that I could show you how to get 30 times the amount of interest than you will get in the bank, is there any reason we could not do this deal?”
Pete then described how some of his many deals were structured and how you need to create your deals. Jack Miller used to say putting your house in the MLS is like putting it in the Bible and praying for a sale.