Strategy #5 - "Foreclosre Consultant"...

Strategy #5 is actually a New Entry into the list of "Fundamentals" of real estate investing strategies and comes about due to a change in the laws of the state of Maryland. While it is currently unique to Maryland real estate investors, it is worth paying attention to because of the groundswell of state legislation regarding real estate and foreclosures/pre-foreclosures.

In 2005, the Maryland legislature passed a law, widely known within the state as SB-761 (State Bill - 761), it raced through the legislature in January and was signed into law by the Governor in April.

Without getting into all the specifics, the simplified (very simplified) version of what has happened in Maryland is that it is essentially illegal for an investor to communicate directly with a home owner who is facing foreclosure when the investor provides "consulting services" and then moves forward to the purchase of the property. Now before you get out your dictionary and start crafting your own definition of "consulting services", note that the law defines what these services are and the list if very broad.

In addition, the law also create a definition of a third-party person who would come in and assist the homeowner in financial distress and labeled this person as a "Maryland Foreclosure Consultant". Again, the law defines what this person is and what this person is allowed, as well as is suppose to do. What is interesting is that the law does not require these Maryland Foreclosure Consultants to be licensed or regulated. It does, however, clearly allow for them to be compensated and does spell out the types of services they are to perform and the technical requirements of what is suppose to be in the documents they use.

A number of very intelligent people have looked at this new law and come away with slightly different interpretations of some of the specifics. HOWEVER, one area that everyone is in agreement on is that in 2005 the Maryland Legislature and Governor essentially created an OPPORTUNITY for real estate investors to specialize in the niche area of Foreclosure Consulting.

When you step away from the law and look at this from a purely business opportunity view, what you see is the opportunity to do something in real estate that is not as burdensome as being a real estate agent, has none of the risk of wholesaling or other facets of the business where you actually take title and put up money, and yet can be very lucrative - if done correctly.

I personally know of one person who is a Part-Time Maryland Foreclosure Consultant who is making well over $125,000/year doing it - part-time!

This strategy is very close to Bird Dogging, but not 100%, has many of the same elements of Pre-Foreclosure & Foreclosure investing, but with many fewer "moving parts", and does not require a license. Therefore, strategy #5 is "Maryland Foreclosure Consulting".

Even if you do not live in Maryland, this strategy is worth looking at. There are a number of states including NY, North Carolina and Georgia who are looking to put similar laws into place in the coming years. DC is also taking a very close look at what is happening in Maryland.

Strategy #4 - "Bird Dogging"...

Bird Dogging a/k/a "Scouting" a/k/a being "the mouse", is where an individual scouts out leads on opportunities that they believe can be converted into deals, and then turns over the information to an investor for a fee.

It is a very simple strategy, has huge UPSIDE, and very little financial risk on the part of the investor because in this type of relationship typically the "Bird Dog" finds potential deals, but does not put anything under contract, does not offer up any earnest money and normally is not a party to the sales contract between the Seller and Buyer. All they are doing is simply identifying opportunities and then getting paid by someone who then moves forward on the deal. One of the reasons why it is a great strategy for new investors is that it gives the "Bird Dog" an excuse to get to know other more experienced investors and learn their "business model". To be really good as a bird dog you must know what the investor is looking for and why certain deals will work, while others will not. To do this you need to "get inside the investor's head", and normally an investor is more than willing to invest time and energy training someone who truly wants to learn.

Bird dogging is a strategy that has close to zero risk associated with it, but not ZERO risk. I say close to zero because in some jurisdictions it may be "illegal". Not illegal as in "go to jail", but "illegal" as the same as a speeding ticket or j-walking fine.

So, why in the world would I even think about posting information on a topic that may be "illegal". Simple, I know for a fact that in some jurisdictions not only is it NOT illegal, it is protected by law. HUH??

The issue comes down to real estate license law, with the fundamental question being: "Can an unlicensed person receive a real estate commission for participating in the transfer of ownership of a piece of real estate". and the answer is of course - "it depends".

A long time ago real estate transactions and real estate licensing issues came under what was called COMMON LAW. For those who may not be familiar with "common law", common law is when a court looks to decisions handed down by other courts (both outside the state as well as outside the country) in trying to determine how a matter should be settled. When a state actually passes a law, unless the law has been found "unconstitutional" by a higher court, then the court of jurisdiction must look to the statute and the intent of the legislature in the drafting of the statute for interpretation versus the "common law".

Because of the power of the National Association of Realtors(R) and their local state affiliates, the period of time during the 1970's - 1980's was a period where many state legislatures got very aggressive and passed a number of real estate transaction and licensing laws. THEREFORE, in almost every jurisdiction real estate matters are controlled by STATE statutes, and not FEDERAL Law.

However, anyone who makes a blanket statement that is applicable in all 50 states, the District of Columbia and US Territories (such as Puerto Rico and USVI) regarding real estate licensing matters is going to be DEAD WRONG.

I have seen posts on very reliable real estate investor websites in which supposed experts write that "Bird Dogging is ILLEGAL", however this is not true. Case in point, in the late 1980's the District of Columbia passed a law (commonly known as the Peggy Cooper-Cafritz law) that allows UNLICENSED individuals to in fact receive compensation for participating in a real estate transaction, a/k/a BIRD DOGGING. So in DC Bird Dogging (depending upon what is actually done) is VERY MUCH LEGAL. In Maryland last year the legislature passed a law (commonly referred to as SB-761) which allows for UNLICENSED individuals to assist homeowners in financial distress to sell their property and mandates that they do in fact "disclose their compensation". Therefore, in Maryland if you do what the law says to do, and specialize in the niche of Foreclosure Consulting, you can in fact collect what amounts to a Bird Dog fee, and not have a real estate license.

Finally, most real estate laws specifically state who can and can not accept a commission, and in most jurisdictions the law is "plain spoken" enough to figure out that a licensed real estate agent can only accept a commission from a licensed real estate broker. Therefore, in most jurisdictions, it is illegal for a licensed real estate agent to pay a finders fee to any one else, licensed or otherwise. HOWEVER, in several jurisdictions (including Virginia) an individual can now obtain either a "temporary license", or a license prior to completing their mandatory 60+ hours of instruction. Therefore, there are some instances where in fact a broker can pay a fee to someone who is acting in the capacity of a bird dog.

What is NOT CLEAR, NOR UNIFORM through out the entire 50 states is the matter of unlicensed individuals accepting fees from home owners, or home buyers. Some states have flat out made this clear, others have not. Therefore, anyone who says or represents that they have both "read" and "understand" the real estate license laws of all 50 states, the District of Columbia and the US Territories is probably not telling the whole truth.

So not to muddy the water, but whether or not "Bird Dogging" is allowed in your state (or territory) depends on the law. Best place to get a read on this, if you are unsure, will be at your local real estate investor club meeting from one or more of the more knowledgeable (senior) members of the group.

To the best of my knowledge, in some states (like Maryland) only a licensed individual or a Maryland Foreclosure Consultant can accept something along the lines of a Bird Dog Fee, and in some states/territories (like DC) the law clearly states that Bird Dog type fees are acceptable. And I suspect, but do not know for a fact, that most states and territories fall somewhere in between.

I know, a very long post to a very simple concept. But my hope is that you make money in this business and to do so you need to go in with your eyes "wide open".

Strategy #3 - Wholesaling vs. "Flipping"...

Strategy #3 is Wholesaling and quite honestly is one of my favorites, personally. It is the strategy we used to avoid financial disaster in 2001, when the events of 9/11 caused the collapse of my aviation business.

Wholesaling is when you get a property under control and assign your interests to another investor at a marked-up price.

And if it appears that I have chosen my words very carefully, you are correct!

Two things you MUST know before we go any further:

1 - It is a well established principal of contract law that EITHER party can assign a contract, unless the contract itself says otherwise. There is a lot of confusion in the marketplace about this - often times the source of the confusion are well meaning, but ill informed real estate agents and real estate brokers. Again - YOU CAN assign any contract (assuming you are a valid party to the contract) unless the contract says otherwise;

2 - Anyone can sell their own property without a real estate license. O.k., so what is property? Property is any tangible thing in which you have some from of ownership interest, including a fully ratified sales contract.

O.k., so before I get in trouble for practicing law, understand this, what I have just said, and will continue to emphasize is that this is about BUSINESS Advice, specifically in the area of real estate investing. NOT legal advice. If there is anything I have written that is confusing, or you are not quite sure about, you need to go speak with YOUR attorney and get her blessing before proceeding. And since everyone has "Pre-paid" Legal, or an attorney available to them, then this will not be an issue. Dudes, Dudettes, if you are investing in anything, or for that matter living in the US, you need an attorney. Someone to look over your shoulder. If you refuse to have a team of advisors, including an attorney, you really do need to turn off the computer right now and go back to watching re-runs of Gilligan's Island cause you're never going to get rich with a DIY (do It yourself) mentality.

We move on...

So wholesaling is the act of getting a property under agreement (contract, letter of intent, memorandum of understanding) and then assigning your interests to another investor. This is the theory, for the actual mechanics of how it works you are going to invest a little more time than simply reading a blog post. Something for you to now ask about when you attend the next REIA meeting or National Real Estate Investor Conference.

Wholesaling is great because it works in ANY market. When you have low interest rates, like we have seen over the past three years, and most of the "end-buyers" are rehabbers and first time home owners, you can wholesale to them. And when you get into a higher interest rate environment (like now) and the "buy/hold" investors start coming back into the market, you can wholesale your deals to this group.

However, what I like best about Wholesaling is that it GIVES YOU AN EXCUSE! That is an excuse to get to know more experienced investors. How? By agreeing to wholesale deals to them and in exchange for doing so, you get to know what they know.

Unfortunately, there is not enough space here to go into all the details of advanced wholesaling strategies, but I will come back to this in future posts. What I do want to touch on now is the need to stop confusing Wholesaling with "Flipping" - they are not the same. Or, more accurately, they do not mean the same thing in all circles.

The term "Flipping" comes from the world of Commercial real estate, where wholesale deals occur ALL THE TIME. On any given day in Washington, DC, or Baltimore, or any major city in America, smart and savvy investors are putting small pieces of property under contract (and making millions) with absolutely no interest in closing on the deals themselves. These street-savvy investors fully intend to take their contracts and assign them to investment groups with much deeper pockets who are in the process of "assembling" a city block to build a huge office building. The larger investors often times encourage the smaller investors to do this because if the property owner really knew XYZ Corp wanted their property, the price would quadruple. A few years ago, the term "flipping" slid into the language of the folks doing single family deals. "Flipping" originally meant to "flip" ones contract.

However today "Flipping" means many things, including "going to jail". HUH???

Yes, in 2003, the Federal Government (HUD) issued a ruling that broadly labeled "Flipping" as illegal. This ruling has to do with collusion and other bad stuff that resulted in a number of mortgages (which were insured by the Government) going into default. This HUD ruling has absolutely NOTHING to do with wholesaling, but most people do not care about details. They hear the words "illegal" and "flipping" in the same sentence and go no further.

In addition to the HUD ruling, HGTV started producing a television show called "...Flipping...". Again, this show has nothing to do with wholesaling. In the HGTV show (which is a knock-off of a British Show called Property Ladder), the participants buy, rehab and then sell houses. If you have ever watched this show, you would know it is probably something you will never want to do, unless you want to drain your savings account and end up in divorce court.

Unfortunately, whether it is a Federal Ruling, or a TV show, the term "Flipping" has come to mean different things to different people. Therefore, it is probably best to not even use the term.

Wholesaling will make you money. "Flipping" may, or may not get you into trouble - depending upon what type of "Flipping" you are doing.

Again, in a future post (after I get through the other strategies) we'll come back and discuss the various ways to make money wholesaling. For now understand this: Wholesaling works in ALL real estate markets, regardless of interest rates, or the economy.

Strategy #2 - "Buy-Hold"...

By far, Strategy #2, Buy and Hold" is what most people think of when they think about getting wealthy in real estate.
And quite honestly, they should as it is a "Sure-fire" proven winning strategy. The question, of course, is why?

The answer is somewhat complex, not complicated, but complex. However, it can be reduced to one sentence:
The rules (at least in the United States) are stacked in your favor. Seriously, the tax laws favor "buying and holding onto" real estate, the Constitution provides for the protection of the asset that are unmatched when compared to other assets such as gold or stocks, and most importantly, you can get 90% (or better) financing for real estate, which is not possible for any other asset such as mutual funds or a privately-held equity interest in an operating companies (such as your own).

Think about it. If you wanted to start a company today and needed start up capital and went to your banker, the first thing the banker wants to know is not can they see a copy of your business plan, no the first question they ask is "do you own any real estate", and if the answer to that is "yes', then they will be happy to look at your business plan and make a loan to your business (well below a 90% loan to value) as long as you are willing to let your real estate serve as additional collateral. Go see the same bank and ask for a real estate loan and they will make you a 90% loan and definitely not ask you to let your company stock serve as additional collateral for the real estate loan. In short, they'll love your real estate and avoid your company like the plague in underwriting their loans.

So, what is buy/hold? It is as the name sounds, you buy a piece of real estate and you hold onto it, allowing your tenants to pay off your mortgage, while the real estate increases in value. Sounds simple - it can be, if you know what you are doing (starting to sound like a familiar theme?).

Big mistake many investors make fall into two categories:
a) not "buying right" upfront;
b) not recognizing the opportunities in front of them.

a) Not buying right - as with all real estate decision making, you make your money when you buy the asset and recognize it when you sell it. Now in a buy/hold strategy, we have to modify this a little to say: "You make your money when you buy and you recognize your profit, when the mortgage is paid". Explanation: To make money in real estate you HAVE TO BUY RIGHT. Some times this means paying less than what is being asked, and sometimes it means being creative with the terms. And sometimes it simply means having the right financing for the particular deal. But bottom line, is that you have to avoid "over paying" up front if you are going to be financially rewarded on the back-end. Unlike other strategies that involve "quick cash" or a quick turn-around, when you buy/hold, you are recognizing your profits each month, without selling. How?

One way is through the pay down of the mortgage. Each month in an amortized mortgage (any mortgage that is not "interest only" will have some degree of amortization) you pay one payment that is credited to BOTH the interest and the principal. Therefore, with a 30-year mortgage, you will be paying down a little of the amount borrowed with each payment as well as the interest due. As Ben Franklin said, "A penny saved is a penny earned" - same is true of nickels and dollars! So with each mortgage payment sent in, you actually are "earning" a small profit with the pay down of the principal. So, in theory, even if the building does not go up in value, you are still earning a profit. Albeit, a very small one. Now, if the building is actually going up in value over time, then you are earning the profit from the pay down of the mortgage, plus the profit recognized from appreciation. But that is not even the "juicy" part.

The real "pay day" from a buy/hold strategy (assuming there is an increase in value occurring) is that periodically, you can refinance the property and any additional amounts you pull out from the refinance are TAX-FREE! Don't even ask me why - they just are. So. if you stop and think about it, anyone who has even a little business savvy should be looking for ways to profit from "Buy/Hold", because with buy/hold you can have your cake and eat it to. That is, you can own the asset, make a regular income from the asset and every once in a while refinance (rather than selling) and have a big hit of cash come into your bank account (as if you had sold it), tax free, and when you wake up tomorrow, the asset is still there - Cool!

Tomorrow, let's talk about you make "buy/hold" work for you, even if you have lousy credit, your spouse just left you and the dog bit you in the butt on his way out the door...

"We Temporarily Interrupt This Lesson for a Commercial On Buying Land..."

Was in the office late tonight working on a mailing going out this week, when I took a break to watch the news.

Instead of the regular 24/7 news programming, I clicked on to an infomercial advertising an upcoming auction for LAND.
And I think I got a peek into life on MARS :)

People jumping up and down about buying land... "10 acres, 40 acres, 100 acres!!!"

All, of course, going to the highest bidder.

YES! People excited about taking this "wonderful ride of their life" One person even comparing the opportunity to the "RUSH OF VEGAS"

What they failed to say, of course, is just where this wonderful land is located - Oops.

They are having a feeding frenzy and now along comes Sherman to splash some COLD WATER on the party.

Now, please do not get me wrong, I LOVE LAND. More specifically, investing in land.

But the #1 rule of investing in land is that: LAND IS INHERENTLY WORTHLESS! Land gets its value not from being land, but in what you can do with it.

Not saying the people I saw on the infomercial were getting FLEECED, no - not me. But they are probably correct in that they are about to be taken for a ride.

Land has transactional costs, holding costs and more importantly; It appears that the same company that was arranging the auction was also arranging the financing for the buyers. (Is it possible that the promoters are simply going to get a bunch of different fees for selling worthless dirt Oh my...) Not saying it is, but should this land prove to be "worthless", then the folks who bought in will ultimately have probably paid: Real estate commissions, Auction brokerage fees (the auctioneer gets a fee in addition to real estate commissions and normally it is the buyer who pays their fee, not the seller), legal (settlement) fees, interest payments and of course property taxes to the local municipality. In fact, the likely outcome is that after years of paying property taxes on land that has no value, the buyers will simply default and it will be sold at tax-sale (umm another late night opportunity). Actually, John Beck's stuff is not bad if you have not seen it. But back to this land sales program. It could be years before these uninformed buyers even realize just what a wild ride "Mr. Toad" has taken them on.

Real Estate investing is fun, real estate investing can be lucrative, and land (as a sub-category) can be as profitable and fun as any aspect of real estate investing.

In December we will be hosting a 4 day Commercial Property Summit, the correct way to purchase development land will be covered, but until then just remember this - Land is Inherently WORTHLESS. Land gets its value from what you can do with it. So step one in any purchase of land is to figure out what the Exit Strategy will be, then tie it up long enough to confirm that your plan is correct. Unfortunately, buying land (all cash, or with financing) as an impulse buy, with no clue as to what you will do with it cuts against the grain of intelligent real estate investing. The guy in TV got it right - its as close to Vegas as you can get, with Odds also stacked in favor of the house.

What I saw in that brief (but revealing) infomercial was not real estate investing at all - it was symptomatic of a "Get Rich Quick, and the Heck with the Details" mentality that has is evidence when an investment area has reached a peak. We are now in the phase where the idiots come to the party with their entire life's savings in the back of the truck -"looking for someone to give it to".

I think it would be interesting to go to one of these events, just for the entertainment value - But Invest in yourself, invest in learning how to do this real estate thing - the right way, But keep your money in the bank (or your self-directed IRA).

One guy's opinion.

Back to the 11 Strategies - tomorrow...