Volume 7 - Is a Realtor Friend, Foe or Competition?

The reason is that you and the Realtor are in different businesses:

• The Realtor is in the business of listing/selling houses for sellers and finding homes for buyers.
• The Realtor makes a commission which can be anywhere from 10% to 7%, 6%, 4%, 3%, or a flat fee ranging from $995 to $350 or even $150.
• In order for the Realtor to make money, certain things must happen:
  1. The house must appraise.
  2. The buyer must qualify for a new loan.

The investor is doing almost the same thing.

• The investor - YOU - are looking for sellers who must sell their homes and buyers who must buy a home.
• The difference is in the income. While the Realtor makes a commission on each sale, the investor's income is virtually unlimited.
• Usually the investor can make an average of $35,000 - frequently even more - using techniques described in previous issues of MREM and Million $$$ Secrets.

Let me sidetrack for just a moment to explain the difference between a Realtor and a licensed real estate agent. The Realtor is licensed by the state as a real estate agent to list and sell real estate. The Realtor is a member of the Board of Realtors in their area. The Realtor has access to the MLS - Multiple Listing System - which is controlled by the Board of Realtors.

The licensed real estate agent is licensed by the state to list and sell real estate. But this agent is NOT a member of the Board of Realtors and does NOT have access to the MLS. You will find many agents/brokers who are not Realtors because they may specialize in property management, investments for certain clientele, commercial properties, or their own real estate investments.

For the purpose of this issue of MREM, we'll use the term Realtor since you are most familiar with that.

Now let's analyze the money. If a Realtor lists a home, sells it themselves, and gets the full top commission of 7%, their gross income is $10,700.

Since I was in that business for many years (real estate agent/Realtor), I know the costs of doing business for any real estate professional runs somewhere between 23% - 45% depending on how much advertising is done. Let's take an average of 34%. Using that number - which is very realistic - the Realtor's net income is $6,930 on the gross commission of $10,700.

The investor, on the other hand, can easily net $35,000 on the same property with expenses of only a few hundred dollars.

Let's take a look at the same house with a sales price of $150,000.

• Seller's expenses on the sale average 10% of the sales price. This includes 7% commission, 2% for costs of sale plus the seller pays for the appraisal, title insurance, and often the points on the buyers' new loan.
• If the buyer is a VA buyer ($1 down), then the seller pays ALL the costs. This could easily be 15-17% of the sales price of the house.
• The best scenario for the seller is that he will net $135,000. the seller is out $15,000.
• The worst scenario for the seller is that he will net $124,000 if his buyer is a VA $1 down buyer. The seller is out $25,500.

It is crucial for you as the investor to understand these numbers and how everything works. This is real life and real numbers.

This is the deal the seller gets from the real estate professional. No matter what the seller does, the property has to appraise and the sale costs him between $15,000 - $25,500. These are the facts.

You should now be able to recognize your potential as an investor. You are in a completely different position than you have been previously.

From conversations in the chat room and e-mails I receive, I realized that many of you think you have to beg the seller to sell you the house. NOT SO! The seller should beg YOU to take the house because you can offer them a much better deal than the Realtor/real estate agent.

This is a mind set situation. If you think you have to beg, then there is no help for you - Beg. But if you stop and think about it, you are a problem solver for the seller.

Why are you a problem solver? You can buy the house TODAY! The Realtor cannot do that. They can offer at best a few weeks, most likely a few months, until the house sells.

Time is money. There is a HUGE difference between selling the property today and selling it 6 months later. Further, when YOU - the investor - buys the house today, the seller knows the deal has a 99.9% chance to close because you and the seller can sign the contract TODAY. Of course the contract has to be contingent on verification of the loan(s) against the property, any liens on the property, etc.

The Realtor can also sign a sales contract TODAY, but before the closing can take place, the buyer must qualify for a new loan - a process that can take 4- 8 weeks. Plus, there is no guarantee the buyer will qualify. Plus it is highly unlikely the Realtor will find a buyer the very first day they list the house. It can happen because it did happen to me when I was listing and selling homes - it's just a very rare occurrence.

As an investor you bring a definitive day to the negotiating table. "Yes, Mr. Seller, you can move tomorrow." That's frequently more important than money. Remember - it depends on how you condition yourself. You are either a fantastic problem solver or a pathetic beggar. It's up to you to choose your own role.

You have to develop a little bit of an attitude with the sellers. "Here is my deal. It's the best deal you will ever get. Take it or leave it." Don't be blatantly arrogant, but make it clear that if you don't buy their house, you'll buy the next one. Remember the word NEXT!

Never, never go to any seller with a "please sell me your house" attitude. It will never work.

1. You are the investor who is there to solve their problem.
2. You can offer the best deal.
3. You can sign a contract TODAY.
4. You can give the seller more money.
5. You are an "angel sent from heaven."

Another advantage the investor has over the Realtor is that the investor doesn't need permission from anyone or any agency to offer whatever he or she wants to offer the seller. The Realtor has all kinds of barriers in the way to try to be equal to your strengths ... and he or she STILL cannot accomplish half of what you can.

Why can't the Realtor accomplish what you can? Because the Realtor has no control of the situation. On the other hand, you are 100% in control of the deal. The Realtor:

• Must have the Broker approve the transaction.
• Must follow the rules and regulations of the state and the Board of Realtors.
• Cannot control the loan officer.
• Cannot control the buyer, especially if he or she is the listing agent.
• Doesn't have much say in the findings of the surveyor or appraiser.
• Has to wait until after close of escrow to get paid.

On the other hand, you as the investor:

• Don't need a new loan and/or a loan officer.
• Can do your own appraisal.
• Can tell the seller he has to pay for the surveyor if you think a survey is necessary.
• Can decide whether or not to sell the house to a particular buyer based on instinct and information you get from the buyer.
• Get paid the day you find the buyer. Why? The buyer must have the down payment NOW because you will be closing in just a few days - not weeks or months.

  If you find your buyer today then today is the day you get $6,000, $8,000, $12,000 or whatever the down payment is in your "hot little hands." And it is all yours except for what you owe the seller - if any!

You negotiated with the seller to give him $4,000 and you were able to sell the house with $12,000 down. You keep $8,000.

Now look at the Realtor. Even if he sells the house the very first day it is listed, he has to wait for his commission check until escrow closes, all the documents record, his office deposits the check from the escrow company, and then he gets his check. This could take 4, 6, or even 8 weeks. If YOU sell it today, you get paid today.

And the Realtor takes the risk that the buyer will not qualify. After taking the house off the market for weeks (or months), the seller is upset and will usually cancel the listing. Now the agent is out of money altogether ... he did all the work for nothing! This happens to every agent - no exceptions. It even happened to yours truly!!

Now you may be saying to yourself, "George the seller has a contract with the broker for the listing. He just can't cancel it." Well, read my lips: Don't believe it.

There is no broker who will take legal action against any seller who wants to cancel a listing. Trust me on that one. The reason is that it is bad for business.

• It is costly to hire an attorney who will want a retainer of at least $2,500 up front plus costs of filing and serving the complaint. Plus legal costs down the road.
• It is bad public relations for the company. Is the broker really going to sue a seller in his own neighborhood where he is trying to do business? NO!
• The broker is in the AGENT business, not in the business of listing and selling homes. I'll repeat it again. The broker is in the AGENT business. He splits the commission with his agents and makes money from the fees he charges the agents such as administrative and franchise fees, photo copies, insurance ... fees galore! I learned this from experience. The broker is not interested if the seller sells or the buyer buys. He expects the agent to get the job done - correctly and legally. This may shock you, but I found it to be true.

But let's continue in this analysis because it is very important that all of you understand it. As an investor YOU are in the driver's seat! You control the outcome of the deal 100%. You control the deal 100%. You control the money 100%. The Realtor doesn't control ANY of it. The Realtor must hope and pray everything works out smoothly and correctly. There's a big difference between being 100% in control of the transaction as opposed to "hoping and praying."

Let's analyze some numbers to see how and why you make 6X more money than the Realtor on the same house.

The Realtor's offer is $135,000 net and it may close in 4 weeks. YOUR offer is $140,000 net and for sure today!

It's the seller's choice. But, you have to show the seller the numbers, and the time frame involved. You have to put yourself in the driver's seat and become the "savior" instead of the "beggar."

Okay. Let's say the seller takes your deal. If the property easily appraises at $150,000, then you should be able to sell it easily at $159,990 because you are offering terms - no qualifying, NO credit check, NO job verification, NO waiting (they can move asap), and NO hassle. The only thing the buyer needs is CASH for the down payment.

At $150,000 this property may be out of FHA limits (3% down) and will probably require at least 10% for the down payment($15,000) + 3% for closing costs. The buyer would need at least $20,000 to get into the house.

Of course, you want to get as much money for the down payment as possible. If you have time - the sellers want to move in 2 months - then you can pick and choose and wait for the right buyer. I suggest you don't wait. Get the best buyer you can get as fast as you can, sign the contract, take the cash, and go on to the next house. Some investors play the game of seek and wait for the best fish .... I don't.

Onto the numbers:

• We sell the property at $159,990 with $15,000 down. (Now is the time to book the cruise because $10,000 is YOUR money. The other $5,000 goes to the seller when you close with the buyer.)
• Now we create a new note for the new buyer at $149,990 at 8.5% interest, amortized over 30 years, with a monthly P & I payment of $1114.85.
• To make it easy to calculate, let's assume the seller was cashed out with $5,000 and his remaining mortgage balance is $135,000 at 7% interest, amortized over 30 years, but has been paid down a few years. The monthly P & I payment is $898.16.
• The difference between YOUR NOTE - yes, YOU are the BANK as far as your buyer is concerned - is $216.69 - your monthly residual income.
$1114.85 (the buyer's payment to you) - $898.16 (the payment due to the underlying lender).

I did not put the taxes and insurance into the payment. They should be the same as what is being charged by the underlying lender. Because you are the bank, by law you can create a reserve amount (impounds) that the buyer has to pay in their monthly payment.

Yes, YOU are the BANK! You are providing financing for the buyer. You are just like Chase Manhattan ..... you just don't have the same money - YET!

Many of you don't seem to understand this very important principle of the Million $$$ Secrets program. I talk about it on the web site, in past issues of MREM, in my books, and in every e-mail I get on the topic. YOU ARE THE BANK!

The majority of people who study my system just cannot accept the facts I outlined in this issue of "Mr. Real Estate Monthly." I believe it is a mind set and you have to make your own choices.

You can work the program from strength, that you are in the driver's seat and that you are the bank for the buyer, or you can work it from weakness waiting for little drops of success to come to you.

Let's continue with the math. We now have $15,000 down. $10,000 is ours. $5,000 is in a "quick interest account" and we give this to the seller when we close with the buyer. The buyer's payment is $1114.85 and you can increase it for the impounds anywhere from $10 - $30 a month. It's up to you - you are the bank!

Banks get sued all the time for withholding too much money, too high impounds, charging for mortgage insurance after the loan has been paid down below 80% of appraised value, etc. The chances are pretty good your buyer will not sue you. The banks laugh at all the "class action" law suits because they have millions of customers. If they rip off customers today, they repay the money ten years later! In the meantime they made interest on a ton of money and they are "laughing all the way to the bank."

Unfortunately, people know very little about their financial affairs. They have no financial education and have no clue they may be ripped off. There are probably 100 million Americans being cheated by their mortgage company. But it's very difficult to fight against "financial giants." You need lots of money and a huge class lawsuit to even get noticed.

Anyway, we wrote the contract with the buyer for 5 years. Every month we get $238.36 from the buyer - rain or shine. Now, follow closely and don't get confused on me.

• Buyer's P & I payment is $1114.85. Property taxes are $1200 a year and insurance is $600 a year. So the buyers PITI payment includes 1/12th of taxes + 1/12th of insurance + your impounds for reserves (3% of the total P & I payment) and totals $1298.30.

  $1114.85 - P & I
  $100.00 - Taxes
  $ 50.00 - Insurance
  $ 33.45 - Reserves
  $1298.30 - TOTAL PITI PAYMENT

  This payment is ideal. It is just below $1300. Keep the payment just under the next $100 increment. In other words a payment of $1307.89 doesn't work as well psychologically as $1298.30

  Now let's take a look at the original seller's payment.
  $898.16 - P & I
  $100.00 - Taxes
  $ 50.00 - Insurance
  $1048.16 - TOTAL PITI PAYMENT

  Now, the original seller's payment could have reserves, have mortgage insurance, be calculated incorrectly, the tax assessment could be incorrect, etc. But as the new owner of the property, you can get everything corrected - if you know how, whom to contact and what to do about it. Remember, if the tax assessor overtaxed the property, it is YOUR money.

  Now, let's continue. The difference between your buyer's monthly payment and the original seller's monthly payment is your residual income. It is your livelihood!
  $1298.30 - Your buyer's monthly PITI payment
  $1048.16 - The original seller's monthly PITI payment
  $250.14 - Your Monthly Residual Income

  You get this money every month. The Realtor doesn't get any residual income. This income is what keeps you in the business, regardless of the economy and what's happening in the Middle East.

  Let's go on. Your contract with the buyer is for 5 years. Your contract with the seller is for 5 1/2 years. (Always keep a little cushion just in case something goes wrong.)

  5 years = 60 months X $250.14 = $15,008.40

  Now comes the final leg of your profit. We created a new loan for the buyer and a new note in the amount of $144,990 (and then we took a cruise with $10,000 in our pocket) and established that the seller's mortgage is $135,000 and has been paid down a few years.

  This is crucial because the new note of $144,990 will be reduced very slowly for the first five years because most of the payment for the first five (5) years is interest - very little principal is paid down.

  However, that scenario is reversed with the note you inherited from the seller since his note has already been paid down a few years. The principal on this note is being reduced much faster than the principal on the new note you created for your buyer.

  What this means is that in 5 years when the buyer has to refinance, you'll make more money! To keep the numbers simple, let's say you make just $1,000 extra - but it will be much more. $144,990 - Buyer's Note
  $135,000 - Seller's Note
  $ 9,900 - Balance due to you
  $ 1,000 - extra
  $10,990 - GRAND TOTAL DUE TO YOU

  Now let's add up the money you made on the property.
  $10,000.00 - Buyer's down payment
  $15,008.40 - Your Monthly Income
  $10,990.00 - Difference between the two notes at the final close of escrow
  $35,998.40 - GRAND TOTAL PROFIT FROM ONE PROPERTY
  

  You made $35,998.40 in profit versus the Realtor's net of $6,930 on the same house! And your expenses are almost non-existent: A few ads in the paper, a few hours showing the house to prospective buyers. Oh yes. You also paid for your subscription to the "Mr. Real Estate Monthly" - information worth its weight in gold. Oops - It's electronic! Oh, well, you know what I mean. You'll never find this kind of information anywhere else.

  Now here comes the part I didn't mention yet. Your yearly tax deduction for interest and property taxes on the property is around $11,000. You make about $3,000 a year in income ($250.14 x 12 = $3,001.68). But you can claim the interest deduction of $11,000 on underlying loan which you are obligated to pay. Hmmmm .... I'll leave the rest to the tax experts.

  There are a few more things to cover here.

  • Even though you record the Memorandum of the contract, there is no record of the actual transaction so no one knows the actual numbers except you and the buyer.
  • The names of the buyers and sellers could be hidden under corporate names.
  • If you don't tell the IRS about the transaction, IRS won't know about it and have no way to find out what the actual numbers are.

    People get very puzzled here. Don't! There is no record about leases or rentals. And, let's face it, the contract of sale is a glorified lease agreement that can last for 30 years.

  Be careful as far as the IRS is concerned. They will say there is no way to make money as I described here for you. They have no classification for it. If you tell them what you are doing, they will be confused. The IRS has two categories for real estate investors and you don't fit into either of them.

  But this is something you will have to discuss with your tax accountant who may tell you to depreciate the properties you bought on contract ... for the next 25 years! WOW!!

  As you can see, this issue of MREM is different. I wrote it so you can put both you and your business into the proper prospective. Yes, you are in the driver's seat as the Lone Ranger. I am your Tonto - advising you what to do.

  
  Click Here to continue to Part 2.

  
  For more information about the "Mr. Real Estate Monthly," and how to order your own subscription, click on the link below:
  http://www.roadtowealth.com/mrrealestate.htm

  
  
  

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