ROBERT ALLEN'S MONEY POWER SYSTEM FOR MAKING YOUR REAL ESTATE FORTUNE “STRATEGY UNITS” TABLE OF CONTENTS UNIT ONE: THE BIG PICTURE: THE CASE FOR REAL ESTATE AS A WEALTH- BUILDING VEHICLE General Considerations 1 Uncle Sam's Tax Reform 3 Real Estate: Still The Golden Opportunity 4 Income Potential 4 Depreciation (Tax Benefits) 5 Equity Buildup 6 Appreciation 7 Leverage 8 How Much Can I Make? 8 What Does It Take To Succeed In Real Estate? 9 What Is The Action Model For Real Estate? 12 General Considerations 12 Surprise: Real Estate Has An Action Model, Too 13 Put On Your Thinking Cap: PICNIC CAP 17 Chinese Boxes 18 An Assignment 19 i What Kinds Of Properties Are In Your Future? 20 UNIT TWO: HOW TO LOCATE ULTRA-BARGAINS General Considerations 1 A Few Terms You Should Know 2 Key Points About Finding Flexible Sellers 4 Two Kinds Of Flexible Sellers 5 What Causes Sellers To Be Flexible? 7 Personal Causes of Flexibility 9 Property Causes of Flexibility 11 Economic Causes of Flexibility 12 How Curable Is The Problem? 13 Narrow Down Your Search 15 How To Find The Bargains 15 Newspaper Advertising 16 Realtors 20 Referrals 26 Personal Research 28 Other Advertising 37 Efficiency Factors In Finding Flexible Sellers 38 A Note About the Win/Win Philosophy 40 How Well Have Your Learned? 40 Putting It All Into Practice 41 The Ten Most Asked Questions About Finding Flexible Sellers 44 UNIT THREE: ANALYSIS MADE EASY General Considerations 1 The Governing Focal Points 2 The Property Selection Grid 3 Four Test Cases 4 The Bargain Finder Form 5 Bargain Finder Checklist 5 Questions For The Seller 11 Assignments 11 UNIT FOUR: NEGOTIATING A WIN/WIN DEAL: THE "HIGH TOUCH" OF REAL ESTATE General Considerations 1 A Few Terms You Should Know 2 Key Points About Negotiating 4 ii How To Negotiate To Win 5 Three Major Objectives Of The Initial Contact 7 What Questions Should I Ask? 10 Fourteen Rules for Successful Negotiation 10 Rule 1: Negotiate In Person 10 Rule 2: Negotiate Price, Rates, Payments, and Dates 16 Rule 3: Ask Questions 20 Rule 4: Be Patient 23 Rule 5: Build Trust By Being Sensitive To The Seller's Interests 24 Rule 6: Use Pre-established Boundaries of Price/Terms Tolerance 30 Rule 7: The First One To Mention A Number Loses 31 Rule 8: Keep It Simple 34 Rule 9: Remind The Seller Of The Problems You Are Saving Him From 36 Rule 10: Explore "Stab-In-The-Dark" Offers 37 Rule 11: Persist and Persist Again 39 Rule 12: Take Time--Time Lessens Tensions 42 Rule 13: Be Flexible, Be Creative, Be Ready With Alternatives 44 Rule 14: Step Back And Give Yourself A Chance To Think 46 Negotiating Checklist 47 Reasons For Flexibility: And How To Turn Them To Your Advantage 50 Three Tactics To Try When All Else Fails 51 Applying The Win/Win Philosophy In Negotiation 55 How Well Have Your Learned? 56 Putting It All Into Practice 57 The Ten Most Asked Questions About Negotiation 60 UNIT FIVE: CREATIVE FINANCE General Considerations 1 The Major Factors Of Creative Finance 4 At What Price? 4 Using Whose Financial Resources To Buy? 5 How Soft Or Hard Are The "Other People" Involved? 5 With What Size Of Down Payment? 6 When Is The Down Payment Due? 6 In What Form Of Consideration? 7 At What Rate Of Interest On The Unpaid Balance? 7 For What Repayment Terms? 8 Creative Finance Score Card 8 A Hypothetical Case Study 9 Tricks Of The Trade 12 The Big Secret 13 Creative Footnotes 14 Six Universal Creative Finance Cookie Cutters 15 iii The Ultimate Paper Out 15 Blanket Mortgage 17 The Second Mortgage Crank 18 Wrap-Around Mortgage 21 Creating Paper 23 Lease Option 24 Assignments 25 Practicum 26 Chart: Situation Analysis Matrix 27 UNIT SIX: MAKING RISK-FREE OFFERS The Five Major Benefits Of The Written Offer 1 A Few Terms You Should Know 3 Key Points About Offers and Documentation 6 How To Document Real Estate Offers 6 Steps For Real Estate Documentation 9 Seven Common Mistakes Often Made By Beginning Investors 10 Negotiating The Ranges 14 Establishing The Value Of A Property 20 Which Elements Are Essential To The Real Estate Offer? 22 Documenting The Purchase Agreement Terms 28 Earnest Money Agreement 31 Detailed Explanation Of The Earnest Money Agreement 35 Using A Documentation Checklist 43 Providing For Contingencies 44 How To Make The Counter Offer Your Tool 46 A Note On The Need For Making Offers 48 How Well Have You Learned? 48 UNIT SEVEN: CLOSING THE REAL ESTATE TRANSACTION General Considerations 1 A Few Terms You Should Know 2 Key Points About Closing The Real Estate Transaction 3 Closing The Real Estate Transaction 4 A Typical Closing or Settlement Meeting 5 Closing Through Escrow 6 Help From Professionals 8 Considerations Before Closing 10 Checklist of Key Action Items In The Closing Process 11 Important Documents 17 Escrow Agreement 27 Making The Closing Go Smoothly 29 Considerations After Closing 32 iv A Title Closing Checklist 32 How Well Have You Learned? 34 Putting It All Into Practice 35 The Ten Most Asked Questions About Closings 37 UNIT EIGHT: CREATIVE MANAGEMENT PART A General Considerations 1 A Few Terms You Should Know 2 Vital Points About Managing Real Estate 3 Keys For Managing Real Estate 4 Key 1: Prepare The Property 5 Beware Of Yuppies 7 Look For Stable Workers 8 How To Find Out What Tenants Want And Are Willing To Pay 8 How To Outdo The Competition 12 How To Get Out Of Doing The Work 14 Key 2: Setting Your Rental Policies 16 An Aside: Consider The Lease Option 25 Key 3: Advertising 27 Key 4: Showing The Property 35 Key 5: Pre-Screening Your Applicants 40 Controlling The Appointment 43 How Well Have You Learned From Part A? 44 Putting Part A Into Practice 46 UNIT EIGHT: CREATIVE MANAGEMENT PART B A Quick Review 1 A Few More Terms You Should Know 3 More Vital Points About Managing Properties 4 How To Be An Effective Property Manager 5 Key 6: Watch For The Little Things 7 Key 7: A Good Application Is A Must 9 Verification Permission Forms 12 Key 8: Verify The Facts 14 Key 9: Choosing The Right Tenant 17 Key 10: Finalizing The Rental 20 Tenant Policies (Sample) 23 Key 11: You Are Running A Business 27 Key 12: Tenant Relations 34 Key 13: The Responsibility For Profits Is All Yours 38 Key 14: Your Tenants Have Responsibilities, Too 42 Key 15: Don't Forget To Say Thank You 47 v Key 16: Help Your Tenants Leave 50 Move Out Checklist 52 Key 17: When You Invite Tenants To Leave 55 Key 18: Stop Managing 61 A Note On Effective Management 62 How Well Have You Learned From Part B? 64 Putting Part B Into Practice 68 The Most Frequently Asked Questions About Managing Properties 71 Rental Application 79 Residential Rental Agreement 81 UNIT NINE: PORTFOLIO BALANCE AND CONTROL: CREATIVE ENDGAMES What You Will Learn In This Unit 1 A Few Terms You Should Know 2 Key Points About Portfolio Balance And Control 4 How To Balance Your Portfolio And Control Its Profits 5 How To Define Your Investment Objectives 8 Expanded Goals Of Portfolio Ownership 11 Basic Investment Criteria 17 How To Build A Portfolio 18 Creative Endgames: Strategies To Increase Profits 20 Split and Double 21 Controlling Your Portfolio Growth Through Diversification 22 Exercising Risk Control 24 Using Teams To Help You Control Your Portfolio 26 Using Options 28 Developing Real Estate For Profit 31 How To Recognize Good Development Real Estate And Turn It Into A Profit 33 What is a Good Development Property 33 How Do You Estimate Market Acceptance? 41 Site Analysis Form 42 What Makes Zoning The Key To Success? 49 How Do You Write An Offer For Development Property That Makes Sense? 53 How Do You Arrange Financing That Protects Your Profits? 56 A Note On The Risks And Rewards Of Developing Real Estate 59 How Well Have You Learned? 60 Putting It All Into Practice 63 The Ten Most Asked Questions About Material In This Unit 68 vi UNIT ONE THE BIG PICTURE The Case For Real Estate As A Wealth-Building Vehicle UNIT ONE THE BIG PICTURE The Case For Real Estate As A Wealth-Building Vehicle 1. GENERAL CONSIDERATIONS There are compelling reasons to be active in the real estate investing field today. For many years, real estate investors have spoken of income property as the "ideal" investment. They have used the word "ideal" as an acronym for the five key factors of real estate investing that have made it attractive over the years as an investment alternative: (1) income generation, (2) depreciation (tax advantages), (3) equity buildup through tenant debt service, (4) appreciation, and (5) leverage. By now, most people who have been active in this field or who are now in training for it are familiar with this succinct formula: Unit One, Page 2 I = Income from rents D = Depreciation (tax benefits allowed by Uncle Sam) E = Equity buildup as tenants make their payments A = Appreciation as the value of real estate grows L = Leverage through the use of "other people's money" For historical reasons, we have to conclude that this formula is in part true, and in part misleading. It is important to enter the real estate field with a clear picture in mind of its advantages and disadvantages. That is why we begin this course with a little reality therapy. There have indeed been times during the past quarter century when equal weight could have been placed on all five of these important factors as dimensions of profit potential. For example, during the heyday of speculative real estate investing by throngs of beginners in the mid to late 1970's and early 1980's, even novices with only the most fundamental knowledge of this field stood a good chance to make a profit. The reason was that all five of the "ideal" factors were at work at the same time. Income from rents were not yet widely under pressure from factors like rent control. The government gave generous preferential treatment to real estate investors through tax write-offs in Unit One, Page 3 the real property arena. Equity could build up relatively quickly. Appreciation was advancing with unprecedented vigor in many sectors of the economy, such as California. And leverage was just becoming a household word as a number of celebrated "gurus" were active introducing the secrets of OPM to millions of receptive would-be investors. Such ambitious investors were being enticed out of the side streets of Everywhere, USA, by ambitions to create for themselves a higher quality of life via the American Dream. But a funny thing happened on the way to the real estate closing. 1.2. UNCLE SAM'S TAX "REFORM" In 1986, the government "reformed" the tax laws in a major way and, for all intents and purposes, clipped the wings of this kind of investing, except for a few lingering and selective advantages. At the same time, appreciation took a U-turn in many areas of the country. And thousands of new investors who had jumped into the fray with minimal business sense found themselves enrolled in the School of Hard Knocks--without a scholarship. All of this (believe it or not) was really for the best. It meant that the "IDEAL" investment had to be spelled a little differently: "I-d-E-a-L," with a small "d" and a small "a." Let's see why. Today's real estate investors can still enjoy the benefits of income generation through tenant debt-service. They can still enjoy equity build-up (even while they are asleep at night). And leverage is still a vitally important dimension (in many respects the most important dimension) of this type of wealth building. However, the tax benefits of owning income real estate have been seriously reduced when compared with those available in the "good old days," and appreciation is at best regional and unpredictable because of the downward economic trends of the past five years. The consequence of this historical shift has been to place real estate investing forcefully into the only context where it makes any kind Unit One, Page 4