The New Economy Real Estate Model – A Soft Sell Concept

As far back as the 1970’s Sears envisioned a kiosk in their stores where a customer could buy stock and even real estate. It was a bold look at the future from one of the world’s largest retailers. All they had to do was to get the consumer to come to their stores to do business. This was quite a challenge thrown down to both Wall Street and Main Street USA. Most of us probably never heard or remember this strategy, and it never got off the ground. People just did not equate Sears with stock or real estate; they were a department store.

In fairness to Sears, the technologies and conveniences did not exist to enable the plan. Sears may have also thought themselves too big to fail. That theme does seem to be a constant.

Hmm, it appears that history does indeed repeat itself, and perhaps at shorter and shorter intervals. It may be ironic that by speeding up processes and the rate at which things can change, the lessons of history are lost at a quicker rate. Did that make sense? If it did, you may be thinking a bit like me – you’ve been cautioned.

In the 1980’s the successful real estate agent became more independent and needed fewer and fewer services from the brokerage firm. As they claimed a higher and higher portion of the brokerage fee, margins for the real estate brokerage began to shrink. Some phenomenally high interest rates had a similar impact on the mortgage banking industry. Unless buyers had no choice, they did not take on these inflated mortgages. The mortgage industry literally shrunk along with their profit margins. We all know that real estate cycles; it goes up and it goes down. The curve is rarely smooth, and is punctuated by sharp turns in one direction or another. Most features of the real estate industry react quickly to the conditions in the market that affect it. Now we have the background for the next attempt to create a commodities market from the real estate process.

In 1974, the Real Estate Settlement and Procedures Act (RESPA), as amended, were passed. It opened the door for consolidations within the industry. To foster competition, companies were regulated to prevent abuses in the industry and to keep prices to the consumer lower. It was almost ironic that the very act that was passed to prevent abuses, in a way opened the door. I don’t know that it has empirically been demonstrated that RESPA actually lowered costs or prevented abuses. With HUD as a watchdog, there was little real enforcement, and although fines were levied, industry practices ultimately were left to the states to manage. It took decades to sort it out, and Wall Street only a few months to make it yesterday’s issue.

The point for mentioning RESPA was that it allowed what was called “controlled business entities,” a term later changed to “affiliated business entities.” The home builder and the real estate brokerage could now have a captive mortgage and title business. The theory was that this would somehow create efficiencies and economies lowering the cost and improve service to the consumer. It didn’t. With all of this vertical integration, each one of the independently managed businesses was caught in the same financial wringer.

Addicted to Real Estate – Seven Figures Easily

I often tell people that becoming a millionaire in the real estate business is an easy thing to accomplish. They usually give me a look of bewilderment. I say that you don’t have to understand every aspect of real estate in order to begin investing. The best thing to do is start with a basic buy-and-hold strategy purchasing whatever type of property you are capable of buying with as little money down as possible. How you buy something with as little money down as possible depends on your financial situation and what types of mortgages you’re capable of qualifying for. Since guidelines for mortgages and government intervention changes daily, it’s impossible for me to tell you the best way to do that. I can tell you how I did it for years using the all-money-down technique I described earlier in the book. But I’ll give you a quick refresher course below.

If you bought $100,000 house through conventional means, you may have to put 20 percent down is $20,000 plus closing costs that will cost you approximately $3000. In this example, you put $23,000 down to buy $100,000 investment property. Using the all-money-down technique, you would buy a $100,000 property for cash putting all $100,000 down plus the closing costs of $3000. At this point, you have $103,000 down on the property and you begin to invest an additional $5000 to fix the property up. You now have a total of $108,000 of your money into the property. You put the property up for rent and you find a good tenant, so now you’re empty investment property is a business making money and shows a profit. Now you go to the bank and you get the property appraised with the intention of doing a cash-out refinance. Because you fixed up the property and it’s a money-making business, the property appraises for $114,000. The bank is willing to lend you an 80 percent mortgage on the $114,000 appraisal giving you a mortgage of $91,200. You originally put down $103,000 and received back a mortgage for $91,200 making your out-of-pocket costs $11,800.

When using the all-money-down technique as compared to buying a property through conventional methods, you save $11,200. Now of course, you’re going to have a higher mortgage and less cash flow coming from the property, but you’re also going to have $11,200 to buy the next property with.

Sometimes the homes you buy are going to cost you $10,000 to buy; other times you’re going to break even on the deal. You might even be lucky enough to actually get paid to buy a house, which has happened to me once or twice. The goal was simply to just keep buying as many properties as possible until you build up a portfolio worth millions of dollars. You will make a profit from the cash flow, but most likely that’s going to go back and do things like repairs and vacancies in all the other issues that come up with real estate. If you do end up banking $10,000 during the year from the cash flow of your buildings, there is your down money to buy an additional property and expand your portfolio further.