Announcement 1: The Secret Life Of Michael Ross

Duane,

Thanks for asking about Manny.

Basically what Manny offers in his Program is a Contract For Deed (CFD). Manny can help with Negotiations (A big plus as far as I see it) and Drawing Up the Contract.

The idea he proposes is this...

Get the house on a CFD, with an agreed upon sales price Above the current asking price. Don't be concerned about this as the payments you make come off of this price and Add to the price at the same time. (It's all done with Math and Interest rate. I'll show you this further down the page.)

After a couple or five years - whatever the deal was for - you Then approach a bank to Refinance and Cash Out the seller. The bank is less likely to make you jump through hoops because...

1. You have proven your ability to afford the property thanks to your payments.

2. The amount you paid over the course of the contract is deemed as Deposit already paid.

3. The amount being financed is Less than the property is now worth.

Now. Before you say "No one will go for this" you need to now some more...

The properties being targeted for acquisition are Vacant. They are NOT the Primary Residence (PR) of the owner. And this is important because...

If the property is the PR the owner wants to be Cashed Out so they can either downsize and have cash left, or upgrade and so they need the cash.

A dwelling that is Not a PR is not needed to be cashed out right away. The owner had Probably been renting it or something. So they are More Likely to go for it.

Manny gives you some ads to use to have people with vacant homes Call You. And those ads do work!

I ran a few ads and had maybe a dozen callers offering me their place. And even though the ad specifically said Vacant I had people call who said they could Move Out to elsewhere.

My problem was... the people who called all wanted ridiculous amounts for their places. Like one guy who had a duplex pair and wanted over $400k Each! I could buy an entire home elsewhere for less than that.

And I was faced with this because the city I was living in at the time was going nuts. A real estate client I had at the time remarked to me that in all the years they had been selling real estate in the city (over 25) Nothing was like this. Homes would sell within days, literally. Another real estate client said about townhouses, a year or so ago we couldn't give them away at $145k, now we can't hold any at $285k.

In other words, no-one was hurting to sell. Any listing was virtually guaranteed a sale within 30 days. Longer than that and the ASKing price was total fantasy land. And that's who was calling me. I was advertising at the height of a boom so my timing was off - though I was still getting calls. I was getting calls from people who had a vacant home and who were willing to sell it to me on Terms. (Remember the three rules - buy at future growth area, borrow less than you can afford, keep money in reserve. Buying these places would have broken those rules.)

One thing to be aware of with a CFD... some jurisdictions consider them a Sale at the time the Contract is signed. So whatever Taxes the jurisdiction associates with a Normal sale are applicable on the signing. So don't go into something like this thinking you don't need Any money - you'd be committing the Leaving Yourself Short mistake. Think of it in all ways Like Borrowing From A Bank, as far as your numbers go. This point is so important I'll repeat it...

When buying with a Contract For Deed, think of it in all ways like borrowing from a bank, as far as your numbers go.

Let me give you an example...

If a bank says... you need 10% deposit PLUS an additional $5k for closing costs, then you know, if you want to buy a $200k place you'll need $20k deposit and $5k closing for a total of $25k. You'll be borrowing $180k which, at 7% interest gives you Interest of $12,600 ($242 per week).

If all you have is $25k and the $180k is the maximum you can borrow, acquiring this place could ruin you. You have no reserve money and a slight interest rate rise does you in.

The same rules should be applied to any places you acquire via CFD. The Payments MUST be affordable and you MUST have money left over after the signing. You may or may not - depending on what you negotiate - pay a deposit. And depending on your jurisdiction you may or may not need to pay closing taxes, levies and fees.

Here's how it Could work with Manny...

ASKing $200k. You agree to pay $218,500 and it breaks down like so...

Home Price $190k
Interest at 5% is $9,500
Contract Term is 3 years (total interest is 3 x $9,500 = $28,500

Total thus is $190k + $28,500 = $218,500.

If the property increases in value at 5% per year, after 3 years is it worth $231,500k. All you are borrowing is either $190k (if you were paying interest only) or a little less (if you were paying principal too). Either way, it's worth $41,500 more than the $190k you'll be borrowing. That's almost 18% equity to be considered a deposit - just about double the deposit the bank would have required from you to buy now.

This is how you pay more for the place - the owner Gets more than they asked for, they just have to wait a while to get it all. Tricky, eh?

Anyway. Manny's Program is good for people who banks want to make jump through hoops - such as business owners and those who may not have a full 10% deposit. But just because you can acquire a place without that hoopla does not mean you should forget your numbers. They are even more important because of the tendency to forget about them.

Paper (contracts) are Powerful things. They can help you - or - can make your life a misery if you mishandle them.

Currently in Australia, interest rates are around 7%. And those who broke the three rules and bought at the top of the market with little growth potential, borrowed the maximum they could afford and used all their money to do so, are now scared the rates will jump a quarter of one percent. In other words, a rate of 7.25% will do them in.

Heck, years ago I was paying 14% for a property investment loan! - and that was the cheapest money I could find at the time!! So it boggles my mind when I hear these people biatch about 7.25%, they just don't know how good they really have it. Of course, if they'd borrowed less than they could afford, kept money in reserve and bought places with as close to 5.2% return as possible (or greater) they wouldn't have the concern they now have.

Here's how that tiny rate rise does them in...

They borrow $400k for a place - this is the average in a lot of suburbs in this city now. At 7% their interest is $28,000 ($538 per week)! They rent the place out at $300 a week (about standard for such a place). The rent gives them $15,600 a year. Leaving them with a shortfall of $12,400 ($238 per week).

An extra quarter percent rate rise means an additional $1,000 a year about $20 a week ($80+ per month). As they were borderline already an extra $80 a month sinks them. Maybe they could handle half of that but not the full lot. This then forces them to live a bit on Credit Cards and pay the interest on the card (going further in the hole). At least until rates either come down - or - the lease expires and they can raise the rent.

BUT, if they raise the rent the tenant might leave to go elsewhere and the place is vacant - something they Really cannot afford.

If they had just bought a place 10% cheaper for $360k the interest would only be $25,200 and their shortfall would only be $9,600 ($184 per week). Leaving them with room to breathe before it got up to the $238 per week they could afford. And a rate rise of one quarter of one percent would only be $75 a month, $17 a week and would just take them to $200 a week shortfall and still give them a $38 a week buffer zone. Not to mention the extra money they would have in reserve thanks to using less deposit.

Anyway. That's the gist of Manny's program and why it's still good to go with your numbers even if having him help you. Hope this helps.

Michael Ross