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Copyright 1997 by John T. Reed This review originally appeared in the November, 1997 issue of Real Estate Investor's Monthly

Book review:

Joe Kaiser's Ultimate Lease Option Strategy

Joe Kaiser's Ultimate Lease Option Strategy loose leaf book is part of his "Total Domination Series." There is only one way to do a good job and have your customers unhappy and that is to promise more than you deliver. Using words and phrases like "total domination" and "ultimate" almost guarantee that the author will not deliver what he promises.

Freudian

Why use these phrases? The people who want to read about lease options are just trying to make a buck. I have never heard of one who said he wanted to "totally dominate" his market. The phrase "total domination" seems downright Freudian and the word "ultimate" insults me and every other author who ever has written about lease options or will write about them in the future. These words accomplish little other than revealing that Kaiser is the kind of guy who is big on hype, self-promotion, and exaggeration.

The cover also contains the phrase, "Targeting the 'Tired' landlord." That suggests what could be an interesting and viable angle on the lease-option approach to real estate investing.

'No fluff'

Kaiser devotes a lot of space to telling you how great his book is. In particular, he says he has "no fluff," unlike other unnamed lease-option writers. Actually, he seems to be referring to some authors who fill their books with directories of court houses and attorneys general and such. I agree that's an inappropriate use of the pages of a how-to book. But Kaiser has a lot of nerve saying he has no fluff.

Blank paper

What he has, which is worse than "fluff," is blank paper. I've seen worse. One of Dave DelDotto's books had no page which was printed on both sides. 39 of the 232 pages in Kaiser's book are blank. In contrast, there are six blank pages in my 262-page book, How to Buy Real Estate For at Least 20% Below Market Value.

High-margin guy

When Kaiser does give you a page with writing on it, he gives you less writing than virtually any book I know of. My 20% Below Market book has normal margins leaving text area of 60.13 square inches per page. Kaiser has huge margins leaving only a text area of 38.5 square inches per page. He also skips a line between every paragraph and has a lot of one-word and one-sentence paragraphs.

The newsletter you hold in your hand has 11-point type with 12-point leading, a normal combination. Kaiser's book has 12-point type and 15-point leading. That means he has fewer letters per horizontal inch and fewer lines per vertical inch in the portions of the page which are text.

If Kaiser retypeset his book using standard margins, type size and leading, only about 150 pages would be printed. The other 82 would be blank.

Kaiser's angle

OK, there is actually some text in among all the white space, Does it contain anything that will help you?

Kaiser's angle is to find likely lease-option sellers by contacting owners of vacant homes or owners who have filed eviction lawsuits against house tenants. He says other kinds of sellers are too unmotivated to lease-option their property to you. Sounds reasonable. As far as I can tell, that's one of the few original, worthwhile ideas in the book.

'Never seen anywhere else'

Kaiser says his material has never been seen anywhere else because he developed the strategies alone. It seems not to have occurred to him that his lack of study of the writings of other people does not preclude the possibility that someone else could have independently come up with the same ideas.

Must do homework

Whenever anyone is going to write a how-to book, he owes it to his readers to read everything else on the same subject before he begins. The mere act of authoring a book implies that its contents do not already exist elsewhere. The mere act of writing a how-to book implies that the author has done his homework. Lease options have many, many legal implications which anyone writing about them must address. Kaiser has not.

High kill ratio

Kaiser disdainfully dismisses strategies where you make a hundred offers and get one accepted. He says his time is too valuable for that.

I have interviewed over a hundred successful bargain-purchase professionals. The low ratio of properties bought to properties investigated was a recurring theme in those interviews. There is nothing wrong with those low ratios as long as you screen them efficiently and make a satisfactory return on your time and money.

Kaiser's out-of-hand rejection of the many lucrative low-kill-ratio investment strategies reflects his narrow experience and what I call the "grass is always inedible on the other side of the fence" syndrome. That syndrome is the tendency of many real estate investors to denounce the strategies which others pursue as dumb, even though they know little about the approaches in question.

Low kill ratio works, too

However, if Kaiser has indeed found a high-kill-ratio strategy, good for him. He just should not be so quick to denounce the low-kill-ratio strategies of others.

Some people become rich in high-margin products (mainframe computers); some in low (razor blades). If the volume and efficiency are there, you can make as much profit per year, or more, with a low-margin or low-kill-ratio strategy as you can with high margins.

'One size fits all strategy'

On page 18, Kaiser says, "Lease options are the 'one size fits all' strategy we've all been looking for." Actually, there is no one-size-fits-all strategy. Although saying there is is so widespread among the get-rich-quick crowd that I made it one of the telltale items in my "Real estate B.S. artist detection checklist" article (1/90 issue or www.johntreed.com/bschecklist.html).

No closing costs?

Kaiser says lease options "completely avoid (or at least delay) the expense of a traditional closing." That's a good example of what happens to a guru when he does not do his homework. Had Mr. Kaiser read my special report on lease options, or pertinent law books, he would have found that although it is common practice for lease-option buyers to not get title insurance, it is also crazy.

In a normal purchase, there is usually a lender to prevent you from doing something stupid like not getting title insurance. The fact that there are no "grown-ups" in a typical lease option does not turn stupid into smart.

Due-on-sale clause

Early in the book, Kaiser says, "In most cases, lease options do not trigger the due-on-sale clause of the existing loan. If done correctly, they never will." He's nuts. The standard FNMA/FHLMC due-on-sale clause explicitly says that it is triggered by a lease option. The only time a lease option would not trigger a due-on-sale clause is in an incompetently-drawn seller mortgage.

Indeed, the implied promise of telling you how to do it "correctly" is not fulfilled in Kaiser's book. He never mentions the subject again.

Formula

Kaiser's target is a single-family house in a good area requiring no more than $1,000 in fix-up, three-year minimum option to purchase with monthly payments no more than 75% of current rental market value. Front money no more than two months rent, preferably one dollar. Kaiser gets 100% credit toward the purchase price for every penny of rent paid over the term of the lease, even if he pays late. [Kaiser has since denied this. Here's the exact wording from page 123 of his book: "Our 'standard' contract includes all of these provisions.

Rent credits for every payment received, late or otherwise."]

That would be a heck of a deal for the buyer, Kaiser, and a Godawful deal for the seller. As with virtually all nothing-down style deals, this one requires that you find unsophisticated sellers and take unconscionable advantage of them. Taking unconscionable advantage of unsophisticated persons is immoral and possibly illegal.

CD-ROMs

Kaiser uses CD-ROMs containing property information. That's smart. See my articles on Metroscan and TRW REDI (now Experian) in the 5/96 and 7/96 issues.

Letters to landlords

Kaiser claims to have worked out the wording of the letters he sends to the landlords through trial and error over many years. Such letters are usually key to bargain-purchase strategies.

He starts one by saying, "I happened to notice your property on Elm Street the other day." He "happened to notice" it because he is a professional investor who laboriously digs the names and addresses of evicting landlords out of court files in the bowels of the county courthouse for the purpose of sending them this letter. That opening line is arguably mail fraud. It is certainly deceitful.

Don't answer the phone

Kaiser says he never answers the phone. He has an answering machine and caller ID to get the numbers of those who do not leave a message. Those are interesting and legitimate negotiating and technology tactics.

No program

Kaiser says landlords who receive his letter often ask, "What's your program?" I am amazed to hear that. No one ever asked me what my "program" was in all the years I invested. What's more amazing is Kaiser's standard answer, "I don't have a program." The hell he doesn't. He wrote a whole book about it.

'Building trust'

In describing his phone conversation with the prospect, Kaiser says he's "building trust." In view of the fact that he has already misled the landlord with his "happened to notice" and "no program" statements, "building trust" is not the phrase that comes to mind. "Conning the mark" comes to mind.

'You didn't hear it ring'

Kaiser says sometimes you make an appointment only to hear the phone ring before the appointment with the caller ID showing the number of the landlord you are going to see. "So, when he calls to cancel," says Kaiser, "you didn't hear it ring." Showing up for an appointment you know has been canceled and pretending or saying that you did not know it was canceled is dishonest.

A sandwich lease

From the start, Kaiser lets the landlord believe that he, Kaiser, will occupy the property. Only at the last minute does he reveal that he plans to sublease it. That could violate laws against bait-and-switch tactics depending on local law and how you do it. It is certainly bait and switch by moral standards.

'Full price' means after commission

Kaiser agrees to pay the landlord "full price" at the end of his lease option, if he decides to exercise it. But he defines "full price" as the current market value less a 6% commission on the grounds that the seller would have only gotten that much from a regular sale. That's an interesting and legitimate negotiating stance. But if I were the seller I would argue that the commission savings should be split between the two of us, not all go to Kaiser. I would also decline to set an option price of current market value then set an option date three to seven years in the future. The price of a multi-year option to purchase should reflect likely appreciation during the period.

First three months free

Kaiser also dates the start of the agreement and his obligation to pay rent three months after he actually wants possession, arguing, "It will take me that long to get the tenant out and fix up the place." That, too, is an interesting approach, although it sounds like an "eleventh hour" stunt of the type recommended in Tony Hoffman's unethical book How to Negotiate Successfully in Real Estate.

Deed signed in advance

Kaiser gets the landlord to sign the deed and so forth and place them in escrow along with "irrevocable escrow instructions" which enable him to exercise the option years hence regardless of whether he can locate the seller. Smart.

Some 'fluff' after all

One of the common tricks some real estate writers use to inflate the size of their books is to give you legal documents which are the same except for slight variations, but they give you the whole legal document over and over instead of just giving it once and then listing the clauses to change. Kaiser's "no fluff" promise notwithstanding, he plays the multiple-almost-identical-legal-documents game.

What the deal should be

Kaiser has come up with some interesting tricks during his years of experience with this very focused approach to lease options. But the deal he offers landlords is morally flawed.

Lease-option buyers should pay a significant sum up front for the privilege of being able to buy the property at a fixed price over a period of years. That right could have much value before it expires, although no such value is guaranteed.

Its value is similar to that of a lottery ticket, albeit with a much higher probability of paying off. They don't sell lottery tickets, even the ones with extremely low payoff probabilities, for free, and neither should a rational real estate seller. Stock market options aren't free either.

Market rent

Furthermore, the lease-option tenant should pay at least market rent. They are getting to use the property. What right do they have to pay a penny less than market rent? They should get no credit at all toward the purchase price except for money which they pay above and beyond the fair market rental value.

In short, the deal Kaiser is offering the landlord stinks to high heaven. It rips the seller off to the tune of five or six thousand dollars per year if the option is exercised. If it is not exercised, the landlord is, in effect, paying Kaiser 25% of the gross to manage the property. The normal fee is 5 to 10%.

Property mgr./co-signer

On the other hand, Kaiser is agreeing to be a property manager and to, in effect, co-sign for all of his tenants. Twenty-five percent of the gross is better than five percent. But who needs all the work and worry of a bunch of rental houses without the normal benefit of their equity and appreciation?

Legal issues

Kaiser barely mentions one of the main legal issues regarding lease options: the possibility that it will be construed by the courts as a sale at the beginning of the lease rather than only at the end when exercised. His legal analysis of the issue is totally incompetent.

Kaiser basically says the problem only occurs when the term of the lease option is too long. There is a Revenue Ruling (60-4) and a Regulation [1.1031(1)-1(c)] that say leases longer than 30 years are considered the same as ownership for tax purposes. But that's irrelevant to almost all lease options.

Probability of equity

The pertinent law, which I discuss at length in my lease-option special report, actually turns on the probability that the option will be exercised or should be. Because of the 100% credit for rent toward the purchase price, and the fixed price based on current value less commission over a three- to seven-year period, Kaiser's lease-option structure is more likely to be recharacterized as a sale than any other I have ever heard of.

Seller's problem?

Kaiser dismisses the whole recharacterization issue as the seller's problem anyway, not his. That's incorrect.

True, it is typically a bigger problem for the seller than the buyer. But it is still a problem for the buyer. For example, a lease-option buyer may have to pay back property taxes for the period of the lease-option in states where a sale price sets the assessment.

Mortgage interest deduction

Or he cannot deduct his mortgage interest, the biggest deduction for most people, because the interest rate is not stated in the lease-option agreement as required by the interest-deduction section of the Internal Revenue Code. In the event the lease option is recharacterized as a sale, the lease payments are, therefore, recharacterized as principal and interest. But you cannot deduct the interest if the rate is not specified in the contract, which it is not in this case.

Sellers often renege

I suspect investors doing this deal would find great resistance from sellers as the end of the option period approached. It would dawn on them that they got completely screwed, that they're about to sell a property worth, say, $140,000, for less than $100,000.

Kaiser thinks he's got them with his irrevocable instructions and all that. But the landlord would typically go to an attorney and ask, "Can you get me out of this?" The attorney would then go over everything with a magnifying glass looking for avenues of attack. I would not want to try to defend Kaiser's deal in court.

Distressed owners only

If you eliminate the blank space, repeated contract language and unethical stuff, Kaiser's book is really nothing more than an article or booklet about several ways to find and negotiate with distressed owners.

A Washington State judge ordered him to pay $3.2 million in restitution and fines to victims of his foreclosure rescue scheme. He was also teaching how to do that scheme in seminars for real estate investors. Seattle Post-Intelligencer article on the court order and copy of the court order itself.