Copyright 2000 by John T. Reed
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Book review: Secrets of a Millionaire Real Estate Investor by Robert Shemin
At the recommendation of a reader, I bought a copy of Robert Shemins above-titled book. It reads like a crude example of something I might have written in my early days as an investor. He seems to have the right basic idea for the most part, but there are a number of problems that require warnings.
The top of the front cover says, Take the high road to high profits! The back cover refers to his high-integrity methods. I welcome such talk, but talk is cheap. Unfortunately, I found a number of places in the book where Shemins advice was unethical or even illegal in my opinion.
For example, he is big on full disclosure, but says to put a lease option on two separate documents so the judge will not recognize the possible equity issues if you try to evict the tenant. If the option is attached to a part of the lease, he says, a judge may deem the agreement to be a purchase and not rule in your favor for a timely eviction. Hes right about what the judge may do. I shudder to think what the judge might do if he belatedly discovered that a purported lease was really a lease option and that an attorney like Shemin had concealed that fact from him.
Concealing a material fact certainly violates ethics like the Golden Rule and the oath to tell the whole truth. In many cases, it is also explicitly illegal.
He says nothing about considering the suitability of an option for lease-option tenants. That violates my ethical recommendations. (See The morality of lease options in the 8/00 issue.)
He says, When I was in property management, I set up a maintenance company that was a very large profit center. We might charge $150 to fix a water heater, even though the repair cost us $100. That compensated us for the low fees we charged to manage properties. Obviously, the ethical thing to do is charge appropriate fees and repair costs, not to hide higher fees inside what you are telling the client is a repair cost.
He recommends using finders who would be violating the trust of their clients to bring a deal to Shemin. For example, Cultivate auctioneers They sometimes will sell a property to you before an auction has been publicized.
He recommends what appears to be a clear case of bait and switch. Offer cash and a quick close. Most people will not accept any other terms at first. Hook them with cash and negotiate later. Bait and switch is unethical because it is dishonest and breaks a promise. It is possibly illegal depending on how and where it is done.
Weasel clauses have long been a staple of bad real estate seminars. Shemin gets off his high road to join that crowd recommending eight different weasel clauses on pages 94 and 95. Weasel clauses supposedly allow you to back out of the contract. He says, closing can be contingent on anything you can think of if the seller allows you to insert it into the contract!
Thats not true. The contingency must be reasonable. If the court concludes that the contingency was overly broad, they may let the seller out on the grounds that there was insufficient mutuality to create a binding contract. It is also dishonest to try to trick a seller into thinking he has sold his property when you are merely considering it. After extolling the virtues of the anything you can think of weasel clause, Shemin, who advocates recording purchase agreements, tries to have it both ways by belatedly recommending that you not put a contract on a property unless you fully intend to close.
In the real world, competent sellers and agents will put a short fuse on any contingencies and will not agree to overly broad ones. They will also prohibit recording the purchase agreement.
I could list more passages that depart from the high road, but the above should be enough to give you the idea.
Speaking of weasel clauses, the book is full of them. Shemin constantly makes statements that sound great at first glance, but upon closer examination, are rendered meaningless by weasel words. Where you and I would say, The sun rises in the east, Shemin would say, The sun may rise in the east or The sun can rise in the east or If the sun rises in the east. He is a congenital lawyer and hedges a high percentage of the statements he makes.
In some cases, his hedging reflects laziness. For example, after recommending that you manage other peoples property for profit, he says you may need to be licensed. May!? As far as I know, property managers need to be licensed in every state. Why imply that there are states where you do not need to be licensed unless you know of some?
Real-estate-investment books ought to have a profit strategy. Amazingly, most dont. Shemins book is a grab bag of the usual approaches that are familiar to anyone who has attended the various get-rich-quick seminars: motivated sellers, lease options, adding the phrase or assigns after your name in a purchase agreement, hire property managers, broker mortgages in your spare time, develop good relationships with bankers so theyll call you about good deals, etc.
Oddly, Shemin advocates giving huge tips ($1,000 or more) to contractors, partners, and such. He also advocates selling properties to charitable organizations. I presume this is part of his high road packaging. Its nutty. You should pay people what you promised. Paying them more will make you popular, although they are likely to think youre crazy. Also, God help you if you give a guy a big tip once or twice, then fail to do so on the third deal.
Sell properties to the highest bidder without regard to whether they are charitable organizations. If you want to give to charity, give cash or donate appreciated properties.
Shemin advocates a sort of Dr. Jekyll and Mr. Hyde behavior pattern regarding the other people you deal with. Contractors and partners get generous terms and tips. Sellers get taken for all theyre dumb enough to fall for.
Sometimes, he treats the same person very badly and very well at the same time. Contractors get tips for doing a good job, but Shemins contractual demands are so tough that I suspect few good ones would ever work for him. Early in my career, I drew up a strong contract. The best contractors I asked to sign it simply glanced at it and walked away. Only the worst would sign it.
It has been said that attorneys behave as if they have clocks, but no calendars. Shemin seems to have neither. His lists of ways to find good deals are lame, but lengthyextremely lengthy. He seems to be writing for another planet where the days last 1,000 hours. It would be impossible to do all the things he says to do. He lists every low-efficiency method of finding deals with no acknowledgment of the fact that you cannot do all or even most of them.
All his examples involve fictitious parties. Like the hours he seems to see in an investors day, his cash flow numbers also seem to come from another planet: a single-family house should generate a cash flow of at least $150 to $300 per month, and duplexes should generate about $200 to $400 per month or you negotiate with Joe Seller to lease-purchase his house for a $200 deposit, $450 monthly rent, and a purchase price of $59,000, all good for three years. Then you turn around and lease-purchase the property to Jill Buyer for a $1,000 option, $750 monthly rent, and an option to buy the property for $65,000, all good for two years.
And the reason Joe is leaving all this money on the table is what? Oh, yeah, hes one of those motivated sellers you hear about in TV infomercials.
Shemin also commits the fairly common sin of assuming that things that are true in his (Nashville) market are true everywherelike property-management commissions being 8 to 11% and option money not having to be returned to the buyer (WA state has a law about that) and sellers usually pay title insurance. A person in an area where these statements do not apply could be hurt financially by Shemins book.
There is some good basic stuff in Shemins book. But there is also a ton of lame and/or inaccurate stuff, as well as a bunch of nonsense about how to get your good-guy merit badge. The book is mostly generic real-estate-guru stuff that you could have heard at various seminars over the last two decades. The few who are smart enough to tell the good from the bad are too smart to need to read this book.