|1 year Subscription to Real Estate Investor's Monthly
|Best Practices for the Intelligent Real Estate Investor |
|Distressed Real Estate Times
|How to Get Started in Real Estate|
|How to Order|
I surmise that the criminal real estate investment gurus all tell beginners that they need to gather a team of advisors like an attorney, a Realtor®, an accountant, and so forth. They also apparently say that you need a network of investors. And they tell you that you need a mentor.
Why do they say this? Because with regard to advisors, it does not matter one way or another to them and it makes them sound reasonable and trustworthy to the prospective suckers they are trying to con. With regard to a network, many of them organize their own cult to help them sell their crappy products and services and tell audiences that their cult is a “network.” With regard to a mentor, many of them sell “mentoring” services so they tell you that you need this because it helps them sell such services.
Also, bad gurus recognize that the people they are trying to con are scared of real estate investment. The myth that you just assemble a team of experts causes them to be less afraid and therefore more willing to take out their credit card and give it to the bad guru.
Do you really need a team of advisors? A network? A mentor?
Do you need a lawyer? I have never had one. That is not to say I have not consulted lawyers. I have. But I consult them on an ad hoc basis. Furthermore, I did not consult just one lawyer. Law is very specialized. When I used them, it was because I needed their specialized knowledge.
When I did civil litigation, I consulted a civil litigation lawyer while acting as my own attorney. When it was copyright issues, I consulted a copyright lawyer while acting as my own attorney. When it was small claims, I took a small claims course from a small claims law expert, and so on. I did not anoint any of them as “my lawyer” or a member of my “team” of advisors. And I rarely went back to the same guy when I needed a lawyer again.
Nowadays, talking about your “team of experts” marks you as a nervous beginner who just took some bogus get-rich-quick seminar.
And I am not the only one. I interviewed William Nickerson once at his home. He was the granddaddy of all real estate investment gurus. He wrote the book How I Turned $1,000 into $1,000,000 in Real Estate in My Spare Time.
During the interview he commented that he had to work on some legal papers related to his apartment building. He was being sued and was representing himself.
Paul Thompson was one of the most professional real estate investors I ever met. He bought about one foreclosure per month. For most years, he handled his own evictions. Most landlords do because evictions are routine and they have years of experience with them. They may have hired an attorney for the first one, but then they saw how easy it was and how much attorneys charge. In the last years before he died, Paul was using a local attorney who specialized in evictions. Why? I asked. He said the guy was very good and very cheap and he could not afford to spend his time on evictions when a guy that good and that cheap was available.
A lot of investors have attorneys that they regularly work with. I think it’s a mistake probably caused by them believing the most successful advertising slogan of all time: “A man who acts as his own attorney has a fool for a client.” In fact, many, if not most, intelligent investors can and should do their own legal work on a great many of the things they have to deal with.
On the rare occasions that I have been represented by an attorney, I felt it was a mistake. I have never regretted acting as my own attorney. Many have told me, including judges and lawyers, that I was the best pro se (non-lawyer who represents himself in court) or one of the best pro se’s they had ever seen. So others may not have the same aptitude for legal matters that I have.
Suffice it to say that a great many successful real estate investors have told me that they generally do their own legal work. And when investors do use an attorney, it would typically be on a case-by-case basis, not some guy they hooked up with when they started and used on every deal thereafter.
Do you need a lawyer to look over the papers every time you buy or sell a property? Hell, no! Although you’d better inform yourself about the pertinent law. And if there is a question you cannot confidently resolve on your own, you should consult an attorney.
In some states, like Massachusetts last I heard, they have no title insurance. Instead, they use attorneys to check the title. When I told people not to use an attorney in an article in the school paper while in grad school in MA, numerous professors and others went ballistic. In that state, it was tantamount to saying not to check the title. You always have to make sure the title is clear. If you are in a state where the lawyers have gotten themselves a monopoly on title checking, then you have to use an attorney for that purpose. But the notion that you have to have an attorney “look over the papers” in every deal is silly.
My late mother was a mortgage office manager. She would laugh at the wet-behind-the-ears newlyweds who would say somberly, “I’ll have my attorney look these over,” when they were handed a standard FHLMC/FNMA mortgage form to sign. I was a real estate agent back then. We, too, would laugh at such behavior, as if these newlyweds had ever done another real estate deal.
Also, in a house purchase through an agent using a bank mortgage, the forms are generally standard. The local board of Realtors® is not going to change their form to please your attorney although they will allow slight changes to let him justify his existence.
When I was an agent, the lawyers would always change our conventional termite clause to a VA termite clause. The VA clause required that damage be repaired. The conventional clause only required that the termites be eliminated.
I suggested to our broker/boss that he change our purchase agreement to put a VA termite clause in it. He said, “Jack, the lawyers all change that conventional termite clause to the tougher VA wording to justify their fee to their clients. They are always going to change something in the agreement for that purpose. If we fix the termite clause, they’ll have to find something else. Since we don’t know what it will be, it will cause unknown problems. It’s better that we let them play the big hero by changing the termite clause than that we force them to find something else.”
Virtually all institutionally-financed single-family house deals are financed using FNMA/FHLMC mortgage forms. Those organizations buy the vast majority of mortgages that are originated in the U.S. and resell them in the secondary market on Wall Street. To do that, they package them into batches. They tell Wall Street investors that every mortgage in the batch is governed by the standard FNMA/FHLMC mortgage documents. Now what do you think the chances are that your lawyer is going to persuade FNMA/FHLMC to change their forms because he does not like a clause? Zero. They will not even allow slight changes so the lawyer can play hero to his client. Those forms are the same nationwide with modifications for each state caused by common local practices (like the preference for trust deeds in the West) and state law differences (like Louisiana’s use of the Napoleonic Code).
There may never have been anyone in the history of the world who should have refused to sign a FNMA/FHLMC mortgage document because of some clause in it. So paying a lawyer to look at it and advise you about it is really dumb. You can take it or leave it which, in most cases, means you have to take it.
I sat at a closing once where the attorney told the title clerk what fee to add to the proceedings. All us pros around the table cringed at how high it was. The newlyweds pretended they were not bothered by such a “standard” charge. Then, to justify the outrageous fee, the attorney proceeded to essentially read the document to the clients and explain the meaning of each clause. “Now this clause means you have to pay the mortgage payments on time or there will be a late charge.”
No kidding, Sherlock?
I am not saying there cannot be a dangerous clause that you should not sign in a document. Nor am I saying that others in the deal won’t try to lull you into a false sense of security by telling you falsely that a document that is not standard is “standard.” But some documents really are standard. My book Checklists for Buying Rental Houses and Apartment Buildings has a chapter on clauses to get and to avoid and why. There are many other good books written by lawyers that advise real estate purchasers on such matters.
When I took the CCIM course, the instructor asked each of us to stand and say our names, where we were from, and our occupation. When one attendee said he was a lawyer, the instructor suggested he get a real estate license so he, “can kill his own deals.” That is one of the problems of using attorneys. They can always, I repeat, always, find reasons to object to a deal. If you get a bad one with no common sense or business sense, he or she will, indeed, kill all your deals. I that case, he or she will not be helping you become a successful investor. They will be preventing you from becoming a successful investor.
I have never used an accountant or tax preparer. My friend Leigh Robinson, author of the book Landlording, used an accountant-tax preparer until he read the first edition of my book Aggressive Tax Avoidance for Real Estate Investors. Then he fired his long-time accountant and began doing not only his own return, but those of some of his friends and relatives.
When I was in Vietnam, my mom handled my first duplex. She had a former IRS agent prepare my taxes on the building. That woman screwed it up big time, but I did not realize it then because I assumed she knew more than I. Then, when I began studying tax law as it related to real estate investment in more detail, I spotted her errors and said never again will I make that mistake.
You should get Quicken or Quickbooks or Quicken Rental Property Manager software by Intuit. Quicken is for individuals. If you are big enough to have a payroll, you may find you need Quickbooks. Quicken Rental Property Manager is customized for that type of user, but I have long recommended plain old Quicken as adequate.
And you use Turbotax by the same company to do your taxes. It can extract most of the information to fill out your taxes from your Quicken or Quickbooks computer files. Turbotax asks you questions as an accountant would, like, “Did you get a W-2?” You simply answer them on your computer and eventually it says on the screen. “Congratulations. Your tax return is done.” Then it either prints out the copy you need or electronically files it for you.
Quicken and Turbotax are really cheap and really easy to use. I once wrote an article titled, “If God wanted us to have bookkeepers, He wouldn't have created Quicken.” (2/95 issue of my newsletter Real Estate Investor’s Monthly) My book How to Manage Residential Property For Maximum Cash Flow and Resale Value used to have a chapter where I told readers how to set up a bookkeeping system using database software. Then, when Quicken and Turbotax were invented, I changed the chapter to say, “Forget the database software. Just get Quicken and Turbotax.”
Long after I wrote that article about Quicken, my son Dan and I became friends with Bill Campbell who was the top guy at Intuit for many years. Campbell was a captain of the 1961 Columbia University football team and later head coach there. His son was a year behind my son and my son’s teammate. Dan was a tailback there. We became friends with Bill through Columbia football and Bill got Dan a summer internship working on the Quicken program in the summer of 2002. Bill had also been head of the company that produced the database program I had previously recommended: Filemaker.
Hiring an accountant to do your books or tax return is crazy unless you have some extraordinary complexity, in which case you’d better be careful you choose the right accountant. My impression is that most accountants and tax preparers are just people with Quicken- and Turbotax-level knowledge who capitalize on the fact that most people are overly intimidated by bookkeeping and tax preparation. Only a small percentage of accountants are high-powered men and women who understand the complex situations.
I have consulted accountants with questions I had trouble researching on my own on occasion. But I have never employed one or a tax preparer on a routine basis except when my late mother hired that former agent and I regretted that.
Depending on what strategy you pick, you may or many not use Realtors® to buy property. And if you do, the notion that you select just one good one is baloney. Realtors® wish you would stick with one and that it be them. But it doesn’t work that way in the real world. I would go to a Realtor® and look at the properties he had that matched my needs. But after several, he or she would always say, “That’s all I have that fit your description.” Then I would go to the next Realtor® and repeat the process.
That’s commercial apartment complexes I am talking about. They generally do not have a multiple listing service. If you are buying homes out of the multiple listing servicewhich is generally not a profitable, smart thing to doone agent could theoretically be all you need because they theoretically have access to all listings. But there are two real world problems with that.
• Agents brag to each other that they won’t show more than three or four homes to one customer. They feel you are wasting their valuable time if you do not buy one of the first ones they show you. I, on the other hand, say you need to consider 50 to 1,000 properties for every one you buy. (See my “Overview” chapter in my book How to Buy Real Estate for at Least 20% Below Market Value.) You do not need to physically inspect every property, but you have to get involved to some extent with 50 to 1,000 to find bargains. Reveal that to a Realtor® and they will throw you out of their office.
• Agents are supposed to tell the MLS about their new listings immediately, but they cheat. They often try to sell it secretly themselves before the whole MLS knows about it so they can “double dip,” that is, get both the listing and selling commissions. Then, after they call their own buyers, they may still keep it secret within their company because companies sometimes have commission rules that give the agents a bigger commission if they sell an “in-house” listing. So the agents have incentives that are adverse to the interests of the client-seller, but in spite of their protestations to the contrary about their Code of Ethics and all that, they routinely keep new listings secret from the MLS for as long as possible to maximize their chances of a double dip or elevated “in-house” commission share. Consequently, if you are pursuing a strategy that involves buying through Realtors®, you want to be one of the favorite buyers of as many of them as possible so they will call you first about new listings that are good deals.
Of course, many strategies, like buying foreclosures at auction on the courthouse steps, have nothing to do with Realtors®.
Very simply, some strategies use Realtors® to buy and some use Realtors® to sell but others make no use whatsoever of Realtors®. Even when your strategy calls for using Realtors®, using just one is almost always totally unworkable. So the notion that you have to go out and find a single Realtor® to be on your “advisory team” is wrong. Plus, most good Realtors® would not agree to be on a team if it required meetings or some such. They are only interested in commissions and they would only put up with such nonsense as team meetings if you generated a lot of commissions for them. When you need a Realtor®, find a good one and use him or her on an ad hoc basis. When you exhaust what that one can or will do for you, find another.
Mentors are free. My book How to Get Started in Real Estate Investment has a chapter on finding mentors. However, I must say that neither I nor most of my investor friends ever had one. You don’t need them. And if you get one, he or she should not be charging you for their advice. Rather, a mentor is your friend who helps you because he or she is your friend, not because you are paying them. (I did have a mentor in book publishing: Leigh Robinson.)
It is really creepy and dorky for a beginner to ask successful investors, “Will you be my mentor?” People ask me that regularly. My answer is, “No.” I am a mentor of sorts to tens of thousands of investors through my books. But that is a monologue, not a dialog like you would normally have with a mentor.
Just get active in the business and in trade associations. You will make friends as a result. When you have a question they might be able to answer, call them. Buy them lunch. Help them back when you can.
The gurus who push mentors have ulterior motives. They know you are afraid of real estate investing and they figure you will therefore be willing to pay for someone to hold your hand through the process. They also believe they can charge hundreds or thousands of dollars for a mentor which is a lot more than they could charge you for a book or CD with similar information. It is a way of selling a little bit of information for a huge price.
Do you need a network of fellow investors? No. Join the local and maybe regional and national property owners or investors or developers clubs and trade associations. Get active in them if there are opportunities to do so. But that’s about all you need. As a general rule, other investors are your competitors. If they are in another city where you do not invest, you can freely share “secrets” with them. But “networking” with local investors is a questionable activity at least in part.
There are some benefits to networking on issues where you are not competing. For example, when I was first vice president of the South Jersey Property Owners Association, I ran a meeting once where we went through all the various trades and supplies we used and asked every member in the room, what do you pay for this and where do you get that product or service. It was a great meeting. Many found that they were overpaying and they decided to switch suppliers right at the meeting. One of the results was that we banded together to get a big discount on heating oil from the supplier who was willing to bid the lowest for our substantial business.
I also later hired two fellow members of the association to manage my apartments for me when I moved away but still owned property there. They were friends; had great instincts, habits, and contacts for getting stuff done quickly and cheaply; and welcomed the money I paid them.
But on other occasions, we were bidding against each other to buy a property or racing each other to get an offer in first.
Telling you to organize a team of professionals to advise you is just another con by the criminal gurus. So are the networking and “mentoring” lines of bull. They are just ways to overcome your objections to buying their stuff, to trick you into thinking real estate investment is easy and risk-free, and to overcharge you for small amounts of information.
You’re really on your own for the most part. If you are a decent human being, you will make friends along the way who can and will help you. You also will find it wise to avail yourself of experts on occasion. But there is no general need for a “team” or mentor when you start out.