11. Are There Still Good Buys?

A few years ago, a young housewife came to my classes to learn real estate. She had five small children. Her husband worked at a government plant as an executive. Re­cently her father had died, leaving her and her brother some $3,000 each.

Dorothea wanted to supplement the family income and her brother had agreed with her that they would learn real estate, try to enter the field with a little brokerage, and as time de­veloped, start to invest their nest egg in some real estate as partners. Dorothea's husband agreed to baby-sit while she at­tended evening classes. The brother took my course at home on records.

When they had finished their training, Dorothea found time to practice a little real estate brokerage and to put into opera­tion the methods you will learn here for finding income prop­erty of the Aunt Toby type. Dorothea lived in a very small town, but the adjoining cities of Framingham and Natick, Massachusetts, are near Dorothea's home and she recognized that the presence of large segments of workingmen in these cities offered her the best opportunity for development of her plans for that reason. There is a General Motors assembly plant in Framingham, employing thousands. Nearby a Ford plant gives a livelihood to thousands more—all on a permanent basis. A brewery, a large government installation, a huge stationery supply plant of many generations history, and other commercial enterprises in the area promise that this will always be a good spot for the type of rentals we offer.

As Dorothea started to spread her message in brokerage and as a prospective buyer of Aunt Tobys the word got around. You will learn just how to get started too—in clear, simple, unmis­takable instructions. These instructions have never failed yet. That leads me to a point that I should mention here. Dorothea was not an outstanding girl. She was a normal happy wife and mother. If there were any distinguishing characteristics about her they were simply these.

She would apply herself. She would try to do fully, thor­oughly, what she undertook. She did her lessons in my class that way. She found time, unlike many others, to do them well and have them ready on time. I noted her sincerity, of course, and I was optimistic, but never dreamed she was slated to go as far or as fast as the future proved.

She was never negative. She had made up her mind to learn how and to move ahead in the light of her knowledge. She thought positively. She was going to do it. It was as simple as that. She was resolved to banish fear and doubt. Perhaps she felt that she would never starve anyway, since she would be provided for as a wife by her dependable husband, even if she lost her (and her brother's) nest-egg. This may have given her courage beyond the norm, but I doubt it. In this re­gard many other students simply earned their starter-invest­ment by commissions on sales of real estate and risked that. I think they were, on the average, no different in their attitudes, depending on the individual.

Dorothea had some $6,000 to play with, and full authority to go ahead and invest it. Brother consulted with her but always agreed to her proposals.

A few months after she graduated, I officiated at the passing of the deed in which Dorothea acquired her first Aunt Toby. She invested about $1300 in cash. She continued her search for more of them, using the methods I will set out here. A few more months and she had located a duplex Toby. Six families.

All the Tests proved positives and the Value Formula said— "Offer the owner so much" (as in the previous one)—and under the following terms. She did. Some of the $1500 that she put down on No. 2 was money milked from No. 1. Then one day she called me about No. 3.

The facts were so intriguing that I went personally to in­spect it for hidden flaws. Since it was perhaps the most out­standing example of my experience, it deserves explicit detail here. The details in No. 3 are so brilliantly and unimpeachably proof of the truism that there still is plenty of room, that I ask you to put your mind into certain orbits before approaching the facts.

Put yourself in 1946. Imagine that you have just talked over the advisability of buying a certain property. You've just ex­plained that all the figures and facts prove it is a good move. Your friend shakes his head and figuratively strokes his beard. You are told, "Stay out of it. You're heading for trouble. Things are bound to go down—but down. They've been rising steadily for six years. For every action there must be a reaction. All the good buys were bought up in the depression by the smart ones. Now it's too late. And mind you, why do you think he wants to sell it? If it was any good, he'd keep it, not sell it. No, better keep your money. You'd lose your shirt." Now, in the light of that sage advice (which is exactly what I received), think of what happened with the Uni property. Think what I would have missed if I had listened to the good-intentioned advice of my well-meaning friends. The psychological implications in this advice, as a trained psychologist would analyze it, are devious and mysterious. But any layman can see here that the advisor want: (1) to appear very wise; (2) to appear superior in his judgment to you; (3) to justify his own stagnation in mediocrity and secretly (although perhaps he does not realize it) to prevent you from moving up and thus spotlighting and proving HIS failure to move ahead.

Now put yourself into 1948.1 was contemplating the Collon-ades block. The details of this one will be set forth in a later chapter, but imagine that you have talked this one over with another sage. The words and music are still the same. But you remember what happened in the Uni property? This one turned out even better, much better!

Now flash yourself through 1952, for much the same scene, and pause a moment at 1955. In that year, I sold Len and Lois G. a package of Aunt Tobys soon after they had graduated from my course. They, too, consulted their "best friend and advisor." Need I say that the advice was much the same? But they bought them. As I write this, I pause to phone the G's. Are they happy? Deliriously! Of course, I could go on and on with this, but you get my point.

As you place yourself in each of these years, and see that the pattern never changes, you should now be able to see the crepe-hanger in the light of these experiences. He or his counterpart is saying almost the same words at this moment to someone. In most cases he succeeds in scaring him and he settles back in his rut, side by side with the crepehanger, and ten, twenty and thirty years from today, they are just where they were, but both of them bitter. Now, with this background for your think­ing, let us see what happened with Dorothea's No. 3.

She and I went to look over No. 3. It was a little off the pat­tern of the usual Aunt Tobys, but interesting. It consisted of a row of eight single houses in Philadelphia style, that is, wall to wall. Each had two stories, attics and basements. Some had their toilets in their cellars. Some had been partially modern­ized. The exterior had been covered with the cheap, ugly as­phalt siding material that is often sold by high-pressure home-improvement salesmen. The present owner had neglected everything except collection of rent. Of course, we should con­sider first, the thing of first importance—Location.

The property was on Avenue N, some five minutes' walk from the center, schools and shopping. It was in a very desir­able residential neighborhood consisting largely of single homes which were nicely maintained by their owners. It was a nice place to live, and anyone could see that the rentability (or saleability) would benefit by excellent location. As a matter of interest, we later learned that this property was considered the eyesore and ugly duckling of the otherwise good neighborhood and the homeowners in the area hoped and prayed it would be demolished.

In the first and most vital test, No. 3 passed with flying colors. We could feel certain that in this city and in this location, we would have no difficulty getting tenants at the rents we con­templated charging. Now a little about the history of the prop­erty.

A former owner had sadly neglected the place to a point where it was abandoned to the bank for the balance on a small mortgage. A prominent realty broker and investor, in fact the most prominent real estate broker in the area, one Mr. H., had obligingly taken it off the bank's hands at this low figure. Mark you, Mr. H. was no novice. He really knew real estate after some forty years of successful practice in the same city. Now, Mr. H. was winding up his affairs and moving to Florida permanently and was disposing of his holdings. Of course, such a reason usually causes lifted eyebrows, but we rarely attach ANY importance to the reason for selling anyway. If we were to rely on this, we would have a poor yardstick indeed for de­termining which properties to buy and which to refuse. Just curious, that's all.

Mr. H. had offered the parcel to a dealer, a friend of mine, a Mr. T. who bought and sold low-priced properties. Mr. T. maintained a crew of repairmen to do the remodeling. He had sent out his buyer-agent and when Mr. H. named his price for the eight houses, the agent had promptly (and automatically) offered him some 25 per cent less. As was the agent's custom, he went away and waited for the seller to come to terms.

Some time passed. When Mr. H. saw Dorothea's ad (that you will use as your prime means of acquiring Aunt Tobys), he called her and asked her to look them over. They weren't exactly the thing she had been advertising for, but they cer­tainly passed all three of our tests with flying colors.

Their location was, for our purposes, and using the yardstick of the rent expected, excellent. Put in simple terms, and at the risk of seeming repetitious, when you drove up the street, and looked around, you would instantly notice that this location forthat rent was fine!

The rents that the owner was getting were in the same de­gree of neglect as the buildings themselves. Some old tenants were occupying an eight-room house, albeit with poor facilities and accommodations, for $26 per month! In 1958! To apply a reasonable rate was simple. Would $75-per-month tenants buy these shelters in this location readily? The answer was obvious. Of course. So it was OK as to test No. 2—modest rents.
The third test, that of heat, was OK here too. Therefore, it was time to apply the Value Formula that you will learn in a later chapter. That recommended a purchase price that was drastically out of line with the price the seller wanted. And it was out of line in reverse relation to the usual. The Value Formula said it was worth more than twice what the owner wanted! And that's what made the thing suspicious.

So I went over to examine it. In those days, Dorothea would often ask me to look over a property and check her figures. Later she felt secure in relying on her own observations and judgments, especially when she saw how little I really con­tributed to what she already knew, having carefully studied what you will learn here.

I have deliberately refrained from mentioning the specific prices in the history of this parcel. I wanted you to view the thing without that distraction. Now that you have been filled in on the history to thus orient you with the proposition, it seems the right time to set out the figures. I do not know what Mr. H. bought (or took it over) for. I would hazard a guess based upon my examination of the previous deeds and the mortgage picture in the title search, that he took it over for the mortgage balance that was owed the bank at the time-perhaps $13,000. In the time he owned it he gradually reduced this balance to some $11,000. He offered it to the buyer-agent for $16,000 and received a counter-offer of about $12,000 which he refused.

It is interesting to note at this point the policy of the buyer-agent. He had no Value Formula. He went by guess-and-by-God. If he thought a property could be fixed up by his company and sold for a good profit, he would try to buy it. But he had been spoiled. By the very nature of the parcels that he had been buying, he was put in the driver's seat as to price. He had been able to virtually name his own price. And still he had been able for years to buy properties for his company to the tune of some ten a week! That was and is due to the unique market conditions that obtain as to neglected property. In its proper order, we will elaborate on this condition. But there was one policy that the buyer-agent never deviated from. He would never pay the price the seller wanted. Yes, even if the seller asked one-half or one-quarter the worth of the property; even if it was obviously a great bargain, he would offer less, much less. Then he would wait. In most cases he got it for his price.

But he missed out on many, many good buys, simply because he pursued this policy. He knew no Value Formula. If he had known one, he could quickly have figured out an exact price that the property was worth. Then he would have compared this with the asking price. If, as often was the case, the seller was asking much less, he would have made it his business not to let the property slip out of his hands, and many a profitable investment for his company was lost to them because of this policy, or lack of it.

When I examined the property and its surroundings with Dorothea, I asked her for the fourth or fifth time this ques­tion: "Are you sure there's no mistake or misunderstanding? He wants $17,000 for ALL eight houses?"

"Yes, I checked it carefully after we talked on the phone and you raised the point. That's what Mr. H. wants. For all eight."
I replied, "I can't believe it. I would find it hard enough to believe the price you mention if the property was offered by someone who didn't know its worth. If the seller was perhaps some heir who had just inherited it and wanted no part of it-wanted to dump it at once for any price. But you tell me it is owned by Mr. H.I He is a seasoned veteran in this business and in this town. It can't be true."

But Dorothea was certain. And, knowing her, I felt that she had the facts correctly. So I suggested that we go straightway to the office of Mr. H. and see if we could close a deal. We sat down with Mr. H. and after some preliminary talk, offered him $14,000. We finally settled on $14,500 as the price. We signed a contract, which we call simply an Agreement. In various parts of the country this is often called an agreement of purchase and sale, or Bond for a Deed. The Agreement required Dorothea to buy at $14,500 in one of two ways. Mr. H. was to try to place a new mortgage for $13,000 and she would put $1,500 down. There was another proviso to make sure the sale did not fall through. If Mr. H. failed to find us a lender for a new first mortgage, it was agreed that Dorothea would take over and assume the old first mortgage of $11,000, give Mr. H. a second mortgage for $2,000, and the $1,500 balance in cash.

Mr. H. probably never knew it, but when we sat down to dicker on this sale, we were determined not to leave until we had him signed up. As soon as the agreement was signed, I breathed easier. This type of contract is one of the most binding and inescapable in legal jurisprudence.

In due course, Mr. H. applied to several banks for the new mortgage for $13,000, blanketing all eight houses under the one mortgage. The various appraisers and security committees from the banks inspected the property and all turned it down. This will be of great significance to us later when we learn how to buy and finance Aunt Tobys. The very difficulty that Mr. H. had in trying to place a comparatively puny mortgage on shabby property is often the very reason that we can buy them at our own price. The seller has become discouraged as buyer after buyer fails to obtain financing for the sale, and the seller then will accept our terms. Yes, it is true. Even the bank's "ex­perts" can't see what you will see in these money-makers.

Accordingly, Dorothea bought the property by assuming the old $11,000 mortgage and gave a new second mortgage for $2,000 and $1,500 in cash. Now she turned her attention to cleaning it up and putting it on a paying basis.

There were some glaring needs in improvement, of course, but the net income left a good margin for that. It could easily be paid for out of the profit from the rents. Let us look at the immediate future of No.3.

Within a short time, after some refurbishing of the exterior appearance, we could easily expect rentals averaging $75 per month per house, with the tenants heating themselves. This meant a gross income of eight times $75 = $600 per month or $7,200 per year. Thus:

Gross annual income                                                                           $7,200
Expenses (and this means true expenses, excluding principal payments, which are not.)
Taxes                                                                                                  $600
Interest on mortgages 5% on $13,000                                                   650
Water                                                                                                    200
Insurance                                                                                               322
Maintenance                                                                                          300
Total true expenses                                                                            $2,072
Balance after deducting expenses from income on
an investment of $1,5001                                                                $5,128 per yr.

Now there were some "catches" in this proposition still to be considered.

First, the matter of the repairs needed to put the property into decent shape to earn the $75 per month per house, as rent. As you can see from the above statement of income and ex­penses, the rents themselves would leave enough money clear in hand each month so that the money for these repairs would quickly accumulate without any contribution from Dorothea. As each month passed and she noted the balance in hand, she cleaned up the next repair on her list. The ugly sidewall cover­ing could wait, but the trim was neatly painted a dark green. The rotted front wooden steps to each house were replaced With concrete for permanent service.

Each tenant was forbidden to park his car on his front yard. There was plenty of room on the land in the rear of the buildings. The front yards were fenced with inexpensive iron pipe and the tenants were given flower and grass seeds. Once they were started, some put up window boxes of flowers, too. Very soon the building was no longer an eyesore. And the desir­ability to tenants grew with every move. Some plumbing had to be done and as soon as sufficient money accumulated, a few modern baths and kitchens were installed. It is not surprising in view of this, that there was soon a long waiting list of tenants. Now in any true picture of the financial situation of a build­ing, we must take into consideration that there are some items which, although they do not properly classify as expenses, nevertheless require us to pay out money from our net income. Since we are concerned here primarily with the methods you will use for pyramiding, this means we should spell out every item for which you will have to pay out money. Otherwise you would not have a true and really workable picture of what you would have left in hand for re-investment. So let us take the true profit shown above and substract from it the other items, cash and "paperwise" that we will have to pay out, so that we will see the final and true-to-life figure that we will work with. Here is how that figures:

True profit per year as above                                                                    $5,128
Further losses and payouts not usually classified as expenses:
Principal  payments   on  first  mortgage  average during first five years       $380
Principal payments on 2nd mortgage                                                           175
Rental loss during vacancy periods and repairs (this figure reduces to a nominal tiny amount after the building is going along)...............................                                              300
Interest on buyer's investment money:
Dorothea would now lose interest on her $1,500                                                60
Total other payouts and expenses                                                       $915       915
Leaving a balance in hand per year, of                                                    $4,213

But-
We must remember that in addition to this sum, Dorothea was becoming enriched each year by $555 which was being paid off on her mortgages by the tenants. If you think this is a pretty nice little deal, read on, and hold on to your hat. I had bigger and better plans for Dorothea on No. 3.

As soon as she had "caught her breath" here was the next step I proposed. Now remember, I told you in the beginning of this chapter that this purchase was outstanding and not routine. It was a juicier deal than the others. But it does demon­strate several points.

I advised Dorothea not to lease the houses. She should rent them from month to month with the written proviso that she could show them at any time to repairmen or to prospective purchasers, and each tenant agreed to vacate within a reason­able time if the building were sold. Then we would sell them off individually to single purchasers. After they had been cleaned up we could easily get $12,000 each if we offered attractive terms. Perhaps $500 down on each house, providing the buyer had a background of good credit and was a steady type. This would leave her a mortgage to hold for perhaps 25 years. Her only bother from then on would be to collect the payments each month, and even that would be handled for her at nominal charge by her bank. The buyer would receive a notice each month from the bank and he would make his payment to the bank and it would be deposited to her account. In calculating the figures, I will leave out the deposits that the buyer would make each month to accumulate for payment of the annual tax bill. Since that is not money which Dorothea would really own, but would only hold in escrow, we should not concern ourselves with it. We will address ourselves to the actual pay­ments on mortgages. Let us see how she will stand.

When she sells all eight houses she will have received for her $1,500 investment:

Net income while she held them (approximate)                        $ 8,000
Down payments on sale of eight at $500 each                             4,000
Leaving her in hand after she sold all                                       $12,000

This will permit her to invest this $12,000 for further gain. Thus she would now be receiving:

Interest on the $12,000 let us say, at 4f, minimally,   $  480 per year
Interest and principal payments on eight mort­gages,
each at 6% on 25 year basis—total       $92,000.00,
payments total $7,114.56 per year          $7,114.56                                 
giving her a total annual income of             $7,594.56

This income would be free of attention, management, re­pairs, etc. That figures out to an income of $136.80 per week for 25 years—plus the fact she would have $12,000 available for further investments—and pyramiding! Let us note how much she would take out of the deal in all in the 25 years. Here is the exact amount-$177,864. On a $1,500 investment! All she needed was the know-how you will have after reading and di­gesting this book.

Do you think this a fine deal? Just wait! We have better ones to study. But let us hope that by this time you have ban­ished from your mind all vestiges of negativeness, particularly as to that oldie, "there just aren't any more good buys around." And you can test yourself at this point, if you are interested. That is, you can now find out for yourself whether you ARE inclined to be negative. I have set a trap for you above. I deliberately led you into a situation where, if you are the slight­est bit negative it would show up. Here is how you can test yourself.

When I gave you the figures in the Dorothea matter, and they are true figures, did you find yourself worrying about how much income taxes you would have to pay if you were making this money? If so, you are inclined to be negative. Your mind needs a determined purging of this attitude. If you did not think of income taxes as you read the figures you are indeed a good bet to succeed in this enterprise. How about taxes? Easy. There is very little income tax to be paid on our type of earning. We have Capital Gain benefits, depreciation allowances and many other special privileges accorded only to real estate investors. Don't concern yourself about it. I will explain exactly how to arrange your program to pay very little tax. And, be­sides, you should never mind taxes. My attitude is, I'm darn glad to make it and pay my taxes. I hope it will be yours. That is the attitude of a positive thinker.

Let us sew up the Dorothea story. Here are the points that it proves:

There are, and undoubtedly will be, plenty of good buys left. Some are just good. Others are excellent. Occasionally, one is fantastic, as in Dorothea's case. But, if you know what to do and what NOT to do, you will find a fertile field for decades to come. Unless, of course, too many buy my book and follow its methods. But I believe negativity will keep that in check.

The most sagacious, experienced, shrewd owners often sell you the best buys. Wait until I explain the Freeman deal, which I bought from a real sharpshooter. But he didn't know the Value Formula. I did. There's a fine income picture in holding the property, if you know how and what to buy—there's a pretty nice picture in selling it if you know how.

You can usually make your start with very little capital. Of the last one hundred properties my students have bought in the past two years, I only know of four where they put more than $1,500 down. All the others required less. You can get your capital out very quickly and buy another. Then two, four, then eight. That is real pyramiding. It is only possible if you buy real estate and if you know how.

Our special benefits in the Real Estate Field permit us to get rich as in no other field.

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