(From Real Estate Fortune Builders By David A. Chodack) CHAPTER ONE: Opportunities Are Where You Find Them - Matthew and Marion Toller "Real estate is dead. The market is going to crash. Interest rates are too high. Nobody can buy. Nobody can sell. The bottom is about to fall out. Real estate was hot a couple of years ago, but if you didn't make it then you never will. Now it's just too late." Pessimists have been spreading remarks like this forever and a lot of uninformed people believe them. Matthew and Marion Toller missed the great real estate boom, but they don't waste time looking back and bemoaning any lack of opportunities in these days of tight money and high prices. They believe opportunities always exist if you really look for them, "Bad times are the best times to make money," says Matthew. "Smart people make money when times are bad because sellers are desperate, so you can find more sellers who are willing to accept creative terms and carry some of the financing. We work at finding good deals. We start at seven in the morning, and sometimes we're still on the phone at eleven o'clock at night, or even later. And when we're not on the phone, we're combing the newspaper ads or the Multiple Listings Book, or going to seminars and workshops or meetings of investors' groups. We work at it full time." And they reap the full time benefits. The Tollers have been involved in real estate since last September, and as of August, they owned over a million dollars' worth of property in joint ventures. They have built up a net worth of over $250,000, and they bought twenty-four houses with little or nothing down between June and August. Not half bad for a pair of ex-student activists who never would have dreamed of being real estate investors or landlords only two or three years ago, and who didn't even own their own home before September. "At that time we weren't interested in making money," Matthew says. "We wanted to save the world, but after a while, we just burned ourselves out. I even wound up in the hospital with an ulcer because I was taking it all so seriously. That's when I knew it was time to get out of politics and into the real world. "Eventually we both got good jobs selling cars, and we began living e good life, making a lot of money, spending a lot of money, partying a lot. It was a welcome change after our poor, serious, striving student days, but after awhile that wore thin, too. "We got tired of our jobs and tired of the way we were living. We It we weren't really doing anything with our lives, but we were in an earning-spending rut, and it was hard to break out of it. "Then the interest rates went up, and car sales went straight down. We had been earning good money selling cars, and that dropped to almost nothing, so we decided it was time to make the change. We were selling expensive cars-Porsches-to clients who had money, and it seemed like a lot of them had made it in real estate. From talking to them, we began to get ideas. "So we began reading all the real estate investment books we could get our hands on. We had a little bit of money saved, and a lot of time on our hands, so we also began attending real estate seminars taught by people like Robert Allen, Jack Miller and John Schaub, Jimmy Napier, Pete Fortunato and Jay Turner, to learn all we could about buying and managing property. "Then we just started looking at properties and making offers. We got a lot of No!'s, but a few owners gave us options on their property, or agreed to sell to us outright at really favorable prices and/or terms. We would negotiate with the sellers first and tie up the properties, and en we would go out and find investors to buy them. "A couple of times we have lined up deals and have not been able to come up with the money, but for the most part we haven't had that problem. Right now we've got more investors than we know what to do with. One person finds they can trust us, and they tell all their friends. Finding Investors                                                           "We found our original investors mostly by going to seminars and vestment groups and speaking out a lot, making ourselves known. We knew how to grab a crowd's attention and hold it from our activist days. It's just salesmanship. If you're a salesman, you know how to sell yourself. That's what we did." "We found a lot of people who attend these seminars don't want to be involved in managing property," says Marion. "They want to invest their money, not their time. So we decided to invest our time instead of our money. Between us, we've been to every major seminar at least once; we stand up and ask a lot of questions, meet a lot of people, and tell them about all the no-money-down deals we have tied up. "Not all of our deals are no money down. Sometimes we'll find a house that's selling below market value and requires some cash down payment, but in those cases we always find someone else, a partner, and let them put the money down in return for half ownership. "Almost all our no-money-down deals involve negative cash flow so there, too, we find investors who are willing to put up the money. Then we find the property 1 buy it, and manage it. "We have written agreements with all our investors, specifying how long we are going to maintain the joint venture. Usually these agreements are drawn up to last for three to five years, but it depends on the circumstances. At the end of the agreed time period, each of us has the right to buy the other out, or we put the property on the market, sell it to a third party and split the profits equally. "People trust us because we try to be honest and open with them. We take the time to get to know the people we deal with and to let them get to know us. It takes a little longer that way-we don't always wrap up our deals all in one day-but it pays off in the end; not only with investors, but with sellers, too. Sellers will definitely give you a better deal if they like you and feel comfortable with you-especially when it's also a good deal for them, when they're getting what they want, too. "I'm a promoter" says Matthew, "a salesman. I like people, and I like dealing with them. I like helping everybody get what they want out of a deal-my family are traders in the commodities market, so it's in my blood-and that's how I get what I want: money. The buyer and seller don't have to be at each other's throats. They don't have to be enemies. If you look at the whole picture-taxes and everything else- then it's usually possible to structure a deal so that everybody will be happy in the end. "For instance, we've had deals where the seller carried back two notes instead of one so he could sell one note and get some immediate cash that way. Let's say the house is selling for $150,000 and the seller is willing to carry a loan for $140,000 at 6 percent interest, but he wants $10,000 cash. "We give him two notes, one for $138,000 at 6 percent interest, and a second one for $12,000 at, say, 7 percent or 8 percent interest. Then he takes the second note and sells it for $10,000 and he has the cash he wants. He holds on to the first note for $138,000, and we get the property with no money down. "Other times we have had to get a second mortgage through a mortgage broker and use that as our down payment. That's when the seller insisted on full price and didn't want to be bothered with discounted notes (i.e., selling a $12,000 note for $10,000 cash). For instance, if that $150,000 house had a $135,000 assumable loan, we would get the seller to take out a second loan on it for another $15,000, and then we would just assume both loans when we took title to the property. That way the seller would get the $15,000 cash, and again, we would get in with no money down." "Of course, the easiest way is when we can just get the second ourselves," Marion adds, "or get a new first to cover the entire purchase price. But that means one, finding a property which will appraise for more than we are paying, and two, a seller who won't balk and try to back out of the deal when he realizes he has sold too cheaply. So those are hard to find. "We have occasionally had sellers carry notes secured by other properties we own, but only when the price was exceptional and we intended to resell the property right away. If a property ever goes bad on us - becomes more trouble than we're prepared to handle - and we have to just give up and walk away from it, we're not going to lose everything else we've built up, too." They Never Get in Too Deep For this reason, one thing the Tollers never do - even short term - is to put up a personal note as collateral. Everything they borrow is secured by liens on specific pieces of property-usually the property they are borrowing the money to buy-so that if anything ever does go wrong, no creditor will have a general claim against them or their assets. Having started with almost nothing, Matthew and Marion are extremely careful about holding on to what they've got, which they have worked so hard to obtain-especially since they have gotten so much of it by profiting from other people's mistakes. "There are so many people in this business who get in over their heads," Matthew says, "and then, when they realize they're drowning, they drag everything they own down with them. Marion and I have deals blow up on us, but by insulating ourselves we've been able to contain the damage and keep on going. We never put our own money into a deal, and we put in as little of our investors' money as possible. "We try to structure our deals so that any money we need to buy a property comes from that property itself and is secured by that particular property .That way, if we've made a mistake and it turns out to be a loser, we've only put in time and effort-no cash, except for closing costs and any negative cash flow. "Whenever possible, we insulate ourselves even further by trying to control properties without even taking title. Many of the properties we have tied up are on lease options. We put up a nominal deposit - anywhere from one hundred to five hundred dollars - and in return, the owner agrees to sell us the house at some future time, anywhere from three months to five years down the road, at a mutually agreed on price. "This is usually about five percent more than the house is actually worth at the time we sign the lease option, so of course we are hoping the value of the house will go up more than five percent before the time comes for us to actually buy the house. "That's why we try to get the longest possible option we can. The longer the time period, the more the house is likely to go up in value. "For instance, someone has their house on the market for $160,000 with no offers, and they need to get rid of it. They bought another house, and can't afford the double payments, or they are just sick and tired of dealing with tenants, or whatever. They are impatient, and anxious to be rid of the property. So we sign a five year lease option to purchase the house for $165,000 in five years, and to rent it for $800 a month until then. "We then take overall responsibility for the house. We find the tenants, screen them, do the credit check and collect the rent each month - usually $900 to $1,000 if we are paying the owner $800 - and the owner doesn't have to deal with any of it anymore. On the other hand, he still holds title to the house, so he is getting all the tax benefits: interest and depreciation write-offs, etc. Inflation Works for Them "It's just another type of 'Don't Wanter' situation. We're doing the owners a favor, performing a service, by taking the management off their hands, finding good tenants, making it up out of our own pockets when the rent is late. Naturally, we expect to get paid for doing all this, wouldn't you? So we collect our pay when we either exercise the option, or sell it to someone else at a profit. It takes awhile, but we figure that as long as there's inflation, we'll make out okay in the end. "The way it works is like this. We agree to pay the owner $165,000 for his house if and when we decide to buy it. We have five years to make up our minds. If we decide not to buy the place, we can sell the option to someone else at a profit-assuming the house is worth more than $65,000 by then-or we can just walk away from it if we decide the house is a total loser. "It's sort of a one-sided contract. The seller has to sell it to us for $165,000 if we decide to exercise our option any time before the five years is up, but we don't have to buy it if we change our minds. All we have to do is keep up with the maintenance and pay him his $800 each month until the five-year lease runs out. "Ideally, with only 10 percent inflation a year, that property which is worth $160,000 today will be worth about $265,000 five years from now, so by purchasing it for $165,000 we will make $100,000 profit, or $20,000 a year for managing the place. So we make our profit in the end, and in the meantime it gives us good experience in managing properties. "Don't Wanters," people who are tired of owning a piece of property, are the cornerstone of Matthew and Marion's business. Don't Wanters are the ones who are ready to offer the best prices and terms. They are the ones who will consider no-money-down or lease option deals. They are the ones who have money, but don't want the head- aches which come with wheeling and dealing and managing property. How do you find Don't Wanters? "You make a lot of offers, low offers with all the terms set to benefit you, the buyer, and you wait to get one accepted. Sometimes you will make offers every day and only get one or two properties a month. Other times you will be deluged with good properties and have to hustle to get investors to buy them. You have to have patience, stamina and perseverance," says Marion. Matthew and Marion have learned to develop all three. "It's an up and down business," Marion says, "and many people give up too easily. Sometimes it will take us several days to wrap up a deal, or even months. It gets nerve-wracking at times, but it's worth it. Anybody can buy at full market value." Involvement Leads to Success                                                       One deal has led to another as their empire has rapidly grown. Once word gets around that you can put together deals - that you can get buyers and that you can find good properties for little or no money down - you start hearing about things through the investor's grapevine, and people start hearing about you. Then the work begins. People who want to get rid of their property will come up to me at seminars and workshops and offer it to me on a lease option or offer me a finder's fee if I can get them a buyer:' Matthew says. "I make some occasional money that way, but we prefer working directly with investors, buying property and managing it. "I have a real estate license, but I don't really want to be an agent working for commissions. I'm sure I could sell three or four million dollars' worth of property easily and make a good living that way, but I wouldn't be building up equity or contacts the way I am now." Matthew and Marion also make extra money by doing an occasional "double escrow." As soon as they buy a piece of property that is really under-priced, at perhaps $160,000, they turn around and sell it for an immediate profit, say $175,000, before they even take title. They arrange for the two escrows to close simultaneously so the money is automatically transferred from one to the other. Their buyer puts up all the money to pay off the seller, and Matthew and Marion keep the difference: $15,000 minus the escrow fees. To avoid conflict of interest, Matthew and Marion never sell anything to one of their investors, but do everything on a strict partnership basis. Doing extra deals on their own allows them to concentrate on real estate full time without having to charge an hourly fee for management ser- vices (which would then reduce or eliminate their equity in the properties they manage), or having to take outside jobs or sell off any partnership properties in order to get money to live on. As rents go up, positive cash flow from the properties should eliminate this problem entirely. In the meantime, they get by comfortably, if not lavishly, as they build for the future. And their involvement in real estate grows deeper with each seminar they attend. The more they learn, the more they want to learn. And the more they learn, the more they find ways to make money for themselves and their investors. Fourteen months and they are still at it: learning and making money, making money and learning. Matthew uses his real estate license to attend Realtors tours and open houses, as well as exchange groups where properties are traded among investors. If a "deal" comes on the market, he and Marion will know of it through hard work and a network of contacts. If a new idea comes along for financing or purchasing distress properties with little or no down payment, they will go to a class or a lecture to find out all about it. Since they don't like to put their own money into the properties they buy, Matthew and Marion have to use their knowledge and skill instead. They approach real estate investing as a profession, not a hobby. They have a definite service to offer their investor-partners, and through their half of the appreciation they are very well paid while remaining independent. Cutting Management Problems The main thing, the most valuable thing they have learned from all the seminars they have taken is how to cut management problems down to a minimum. That is how they are able to manage so many properties at once and accumulate equity so quickly. By using a good tight lease agreement, stringent credit checks and their own intuition, they are able to scare off potentially troublesome tenants and stop problems before they begin. "All of our properties are single family homes in decent working class and middle class areas" Marion says, "and we get them rented without any trouble-usually to couples with both of them working. If they have children or pets, they have to put up an extra security deposit and agree to be responsible for any damage; and the lease says we correct any major problems, but the tenant is responsible for minor repairs such as leaky faucets, etc." They also have their own ideas about how to deal with people psychologically. "You have to come on hard at first" says Matthew, "and then you can ease up later. If you're too nice to tenants or sellers they'll walk all over you. If you come on like a hard-nosed S.O.B. at first, and then you suddenly do something nice for them they'll love you and think you're great, but at the same time they'll respect you, too, and realize you can't be pushed around." They use their own modified version of a lease they got from Jack Miller and John Schaub, called a "discount lease." If they want $900 a month rent, they set it at $1,000 a month. Then, if the tenant pays on time, he/she gets a $100 "discount. If the rent is late he/she pays the full amount. This eliminates the negative connotations of a late fee. In spite of their seemingly hard attitude, Matthew and Marion agree that you get respect and fair treatment from tenants by dealing with them the same way you deal with sellers or investors: honestly and openly. "We can go to dinner at the home of just about everyone we've ever bought a house from or invested with - that's the kind of relationships we've developed, and we can visit most of our tenants, too," Marion says. "People like us. That's why they trust us with their money and their property and we try hard not to let them down. We are professionals." "Some of our old friends thought we were a little nuts", Matthew says, "but now most of them are starting to come around. They can see we're really building something. Sure, it takes up a lot of our time, but what are we supposed to do with that time, anyway? Sit around in the evenings and watch TV or get drunk and do drugs? We would rather work towards the future. Besides, it is a fantastic challenge. There is so much to learn, so much to do. .." The Trouble With Agents Matthew and Marion do most of their looking on their own. Echoing the words of many professional investors, they say they are perfectly willing to work with agents, but they find that many agents are not creative and flexible enough to deal with them. "Many of them seem to be afraid of creative deals," Marion says, "and worried about their own possible liability. They tell us that their broker would never let them present an offer like that, or they can't do it because there is no security for the seller. We don't have much problem with sellers once we explain to them what we're talking about. "Not all of them will go for it, but most of them will at least listen. The agents are the ones who don't seem to understand what we're trying to do. I mean, by law they're supposed to present any and all offers, but what can you do? I suppose we could complain to the local real estate board, but it's just not worth it." Instead, the Tollers work independently, going through the newspaper ads line by line. When they see something that looks like a possibility, they get in touch with the owner and talk terms. If the property looks like a good bet, they drive by and then set up an appointment to see the inside, usually with an offer already written up. They walk the streets in neighborhoods they especially like, cultivating store owners, and hairdressers, anyone who comes in contact with a lot of people. They offer referral fees and also find other ways of repaying favors in a constant effort to find out about divorces, pending foreclosures and defaults, tenant-landlord disputes, anything which might cause a property owner to become a prospective seller. It is hard work, but so far they say they love every minute of it. Will it pay off in the long run? All indications seem good. Right now, Matthew and Marion seem to be doing just fine. Their management program is going well and they are having no trouble handling success. Tomorrow? Who knows? They take it one step at a time. Setbacks Are Temporary They have suffered their share of setbacks, too. In the spring, they thought they had it made. A deal was in the works to buy over 200 houses from one seller - 20 or 30 a month over a period of several months. The seller was willing and anxious, they had an investor lined up; all they had to do was tie up a few loose ends. Then the roof caved in. "Our original investors backed out at the last minute," Matthew says, "so we went searching around for some new ones, since this was a terrific deal, too good to just pass up like that. We began dealing with a broker who had been recommended to us, and he thought he might have some people who would be interested, and he did. The only trouble was, they wound up maneuvering us right out of the deal. "Most people we deal with are honest, but every once in a while something like that happens, and we wind up putting in a lot of time and effort and getting nothing out of it. That's just the way it is. We pick up the pieces and go on to the next deal." For Matthew and Marion, that meant transferring their operations from a San Francisco suburb where prices and negative cash flow were just too high, to Tucson, Arizona, where the opportunities are greater. "It's just great down here!" Matthew exults. "Everything is so much slower than the Bay Area, and that works in our favor. There, everyone is too super-sophisticated and negative. Here, I can go to seminars, learn these new techniques, and when I try them out, they work! There is a huge backlog of unsold homes here, so sellers are more open to creative deals. "We've picked up twenty-four houses in the last couple of months and haven't had to put any money down on any of them. Most of them work like this: a $150,000 house with a $130,000 mortgage at 7.5 percent, with payments about $900 a month, for instance. We assume that, get a second mortgage for $10,000 at 10 percent, for 15 years, with payments of $108 a month and then we get the seller to carry a third for the remaining $10,000 for three to five years at 10 percent, interest only at about $80 a month. With taxes and insurance, our total cost is around $1,250 a month. It will rent for $1,000 to $1,100, so we're averaging $150 to $200 a month negative cash flow. We handle that by getting investors who pick that up in exchange for a half interest in the house, or tenants who agree to live there for three to five years and cover all the payments and maintenance in exchange for half ownership. "With investors, we charge them $3,000 up front. $2,000 is a loan which we have to pay back when the house is sold, in three to five years-that way it is tax free, because it is not income - and $1,000 is a management fee. "With tenants, we charge a $1,500 processing fee, and then we set the whole deal up through a title company. They pay their money directly to the title company each month, and it goes into a special account. When they have made their 36th, 48th, or 60th payment, depending on the length of the original contract, the title company files a signed grant deed which we have left with them, and the tenants automatically go on title as half owners. "If they are fifteen days late with any payment, the title company sends them a notice that the agreement is null and void and they have to move out. "This way, it is all nice and formal and impersonal; Marion and I aren't even involved. The title company does it all. At the end of three to five years-whenever the third note to the seller is due and pay- able-we go through the same procedure, whether the other person is an investor or a tenant. We have the place appraised, and then either one party buys the other out at the appraised price, or we just put the property up for sale on the open market and split the profits equally. "Right now, we're negotiating with a builder who has about 80 unsold houses, and we may take those on and sell them for him on an equity sharing basis. We're even thinking of opening a brokerage business that will list houses and sell them that way. With high interest, high prices, and houses sitting unsold, that seems to be the wave of the future, and we intend to ride it for all it's worth." BACK TO PERSONALITY PROFILES PAGE HOME PAGE