Buying With Cash
Issue #2086
- WEALTHY: 7 ways to protect your money (Justin Ford)
- HEALTHY: Why I quit taking a fat-burning nutrient (Jon Herring)
- WISE: Gregory Nunn on the value of cash
ALSO IN THIS ISSUE:
- How to lighten your load without slowing your career (Michael Masterson)
- 2 ways to test your new business idea (David Cross)
- It’s Fun to Know… about names and faces
- Add "refractory" to your vocabulary
You Already Know Fortunes Are Made from Trading. The Question Is: WHAT Are ‘They’ Trading Most? (And It’s Not Shares or Commodities!)
… Thirty times more trading going on than the stock market and mostly investment banks doing it.Ummm… Maybe ‘they’ know something you don’t?.Click here to learn more…
"Never underestimate the value of cold cash."
Gregory Nunn
Buying With Cash: With Power Comes Responsibility
By Justin Ford
As a real estate investor, there will come a time when you will be in a position to buy properties with all cash. You may have profits from selling a long-term hold or a short-term flip. You may build up equity and get credit lines. You may develop access to cash through private lenders. You may have a combination of all these.
When you’re buying with cash - houses, apartment houses, commercial properties, or any other kind of real estate - you’ve reached a higher level of investing.
Buying with cash enables you to do deals you couldn’t do with traditional financing… and may even be impossible with hard-money lenders. Your field of competition becomes smaller… and your potential profits grow.
At this stage, you may qualify for the need-to-sell-quickly, deeply discounted deals other buyers can only dream of. It’s a good position to be in. You can even buy large properties that are vacant, direly in need of rehab, or both… and then fix them and lease or sell them for a big profit.
But with that extra power comes the need to be extra careful…
You Can Learn a Thing or Two From Stodgy Banks
No one looks after their money quite like a bank does. Before giving you a loan, they’ll make you:
- Prove you’re worthy of the loan (or that your partner is).
- Prove the building is in okay shape.
- Take steps to reduce legal risk and provide adequate property insurance.
They’ll make you complete a series of appraisals and inspections. And in special circumstances, they may require environmental reports and/or "four-point inspections" (certifying that the heating and cooling, roof, electrical, and plumbing systems are okay).
They’ll insist on reviewing the survey and title insurance. Then they’ll have you sign dozens of documents that allow them to grab the underlying asset, its income, or both if you start to default.
In other words, they’ll do all the things a reasonable, cautious person would do to cover his bases when lending a substantial sum of money.
When the only money on the line is your money, you should do no less. Just because you’re not filling out an application and jumping through bank-required hoops doesn’t mean you shouldn’t be just as diligent in your research, making sure you’re watching your downside at all times.
Yes, Cash Is King… but Don’t Make King-Sized Mistakes
Do banks sometimes cut corners on their due diligence? Absolutely. Especially in bubble markets, when many of them become little more than money pimps. They just want to get the cash out there, working for them.
But solid banks - the ones that last through up and down cycles - do their homework in earnest. Those are the ones you want to emulate when you’re financing your own deals.
The key point to keep in mind is that when you buy with all cash, you no longer have a bank looking out for their money (and, by implication, looking out for you). So you have to be careful that you don’t make the kind of mistakes I’ve made…
The first time I did a self-financed deal, the closing was on the eve of a holiday weekend. Everyone was rushing out of the office, and I was closing from out of town, relying on an excellent local partner who had a limited power of attorney from me.
I was busy, the title agent was busy, my local partner was busy.
My partner and I were excited, because we had picked up a property in an improving neighborhood for 25 percent below market value and with the potential to cash flow like the Mississippi. I expected her to watch the details, and she expected the closing agent to watch the details. And I guess the agent expected us to watch the details.
Turns out, we missed a few…
For one thing, we didn’t get a survey - and it wasn’t the first time I’d made that mistake.
On one house I bought early on in my career, I assumed the property line was where the owner had surrounded the property with hedges. But it turned out it was five feet inside the hedges. Multiply that by a 300-foot perimeter, and I was shortchanged 1,500 square feet! Wit barely enough room to begin with to accommodate a pool in a pool-type neighborhood, the loss of that 1,500 square feet smarted.
Fortunately, it wasn’t the disaster it could have been. Because I had "bought right," I still made more than five times my cash investment. But I vowed I would never again make broad assumptions on key points,and that I would double-check things like the survey. (And so I did… until I bought with cash.)
But the survey wasn’t our only area of negligence on that house. The coup de disgrace was the property insurance…
Before closing, my partner had obtained a decent insurance quote. But we never got the binder, because the agency never got the check! So, for the entire holiday weekend, the property I bought with all cash was uninsured… ready to be burnt down, blown up, or blown over without anyone anywhere offering me a nickel in compensation if it happened.
Make a Checklist and Check It Twice
For any closing, you should make a checklist. But it’s doubly important when you’re closing with cash, because you no longer have a lender who is (indirectly) doing due diligence for you.
Your checklist should not only include the kind of property inspection I describe in detail in Main Street Millionaire, it should cover the following red-tape P’s and Q’s:
- Get the title insurance commitment in plenty of time, usually at least a week before closing, so you can have your lawyer review it to make sure there are no "weasel exceptions." (You’ll also - at the very least - want to have your lawyer review the closing statement for you.)
- Get the updated survey in plenty of time, usually within a week after the effective date of the contract or at least a week before closing. Then take the survey out to the property and walk it off. If it shows one property line to be 30 feet from the garage door and other property lines to be 25 feet from the center of the street, bring a tape measure and measure it. Make sure you’re getting the land you think you’re getting.
- Make sure the type of deed you specified in your contract is the deed you’re getting. The best kind of deed is usually a warranty deed. That’s where the seller warrants and will back up his right to deed you the property against all potential claimants, past and future. The weakest type of deed is usually a quit-claim deed. That’s where the seller gives up their interest in the property, but they make no warranties as to whether others may have claims against it.
Go for the warranty deed at contract time. Spell it out if your contract template doesn’t.
- Make sure you get an insurance binder, not just an insurance quote. (This goes in the Duh! category, but it’s easy to overlook if you think someone else is taking care of it.)
- Make sure FIRTPA (Foreign Investors Real Property Tax Act) documents are in order. FIRTPA requires non-resident foreign investors to have 10 percent of the gross sales price withheld so the IRS can make sure they get their cut. If the seller is a non-resident foreigner and you (or the title agency) don’t withhold the 10 percent, you as the buyer could be on the hook for it.
There are some exceptions, but this is a potential minefield.
- Make sure that any credits due to you - such as rents or negotiated allowances for repairs - are indeed credited to you on the closing docs.
On residential properties, you’re entitled by law to see the closing statement at least one day prior to closing. Many title agencies do not honor this. Hold them to it so you can make sure they do what they’re supposed to.
- Finally, remember that if the seller chose the closing agent (which is what usually happens), that closing agent often feels almost no fiduciary responsibility to you. So have a conversation with him early in the process, and put in writing the items you want to make sure are in place before closing.
Take charge of these details, and closing with cash will indeed become an option that can help you make a lot more cash.
[Ed. Note: Justin Ford will be one of 12 highly successful real estate entrepreneurs to teach their investment secrets at the Doral Golf and Country Club Resort in Miami this fall. Other speakers include Dave Lindahl (on apartment house investing and condo conversions), Alan Cowgill (on building a multimillion-dollar network of private lenders), Steve Cook (on wholesaling properties for quick cash), Thomas Phelan (on buying real estate with your IRA), plus other expert investors and teachers in the most profitable segments of real estate investing - from pre-foreclosures to short sales. Click here to learn how you can attend this extraordinary 3-day event for less than the cost of your daily newspaper.]
The Best Day to Buy a Stock
The pros on Wall Street know that there is a unique "window" of time that puts the odds of making a winning trade substantially in your favor. And now, one former insider is prepared to let the secret out.
The best part is that, just like clockwork, this strategy works every 90 days. Thanks to government regulations, it has to! And the next few weeks offer a VERY "target-rich environment".
Don’t delay… click here to learn how you can profit from “the most profitable season on Wall Street.”
When to Say "Yes" and When to Say "No"
I make a lot of commitments that unnecessarily add stress to my life. Why I find it so difficult to say "no," I can’t say. But it’s something I’m teaching myself to do.
The first step is to figure out when to say "yes" and when to say "no." Here’s what I’ve come up with…
1. Say "yes" - often but not always - to two people: your spouse and your business partner.
2. Say "no" - as often as you possibly can - to everyone who asks you for help. This would include:
- your lazy colleague
- your shiftless friend
- your spoiled children/grandchildren
- your most self-centered customers
- anyone who isn’t willing to give back
Here’s something else you can do to lighten your load and maintain your forward momentum:
- Write a list of 20 things - people, situations, responsibilities - that cause you stress.
- Reduce that list to 10.
- Reduce it again to three.
- Now pick one of those three - and stop doing it.
If you are like me, the thing that is creating the most stress in your life right now is something you are doing to help out someone who doesn’t deserve it. And if you’re like me, you feel guilty about even thinking about stopping.
Do yourself a favor. Call him up right now and tell him very definitively that you are going to stop doing it at the end of this day/week/month/year. Offer a simple explanation. Don’t feel the need to elaborate. If he objects, say "I’m sorry that this will be inconvenient for you. I am sure you will be fine in the end. But the decision has been made."
And stick to it.
Try it. You’ll be amazed at how good it makes you feel. Do that and don’t take on another responsibility for at least 24 hours.
The First Step for Your New Business
By David Cross
This morning, I talked with a friend in England who is launching a new line of natural cosmetics online. He spent months researching the opportunity, had a number of meetings, traveled abroad to sign contracts, and developed his new business website and shopping cart.
I asked if he’s sold anything yet. He hasn’t. I asked him how he knows people will buy the cosmetics. He has "a good feel about it."
I’m glad he has confidence in his product. But confidence - even with a truly good product - isn’t enough.
Most people who come up with a "great" business idea jump into it without answering one crucial question: "Are people going to buy what I’m selling?" There’s no reason to do extensive research, create sales letters, print brochures, or even produce your product until you know that they will.
In ETR #2057, Paul Smithson told you how to use keyword research to determine whether there’s a good base of potential customers for your product. Another way to find out if your business idea has legs is to test it with Google AdWords PPC (pay-per-click) ads.
Just put together a few small ads (using Michael Masterson’s shortcut method for writing killer headlines). You might, for example, ask people to submit their e-mail addresses in exchange for a free sample of your product (maybe asking for $1 to cover shipping) or a free report full of useful, actionable information related to your product. You can then use their e-mail addresses to send these people - who’ve already shown an interest in your product - further offers.
Depending on the number of people who click on your ads and respond to your offers, you can determine whether your business idea is a good financial risk.
[Ed. Note: David Cross is Senior Internet Consultant for Agora Inc. in Baltimore.]
CLA: Weight-Loss Super-Supplement or a Risk to Your Health?
By Jon Herring
About a year and a half ago, I set out to improve my level of fitness and shed body fat. In addition to closely following the same nutritional and exercise advice we regularly provide in the pages of ETR, I started taking a few supplements that I thought would help. One of these was conjugated linoleic acid, or CLA.
CLA is a fatty acid, found primarily in grass-fed ruminants. It is one of the most beneficial nutrients in grass-fed beef and dairy. In ETR# 1501, I wrote about its range of health benefits, including strong anti-cancer protection. CLA has also been shown to reduce body fat, especially when combined with exercise.
I was eating plenty of grass-fed beef, but to be sure that I was getting enough CLA to make a difference, I also took a supplement.
While my experience with CLA was anything but a reliable clinical trial, it certainly seemed to work for me. After about eight weeks of taking the supplement and exercising routinely, I became about as lean as I have ever been.
My only concern was that the CLA that comes in supplement form is not natural. It is derived by processing safflower oil and, sometimes, soybean oil. I began to hear that this type of CLA could cause negative side effects, so I stopped taking it. A recent article in The New York Times touched on this, mentioning studies which have shown that CLA "can increase blood levels of C-reactive protein, lipoprotein, and leptin - all of which can heighten the risk of heart disease."
Based on my personal experience and the results of numerous studies, it appears that supplementing with CLA can increase fat loss. But it also seems to be connected with unwanted risks. So if you want the many benefits of this nutrient, I suggest that you get it in its natural form by consuming grass-fed beef and dairy and skipping the supplement.
[Ed. Note: We know that many doctors, nutritionists, and health professionals read Early to Rise. What do you think of supplementing with CLA? Are you aware of any negative consequences? Do you believe it’s risky? And for those of you who have tried CLA, what has been your experience? Let us know on the ETR Speak Out Forum.]
It’s Fun to Know: Names and Faces
What does someone named Bob look like? Based on the results of a recent study, psychologists at Miami University have discovered that certain names are associated in people’s minds with certain facial features. A Tim or Andy, for example, is usually pictured as thinner than a Bob. The researchers also found that when a person’s name does not "match" with their features, people will have a hard time remembering the name.
(Source: Science Daily)
What Does Your Mother In-Law Really Think About You?
AHH, In-Laws…Can’t Live With ’em…Can’t Kill ’em! Is There Anything You Can Do to Salvage This “Wonderful” Relationship?
Tired of Your Mother In-Law Thinking You’re Not Good Enough for Her Boy?
I bet when you got married you thought it was just the two of you… right? Never thought for a moment you’d get the whole family, did you? My grandmother used to have a saying that is perfect for this occasion. Here goes…
“If you’re given lemons, make lemonade.”
Let’s face it, your mother in-law (has she driven you COMPLTETLY crazy yet?) isn’t suddenly going to fall off the face of the earth, no matter how much you pray for it at night. But what else, short of hiring kidnappers, can you do? No need to fear, we’ve got you covered. We’ll show you how to control your in-laws without giving in to them. Click here for more info.
- Patrick Coffey
Word to the Wise: Refractory
"Refractory" (rih-FRAK-tuh-ree) - from the Latin for "to oppose" - means stubbornly disobedient or unmanageable.
Example (as used by George Bain in Time): "It’s a head shot of Lucien Bouchard peering out of the dark, openmouthed, teeth showing, eyes glittering and appearing not to have shaved in a week. In another age, the shot might have been held up to a refractory kid with the warning, ‘The boogeyman will get you if you don’t watch out.’"
[Ed. Note: Become a more persuasive writer and speaker … build your self-confidence and intellect … increase your attractiveness to others … just by spending 10 VERY enjoyable minutes a day with ETR’s new Words to the Wise CD Library.]
Michael Masterson
Copyright ETR, LLC, 2007