Don't Let Your Clients Fall Prey to the Gurus

You just never know what you find on the Internet. And in the case of this article by Dominate Preforeclosures , the stuff you find is basically worthless.

For instance the author claims that he made over $50,000 dollars in five weeks by buying a home from a couple who was in financial trouble. After negotiating to buy the home for $145,000, the author was able to secure a loan from a private lender for $175,000. After rehabbing the property, he was able to sell it in two days for $230,000 without a real estate agent. According to the author, he received a check for $51,515.69 at closing.

Is a deal like this possible? Perhaps. Did it actually happen? Not likely.

Here are the clues I found which have convinced me this story is a false one. And agents take down notes so you know what to tell your clients who may fall for stories like the one above.

Clue # 1- The Math is All Wrong

Before he "flipped" the home, the author claims he obtained a loan from a private lender for $175,000 based on the home's "real market value". The private lender will more than likely have been a hard money lender, unless this guy has a rich uncle. So if the home was worth $230,000 after he rehabbed and he obtained a loan for $175,000, he is looking at a loan to value of 76%. I hate to break it to this guy, but most hard money lenders only lend up to 65% of the after rehab value. And to top it all of the points they charge can be anywhere from 7% to 12% of the loan.

Let's give him the benefit of the doubt that he does get a hard money loan at 76% LTV. That means he would have to pay up to $21,000 on points alone. Did I forget to add the 14% interest rate most hard money lenders charge? How about the six months in pre-paid taxes to the county? How about the mortgage payments? How about any transaction costs?
If this guy is leaving all those costs out, who know what else he is leaving out. Without knowing most of the details of this supposed transaction his "profit" is already slashed nearly in half.

Clue # 2- The Time line is Too Short

The author states that "he went to bat for the couple" and negotiated with the bank to release the lien on the house for less than what the couple owed. This is what's known as a short sale. This process typically takes weeks from beginning to end. So the author is expecting to believe that he was able to negotiate the short sale with the bank, rehab the house and then sell the house all in a matter of five weeks? A short sale is a difficult transaction for even experienced investors, not too mention for newbie investors. For all you agents that specialize in short sales, you know what I am talking about.

Clue # 3- Too Good To Be True

I visited the website of the author and found the the sales pitch was just to good to be true. There were no real pitfalls mentioned. He is pitching investing in pre-foreclosures by the use of short sales. As I mentioned above, short sales are not for the faint-of-heart and should really be left to seasoned professional. I also noticed that the author posts a copy of a check from a title company in Helena, Montana. I did a quick search on Realty Times and found that the market in Helena is still a seller's market, so ask yourself why the sellers gave up over $80,000 worth of equity if the market was on their side. In addition why would the bank discount so much as well if the market was on their side as well? It doesn't make sense.

Advice your clients to use common sense whenever they read anything on real estate investing. Sometimes it's easy to catch a B.S. artist, but sometimes it's not. Help guide them in their investing ventures which not only helps them, but also helps you build a steady income.

Happy selling.