Making Hard Cash in a Soft Real Estate Market

• Find the Next High-Growth Emerging Markets • Buy New Construction – at Big Discounts • Uncover Hidden Properties • Raise Private Funds When Bank Lending is Tight

WENDY PATTON JUSTIN RYAN

John Wiley & Sons, Inc.

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“This book shows you exactly how to make a lot of money now—in today’s market. Read it, do it, and you will make it.” —Robert Shemin, bestselling author, Why Is That Idiot Rich and I Am Not??

“Wendy and Justin have put together a marvelous book teaching the reader how to evaluate market changes and emerging markets. It is fantastic!” —Kendra Todd, winner of The Apprentice, host of HGTV’s My House Is Worth What?, and author of Risk & Grow Rich

“This book is ﬁ lled with creative strategies that work in today’s market. A must read for the real estate investor!” —Albert Lowry, Ph.D, New York Times bestselling author of How You Can Become Financially Independent by Investing in Real Estate

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• Find the Next High-Growth Emerging Markets • Buy New Construction – at Big Discounts • Uncover Hidden Properties • Raise Private Funds When Bank Lending is Tight

WENDY PATTON JUSTIN RYAN

John Wiley & Sons, Inc.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada

Wiley Bicentennial Logo: Richard J. Pacifico

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Library of Congress Cataloging-in-Publication Data:

Patton, Wendy, 1964- Making hard cash in a soft real estate market: find the next high-growth emerging markets, buy new construction at big discounts, uncover hidden properties, raise private funds when bank lending is tight/Wendy Patton, Justin Ryan. p. cm. Includes bibliographical references. ISBN 978–0–470–15289–8 (pbk.) 1. Real estate investment—United States. 2. Real estate investment. I. Ryan, Justin, 1974- II. Title. HD255.P378 2007 332.63'240973—dc22 2007012411

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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INTRODUCTION 1

PART I How You Can Still Make Good Money in a Soft Real Estate Market

CHAPTER 1 How Real Estate Investing Must Change When the Market Shifts from Hot to Cool—Why There’s Still Good Money to Be Made in a Cool Market 7

CHAPTER 2 The Secret is Out—How the Wealthy Make Their Money 11

PART II The Psychology of Successfully Investing in a Down Market When Others Are Running Scared

CHAPTER 3 The One Thing that Stops Investors Before They Even Start 17

CHAPTER 4 The Science of Risk Management for the Real Estate Investor 25

PART III The Best Investment Strategies for a Soft Market

CHAPTER 5 Find the Next High Growth “Emerging Markets” 37

CHAPTER 6 Time the Market—When Will It Be Safe to Start Investing Again in Nevada, Florida, Arizona, and Other “Burst Bubbles”? 63

CHAPTER 7 The Power of Lease Options in a Soft Market 71

CHAPTER 8 A New Opportunity in the Soft Market—Land Contracts & Seller Financing 81

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CHAPTER 9 Getting the Deed from Sellers in Trouble—AKA “Subject To” 93

CHAPTER 10 Invest in Foreclosures and Other Hidden Bargains 103

CHAPTER 11 Buy Unsold, Discounted Inventory from Builders in Distressed Markets 113

CHAPTER 12 The Way to “Buy and Hold” in a Down Market 121

CHAPTER 13 Our Favorite Investment Strategy—Investing in New Construction, in the Emerging Market, in a Hands-Off Fashion 127

PART IV Creative Financing in a Soft Market When Bank Lending Is Tight

CHAPTER 14 Determining How Much Investing You Can Afford 137

CHAPTER 15 Successfully Financing Your Real Estate Investments 151

CHAPTER 16 The Importance of Using Other Peoples’ Resources 161

CHAPTER 17 The Nuts and Bolts of Numerical Analysis 169

PART V New Construction Investing: An Ideal Soft-Market Strategy

CHAPTER 18 The Development Process—How It All Comes Together 183

CHAPTER 19 The Power of Group Buying 195

CHAPTER 20 Exit Strategies—When and How to Sell 203

CHAPTER 21 Base Your Investing on a Foundation of Reality 215

APPENDIX A 223

INDEX 225

fftoc.inddtoc.indd xxiiii 66/25/07/25/07 5:27:305:27:30 PMPM This book is dedicated to the real estate investor—the person who is willing to work for the most precious thing in our world—freedom.

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We want to thank those that assisted in multiple ways with this book, including but not limited to: Michael Gott, Pete Scheepens, Sara Lechleitner, Beth Slade, Debbie Kessler, Steven Sirop, and Mark R. Walenczyk. We want to give a special thanks to Robert Golden who was there from the beginning to the end. We could not have done this without any of these people. The life experiences we have had in real estate have motivated us to share them with the rest of the world. Wendy Patton and Justin Ryan

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There is nothing more important than being in the right market at the right time. This is more important than ever right now in our country. Why? Because so many markets have softened. Several years ago, a real estate investor could make one mistake after another and still make a profi t, because many markets were hot. Things are different today. A new set of strategies is required. Right now, if I was investing only in my home town, profi ts would be dismal at best. Today, nothing is more important than knowing exactly how to invest in our current real estate climate. There is still a ton of profi t to make in today’s market, if you know exactly how to do it. In fact, there is even more money to be made. In today’s market, so many people think “real estate is not a good investment right now.” This creates less competition. And people who have some very powerful “contrarian” insights will do very, very well. I started investing in real estate at the ripe old age of 21 (this is Wendy Patton writing). I started investing primarily with rental properties and single-family homes in the Detroit, Michigan area. I always thought that my ideal portfolio for these types of properties would be right in my own back yard. I wanted to be “close to them” so that I could be in control. Keeping my properties geographically close also enabled me to do something else I was not aware of at the time; it allowed me to stay in my comfort zone! I didn’t realize back then that by stretching my comfort zone, a skill that my partner Justin Ryan taught me, I could make so much more money in real estate investing while freeing up more of my time. Today my husband, Michael Gott, and I invest in many emerging markets across the United States. We research and

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determine where we want to invest based on many different indica- tors, and then we search to fi nd the right opportunity. We are not tied specifi cally to our local market any longer; emerging-market investing has liberated us and given us our fi nancial freedom. Let me tell you the story that changed the way I invest in real estate. My friend Sharon made $200,000 in a few months, and because I got in a few weeks after she did, I only made $100,000 on the same deal. Sharon was standing in the blazing hot sun. It was 90 degrees with 90 percent humidity. She was waiting with more than 1,000 other people for the chance to buy 1 of 200 units that were being made available for pre-sale in a newly developed condo- minium project. (When I heard Sharon recount the story from that day, I said to myself, “There must be a better way!”) As the day progressed and the heat index was still climbing, Sha- ron was struggling to stay out in the heat of the day, but she really wanted one of these condos. There was no place to go except back to the car to cool down, but in this lottery you had only 15 minutes to respond when your name was called. If you did not respond, your name was removed from the drawing and any hope of getting into the project at such an early stage was gone forever. The day seemed to drag on and on. When she looked at her watch, she realized she had been out in the heat for six hours. Then suddenly, like a shot in the dark, she heard her number called! She ran to the trailer where she put down her reservation deposit to buy the condo. During the waiting, another name was called out: Carleton Sheets, the man himself. She thought to herself, “If Carleton is buying one of these units, then this truly must be a good investment; he is no dummy when it comes to real estate investing.” Figuring he lived nearby and he really knew and understood the market, she felt that she was on her way to an outstanding investment, and that’s exactly how it turned out to be. The unit Sharon picked that day ended up increasing in value more than $100,000 in weeks! A good investment? I would say so! It wasn’t even built, and she had nearly doubled her money! After hearing this story from Sharon, I thought to myself, I want one of those units! This was the launching point for my personal pre- construction investment portfolio, and although I’ve been a successful real estate investor for many years, this experience changed the way that I invest.

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It wasn’t long before my fi rst opportunity came. Shortly after hearing this story, one of the units in that same development became available, as someone who had reserved a unit on that hot summer day could not come up with the 20 percent down required. So I stepped in and purchased it. On that day, only the reservation fee of $10,000 was required. In a few weeks, the remainder of the 20 percent down was required. At that time, some of the original buyers were not able to complete the transaction. When the developer went to resell those units, he did not sell them for the same price. He sold them for $100,000 more! Even though a big increase came that quickly, still we decided to purchase our unit. And I sure am glad that we did, because here’s what happened next. Just months after we had locked up our unit, values had increased by another $100,000. My friend Sharon and Carleton Sheets received $200,000 of increased value. We received $100,000 of appreciation, and the unit was not even built yet. Getting in early is very important—the earlier the better. Imagine the profi t potential if we had gotten in before Carleton or our friends even knew about this project? That is what we do now. No lines, no heat, no negotiating, and we get all of the profi t on our property before the shovel hits the ground. This book covers many strategies for making money in a soft real estate market, but we explain the details of this “new construction investing strategy” in detail in Part III of this book. My husband and I met Justin Ryan in the year 2000 at a real estate conference that we were hosting. He impressed me as a talented, creative, lifelong real estate investor, speaker, and coach. One day he approached me about investing in real estate as he was evaluat- ing his own portfolio. He felt that he was in a rut after many years of being a traditional landlord, and he wanted something new. I could totally relate, and I shared with him what we were doing with new construction investing in emerging markets. I shared how it was a hands-off type of investing strategy. This was all Justin needed to hear, and he soon joined us in this fantastic venture. In 2005, we formed a company that takes new and seasoned investors on tours into emerging markets and shows them pre- screened opportunities from developers. We work directly with developers so that our attendees get a solid investment opportunity without standing out in the hot sun, and don’t have to compete with 1,000 other people to buy 200 units. On our tour they get to pick a unit or home before the public offering and usually below

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public pricing. This concept is good for the developers, as it helps with their marketing expenses and also their holding costs, which we will explain in more detail in this book. Our customers can, and do in many cases, purchase investment real estate, or their second- ary or primary residence at a great discount before the public is even aware of the project. This, combined with the development being in an emerging market, or a market that has been appreciat- ing consistently, can be a very powerful strategy for making sub- stantial proﬁ ts. This book was written to share with our readers how to invest in a soft real estate market. This is, by far, the most important topic for today’s real estate investor. Investors who know how to invest in the right emerging markets put themselves in a very powerful position. We have a passion for sharing our knowledge and the information we have learned over the years. In this book, we have also detailed how to use various strategies in soft markets, negotiating with developers, how to raise extra funds for real estate transactions, the power of investing in hidden properties, and most important, how and when to exit from your investment. We both look forward to taking this educational journey with you! We hope you enjoy reading it as much as we enjoyed writing it!

Wendy Patton and Justin Ryan www.InvestingTours.com

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How You Can Still Make Good Money in a Soft Real Estate Market

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How Real Estate Investing Must Change When the Market Shifts from Hot to Cool

Why There’s Still Good Money to Be Made in a Cool Market

In recent years, many real estate markets in our country were hot. We saw record levels of appreciation and a lot of people made a lot of money. This caused a certain belief system to develop. This inaccurate belief looks something like this:

Now that the real estate markets have slowed down, it’s not possible to do well as a real estate investor.

This is not true, but market conditions have caused many folks to believe that it is true. All of the real estate pros, who have been around awhile, know the truth: We make great money in any market. Our strategies just change. This next statement may shock you.

Not only is it an excellent time to invest in real estate, in many ways, it is actually a better time to invest!

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You may have just thought “You have got to be kidding me. That isn’t true at all.” We commonly hear that reaction from our inexperi- enced real estate investors. Our experienced folks know the truth. More money has always been made in a down market than in an up market. If you are an experienced real estate investor, you know this statement is accurate. If you’re newer to real estate, you feel that it’s so, maybe without knowing exactly why. Why are markets softer? We’ll talk about that during our time together. But we’ll spend most of our time exploring a more important topic:

How do I invest in today’s softer market and still make a good proﬁ t?

Very few of us have control over the real estate market. How- ever, all of us have an enormous amount of control over how we invest. In fact, we have 100 percent control over what investments we select. Therefore, this book will focus on the very important topic of how we invest in today’s soft market, and less on why today’s market is the way it is. We will be teaching many funda- mentals for making wise decisions and choices for investing in this particular market. When markets go soft, things get interesting. Even though an abundance of opportunity exists in a soft market, many people still won’t take action. Why is this? Because by nature, people follow a “herd” mentality. Most people believe that for something to be the “right” thing to do, many people need to be doing it. Actually, this is not true at all. But this is generally how people think and act. We are going to teach you why you want to be in a market before the herd gets there. Good times create action by people with a herd mentality—many more people become interested in real estate investing and thou- sands of new investors enter the market. This, in turn, creates a lot of competition. All this competition from these newbies makes it harder to negotiate good deals, because so many people are looking to buy, buy, buy. As a result, the good times eventually end. The real estate market becomes “oversaturated” with investors and eventually the market needs to “adjust.” This happened in many markets in 2006 (such as Florida, Arizona, and Nevada). Believe it or not, this is a good thing.

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An experienced insider’s secret—that many folks don’t want you to know—is this . . .

When the markets go soft the playing ﬁ eld is being “reset.” Short-term opportunists are removed and an abundance of opportunity gets created for the seasoned investors who know how things really work.

And here is where you really create opportunity for yourself. By using the strategies in this book, you will be able to embark on investments that are in the right place . . . at the bottom. Once you have entered, you wait. You manage your investments, and add to your portfolio. And eventually something will begin to happen. The market will begin to come back. And when the market does come back, here’s what you do . . .

You exit from your transaction when the frenzy is still in its early phases.

We will talk more about this during our discussion of market timing. In the early stages of a market rebound, all the short-term opportunists become active again. And your exit strategy is ready. Don’t be greedy. Exit when the frenzy is still in its early phases. One of our favorite expressions is this one: “Pigs get fed, but hogs go to slaughter.” There is a lot of truth to that in the real estate business. But it doesn’t have to be that way for you. There is an abundance of opportunity in our country in good times and bad. When the market changes, our strategies simply must change with the market. This book will outline each of those strategies for you. This is how the wealthy make their money. They know when and how to change. After reading this book, you will also know when to enter a market and when to leave it.

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The Secret Is Out

How the Wealthy Make Their Money

Novice real estate investors make one big mistake: they hunt for property only in their own backyard. If your own backyard is not in one of our country’s best markets to invest in, you are missing out on the most profi table investments in our country. When you invest in the stock market, do you care where the company you’re investing in is located geographically? Of course not. We only care where that company is located fi nancially so we can make an intelligent investment decision. If stock investors were willing to invest in companies located only in their own hometowns, it would be senseless. They would be missing out on some of the best investments for no valid reason. The wealthiest real estate investors, who have done the best in our industry, think about real estate investing exactly the same way. They couldn’t care less where their properties are located geographically. They only care where their investments are in the real estate market cycle. When you commit only to invest in the best real estate markets in our country, you have also committed to making the most profi t. This is how it will always be. A person can either realize this fact and make more profi t, or continue to fi nd excuses for staying close to home, and making only mediocre profi t. One of the classic reasons why so many real estate investors invest only in their own hometowns is because staying close to home keeps them inside their comfort zone. We do this because

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