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Are Russ Whitney’s property improvement loan techniques illegal? by John T. Reed 4

Wording of the application form
As I have mentioned, the actual loan application you fill out invariably contains pointed questions. Answering them inaccurately violates multiple laws.
If your files contain any improvement loan applications—Title I or otherwise, I would appreciate it if you would send copies of them to me so I can get the exact questions asked during the period when Whitney was seeking these loans. I already have one source: one of Whitney’s own books. His Real Estate Forms Book contains some samples.
FNMA residential mortgage loan application Form 1003 (Revised 8/7 Cool

“I/We fully understand that it is a federal crime punishable by fine or imprisonment, or both, to knowingly make any false statements concerning any of the above facts as applicable under the provisions of Title 18, United States Code, Section 1014.”
Department of Housing and Urban Development Federal Housing Administration Credit Application for Property Improvement Loan Form Approved OMB No. 63R-0037 (Revised 3/76) “PROCEEDS OF THIS LOAN WILL BE USED TO IMPROVE THE DESCRIBED PROPERTY AS FOLLOWS:” and “WARNING—Any person who knowingly makes a false statement or a misrepresentation in this application or causes such a false statement or misrepresentation to be made shall be subject to a fine of not more than $5,000 or by imprisonment for not more than 2 years, or both, under provisions of the United States Criminal Code.” And for persons who sold the improvements to the property owner, “I/We certify that the above statements are true, accurate, and complete to the best of my/our knowledge and belief.” and I/We certify that 1. I (we) am (are) the person(s) who sold the job. 2. The contract contains the whole agreement with the borrower. 3. The borrower has not been given or promised a cash payment or rebate nor has it been represented to the borrower that he will receive a cash bonus or commission on future sales as an inducement for the consummation of this transaction, that the improvements have not been misrepresented, no promises impossible of attainment, no encouragement of trial purchase, no promise that the improvement will be used as a model for advertising or other demonstration purposes, and no offer of debt consolidation.”
‘The bank was treating me more coldly’
On page 8 of Overcoming…, Whitney says “The bank was treating me more coldly, too.” He surmises this was because of his youth and aggressiveness. It could also be that the bankers suspected that Whitney was not giving them accurate estimates of improvement costs and was not putting all of the loan proceeds into improvements..
Lenders like young, aggressive businesspersons—who are honest and competent. Like professional baseball teams, they try to identify such businesspeople as early as possible so they can build relationships with them. If they don’t, they fear they will lose them to the competition.
Honest mistake
As I said, estimating is a complex art and science. Even if you make a good faith effort to be accurate, you will inevitably make mistakes—either over or under. As long as you make a sincere, good faith effort to get it right, no one is going to prosecute you for being a little off.
The problem with Whitney, is that he obviously did not make a sincere, good faith effort to give the lenders accurate estimates of the improvements costs. On the contrary, he deliberately, grossly overstated the costs of the improvements in order to use improvement loans for other purposes like down payments on other properties. In at least one case—aluminum siding on 3160 Guilderland in Rotteram, NY—his statements make it appear that he did not do the promised improvements at all. That is immoral, unethical, and illegal and you could go to jail for doing it.
Assumption of Title I loans
On page 5 of Overcoming… and elsewhere, Whitney says he sold a property and had the buyer assume his Title I mortgage. I am not sure that is allowed. I would have to see whether the mortgage contained a due-on-sale clause.
‘You should have enough cash flow to cover the payments’
Whitney says this or similar words over and over. He is right to admonish readers to make sure they can make the payments on a property improvement loan. But his statements or implications that this is easy or normal are bull.
As even investors with very little experience know, it is extremely difficult to buy rental property that has positive cash flow. In almost all normal deals, the cap rate (net operating income divided by purchase price—net operating income is all income minus all expenses other than the mortgage) is lower than the weighted annual constant (loan-to-value ratio of all mortgages on the property multiplied by the weighted average annual constant of the mortgages—annual constant is the total payments for the year divided by the loan balance). When the cap rate is lower than the weighted annual constant, you have negative cash flow. Trust me, properties with normal, 75%- or 80%-of-value mortgages that have positive cash flow are extremely rare.
Mind you that’s with 30-year first mortgages. Improvement loans generally have higher interest rates and much shorter terms. That means they have much higher payments as a percentage of the amount borrowed, which is another way of saying they have higher annual constants.
Here’s an example. Here is what the annual payments and annual constant would be on a self-amortizing (no balloon payment), $10,000, 10% home improvement loan for various terms.
Term
Annual payments
Annual constant
30 years
$1,044.38
10.448%
15 years
$1,278.87
12.79%
10 years
$1,572.70
15.73%
7 years
$1,975.68
19.76%
As you can see, it is almost twice as hard to have positive cash flow with a 7-year improvement loan as a 30-year mortgage. Yet there are virtually no 30-year improvement loans, and Whitney blithely tells you to make sure that your net operating income covers the payments and repeatedly says you “should” be able to do this. When elephants fly!
You will find that unless you make a bargain purchase at a substantial discount below market value—like 25% or more—your rental property will have negative cash flow with just an 80% of value first mortgage. To buy for nothing down as Whitney advocates, and then borrow a property improvement loan to boot, will drive your negative cash flow through the roof! See my article on positive cash flow. To learn how to buy properties for at least 20% below market value, see my two-volume book on the subject.
In other words, Whitney’s improvement loan techniques are not only arguably unethical and illegal, they are also impractical in the sense that you cannot afford to make the payments on all that debt from your rents unless you made an extraordinary bargain purchase.
‘Motivated sellers’
Whitney often claims to have purchased property at great bargains because the seller were “motivated.” All sellers are motivated. Indeed, the various reasons Whitney cites for the seller selling in the various deals he brags about sound quite normal to me. They are not distress situations.
In the real world, the only way you get a bargain from a motivated seller is if he or she must sell in an enormous hurry—like they have to close in a couple of days—and you move with enormous speed to tie the deal up before the other buyers arrive. The situations Whitney depicts come nowhere near that. We have all read about sellers receiving multiple offers on properties. That happens when the asking price is only a couple of percent below market value. Imagine the crowd you attract when you put a property on the market for 20% below market value.
Shoddy construction work
If you read various property improvement loan Web sites, you will find that shoddy construction work is a big concern. That’s why some lenders only work through contractors they know well.
How does what Whitney did and what he recommends come out in that regard? I think if you look up shoddy construction in the dictionary, Russ Whitney’s picture will be next to the definition. Listen to what he says about getting work done on his properties and yours.
Source
Whitney comment
p.9 Overcoming the Hurdles and Pitfalls of Financing, Locating, and Analyzing of Real Estate
“…go to a discount carpet outlet and check the remnant carpets. You can get big enough remnants to cover any normal size living room or bedroom.” [Reed comment: This means every room has different color wall-to-wall carpet.]
p.9 Overcoming the Hurdles and Pitfalls of Financing, Locating, and Analyzing of Real Estate
“In middle and lower income units, I saved money by not using padding and installing the carpet myself.”
p.9 Overcoming the Hurdles and Pitfalls of Financing, Locating, and Analyzing of Real Estate
“…if you make a wrong cut the first time or make a mistake, you will still get the same amount of rent…I’m sure the tenant will not come look at the unit and say, “hey buddy, there’s a mistake there in the carpet. I want the apartment for twenty-five dollars less per month.’ I have made many mistakes on all different types of things from panelling to painting…”
p. 25 Overcoming… Financing, Locating, and Analyzing…
Buy used mattresses for your rooming houses
p.64 Building Wealth
“…plenty of people around who are looking for part-time work…students…other people…who will do painting and other fix-up work on weekends at very affordable rates.
p.64 Building Wealth
“You don’t have to pay a painting contractor $20 or $30or more an hour when you can get a teenager to do the same work for $8 an hour.”
p.71 Building Wealth
“Either install them yourself or hire a handyman to do the job; there’s no reason to use a licensed electrician.”
p.71 Building Wealth
“Purchase carpet…and use your handyman for this job, too.”
p.67 Building Wealth
“Become a Highly Paid Contractor Without a License or Ever Hammering a Nail—Even if You Don’t Know Anything About Construction” subhead
p.7 Overcoming the Hurdles and Pitfalls…
It was too expensive to put aluminum siding on the whole building, so I had the front done to dress it up. We painted the other three sides to match.”
p. 14 Overcoming… and County clerk’s office
Had fire in 812 Grant Avenue. “I really didn’t want to go through the hassle of fixing the property, so I gave it to [my handyman]…” [Reed comment: Even though the fire “burned the interior of the apartments pretty bad,” according to Whitney (p.14 Overcoming…), the deed to the handyman was almost two years after the fire and indicated that the property taxes were in arrears and that Whitney had been cited for housing code violations in the property.]
Improvement lenders are concerned about shoddy construction because they want the property value to be enhanced by the improvements in order to provide increased security for the mortgage if the loan is secured. Also, borrowers who are unhappy with improvements sometimes irrationally decide they do not need to make the payments on the loan because the work was shoddy. Since the lender did not do the work, they are understandably not happy about being blamed for it or for not getting their loan money back with interest. Lenders want to avoid shoddy improvement construction because they know an ounce of prevention is worth a pound of cure.
I believe it’s safe to say that the descriptions above of the way Whitney improves his properties would not be well received by Whitney’s lenders.
Paying yourself
A reader tells me he attended Whitney’s “Millionaire University” and that at that session, Russ told the students to pay themselves a paycheck ot of their business account weekly then put the money back in the account. This was to genrate cancelled checks to prove income to qualify for loans. The student says he got into an argument with Whitney’s staff members about the ethics of this.
Good for him. Sounds not only unethical, but also illegal to me. If it is not an attempt to mislead, what is the point of doing it?
Should you follow Whitney’s advice?
Should you follow the Whitney approach to improvement loans.?
No way!
You could go to jail! You could also lose your good reputation. Loan officers are not as dumb as Whitney implies. Nowadays, lenders are also smarter about ferreting out this sort of fraud—sometimes requiring inspections of completed work, receipts, and so forth. There is also the issue of making the payments if you do manage to defraud some lender into lending you more than the cost of your improvements.
It is outrageously irresponsible for Whitney to brag about and advocate his “overfinance” improvement-loan techniques without warning you of all the stuff I have told you about in this article. He is charging “admission” to send you into a “minefield” that he misrepresents as a “picnic ground.” I am warning you that it is a “minefield” and giving you a “map” of where the “mines” are. No charge.
Property-improvement loans make sense in many situations—for improving properties only. For them to make sense, you must make a higher return on the improvement than the interest rate, furthermore, you must be sure you can make the payments on these high-annual-constant loans.
Copyright 2002, 2003 by John T. Reed
Last update 3/11/03
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John T. Reed, a.k.a. John Reed, Jack Reed, 342 Bryan Drive, Alamo, CA 94507, Voice: 925-820-7262, Fax: 925-820-1259, Email: johnreed@johntreed.com

CONSUMER WARNING NOTICE: I recently saw Russ Whitney on a late night TV infomercial and then attended one of his "free" seminars. Unfortunately I believed all of their LIES and FRAUDULENT CLAIMS and I paid thousands of dollars to go to his "training camps". Needless to say I was clearly ripped off, cheated and lied to by Russ Whitney and his employees (band of thieves). My mistake was not searching the Internet to find out more about Russ Whitney and his company's HORRIBLE reputation for fraud, deception and illegal activities. Had I searched online I would have found out about THOUSANDS of customers being cheated, HUNDREDS of investigations by the Attorney General into the fraud of Russ Whitney and his company's, and that Russ Whitney himself is a CONVICTED VIOLENT FELON and spent years in PRISON. I saved the cached pages from the major search engines of the John Reed lawsuit with Russell Whitney and the TRUTH and FACTS that Reed discovered during his investigation of Whitney. I am posting this information on real estate discussion boards so other people do NOT get cheated and ripped off like I did.