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John T. Reed' review of Russ Whitney' book Building Wealth 5 "One of America' youngest self-made millionaires by the age of 27" The back cover of Building Wealth says, ""¦he became one of America' youngest self-made millionaires by the age of 27." He turned 27 on 11/18/82. He lost a civil suit on 10/27/87. The judgment in that suit was entered against Whitney on 1/14/88 in the amount of $1,190,809 (Schenectady County Judgment Index 82-860). Whitney' homeowner' insurance company"”Aetna"”paid $100,000 under that policy. That left $1,090,809 for Whitney himself to pay. Phil Rodriguez, the winning attorney, said Whitney subsequently threatened to file bankruptcy if the winners forced him to pay the whole judgment. In order to declare bankruptcy, you must swear under oath that you have a negative net worth. In other words, you must swear that your liabilities exceed your assets. By threatening bankruptcy, Whitney was stating or implying that his net worth, minus the remaining judgment amount"”$1,090,809, was negative. That means his net worth was less that $1,090,809 in February of 1988. That, in turn, makes it extremely unlikely that he had a net worth of more than $1 million on his 27th birthday: 11/18/82"”five and a half years earlier. Above, I figured that Whitney owned $98,000 worth of real estate on 11/18/80. If he was a millionaire two years later, he must have made $1,000,000 - $98,000 = $902,000 in the interim. Did he? 8 Hawk resale On page 12 of Overcoming"¦, Whitney say 8 Hawk Street closed 11/3/79. Actually, it was 12/3/79. And he says, ""¦my profit when I sold it a year and a half later was and still is a handsome one." Actually, he sold it on a land contract on 1/29/82"”more than two years later"”as part of a three-property deal that also included 20 Swan Street and 455 Hulett Street. Was it a "handsome profit?" Take a look: Address Purchase price Sale price 8 Hawk Street $23,000 . 20 Swan Street $25,500 . 455 Hulett Street $6,500 . Total $55,000 $72,000 Not bad, but it doesn"t constitute much progress toward the $900,000 he needs to be a self-made millionaire at age 27 later in 1982. But let' look at the big picture of this sale date 1/29/82 This isn"t just any date. You"ll recall that Whitney hit a pedestrian on 11/15/80. On 6/8/81 he was giving his deposition in the civil suit filed against him. At some point in that period, the Schenectady County district attorney tried unsuccessfully to get a grand jury to indict him. Whitney decided it was time to get out of Dodge, so to speak. Why? On page 47 of Building Wealth he says, "I was financially independent because of the income my properties and businesses generated [What businesses"¦Oh, never mind], so I decided it was time to investigate investment opportunities in other parts of the country." Whitney makes no mention whatsoever of his hitting the pedestrian or the resulting criminal and civil legal proceedings anywhere. Whitney says his decision to move to Florida was caused by better weather and growth prospects. In March or April of 1981, two or three months before he was scheduled to give his deposition, he and a buddy drove to Florida to investigate investment opportunities (Overcoming"¦ page 26). While there, he agreed to buy some vacant lots requiring $3,000 down Upon returning, they decided to move to Florida in September of 1981. Here is how Whitney characterizes his situation between April and September 1981 on page 28 of Overcoming"¦ "You talk about pressure. I was low on capital because of my co-op escapade and had to come up with $3,000 for the lots in Florida to boot! At this point, Ingrid and I had about $3,500 or $4,500 in the bank. The Lincoln Avenue [purchase] was coming up and I needed $1,500 for closing costs

and down payment there. Oh, brother." Sounds like one of those cliffhanger movie serials, doesn"t it? Except didn"t I just quote him on page 47 of Building Wealth saying he decided to go to Florida because of his financial independence and income from his properties and businesses? Which book do you think is more accurate? The one written in 1984 (Overcoming"¦)"”or the one written in 1994 (Building Wealth)? According to the Building Wealth version, he leisurely decided to leave town because he was bored with playing in his money bin all day. If his situation was as he depicted in Building Wealth at that time, he was under no pressure whatsoever. Why not just sell off properties and move whenever you sell enough of them? What' your hurry? Maybe the titles of his books should be Overcoming the Hurdles and Pitfalls of Investing in Real Estate (1984) and What Hurdles and Pitfalls? (1994). Building Wealth is more in tune with the no-cash, no-credit, no-risk, no-effort marketing pitch needed to sell get-rich books in the nineties and thereafter. "Satan" On page 31 of Overcoming"¦, Whitney tells us about "Satan." Satan is the buyer of many of his property who caused Whitney all sorts of problems because of his dishonesty"”or at least that' Whitney' side of it. Whitney calls him Satan because, ""¦my real description could not be printed." Rooming houses One of Whitney' big tricks is to convert single-family houses to rooming houses. He says it' easy. In fact, it is generally illegal because of zoning. Furthermore your neighbors will typically be out in front of your rooming house carrying torches and nooses. Rooming houses rank right up there with tanneries and pig farms (or slaughterhouses) in popularity with neighbors. Also, rooming houses are the sort of densely occupied buildings that trigger such expensive, mandatory, retrofit, safety requirements as fire escapes, crowd bars on exterior doors, sprinklers, and fire alarm systems. I surmise that he just did it and got away with it a number of times, but I do not think it' appropriate advice in a how-to book for beginners unless you are going to explain how to get approval from the local government for the conversion. Also, the book should explain the unique management and safety challenges of such properties. Source? Whitney quotes various statistics and studies that he does not identify"”like the real estate urban legends that 95% of people end up in poverty if they do not invest in real estate and that the vast majority of the rich became so through real estate. The recent Forbes cover story about U.S. billionaires says only 14 of 243 or 9.8% got rich through real estate. And when he does identify, some of the sources seem unlikely. For example, he quotes Abraham Lincoln, "Things may come to those who wait, but only those things left by those who hustle." Doesn"t sound like Abe' style"”or even phraseology that anyone used in the 1860'. He attributes another quote to C.W. Gran. I never heard of him, nor have any of my quotation books, my encyclopedia, or the Google Internet search engine. Positive thinking Like so many gurus who target novices, Whitney is big on positive thinking and smiling and hates "negativity." To a salesman like Whitney, negativity is anything that gets in the way of his sale, like pointing out that converting properties to rooming houses is very difficult to do legally. The chapter in the book where Whitney sounds most skilled is also the one that is the scariest"”the chapter on salesmanship. I and others have commented that the mass market real estate gurus are far more salesman than real estate experts. I have also noted that being a great salesman generally means that people who know you cross to the other side of the street when they see you coming. His sales chapter is so manipulative it' creepy. If I were to go to one of his "free training" sessions"”really a pitch for his non-free seminars and such"”I would leave my checkbook and credit cards at home for fear of being manipulated into falling for one of his pitches. I was bemused to see that a couple of other people made that same recommendation on the Internet. Two people who bought Whitney stuff and regretted it said they felt as though they had been "hypnotized" by Whitney or his salespeople. Some of Whitney' approaches bring to my mind the tactics of religious cults or North Korean prisoner of war interrogators"”like keeping the meeting rooms very cold and urging audience members not to listen to "negative" friends or relatives.. Good stuff Whitney admits to some of his mistakes"”almost unknown among mass market gurus. I liked his chapter on how to build and repair credit. The other guys say you don"t need good credit to make a fortune in real estate. I especially liked his chapters on building a business (not necessarily real estate investment) and his final general chapter on how to succeed. They contain decent advice and sound like they are written by a guy who knows what he is talking about because he did it. Many of the mass market gurus sound like impersonators. Biweekly mortgages One of Whitney' businesses sets people up to profit from biweekly mortgages. Apparently, you buy software and a computer from Whitney, then you persuade people who have home mortgages to send half the monthly payment to Whitney every two weeks. He then makes the monthly payments to the mortgage lender plus a 13th monthly payment each year. And he sends you a little cut. This extra payment reduces the amount of interest the home-owner pays over the life of the mortgage. This is goofy. Why would anyone need Russ Whitney or his followers to send in an extra mortgage payment each year? He says they lack the self discipline. So let them get mortgages with shorter terms. The book is generally quite articulate, although in the biweekly mortgage chapter, Whitney sounds very much like a high school dropout. I suspect the biweekly mortgage business might trigger laws pertaining to trust and escrow companies and possibly even banks. One would think Whitney would need to be licensed or chartered and have posted bonds to handle large sums of consumer money. And what idiot would trust his mortgage payment to a get-rich guru like Whitney? He also sounds like dropout Russ when describing how he deposited $1,000 in a local bank, borrowed against it, put the money in another bank, etc. The big trick was that he made the payments on time, thereby establishing many bank relationships. This is an old chestnut of mass market gurus"”and I do mean old. When did this last work"”when George Bailey was head of the building and loan in It' a Wonderful Life? There is still such a thing as a relationship with a lender, but you don"t establish it by putting $1,000 in an account, then borrowing against it. That is more likely to cause a banker to think you"re stupid. Nowadays, your credit rating is based on comprehensive records of your finances and payment history, not just what happens at one bank. They also rely heavily on credit scores like those from Fair Isaac Company (FICO). This idiotic tactic Whitney advocates is from a bygone day before computers. Cash at closing Whitney has a chapter titled "Walk away from the settlement table with cash every time you buy." To experienced real estate investors, doing such a thing is an oddity"”like getting a two-dollar bill in change. But with novices, cash at closing is big. Almost invariably, it' merely a loan that has to be paid back. But novices regard it as found money. One of Whitney' techniques involves a combination of institutional and seller loans that exceed 100% of value. Institutional lenders will generally reject such loans on rental property. He says to negotiate any prohibition against such secondary financing out of the institutional mortgage by telling the banker you "eventually" want to seek a second mortgage. He does not say to mention that "eventually" means tomorrow. In fact, you can rarely negotiate mortgage terms today. The vast majority are sold or intended to be saleable to the secondary market and must use standard contract documents as a result. He also advocates characterizing the cash at closing as a "repair and redecorating allowance" from the seller"”as if the first lender would not see through that ploy. Or he says you "could" tell them that you want to "consolidate some bills, pay off a charge card," etc. or that you "have a commission check, tax refund, or family gift due in the next 60 days." He does not mention that any such statement must be true or you have committed fraud. Concealing secondary financing from an institutional first mortgage lender is generally a civil and/or criminal violation. Prorating rents Another cash-at-closing technique he advocates is closing on the 3rd of the month to get a large amount of rent credited to you at closing. I have noted that benefit myself, but I gave the full story. That is, it is to your slight advantage to buy at the beginning of a month when you expect significant positive cash flow and at the end of a month in which you expect significant negative cash flow. Whitney says to always buy at the beginning of the month. He totally ignores the fact that you will have to pay the operating expenses related to that rent before the next rent due date. In other words, closing on the third of the month is only the slightest good deal and that' true only when the building has positive cash flow. You don"t get to keep the rents; only the positive cash flow. The rest of the rent rushes right back out the door to pay the operating expenses and mortgage before the end of the month. He has similar comments about the rent security deposits you will be credited at closing when you buy rental property. At least here, he emphasizes that the deposits are the tenants" money, not yours. But I see no reason even to mention the security deposits as a cash-at-closing item. In many, if not most states, the deposits must be kept in separate accounts and not commingled with the landlord' money. Even where that is not the case, it is neither prudent nor moral to commingle the funds"”even in your mind. Property management Most mass market gurus say you never have to worry about property management. You just hire a property management company. Whitney has a different slant on that. He says to start a property management company to manage your own properties. I agree, although I see no reason to incorporate as he advocates. Just do it. But then he loses me when says to offer your property management services to other owners. He says the fees you get range from 10 to 15%"”higher on hard to manage properties. The fees are nowhere near that high. The Institute of Real Estate Management says property management fees range from 4.6% to 5.7% in apartment buildings. That' based on a huge nationwide study they have been doing for decades. He does not mention that you must have a brokers license to be a property manager of other people' properties. He also says he bills his property management clients at a 100% markup for maintenance labor performed by Whitney' employees and for parts that he buys at wholesale. He says he still charges market or less even after such markups. That seems unlikely. Such markups represent a huge conflict of interest. It would take a saint to resist the temptation. Russ Whitney don"t sound like no saint when brags about using fake drivers licenses and such. A property manager should constantly search for and use the suppliers and subcontractors who offer the best value for his client. But, the property manager, being both decision maker and bidder, could always slightly underbid outsiders and get every job. That would cause outsiders to stop bidding. The Certified Property Manager Code of Ethics has 2 pertinent canons: Article VII A CPM shall not represent divergent or conflicting interests, nor engage in any activity reasonably calculated to be contrary to the best interests of his client or client' property unless the clients have been previously notified. Article VIII A CPM shall not receive directly or indirectly any rebate, fee, commission, discount, or other benefit, whether monetary or otherwise, without the full knowledge or prior consent of the client concerned. No novice should be encouraged to mark up parts or labor to a property management client without mention of the need for full disclosure and avoiding conflicts of interest. Jekyll and Hyde Whitney' book suffers from multiple personality disorder. In some chapters, he is intelligent and wise. In others, he sounds foolish. In some, he is responsible; in others, he advocates behavior which is unethical and/or illegal. Some chapters contain excellent real world advice; others are fantasy land. Even the good stuff is not especially original. Some of the bad stuff, like biweekly mortgages or marking up your labor and parts to clients or converting to rooming houses, is original, but not advisable. Copyright 2002, 2003 by John T. Reed Last update 3/11/03 John T. Reed, a.k.a. John Reed, Jack Reed, 342 Bryan Drive, Alamo, CA 94507, Voice: 925-820-7262, Fax: 925-820-1259, www.johntreed.com

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