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John T. Reed' review of Russ Whitney' book Building Wealth 3 The "first fortune" continued On page 47 of Building Wealth, Whitney says, "By the time I was 25 [11/18/80"”three days after he hit a pedestrian with his pickup truck], I owned well over $1 million in real estate and was owner or partner in several other businesses." Well, let' just see about that. On 12/4/78, he bought 11 Eagle Street for $36,700 with $4,0000 down and a seller wraparound land contract on a land contract (no deed until you pay off the seller financing) for $32,700. The underlying first mortgage had a balance of $20,391.49 and would last until 9/1/95. Whitney sold this property on a land contract along with his home at Guilderland and the other Eagle Street properties on 1/29/82 and again (??) on 6/29/82. Whitney quit claim deeded 11 Eagle Street to N. E. Management Properties, LLC on 5/26/02. I do not know who N.E. Management is. The original owner recorded a discharge of the wraparound land contract on that same date. 23-25 Eagle Street On 1/9/79, Whitney signed a land contract to buy 23-25 Eagle Street (duplex), Schenectady from Bill Adkins (not his real name) of Jacksonville, FL for $13,094.26. $2,500 down and a 5-year, 8.5% mortgage for $10,594.26. Oddly, there was also a $12,905.74 first mortgage on the property owed to Schenectady Savings and Loan. The land contract said Whitney assumed and agreed to pay that mortgage, but it also said that the seller"”Adkins"”would make the payments on the Schenectady Savings and Loan mortgage for the first five years. The land contract said the security deposits, which seem to be one month' rent, were $155 on each apartment. It also said Whitney had to buy $23,500 of fire insurance, indicating the seller thought that was the value of the building. 20 Swan On 7/3/79, Whitney entered into a land contract to buy 20 Swan Street for $25,500. $1,500 down and a wraparound land contract of $24,000. The underlying first mortgage to Schenectady Trust Company was $16,651.33 and Whitney agreed to assume it. The land contract demanded fire insurance of $25,500 indicating the seller thought that was what the building was worth. 16 Eagle Street This may be the most screwed-up real estate deal I have ever seen. See if you can follow it. I can"t. On 10/2/78, a Schenectady area couple deeded 16 Eagle Street in Schenectady to a man I will call Bill Adkins who lived in Jacksonville, FL. This deed was not recorded until more than a year later on 12/28/79 (deed book 1033 page 835-6). I don"t know why the delay. Bill Adkins is not his real name. I will not use the real name because he may be a private person. According to page 7 of Overcoming"¦, this is a 6-plex. On 9/14/79, Whitney and Adkins, got a $15,000 mortgage from Pioneer Savings Bank (Mortgage book 955 page 135-8 recorded 11/8/79). This sounds like a HUD Title I home improvement loan. The document itself looks like a Title I mortgage. Overcoming"¦ says he and Adkins got a $15,000 home improvement loan, but I do not understand how they got it before Whitney became one of the owners. On page 7 of Overcoming"¦, Whitney says "We also agreed to co-sign a note to the bank for another $15,000 Home Improvement Loan" [emphasis added]. I can see how Whitney could co-sign before he was the owner, but the recorded documents do not show any cosigning. Rather, they show Adkins and Whitney as co-owners mortgaging the property. The mortgage also indicates that both Adkins and Whitney resided at 3160 Guilderland, Whitney home. Very strange. On 9/21/79, Bill Adkins deeds 16 Eagle Street to Lucy Adkins who lives at the same address as him in Florida. This document is not recorded until 12/28/79 (Deed book 1033 page 837-8). On 9/28/79, Lucy Adkins deeds 16 Eagle Street to Bill Adkins and Russ Whitney. This document is not recorded until 12/28/79 (Deed book 1033 page 839-40). On 10/22/79, Bill Adkins and Russ Whitney give a mortgage for $25,000 to Lucy Adkins. It is recorded 12/28/79 (Mortgage book 956 page 225-6). On 7/10/80, Bill Adkins and Russ Whitney give an eight-year option to buy 16 Eagle Street for $50,000 to Whitney' favorite Schenectady Realtor'® (Deed book 1039 page 44-5). As with the subordination agreement described above, the option was so amateurishly drawn that it was probably not enforceable. In order for an option to be enforceable, it generally needs to have a complete purchase agreement attached to it. This one did not. It was a typical seminar guru option that just stated the address and price with no terms or detailed description like you would see in a normal purchase. Judges generally will not enforce such an option on the

grounds that real estate purchases require more detailed agreements. Whitney characterizes this as a "partnership" in Overcoming"¦ (page 7). He says he put no money down, but that they split the profit and depreciation deductions 50-50. He also says the place was worth $75,000 after rehab. That raises the question, why did you sell an option to purchase it for $50,000 any time during the next eight years? What about the tax implications? If Whitney owns half of a $75,000 6-plex with a $25,000 mortgage, he has $75,000 - $25,000 = $50,000 ÷ 2 = $25,000 of equity. If he paid nothing for that $25,000 of equity, he has $25,000 of taxable income of some kind, or maybe a gift. Most likely it is compensation for Whitney' management services. That is ordinary income the day you receive it. Whitney does not mention that this is taxable income or that he paid a tax on it. I would be surprised if he did. In this case, Whitney says he actually spent the $15,000 on improvements plus another $4,000. He also says he had a $15,600-a-year rent roll. I cannot confirm that. Whitney says he sold the property to his favorite Realtor'® in 1980. Whitney claims the sale price was $51,000, that the Realtor'® assumed the mortgage to Lucy and the Title I mortgage to Pioneer, that Adkins took back a third mortgage for $5,500, and that Whitney got $5,500 in cash. I found no record of the sale to the Realtor'® or the third mortgage to Adkins in the county recorders office. Furthermore, paragraph 10 of the Title I mortgage says, "the whole of said principal sum shall become due in the event of sale, or transfer of the premises by the Mortgagor." This is known as a due-on-sale clause. It means that the sale of the property to the Realtor'® puts the property in technical default on the improvement loan, thereby giving Pioneer the right to make the borrowers immediately pay off the entire balance. To put it another way, Whitney is claiming that the Realtor'® assumed a mortgage which was unassumable. If the option was enforceable, the Realtor'® was nuts to exercise it in 1980. Remember, the option had an expiration date of 1988 and a fixed price of $50,000. What person in his right mind would exercise such an option before 1988? You would let it sit there appreciating until the last month before it expired in 1988. Why put up with the hassles and risks of ownership for eight years when you can get all of the appreciation above $50,000 with no effort whatsoever by simply waiting until 1988 to exercise the option? This, in turn, means that Whitney was nuts to grant such an option. He would have you believe he was some kind of overnight success in real estate. No. He was a bumbling incompetent for the most part initially. This option is an example of his incompetence. Summing this deal: Cost: $25,000 mortgage to Lucy + $15,000 mortgage to Pioneer + $4,000 additional improvements = $44,000 Sale price: $51,000 (Not in recorder' office?) Cash in: $4,000 for additional improvements Cash out: $5,500 (Not in recorder' office?) to Whitney Net cash out: $5,500 - $4,000 = $1,500 Seems like Whitney could have made the $1,500 more easily by taking a part-time job shoveling french fries at McDonalds for a year. Adkins also left with a $5,500 third mortgage"”if you believe Whitney' book in spite of the lack of corroboration in the recorders office. This is not an adequately profitable deal. Adkins and Whitney bought and sold a property, plus they borrowed $15,000 and spent $19,000 on improvements. Whitney had to manage the property for a year and supervise the $19,000 worth of improvements. That' a lot of work and risk. If Whitney had taken a job as the manager of a 6-unit building for a salary, and a job of supervising a $19,000 rehab for a salary, he probably would have made more than he did in this deal as part-owner. Whitney tries to make this sound like some shrewd real estate deal. In fact, it was a whole lot of effort and risk for hardly any reward. Real real estate investors laugh at deals like this. Furthermore, unless someone can find the recorded documents indicating the sale to the Realtor'®, it would appear that Adkins and Whitney still own this property. 812 Grant Avenue On 11/15/79, Whitney entered into a land contract to buy 812 Grant Avenue for $10,000. $1,252.41 down and a 10-year, wraparound land contract for $8,747.59 with an underlying first mortgage of $4,247.59 to Mohawk National Bank. 8 Hawk Street On 12/3/79, Whitney entered into a land contract to buy 8 Hawk Street, Schenectady for $23,000. $153.23 down. Assume a first mortgage of $17, 846.77, and agree to a land contract second of $5,000 10% for ten years. So was this "well over 1$ million in real estate" by his 25th birthday (11/18/80) as Whitney brags? No. Here' what he apparently owned on his 25th birthday including what he paid for it. Address Purchase price Nature of ownership 3160 Guilderland $20,000 Legal owner 455 Hulett $6,500 Legal owner 23-25 Eagle Street $13,094.26 Equitable owner* 20 Swan Street $25,500 Equitable owner* 812 Grant Avenue $10,000 Equitable owner* 8 Hawk Street $23,000 Equitable owner* Total $98,094.26 . 16 Eagle Street is not on this list because he says he sold it before he "turned 25." * An equitable owner is one who owns everything but the deed. When you use a land contract to buy, you do not get a deed. You usually get the deed when you pay off the land contract, which is the equivalent of a seller mortgage. Although, Whitney' land contracts say his relationship with the previous owner is that of landlord and tenant. For example, paragraph 7 of the 11 Eagle Street land contract says, ""¦it is mutually agreed that until delivery of the deed, as herein provided, the payments hereunder shall be regarded as rent and the relationship between the parties shall be that of landlord and tenant." [emphasis added] If you believe that, Whitney did not buy the above properties. He rented them. That would make his claim that he "owned well over $1 million in real estate" [emphasis added] even more preposterous. At best, he was the legal owner of his $25,000 home and $6,500 Hulett Street and the equitable owner of another $71,000 of slum properties. I think the best way to describe his situation to today' beginning investors was that his situation was similar to today' lease-option tenants. If they behave and make all the payments on time, they may become legal owners of the property. However, I must say that I do not believe the landlord-tenant relationship. This is yet another of the amateurishly drafted legal documents with Whitney' name on it. As "buyer," he probably did not draft this land contract, but he seems to have associated with a bunch of amateurs in his Schenectady days. I believe the law would say that the landlord-tenant portion of the land contract agreement was unenforceable. Clearly, the agreement is like a sale and mortgage. Clearly Whitney would build up equity in the property over time"”although because these were in a slum neighborhood"”it would probably take a lot of time to build up much equity. But still, the law abhors forfeits. If Whitney were to fall behind in his payments, this agreement says he would lose any equity he built up. That' not fair to Whitney. If he fought eviction on that basis, the court would probably agree with him that he is an equitable owner, not a mere tenant, and force the previous owner to foreclose. In that case, Whitney would get any excess proceeds above the amount needed to pay the balance due on the land contract. Here' a rather odd discussion of land contracts. I only offer it because it comes from one of Whitney' publications: Step 7 page 4 of his MPAP manual. "This makes [the land contract] a favorite of the land hustler, because it doesn"t disclose what will appear on the title in, say, twenty years. It is primarily used when the seller has a title problem, or the buyer, a credit problem. The buyer risks receiving clear title if the seller runs into financial difficulty down the road." I"m not sure what that paragraph means, but it should be noted that Whitney bought almost all his New York properties on land contracts and sold them the same way. "Leaving the scene"¦" Another event must be mentioned if we are going to talk about Whitney "turning 25." Three days before his 25th birthday (11/18/80), Whitney hit a pedestrian while driving his Toyota pickup at around 2:30 AM in Glenville, NY. Two days before his 25th birthday, Whitney surrendered to Glenville police in response to an all-points bulletin describing his pickup truck. He was arrested and charged with "leaving the scene of a personal injury accident." That story is on page 29 of the 11/17/80 Schenectady Gazette. The day after his 25th birthday, Whitney had to appear in Town of Glenville court with regard to that incident. Later, the District Attorney tried to get a grand jury to indict Whitney for some felony. They decided not to prosecute. But the family of the victim did file a civil suit against Whitney, which he lost. The judgment against him was for $1,190,809. He avoided paying much of it by threatening to declare bankruptcy. Although he apparently has truly become rich as of 2002, he has never paid a cent to the victim beyond what he grudgingly agreed to pay to settle the case after he lost in 1988. The victim, a 19-year old boy, survived but had his life ruined because of permanent brain damage and other crippling injuries. It is disturbing that Whitney has been bragging for years about what a big success he was when he "turned 25," considering that the main thing that was going on in his life when he "turned 25" was trying to stay out of jail and/or avoid bankruptcy because his conduct in the early morning hours of 11/15/80. ""¦owner or partner in several other businesses" On page 47 of Building Wealth, Whitney says that, "By the time I was 25, I owned well over $1 million in real estate and was an owner and partner in several businesses." I just analyzed the $1 million in real estate. Now let' look at the "several other businesses." While at the Schenectady County court house, I searched the assumed name indexes for Whitney' name. Zero hits. I searched every index from 1976 to the present. He never registered any assumed names. If you operate under an assumed name, you are required to register. There are a number of reasons for this. One is so the public can find out whom they are dealing with. If you have not registered, you cannot sue anyone with whom you did business under the assumed name. In some cases, registration for the assumed name might reveal to the authorities that you are engaging in an activity for which you are supposed to be licensed"”like construction. Does Whitney even know about filing an assumed-name registration? Yep. He discusses it on page 69 of Building Wealth"”says "you can do so for a nominal filing fee." He says you don"t have to file if you are only working on your own properties. That' one way to put it. Another way would be to ask, "What possible purpose could you have for using an assumed name for a "company" that only works on your own properies"”other than defrauding a lender into thinking it' a company that does business with people other than you?" Is it possible to be in business without registering an assumed name? Yes. I do it. My business name is John T. Reed Publishing. Why don"t I have to register? Because my name is in the company name and the additional word"”"publishing""”simply states what I do. So was Russ Whitney operating some business under the name Russ Whitney this or Russ Whitney that? Not that I have found. I looked through the old Schenectady area phone books from the late seventies and early eighties. I found no listings for Russ Whitney other than his residences. Has Russ Whitney ever claimed he operated a business under another name? Yes. On page 89 of Building Wealth, Whitney says he used the name "R&I Enterprises" (R & I are the first initials of Russ and his wife) on an early business card. On page 123, he tells of using the name "R&I Contracting" to write up estimates for improvements to his buildings. On page 151 of Building Wealth, he mentions R&I Contracting again and refers to "creating a company for loan purposes." Creating a company for loan purposes seems to mean to deceive a lender into thinking the improvement estimate that is really from you to you, is from a third party dealing with you at arms length. Did Russ Whitney register "R&I Enterprises" or "R&I Contracting" with Schenectady County? No. Should he have? Yes. Why didn"t he? I don"t know, but one possible reason might have been to prevent lenders from learning that it was not a third-party contractor. Whitney does say that he got a real estate salesman' license in April of 1979. He said elsewhere that the license hung in the offices of Plumb Realty and Plumbannd of Rotterdam, NY"”the town where he lived. Was he an "owner or partner" in either of those businesses? Not that I have been able to determine. Larry and Shirley Plumb have passed away. Whitney appears to have been just a salesman. To be an owner or partner in a real estate brokerage, you generally have to be a licensed broker, not just a licensed salesman. You can see my comprehensive list of the various affiliations Whitney has had or may have had during his adult life at http://www.johntreed.com/Whitneyaffiliations.html.

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