John T. Reed' review of Russ Whitney' book Building Wealth 1 Russ Whitney is a real estate investment guru with TV infomercials and all that. He is noteworthy in that he seems to draw the most virulent complaints of any guru I hear about. He is also noteworthy at my house because he has sued me for trademark infringement and libel. So I bought his book Building Wealth, From rags to riches through real estate. After all I had heard about him, I must admit that I was surprised that the book was not quite as bad as I expected. High school dropout In order to qualify for a real estate guru secret decoder ring, you have to have humble origins. Whitney' mother left when he was three. His father married a "stereotypical wicked stepmother" (p. 22). Then his father died when he was 14. He ran away and dropped out of high school. (He later got a G.E.D. but has stopped fessing up to that in recent years. Building Wealth makes no mention of the fact that he is really a high school graduate and repeatedly says he is a dropout.) Not that that stops him from pontificating about what they teach in colleges, i.e., figuring out all the reasons why something won"t work. I do not recall any such course at my college, but I guess Whitney would be the expert on what they teach in colleges. After ridiculing the educated at some length, he says he plans to send his own children to college. Do as I say, not as I did or advocate to my readers. He got a short-order cook job by lying about his age, worked as a telemarketer (Hmmm), and drove a taxi using a fake drivers license. I admire his work ethic, but he would not be the poster boy for working smart rather than hard"”or for ethics. "The older I get, the more humble my origins become" I once saw a tee shirt that said, "The older I get, the better I was." Whitney suffers from that problem. Only in his case it', "The older I get, the more humble my origins become." The back cover of Building Wealth, which is copyright 1994, says, "Russ Whitney was a twenty-year-old high school dropout working in a slaughterhouse for five dollars an hour when he set out to become a millionaire." Russ Whitney seems to say otherwise in his earlier book Overcoming the Hurdles and Pitfalls of Investing in Real Estate. That book was published in 1984 by Mark O. Haroldsen' National Institute of Financial Planning. Mark Haroldsen is a real estate investment guru. Here' part of what I said about Haroldsen at my guru rating Web page: "Author of How to Awaken the Financial Genius Within You. Publisher of the now quarterly Financial Freedom Report. His main claim to fame is that he invented the densely-worded, full-page, magazine, direct-mail ad to sell his book. The novelty of that trick apparently has long since worn out. I haven't seen it in years. "Financial Freedom Report was accused of 83 counts of deceptive sales practices by the Utah Division of Consumer Protection according to a 5/19/97 KSL-TV story in Salt Lake City. Utah had received over 900 complaints about Financial Freedom Report nationwide since 1993 but only took action based on the 83 complaints from Utah residents. KSL-TV said the Commonwealth of Virginia had also taken action against Financial Freedom Report. "The Wisconsin State Bureau of Consumer Protection published a Guide for Wisconsin TV stations which lists several "Questionable infomercials," among them those of Financial Freedom Report. Refusal to acknowledge Haroldsen Whitney apparently got the idea to go into real estate from Haroldsen' How to Awaken"¦ book. But he refuses to acknowledge the name of the author or the title of the book. He does not even mention How to Awaken"¦Haroldsen in Overcoming"¦, which was published by Haroldsen! (He does say that Haroldsen has "among the best seminars" on page 41 of that book.) Seems to me he ought to acknowledge the contribution of Haroldsen to his career simply because Haroldsen deserves the credit. Furthermore, he ought to tell his readers about Haroldsen' book if it was any good. I am not a Haroldsen fan, but I find Whitney' refusal to acknowledge his mentor and to recommend him to his readers to be amazingly selfish. Does Whitney have such a monstrous case of insecurity that he cannot acknowledge that any other real estate author has anything of value to say"”even his own mentor? Apparently. Was it $6 or $5? Anyway, on page i of the 1984 book, Whitney says he was paid $6 per hour at the slaughterhouse. It dropped to $5 ten years later when he wrote Building Wealth. I understand he has a new book coming out. I can"t wait to see how much lower his "slaughterhouse" compensation has dropped in the last eight years. Still, even $6 an hour sounds pretty meager doesn"t it? Well, let' think about it. We"re talking 1976 here. That' when Whitney was 20. You can use a nifty little online calculator to adjust any past amount for inflation at https://minneapolisfed.org/research/data/us/calc/. If you put in the year 1976 and $6 per hour and translate it to 2003 dollars, it is $19.40 an hour in 2003 dollars. Whitney says that with overtime he made about $300 per week at the "slaughterhouse." $300 per week x 52 weeks per year = $15,600 per year. Put that in the inflation calculator and it translates to $50,446 a year in 2003 dollars. Whitney' wife was also working there at the time. If she made the same, the two of them were making 2 x $50,446 = $100,892 a year in 2003 dollars. And this would be the "rags" period in what the subtitle of Building Wealth calls his "rags to riches" story. Dickensian And what about this "slaughterhouse" stuff? He worked for Tobin Packing Company
in Albany, NY. He was a union laborer. For a time, he shackled pigs in preparation for someone else killing and butchering them. Isn"t calling it a "slaughterhouse" a bit melodramatic and Dickensian? Was it across the street from Ebeneezer Scrooge' office? Around the corner from the orphanage and up the street from the poor house? What do you think the chances are that when he was asked where he worked at the time, he answered, "The slaughterhouse?" I"ll bet his answer to that question was, "Tobin Packing." Dropout In Building Wealth, Whitney is always a "high school dropout." But on page 2 of Overcoming the Hurdles and Pitfalls of Investing in Real Estate, published ten years earlier, he says, ""¦my educational background peaked only with a G.E.D. diploma." He never describes himself as a "high school dropout" in that book. My wife has a G.E.D. In fact, the last year she attended high school was her freshman year. Whitney stayed in high school until his junior year. I asked her if she had ever described herself as a "high school dropout." "Of course, not," she said. Like Whitney, she studied her high school courses at home and took a test. (Her father was stationed in Ethiopia at the time. There were no English language schools nearby.) Unlike Whitney, she graduated from Drexel University with a B.S. and Harvard with an M.B.A. But as far as high school is concerned, my non-high-school-dropout wife only has one-third the formal high school attendance of "dropout" Whitney. At best, he can claim to have been a temporary or former high school dropout, but it is disingenuous at the very least for him to describe himself only as a "high school dropout" in Building Wealth and elsewhere. By itself, this is a relatively harmless bit of B.S, but it ought to make you wonder what else he is B.S.ing you about. "Lousy childhood" On page 18 of Building Wealth, Whitney says, "I easily could have used my lousy childhood as an excuse for never achieving anything significant." Once again, his "lousy childhood" appears to have come into being between the 1984 book Overcoming"¦ and the 1994 publication of Building Wealth. He makes no mention of any childhood problems at all in Overcoming"¦ or his other 1984 book about Locating, Financing, and Analyzing Real Estate. Who cares about Whitney' childhood"”unless it involved real estate investment? My wife used to help her grandfather with his real estate business when she was a kid. She would stamp his mortgage checks "for deposit only" and help him pound survey stakes into the ground at rural lots. She said her fond memories of her grandfather transferred to me to an extent when I first told her I was a real estate guy. If my wife ever wrote a book on real estate, she should probably mention her grandfather' involvement in the field and her childhood helping him. I cannot recall any other real estate investment authors talking about their childhood in their books. Millions of more successful people than Whitney or me had just one parent or no parents. Having a less-than-ideal childhood may be the norm rather than the exception. It actually has some advantages. It makes you hungry for something better, which is apparently the understatement of the year with regard to Whitney. He appears to be driven to an unhealthy degree"”apparently by his childhood. Having a drunk father caused me never to take a drink, which was a very good thing. According to Whitney, his biological mother "left" when he was three. Most people don"t remember anything from before they were four, so one suspects that he only knows about his mother leaving because older relatives told him about it. His father apparently divorced his biological mother and remarried a woman Whitney refers to as his "wicked stepmother." He says she held his hand over a gas flame and told him he was, ""¦no good, would never amount to anything, and would probably spend most of his life in jail." Well, that sounds pretty rotten, but I would like to talk to her and get her side of it. It may be that he did some bad stuff and that the stepmother behavior he describes was appropriate, especially for the time"”around the early sixties. Maybe the gas flame thing was to persuade him to stop endangering himself and his family by playing with matches after he had been told several times using less dramatic, and less effective, teaching aids. Maybe the jail comment was in response to his repeatedly getting in trouble with the police (I do not have any evidence other than his mother' comment and his own vague references that he was in trouble with the police as a youth). And maybe neither the gas flame nor the jail accusation ever happened. Whitney says his father died when he was fourteen. I confirmed that. That' rough if you love your dad. Although Whitney says his dad took his "wicked stepmother' side" when mediating disputes between the two of them. That suggests that his stepmother was in the right. But, again, Whitney is not the first kid to be orphaned. Many orphans never knew their parents at all. After his father' death, Whitney lived with his stepmother, an aunt, and a half sister. Sounds a lot better than a foster home or orphanage. But he still ran away from all of them. Seems like he should have found at least one relative he could get along with"”after all, he was just a teenager. He says he was "emotionally devastated" and "had to get a job to support myself" at age 14! I am extremely skeptical of his claim that he had to get a job to support himself at age 14 or any pre-18 age. This was 1970, not 1930. He had a stepmother and an aunt who were apparently willing and able to provide for him. If not, there were a zillion programs back then including food stamps, social security benefits for children of deceased parents, foster care, and orphanages, to make sure a kid was supported without having to quit school and go to work. In general, I would like to hear the stepmother', aunt', and half-sister' version of the events before I draw any conclusions. Until then, either Russ Whitney had all rotten relatives or he failed to make an adequate effort to get along with the relatives who were willing to care for him. On page 18 of Building Wealth, he admits to having a "bad attitude" as a teenager. That sounds more like he was a lousy child than a kid who had a lousy childhood. "Through real estate" The subtitle of Building Wealth is "From rags to riches through real estate." He does appear to be rich now, but "through real estate?" Exactly which real estate was that? I went to Schenectady, NY, the site of his first six years of investing in real estate. I did not see much evidence that he made any money there at all in real estate. Public documents indicated he had trouble paying his bills for oil and power and other services, property taxes, and a judgment against him. He had a number of housing code violations. He threatened to declare bankruptcy to get out of paying all the judgment, which was for over a million dollars. He deeded one duplex to a tenant for nothing according to the public records. In his book, Whitney said it was in return for installing five ceramic tile baths and a furnace at his other buildings. In Overcoming the Hurdles and Pitfalls of Investing in Real Estate, he said he had great trouble selling his other buildings. He said he was willing to settle for just $10,000 profit per building"”hardly "riches""”but the market refused to pay him even that small amount. He gave his RealtorÂ® an option on a property. According to the public records, it apparently was never exercised. He had to "lower his price" and take back a mortgage on his Lincoln Avenue properties. In 1982, he admits "we weren"t showing much, if any, profit on the buildings." He says his property manager was embezzling money from him by claiming apartments were vacant when they were not and by overcharging him for maintenance. He could not find a tenant for his NY home for an extended period. With regard to his final extraction from Schenectady, he says, "I had to really concede with terms. I also dropped in price." (Overcoming"¦ page 36) He sold a number of properties in one package for just $10,000 cash"”not $10,000 per property"”and took back a mortgage. Overall, Whitney said he allowed himself to become exactly the sort of person he seeks when looking for bargains: a "motivated seller" and thereby took a bath. This is all very interesting and instructional as to what not to do. But where are the "riches through real estate?" Sounds more like he was lucky to escape his Schenectady real estate adventures with the shirt on his back. In general, his Schenectady real estate investments sound to me like he was a below-average, beginning investor who made more than his share of mistakes. He talks a good game, but when you examine all his books and the pertinent public documents, it appears he was all screwed up from start to finish in New York. Many people suspect that guys like Whitney claim they made most of their money through real estate or whatever they are selling advice on, but really made it from selling books, seminars, and so forth. I suspect they are quite right about that with regard to Whitney. He appears to have tried to make money in real estate for about six years, was not very successful, then became a famous lecturer and author selling the "secrets" of his non-existent or near non-existent "real estate success." "Made $11,000 in three weeks" On page 18, he says he "made" $11,000 three weeks after he read a book"”apparently Mark Haroldsen' How to Awaken the Financial Genius"¦That book ain"t that good. No book is. So exactly how did he "make $11,000" in three weeks from reading a get-rich real estate book? A brief version of the story appears on pages 120 and 121 of Building Wealth. He gives more detail in previous books. Basically, he refinanced his home. According to the deed in the county recorder' office, he had purchased the home on 3/11/77 putting $4,000 down. Since the recorded mortgage was $14,500, the purchase price was apparently $18,500. He says he spent another $1,500 fixing it up to give a total cost of $20,000. Actually, the cost was higher because he and his brothers in law contributed much free labor. According to Building Wealth, it had a $14,000, 8.5%, 15-year, seller mortgage and Whitney refinanced it for $18,000. That gave him $4,000 cash after he paid off the seller mortgage. He obtained the loan by telling the mortgage lender that he wanted to install $4,000 of aluminum siding on the property. That was the amount of an estimate from a siding guy for installing the siding. The original amount of the mortgage was $14,500 according to the actual documents recorded. It may have been paid down to $14,000 when he refinanced 15 months later. Does it sound to you like Whitney has "made" money on this deal so far? Me neither. Whitney also arranged for the seller to modify his $14,000 first mortgage to a $7,000 mortgage. That would mean the total mortgages on the property would be $18,000 + $7,000 = $25,000. Whitney says he "felt certain that the house was then worth $25,000 to $30,000." Property owners" appraisals of their own properties should be taken with a grain of salt. I"ll use the lower figure. The document modifying the amount of the previous owner' mortgage to $7,000 was recorded in mortgage book 942 pages 20-22. Then the "subordination agreement" purportedly making that mortgage subordinate to a mortgage to Schenectady Trust Company was recorded in book 942 at pages 23 and 24. The subordination agreement document, which I got from the recorder' office, seems amateurish"”subordinating to "any and all indebtedness" to Schenectady Trust. I would not think that was enforceable. Based on my knowledge of real estate law, I think you would need to spell out specifically the terms of the mortgage to which you are subordinating or simply identify the mortgage in question in the public records. Then the Schenectady Trust Company "first" mortgage for $18,000 was recorded in book 942 at pages 25-28. The fact that the subordination agreement was probably unenforceable strongly suggests that Schenectady Trust did not know about it. Or more likely, that they assumed it would be paid off but did not make sure of it. Had they known that such a mortgage was recorded before their "first" mortgage in the mortgage books, it is all but certain that they would have insisted that their attorney prepare any subordination agreement. A bank attorney would almost never come up with an unenforceable agreement. Also, it would have been cleaner to just pay off the original seller first, then record a new second after the Schenectady Trust first. Because of the inadequately worded subordination agreement, I suspect that Schenectady Trust really got a second mortgage in spite of insisting that they have a first. I cannot tell whether Schenectady Trust knew that the existing first was not being paid off in full, but rather was being paid half off and "subordinated" to the new first. On page 121 of Building Wealth, Whitney says, ""¦the banker showed up with two checks: One payable to me for $4,000, and one payable to the seller for $14,000." That strongly suggests that the banker did not know that Whitney was getting half the $14,000 and that the first was not being totally paid off. On page 2 of Overcoming"¦, he says, "Well, the bank came out to appraise the house and said they would lend $18,000, but they would have to first mortgage, indicating that I would have to pay off the existing first" [emphasis added]. Again, this strongly suggests that Schenectady Trust did not know that Whitney was only paying off half the first and that a mortgage for the other half would remain on the property. I am astonished that the Trust company and title company did not make sure they had either a better subordination agreement or a payoff of the first before recording the new second. I am also inclined to believe that Schenectady Trust did not know the full story because of numerous subsequent deals that Whitney brags about in his books. Time and again he brags of misleading lenders as to the cost of improvements and the intention to have a seller give him a second or third mortgage after a new first has been originated. In one case he admits to "deception." In others he lists the "real" terms of the deal and the "lender" terms"”that is, the more conservative terms the lender was shown.