John T. Reed' analysis of Russ Whitney' TV infomercial 1 Copyright 2003, 2005 by John T. Reed Last update 3/22/05 On 1/20/03, my wife taped a Russ Whitney TV infomercial. Here is my analysis of it. Shawn McCabe testimonial Early in the infomerical, there is a testimonial by Shawn McCabe of Minneapolis. He claims to have purchased a pre-foreclosure in the Minneapolis area. A pre-foreclosure is a property where the owner has fallen behind in their mortgage payments and is in the process of being foreclosed. McCabe said he spent $25,000 to $30,000 on fixup for carpet and paint. That strikes me as an awful lot for just carpet and paint. On 3/22/05, I got an email from a person claiming to be Stephanie McCabe, Shawn' wife. I will put what she said in red and my comments on her statements in [brackets]. THE $25,000 to $30,000 INCLUDED THE MONEY THAT IT TOOK TO STOP THE FORECLOSURE AND THE AMOUNT WE GAVE THE HOMEOWNER, CARPET, PAINT, APPLIANCES, CLEANING SUPPLIES, AND NEW DOORS, ETC. TO FIX UP THE PROPERTY. [So she is agreeing with me that the amount was for more than carpet and paint"”far more.] He says he got a check for $59,000 at closing when he sold it. I guess that would be the net sale proceeds after paying off the mortgage. He does not ever mention the purchase price, sale price, or mortgage amount. I'M NOT SURE ABOUT THE PURCHASE PRICE, BUT I BELIEVE WE SOLD IT FOR AROUND $114,000. [We really need the purchase price and other out-of-pocket costs to calculate the profit, not just the sale price and some costs. Also, if McCabe profited $30,000 to $35,000, that profit came at the expense of the person being foreclosed. I have a chapter on ethics in my book How to Buy Real Estate for At Least 20% Below Market Value. That book also includes a chapter on pre-foreclosure deals like this supposedly is. You must be careful not to mislead the foreclosee as to the market value of her home and what will happen to her if she does not sell to you. For example, foreclosees with substantial equity typically get a check for excess proceeds from the foreclosure auction. In California, you are required to tell the owner that.] Whitney asks the amount of his profit. McCabe says $30,000 to $35,000. THE DEAL PROFITED AT LEAST $20,000, IT WAS PROBABLY CLOSER TO THE $25,000 MARK THAN THE $30,000 MARK. [There is a big difference between $30,000 to $35,000 and $20,000 to $25,000. Plus, real estate investors are prone to exaggerate their profits"”especially beginning real estate investors. How about letting me go over the books including the transaction costs; the value of McCabe' time finding, negotiating, financing, managing, and selling the property; counting all the operating expenses, and the federal and state income taxes? Since he was a beginner, I expect we would find that he earned whatever profit he made involved many hours of work and that his hourly compensation was
not that much higher than a normal job and normal jobs do not involve the risk and uncertainty that real estate investment does.] I"m skeptical I have repeatedly expressed great skepticism about the testimonials in TV infomercials. In particular, I wonder if: 1. The deal even happened at all. WE REDEEMED THE PROPERTY IN NOVEMBER 2000 AND SOLD THE PROPERTY IN JANUARY 2001 I BELIEVE. [I would like to see the deeds and know the property address.] 2. The deal was as profitable as depicted. 3. The deal was ethical, legal, and moral. THE HOMEOWNER WAS INFORMED OF HER OPTIONS AND THE DEEDS WERE PROPERLY FILED TO THE BEST OF MY KNOWLEDGE. [I would like to talk to the person who sold the home to McCabe and ask what the details were. I would not expect to find any problems with filing of deeds in such a transaction unless an institutional lender was involved. I did not see any mention of such a lender.] I have found examples of all three discrepancies in my investigations of various gurus. McCorkle As far as I know, only one guru' testimonials were investigated. NBC Dateline investigated the testimonials of William McCorkle. They were totally phony. A couple were made by paid actors who never took McCorkle' course. One was his secretary. Another was an actor/friend. I would appreciate it if a reader in the Minneapolis area would check the local recorder' office to get the documents from the deal McCabe claims to have done. In particular, I would like to see the following: "¢ deed to the borrower who was getting foreclosed "¢ notice of default on the mortgage "¢ deed to McCabe "¢ building permits, if any, for improvements WE DID NOT DO ANY CONSTRUCTION, JUST COSMETIC WORK, SO NO PERMITS WERE PULLED. [That is possible. I would need to talk to the local building inspector and see exactly what work was done. The building inspector may have a different view of whether permits were necessary. in my experience and observation over 38 years in real estate, cosmetic improvements are not cost-effective improvemeents. That is, they typically raise the property value less than they cost, which means they harm the investor rather than making him money. Again, believing that cosmetic improvements are profitable is another typical beginner mistake. See my book Fixers for more on that. To make the building worth enough more to pay for both your costs and profit, you generally need to increase the number of bedrooms or turn an uninhabitable building into an inhabitable one. That is the kind of stuff for which building permits are required.] "¢ deed from McCabe to the guy who bought it from McCabe THERE WERE ACTUAL DEEDS, THE PROPERTY WAS BOUGHT FROM AND SOLD TO TWO SEPERATE INDIVIDUALS AND THE LOAN WAS CLOSED AT AN INDEPENDENT TITLE COMPANY. "OK. May I see them please? I am mainly interested in whether the deed prices reflect the profit claimed and whether they were arms-length transactions. Virtually ever Russ Whitney trasaction I tracked down the documents for was not an arms-length transaction. That is, he often bought from or sold to cronies. See my article about his claims versus my investigation of them] In addition to getting the documents, I want to talk to the owner who was being foreclosed, McCabe, and McCabe' buyer. If you cannot find any trace of this deal, I would like to know that, too. I looked up Sean McCabe in the Internet directory Switchboard. It gave a listing in the Minneapolis suburb of Chaska, but when I called the number, it was disconnected. That may not have any significance. WE HAD MOVED TO A DIFFERENT SUBURB IN THE MINNEAPOLIS AREA ABOUT 2 AND A HALF YEARS AGO SO THAT WOULD EXPLAIN THE DISCONNECTED NUMBER. Like I said, no significance.] McCabe' second deal McCabe tells of another deal in a bad neighborhood in downtown Minneapolis"”another pre-foreclosure. He say he did some sort of land-contract deal. Land contracts are used to avoid triggering mortgage due-on-sale clauses. They do trigger due-on-sale clauses, but it' easy to convince uninformed laymen that they do not. Anyway, McCabe says he made $47,000 profit on this deal. I would appreciate it if a reader in the Minneapolis area would track down the details of this deal. THIS HOUSE WAS ACQUIRED FROM AN INDIVIDUAL WHO SIMPLY WANTED OUT OF THE HOUSE AND SOLD TO A TENANT IN A RENTAL PROPERTY WE OWNED WHO NEEDED A LARGER HOUSE. SHE BOUGHT THIS HOUSE ON A CONTRACT FOR DEED WHICH WE ENDED UP PROFITING ON. [All sellers want out. The notion that "motivated sellers" give tremendous bargains to buyers is a get-rich-quick seminar myth. I wonder if the house being foreclosed was listed with a broker when it was sold to McCabe. If so, it would appear that the broker let the seller down by getting less than market value. The fact that the property was sold to a tenant of the McCabe' raises arms-length questions. When a deal is not arms-length, that is, between total strangers, questions should be raised about whether there was any other consideration. For example, Whitney says he once gave a rental property to one of his tenants in return for the tenant doing some handyman work for him. Records showed there were also building code violations and apparently fire damage in the building. That all clouds our ability to see how well he did, if at all, on the deal because it' hard to know what work was done and what it was worth. The fact that the McCabe house was sold on a contract for deed raises more questions. Roughly speaking, I think that means the McCabe' took back a mortgage. If so, you need to know the terms to see whether they were so generous that the sale price is inflated above market value. Seller financing generally is used when teh buyer cannot obtain normal financiing. That indicates that theseller is doing the buyer-borrower a favor and the favor is generally returned in the form of the buyer overpaying for the property. Whether that is a good deal for the seller depends on whether the buyer-borrower makes all teh payments on time. People who were unable to get a normal mortgage often don"t. Contracts for deeds are also often used to get around due-on-sale clauses in mortgages. A due-on-sale clause says the lender can make you pay off the entire mortgage when you transfer most interests in the property. See my article on getting around due-on-sale clauses for more on that. Briefly, the notion that using a contract for deed gets you around a due-on-sale clause is another get-rich-quick seminar myth.] Quit job McCabe also says he quit his job three months after he took Whitney' seminar. That is precisely the kind of thing that greatly helps sell seminars. I think a person would not be able to go full-time in real estate after only three months. It would take years. So I would appreciate it if anyone who knows could enlighten me regarding McCabe' employment and quitting his job. SHAWN WAS EMPLOYED WHEN HE WENT TO THIS SEMINAR. YOUR STATEMENT ABOUT QUITTING HIS JOB SO SOON AFTER STARTING IN REAL ESTATE IS ACCURATE AND WOULD HAVE BEEN DIFFICULT HAD WE NOT WORKED WITH WONDERFUL FINANCIAL BACKERS. THE ORIGINAL FINANCIAL BACKER WAS HIS BOSS, WHEN HIS BOSS REALIZED THAT REAL ESTATE WAS JUST AS PROFITABLE AS HIS REGULAR BUSINESS, HE GAVE SHAWN HIS OWN FLEXIBILITY AND HIS OWN "DIVISION" STILL UNDER REGULAR DRAWS. TECHNICALLY HE WAS STILL GETTING REGULAR PAYCHECKS, BUT HE HAD SHIFTED TO REAL ESTATE INVESTING FULL TIME IN A PARTNERSHIP WITH HIS BOSS. SINCE THEN, WE HAVE WORKED WITH OTHER INVESTORS WHO PUT OUT THE PHYSICAL CASH FOR THE DEALS, BUT SHAWN HAS NOT HELD A REGULAR PAYING JOB IN THE PAST FEW YEARS TO SUPPLEMENT HIS INCOME. HE CURRENTLY STAYS HOME WITH OUR CHILDREN AND DOES REAL ESTATE INVESTING FROM OUR HOME. [Once again, Ms McCabe says I am right. Furthermore, her account makes it sound to me like he did NOT quit his job. He continued to work for the same guy and get paid by him. It sounds more like he started a new real estate investing department for the company. This "quit his job" statement in the infomercial was quite misleading. It sounds like Shawn now, after several years, is a Mr. Mom (as I was for many years) and that his wife still works at a normal job. In addition to working for his boss after he "quit his job," McCabe apparently has worked for a bunch of silent partners as well. This is far less attractive and spectacular to Whitney' target market than the notion that one can "quit his job" just three months after taking Whitney' $1,790 seminar.] $750,000 Finally, McCabe claims he accumulated $750,000 in assets within a short period. Did he? See my investigation of similar claims made by Whitney himself. I found they were not true. For example, Whitney claims he owned "well over $1,000,000 in real estate" on his 25th birthday. My research indicates he owned or was buying on land contract just $98,000 of real estate on that birthday. Investigation of McCabe may turn up a similar discrepancy. WHEN TAKEN IN THE CONTEXT THAT YOU WROTE IT, YES, HE DID ACCUMULATE $750,000 IN A SHORT PERIOD. WE HAD A FOUR-PLEX IN ST. PAUL APPRAISED AT $250,000, A TOWN HOME WORTH ABOUT $115,000 IN APPLE VALLEY, A HOME IN CHANHASSEN WORTH ABOUT $225,000 AND A HOME IN BROOKLYN PARK WORTH ABOUT $150,000. SO IN TOTAL THOSES ASSETS ON PAPER WERE WORTH $740,000, REAL CLOSE TO WHAT SHAWN STATED ON TV. THE OTHER SIDE OF THAT BALANCE SHEET THOUGH, THE MORTGAGES, MAKES THE NET WORTH CONSIDERABLY LESS THAN $750,000, BUT I DON'T BELIEVE THAT'S WHAT HE STATED. [To really evaluate it, we need to know how long the "short period" was. Also, Ms. McCabe indicates that those assets were mortgaged, perhaps to the hilt, indicated that discussing just assets was misleading as to how well off they had become. Also, there are assets and there are assets. Not only are heavily mortgaged assets indicative of far less success than free-and-clear assets, they may be assets of dumious quality. Real estate investors are notorious for exaggerating the value of their properies. They may not be doing it dishonestly. They fervently want to believe their assets are worth that much. Virtually every book for real estate agents has a chapter on how to get the seller to lower his price to reality levels. If McCabe' properties were heavily mortgaged"”and they were in "bad" neighborhoods as McCabe says of one"”and he is doing the normal owner optimism of their values"”it may be that he made little if any profit at the time of the infomercial taping in spite of acquiring four properties. Reading Mrs. McCabe' account makes Shawn sound more like a normal beginning real estate investor. In the real world, beginning real estate investors work their butts off, make mistakes, and make far less profit than they claim at cocktail parties. If they are lucky, marketwide appreciation bails them out and they live to invest another day.] "˜Proven, safe" The infomercial narrator describes Whitney' methods as "proven" ways to "safely invest in real estate." Based on my 34 years in real estate, I believe few of Whitney' techniques are worthwhile. They are not proven by any evidence I know of. If Whitney is going to use the word "proven" he should have to provide the proof he is referring to. Indeed, there are laws that require just that in a number of fields. The word "safely" is absurd in a real estate investment context. Lay beginners are afraid and want safe methods to invest. That means gurus need to promise safety to sell seminars. But the fact that beginners want safety does not mean anyone can give it to them. Take just one variable: interest rates. No one can forecast interest rates. Nor can anyone control them. Furthermore, interest rates are extremely important to property values. When interest rates go up, property values fall, and vice versa. Ask anyone who was around in the early eighties. So how is Russ Whitney going to protect you from interest-rate increases? He' not. Nor can he tell you how to protect yourself from adverse changes in tax laws like the devastating Tax Reform Act of 1986 or regional economic downturns like what happened in Texas in the mid eighties. Whitney' promise of "proven" techniques is dubious. His promise of "safe" real estate investment techniques is total bull. There are no such real estate investment techniques. Real estate investment is risky business and nobody can change that.