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John T. Reed's analysis of Carleton H. Sheets' books and tapes 2 Review of Sheets' The Painless Guide to Profitable Property Management I have a problem with the title of this book-and-cassette package. Property management is a real pain. Knowledge can make it less painful. But painless? Forget it. Gurus who use this sort of phraseology provide more hype than help. Like all the books I received from Sheets in 1998, this one is copyrighted 1998. The about the author page says, "He was recently named to Who's Who in Real Estate..." "Recently?" That book was only published for one year: 1983. So far, Sheets has told us that property management is painless and that 15 years is "recent." Not a good start. The book is double-spaced with large margins. See my B.S. artist article for more on the blank-white-space crowd. On page 1-3, he discusses "Using outside management." That' easy. Don"t. Manage property yourself or hire salaried employees to do it. NEVER hire outside percent-of-the-gross guys. Indeed, Sheets mentions that he lost $5,000 when such a manager embezzled from a property he part owned. That would be typical. When I was a property manager, both my predecessor and my successor took kickbacks. But Sheets only says you should be careful when you hire an outside manager. The correct advice is never hire outside property managers. On page 1-9, Sheets says, "It' becoming an increasingly sticky situation to discriminate against children so check your state laws before you do." Folks, it is not only "sticky" to discriminate against children, it is absolutely illegal. And checking your state law won't help much. It' true that state laws vary on the subject. And it' true that state laws used to matter. But that was before the federal Fair Housing Amendments Act---of 1988! Does anyone need any more proof that Carleton Sheets" super current copyright dates are pure bull? In the next sentence, he says not to discriminate because of race or religion. "You can get some free room and board for that." Jail? Actually, you cannot go to jail for discrimination. It' not even illegal in some cases, like an owner-occupied dwelling. And the penalty is never jail time, only fines. There are other reasons not to discriminate by race or religion---like it's stupid and violates the Golden Rule. Page 1-10. Sheets says never buy master-metered buildings unless you can convert them to individual meters. My management book has a chapter on why he's wrong. Page 1-11. Sheets says not to provide drapes or to permit tenants to use sheets or aluminum foil for drapes. I agree with the no-sheets-or-foil policy. But he seems not to understand that whether the landlord provides drapes is a function of the local market. I never provided them in NJ. I had to in TX. Sheets claims to have much experience, but it must all be in one area. OK I"ve had enough. Only one chapter into the book and most of it is either wrong or lame. To learn about property management, read my book, How to Manage Residential Property for Maximum Cash Flow and Resale Value, and/or Leigh Robinson's book, Landlording. Review of Sheets" No Down Payment course I was going to review the first chapter of Sheets" No Down Payment course, but the initial chapters seem to be about a different subject than the title. They are extremely general discussions of goals, the nature of real estate and stuff like that. Most investment books are really just investment dictionaries that are not in alphabetical order, the beginning of Sheets' No Down Payment course appears to fall into that category. I had to go all the way to chapter 11 before I found some discussion of buying property with no down payment. To an extent, the initial chapters seem to be motivational. Promising real estate how-to information and delivering motivational material is one of the items on my B.S. Artist Detection Checklist. Technique # 1 on page 11-5 has you buying a $50,000 house by getting a $27,000 new mortgage from an institution like a bank and the seller taking back a second mortgage for $23,000. Does this work? No. Although Sheets says, "Simply obtain a new first mortgage for $27,000...," it is far from simple and most

 likely is impossible. Mortgage applications ask you where you are getting the down payment. If you answer, "I am not making any down payment. The seller is taking back a mortgage for the balance of the price," your mortgage application will be rejected. Over a century of experience, mortgage lenders have learned that it is not prudent to make a mortgage loan where the borrower has no investment or equity in the property. The default rate on such mortgages is ruinously high. In general, regulated mortgage lenders are prohibited by law and/or by regulations from making such a loan. See my article on nothing down. Sheets says also that, "Sellers have been known to join the buyer in signing a note and mortgage..." Comets have been known to pass near the earth, too, but I am not sure which is more common, comets or sellers cosigning on the buyer' note. Actually, sellers will do that in some cases in special situations, like the buyer is their adult child. In theory, there are some other situations where it might happen. I have never seen or heard of such a deal in 31 years in real estate. Sheets says, "Many banks, but not all ..." will not go for this deal. In fact, no bank will go for this deal. I invite Mr. Sheets to name a bank that will. A list of such banks would be worth the money Sheets charges for his course. Until he produces such a list, this "technique" is not worth the paper it is written on. I had this same discussion with Joe Land when he and I appeared on 60 Minutes and were subsequently interviewed by Time magazine. Land said there were such banks, but refused to name any citing "privacy," even after Time promised to keep the identity of the banks secret in its article. Robert Allen, author of the book Nothing Down, also says what Sheets says. When I dug up the documents on one of the deals where he actually used this "technique," the lender was Bank of America. Their written policy at the time, which I have a copy of, said they would make no mortgage loans where there was any secondary financing, let alone nothing-down financing. In that deal, Allen had the second that was taken back by the seller recorded one day after the closing on the sale and the first mortgage. This is called a "silent second" and is done to reduce the chances that the first mortgage lender will find out about it. In other words, the bank making the first mortgage loan did not agree to the nothing-down second, rather they were apparently told there was none. If you try to use Sheets" "Technique 1," you will be rejected by all institutional lenders. You will then be tempted to lie to a lender. If you succumb to that temptation, you could end up in jail with a felony conviction. The statute in question; Title 18 United State Code, Section 1014; is quoted just above the line where you sign your name on the mortgage application. Sheets suggests helpfully that the recalcitrant bank might agree if you get a mortgage against equity you have in another property you own and use the proceeds of that loan as your down payment on the new purchase. I agree that they are likely to go for that. In order to do that, you would have to have an extraordinarily large percentage of equity in the other property. The lender will only loan up to about 75% for such purposes unless it is a home equity loan. But since Sheets" course is aimed at beginners, why is he advocating a technique that can only be used by experienced, multi-property investors? Also, how is it a no down-payment deal if you borrow against a property you already own and use the proceeds as a down payment on a new property? Your overall loan-to-value ratio on all your properties combined after this "no down payment" deal would be around 80% at best. That's hardly a no-down-payment situation. Besides, did you really need an expensive infomercial course to learn that you could borrow against a property you already own to get down payment money to buy another property? If you're that ignorant of real estate finance, you should have a legal guardian appointed to take over your financial affairs. Sheets also suggests you get a partner if the banks won"t agree. This is the universal fall-back position of all nothing-down gurus. Since partners are unregulated, they can do whatever they want. Accordingly, neither I nor anyone else can prove to you that you cannot get a partner who will agree to put up the down payment for your nothing-down deal. But I can tell you that it is very hard to find such partners. And, once again, I question why anyone would need Carleton Sheets to tell them that if they don"t have the money for a down payment, they might try getting a partner to put it up. When my mom bought her house, she didn't have enough for the down payment. She went in partners with her mother who lived with us. Carleton Sheets was 24 at the time so she did not get the idea from him. Either my mom, who worked as a secretary, was a financial genius, or you do"t need Sheets to tell you about asking someone to partner with you in a purchase. Sheets says still another way to do this is just to buy subject to the existing mortgage. Actually, that's the correct terminology. Sheets incorrectly uses the phrase "as is" to mean "subject to." Anyone who has completed a real estate salespersons license course knows that. Earlier I said his book is largely just a real estate dictionary that is not in alphabetical order. Make that an incorrect real estate dictionary that is not in alphabetical order. Kind of amazing how he can sell an incorrect dictionary that is not in alphabetical order for far more money than they get for correct real estate dictionaries that are in alphabetical order. It's a measure of how slick a salesman Sheets is, or how colossally stupid his customers are. Also, Sheets names this technique: "Obtain a new mortgage to pay off existing loans and provide down payment money." But before he moves onto the next technique, he is telling you to just buy subject to the existing first mortgage and have the seller take back a mortgage for the remaining 75%. That's the exact opposite of what is promised in the title of the technique. The vast majority of existing mortgages contain a clause that says the lender may make you pay off the mortgage immediately if you sell the property. See my discussion of that issue by clicking here. In other words, this technique does not work unless the existing mortgage is one of the rare few that has no due-on-sale clause. Here's a summary of my analysis of Sheets" "Technique Number 1:" Sub technique Is it really a no-money-down technique? Is this technique sufficiently obscure or complex that a layman would need to pay a guru to tell him about it? Does this technique work in the real world? A. Institutional first and seller second for balance Yes Maybe No B. Seller co-signs buyer's mortgage Yes Yes Almost never C. Borrow against another property you own to come up with down payment No No Yes D. Get a partner to put up the down payment No No Yes, but it's very hard to find such partners outside your circle of friends and relatives E. Buy subject to the existing first mortgage and have seller take back a second for the balance Yes Maybe Very risky in the vast majority of cases because of seller's continuing liability and risk of enforcement of due-on-sale clause Technique #2 is really just technique #1E only with a sweeter interest pot for the seller. Sheets says to lower the price and raise the interest rate. In his example, you offer $95,000 to a seller who wants $100,000 but you give him 15% interest instead of the 10% he asked for at the $100,000 price. That' a bit asymmetrical. You lower the price 5% and raise the amount of interest you are paying by 50%! If you read my article on nothing down, you know it' hard to have positive cash flow even with a 20% down payment. The less you put down, the bigger the mortgage. The bigger the mortgage, the bigger the mortgage payment. So if you have negative cash flow with 20% down you have a lot of negative cash flow at 0% down. Now Sheets wants to increase your interest rate by half! Where are you going to get all the money to make those payments? This is like telling you you can increase the sales in your candy store by cutting prices below cost. You sure can, until you go bankrupt. In addition, Sheets says to pay interest only for five years then pay the entire mortgage off at that time. That' bad advice. You should avoid all balloon payments, especially those that fall due in five years. Sheets says that if the payments result in negative cash flow (If?!), arrange to pay only part of the interest currently and add the rest to the balloon payment. That' called negative amortization. It means your debt goes up every month, instead of down. There is an extremely high probability that you will default on this loan if it is interest only and an even higher probability that you will default if there is also negative amortization. Sheets says this requires that the first mortgage be assumable. This is a statement I used to make in the seventies. I don"t make it anymore because assumable mortgages are now almost entirely a thing of the past. It is a bit cruel to send beginners out looking for assumable mortgages. It' like snipe hunt. They will be laughed at by everyone in the real estate business. "Hey, Fred! This guy wants an assumable mortgage. We have any of those? Sorry, buddy. You"re only about twenty years too late." Technique #3 is a wraparound mortgage. It has an intriguing name to laymen. A wraparound is just a seller second mortgage. Instead of stating the amount of the second mortgage in the normal way, in a wrap, the amount of the mortgage is the sum of the second and first mortgages. Typically, the buyer sends one payment to the seller and he, in turn, pays the first mortgage. Wraparound mortgages are meaningless unless the seller is trying to use the Stonecrest line of court decisions avoid paying taxes on excess loans over basis. But they are big at real estate seminars because of their funny, exotic name. Technique #17 In the June, 1985 issue of Real Estate Investing Letter newsletter, I wrote an article called "Seller loans are junkier than junk bonds." The second paragraph of that article says, I"m about to tell you about an unethical, unconscionable, illegal scam that uses junk bonds. I am NOT advocating it by any means. I"m just trying to make a point about seller loans and "creative" financing. Guess what Carleton Sheets" Technique #17 is? Correct. It' my "unethical, unconscionable, illegal scam." Only instead of using junk bonds, which sell at a large discount off their face value, he advocates using zero-coupon bonds, which also sell at a large discount off their face value. In each case you buy a bond which says it' worth $100,000, but which is worth far less because of the credit of the bond issuer or the delay in getting paid off. After buying the bond for, say, $56,000, you then tell the seller of the property you want to buy that the bond you are using for down payment is worth its face value of $100,000. Email about Sheets Here is an email I received from an unhappy Sheets customer. "Dear John: I wrote to you back in March regarding Carlton Sheets' not refunding me the shipping charges on a refund of a purchase. I did get a refund of the main purchase price but never did get my $20 back for the freight he charged, so I passed it off as a learning experience and thank you for your web site which saved me from even a more costly experience. Well, I noticed on my May 18, 2001, bank statement an unauthorized purchase, dated May 4th, for $84 from a MWI*FINANCIAL at 1-800-393-0115. I telephoned the 800# and spoke with a Wilford with Money Masters which is connected with Carlton Sheets. I told this Wilford character that I never ever authorized the $84 purchase and demanded that he credit my Bank Visa Card immediately and that I did not appreciate what his company did. He then tried to convince me to keep the purchase (which I had yet to even receive) and they would knock off $20 or whatever. I told him again that I was absolutely not interested if they were to even give it for free. That conversation took place on May 29th, so I will be checking with the bank soon to see if he indeed did have my account credited. Bottom line is that your web site home page WARNING regarding these shysters should be adhered to and they should be watched very carefully. I hope this helps in convincing other would be victims to be on the lookout. Again, I hope your readers benefit from this information and most definitely your web site." Darlow Madge To be continued 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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