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’s 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’s 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’s 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’s 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’s office to get the documents from the deal McCabe claims to have done. In particular, I would like to see the following:

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.]

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’s 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’s 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’s 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’s 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’s 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’s 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 the 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 the 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’s 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’s 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’s target market than the notion that one can “quit his job” just three months after taking Whitney’s $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’s 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’s 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’s methods as “proven” ways to “safely invest in real estate.” Based on my 34 years in real estate, I believe few of Whitney’s 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’s 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’s 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.

‘Any level of income or credit’

The narrator says these techniques will work “for any level of income or credit.” I can tell you why he says that. He wants as many people as possible to sign up for his seminars. But can he deliver real estate investment techniques that work for any level of income or credit? Almost certainly not.

For one thing, people at opposite ends of the income and credit spectrum must employ opposite techniques. And people at the bottom end of the spectrum have an exponentially harder time investing in real estate. If you really wanted to teach them how to invest in real estate, they would have to take a much longer and very different course than the people who have income and credit. I have never heard that Whitney is teaching multiple technique levels for different income and credit investors. I read a bunch of his books. His approach is one-size-fits-all, which is not reality—especially when he encourages person of all income and credit levels to buy his stuff.

‘Quick-cash properties’

The narrator says you will learn “how to buy and sell quick-cash properties.” What, pray tell, are those? I have been in the real estate investment business since 1969. I have never heard the phrase “quick-cash property.” So it appears to be an invention of Russ Whitney designed to tell prospective customers what they want to hear.

I get a lot of people who want to know how to make some extra cash and figure real estate is the way to do that. I straighten them out. For example, page 11 of my How To Get Started in Real Estate Investment book explains that real estate is a capital-intensive business.

In real estate, we have an expression, “House rich and cash poor.” It refers to the propensity of property to soak up cash, not throw it off. The fact is, ownership of rental property is not in any way a source of quick cash and never will be. The only quick cash in real estate ownership comes from sale of property.

Whitney has a unique way of regarding borrowing as “making” money. I regard it as borrowing. So do most people. So his “quick-cash” properties may merely be properties that will facilitate your going deeper into debt.

‘To create positive monthly income’

The same comments I made about “quick-cash properties” apply to positive monthly income. The vast majority of rental properties purchased today with mortgages of 80% or more of value have negative cash flow. That is, their monthly income is less than their monthly outgo. Not good.
Once again, “positive monthly income” is what beginners want to hear before they sign up for an expensive seminar.

The truth is that in order to get positive monthly income you have to have a very small mortgage as a percent of value—like 60% or less. One way to do that is to make a huge down payment. Another is to buy the property at a huge bargain—like 40% below market value. See my book How To Buy Real Estate For At Least 20% Below Market Value for details on how to do that. But that book starts by telling you how hard it is to buy at a bargain price. Such painful truths cannot be uttered by gurus who are trying to sell multi-thousand-dollar seminars to tens of thousands of beginners.

FHA and VA assumable mortgages

Whitney’s narrator then says, “Find and get FHA and VA assumable mortgages you don’t even have to qualify for.” Well, now, that’s a very interesting statement.

When I got into real estate in 1969, you could buy real estate “subject to” all FHA and VA mortgages without qualifying. The same was true when Whitney bought his first home in 1977. You could never “assume” such mortgages without qualifying in the sense of the FHA or VA letting the previous borrower off the hook. So why is Whitney’s narrator using the incorrect word “assume” rather than the correct phrase “subject to?” I imagine because he figures many more people understand “assume” than “subject to.” As usual with Whitney, his paramount objective is what sells best, not what is accurate.

But even the non-qualifying subject to’s changed starting in 1986. On 12/1/86, FHA began requiring credit checks of buyers trying to buy subject to existing FHA mortgages. On 2/29/88, the VA announced they would require credit checks for subject to’s. And on 12/15/89, FHA added a number of strict assumption and subject-to rules. So even if you allow Whitney to use the word “assume” loosely to mean “subject to,” it still does not wash because policies instituted by the FHA and VA in the late eighties ended it.

It is true that you can still buy subject to FHA mortgages originated before 12/1/86 and VA mortgages originated before 2/29/88. However, that does not mean much as a practical matter because loans originated that long ago have been getting paid down for 15 to 17 years. Furthermore, the properties in question have almost all appreciated in value to the point where you would need an enormous down payment—like 80%—to buy subject to those old FHA and VA mortgages.

‘Pocket up to $3,000 at closing’

Real real estate investors do not pocket money at closing. They would be surprised to learn that out in real estate investment Seminarland, putting cash in your pocket is big.

How can such a thing happen? Other than some sort of mortgage fraud, I wouldn’t know. The seller is not going to give you $3,000. That would be like cutting his price that amount. The price is almost always arrived at after hard negotiation. Who else is going to give you $3,000? The title company? The Realtor®? The termite guy? F’get about it!

About the only one who is writing a big check at a real estate closing is the new first mortgage lender. Will they write a check for $3,000 more that your purchase price plus your closing costs? Why should they? It would make their loan less secure. Most likely, this is accomplished by misleading the new first mortgage lender into thinking the purchase price is higher than it really is or that you are making a bigger down payment than you really are. That is a felony. I would like to hear from anyone who can tell me how Whitney’s instructors say to pocket the $3,000 at closing when you buy a home.

One of Whitney’s favorite tricks is to make a big deal out of the fact that the security deposits of the tenants in a building you are buying are credited to you at closing. This may be one of the ways he claims to tell you that you can get cash at closing. First, it is standard practice in real estate for that to happen. In some states, I believe it is required by law. So it is not a Whitney idea. Second, this money belongs to the tenants. Again, there are many state laws that require you to keep it in separate accounts and so forth. The only reason such money is credited to you at closing is so you can put it ino a trust accountt for the tenants. You cannot spend or invest it.

Another trick that Whitney makes a big deal out of is closing shortly after the first of the month in order to get the maximum amount of rent for that month credited to you. If the rests are due and collected on the first, the seller credits a prorated amount to the buyer at closing. Again, this is standard real estate practice, not a Whitney idea. Generally, however, this is bad advice. Nowadays, most buildings bought with normal mortgages have negative cash flow. In that case, you should want to close on the last day of the month, not the first. Most profits nowadays come from appreciation in the value. You start getting tat as soon as you lock in the purchase price. Actually closing on the propery gets you the expenses and hassles. That way you have to pay less negative cash flow. You would only want to close shortly after the first of the month if the property were going to have positive cash flow for that month. Either way, it is a piddling little amount once you take into account that you have to pay the building’s expenses for that month out of that rent. Like the security deposits, it may go into your pocket, but it won’t stay there long.

Government grants

The narrator says you are going to learn how to qualify for government grants that first-time home buyers may never have to pay back. Uh, that’s the definition of a grant. It’s a gift.

I am not familiar with any such grant. I would appreciate it if someone who has taken the “free training” would tell what specific program this is. If there is such a program, no doubt it has its own Web site and brochures that you can get for free.

You don’t need Russ Whitney or anyone else to tell you about programs like this. Furthermore, it is highly annoying that he would use a government program paid for by the taxpayers to lure prospects into his web.

Finally, let me speculate on this program based on my experience with other gurus and my knowledge of government programs. If there is such a program, it is almost certainly targeted solely to people who are extremely poor—maybe only in certain geographic areas like ghettoes or rural areas far from civilization. Other gurus used to push similar Farmers Home Administration programs because they were nothing down and 1% interest. Great stuff for attracting customers, but only a tiny percentage of the population could qualify. Whitney was once a speaker for a guru who did that: Dave Del Dotto.

Community Development Block Grants

7/18/03: I have now learned what grants Whitney is using to sell his “free training.” They are Community Development Block Grants. According to the Web site of the Deparment of Housing and Urban Development, grants are only available to “organizations and groups.”

In particular, the grant Whitney promised to tell you about if you attend his “free training” is the Community Development Block Grant for the Assisted Living Conversion Program. The government gobbledygook explanation of how the prgram works is at http://www.hud.gov/offices/adm/grants/nofa/gensec03.htm.

Whitney makes it sound like the government is giving out free money and you will learn how to get some at his “free training.” When you get done reading the requirements to get that money, you will prefer working in a slaughterhouse or some such to earn the grant amount instead.

$1,500 a month in passive income right away’

This is another sentence written based on what beginners want to hear rather than reality. First, why $1,500? Why not $1,200 or $2,300? It’s just a number Whitney picked out of thin air because it sounds both attractive and possible. He’s been using than same number since at least 1997 when I saw it in a newspaper ad for one of his free seminars.

Why the phrase “passive income?” He’s trying to capitalize on the success Rich Dad Poor Dad author Robert Kiyosaki has had with his “portfolio and passive income” acts. Real real estate investors never used the phrase “passive income” until the Tax Reform Act of 1986, which included a hated provision called the “Passive loss limits.” That provision is still law and still hated by real estate investors. Guys like Kiyosaki and Whitney live in a world apart from real real estate investors. They use words and phrases for the effect they have on ignorant laymen, not because they are used in the real estate industry.

What about the phrase “right away?” Whitney makes his money selling get-rich-quick schemes. But he can’t use the phrase “Get rich quick” per se. You have to use less discredited phrases like “right away” and $1,500 a month.

OK, so is it possible to make $1,500 a month right away? Well, you could take a real estate job that pays $1,500 a month—like resident manager of a small apartment building. But I don’t think that’s what he means.

$1,500 a month?

Can you make $1,500 a month from a real estate investment? Sure. Figure out what rate of return you can get, then divide that into $1,500 to learn how much you have to invest. The best data on returns is put out by Mike Scott in Seattle. Last I heard, he said apartments in that area had return rates of 7.8% annually or 7.8% ÷ 12 = .65% a month. So divide $1,500 by .65%. That equals about $230,750. So, if you can buy a $230,750 rental property paying all cash and that property has a 7.8% return, yes, you will net $1,500 a month.

Can real estate genius Whitney tell you how to get a better return than 7.8%? Yes, actually, he can. I read most, if not all, of his books. One thing he says to do that raises return is to buy in slum neighborhoods. And that works, up to a point. If the neighborhood is too bad, it will be a disaster, but if you can buy a semi-slum, you can jack your return up to about 10%. In that case, you only need $1,500 ÷ (10% ÷ 12) = $1,500 ÷ .83% = $180,700 worth of free-and-clear slum property.

Does he have any other return-raising ideas? Yes, like every other get-rich-quick guru, he is a big advocate of going after “motivated sellers.” Does that work? Not the way he says. You can get bargains sometimes from distressed sellers in extreme situations like sheriff’s sales, but that takes far more specialized training than I have seen in Whitney’s materials. Many of those techniques also take huge amounts of cash.

Rooming houses

Whitney also advocates switching a property to its highest and best use. That’s a correct real estate concept, but a lot easier said than done. The only specific technique I’ve ever heard him advocate is converting a large single-family house to a rooming house for low-income, transient, young men. Lovely.

Does that work? I would be surprised if it does. But it’s too tiny a niche to be able to say one way or another. It may not even be real estate investment. It sounds more like a hotel to me—with weekly rentals and high turnover and all that. If you decide to go into the rooming-house-conversion business, you’ll quickly be the world’s number one expert at it.

How much rate of return can you get if you buy a slum house from a motivated seller and turn it into a rooming house for transients? Maybe 15%. Can that produce $1,500 a month right away? Sure, if you buy a free-and-clear slum house to be converted to a rooming house for $1,500 ÷ (15% ÷ 12) = $120,000 cash, you’ll get Whitney’s $1,500 a month “right away.”

Whole Christmas list

Whitney’s narrator says you will learn how easy it is to buy, sell, and finance properties for big profits and be your own boss and achieve financial independence. Whoa! The whole Christmas list of the wannabe real estate investor. Can you achieve all those things in real estate investment? Absolutely. Is it easy? Absolutely not.

Whitney’s first book was called Overcoming the Hurdles and Pitfalls of Real Estate Investing. His recent book is Building Wealth. Note the different tone of the titles. “Hurdles and pitfalls” is truth when it comes to real estate investing. But Whitney figured out that talking about hurdles and pitfalls—telling the truth—is bad for selling get-rich-quick seminars.

‘Seating is limited’

Read what I said about this in my article on what happens at Whitney’s free training. The short version is that he always says seating is limited. In fact, if he has too many seats, he sneaks some out the back to make the room look crowded. He admits it in the back of his Mortgage Payment Acceleration Program manual.

Dick Howard, Charlotte, NC

In another testimonial in the infomercial, Dick Howard of Charlotte, NC claims he “netted” $25,872.62 on a house “last march.” Since then, he said, he had acquired 21 homes worth $1.3 million and that he bought them for 60¢ on the dollar, that is, he paid 60% of market value for the properties. He said he bought a second property on a lease option, was going to close “in July” and make a $20,000 profit.

First, I am extremely suspicious of infomercial testimonials in general. Secondly, these claims are preposterous when compared to my real estate experience and that of the thousands of real estate investors I have interviewed.

John Beck is probably the biggest expert who ever lived on the subject of bargain purchases. He defines a property that can be bought for 20% less than market value as a bargain. If the property can be bought for 33% less than market value, he calls it a “superbargain.” Superbargains are generally only possible in extreme distress sales like sheriff’s execution sales which are poorly advertised compared to foreclosures.

21 superbargains

Howard makes no mention of any sheriff sales or any other extraordinary circumstances, yet he claims to have purchased 21 superbargains!

Howard says he “netted” $25,872.62 on a home. One would assume that means he paid that much less than his net sale price after paying costs of the transaction. Let’s check out Mr. Howard’s investments in the Charlotte area. I would appreciate it if readers in that area would check the public records of the local tax assessor and recorder to see what Howard owns now and what he has owned there in the past.

Delbert Kinchelow, Lee’s Summit, MO

This testimonial giver says he put $25,000 cash in his pocket five days after he took Whitney’s training. It is extremely difficult to do that without being naughty in some way. I would appreciate it if readers in the Lee’s Summit, MO area would check the local recorder’s office to find this deal and send me the documents.

Bill Johnson, Sonoma County, CA

This man says he made $34,000 on his first deal as a result of selling a house. “I did nothing,” he says. I note that this man has the most common last name in America and that Whitney only lists his county, not his city. Like Whitney’s saying vaguely that his early investments were in “upstate New York,” this “Johnson of Sonoma County” strange vagueness makes me suspicious. The good news is that Sonoma County is across the Bay from the county that I live in.

Gina and Russ Bowles of Ohio

Now we’re getting more vague. We don’t even get a county. Just a state. Why?
They claim to get $2,000 a month positive cash flow on their first two deals. Not likely unless they made a down payment in the $25,000 and paid about 67% of market value—a superbargain. They also claim they own over $1,000,000 worth of real estate.

First, we need to find out what county these folks did this in, then we need to find the deals in the recorders office.

The Bowles do mention having bought a triplex in Salem, OH. They say they put nothing down and have $300 a month positive cash flow. That would require a superbargain in the 50% to 60% of value range—an extremely rare hyper bargain.

They also mention buying two six-plex apartment buildings, perhaps also in Salem. Again, they claim nothing down and about $2,000 a month positive cash flow. They further claim $40,000 of cash-out refinance proceeds. Coming on top of nothing-down purchases, this is near miraculous. I would appreciate it if someone in that area would check these claims out in the Salem area recorder’s office and send me the results of the search.

They claim a net worth of $250,000 with “nothing down, helping people and solving problems and the money comes.”

‘Helping people’

One of the recurring themes in the pre-foreclosure seminar business is that the investor is getting paid for “helping people.” Let’s examine that notion.

The source of profit in pre-foreclosures is the equity of the homeowner being foreclosed. If the homeowner being foreclosed has no equity, pre-foreclosure investors all walk away. (In some cases, equity can be created in these situations by obtaining discount lien releases from the creditors, but that’s getting too complicated for this article. For details on investments like pre-foreclosures and discount lien releases, see my book How to Buy Real Estate for at Least 20% Below Market Value.)
The key question from an ethical and moral standpoint, is whether the homeowner who is being foreclosed is overpaying for the “service” of being “helped.”

‘Saving their credit’

Another phrase you hear from pre-foreclosure gurus and their followers is “saving their credit.” If you are being foreclosed, your credit is already messed up. You are behind in your mortgage payments by several months. This is recorded in your credit record and there is nothing Russ Whitney or one of his students can do about it.

What a pre-foreclosure investor can do is prevent you from having a foreclosure per se on your record. Is that “saving your credit?” I think not.

Deed in lieu

I deeded two Texas apartment complexes to the lenders in lieu of foreclosure in 1988 and 1992. One dropped in value from the $835,000 I paid for it to about $300,000 value—and had a mortgage of $585,000. The lender is the only one who will buy it under those circumstances. It was also losing $35,000 a year cash flow, so made no sense to wait for the value to go back up. The other dropped in value from the $600,000 I paid to about $200,000 and it also was losing $35,000 a year.

Deeding a property in lieu of foreclosure is almost equivalent to a foreclosure. Mortgage applications generally ask have you ever been foreclosed or given a deed in lieu of foreclosure, illustrating their equivalence in the eyes of the lenders.

I wrote an article about it called, “Won’t that affect your credit?”

To our surprise, deeding two properties in lieu of foreclosure had almost no effect on our credit. Specifically, several lenders said they could not loan to us until two years had passed since the last deed in lieu. Because interest rates had fallen, we refinanced our home. Although several lenders said they could not, by policy, lend to us until after two years, other lenders said they could lend to us now. The only problem was that among the lenders who could not lend to us were one or two whose rate was 7% for loans like ours. The lowest rate among those who would lend to us was 7.25%. So the answer to the question, “Won’t that affect your credit?” was, “Yes. It will cause you to pay 1/4% more in interest for two years.”

How much should you pay to ‘save your credit?’

So how much should you pay to someone who is going to “save” you from having to pay 1/4% more interest for two years? About 1/8% for two years I would say—split the savings with the “savior.” On, say, a $50,000 mortgage, 1/8% for two years would be about $125.

Is that how much the pre-foreclosure guru testimonial givers are getting paid? No. They typically claim profits of $20,000 or more for “saving the credit” of the person being foreclosed. Charging a person who is down on their financial luck $20,000 for a service that’s worth $125 is a bit excessive, don’t you think? With friends like that, who needs enemies?

California’s Home Equity Sales Contract Statute

The State of California thinks so. They passed a law called the Home Equity Sales Contract Statute (California Civil Code §1695). It begins with a purpose statement.

“During the time between commencement of foreclosure proceedings and the scheduled foreclosure sale date, homeowners in financial distress, especially the poor, elderly, and financially unsophisticated, are vulnerable to the importunities of equity purchasers, who induce homeowners to sell their homes for a fraction of their fair market values through the use of schemes which often involve oral and written misrepresentations, deceit, intimidation, and other unreasonable commercial practices.”

As you might expect, after reading that, California’s law places numerous restrictions on investors who buy from someone who is in the process of being foreclosed. I understand some other states have similar laws. If Whitney is advocating pre-foreclosure investing, in my opinion, he has a moral and ethical obligation to apprise students of the existence of laws like California’s.

Excess sale proceeds

There is also the issue of excess sale proceeds. If the homeowner being foreclosed has equity, which is the only situation a pre-foreclosure investor would accept, it is likely that the foreclosure sale would be for more than the loan balance of the loan being foreclosed. That means the sale would generate excess proceeds—the difference between the foreclosure sale price and the amount owed to the lender who caused the foreclosure.

Guess who gets that? The homeowner who got foreclosed. But if their “credit is saved,” there is no foreclosure auction and consequently no excess proceeds. Who gets what would have been excess proceeds then? The “savior.” So are we helping people—or helping ourselves to financially-distressed people’s life savings? California’s law prohibits pre-foreclosure investors from misleading the person being foreclosed regarding the possibility of excess foreclosure auction proceeds.

‘Pastor Archie Nevins’

Another testimonial giver in the infomercial is “Pastor Archie Nevins.” With “Pastor Archie Nevins,” the details on who he is reach a new low in the infomercial: no city and no state. Since he’s a “pastor,” a denomination would be helpful, too. No denomination either. This is very “upstate New York-like.”

Why is Whitney not giving us the city and state on this guy? There’s probably a reason. After all, he did give that information on the others.

Nevins doesn’t say much other than what “great teachers” the Whitney instructors are. So why is he even in the infomercial if he never did a deal to brag about? My guess is that his title of “pastor” gives him credibility with many who trust clergymen.

Questions about Archie:

Within hours of posting this, I get an email saying Nevins did take all or almost all of Whitney’s seminars. Whether Nevins made any money in real estate I do not know. The guy who wrote me said he lives in Tracy, CA, which is near me. He did not know who made Nevins a “pastor” and thought he no longer was one.

I am also told that Whitney has called Nevins his biggest star student, but that Nevins net worth is mainly the result of a multi-million-dollar lawsuit settlement he received around the time he took Whitney’s seminars.

Bobby Threlkeld in Alabama

Bobby says that two weeks after the training he bought a pre-foreclosure for $36,000. It appraised at $77,000. (By whom?) He made $30,000 to $40,000 on that first deal. Two weeks later, he bought two more. Paid $18,000 on the courthouse steps (Sounds more like a foreclosure than a pre-foreclosure) and sold them for $40,000 within 90 days.

He sold another property for a $20,000 profit 18 months after he bought it. Made a total of $80,000 on his first four deals. He says his best deal was one where he paid $12,000, it appraised at $120,000 and he pulled out $58,000 on refinance.

As above, I would appreciate it if some reader in the Alabama area would track down this guy’s deals in the recorders office and send me the papers.

But I can make a few comments just from the infomercial comments.

The $30,000 to $40,000 he says he made on the first deal was formerly the equity of the person or couple being foreclosed. We are not quite sure of what Bobby “saved” them from. We know it was foreclosure, but we do not know how much better off their credit is—after all, they were behind in their payments and that will still show up on their credit rating. But we can be sure of what he says he charged them for his “savior” services: $30,000 to $40,000. Best guess: Their net worth before Bobby “saved” them was about $35,000 to $45,000; after, $5,000.

In general, I would characterize that as a heck of a first deal for a guy with two weeks of experience. From what I understand, people who are being foreclosed are bombarded by pre-foreclosure investors trying to get their equity. How Threlkeld beat out all those far more experienced guys and got this superbargain in spite of competition that is usually willing to settle for a far smaller profit on his first try is a question I would like to answer.

Two weeks later, he goes to a different niche—foreclosure auctions—which require all cash in many states—and again beats out the pros who have been doing this every week for decades. What a guy! Most investors either do pre-foreclosures or foreclosure auctions, but not both. They require different personalities, cash available, title search capabilities, and so forth. But not Bobby. He can do either better than the pros—and in only four weeks! What a guy! What training!

But the topper is buying a $120,000 property for $12,000! He doesn’t say how. I would sure like to know. That’s a 90% discount. I have written about actual case histories of similar discounts, but they were really weird situations—like an ancient sheriff’s deed found in a drawer when a guy bought an auto-repair business, some tenant-in-common interests, and some judgment deals. See my books on How to Buy Real Estate for at Least 20% Below Market Value for details. But as far as I know, Whitney is not teaching those techniques. He just teaches “motivated sellers,” cosmetic rehab, converting houses to rooming houses, and such.

Lest you miss my meaning, I am really skeptical about Mr. Threlkeld’s deals. Alabamans, please Roll Tide and dig up his deal documents for me.

‘$100K in loan money even with bad credit’

The narrator says you will learn “how to receive $100,000 in loan money even with bad credit.”

I have often observed that the nothing down creative finance movement techniques all fall into two categories:

Misleading an institutional lender is a felony. See my article on Whitney’s property improvement loan techniques for details. But, if you have bad credit, you probably cannot try the felony route because banks will check your credit, find your bad credit, and tell you not to let the door hit you in the butt on your way out.

So we must be getting up to $100,000 in loan money from an unsophisticated seller—typically seniors who have paid off their home and own it free and clear. Such persons, of course, are the only ones ignorant enough of sound lending practices to do such an idiotic thing as lend $100,000 to a guy with bad credit.

Is it legal to persuade seniors to make such a loan? Probably not. In Texas, for example, it would probably violate their Deceptive Trade Practices Act (Texas Business and Commerce Code Section 17.45) because it causes an unsophisticated person to exchange something of value—the equity in their home—for something of much lesser value—an IOU signed by a guy with bad credit.

And why is the narrator saying “up to $100,000?” Is there a law that sets a $100,000 limit to making loans to people with bad credit? Nah. It’s another number they pulled out of the air because it sounds both plausible and attractive. It ain’t plausible if you know anything about finance. And it ain’t even desirable unless you are going to stick with your bad credit habits and not pay it back. If you start behaving, you have to pay the darned $100,000 back, plus interest. That’s only attractive if you can invest the $100,000 in something that pays more return than the interest you have to pay on the loan. Otherwise, you will lose money on the loan.

Talking about borrowing large sums of money as if it were equivalent to winning the lottery is a sign of poor understanding of finance, or that the speaker figures the audience to whom he is speaking has a poor understanding of finance.

Would someone please tell me how Whitney’s instructors say to accomplish this.

‘Establish $60,000 line of credit in 30 days’

Again, these are two numbers picked out of thin air for their combination of attractiveness and plausibility. Why not $50,000 or $75,000? Why not 15 days or 60 days?

Can this be done? Sure, if you have enough income and credit. Probably would not take 30 days because of FICO scores and such. Do you need Russ Whitney to tell you how to do this? Heck no! Just fill out a loan application.

Suppose you don’t have much income or your credit is bad or both? Then you will not get approved for the line of credit. Can Whitney or anyone else teach you tricks for getting approved in spite of these handicaps? No. You might be able to increase the line of credit you are eligible for by around 5% or so if you knew every trick in the book, made sure your credit report was accurate, knew how to word stuff on the app, and so forth. But the only way a guy with low income and/or poor credit is going to get approved for such a line of credit is to mislead the bank, which as I’ve said, is a felony.

I would appreciate it if attendees would tell me how Whitney’s instructors tell you to accomplish this.

Borrowing your own money

A reader responded that he attended a Whitney “free training” and he thinks the $60,000 line of credit worked like this.

  1. Deposit $1,000 into savings account at Bank A.
  2. Ask for $1,000 loan secured by that savings account from Bank A.
  3. Deposit the $1,000 borrowed from Bank A into savings account at Bank B.
  4. Ask for $1,000 loan secured by savings account from Bank B.
  5. Continue doing this until you have five such loans.
  6. Use the fifth such loan to pay off the first at Bank A then ask Bank A to lend you $1,000 unsecured. Presumably they will do this because they are so impressed with your paying off the original secured loan.

Anyway, you keep doing this sort of thing until you have $60,000 of unsecured loans.

Will this work?

Absolutely not. It is nutty, dishonest, and about 30 years out of date.

Worked during the Truman administration

The notion that this would work stems from an era before Russ Whitney was born. Back in the days depicted in the 1946 movie It’s a Wonderful Life, bank loan officers held their jobs for life. As you may recall, in that movie, Jimmy Stewart played “George Bailey,” the president of a small town Building and Loan Association. They made their decisions based on knowing the borrower personally. Borrowing small amounts and paying them off were a sensible way to establish credit. Also, back then, $1,000 was a lot of money—$9,435 in 2003 dollars.

Even then, this technique was unethical, immoral, and arguably illegal. It is akin to a check-kiting scheme. Obviously, it depends on each lender erroneously thinking they are the only ones lending to you. But back then, you might get away with it because the lenders would not know otherwise.

Then something called a credit report was invented. Initially, it recorded payment history on installment debt. With Whitney’s technique, that meant the five lenders would eventually find out about each other when they checked your credit report a year or so down the line.

Inquiries, too

Then they improved credit reports to start adding inquiries. That is, whenever any prospective creditor inquired about your credit, it was reported to all other inquirers. Why? Precisely to stop the sort of simultaneous borrowing Whitney is advocating.

So now, if you go into five banks in rapid succession and try to borrow or arrange lines of credit, they will each run a credit check, see the inquiries of the other banks, and thereby find out the whole story of exactly what you are doing. They will be annoyed, reject you, and tell you not to let the door hit you in the butt on your way out. Far from establishing credit, you will have destroyed your credibility.

There is also the issue of stupidity. Why would anyone deposit $1,000, then borrow back their own money and pay interest on it? You would not make an impression on the loan officer as being a good risk. Rather, you make an impression as being an idiot—or someone who is trying to run some ancient scam they learned at a get-rich-quick seminar.

If you said you were doing it to establish credit, the loan officer would explain that in this day of credit reports and credit scores, you establish credit with Bank A by borrowing from any creditor and making the payments on time.

$180 a year

Then there is the issue of the amount of the loan. How much interest do you suppose a lender gets per year on a $1,000 loan? At 18% it would be 18% x $1,000 = $180—if you never paid any of it off during the year. That’s the gross. Their net would be reduced by the cost of the loan application form you filled out and the time of the employees who processed it. How much employee time can you buy for $180? Not much. There is also the lender’s fixed costs like overhead, heat, lighting, etc. In short, bank loan officers don’t have time to screw around with $1,000 loans in the 21st Century.

Nowadays, you get a $1,000 loan by obtaining a credit card with a limit of $1,000. The processing of such things is almost all automated, which is the only way it makes sense today.

Other lines reduce your credit

Finally there is the issue of the amount of unsecured credit you deserve. Each of us qualifies for a certain amount of unsecured credit—also called a signature loan. If you apply to ten banks, there may be some small variation in how much credit each offers you, but they generally will all offer you the around same amount.

How is it determined? By your salary or net income, assets, liabilities, and credit score. Whitney is implying that a person who is eligible only for a $1,000 secured loan can easily qualify for a $60,000 unsecured line of credit simply by playing escalating games with passbook loans. His basic idea is to get to where you qualify for, say, $5,000 in unsecured credit, then simultaneously borrow that amount from twelve different banks.

It doesn’t work that way. As I said, nowadays, they will learn about other inquiries when you apply for a line of credit with multiple lenders. They also make you tell them in writing about all your other lines of credit, regardless of whether you are currently borrowing against them.

The lender will then calculate how much total unsecured credit they think you qualify for and subtract all your existing lines of credit from that amount. For example, If you qualify for $10,000 in unsecured lines of credit, and you already have a $5,000 line at one bank and a $2,000 line with a credit card, they will give you a line for an additional $3,000, bringing your total lines of credit to $10,000. You absolutely cannot get more lines of credit than you qualify for by simultaneously applying to multiple lenders and not telling each about the others.

Arguably, even attempting to do that would be a felony. Whitney is big on dismissing such disclosures as, “The bank doesn’t need to know that.” Yes, they do (18 USC 1001) and nowadays they will specifically ask you in writing. You cannot just not mention the other line of credit applications anymore. It would be a felony. Plus, they will force you to make a written statement so you would have to lie, not just not mention it.

‘Become totally debt free!’

Excuse me. You just told us you were going to show us how to borrow up to $100,000 and get a $60,000 line of credit. Now you’re going to tell us how to be debt free. Well, which is it? Is Whitney’s target market so profoundly stupid that they think they can borrow $100,000 and be debt free at the same time? That would explain a lot.

Telemarketing against you

Whitney owns one of those Utah telemarketing companies. I am reliably told that once they get your name and phone number, they have commissioned telephone boiler room salespeople pressure you to sign up for seminars or mentoring. You should record them if they call, but legally you generally need their permission. One guy asked a Whitney telemarketer if he could tape the call and the telemarketer said, “No way!”

But if you agree, you get another call from them to confirm your order and they insist on taping that call to prove in court that you agreed. So they are allowed to tape you to prove that they gotcha, but you are not allowed to tape them to prove that they misled you.

Suggestion: Tell them that if you cannot tape the sales call, they cannot tape the confirmation call. That’s fair, isn’t it? Better yet, hang up on the first call.

Fast talkers

I am told that the speakers at the “free training” are fast talkers. Well, that would be consistent wouldn’t it? “Fast-talking salesman” is one of those phrases like “get rich quick” that has long described schemes you should avoid.

Reportedly, Whitney’s “free training” speakers put slides up and pull them down so fast you do not have time to write down what they said. Why wouldn’t they want you to write down what the slides say? As with the telemarketing, the promises you are relying on may not be recorded, but the contract you are asked to sign is quite the opposite. They get you on paper, but you cannot get them on paper.

Haven’t heard from a single one

This page has been up on my Web site for some time now. Wouldn’t you have thought I would have heard from one or more of these testimonial givers by now. I have not heard from a single one.

They were so eager to go on TV to talk about these deals and what great training Russ Whitney provides. But none sends me a copy of a deed or closing statement or a letter or an email or calls. My home phone number is on almost every page of my Web site. For folks who were so willing to talk about their deals on national TV, they’ve become awfully quiet now that someone is going to look into those deals.

The infomercial narrator says, “These are people who have done it.” Maybe. But so far I have not received any proof.

Whitney’s lawyer sent me a list of these testimonial givers addresses and phone numbers. The first one I called asked me who was calling then said I had the wrong number. I have not yet tried the others.

Generate up to $3,000 to $5,000 of income every month

Now wait a minute! Which is it? “$1,500 a month in passive income” or $3,000 to $5,000 of income every month?” Whitney can’t even keep his story straight in the space of a single infomercial? Why were we screwing around with a measly $1,500 a month earlier in the infomercial if we are going to learn how to earn $3,000 to $5,000 a month? Probably because this is all a bunch of bull so it doesn’t matter which number you pick out of the air. I already explained to you how to earn $1,500 a month. Just multiply those cash down payments proportionately to learn how much cash you have to have to earn $3,000 to $5,000 a month. I’ll give you a hint: It’s about two or three times as much as it takes to earn $1,500.

Get 100% financing

Not that much of a trick these days if you have good credit and are buying a home to be your principal residence. If you do not have good credit or you are buying a rental property, you will have probably have to commit fraud or take advantage of an unsophisticated seller to get 100% financing.

Welcome to Russ’s world. See my article Are Russ Whitney’s property improvement loan techniques illegal? for details.

You need no training other than these workshops

According to the narrator, you need no training other than “these workshops.” That refers to the “free training.”

But I have heard and seen numerous complaints that the “free training” actually offers very little training on anything—let alone everything. Rather, it is just a high-pressure sales pitch to get you to sign up for paid seminars.

In fact, real estate is extremely complex. You need to train for a lifetime on all sorts of things that Whitney does not cover or covers inadequately like air-conditioner maintenance, federal income tax laws relating to real estate, and so forth. Owning real estate is running a complicated business in a dynamic environment where things change annually.

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