Deconstructing the Myth of Financial Independence:

A Deeper Look at ‘Pieces of the Puzzle’ Theory

Operating on ‘Level III’ Thinking

Written by Robert Feol, for the Baltimore Real Estate Investor’s Association

‘Chance Favors the Prepared Mind…’

- Louis Pasteur

Sitting at my camp in the Adirondack Mountains, having done my radio broadcast from the actual property(not a studio), and based on the massive response I have been receiving from the listeners, has me thinking today about the true cost of financial freedom, which I believe, is THE reason that people look at real estate investing as an avenue of exploration. True, you may have someone who is ‘looking for a career change’, or ‘another source of income’, or ‘to keep themselves busy’; but in my experience, and comparatively speaking, people recognize the potentially lucrative nature of real estate investing, and explore it with that end in mind.

Now, the fact that I was able to actually purchase a vacation home in my favorite place on Earth is a true mystery in itself, as I was never the guy who was supposed to have a vacation home to begin with. Suffice to say, knowledge of solid negotiation, owner financing, creative deal structuring, multiple parcels on one property, and a bit of ingenuity with newspaper advertising, and voila… here I sit and write this. Oh, and about 700 deals under my belt too…an important part of the equation, for certain, but had I not done that first deal so long ago, then I would not be writing this, and would probably be teaching music at a summer camp for the Memphis City School District. Which brings me to the point of this essay.

For people who are looking at real estate investing as a long term investing strategy, the road which lies ahead of them can seem daunting. After all, owning one rental property may seem like a massive hurdle to the new investor– how then, could they ever own FIVE rental homes? Five homes can come across as insurmountable, to say the least, to a new investor, and at times be discouraging. But, what if I told you that there is a secret way that an investor can suspend disbelief AND in doing so be successful? And what if I told you I would share it with you here?

I am firmly convinced that to succeed in the world of real estate investing, you must FORGET ALL THAT YOU HAVE LEARNED ABOUT FINANCE, BANKING, AND REAL ESTATE. You must unlearn your reality that creates artificial boundaries of success measurements. And, more simply out, you must begin to accept that everything you are told on television is a lie.

Radical, yes? Perhaps. ..but if you allow me to illustrate the above ideas in practical terms, you just might find yourself *cough* actually agreeing with me. For simplicity’s sake, let’s review some fundamental ideas in the world of real estate investing, basic ideas and elements that all investors, regardless of experience, must grapple with. We will assign arbitrary levels of thinking to each analysis, i.e., Level I, Level II, and Level III. Think of each level as progressively more complex, and therefore, more profitable than the previous level. Your goal then, ideally, would be to become a Level III real estate investor. Can you do it? What level are you on? Let’s find out!

Theorem 1: To invest in real estate you need cash or excellent credit.

Level I Investor: I (do/do not) have cash or excellent credit, therefore I (can/cannot) invest in real estate.

Level II Investor: I have good credit, so I should go searching for the best rate and get the ‘best deal’ from a bank where I can hopefully(crosses fingers) get approved for a loan.

Level III Investor: The banks, and the fractional reserve banking system based on fiat money, is a total and complete farce to begin with, supported by the Federal Reserve, which has is nothing Federal about it, as it is a conglomerate of private bankers. Why would I beg for their permission when I can use private lender’s money, give them a better rate of return, and control my own investing destiny? Private lenders are what I need to find to fund my acquisitions.

Theorem 2: You need experience to be successful in real estate.

Level I Investor: I (do/do not) have experience in real estate, therefore I (can/cannot) succeed as a real estate.

Level II Investor: My cousin, who is bankrupt, invested in real estate…maybe I can ask him his advice and see where he went wrong, and try to learn from his mistakes since I have no experience and am unlikely to succeed without help.

Level III Investor: That is the most ridiculous thing I have ever heard. How can you get started in real estate investing if you need experience to do so? What, all successful real estate investors were born with knowledge of doing deals? Hmph…here is a better idea…why don’t I seek out other successful investors and ask for some direction, while I real books and attend my local REIA group meetings? There’s a SOUND plan…

Theorem 3: You are allowed to own only 4 houses. That’s the rule.

Level I Investor: I wonder if I could ever own even one house!

Level II Investor: I guess I should make the first 4 houses I buy good ones, because after that I probably can never buy any more investment homes.

Level III Investor: What a stupid $%^&*% rule? Who made up this idiocy? Who is anyone to tell ME, living in a capitalist society, how much of anything I can own? I will find my own way – I hear there are people who own THOUSANDS of homes, so do they not have to follow certain rules? I wonder if I can talk to one of them and figure out how they didn’t have to follow ‘the rules’…

Theorem 4: To own rental property, you have to love midnight calls from tenants who need their toilets fixed.

Level I Investor: I hate midnight calls from tenants, and I don’t know how to fix toilets, so if I buy an investment property I might fail!

Level II Investor: I hate midnight calls from tenants, and I don’t know how to fix toilets, but I guess I can learn and ‘tough it out’ for 30 years until the home is paid off. Hopefully, I won’t go bankrupt in the process.

Level III Investor: I hate midnight calls from tenants, and I don’t know how to fix toilets, but it’s a good thing my property management company takes midnight calls AND knows how to fix toilets! Obstacle…ELIMINATED!

Theorem 5: Investing in yourself and your real estate education is of paramount importance to your success, and is directly correlated with it.

Level I Investor: HOLY $%^&! This ‘guru’ wants $697 for a bunch of binders and a cd set? I don’t have THAT kind of money! What a scam! These REIA groups are rip off artists! I’m out of here!

Level II Investor: HOLY $%^&! This ‘guru’ wants $697 for a bunch of binders and a cd set? I don’t have THAT kind of money! I’ll just figure it out myself! What a gyp!

Level III Investor: HOLY $%^&! This ‘guru’ wants $697 for a bunch of binders and a cd set? I can’t believe he would give all his information away so cheaply!!! If I make this investment in myself I can add another tool to my toolbox, in my never ending question to become an all encompassing ‘transaction engineer.’ I better get in line before it is sold out!

Now, some readers might argue that there are many more levels and variations on these themes, and while I wouldn’t necessarily disagree with the idea of infinite possible variations here, I would simply say that in your daily experience as a real estate investor, and as a human, you are either assisting to either construct the reality which is reinforced to you each and every day through mediums such as television, mainstream news, radio, and newspapers, or you are DECONSTRUCTING THE REALITY PRESENTED TO YOU AND CREATING YOUR OWN REALITY.

My CPA and I recently had a discussion about the fact that whenever I am approached in business by someone, they always have an angle which involves using my abilities in real estate to their benefit, while disguising it as being for MY benefit. I think the same thing also applies to you in your daily journey with real estate investing – ask yourself this – ‘qui bono?’, or rather, ‘who benefits?’ The government, for example, keeps telling us that the economy is in horrible shape, while Wall Street bankers are seeing ‘golden parachute’ types of retirement packages with government bailout money! Is the economy really that bad? Or is there a method behind the madness? And the same thing applies to your real estate investing – are you REALLY only allowed, to own 4 homes, for example? Is that really the rule?

Are you assisting to construct someone else’s reality?

Or are you deconstructing the reality you are presented with, to build your own?

What level of thinking are YOU operating on???

“It is not wise for a blind man, riding a blind horse, to approach the edge of a deep pond.” (Chinese proverb)

When I returned from Don Derosas’ and Pete Youngs’ Investor Bonanza in Atlanta last week, I checked my voicemail.  My cell phone provider has a strange way of not letting me know I missed calls or have voice mails, so even though I tried to return all of the calls that I missed, somehow I still ended up with 14 messages.  In my kitchen, after setting my bags down, I began to scribe the names and numbers of callers who left messages.  I had missed several calls from radio program listeners, and began returning those immediately.

Now, callers from the show tend to fall into one of three categories, as follows:

1)     People who want to invest in real estate and need a consultation to see if it is feasible for them

2)     People who heard something about a seminar and missed the information but wrote down the phone number

3)     People who want free stuff

This particular caller was of the first persuasion, someone who was interested in looking at the prospect of making real estate investments.  She was asking some good questions, the kind of questions that told me she could in fact purchase investment real estate and be successful at it.  After about 30 minutes on the phone, she then asked if she could come in for a consultation.  I told her that I would be glad to sit down with her for an hour, but that there would be a consulting fee that would apply for an hour of my time.  When she heard this, the tone of the conversation immediately changed and she seemed very put off…we ended up getting off the phone, but I knew that I wouldn’t hear from her again.  And so, the following questions floated through my mind:

If I had waived the consulting fee would she have come in and purchased an investment property?

Maybe.

Was the consulting fee the reason I haven’t heard from her?

Probably.

So, the question you wholesalers are saying is ‘Robert, if you had waived the $149 fee you could have made 30 – 50 times that in a wholesale commission.  ARE YOU INSANE?’

Maybe.

You see, I have been working with a career coach who is insisting that I need to begin charging for my time.  He insists that my time is no less valuable than a doctor’s time.  The fact that what I do from a consulting standpoint is multifaceted and solves problems makes it even more valuable in some ways, he insists.  And, maybe it is the growth of the show on AM radio or just random events, but I find myself spending 10 – 15 hours each week doing consulting for clients who may or may not buy homes.  And that is alot of time to spend unpaid, for certain.

Now, selling homes is the least desirable part of what I do. Don’t get me wrong, it’s not that I don’t like it – I do.  But I have interests beyond being a wholesaler, and so that makes selling homes the least desirable of my daily activities. Still, at this point in my career it does pay the bills though, so I recognize that I need to continue doing it until I am able to get effective systems online and in place so that we can still provide the level of service people have come to expect from DiscountPropertyWarehouse.net, without me having to personally oversee it.  So, it is important to note that while I would rather NOT be selling homes and be doing things related to education and consulting, selling homes for now needs to be a mainstay of the workweek.  Clients coming in for consultations is part of that.  So why turn away a client over $149, you ask?

The answer lies in two simple words: ‘perceived value‘.

You see, if a client(let’s call them a prospect at this point, as they are not, technically, a ‘client’) at this point is interested in buying homes and recognizes that they do not have the knowledge necessary to mitigate risk and point themselves safely in the correct direction, they will naturally seek out an ‘expert’ in the field.  This is no different than a Doctor.  Suppose you have a compound fracture of your radius(forearm bone) and it is sticking out of your arm.  You recognize the bone is in fact broken, yes?  But you ALSO know that you do not have the knowledge necessary to fix it, even though you know what is wrong.  So you see a Doctor, who then gets paid for his experience.  The doctor spends 30 minutes with you(after you wait) setting the arm and placing a cast on it.  Then you get charged like $2000.  Nobody questions his $4000/hr rate.  It is understood he spent many years in school for such knowledge.

Now I want to be bold here and make a statement that some readers won’t agree with, but I am not trying to suggest that real estate investors and doctors provide the same level or type of service.  I am saying, however, that a real estate investor who is highly skilled and experienced(read: hundreds of transactions) who also is interested in their clients’ success is very hard to find, and if they help people make money through safe investments or can assist in preventing monetary loss by assisting families in foreclosure, etc., then their time is probably worth something.  Maybe not $4000/hour, certainly.  But $149/hour might then be of some  value.

The problem with this though is that, in the real estate world, the barrier of entry is so low and the level of competition for (insert real estate term here, i.e.m buyers/deals/investors/lenders/etc.) so high, that new real estate investors are so desperate to make sales that they offer ‘free’ consultations and glitzy sales advice. ‘We’ll mentor you‘, the local wholesale ‘guru’ says.  ‘We’ll teach you everything you need to know – no need to buy all those expensive books and tapes, that’s just a bunch of horseshit anyways.‘

It is the prevalence of this sales mentality that makes the radio listener who wants to invest but balks at the $149 consultation fee reveal the possibility(not I did not say certainty) that she may be, in fact, an undesirable client to work with if only because her expectations are so skewed.  Remember, real estate investing involves using cash, credit, or other people’s money, and all of those involve a certain level of expectation and responsibility.  The $149 consulting fee here is ancillary, by the way - it is irrelevant.

If I charge $20 or I charge $350 it doesn’t matter, as there is no threshold here where the consulting fee has value in her eyes, since the person who questions the fee would question the value of it at $20 even more than at $149.  “Can you just waive the $20 fee?“, they would say.  And the fee being negligible at $20 would not imply value to a client anyway, so at such a low price it is a no – win anyway.  The $149 fee is almost more of a litmus test if a client is worth working with, because many people who are unwilling to pay $149 to meet with someone who can not only help them purchase highly discounted property but who can also help them determine what investment strategy might be appropriate for them given their current situation, which may including counseling them against taking on risk due to inadequate reserves and in doing saving them a great deal of heartache later, probably doesn’t need an hour of an experienced investors time.  Including mine.  So, before the reader hate mails begin to pour in, what am I saying here?  Let me tell you a story.

Last week, a client(actual client) was referred to me by a close friend.  This client had a peculiar situation that he needed some help with and he wasn’t sure what to do.  My friend told him if anyone could help, it was me(I don’t know if that was true, but that sounds impressive!).

Anyway, here is the situation: he and his wife have been renting a home for 18 months, paying $1200/month in rent, and have an impeccable rent history.  2 months ago they started to get letters from the bank saying it was going to foreclose on the homeowners due to nonpayment.  My client(the renter) wanted to buy the house, but had poor credit and couldn’t qualify for a home loan, but they had a 5k payment to put down towards a lease purchase or owner financing on the home, and they wanted to stay if possible.  The current(delinquent) owners indicated they would cooperate however was necessary and would like to preserve their credit.  The bank indicated that it would allow a short sale to take place, for about 110k less than the home was bought for 2 years ago.  This would allow the renter to have a payment almost identical to the rent they were now paying.  Obviously, the short sale was conditional on the bank being cashed out, which couldn’t happen since the renters could not qualify for a loan.

The proverbial ‘catch 22′, naturally…or was it?

I knew, based on the renter(my client) describing the situation on the phone, exactly what needed to take place and how I could do it so the client became the homeowner, the bank got cashed out, the owners got out from the foreclosure without it hitting their credit, AND I could get paid at the same time. Without me revealing the technical answer here answer, though, let me say this – the client wanted, after the phone consultation, to come in for a personal appointment.  I told the client that for me to ‘take the case’, and there were no guarantees(meaning nothing could come of this, since there are a number of ‘known unknowns‘, if you will), that for me to work on this would require a fee of $350 upfront, and that did not guarantee any success.  I also told them that I would understand if they did not want my help, because obviously the fee is hefty.  What did they want to do?

They told me ‘the $350 was a non issue.  When can we meet?’

The fundamental difference here is that my client in this situation(the renter) understands that there is a complex series of skill sets involved to make what he perceives as impossible, possible.  The radio show listener sees the $149 fee as a waste of money, coming from the angle that ‘anyone’ can buy investment real estate. so why should she pay such a ‘junk’ fee?  Her assumption indicates that I must just be trying to ‘rip people off’.

Two critically different perspectives.  Neither is right or wrong, but certainly stark in contrast.

Now let me share with you one more tale.  A few months ago, a client came into my office and told me a story which involved him buying 2 investment properties from a local Memphis wholesaler, only to run into difficulty refinancing because he had overpaid significantly for the houses.  He had invested 2k earnest money already, and had carried some debt service payments as well.  He was at this point out about $5000, and the hard money lender was about to foreclose, which was troubling as well.  Now, with this story being told to you(and remember this guy knew NOTHING about investing in real estate before he bought from this particular wholesaler), do you think that, if given the opportunity, he would have rather:

a) Repeated his mistake and done things EXACTLY the same way

b) Pay the consulting fee to someone like me and avoid that situation by paying way below market values after getting prequalified with a competent lender so refinancing was not an issue?

And, the question within the question is, would the new investor who now is about to lose their first two investment properties have seen any value in the $149 consulting fee?

When you get down to it, money and the value of it becomes such an arbitrary distinction such that it is entirely circumstantial.  Would you save $5000 by paying $149?  Of course you would.  And so would I.  But if you had a doctor say “listen, I want you to come see me every week and for $60 I’ll give you a B12 shot that will extend your life by 10 years”, you maybe wouldn’t immediately go for that, because the value is, well…implied, and you don’t see results immediately.  It is perceived value – which is why 100% of people would pay $149 to save 5k but not everyone would go for the B12 shot.

Consulting is the same way.

I see this time and time again in my travels as an investor and educator.  People WANT to change their circumstances and financial situation, but they cannot justify investing the money in which to do so.  Take for example, Investor Bonanza (www.InvestorBonanza.com) which I just hosted.  Don Derosa and Pete Youngs are EXPERTS in their disciplines, and yet they didn’t sell out of courses even though there were more students at the workshop than courses.  Granted, maybe some students already owned certain courses, but my point is that at the end of each presentation where speakers had educational materials for sale, I saw some students come up to the table, rub their chins thoughtfully, and walk away empty handed.  And they hadn’t ever done a deal, which was why they had come to this incredible educational even in the first place!!!!  What, did they not need the courses?  Of course they did.  The question was assigning VALUE to such items, enough to justify its cost.  And teh students who walked away emty handed could not justify its cost.

Our society has this paradox I want to tell you about, and it is a paradox I call the ‘college degree‘ paradox.  It is really simple.  What it says is that, ‘if you don’t go to college, you relegate yourself to some entry level position with no hope of upward mobility‘, but, ‘if you DO go to college, then you can get a job for 40k – 60k a year, or maybe more, with benefits!‘  Now it may cost you 200k in total tuition, but you can get that kind of a job if you invest in your education.  And that is the paradox – that it costs you 200k a year to be ‘entitled‘ to a 40k a year position.

To become a real estate investor with the skills necessarry to succeed, since you can’t go to college and major in topics like ’short sales’, you have to invest in your eduction through courses and seminars.  Now, course value and risk/reward ratios are beyond the scope of this article, but I will say that it costs MUCH less to become a real estate investor capable of earning a 7 figure income than it does to invest in a college education that costs 200k in tuition and gives you a 40 hour a week job at best(ask me how I know this).  The question is, why are people so willing to invest in college but real estate home study courses at times are assigned such little value?  And more importantly, if courses, which are tangible, have such little value, what value does preventative investment consulting cost?

For the family about to be forced to move because of the owners not paying their mortgage, consulting evidently has LOTS of value.  Yet, for the new investor who is exploring the possibility of doing their first deal, it has very little value.

My question to you, reader, is this:

If you were a new investor hoping to do a deal while mitigating as much risk as possible, would YOU pay a $149 consulting fee, or would you ’save’ money by not paying it.

And why?

Robert Feol explores the ‘new’ way of doing business, taught by some of his ‘colleagues’ in the industry!

2009 was  a rough year for me.  Really rough.  It’s not worth getting into, really. I wrote a great 1000 page, very descriptive and detailed tale of how this took place for this article, but for the sake of brevity/space,  I’ll summarize the story for you in one sentence, 2009 as follows:

On January 4^th 2009, my income from the wholesale real estate company I built for 3 years went to zero, unexpectedly– found myself with about 200k of unexpected debt from this – got to spend 12 months figuring out how to rebuild years of work by myself.

The end.

Now, I know that this is probably the best bedtime story you have EVER heard.  Grimm brothers, look out!  Here comes something really interesting! Be sure to tell your kids this at bedtime – insomniac children will surely be put to sleep by this, as well as spouses and rowdy domestic pets, including reptiles.

I have no doubt the movie will be made at some point into the future – think The Pursuit Of Happiness, with me as Will Smith and my dog ‘Little Fat’ as his son Jaden Christopher Syre Smith.  I will say that ‘Little Fat’ and myself combined do not have an ounce of the acting talent that these incredible actors possess, but I digress.  The year ended.  And that is good.

Now, some interesting thing happened in 2009, and while there were many things that happened, I will point out the following two as being of critical importance to this essay:

1) I found myself surrounded by a harvest of friends I did not know previously existed.

2) I found myself having to invest substantial monies into infrastructure, specifically to rebuild the infrastructure I had already paid for such as websites, media, etc.

Again, not interesting, no?  I am sure you have heard such common stories before.  Robert Feol had to write some checks he didn’t want to.  Who cares?  But, here is where I discovered an interesting behavior I had never known existed before –a possible scientific discovery noteworthy of the journal Nature, I will admit – but I discovered something  I call the ‘Where’s My Check?’ syndrome.

And I want to explain how you can observe this in your own life.

The ‘where’s my check?’ syndrome usually comes when people who have been fortunate enough to receive some type of monetary compensation from you, usually as a result from on ongoing relationship you have with them(say, for example, a contractor), begin to develop a sense of entitlement.  You give them some work, they do a good job.  So you give them more.  At some point, you have a relationship where you are essentially making an investment in them.  Perhaps employee, perhaps contractor, perhaps consultant.  Perhaps you are paying a fee to your media group for a radio show.  But for the purpose of this treatise you have paid someone consistently for about a year, and paid them an income which they would not have had otherwise should you not have seen value in their work and wanted it to continue in an ongoing capacity that you viewed as mutually beneficial.

Now, the year may end.  Suppose it does.  You review expenses and realize that, maybe you have been investing money in a resource that hasn’t provided the same output for your input.   Things have gotten out of balance with your investments in people.  You view them as a resource, but now you see them as a different kind of resource.

A resource that has….perhaps…taken you for granted?  Especially after so many checks that have been written unquestioned.  You just paid and paid and paid.  And finally, you decide – ‘enough …now I will consolidate my finances and stop spending money where it is not getting a solid return on investment.   I will cut expenses.  Thank you for all your hard work, and hopefully we can work together in the future.’

What happens next?

Everybody comes a runnin’.

‘Where’s my check?’, they scream. ‘I need this to pay my rent!!!!!’

Of course you do.  My investment in you paid your rent while you spent less and less time attenuating to the reason why I invested in you in the first place, and whether you were taking payments and doing less of a quality job or just outright plotting behind my back and stealing, or WORSE, committing a conspiracy to defraud, we all know that YOU really were not doing the right things.  And now you got busted – and you are sad that your finances are beginning to collapse as your friends disappear.  Perhaps you are getting your…just desserts?

Yet my thoughts at this time juncture are as follows…

Why wouldn’t you be looking for your check?  Sorry it’s gone.  But, the fact that you can’t pay your rent or mortgage isn’t my concern, honestly.  It’s yours and you should have considered that, before I saw you as an expense that needed to be excised, or got fed up with your constant and never ending sea of excuses, spins, and lies.

Too harsh?  In 2009 I used to think so, but now I am not so sure about that.  The necessity of performance and results has overshadowed any compassionate obligation I once felt for those who were simply nice to me.

This was solidified when a recent media relationship I had, an account manager specifically, who tried to renew my contract(already at the top of the rate card) and sent me a contract renewal with a 23% increase without notice, telling me to sign because other people had ‘lined up’ for my spot, and that I could easily be replaced.

Now, I get that.  On a major Memphis station, AM talk radio – I get it.  Many advertisers want to be there.  I am surely replaceable.

But, ratings DO count.  And, what I didn’t tell you is that I took my show on this station, where I do all the programming myself out of the pool of national speaking talent for REIA groups(not easy to do), from a 30 minute show which was preempted most of the time with a 1400 person average listener base to a show which had an average 5000+ person average listener base in the same time slot, same year – in less than 12 months.

I tripled the listener base for my program in one year.

UNHEARD OF in AM radio.

Yet, as I tried to syndicate between multiple local stations, programming couldn’t be bothered to assist.  It was an inconvenience.

Ok, again – I get it.  There are bigger fish to fry for the programming division of radio stations, and my show is not a priority.  No problem!  I’ll take my show to the two hour slot where the president/general manager of the station has spoken assisting me with national syndication.  Just move to another station, quietly.   The fact that, from a production standpoint, the new station is half the cost is only a bonus.

Can you guess what happened?

They came a runnin’.

Now this time, not only were they asking ‘where’s my check?’, but they were – get this – threatening me that I would never be broadcast on their station again.  That I would be burning bridges.  So I better stay on for another 2 years. OR ELSE.

The last straw came when I switched to paying by check from credit card auto debit.  Having paid faithfully for 12 months, when I wanted to walk in a check, I got – not lying here – no less than 4 calls and 3 emails a day from the account manager asking where the commission, um I mean payment, was.  Evidently, people needed to get paid.  Which brings me to the topic of this article, which talks about this interesting idea of entitlement.  If I enter into a relationship with you AND pay you faithfully, can I not faithfully give you notice AND stop without hassle?

I guess not.

Now, I don’t know most of you readers but I have written faithfully for you for the past year.  And it is on this extremely professional not that I let you know my 2010 philosophy has changed from my 2009 one of personal growth and real estate development/personal financial freedom to more genuinely reflect and emulate the attitudes, actions, and behavior of so many of my colleagues in the industry.

I have simplified my philosophy, and it is now this:

WHERE’S MY CHECK?