Sunday, February 19, 2006

John Burley: Guru or Predator?

Some introductory remarks if you please.

A Quick Study in Contrasts

As a part of my dissection of John Burley, I considering borrowing liberally from John T. Reed’s B.S. detection checklist and then going through Burley’s web page and other materials with an eye toward where Burley rates, but then I thought, “Reed’s already done the work, so why repeat it unnecessarily?” Instead, I strongly suggest you give Reed’s checklist a look while you simultaneously peruse Burley’s page.

You may think that perhaps Reed is being too unforgiving, since, after all, Burley’s just out to sell his products with the most effective sales techniques available, right? I mean who is going to buy a product called Well-Known Real Estate Techniques That Are Extremely Risky and Excruciatingly Difficult? There is something to be said for that, but I invite you to spend some time taking a look around John Schaub’s page, for some contrast. While you’re there, ask yourself “Who is the more credible? Who seems more intent on creating a cult of personality and who on educating investors? Which guy evokes in me the word smarmy?”

The Secrets of Professional Investors Made Easy

In a fit of disgust, I threw away my Blue Print For Success and Wrap Your Way To Wealth tape sets some time back around 2002. I now regret having done that, because they would have provided me with a ton of material for these posts. As disappointing as that is to me, I have no interest in lining Burley’s pockets any more than I already have, so there’s no way I’m going to buy them from him (or any of the countless other “wealth training” sites out there) again. On the other hand, I have no objection to spending $15 on eBay to buy a used copy of The Secrets of Professional Investors Made Easy, a recording of a 3-day seminar in 1997 given in Australia by Robert Kiyosaki and John Burley, among others, in front of about 40 people, who each paid $3000AU for their seats. Not surprisingly, this tape set contains plenty of fodder for discussion (and that doesn’t even include Kiyosaki’s rambling tirades on the thing).

On the first day of the seminar Burley introduces and describes his conception of the 6 levels of investors (since updated to 7 levels, and available for free from his web page (.PDF) in a form that is arguably more substantial than what was presented at the expensive seminar). Following the descriptions of the levels of investors, Burley gives his formula for “Automatic Wealth” (also available from his web page for free (.PDF)), summarized here:

The 7 Habits of the “Level 4” Investor
  • Paying Yourself First
  • Re-investing Your Investment Returns
  • Invest in Index Mutual Funds as a base to start
  • Know What Your Money is Doing
  • The “No Budget Budget”
  • Financial Competence (Intelligence and Responsibility)
  • Be Debt-free
While describing the above habits, Burley makes this asinine statement: “It’s so simple and easy to become wealthy that most people never do.” Is that supposed to be an attempt to sound profound?

I recommend you read the reports. They’re not entirely without content, and at least then you’ll know what “level 4” and a “level 5” investors are (and he uses those terms a lot). On the other hand, you’ll probably agree that these reports should be given away for free. They really don’t amount to anything more than you might get out of books like The Richest Man in Babylon (a far better book than RDPD, by the way, because, for one thing, it doesn’t pretend to be something it’s not) and More Wealth Without Risk. Had I been an attendee at the Secrets seminar, though, I would have been more than a little upset at the amount of time spent on this material (which I’d say was about $200 worth—all to go over this stuff he’s giving away free).

“The How”…

Late on the second day, the seminar finally gets to the discussion of Burley’s wrap technique. Burley goes over some brief biographical background, such as that he left a $140,000/year financial planner’s job so he could move to the Phoenix area in 1990 and take advantage of the down real estate market. He then launches into this perfect example of what is wrong with John Burley:

I do a 5-day seminar that’s just real estate…essentially the first two days is spent with people [who are unwilling] to believe that what I do can be done. So we waste, in essence, two days of the program, because everybody has got to sit there and psychobabble and what they’re doing is, the whole time they’re going, “B.S.! B.S.!, B.S.!” and it’s always, “Maybe where you are but not where I am. We can’t do it here.”

Okay? So if we’re going to do we-can’t-do-it-here, then instead of covering about a dozen ways that you can do it…we’ll get through maybe 1 or 2 of them. So this is up to you. So, in other words, the more you’re analytical and the more you question and the more you go through it and the more you need details the less you’re going to get. Does that make sense?
No! It doesn’t! If I were a seminar attendee I would have been thinking “Hey! I didn’t pay thousands of dollars to waste my time listening to vagaries and veiled insults to my intelligence.”

If you could pretend for a moment you’re 5th graders this would be much easier because adults are a pain in the butt when it comes to they gotta know every answer.
With those explicit instructions that the audience voluntarily make themselves stupid while sitting there, Burley continues. He describes that, at least initially, his method of property acquisition was through VA auctions. Because the Phoenix market was so bad at that time, there were several hundred foreclosure properties available at auction every 2 weeks. They were being sold at 75% to 80%, on average, of construction costs, and the VA loans were fixed rate 30 years at 10%, which Burley says was the best rate at that time.

Following all that, he says, “Details don’t matter, you don’t need to write this down.” I agree that writing the details down would be worthless (especially for people in Australia, who don’t have access to VA foreclosure properties), but to say that details like that he was able to buy the properties at 80% of construction costs don’t matter is a bald-faced lie. I think there is little doubt that this fact, if true, played a large part in how Burley made his money. And it’s also an unusual circumstance that makes his example completely inapplicable to anyone in attendance at the seminar, and quite likely, almost everyone who subsequently listened to the tape set. Are you going to tell me that that doesn’t matter? Wouldn't someone interested in actually teaching a wealth-building technique at least make an attempt at giving an example that was relevant to his audience?

Just a minor detail is that I didn’t have any money. And since I didn’t have a job I couldn’t qualify for a loan… Would a 5th grader worry about that detail?
No, but a 5th grader wouldn’t pay boatloads of money to listen to you prattle on, either.

The fact that he bought a house with no money and no ability to get a loan is a minor detail? Who is he kidding? Obviously he is out for some sort of effect, here, and my cynical side believes that his intent is to so confuse his audience that by the end of it they won’t be able to tell that they’ve been snowed. Not only that, but I think he's lying. He purchased his home in Glendale in 1990 for approximately $220,000, and title company records indicate that he borrowed that much. It isn't your average broke loser who could qualify for that kind of money--and 100% LTV--in 1990!

He goes on. For ease of example, Burley talks about buying a hypothetical $100K house. In the process of the hypothetical he emphasizes, again, “I didn’t have any money, right?” But, he then jarringly switches topics, jumps to the present, and claims he still can’t get a loan:

[Rhetorically:] Why would you give a loan to a multimillionaire who has no debt and excessive income? They won’t because I have “too much real estate.”
What does that have to do with when he was starting out? And how could he have not had any money when, just prior to moving to AZ, he was making $140,000 per year in California? Wasn’t he taking care of fundamentals? In this program Burley and Kiyosaki counsel against starting “level 5” investing without first making sure your financial house is in order and becoming a solid “level 4” investor via the “7 Habits.” Did Burley ignore his own advice?

The fact that the difference between what I owe on the real estate and what it’s worth is millions and millions of dollars [is irrelevant]. The bank says I’m a bad risk because the banker thinks an investment property is not an asset. He considers it a liability. That’s why bankers are poor and investors are rich.
So the banker considers the home you live in to be an asset (and you and Kiyosaki claim it’s actually a liability) but he considers your investment property a liability? Having applied for (and received) many real estate loans myself, I know for a fact this is bullshit. They consider your property plus any rental contract you have (minus a discount for future vacancies) an asset, and your mortgage on it a liability.

My guess here is that no bank will lend to him because he can’t show them any of his documentation—all of it will clearly show that he ignores the due on sale clauses in the loan contracts. Why would a bank want to deal with a borrower who isn’t going to abide by the agreement? In addition, because it will be obvious that Burley does not intend to occupy the property, any loan he will get will have a comparatively higher interest rate, affecting his monthly spread and thus his return on investment (more on that later). [Update: Not surprisingly, it turns out that Burley is lying about all this, and he actually can get a bank loan. Imagine that!]

Having spewed that irrelevant tirade, he jumps immediately back to the “details” of his hypothetical home purchase:

Purchase price $100K PITI: $750/mo. IR 8%
So, those are your details. That’s what you get. Now, I don’t have any money for this and the bank won’t give me a loan. Does that matter? No.
Why doesn’t that matter? How in the hell can he possibly get away with saying that it doesn’t matter? Only at a Kiyosaki seminar, where, for the past day and a half, RK has been rambling on about how he knows all and anyone who disagrees with him is a fool or a liar.

Next, and almost without pausing after saying the quote above, Burley says:

One thing you’ve got to understand about real estate—I’ve talked to a couple of you here that are familiar with commercial real estate—do you know on commercial real estate, like this hotel—you know this hotel was bought with no money down? Do you know that they probably got somewhere between a 25 to a 50 year loan? Do you know that they got below market interest? Commercial real estate is essentially always traded with no money down. It’s usually sold with vendor financing, meaning the seller financed it, or in a combination with the lender. Do you guys know that?
I have no experience with commercial real estate, but even if it is true, how is it relevant to residential property loans and the example house that he started talking about? Rather than simply get right to his point (which is that investors should always try to get the seller to finance the property directly, because its easier to negotiate favorable terms), he seems to be engaging in deliberate obfuscation, here—more confusing switching of topics to distract the mind from the building questions. You almost have to admire the artistry.

This stuff about houses where you’re supposed to put these large down payments down and pay higher than real interest rate is a crock that you’ve been sold by the banking industry, because people in commercial real estate won’t do it.
How is that? Just because the commercial real estate market is one way (he claims), it does not follow that the residential market is the same. Obviously they are not the same, and how the commercial market operates bears not a whit on how the residential market works. When you, as an investor in single-family homes, need to borrow money, you do it on terms that the lenders are offering, and since they are competing for borrowers you’re going to be getting a competitive rate and terms, based in the market and your credit-worthiness. Where is the “crock”? He implies that borrowers are being lied to, and he then fails to explain its relevance:

So, I’ve got a house, now. And I had to bring in an investor because I didn’t have any money, right? So, I brought Robert in, and Robert put down 10% [While this specific example is undoubtedly a hypothetical, it turns out that Robert Kiyosaki is in fact one of Burley's investor partners. See here for more detail on that.]

So I’ve got a 90K loan, my payments are $750, my interest is 8%. And believe it or not the house, give or take, is worth 90 to 100 thousand dollars.
One would hope that it’s at least that! You’d have to be a pretty worthless investor to pay $100K for something that isn’t worth at least that. And notice that finally we’ve got a deeply unsatisfying hint about how you can buy a house when you don’t have a job and/or can’t get a loan: get someone else to pay for it. Now there’s a “minor detail,” alright! I’m sure everyone in attendance and all the listeners of this tape set are going to be able to run right out and attract investment capital like a magnet!

See, because there’s two ways you can buy real estate—you can buy real estate for price or for payments… So most people think the only way to make money in real estate is to buy it cheap and sell it high, right? Wrong. That’s the hardest way to make money in real estate, because everybody wants full price. Who would want to sell their real estate for less than it’s worth?
By the way, this rhetorical question goes directly counter to his advice in the other tape sets to always offer a maximum of 70% to 80% on the market value of a property you’re interested in buying. So, obviously he thinks someone would “want to sell their real estate for less than it’s worth,” or else why would he counsel to offer less?

So I’ll buy it for market as long as I can get a good monthly payment for it. Because all I care about at this point in my life is cash flow. I don’t care about cash. The last thing I’d want to do would be to buy this thing for $70,000 and then turn around and sell it for $100,000, because now I’ve got $30,000 more dollars that I have to invest again that’s just sitting there. And it bothers me when the money sits there. It’s supposed to be working.
Is he stoned? In what universe is it a bad thing to make $30,000 on a transaction? Besides, who says this can’t just be translated into a bigger spread for the “wrap”? This seems to be more obfuscation intended to get the minds of the people in the audience reeling, so that he can then yell “Psychobabble!” at them when they ask for clarification of details.

We take the house and “repackage” it. Sell it for $130,000. So the buyer puts $5000 down, and a gets a loan for $125,000. The average person buying a house or a car cares about two things only: How much to get in, and how much per month. Buyer’s payment will be $1150 per month. IR: 10%. The money is made on the spread.
Of course he doesn’t explain how or why a person would be willing to pay $125K for a house that’s only worth $100K, but obviously his buyers are going to be people who can’t buy a house because of serious credit problems.

Now, imagine for a moment that you're a new McDonald's franchisee. You've just payed thousands of dollars for the privilege of getting in on Ray Kroc's secret recipe for running a profitable hamburger joint. He looks you in the eye, leans in close, and says in a low voice, “Spend a dollar on a burger, then sell it for two!”, after which he promptly stands tall and smiles smugly, as if he's just given you The Keys to the Vault.

You look at him, confused, and ask, "How? How do you make the burgers so cheaply?"

A scowl comes across his face. He screams “Psychobabble!” at you, and then says:

Most of my successful students don’t have any money. And they decided for once in their life they were going to stop going How? How? How?—because it’s just a crock! They decided they’d make some money for once.
Implicit message: “If you want to ask me how, that must mean that you aren’t really interested in making money, you're not going to be like my successful students, and thus your being here today is a fraud.”

Having heard that, do you feel confident that your restaurant is bound for success? If Ray Kroc doesn't get a pass, then why should John Burley?

After endless hand-waving and insults hurled at the audience, Burley gives somewhat of an answer to the question of how he can buy a house without any money or ability to qualify for a loan: “An investor puts the money up, I put up the system.” Burley and the investor split the Buyer’s down payment and the monthly income generated from the spread 50-50.

The least important thing is the money because I can get money from anywhere. The idea is important.
He said earlier that when he was starting out he didn’t have a clue what he was doing, so how in the world is a “broke” and “jobless” guy with an apparently unproven and half-conceived idea going to attract investment capital? If what he’s claiming is true, then he’s obviously not telling the whole story.

To attempt to get a better picture of the real story, I plan on delving deeply into the public records in my next Burley post. Go here for it.


Craig said...

Some very good analysis. It made me laugh and reminded me why I don't go to investing seminars.
I did read rich dad poor dad once. I read it in Chapters and then put it back on the shelf. A lot of people seem to read that book. Maybe it just has an intriguing title and cover that makes people choose to read it.
I didn't get that inspired by the book, although I realise now that I still don't understand the proper meaning of assett and liability thanks to the books explanations.

Einzige said...

Hi Craig! It's good to see you around again. Thanks for the comment and compliment.

Glad to hear that Kiyosaki didn't manage to suck you in with his promises of easy money.

As far as the asset/liability thing, I barely remember, myself, except that they must always balance out so that your assets + liabilities = zero. I'm not sure what the purpose behind that is, exactly, but I suppose accountants have to make things hard to justify getting paid. :)