Nouveau Riche University

This morning I attended an introductory meeting (a.k.a., "sales pitch") for the "real estate investment college", Nouveau Riche (NRU). I had stumbled upon the company, quite randomly, a few months ago while perusing some of the local groups at Meetup.com, but until recently I just couldn't bring myself to take the time to check them out in any detail.

The first red flag to jump out about NRU, though, is that its founder, Jim Piccolo, was also the founder of the MLM company TruDynamics (a.k.a., Travel Dynamics). In my book, anyone who starts a network marketing company is not a trustworthy individual.

There's always a chance, though, that a person can reform, and I wasn't really doing much with my Saturday morning anyway, so I figured "what the hell?" and headed to one of their twice-weekly meetings. When I arrived I could tell immediately I was in the right place, since two of the cars parked there had huge wraparound signs on them, asking "Did you make $30K last month?" and, if you didn't, suggesting to call the supplied phone number.

Much of the content of the meeting itself can be found here, including the actual Powerpoint slide show used by the presenter. Several things struck me about the meeting, though. There were roughly 15 people there, including myself, but I'd say 10 or 11 of them had already either purchased the R2E2 or paid the full "Regents" tuition. This struck me as odd, but one thing they did seem to stress - especially when 4 of the attendees stood up to tell their own success stories since joining (one of the 4 strongly implied that her 19-year-old daughter would be skipping "regular" college and just attending NRU - yikes!) - was NRU's "community" aspect. Supposedly you won't ever be left out in the cold if you join up. I'm guessing many of the people there were enjoying the community? (Yes, it's true that at least some of the people were probably there in hopes of earning a commission on a sale.)

Another thing they stressed was the Investor Concierge service, which sounds pretty cool, but, as this website points out, the example property shown in the presentation used suspicious numbers, such as a 5.25% interest-only loan. For reasons I'll get to in a moment, I strongly suspect the Investor Concierge has a chronic shortage of properties - profitable or not (I'd suspect mostly not) - but a look at one of the "Last 20 Sold" houses using the site's guest account revealed something even more suspicious. Here's a screenshot of a Phoenix AZ property listing on the Investor Concierge site (click images for full size):


Here's the same property's details from the records of Transnation Title:


The discrepancies ought to be patently obvious. The Arizona Regional Multiple Lising Service corroborates Transnation Title's data (big surprise there!). No recent sale of 3302 W Acoma has taken place - at $139K or any other price. I'll let you draw your own conclusions, but I hope you're as disturbed as I am by the implications.

They also highlighted their "business opportunity" aspect - not surprisingly, invoking Kiyosaki's "cashflow quadrant" in the process. While it doesn't technically meet the definition of MLM, the "opportunity" certainly resembles it in many aspects. I'll skip going into any real detail, but the basic idea is that you, as a sales rep for NRU, bring in 2 paying customers, which will result in 50% commissions being paid to your trainer/sponsor/mentor person (the one who introduced the company to you). After that, the first two people those people bring in will result in a 50% commission being paid to you. It's not MLM, exactly, but it does suffer from the serious drawback of quickly creating too many sales people in a given region.

Think about that, for a moment. You might remember that old shampoo commercial: "They'll tell two friends, and they'll tell two friends, and so on, and so on..." That may work great for shampoo, but is such a scenario even remotely workable for real estate investing?

For sake of argument, let's grant that, say, 5 of the people with the big car signs really do, consistently, month in and month out, make $20K-30K selling NRU tuition packages. They claim that 98% of the people who sign up do so at the "Regents" level. That's an $8K commission to the person who signed them up. So, that's roughly 3 new "students" per salesperson signed up every month, or 3x5x12=180 new "real estate investors" recruited in a year by those 5 salespeople. Now, as you know, those 180 people were, in part, enticed to join NRU with the promise that they could each also make approximately $288K in a year. But to do that they'll have to bring in another 6,480 people. And what about those people? How easily do you think they'll each make $20K/month?

According to a recent article on azcentral.com, homeowners in the Metro Phoenix area who default on their mortgages get an average of 300 pieces of mail from foreclosure investors. Assuming your typical pre-foreclosure investor sends a "campaign" of 5 letters to one house, that means that there are somewhere around 60 people competing for each potential investment property. The competition has gotten so fierce that now some foreclosure sharks are sending oddly shaped colored envelopes with hand-written addresses - and even including pieces of Jolly Rancher candies inside! All in the hopes that their ad doesn't simply go straight to the trash, ignored. Nouveau Riche University wants to increase that number from 60 to 6,480 competitors, plus! Does that seem even remotely sustainable to you? Are you interested in being one of those 6000+ "investors" competing for investment properties? In what other industry (aside from MLM) are the "sales reps" actively working to undermine their own success by training their own competition?

In spite of the obvious mathmatical unworkability of NRU, their introductory meeting's sales pitch is definitely a slick presentation, and you can't help but get caught up in the warm and friendly atmosphere they, no-doubt, carefully cultivate. At the conclusion of the presentation they instruct you to immediately go and tell your sponsor-person if you're interested in signing up, learning more, or just want to leave. I told my Independent Student Advisor that I was somewhat interested in learning more, but that I still had a number of questions. Foremost in my mind at this point is why this person, who has been with NRU for about a year, doesn't appear to own any investment properties - at least not locally.

It probably goes without saying that I won't be plunking down any money for this "opportunity" any time soon.

A superb, must-read, critique of the whole Nouveau Riche phenomenon can be found at cockeyed.com.

UPDATE, 7/16/07: I received an email today from my independent student advisor contact, asking me to remove all mention of her from this post and the comments following. The ISA's contention was that the inclusion of this information is "disrespectful" and "unnecessary". I have agreed to remove all mention of her name - to protect against the possibility of unrelated future Google searches by, for example, potential stalkers - but I believe that the links to the public record are necessary. Anyone interested in the truth should be in favor of greater transparency, in my humble opinion. This is why I include links to both the Maricopa County records, and the AZ Corporation Commission records, since she claims not to own any investment properties by name.

As part of this update, I had to delete several of the comments from the comments thread. Those are reproduced here, with the ISA's name replaced by strings of X's.

KIWI said...
And by the way, XXXXXXXXXX DOES own several properties here and in Las Vegas! Please do not make assumptions about things you know nothing about.

7/02/2007

Einzige said...
Kiwi,

What's with the ALL CAPS? Do you think that by shouting at me you'll win others to your cause?

You say: I KNOW WHATEVER I SAY WON'T BUDGE YOUR STUBBORN MIND...

Quite the contrary, I am more than willing to listen to substantive arguments, consisting of logical analysis and the presentation of empirical evidence in support of your assertions. Unfortunately your comments so far have provided neither of those. Instead, you've simply made a number of bald assertions and insults to my character - while simultaneously ignoring the bulk of my complaints against NRU. Hardly persuasive stuff, I'd say.

WHY WOULD YOU THINK INTEREST ONLY IS BAD FOR A BUY AND HOLD?

I'll skip delving deeply into the details, but each potential loan is going to have its pluses and minuses, and should be evaluated on an individual basis. The main questions with respect to an interest-only loan should be: 1) How long is the interest-only period? and 2) When the reset comes, what are my best- and worst-case monthly payments going to be? I suppose there are situations where an interest-only loan is appropriate, but given the future's uncertainties, I'd prefer knowing what my payments are going to be.

Why don't you explain your thought process, rather than insult me for my apparent ignorance in this area?

And by the way, XXXXXXXX DOES own several properties here and in Las Vegas!

How do you know this? Note I didn't "assume" anything. All I said was that she doesn't seem to own any investment properties locally, based on Maricopa County records associated with her name and the name of the corporate entity I could find associated with her - I even provided a link to the relevant MC records! I didn't claim that this was definitive proof.

On the other hand, if she wants to convince potential recruits that NRU is an effective means of becoming a successful RE investor, she ought to make it easy for folks to find evidence that she actually is one herself. Don't you think?

What about you, Kiwi? Where are your investment properties? I'd like their full addresses, for starters. Maybe some rental agreements, too. Otherwise I think those of us who are incredulous are entitled to remain so.

7/02/2007

UPDATE TWO (01/09/08): It seems that all of my ISA's promotional web sites for NRU and real estate investment are now defunct. This is certainly not evidence in favor of NRU.

Advertise Your Way To Wealth

As I’ve mentioned before, I’m a big fan of the Howard Stern Show. I have been since my girlfriend (at the time) introduced it to me in 1993 (for this I can almost forgive her the broken heart). I followed Stern to Sirius and consider the show to be better than ever. One contributing factor: while there are still too many commercials, they are far fewer in number than they were on “testicle” radio.

Thankfully the national nature of his show spares us listeners from the endless hammering we used to get from the local auto dealers, brake shops, and Guitar Centers. God, how I don’t miss those! This is not to say that the current crop of advertisers is any better, though. Given the quality of the ones who remain, I can’t help but worry about the future of Stern’s employer. Apparently Stern has already paid for himself. Nonetheless, Sirius has yet to show any earnings, and its stock appears to be languishing at around $4.50 a share, off from a high of almost $8 back in early January (sadly I bought when it was over $5—What can I say?). I can’t help but wonder if there might not be an element of desperation behind their decision to accept, as Stern show advertisers, companies like The Prosperity Automated System (PAS) and The Smith & Merritt Institute (S&M).

PAS is a pure Ponzi scheme. Unlike companies like Amway/Quixtar or ACN, PAS doesn’t even pretend to have any product, other than the system itself. This is such a huge red flag I am convinced they are mere days away from being shut down by the FTC (then again, when has the federal government ever been on top of anything—except for threats to its own revenue, that is?).

I have less of a problem with Smith & Merritt, but my recent foray into the world of the get-rich-quick scammers has made me hypersensitive, I suppose. Like Burley’s 7 Levels and Kiyosaki’s Cash Flow Quadrant, S&M have a catchy little slogan that they undoubtedly hope will be the “hook” that catapults them to fame, fortune, and guest spots on Oprah: “Spend Your Way to Wealth.” If that isn’t enough of a red flag, a visit to their web page isn’t helpful. They don’t seem to have any “products” for sale—except a “Free Report and Consultation,” which has to be some sort of loss-leader designed to get you to buy the “real” (and no doubt “real expensive”) stuff, whatever that is. It’s all pretty vague.

The stuff they say on their blog seems pretty harmless and vanilla (“Stay out of debt” and “live within your means” are common refrains—clearly different and less catchy messages than “Spend your way to wealth,” though, huh?), but some of what they say is a little odd, some shows a disturbing lack of economic understanding, some suffers from extreme oversimplification, and some of it just plain wrong.

Examples:

In this post they decry the “rampant poverty” throughout the world. I’m not going to disagree that there are people today who live in appalling conditions. On the other hand, when you compare the living standards of today’s poorest Americans and Europeans with those of people from just 50 years ago, you can’t help but feel that there really is no such thing as poverty in the West any more. But the US is where S&M are focusing their efforts. And their “solution” to world poverty? “Live Abundantly!” Seriously. I wonder how well that advice would go over in Darfur.

Not surprisingly, they repeat the tired canard that personal debt is soaring. However, take a look at the Federal Reserve Data for the debt service ratio for Americans over the past 25 years:



Does that look like “soaring” to you?

They think that Pay Day Loan places should be made illegal. As I point out to them in the post’s comments [UPDATE July 6th: My comment there has been deleted!], this would likely have the perverse effect of hurting the very people S&M claim they would like to see helped. See here for an excellent explanation for why that is the case.

They think it’s a good idea for everyone to pay off their mortgage ASAP. However, if you’re paying less than 7% interest and you’re also saving for a retirement that is still a couple decades out, it makes far more sense to put as much money as possible into your retirement fund, where your returns are likely to be a lot higher than 7%, especially if you’re using an IRA or 401K (due to their tax advantages).

In a similar vein, they say you should amass an emergency cash reserve prior to paying off your high-interest debt. I think this is absurd. If you’ve got revolving credit card debt costing 18%, why would you set aside thousands of dollars, meanwhile, in a low-interest-bearing savings account instead of using the money to pay the credit cards off as fast as possible? Doing it that way is more expensive and thus slows the process down. I think you should start amassing the emergency funds once the credit cards are paid off. Cancel all the cards except one, which you keep at a zero balance. Use it as your emergency cash reserve until you actually have a real one to use.

They call Adjustable Rate Mortgages “evil,” but fail to mention that sometimes they make sense. Why pay a relatively higher 30-year interest rate on a home loan that you know you’ll only be paying on for 5 years, because you plan to move to a new place at that point or sooner (this is what most people—especially first time homebuyers—do)?

I can get behind the message to pay off your debts and always live within your means (but who would disagree?). The rest of it, though, is highly questionable, and I sincerely hope Sirius and the Stern Show are able at some point to land some less annoying advertising contracts.

The Burleyists - Robert Yang

If you're at all interested in what John Burley has to say on financial freedom or real estate investment, then you'll very quickly find your way to the John Burley Discussion Forums. I have spent a good deal of time reading the messages there, myself - originally because I was in thrall to the beliefs, but more recently as research for my Burley-related posts here (and I admit there's an element of sick fascination involved, as well).

One of the dangers of reading the forums for extended periods, however, is that you might find yourself starting to almost believe the hype. Message after message from "successful students" who claim to be living the dream and making fistfuls of cash (aka, "Progressive Profits") as a result of following Burley's advice is enough to weaken even my skepti-sense after a while. It takes a conscious effort to remember that

1. Correlation does not necessarily mean causation (e.g., just because night follows day does not mean that day is the cause of night)
2. Anecdotes are the weakest form of evidence for something (precisely because of reason 1, but also because they aren't necessarily representative of the target population as a whole)
3. Most importantly: this is Burley's promotional site! You can find rah-rah sites on the web for just about any absurd scam you can think of - from homeopathic "medicine" to "over unity" technologies.

In spite of this, I must have been in the midst of a particularly weak moment a few months ago when I first happened upon Robert Yang's comments on the forums, because I didn't take the time then to really give Mr. Yang the attention he warranted. I am rectifying this as well as I can now.

Let's have Robert introduce himself:

Hello, my name is Robert Yang.

I am the Host of yisemen.com, a site devoted to your financial education. I just turned 35 and currently in semi-retirement after achieving financial freedom for myself and my family. It did not start out this way. In October 2002, after realizing I lost $500,000 in the stock market with a high probability of been laid off from a Fortune 500 company that I worked for since college. I dedicated myself to the “1,000 days challenge” to be out of the rat race (achieve financial freedom). I was fortunate to have many mentors and found many supportive networks along the way. I have indeed achieved financial freedom in less than 3 years.

However, it was not an easy road traveled. Being a W2 wage earner with a full-time job and a family to take care of, it was hard to get started. I learned enough lessons along the way that I am now in a position to share my experiences with you and support you if you too have the burning desire to one day quit your job to spend more time with your family and having the free time to do what you like to do, not what you have to do. I honor you for taking your first giant step forward and joining me and my friends in the journey toward financial freedom! As one of my mentor Anthony Robbins likes to say, “Life will never be the same again!”

How did I came up with the name yisemen”? Last year, when I was interviewing CPAs for one of my companies, I was asked to give the names of our principles. I was providing the names one by one, she noticed that my partner, Jeffrey, my advisor, Edwin, and myself all shared the last name starting with the letter Y. So, she jokingly said, “you guys are the three Y’s men (wise men). I like the name a lot and decided to keep this nickname and be one of the – “yisemen”.

Keep the passion alive,

Robert Yang

Unfortunately some time in the past 3 months Robert's web site for Yisemen Financial has all but disappeared. All that remains today is Google's cache of the site.

One has to wonder what happened. Yisemen Financial had so much going for it! With the incomparable teachings of Robert Kiyosaki, Matthew Chan, and John Burley behind it, as well as the indispensable "burning desire" of Robert Yang - Burleyist extraordinaire - to succeed, it just doesn't seem possible that the company could have met with failure. Of course, the other possibility is that Robert has taken that fabled quantum leap out of the rat race and has no need of Yisemen Financial any more.

But wait! Robert says that he had already done that before starting his site, so that can't be the answer - and clearly the financial education needs to continue because, for example, I have yet to leave the rat race. So none of it makes any sense!

Whatever happened, though, I hope Robert Yang is "keepin' the passion alive" out there somewhere!

Google's cache of www.yisemen.com is undoubtedly going to be cleared soon, and I can't bear the thought that Robert Yang's invaluable insight might be lost. So, for the sake of posterity, here are a couple choice quotes (I really want to do more, but I'm a little worried about already being on the edge of fair use)...

There are no bad investments
There are bad investors

This is so true. It is the investor, who finds a way to create value, and make it a good investment. I lost tons of money in the stock market because I was a bad investor prior to October 2002. I thought I was a great investor when I saw one of my high-tech stock portfolios grow from $20,000 to $240,000 between 1993 to 2000. Now looking back, I realized I was just a Level Three pig who got lucky with the tech run in the 90s. I had no limit order in place to sell my stocks when it fell below a certain price. I was greedy. I took everyone’s advice – invest for the long term. I didn’t cared how high the PE (Price to Earnings) ratio was – thinking there are more fools behind me who will pay even higher prices for my stocks. I did not realize that stock is not a secured investment, where the down side can be 100%. I had absolutely no control over my investment in the stock market.

Yet, not all investors lost money during the stock market crash of 2001. Warren Buffet did just fine for his investors. Many seasoned investors had hedge position. Some even welcome the big swing in the market as they utilize options to earn very high return on their money. So, the lesson is – It is not the investment, it is the investor that creates the return.

...

So, what is the secret for getting out of the rat race?

My experience tell me that first you have to address the basics. Once you have a good fundemental, you can speed the procoess up by going through self-improvement seminar, having mentor, network with other successful people.

1) You must save a part of you earn... It a sample mathemtics. When you get your check every month, put at least 10% to 20% aside for investing before you pay for everything else...

2) Know your financial freedom gap

Financial Freedom Gap = Expense - Passive Income

Track your expense for few months and know how much money you needed per month to live. Start invest for passive income. Most people only invest for capital gain (which help to increase your networth, but does nothing to get you the income you needed to be out of the rat race).

3) How much money do I need to retire?

It depends on what rate of return you can get.. Example if you need $5,000 per month to cover your expense, then,

APR Capital Needed
2% $3,000,000
8% $750,000
15% $400,000

4) Turn your liability (which creates expense) and un-productive assets (which generates no passive income) into true assets (that produces income for you every months).

5) Network with other sucessful investor and co-invest with them when you starting out.

6) Improve your skills by going to seminars, listen to audio CD, get a mentor if you want to speed up the process.

7) Play Cashflow 101 at least once a month for the next 12 months

Those are some of the fundmentals...

Keep the Passion Alive,
RobertY (Host)

Feeling financially freer, yet?

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.

Some Brief Remarks About John Burley

Before I launch into full-on analyses of John Burley, his claims, and his teachings, I think some introductory remarks are in order (and they'll hopefully clarify - at least a little - the purpose of those long lists in the previous two posts).

I first became aware of John Burley, I believe, in early 2000, via a Robert Kiyosaki tape set I bought, called Financial Literacy. Burley was one of the featured speakers on the set, and he talked for roughly an hour about how he had become fabulously wealthy "wrapping" single-family homes in Phoenix, AZ.

Briefly, a "wrap" (also called a "lease option," or a "land contract") consists of buying a home and then selling it to a buyer who, for whatever reason, can't qualify for traditional financing, and so is willing to pay a premium to the investor, in the form of a higher purchase price and a higher interest rate. John T. Reed looks on these deals very poorly (see here and here), and I mostly agree with him--but I'm getting ahead of myself.

As someone who, at the time, owned two rental properties, I was immediately struck by this idea, because it seemed to provide all the benefits of rentals, with none of the downside. Of course, the hour-long discussion of the technique in Financial Literacy left out many significant details, and I wanted to learn more, so I went in search of what information there was available. It didn't take me long to find Burley's tape set Blue Print for Success, and plunk down $300 for it.

Sadly, the "course" didn't answer all of my questions, and whenever Burley would gloss over pertinent details and a member of the audience would call him on it he would simply say, "Psychobabble!" and that would be that.

Even though a very clear pattern was emerging (a pattern begun back in early 1998 with Rich Dad Poor Dad, actually), I decided I would pick up Joe Arlt's "Wrap Your Way to Wealth," which seemed a steal at "only" $149, and promised to be "very detailed" and done by a guy who claimed to be a "boot camp" attendee who was initially skeptical of Burley's techniques. It almost goes without saying that Arlt's tape set didn't offer any significant additional information, either (as an aside, I find it interesting that although I was easily able to find evidence that Burley does indeed seem to buy and sell houses in Phoenix, I have found zero such evidence in Virginia for Joe Arlt, even though he claims to "own and manage" over 400 houses. It's also a bit of a mystery to me that Arlt's tape set is no longer offered on Burley's web page, and Arlt is no longer a regular contributor to the discussions over at the Mastermind Forums. Hmmmm...).

So, in upcoming posts, I'm going to be looking in detail at what John Burley sells, what he says, and then I'll take a stab at how that compares to what he really does--or at least that part of what he does that can be more readily gleaned from the public records. I think also that I'll take a quick look at 1 or 2 of his more successful students, along the way.

Go here for the next post in the series.

The Secrets of The Rich

In my previous post on confirmation bias I derided religious folk in general and network marketers in particular for pulling the wool over their own eyes. You might wonder why I care so much.

In the early fall of 1997 I left San Francisco—after living there for only a year—and moved to Phoenix. I had recently lost all interest in writing music, and I was faced with working in a career that I had basically fallen into by accident. On a whim in a Borders one day I picked up a copy of a book called Rich Dad Poor Dad. It had a profound effect on my psyche. Given the book’s success, as well as the continued success of the Kiyosaki franchise, I was obviously not alone in that regard. Kiyosaki’s book was—is—full of promises of an easy way out—out of the “rat race”… out of “wage slavery”… into “early retirement” and “financial freedom.” All you need, according to it, is the right attitude, some “financial intelligence,” and some “assets” that give you “passive income” (“let your money work for you, instead of you working for money” is a platitude endlessly and unhelpfully repeated throughout Kiyosaki's works) and your success and induction into the ranks of “the rich” is assured.

Even after only one semester of Accounting in college (in which I got a C) I realized he was using the terms “assets” and “liabilities” incorrectly. There were other seemingly minor things about the book that bothered me (I should have seen his endorsement of MLMs as entirely destructive of his credibility, for example). Nonetheless, enamored with the idea that becoming wealthy is actually easy, filled with foolish enthusiasm, and determined to “leave the rat race,” I embarked on a mission to “learn the secrets of the rich” and then to become rich myself—even though I hadn’t the slightest clue how to go about it.

I’ll discuss a few of the details of that crazy ride (ultimately to enlightenment—or, at least, wisdom) in upcoming posts. For now I just want to admit the extremely embarrassing fact that the allure of Kiyosaki’s message and his endless promises to reveal “the secrets of the rich” (if you only buy his next book, or tape set, or attend his next seminar…) held me in sway for several years, effectively counteracting my usually healthy and alert skepti-sense. In fact, its grip on my mind was tight enough to keep a hold of me for several months after I stumbled onto John T. Reed’s guru ratings page, and read his probing and comprehensive analysis and refutation of Rich Dad Poor Dad.

All told—and this is painful to admit—I must have spent well over $500 on Kiyosaki crap, all of which promised and none of which offered any significant content beyond what little he had already covered in Rich Dad, and all of it repetitively feeding that unfocused enthusiasm and burning desire to “leave the rat race” with “passive income” and thus join the ranks of “the rich.” It was as I was reading his third book, Rich Dad’s Guide to Investing, that I suddenly got the distinct and very disturbing impression that I was, in fact, reading Neo-Tech, instead. An odd sensation came over me. I guess that was the moment when I could no longer continue to lie to myself.

At this point I find it very disheartening to visit Blogs and discussion forums filled with people who are currently in thrall to Kiyosaki’s brand of snake oil, because I know that they are—like I once was—unwilling to face the reality that making money quickly (especially a lot of it) is inherently difficult and risky. That it often requires extraordinary talents or proclivities. And that, as the name “work” implies, it is not usually very much fun. Had Kiyosaki been honest in his books, those would have been the “secrets of the rich.” Of course he wouldn't have sold quite as many books that way—another “secret” of the rich being “give the people what they want.”

Confirmation Bias

Is it just the skeptics and the scientists who take epistemology seriously?

This question springs from my continued study of The Bible and its prima facie absurdity. Confronted with the Bible's inherent lunacy, Christians metaphorically wave their hands and avert their eyes, and take comfort in those biblical passages that glorify faith. It seems very few of them are truly concerned with the fundamentals of how we know what isn't so. I find it fascinating that religious folk can be so blind when it comes to their own crazy beliefs and yet so rational when it comes to the crazy beliefs of others. Jews laugh at Catholics. Catholics laugh at Mormons. Mormons laugh at Scientologists... ad nauseum. Of course, this tendency isn't restricted to the religious sphere alone. It seems par for the course in any sales pitch for snake oil.

While I was an admissions counselor at the University of Phoenix (really nothing more than a glorified telemarketing position) I had the pleasure of having two "network marketers" on my admissions team. One was affiliated with Quixtar (an Amway offshoot - though they don't like to point that out) and the other was affiliated with some long-distance service reseller called ACN. I was only able to have a couple brief (though animated) conversations with the Amway/Quixtar zombie before he was completely alienated, but they were enough for me to surmise that the guy was completely closed off to rational discourse. For example, he felt it was a huge selling point that Quixtar "pays you back" for the things that you purchase from them. Inexplicably, he thought that this was materially different from if Quixtar simply lowered the prices of the items in question, and he further felt - again, inexplicably - that this was an important demonstration of the truth that he would soon be able to retire and live off the massive residual income - he would soon be living the dream.

Meanwhile, my ACN friend was often privy to these conversations, and he would happily join in the derision. Unlike the Amway zombie, my ACN friend, Mike, was someone I had known for a while. Based on overheard conversations I had always kinda guessed he was in on some sort of get-rich-quick scheme, but I always felt it was none of my business. Subsequent to the Quixtar conversations, I broached the topic with him.

The first thing I asked him was why he was so down on Quixtar. He said it was because that was clearly an unworkable pyramid scheme, whereas ACN was the real deal. This is, of course, the standard sales pitch of every pyramid scheme out there. They all claim that their compensation plan avoids the pitfalls of the "real" pyramids and assures success to those "business owners" who "only have what it takes." Nevermind the mathematical impossibility of this claim. The mental gymnastics that Mike performed, when confronted with these inherent obstacles to easy money, were a sight to behold:

Well, obviously we both look at network-marketing differently. I look at as something you can do part-time, which is fun, where you have no boss, where it is all up to you. If you produce, you get paid if you do not you don't, there is no grey matter. I look at is as sorting through people, looking for superstars and believing in someone who may not ever think they can do something great. I have gone in knowing most who take this ride will fail because of either lack of belief, work ethic, or fear. I know I have to pay very close attention to those who are successful and duplicate what they have done . For what they have and the experiences they have are what I want for myself and my girlfriend.

I'll take the easy pot-shot first and say that I agree with him when he says "there is no grey matter." Of course I'm sure he meant to say "area," but in this instance I choose to have faith that Freud was on to something. The rest of the 'graph reads like Kiyosaki on a three-day speed binge, but when he makes the claim that what he is doing is "fun" I have to call foul. Having been a Realtor for two years, I know how uncomfortable it is soliciting your friends and family for business.

Now, I don't mean to pick on my unfortunate friend (who has, since writing the above, not-so-much come to his senses about ACN as ground to a halt - the way he put it: "I have transferred my time and energy into other areas"). He simply serves, I think, as a reminder that the religious impulse lurks in unexpected places. We have an insidious--though perhaps understandable--tendency to see what we want to see and believe what we want to believe--what the philosophers, skeptics, and scientists call confirmation bias.

Oh, and by the way, check out the real "Secrets of the Rich" here.