Who would buy real estate in this market?

Nouveau Riche University makes money by getting its students to buy investment property - no matter how scary the market gets.

By Patricia B. Gray, FSB contributor

(FSB) Scottsdale -- Several months ago Silvia Cuevas took stock of her life, and it was a profoundly unsettling experience. At 40 she had a solid job with a modest salary at the public library in Santa Ana, Calif. She'd carefully squirreled away some savings and bought herself a little house. She was financially secure - and utterly dissatisfied. All around her, Santa Ana throbbed with the feverish energy of recent immigrants eager to cash in on the promises of America. A short drive from Disneyland, Santa Ana boasts one of the highest concentrations of Latinos of any city in the U.S., and these days it is a hotbed of entrepreneurial activity. Cuevas, though, felt as conservative, meek, and, well, dull as a church mouse in Vegas. "I was going nowhere," she recalls. "How was I going to find my fortune?" Then a girlfriend introduced her to Nouveau Riche University.

Not exactly a university, Nouveau Riche offers real estate investment classes -and a host of related products and services - to would-be tycoons. In April, Cuevas plunked down tuition of $16,000 and attended a weeklong program in Phoenix. Two weeks later, emboldened by her instructors and an advisor assigned by the university, she refinanced her home, taking out $200,000 - a large share of her equity. She used the money for down payments to buy - sight unseen in one case - three investment properties through a real estate agency controlled by Nouveau Riche. By midsummer Cuevas' portfolio of investments had grown to include a condo in Colorado, three acres of undeveloped land in the Smoky Mountains, and a three-bedroom house in San Antonio. Her debt load has grown too, thanks to the hundreds of thousands of dollars in loans she took out on the properties, but she doesn't worry. "I learned how to be bold at Nouveau Riche," Cuevas says. "They're the market experts, so I trust them to help me buy. I can't wait to make my next purchase!"

That's the kind of rah-rah spirit visitors encounter at Nouveau Riche (nruniversity.com), where the lectures are more like pep rallies, the tests are sometimes self-graded, and the homework is optional. Nouveau Riche has reason to cheer too. Co-founder and CEO Jim Piccolo claims that revenues will top $80 million in 2007, up tenfold since 2005, when the company was founded and the real estate market peaked. Piccolo makes money not only from tuitions but also from commissions on the properties his students buy and from the fees he charges for accounting, finance, and property-management services.

Remarkably, Nouveau Riche is able to attract huge crowds (a recent class in Phoenix lured 2,479 students) in a market that is declining rapidly. The Standard & Poor's Case-Shiller home price index (homeprice.standard-andpoors.com) shows that nationally prices fell 2.7% in the first quarter, more than in any quarter since 1990. In a late July conference call with analysts, Countrywide CEO Angelo R. Mozilo, who runs the nation's largest mortgage firm, said home prices were falling "almost like never before, with the exception of the Great Depression." That's not all. PMI Mortgage Insurance (pmigroup.com), a financial firm that tracks the market, predicts two more years of decline across much of the U.S.

Given those grim stats, why would anyone want to invest in real estate? Nouveau Riche borrows heavily from the investment philosophy popularized over the past several years by real estate guru Robert Kiyosaki, who wrote the bestselling advice book Rich Dad, Poor Dad. Like Kiyosaki, Nouveau Riche teaches that working for a salary is a fool's game; the road to riches requires leveraging debt to amass a portfolio of income-generating properties. Yet investing in rental properties, like all entrepreneurial endeavors, is hard work. A successful landlord has to know the market, maintain his properties, and retain paying tenants.

That doesn't seem to bother Nouveau Riche students, many of whom have seen their neighbors get rich flipping houses or renting them out during the boom. Judging from the callused hands and well-worn work boots spotted at a recent Nouveau Riche event, it attracts a blue-collar crowd for whom the promise of riches from real estate rings true at a gut level that stocks and bonds don't reach. "I know I'm not going to get wealthy working for the fire department," says Hector Magallanes, a firefighter from Los Angeles. "I'm working up the courage to take the risks I need to take to be financially independent."

Nouveau Riche makes it easy for would-be tycoons to get started. "We learned through our research that most students of real estate seminars never actually buy any property because they don't have the tools to take that first step," Piccolo says, "so we are offering them all the tools they need to build their portfolios."

At a recent seminar at a Hilton in Phoenix, Fix 'n Flip - a daylong course in the art of the fixer-upper - was standing room only. So was Creative Financing, in which students learned how to tap their retirement savings and their home equity for money to invest. Between classes, throngs of students flocked to the lobby to booths featuring affiliates of Nouveau Riche. Save Our Scores (or SOS, as it is called) helps high-risk borrowers boost low credit scores so that they can borrow more money at lower rates. (Fees range from $600 to $1,200.) Investor Concierge, the real estate brokerage firm owned by Piccolo and his associates, helps students buy houses and condos, arranges financing, then provides management services for their far-flung properties. (The firm's slogan: "Click a mouse, buy a house.") Meanwhile, the Nouveau Riche University Store did a brisk business in polo shirts, plus jackets with the college logo, a stylized eagle.

These days alumni groups are springing up in Atlanta, Boise, Tacoma, and other cities. What's on the agenda at their meetings? "We boast about our portfolios," Heather Echevarria, 29, of Boise, says. "We shop deals too." Echevarria and her husband, Ben, specialize in pre-foreclosure properties - that is, buying houses from cash-strapped owners who can no longer afford to pay their mortgages. Typically, she says, they buy houses for half their appraised value. Last year, the pair claim, they bought-and quickly resold for a profit - 75 homes in Idaho and Nevada.

But will other graduates of Nouveau Riche do as well? What happens if interest rates rise and the monthly payments on a variable-rate loan soar, or a tenant leaves? Will the investor be able to sell at a profit in a market where home prices are falling? Casey Serin, a 24-year-old programmer from Sacramento, had already invested in property (although not through Nouveau Riche) before he enrolled in one of its classes last year. "What they teach there is dangerous," he says. "They're selling you on getting rich fast-and that's a risky game to play."

Piccolo retorts, "There is no better time to buy, because real estate is on sale. You can never go wrong with real estate in the U.S. of A." He admits, though, that he has not bought any property lately.

Raised in Nebraska, Piccolo says he was a poor student, interested more in sports and cars than his classes. After graduating from the University of Nebraska in 1984, he moved to Phoenix and worked in the car detailing and design business. In 1990, Piccolo says, medical bills forced him to file for Chapter 7 bankruptcy and list debts of $650,539. Piccolo ran into more trouble a year later when he pleaded guilty to the theft of his girlfriend's new Mercedes-Benz. Although he denies responsibility now, Piccolo admitted to the court that he had dumped the car in the desert so that his girlfriend could collect an insurance claim of about $24,000; Piccolo said she'd complained that the car was a lemon. "I couldn't bear to see her hurt," he told the court. After three years probation, his felony conviction was reduced to a misdemeanor.

Not long afterward Piccolo discovered real estate. By the mid-1990s he had stumbled on the idea of consolidating investment seminars, offering students the opportunity to hear several gurus speak on various techniques. Out of that grew Nouveau Riche, which he and a co-founder, Bob Snyder, launched in 2005.

At 45, Snyder is a veteran of the multilevel-marketing business. "I'm good at building teams," he says, and indeed, he has been teaching salespeople for more than two decades, after being trained by Amway (amway.com), the global leader in multilevel marketing, in which sales reps are paid not only for selling products but also for recruiting more reps. To date, he has signed up 1,300 sales reps for Nouveau Riche. Working out of their homes, they sell two products: a 15-volume encyclopedia on real estate investing for $3,500 and tuition to the "college" for $16,000. The first five tuition sales don't yield a commission, but on subsequent ones the sellers get a 50% cut, or $8,000.

How does the company attract customers? It offers free one- or two-day intro classes. According to Andrew Yurasek, an independent regional advisor for Nouveau Riche, at a recent event in Shaumburg, Ill., the company rented Lamborghinis and Ferraris for six of its sales reps for the night so they could roar up to the hotel just as prospective students were filing into the Hyatt. "We want to generate some excitement," says Yurasek. Among the reps, he adds, were an architect, a housepainter, and an office worker, none of whom have a real estate portfolio. About 10% of those who come to the free classes buy the home-study materials or spring for the tuition.

As chancellor of Nouveau Riche, Piccolo doesn't teach any classes, but he is a regular on stage on the university's awards night, working the crowd of star-struck students eager to pose for a quick photo with him. At 50, he has the tanned good looks and boyish charm of actor Dennis Quaid, whom he resembles.

These days Piccolo is living large - and proud of it. "Only in America," he says, "can a guy who barely made it through college end up owning a college." He and his wife, Mary, own three homes, including a ten-acre ranch with a 22,000-square-foot house and a pool in North Scottsdale. Still a car buff, he boasts a collection that includes a Ferrari 360 Spider, a Lamborghini Diablo, and a Bentley GT convertible. He also travels in a Falcon 200 company jet. For their seventh wedding anniversary he surprised his wife with a cherry-red grand piano signed by Elton John. Cost: $100,000. Piccolo says he and his wife also own investment properties in Arizona, Nevada, Oregon, and Utah; Mary Piccolo manages the portfolio. Piccolo estimates its total value at $20 million.

Investor Concierge, Nouveau Riche's brokerage arm, typically sells students about 100 properties a month, most ranging in price from $100,000 to $200,000, says the firm's president, Craig Cottrell, 39. To date, Investor Concierge has racked up property sales on 1,100 units, most of them in Georgia, Michigan, and Texas. Over two recent weekends the firm moved 60 condo units in a complex in Fenton, Mich., a blue-collar town 15 miles south of Flint, at prices ranging from $60,000 to $67,500.

The way Investor Concierge structured the deal in its prospectus, the buyers put 10% down, borrowing the rest using an interest-only loan. Trouble is, the rents on the condos won't cover the total cost of owning them. No problem. Investor Concierge explains that it has arranged for the seller of the condo complex to subsidize the rent for as long as two years at above-market rates. The seller will also pay all the management fees and real estate taxes for two years. As a result the investors should be $145-a-month cash-flow positive. But what happens when the subsidies expire, and the buyer discovers he is losing money every month? Will he be able to unload his property or command a higher rent?

The way the Michigan real estate market is headed, it might not be so easy. According to Judy Brant, a broker in Fenton for more than 20 years with Coldwell Banker, the inventory of homes in Genesee County, which includes Fenton, averaged 2,000 units in 2005. Today it is 8,000, up 300%. When Brant heard that Nouveau Riche students had bought 60 condo units in her town - sight unseen - she said, "I'm speechless. The housing market here is tied to the auto industry, and prices are falling faster than you can imagine: 10% last year and another 10% this year. Who knows when it will reach rock bottom? As far as rental properties, it's hard to rent anything here now. Houses and apartments sit empty all over town. People are leaving because there are no jobs here. We're really suffering."

Despite these risky deals, Nouveau Riche's enrollment keeps booming and Piccolo's pockets keep filling, which lets him plan big for the future. The company bought 24 acres on top of a black-lava mountain north of Phoenix. In 2008, Piccolo intends to break ground on a new campus with modern steel and glass classrooms and four luxury dorms, each with its own pool and barbecue pit. The pools will be linked by a man-made river; students will be able to float from dorm to dorm, riding the river on inner tubes. "It'll be very theme-y," he says. "We're going to build a Disneyworld for investors and entrepreneurs." *  Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.