Knocking on doors to land deals

Daryl White, a student of real estate instructor Alexis McGee, made $300,000 in his first year of foreclosure investing.

Dawn Connelly took part in a foreclosure investing seminar in September and hasn't landed a deal yet, but she remains optimistic.

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Is a $10 house a steal? Mary Krawiec and Mark Peabody scooped up a nine-unit Victorian in Troy, N.Y. nine years ago for just $10. They have four apartment renovations down and five to go. What they've spent $10 Price of house at foreclosure auction in 1998. $2,000 Water bill including previous owner's debts. $3,500 Replaced cracked rubber roof. $2,200 New carpets installed, walls and ceilings patched and painted. $4,400 Special-order thermal-pane windows. $6,000 Four new boilers to take the place of single old one. $6,000 Four bathroom renovations. (cabinets, floors, toilets, tubs) $12,000 Four kitchen renovations. (sinks, cabinets, appliances) $36,110 Total to date Expenses to come $5,500 Replace rest of the windows $7,500 Five more boilers $7,500 Five remaining bathrooms $15,000 Five remaining kitchens $35,500 Total projected What they've made $250,000 Estimated home value $52,020 Profit (rents minus taxes, insurance, utilities) 27% Annualized return on investment

(Money Magazine) -- Daryl White, 44, took Alexis McGee's class nearly three years ago. He'd been to other real estate seminars and gotten little out of them.

"I didn't think you could do as many deals as McGee promised," says White, who lives in Valencia, Calif.

McGee is president of Foreclosures.com and using her guidelines, White set a profit goal of $200,000 his first year. Instead, White says, he made $300,000.

Now one of the four coaches in McGee's mentoring program (a $7,500 service that lets you talk to a coach for an hour a week for three months), White claims he's set to make around $500,000 from investing this year.

Because he is a star student, his success is featured on McGee's Web site, and he gives a testimonial on her DVD.

As McGee suggests, White starts his search on the phone. But he says that to land a deal you have to knock on doors.

White grew up in the Baldwin Hills section of Los Angeles in a small three-bedroom house he shared with his parents and three siblings. These days he drives by the mostly one-story modest homes of Baldwin Hills in his BMW SUV, looking to strike deals.

On a recent weekday afternoon, White has six addresses he wants to check out - and where he hopes to talk to the homeowner. At the fifth house he finally catches someone at home, but the woman doesn't want to talk.

"I have taken care of it," she says, trying to get White to leave. White asks how. "Borrowed money from friends and stuff," she says.

White asks if she has had a lot of people come by. No, but she has gotten a lot of mail. She asks White to leave a card. He writes out his information on a Post-It note. (White thinks cards make you look too formal.)

As White walks away, he says, "She hasn't taken care of it" and makes a mental note to stop back in a couple of days. "It takes a few trips before you can get to the point where the homeowner will actually start talking details with you, which is fine with me," he explains. "It's about building relationships, and I like that."

Of course, a salesperson's smile and persistence will take you only so far. You also need cash. People who can't pay their mortgage generally can't pay to maintain their home either. So most foreclosed properties need work.

In addition, it's nearly impossible to get a traditional mortgage to buy a house from someone seriously behind on his mortgage. With foreclosure looming, there's simply not enough time to do the title search, appraisal and inspection that lenders require.

If you don't have the money on hand to purchase the home without a mortgage, you need to find another investor to buy the house for cash once you locate a prospect.

McGee calls this buying "on assignment"; she maintains that as long as you uncover good deals, it won't be hard to line up backers who will pay you essentially a finder's fee. Not all agree that it's so simple.

The strategy is doable, says real estate author Gary Eldred, "but finding people who will pay you those fees is quite difficult."

Even if you can handle the financing, profitable deals remain hard to dig up, despite the meteoric rise in foreclosures. The reason: Many homeowners facing foreclosure have no equity. They stretched to afford a home by putting little money down or taking out interest-only loans that never let them build equity.

With home prices falling in some of the markets with the most bad loans - such as Sacramento, Fort Lauderdale and Detroit - those owners are often behind on loans that are bigger than the value of their homes (see charts).

In other cases, homeowners have loaded their homes with multiple layers of debt. Without a title search, you can't be sure that you know about all the debt when you make an offer. "Right now you have to be very careful," says Ray Cloughen of Manorville, N.Y., who has been investing in foreclosures for nearly 40 years.

When a homeowner has no equity, the pre-foreclosure method that McGee and others teach won't work. Owners are reluctant to sell a house for less than they owe, since they'd still be on the hook to their lender for the full amount of their mortgage. Most consider foreclosure the lesser evil. It ruins their credit, but it avoids a potentially huge outlay.

Finally, assuming that you can pick up a home at a decent price, you may face one more hurdle: finding a buyer who's willing to pay more than you did at a time when home prices are falling.

"The bet you are making when you buy in foreclosure is that the market is going to recover," says John Vogel, who teaches a class on real estate and entrepreneurism at Dartmouth's Tuck School of Business. "However, a leading indicator that a market is going to take a while to recover is a rise in foreclosures."

In her book, McGee writes that a diligent foreclosure investor should expect to make $180,000 in year one, assuming six deals and clearing $30,000 on each. But even the successful students to whom McGee referred Money Magazine aren't making anywhere near that sum.

Lisa Carlson, a former medical sales rep who lives in Madison, Wis., says she has closed 14 deals since taking McGee's class two years ago (12 of them assignments), earning a total of $110,000 (an average of about $7,850 each).

After attending McGee's class in April 2006, Leslie Bach quit her job as a computer systems analyst and, with her husband, took up foreclosures full time in Austin.

In that year and a half, they have bought and sold four houses using bank loans, netting $100,000. Two more properties that they bought using McGee's methods have yet to sell in Austin's still lukewarm market.

McGee says that her $180,000 estimate is for California and other places where housing is relatively expensive (though she doesn't specify that in her book); investors will make less where homes are lower priced.

Dawn Connelly, who graduated from McGee's class in early September, is likewise finding it slow going.

A 32-year-old corporate lawyer and a mother of two from Stuart, Fla., she enrolled in McGee's class (and the mentoring program) to see if she could make money on foreclosures on the side. She has yet to land a deal. In fact, she's had homeowners threaten to summon the cops or even the FBI when she calls. "People get very angry," she says.

This is not to say that Connelly or the others are unhappy. Bach says she and her husband have replaced the income from their previous jobs. Carlson says she doesn't yet make what she used to earn in sales but feels she is headed in the right direction.

And Connelly is optimistic that she will buy her first property soon. She says she's running into more people who are having problems paying their mortgage.

Recently, when she struck up a conversation with the guy installing her cable, she learned he was late on his mortgage and wanted to sell his house. "He dropped the wires and went home and got his paperwork," says Connelly. "I am going to see his house next week. We might do a deal."

As McGee's students struggle to make their fortunes in real estate, they can take inspiration from McGee and White, who've grown rich doing what they preach. At least that's what they claim.

In her book, McGee says she has "had her hand in more than $100 million in both residential and commercial foreclosure deals." She did the majority of those deals, however, in her capacity as a broker, completing other people's transactions and collecting a commission.

Her book also says she has "earned millions of dollars buying and selling foreclosure properties in good times and bad." A public records search by Money Magazine turned up only four properties ever bought by McGee, aside from her personal residences. According to her, those four deals generated slightly more than $200,000 before rehab and other costs.

McGee contends that she rarely puts her own name on the title and deed when she buys a house. Most of her deals, she says, are done though limited-liability companies (LLCs) and other legal entities in order to limit her risk and protect her privacy, a common practice among real estate investors.

When Money Magazine asked for the names of the companies she uses, McGee declined, citing privacy.

It is even harder to verify Daryl White's foreclosure track record. A search of real estate transactions in the Los Angeles County area for the past five years turned up no record of White ever having bought or sold any property other than his current and former homes in Valencia.

Money Magazine repeatedly asked White for a list of addresses of houses he has purchased in foreclosure. White declined, also citing privacy.

And while he initially said he bought all his properties in his own name, after Money Magazine said it had found no record of them, he said that he buys properties through an undisclosed private company.

White did provide Money Magazine with a 2006 tax return, which showed $645,000 in dividends from an LLC but omitted the name of the LLC and his accountant. McGee says she's seen proof of White's real estate transactions and that it is very common for her students to utilize LLCs.

That attitude irks veteran real estate investor and industry gadfly Reed, who believes that those who charge thousands for their classes and seminars should be willing to prove their investment success.

"Many gurus say they are trying to keep a low profile for liability reasons, while simultaneously bragging from the rooftops about how much money they have made," he says. "It's totally inconsistent."

Cashing in on a foreclosure fire sale