Rich Dad Education Blog

Last month, we discussed tax liens and deeds as an overlooked area of real estate investing. Too often, investors are one-dimensional in their approach to real estate investing. Being a one-strategy investor can be successful, but highly successful real estate investors rarely settle on one investment strategy until they have become well versed in multiple strategies. After trying out a few options, investors then settle on the strategy that best fits their strengths and fulfills their personal and financial goals.

This month’s article will focus on probate investing, which, much like tax liens and deeds, is an area that most real estate investors have only cursory knowledge of. This is an unfortunate oversight on their part, as investing in probate properties can be a lucrative method of investing that fits nicely with personal time constraints and financial goals of many new and seasoned real estate investors. It is definitely an area of investing that all real estate students should investigate to see if it is a match for them.

What is Probate? A Simplified Explanation

As with most legal matters, probate is complex and full of details. For our purposes as real estate investors, we only need to understand the big picture and the basics so we know why properties in probate can make attractive investment opportunities.

Probate is simply the legal process of what happens to the estate of a deceased person.
The probate process insures that all of the deceased person’s debts are paid and the remaining assets are distributed according to the deceased person’s wishes. While items such as trusts can be used to insure loved ones inherit assets, they are not always used or available.

The executor is the person charged with overseeing the disbursal of the deceased person’s estate. Executors can face a plethora of situations, some of which can create sound investment opportunities for the investor. A few common examples of such situations include:

• A property that is in need of repair
• A heir that doesn’t want the inherited property but wants cash right away
• A heir that doesn’t wish to invest their time in the liquidation of the estate and is looking to expedite the process

All of these situations can create a motivated-seller situation.

Motivated Sellers—A Key to Successful Real Estate Investing

Many successful real estate investing strategies require finding and negotiating with motivated sellers. As real estate investors, we are naturally looking to make a profit on our investments based on the time and money we invest. We also love win-win situations where we can make profit while helping others fix a problem and move on with their lives.

Finding good investments typically requires finding individuals that are motivated to sell. This motivation can stem from numerous sources, and many times probate properties come with motivated sellers. In fact, the probate market probably has a higher percentage of motivated sellers than any other area of real estate investing. In traditional searches for motivated sellers, you are often dealing with people who live in the home they are trying to sell. This is usually not the case in probate properties.

Whether through the desire for fast cash, not wanting to deal with repairs, not wanting to deal with a second property, or out-of-state heirs, there are multiple reasons for motivation that are not found in traditional homeowners. Whatever the motivating reason in these situations, the end result is that you have an individual(s) who doesn’t want the property. In many of these situations, you will find that they want to move the property as quickly as possible and often, especially in today’s real estate market, are willing to offer large discounts to accomplish that fact.

Where to Find Probate Properties

You likely have a local probate office—all cities (or counties if you live in a smaller town) have a probate office. Probate offices have files on all of the probate houses within its jurisdiction free of charge. There is usually just one probate office in your city and it should be easily located by putting in the key words probate, office, and your city name into any search engine.

You may get lucky, and your city’s probate files may be online to view. If not, a quick trip down should provide you the information that you are looking for, which is real estate in the executor’s estate and the contact information for the executor. From there, you can put your real estate training to work.

Like many niche markets, probating investing is not for everyone. Unlike many niche markets, probate investing can be done by just about anyone. Once you become familiar with case files, understand what you are looking for, and are able to weed out cases that have low probability of success, then the process becomes quite effortless. Over time it can be the easiest way to find motivated sellers.

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Based on fears that America is heading into another recession, and that the European debt problems aren’t solved, the Dow fell 512 points on Thursday, August 4, 2011, the biggest drop since December 2008. After hours on Friday, August 5, 2011, for the first time in history, the S&P cut America’s credit rating from AAA to AA+”. The VIX, Wall Street’s so-called fear index, had a dramatic spike on the following Monday, with the end result being a 634-point loss.

In the June edition of the Rich Dad newsletter, we discussed fear, and how dramatic drops in very short timeframes can occur when fear sets in. The main point in that article is that for the technical trader, there is no room for emotions like fear and hope. These emotions handicap a professional trader and, at best, limit what a trader can be become. At worst, they can devastate a trader’s capital through poor decisions.

When a trader sticks to their rules and follows their trading plan, days like those that occurred in the past couple of weeks are just another day at the office. When traditional investors are panicking that their 401ks are losing value, and other traders have their face sunk deep into the palms of their hands, the disciplined technical trader is relaxed. Depending on their rules, the disciplined technical trader is either taking only small losses on current positions, sitting out of the action, or actually making decent profits as the deadlines scream panic.

The reason traders who are adept at technical analysis can be so relaxed is that they have a trading plan. No matter what the market throws at them, they have trades they can make and tools and techniques that allow them to increase their chances of success. The foundation of many trader’s trading plan is what is known as the 5 Ts of Trading

The 5 Ts of Trading

The 5 Ts of trading is a way of organizing and categorizing knowledge as you learn to successfully trade. The 5 Ts are as follows:

Trade Identification
Trade Triggers
Trade Targets
Tradable Instruments
Trade Management

Systematically going through each of the 5 Ts as you make trades takes the emotion out of trading. While others are frantic, the trader who applies the 5 Ts can carefully apply his/her knowledge and experience to the trade at hand, and increase the probability of success, no matter what the market may be doing.

Trade Identification – What to Trade & How to Find It

Most people who participate in the markets know one way to trade—they buy stocks. The problem with this should be self evident, but if we want to put a kind spin on this approach, we can simply say that this limits a traders potential. The market can be up, down, or in a holding pattern and trading sideways for long periods of time. Those adept at technical analysis can identify through trends, support and resistance, pivots, candlestick patterns, and other indicators what the chart is showing, and make the correct trade based on the trade set up. Stocks trending up may be primed for a bullish breakout, or may have a pattern that indicates a bullish retracement. Stocks trending downward may be set up for a bearish breakdown or bearish retracement. A stock in a holding pattern may be in a prime set up for a covered call.

Regardless of what the market is doing, you should be well versed in your trading approaches to know what trade to do. When others are panicking, you may have prime set ups and profit opportunities.

Triggers – Your Call to Action

Emotion often appears when traders are about to or want to make a trade. Caught up in the surety of what they think will happen, they enter the trade based on hope, and then sit back and watch the results. Please don’t ever do this.

As a student of technical analysis, you should only enter trades when an event that occurs on a chart materializes. This is your trigger. A trigger can take many forms, depending on the trade setup. In the case of a breakout, it can be when a certain price point is hit. It can also manifest itself in the formation or failure of pivots, through pattern confirmation, and candlestick formations. Depending on the type of trade you are doing and your personal rules, the moment you enter the trade is when the corresponding technical event happens. Not when you think, or you guess, or when you want to make it trade. The chart will tell you when to enter and that is the moment of entry.

Targets – Reasonable Expectations

The third T is the target point at which we are estimating the stock may hit based on our analysis of the chart. In laymen’s terms, this is the goal of the trade, or what we anticipate the stock hitting (or falling to). Many traders when they enter trades try to hit a home run with every trade. These types of traders soon go back to their day jobs as successful trading is often based on steady success. Home runs do occasionally happen, and there are ways to manage trades that don’t force us to exit a trade immediately upon reaching our target, but we should try to have reasonable expectations when we initially choose the target of our trade.

Trade Management – Manage and Divert Risk

The fourth T—trade management—is what allows traders to sleep soundly at night. Successful traders know their risk tolerance and allocate their funds for each trade accordingly. Gamblers risk it all, while those who succeed in the long term never put so much of their trading funds on one trade to adversely affect them.

A key part of trade management also involves the use of stops. The first, second, and third rule of every trade should be the use of a stop. Nobody likes to lose on any trade, but losing trades do occur. The worst thing that can happen is for the trader to chase their money hoping the trade will turn around. This is the worst situation to be in for a stop to kick in, the fundamental analysis that made the trade appealing has now disappeared and you are truly gambling.

The fifth T—tradable instrument—relates directly to trade management. Whether you choose to purchase stocks or use options or other instruments often is tied directly into your risk tolerance.

Rich Dads Education’s Master Trader course goes over the 5 Ts in detail and applies them to numerous trade setups that can occur. For the next four months of the Rich Dad newsletter, we will go over each of these areas in detail. In the mean time, remember to maintain discipline and follow your personal rules. While the VIX might have hit a 52- week high, your own personal VIX should remain nice and steady.

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Across the country, professional and amateur athletes are in the midst of football camps in preparation for their upcoming seasons. While August may be the dog days for baseball, for football, they are a time for preparation when new offenses are installed, new plays and terminology are taught, and game plans are created for the upcoming season. In conjunction with physical workouts, how coaches approach this intense learning period is crucial for how their teams will perform in the early season.

Even before camps start, most teams have some sort of playbook that they distribute to their players months before training camps begin. Knowing the playbook is expected of athletes as knowledge of the various formations and player assignments helps maximize the time once camp begins. No matter how well designed the playbook is, however, and no matter how hard the athlete studies, every coach will tell you that no team truly starts to come together until training camp is well underway.

The plain and simple reason for this is it is difficult to truly become adept at anything through simply studying it. A player may feel that he knows play XYZ, but until he has run the pattern time and time again, he may not feel comfortable enough to fully maximize his potential. For this reason during training camp, a coach may have a team run a play over and over and over again until he feels that they are starting to get it. Sometimes coaches will install minimal plays at the start and just practice those plays with the belief that it is better to be good at the few plays they know then to be mediocre at numerous plays they only marginally know.

For example, last year, the Chicago Bears installed a new offense. Wide receiver Devin Hester said he spent up to 70 percent of his pre-snap thoughts simply thinking what his assignment was on that play. This was valuable time not spent reading the defense in an effort to maximize the plays potential. This wasn't some scrub talking either. This is coming from a future hall-of-famer, who had spent the better part of six months preparing for those plays. A year later, after endless repetitions in the off season and countless hours, Hester now says he spends zero percent thinking about his assignment and 100 percent of his time reading the defense. This helps demonstrate the power of repetition and should get Bears fans excited for the coming year as well.

Repetition and the Financial Markets

Students new to the financial markets can understand the basics of technical analysis, but if they are new to online trading, may become very intimidated with the process. When students call the hotline, some of the most frequent questions are procedural questions, such as how do I place my order with a stop? After a few times of entering a stop, it becomes second nature to them.

More complex problems in financial markets trading are not answered so easily. Successful trading requires the ability to read charts, analyze data, identify correctly entry and potential exit points, and apply proper trade management. Even the most studious individual can gain a lot simply by studying material in a book. Fortunately, they don't have to learn through the school of hard knocks to gain experience.

There are numerous free-to-use virtual trading tools available from most online brokers. If you are new to trading, feel uncomfortable, or had a few trades not go as expected, then think of virtual trading as your training camp. Much like training camp, you likely have plays that you want to master. They may be breakouts, covered calls, retracements, or straddles, but you likely have numerous plays that you want to learn. There is no quick way to become an expert at these plays. However, if you are willing to put in the work and everyday enter virtual trades, then you will find yourself becoming more and more comfortable with the process. You are also likely to identify things you may be doing wrong without having to pay for the experience through making the mistake on a live trade.

There may be the temptation to exit your virtual practice field prematurely after a few of your trades would have resulted in winning trades. At some time you will have to leave the virtual practice field, but only do so once you start to be able to go through the whole process of the trade instinctively reading the chart correctly.

Real Estate Investing and Repetition

There is not the equivalent of the virtual trading room for real estate investors. That does not diminish, however, the powerful effect that repetition and practice can have in many aspects of the real estate arena. One of the most powerful of these areas is practicing the art of negotiation.

If you are a private investor looking for motivated sellers, at some point you are going to have to sit down and have a conversation about what they are willing to sell for. For a lot of people who have never done this before, price negotiation can create a great deal of apprehension. The majority of apprehension comes from the fact that the new real estate investor simply doesn't feel prepared for all of the many questions or objections that the seller may have.

You may feel silly practicing negotiating with yourself, but it can be a tremendously useful experience. Practice your opening over and over until it feels like you are having a natural conversation. Then practice your initial questions, and do a bit of role playing and come up with objections or questions on the other side. Practice how you would respond to those objections or questions, and then go over it again and again and again. Ask those with experience for advice on what you might expect in those first meetings, and then dive in and get some real-life experience by talking to home buyers. Unlike stock trading, you can't lose any money simply be hearing no, and this type of practice can be done just about anywhere, anyplace.

Practice is usually not as fun as the real thing, but is a necessary component to succeeding. Athletes have training camps, and spends months in practice and preparation for just a few hours on the field. For those that trade in the financial markets and invest in real estate, there will come a time when practice becomes obsolete in your newfound professions. Until that time, utilize your spare time as much as possible to get in those extra reps.

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