Highlights from the Dave Ramsey Show

QUESTION: Jennifer in San Francisco says the real estate market where she lives is frenzied. She doesn't want to overpay or get caught up in the frenzy. What's the best way to navigate this kind of real estate market?

ANSWER: One is you have to steel yourself against the frustration of finding something you want and then missing it because somebody goes crazy. If somebody goes crazy, you just have to let them go crazy. You can't participate in crazy. What that creates is frustration and disappointment on your part, and you've got to steel yourself against that because that's the only way you don't jump in and participate in crazy. You become one of them.

From a practical standpoint, what we do when we're buying almost any property—whether in that environment or any other environment because what we're aiming to do as an investor is we're trying to buy something well below market, and we don't want other people involved in the transaction to go tell their friend who gets it at $5,000 more than we offered because we're getting a deal—we put a fuse on the offer. The offer is good for only 24 hours, until 5:30 Tuesday night, or 6:30 PM on Wednesday—whatever. If they don't get back to us, we just tell them the offer is no good. We tell the real estate agent on the other side this is a limited, one-time deal, and if you don't take it, we're going to move on.

What happens sometimes is you get shopped, meaning that three people looked at the house that day, so the seller's all excited and the listing agent is all excited, and then you put in an offer. They kind of want to stand around on one foot and on the other to see if another offer comes in that's better than yours. That's called shopping your offer. Or worse than that, they do something unethical like saying, "These people have this offer at this price," and they start calling the other agent that did the other showing saying, "Hey, I got an offer of $X, so if you're getting in an offer, you need to put in one today because they're right here, and I've got to take that offer over there." They start playing, using your offer to get the seller a better price. I don't want to be used as a tool that way. Instead, I want them to take my offer or not, so I put a short enough fuse on it that it doesn't give them a lot of time to do that.

Just because people are going crazy does not mean you need to. You'll find something. It's not like you're not ever going to buy a house because of this environment. That's just not the case. It's going to take you a while, and you've just got to find a situation that has some peace about it, some sanity about it, instead of you going in and paying 120% of value.

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Question: Diane in Michigan and her husband bought a hotel for $475,000 at 10% interest on a land contract 10 years ago. Two years into it, they decided to refinance through a bank, but the owners objected, so they lowered the interest rate. Diane gets the deed in three more years with $90,000 left on this hotel. Dave tells Diane to go get a loan today and get out of this.

Answer: They basically bullied you, you dropped it to the 6% interest rate, and stayed with them on a land contract, which you should not have done. Now you've gotten yourself into a mess, I'm guessing.

I'm confused how you're hurting them by giving them money that you owe them. You're not causing old people to not be able to eat. That's ridiculous. Let me tell you what's real scary here. What's real scary is you guys have paid a bazillion dollars for this deal—hundreds of thousands of dollars—and you don't even have the freaking deed because you did a stupid land contract. If they die or they get hit by a car or they hit somebody with their car and they get sued and get a $500,000 judgment lien against them or against their estate, you're not going to get title to this. You're so vulnerable it's unbelievable. You need to go get a bank loan today and pay them off in full.

You've gotten by so far by the skin of your teeth. A land contract is the most dangerous way to buy anything for the buyer because anything the seller does to screw up the title keeps you from ever getting the title. They could do something that they didn't even mean to do. They're a sweet old couple. They're not going to do it on purpose, but there are a lot of people who don't do things on purpose who are stupid or that have bad things happen to them.

Let's just pretend he falls asleep at the wheel and swerves over on the other side, hits somebody head on, and gets a $500,000 or $5 million judgment lien against him for vehicular manslaughter. You lost your hotel. You don't own the hotel—he does. When that judgment lien goes down against him, it goes against him at the courthouse. It clouds the title. You'll never get the deed. Bad, bad, bad deal is what land contracts are. I'm going crazy here because I'm scared for you. I'm not fussing at you. And you're not harming them.

I won't tell you to do things that harm people. If you hand them a check for $90,000, that somehow keeps them from eating? No, it doesn't. They can go see their mutual fund broker and put it in a good balanced mutual fund, or they can buy a little piece of real estate with it that creates a rental income. They could put it in a CD and make nothing on it—whatever they want to do, but it's their choice. It's their money. They have $90,000. Surely they can figure out a way to buy a sandwich. No, you're not cheating them. And I appreciate your husband's kind concern for them, but you guys are extremely vulnerable. This is a very scary situation. It doesn't screw up their life when you hand them a check for $90,000. Defaulting on it might screw up their life, but you're paying them. That would be a legitimate thing then because they're not getting their money, but in this case, they're getting their money. They've got no gripe.

My suggestion is that you involve the son or the daughter whose judgment they trust, and they can walk them through the emotions of how to deal with this $90,000 check you're getting ready to hand them—just as a kindness to these people. They apparently can't grasp themselves how they're going to be okay if you pay them off. All they need to do is sit down with a decent broker of some kind. What we're trying to accomplish here is not tough and definitely not in any stretch of the imagination cheating them. You just maybe need to have somebody in their family help them walk through the emotions of this because they've got this thing stuck in their heads in one way, and it's just not going to be that way anymore. They need to hand you a deed, and they need to do it right now while you can still get a clean deed.

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Question: A Twitter listener asks Dave what his evaluation criteria are when buying rental property.

Answer: Generally, on all real estate, I am trying to buy at less than 70% of value, depending on what it is. I try to figure out what it's worth today in its current condition, not what I wish it was worth.

With a bigger property or something that is a project and going to take a while, then I won't give that much for it. But a simple house or a rental house that I can fill up pretty quickly and it's $200,000, I'll buy it for $140,000 or $150,000 or somewhere in there. We buy a lot of foreclosures and bank properties. They often need a little tender loving care after we buy them. The main criteria I have is to get a deal on it.

The second thing is that I don't want to deal with trash. I used to own a lot of very low-income stuff when I was doing real estate in my 20s. It's not that I'm a snob, I just don't want to deal with all that drama for a small amount of money. I'm looking for a good solid neighborhood that is increasing in value. I'd like for it to be within a county or two of where we are. I want to be able to drive by it every so often.

If I do those two things, everything generally works out. I also like to see what it will rent for versus what I paid for it. I like to see a return on investment, but that's a little bit secondary to getting a great deal and it being in a good, solid location.

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