In the world of get rich quick eBay programs and mentoring proposals, a word gets dropped a lot that bears a few lines of discussion; OPM or Other Peoples money. What exactly is OPM? The idea as presented by those offering mentoring services is that you can take a credit card, which you are fully responsible for, and charge up several thousand dollars to pay for their service. Their concept is that by leveraging the bank’s money to use their service (which they offer a guarantee of some sort that you will make your money back in 3-6 months) you’re not using your hard earned money, but rather the banks money to accomplish getting your ‘money making’ business off the ground. In my eyes, and the eyes of many, basically you are getting a loan and you are fully responsible for the payment of it. This is not really OPM in the truest sense of how it has been practiced for many years. Do their programs work? Can’t say. Would have to risk several thousand dollars just to find out. And there are many such businesses out there, so just which one do you pick (We’ll talk later about how to investigate various services).
Back to OPM. What exactly is OPM in the truest sense of practice? I suppose OPM has probably been around in some form since ancient times, however in recent decades OPM is a method employed by real estate investors to leverage the money of a lender to make improvements on a property of interest, although there are many legitimate uses by business of OPM. Once the improvements have been made, the property is sold at a profit. Here’s an example:
Investor Bill deals in real estate from time to time, but wants to make some extra bucks. Bill does a considerable amount of research to determine various property values in several neighborhoods throughout his community. On day a home comes up for sale at what seems like a great price, in an area Bill has not investigated. Bill researches the values and determines that even though the price appears good, for homes in that neighborhood it would have to be in pretty good condition to make a profit on. Bill tours the home and decides that having to do $10,000 worth of repairs to various parts of the property and home does not make it a good deal.
Bill hears about a second property that will be put up for sale soon. It is in a neighborhood that Bill has already researched values on and the rumored price of $125K appears to be a steal. Let’s say that homes in this area typically sell for $190K or more. Bill either waits for it to come on the market, or contacts the owner ahead of time, and tours the home making note of the cost of repairs. Bill estimates that it will cost him $20K in repairs making the home investment cost around $145K. Here’s where OPM comes into play. Bill creates a proposal, contacts a lender and proposes borrowing $145K, showing the house is worth $190K. The lender will likely approve Bill’s proposal since they typically require 10%-20% down on a property purchase, which at 20% means the max amount of Bill’s loan could be is $152K. Bill makes the necessary repairs, lists the house for $195K and sells it at a nice profit ($50K).
So where is the OPM in this example? Bill used the banks money to:
- Pay for the property &
- Pay for all improvements
When does it become NOT OPM? If Bill fails to sell the property, however, in this example, Bill did the upfront research, prepared a proposal showing that the property with improvements would be worth considerably more than the proposed investment, and Bill weighed the risks associated with real estate sales timing. If all those factors point to a positive situation, then Bill has achieved success with this property.