"The power of accurate observation is commonly called cynicism by those who have not got it."

Have you ever seen those ads in the paper advertising amazing wealth building seminars? "How I Made Ten Million in 5 Years and You Can Too!" and "Investment Secrets of the Super Rich".

Of course you have, because there are a dozen of these in every single weekend newspaper. They are very very popular at the moment, not to mention the "free" ones that get pushed through small ads and telemarketers.

Real estate seems to be a popular theme, in particular how you can buy real estate with "creative finance". What you have to understand is that "creative finance" is the real estate twin of "creative accounting", ie tweaking the company books to show whatever result you desire. Substitute the word "Dishonest" for "Creative" and you'll get it.

Why is real estate so popular? Well for starters people "understand" real estate and think it has no risk. Unlike shares which go up and down a lot and frighten people, real estate is comfortable and solid and real. Most real estate investors claim to have extensive knowledge of how real estate works, calling on years of experience spent in and around buildings.

The common sales pitch is "because of the tax deductions you can get a house by having the tax man pay 45%, the tenant 50% and you 5%." This pitch is compelling to the financially inept person, but breaks down under scrutiny. First of all claiming tax deductions by making a loss is not necessarily good business, although you do pay less tax, you are losing money to do so. A rational investor wants to make more money after tax, not make less money and hence pay less tax. As for the tenant paying for the place, the same argument can be made for any investment (including bonds and shares) that produces some sort of income, a share can pay for itself with dividends as well. As for the bit about you paying 5%, just redo the calculations while taking into account accounting fees, strata title fees, insurance and all the rest, using realistic numbers this time. Direct real estate is the most expensive investment, especially when you borrow the full amount.

What is "creative finance"? Well there are a number of different approaches, but the most popular, especially since Robert Kiyosaki talks about it so much in those "Rich Dad, Poor Dad" books is the lease option.

The way a lease option works goes like this: instead of buying a house, you "control" it. In particular you control the right to sell it, without actually buying it first. You basically rent the place with an option to buy it at some time in the future. Instead of moving in you get some other guy to move in and he can pay you rent instead. You then get the guy to buy the house. If he is willing to buy the house for more than the purchase price of your option, you exercise your purchase right on the house and then immediately sell it to the other guy, making a supposedly fat, instantaneous, risk-free profit, all without you having to borrow any money.

Sounds interesting doesn't it? If you could make that work it is definitely a great way to go, and anyone who has read a Kiyosaki book or been to any real estate web site that talks about "creative finance" will be really excited and ready to go out and "buy" and "sell" property in this way. Kiyosaki claims to make vast sums of money like this, and it is a typical example of some of the "what the rich teach their kids that the poor don't" ideas that you learn in the "Not a how-to real estate book, just a general text on wealth" Rich Dad books.

Problems? Well, in the real world not many people will agree to do a lease option, not residential property owners anyway. That itself is a formidable obstacle that would spear the real estate millionaire hopes of most people. But it gets worse.

Just say you do get someone to approve a lease option, they would have to be relatively sophisticated to start with because not too many ordinary types would be willing to go into something as confusing as this. In general they would prefer to sell for cash and be done with it, taking an alternative offer instead of going for the weird one.

Someone selling their house that would be willing to accept a lease option instead of a cash sale is probably already a real estate investor. They would be able to figure out how a lease option works and will either 1) charge you a much higher level of rent than market levels, none of which you get back if you don't exercise the option to buy and/or 2) set the buy price way above present market levels.

Now presumably, if some real estate investor has been trying to sell his place he knows a certain amount about market values in this area, and unless you really got him on the first day of listing and got him to sign straight away, he'll either have offers ... or no offers, because the market is slow.

So for starters you are going to be paying a very high level of rent, which certainly is not a risk-free investment, you could pay a fortune if you don't have a ready buyer. Following that is the purchase price, you're gambling on a pretty serious improvement in local real estate market conditions. Most lease options, like most puts and calls on the stock and futures markets, expire worthless because the price of the asset never reached the price of the option.

Kiyosaki also glosses over the problems with getting your own buyer. In these books, as in all the dodgy real estate seminars and info there is always someone wanting to buy off you. There is a never-ending supply of cashed up buyers willing to buy your property, and if you are Robert Kiyosaki you have a long list of these guys and they are ready to buy your lease optioned properties as soon as you show them. These guys don't know much about the local market and it is assumed that they won't be looking at the place for sale across the road which hasn't had a real estate speculator mark up the price with an option and is probably much cheaper.

If you have a long list of clients ready to buy properties off you, might I suggest a much less risky way of making a profit on all these sales would be to become a real estate agent instead. The idea of lease options is inherently kooky as it depends on so many miracles lining up. If you've ever played Kiyosaki's board game you'll see that these miracles are taken for granted.

What you have to understand is that lease options are really the "covered call" of the real estate world. A covered call is an option you can write for extra income on your shares. You sell the call and if the shares don't go up in price above the strike price before the option expires you keep the option premium. If your share goes above that price you are forced to sell the shares to the option buyer at the strike price, so then the option buyer can sell them at market while buying for the cheaper strike price.

Landlords wanting to make an extra buck can offer lease options. They don't happen much in Australia and you may have trouble finding a lawyer who writes them, but if you are a real estate investor and want to increase your income you can sell a lease option, thus being able to charge a very high rent on the place. The vast majority of tenants who buy a lease option off you won't be able to afford the property when the option expires, or the property won't be worth as much as the option strike price so it is worthless. You have just profited from the dashed home-ownership dreams of your tenants.

I have an ethical problem with this as those who buy lease options do so because they have trouble securing finance to purchase by other means. As in all likelihood the option will expire worthless you are entering into this transaction fully aware that someone who is desperate to own their own home is now even poorer because they came out second best in a deal with you.

Business is about finding a need and filling it. If there are a lot of sub standard houses around a real estate investor can make a lot of money fixing them up and selling for a profit. What need do lease options fill? They fill a need for people who can't get finance to become an owner by entering through a back-door to ownership. Because it is unlikely they will actually be able to buy the house off you after all, thanks to "creative finance" people, they now may never get that house.

What other crap is taught at these things? Well if you don't want to use lease options there are other tricks. "Vendor Finance" is one. The bank isn't going to lend you 100% of the value of the property, you'll need a deposit, or equity in your own home or equity in the rest of your investment portfolio. How do you get a deposit if you have no money and no home or equity? One lateral thinking type of alternative is to get the home seller to provide the deposit! Vendor financing means getting the vendor to pay the deposit for you and the bank to pay the rest, in turn you pay the vendor back as a second mortgage.

Problems?

1. It isn't safe to borrow 100% of the value of a property. Banks realise this after hundreds of years of lending people money, unless someone has serious assets to back up their loans the bank is going to lose money. They are protecting aggressive speculators from themselves, knowing that people that borrow 100% of the value of a property tend to go broke eventually, if not this property then their next one, or the next one.

2. The vendor is unlikely to go with your scheme unless the rate of interest you pay is very high. Kiyosaki fans, stuck on the concept of "cash flow" as the central, single most important factor in investment will realise that it is very hard getting positive cash flow on most ordinary deals, a 100% borrowing deal is even harder, a 100% borrowing with really high interest is simply going to be impossible. Ask the guru how many houses they have actually bought with vendor financing, it will be very hard.

3. This is cheating the banks, to claim that money from the vendor is your own deposit is to lie when applying for a loan. You can go to prison for this. Banks aren't being "greedy" when they disallow this, as many seminar gurus claim, they are being prudent. If you think 100% loans are a good idea I suggest you offer them yourself when you do finally get your millions. You'll be able to charge a high rate of interest to all the real estate seminar attendees and you'll have the market to yourself. Just see how long you last in the loans business.

4. Relies ultimately on swindling the vendor, or the bank, or both. You are not going to make any money on this deal unless you get really good terms from a private lender. These terms would have to be a lot better than the terms offered by a bank. If a person is willing to take below commercial returns from an above average risk then they are simply being swindled. There is nothing more to it than that, you are taking advantage of someone, ripping them off. This is ethically very similar to purse snatching.

There are still more "creative finance" techniques taught, and all of them are dishonest in some way. You are lying and cheating and pillaging and stealing. There is really nothing more to creative finance than that.

Real estate seminars rely on this stuff to justify their high prices. You'd be pretty pissed if you went in there and they taught you plain old ordinary material like home equity loans and renovation, you need something exciting, something new and innovative and "clever" to justify paying $1,000 a ticket. Because of this "creative finance" is common at these seminars, it is sophisticated and advanced and is the sort of thing punters will pay to hear.

In summary, the "zero down" techniques taught at these seminars don't work commercially because deals done in this way lead to heavy negative cash flow, paying too much for a property, involve some sort of fraud or are too complex and impractical to work outside of the theoretical examples given by seminar gurus.

Other seminars are sales pitches for trading software, usually black boxes.

Are there any good seminars out there? Sure there are, usually they are given by reputable people with an investment license, including financial planners and stock brokers. I suppose there are probably some good real estate seminars out there too given by proper real estate agents, I just haven't come across one yet in real life.

The trouble is, the genuine seminars can't compete with the dodgy ones! As a financial planner I tell people to expect single digit returns because the stock market has returned only about 6% above inflation over the long term. I tell them that property produces pretty respectable returns if you include rent and capital growth together, but growth in prices is nothing too exciting as in the long term it is likely to exceed inflation only in special locations with a rarity value or substantial improvements in their character. How dull! Why listen to a financial planner when you can go to a Robert Kiyosaki show and be told you can make millions without risk by using lease options? Why listen to an ASX lecture on blue chip stocks when you can go to a "beginner's trading seminar" that claims you'll make the $15,000 purchase price of their black box trading software back in a couple of months, transforming you quickly and without effort into a flamboyant, mega wealthy day-trader.

People don't want to hear about superannuation recontribution strategies to maximise the deductible amount on their retirement income stream and save them tax on a super pension. (Even if that strategy does save you $10,000 in income tax over several years from your retirement). This is boring, and complicated. People don't want complicated answers, they want "easy" answers, ways to make big bucks without having to consult an expert and pay professional fees. They want to know how you can make millions, and pay no tax while they are making them. Bullish forecasts of stock and real estate growth, combined with contrived theoretical examples that show how wealthy you'll become are much more appealing.

I'd seriously love to get into the seminars game, and maybe one day I will, but I'll be damned if I'm going to turn out this crap! I doubt I'll ever make much of an impression though, I'll never have the showmanship or the ethical flexibility to put on a really good show and be able to charge 1,000 attendees $500 each for a two day seminar. Kiyosaki never had any money at all until he made a fortune on his Rich Dad books, after which he was able to charge as much as $12,000US (per attendee) for his seminars in Hawaii, and make vast amounts for speaking fees or promoting his roadshows. (One free tip: whatever you do, don't send in the voucher in Rich Dad, Poor Dad to get their free booklet or info pack or whatever it was, and don't call their hot-line. You'll just get subscribed to their mailing list for Kiyosaki roadshows, they don't actually send you anything good at all, just "Pow Wow News", the official Kiyosaki glossy junk mail.)