Articles of Interest
Disclaimer
Dec. 2007: MIRED IN A MONEY CRISIS
The U.S., and most of the world, is currently in a money crisis. A money crisis occurs when money is in short supply. However, this money crisis is not a result of a scarcity of dollars being printed, rather that of banks being unwilling to lend their precious money out to borrowers, as they feel the need to keep it for themselves. When banks don’t lend money to borrowers, business and spending contract, thus leading to a recession. In fact, central banks fear any type of money crisis, because it means they are losing control over the economy. Our current money crisis is based on credit or lending, which is why some people refer to our situation as a ‘credit crisis’.
In most cases, our Federal Reserve can pump liquidity into our financial system by simply lowering interest rates, thus allowing banks to pass that interest rate savings onto borrowers. In addition, lending standards tend to be less stringent when the cost of money is low, all of which adds to liquidity. Think of liquidity as a situation when lots of money is available at low cost. But the Federal Reserve didn’t count on banks increasing their lending requirements, thus lowering liquidity.
It’s quite difficult to force an institution to loan money. Our banks don’t even trust other banks, let alone businesses and individuals. The banks know that there are huge losses about to surface from risky ‘over the counter’ type transactions that are not controlled or monitored by a brokerage system. These transactions include ‘collateralized debt obligations’ and some ‘derivatives’. There is no way to determine the actual value of these so called investments that were based on bad debt, and now they are unwinding (decreasing in value) so fast everyone is scrambling for cash to cover their losses. The actual losses are in the trillions of dollars, and nobody knows who is hiding the most corpses (exposed to the most losses), so the banks don’t want to lend money to anybody out of fear they won’t be paid back.
How does this relate to real estate? If banks don’t want to lend money to other banks, they surely don’t want to create a loan that they can’t sell on the secondary market. We are now in a vicious cycle of increasing housing inventory leading to reduced values leading to increased lending standards leading to reduced mortgage originations thus leading to more increasing housing inventory. Our advice is to stay away from real estate unless you can buy it and achieve positive monthly cash flow. When we get closer to the bottom, we will let you know. At that time, we should be able to buy using ‘seller financing’ to our advantage.
Nov. 2007: THE FEDERAL RESERVE AND THE U.S. DEFICIT
Our government started the new budget year with an October deficit of a whopping $55.6 billion, which is 12.6 percent higher than it was last year at this time. Yet our Congressional Budget Office is forecasting that the budget deficit for the entire fiscal year of 2008 will be less than last year, which was $162.8 billion. How can that be! We have eleven more months in the 2008 fiscal year and a so called war in Iraq that is not going away.
Our government claims that there will be faster growth in revenues than in spending over the next few years. In fact, the Bush administration says the country is on track to accomplishing the president’s goal of eliminating the budget deficit by 2012. I guess they forgot about the impending retirement of 78 million baby boomers, which will increase the cost of Social Security and health care. They say our economy is expanding, but all they are doing is printing more currency.
I’ll let you folks in on a little secret. The federal income tax system was designed right around the time the Federal Reserve received its charter as a private corporation in 1913 to completely control our money supply. (Before that the production of our money supply was controlled by the government’s Treasury Department) The purpose of federal income tax is to guarantee payment of the bond interest to the Federal Reserve for authorizing the printing of U.S. dollars. Pretty clever, huh! Our government’s income tax revenue is not used to reduce the budget deficit because it’s all spent on paying bond interest. We can’t balance the budget, because our whole economic system is based on DEBT. In addition, if we had a balanced budget, then there would be no required interest to pay the Federal Reserve. We can talk about balancing the budget, but right now the U.S. is being run like the worst business in history. Even the creation of our money supply is based on DEBT. Everyone from our government, to our citizens, to our corporations are in DEBT, which is being financed by other countries, again through bonds. How much longer are these countries going to finance our debt orgy? Probably for a few more years, but the beginning of the end has started, judging from the recent breakdown of the U.S. dollar index below multi-decade support of 80.
The Federal Reserve, a for-profit corporation, receives government backed bonds in exchange for the production of money that’s not even their’s. The Federal Reserve has the power to increase money supply, thus leading to price inflation, or to reduce money supply, thus leading to deflation and all previous depressions. (Stock market collapses are just an excuse fed to the uninformed as to the cause of depressions) They (The Federal Reserve) have more power than any opposing army could ever imagine. Until we fix our system of money supply and return the monetary power to all the people, i.e. The Treasury Department, it looks like the Federal Reserve will continue to dilute our purchasing power until the people ask for a new currency, the AMERO, again controlled by the Federal Reserve. The other option is for the Federal Reserve and the other international bankers to plunge the world into another depression. During a depression, wealth in transferred from the many to the few. The international bankers had their chance after 911 and the last stock market crash, so it is looking less likely that they want a depression. I guess they have enough wealth?
Oct. 2007: IT’S FAR WORSE THAN YOU THINK
The real estate market and our U.S. economy are in much worse shape than the new media wants you to believe. The ‘Don’t Worry, Be Happy’ crowd are telling us that all is well and our current financial crisis is under control. Local and national real estate experts are telling us that the market is just about at the bottom of a downturn they couldn’t even predict and denied all along. The average American believes that after the next presidential election, everything will get fixed. Nothing could be further from the truth.
The U.S. economy is in dire straights as a result of ridiculously low interest rates and excessive production of our currency. Low interest rates a few years ago delayed the inevitable economic collapse that follows all bubble stock market collapses, from occurring. Yet the low interest rates created another market bubble, namely real estate. Now that the real estate bubble is bursting, the powers that be have no choice but to print more money to avoid an economic meltdown, but all they are doing is delaying and worsening the fateful outcome. As we print more money, the intrinsic value of our dollar declines, resulting in price inflation. Add to that our credit card crisis, where the average American cannot keep up with their credit card debt because they can’t go to their ‘House ATM’ to pull out money. Both the average consumer and the U.S. government are swimming in a sea of debt that is only getting worse.
"And to preserve their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude." - Thomas Jefferson
Now let’s add that foreign powers, which are not our friends, hold billions of dollars worth of U.S. bonds that would have the same effect as an economic nuclear bomb if they decided to cash them in. Finally, we have both public and private pension plans that are grossly under funded today, which will only get worse as millions of baby boomers enter retirement in a few years.
How does all this end? Usually, markets re-align themselves using a process called a ‘corporate correction.’ A corporate correction is when the producer lays off employees, restructures, and reduces prices in order to produce a fairly quick turn around. We have seen this occur time and time again. This time though, a corporate correction is not going to solve our problems, and we’re going to see a much longer term ‘consumer correction.’ In a consumer correction the average citizen slowly realizes they can no longer spend money frivolously and must begin saving. The result will be a prolonged recession followed by a depression. During this entire process, a new superpower will replace the dominance the U.S. has held since World War II, and that superpower is China. Just watch what happens at next years summer Olympic Games.
Up until now, if the U.S. had a cough, the world got a cold. We believed that the world needed our consumers to buy their products, and we became runaway consumers of global resources. Now the Asian consumer numbers have reached critical mass, and they have created a market that is large enough to survive when we take the fall.
"The trouble with ignorance is that it picks up confidence as it goes along." - Arnold Glasgow
Folks, I don’t like this either, but I feel it is my mission in life to provide you the facts so you at least have a fighting chance at survival. Here is what you need to do:
- Convert your useless and depreciating dollars into commodities, especially precious metals
- Get out of the U.S. stock market and into Asian stock markets
- Start saving now so you can buy other people’s assets when they panic
- Accept the fact that our real estate market is going to keep going down for another two years at a minimum. Only buy in areas that are under the national price average and where you can achieve positive cash flow.
- Protect your credit score so you can borrow money when others cannot
- Prepare for social upheaval and increasing government oppression. This one gets ugly.
Sept. 2007: GET READY FOR A UNIQUE BUYER’S MARKET
Here are the facts to date:
- Sales of existing homes have fallen in 41 states during the April-June quarter
- Home sales are down 41% in Florida, 37% in Nevada, 23% in Arizona, 21% in both Tennessee and Maryland, and 20% in California
- Home prices are down in one-third of U.S. metropolitan areas
- The current housing slump is the worst in 16 years according to the National Association of Realtors
- The national median sales price is $223,800
- The number of foreclosure filings in the past year has increased 93%
- Nevada has the highest foreclosure rate in the nation with one filing for every 199 households
- Interest-only and negative amortization loans accounted for 23% of all new mortgages in 2006, yet in San Diego the number was 42%, San Francisco was 40%, Los Angeles was 39%, Las Vegas was 38%, San Bernardino and Sacramento was 35%, Naples, Florida was 35%, Phoenix was 34%, and Seattle was 33%
The cleverest of investors will utilize the last statistic in the above list to make a fortune in the coming inflationary/depression the United States has already entered. Don’t expect to be told about this on the local news until well after we come out of this mess. The nine cities mentioned represent the best opportunities to take advantage of a wealth transfer, which is what a depression really amounts to. The trick will be to buy correctly and sell to the students of the ‘late night gurus’ like Carlton Sheets, Russ Whitney, and Robert Allen.
Yes, we are just entering a unique buyer’s market, but that doesn’t mean it will be easy to make money. You see, we are also entering a period of stringent financing standards combined with a secondary mortgage market in the midst of a collapse. Nobody wants to buy mortgage backed securities, which literally defines the secondary mortgage market. With nobody buying mortgage backed securities, lenders are unwilling to provide a mortgage because they will be stuck with the underlying loan until the buyer turns into a seller, which normally takes an average of seven years. So right now, it doesn’t matter what your credit score is, or your income, because few lenders are willing to make a loan with real estate as the collateral.
If you think prices have come down already, you ‘ain’t seen nothin yet.’ In the next one to three years you will see real estate values plummet in select areas by another 40%. Yes, the bottom of this real estate crisis should arrive by 2010, which coincides with the peak in existing mortgage rate adjustments. In the next few years, the average person on the street, i.e. lemmings, will avoid real estate like the plague. That represents a unique opportunity for those that can seize the moment.
You will need CASH to make money in real estate until the bottom hits. Every seller represents a DISTRESSED SELLER, and plenty will sell their homestead for 60 cents on the dollar if they have the equity. If they don’t have the equity, you’re going to have to WAIT UNTIL THE BANKS GET ON BOARD. The banks still think real estate is worth 2006 values, so only the elite real estate investors are going to make money on bank owned property or short sales. Go for the sellers with equity that for some reason have to sell in this market. Buy without a mortgage loan, and then sell to a less sophisticated investor for 80 cents on the dollar. If you can’t sell for whatever reason, rent using a lease/option technique.
We are in the process of starting a business that utilizes the business plan in the preceding paragraph. We are going to begin buying in the Las Vegas area, then move on to other key areas. Guess where those are? Anyway, if you want to get involved, contact our office.
August 2007: REVERSE MORTGAGES AREN’T SO BAD
The lending community is looking for new markets to exploit at a time when their other income steams, like subprime, are running dry. Right now, only two percent of seniors have turned their home equity into cash by taking out a mortgage that pays them, instead of the other way around. Yet we expect the interest in Reverse Mortgage products is going to soar, as the 77 million baby boomers that are about to reach the required minimum age of 62 begin to consider the benefits.
Reverse mortgages are really ‘home-equity conversion loans’ that enable homeowners to convert their equity into tax-free proceeds. The proceeds are tax-free because they arise from a loan. The amount one can receive is based on the age of the youngest owner occupant, the home’s value, and of course, the location of the home. Mobile homes, cooperatives, and investment homes are not eligible. The home must be one’s primary residence and be owned free and clear, i.e. no underlying mortgage or debt of any kind is allowed.
Reverse mortgage borrowers can receive their money in a lump sum, as monthly payments, as a line of credit that can be utilized as needed, or in any combination of the three choices. While interest accrues on the borrowed amount, no payments are necessary until the home is no longer owned by the borrower. That means the loan does not have to be repaid until one sells, moves, or dies. Reverse mortgages are one of the few ways for seniors living in a paid off house and that can’t qualify for a traditional loan to receive money that can increase their quality of life. Sometimes, the difference between a life of misery and a life of fulfilled expectations is a few hundred dollars per month.
We have noticed that both Bank of America and Countrywide Financial have entered the home-equity conversion market in the past few months. They are trying to carve out a piece of market share from the nation’s number one reverse mortgage lender, Wells Fargo. As a result of the renewed competition, seniors can now find reverse mortgage loans with fixed rates, whereas before only adjustable rate loans were available. However, we still advise caution, as the same charlatans who took advantage of subprime borrowers may soon be focusing on unsuspecting elderly homeowners who need to cash out some equity.
July 2007: THE BEST BARGAIN IN VEGAS
While working with an investor client, I came upon a startling revelation concerning the high rise condo-hotel market in Las Vegas that has not hit the newspapers yet. While it’s no secret that the residential real estate market across most of the country is in the midst of a serious correction, did you know that the high rise condo-hotel market in Las Vegas has corrected so fast that the bottom may be here? That’s right, if condo-hotel prices drop any further, there will be a rush of buyers that will prevent the prices from further deterioration.
The high rise condo-hotel market is quite different than the residential real estate market. In fact, you can consider it a cross between a condo rental and a commercial hotel, i.e. a combination of both the residential and commercial markets. A dream goal of many real estate investors is to become an owner on the Las Vegas strip and participate in the hotel business without paying millions of dollars and joining the mafia. Yet anyone with a moderately strong financial statement can become the owner of a strip high rise condo-hotel unit, thus providing the opportunity to share in the success of the Las Vegas tourism business. There is only one slight problem: unless you bought in the early phases of the projects that started in 2003-2004, the purchase price has always resulted in a negative cash flow scenario. That is, until now.
I targeted the high rise condo-hotel with the best location on the strip, the best design, and the best link to an existing and successful hotel: The Residences at MGM Grand. They recently completed building three towers, each with about 500 units. I decided to first speak to a salesperson about a new unit, and much to my surprise he mentioned that if I found a similar unit that was a resale, he could adjust the price accordingly! In that little statement I detected weakness. So I dug a bit further and determined that the 1st tower has been open about one year and there are over 100 units for sale as resales! That’s over 20% of the property! Imagine if you drove down your street and saw a ‘For Sale’ sign every fifth house. But it gets even better. There are NO comparables because there have been NO sales. That means you can name your price.
Now here is the inside scoop on how to make an offer. The disenchanted owners at The Residences at MGM Grand had to pay a 30% down payment, the highest on the strip. While nobody likes to loose money, it’s even worse to show up at the closing table as a seller and write a check. Therefore, one can offer select sellers up to 30% less than what they paid for the property while it was still under construction three years ago. (There are actually units with a strip view on high floors that were bought for $600K where the seller will accept $400K.) Since the transaction involves non-owner occupied property, the buyer will need 20% down. Consider an average rental of $250 per night ($125 for you and $125 for the property manager) and a conservative 80% occupancy (the strip average is 92%), and you will find that the new owner actually cash flows at the expense of the seller that overpaid for the property.
Remember, the builder already got paid for the building and could care less if the units are for sale or not. They do not deteriorate like a single family home just because they are vacant. In addition, the news media has not focused on the astonishing number of condo-hotel resales. There has only been one article on the subject, and it stated that ‘many high-rise condos are being put back on the market for resale and, like single-family detached homes, they’re not selling.’ The same article mentioned the ‘So Ho Lofts’ have 70% of their units listed for sale, but it is not a condo-hotel and it is not on the strip. In general, about one-third of high-rise closings this year are showing up for resale the next day on the Multiple Listing Service. But don’t make the same mistake most of the past buyers made; choose your location based on the ability to rent out your unit. People come to Las Vegas for The Strip. Most of the high-rise condos are located off the strip and are NOT condo-hotels, thus contributing to what I call ‘Investor Remorse.’ Finally, this opportunity may or may not get better when Trump’s condo-hotel is completed next year. I expect similar resale numbers, but I don’t expect the price to go below that which results in break even cash flow. I will never forget what one of my financial advisors told me in 2001, “always invest in assets when they are Cheap and Hated.”
June 2007: TAX DEDUCTIBLE MORTGAGE-INSURANCE PREMIUMS
Mortgage-insurance premiums will be tax deductible for the 2007 tax year! For the first time ever, mortgage-insurance premiums on conventional and government loans can be ‘written off’ on your 2007 tax return, but it won’t be a dollar-for-dollar write-off. Remember that ‘Private Mortgage Insurance’ (PMI) is required by lenders willing to allow borrowers to put up less than 20 percent of the purchase price or appraised value, which is how almost everybody buys a house. Sometimes it’s better to take out two loans; a primary mortgage at 80% and a second mortgage at 20%, which both have tax deductible interest, but the closing costs are higher and the second mortgage cannot be cancelled like PMI.
Like mortgage interest, the mortgage-insurance tax deduction will be based on your tax bracket however, your adjusted gross income (AGI) will have to be $100,000 or less for the full deduction. Another caveat is the write-off applies only to mortgages on a principal residence and one vacation property, not investor or non-owner occupied loans. (Well, that’s better than nothing for us investors with a vacation property) In addition, the deduction applies to refinances only up to the original loan amount, yet there is no loan limit.
All in all, if the write-off is extended beyond the 2007 trial year period, it should help first time buyers justify making their first purchase. This deduction, even though it is small, can only help our currently sinking housing market. Make sure you take advantage of this deduction, especially if you are purchasing a property this year.
May 2007: BAILOUT PLAN
In an effort to help homeowners keep their homes, federal bank regulators are calling on lenders to work with distressed borrowers that are unable to meet their mortgage payments. In addition, the heads of Fannie Mae and Freddie Mac said they are developing new types of loans, part of the ‘HomeStay’ program, to aid homeowners approaching default. The Federal Reserve is encouraging financial institutions to extend flexible terms to struggling homeowners, namely 40 year mortgages. Key Senate Democrats are asking for hundreds of millions of dollars of new federal aid, but that will only save a fraction of the borrowers. The Federal Housing Administration may develop a ‘rescue fund’ to refinance mortgages in danger of default. It won’t be enough. Consumers are being told that prudent workout arrangements are in the best interest of all involved parties. Lending institutions are being told that they will not face regulatory penalties if they pursue reasonable workout arrangements with borrowers. So what is really happening, and why?
Let’s start with our friends, the news media. They want to blame subprime mortgages for the housing meltdown (refer to last month’s feature article). While subprime lending is a piece to the puzzle, their scapegoat status is only partially deserved. This all goes back to a former Federal Reserve chairman named Alan Greenspan, who in an effort to avert a financial collapse reduced the federal funds rate to 1.0 percent. The ensuing easy money policy had the effect of transforming the stock bubble of the 1990’s into a real estate bubble. Like all bubbles, they can never be sustained beyond a typical market cycle, and the eventual collapse catches most people by surprise. This time the victims are over zealous real estate investors and ‘renters turned homeowners’ that have no business owning a home. Though we are taught by the late night gurus that banks don’t know what they are doing when it comes to real estate, they actually know exactly what they are doing because they control the system. Yet this time, the banks may also become a victim of excessive loan defaults. It is this fear of a foreclosure lead banking collapse that is forcing federal bank regulators to develop a ‘Bailout Plan.’
This ‘Bailout Plan’ is supposed to include loan restructuring that will magically transform a struggling homeowner into good standing and improve their credit. What nonsense! The home mortgage business is not a simple lender/borrower relationship. It now comprises Wall Street investment firms buying loans in bulk from banks (the secondary market), then bundling those loans into securities that are sold to investors. Therefore, the distance separating the home loan borrower and the ultimate holder of the mortgage is too great and obscure. Who is going to pay for this ‘Bailout Plan?’ The banks that provided the loan? The Wall Street investment firms that bought the loan? The investors who bought the securities? No matter who pays for it, it won’t be enough to prevent a significant correction in housing valuations. The banks fear there will be too many foreclosures for their ‘bailout plan’ to prevent a cyclical cascade of reduced housing valuations, foreclosures, and bank closures. As an investor, if you can survive the ride down, the bargains will be tremendous, as they will constitute one of the greatest transfers of wealth in history.
April 2007: SUBPRIME MELTDOWN
Throughout the country, between 40 and 50 subprime lending companies per day are closing, says a chief executive at Countrywide Financial. There is even an Implode-O-Meter website (www.ml-implode.com) that tracks closures in the subprime lending industry. The companies are closing because Wall Street is losing its interest in the now considered ‘risky’ subprime loan business. Investment banks no longer back subprime mortgages, and they are actually returning bad loans back to the originating lenders, thus forcing the lenders to go under. About 30,000 loan originators should be going out of business in the first half of this year.
All of this was created through greed during the real estate boom years of 2001-2005. Lenders were providing loans to applicants with the requirement that they did not drool on the application! Just when everyone figured that real estate values would continue to increase to infinity, Alan Greenspan raised the Federal Funds Rate from 1.0 percent to 1.25 percent, which signalled the beginning to the end of the party. We should have expected it, since the same thing happened to the stock market in 2000. After almost a decade of rising equities prices and the news media telling us how to dial in an investment return, the sell off took all the lemmings by surprise.
For the near future, expect the elimination of zero-down mortgages and 80-20 combination mortgages. On the other hand, expect to see more 40-year mortgage products to ease the pain of the typical borrower, as well as escrow accounts being a requirement, not an option. Finally, mortgage applicants with only an Individual Taxpayer Identification Number (ITIN), normally issued by the Internal Revenue Service to help immigrant workers who don’t qualify for a Social Security number to report their income and pay federal taxes, will no longer be provided a mortgage.
Unfortunately, this is just the beginning, as real estate cycles typically last 4-7 years. As small subprime lenders close, expect them to take down a few of the larger lenders, which will eventually result in the closure of some major banks. Our global financial system is almost too interconnected, and everyone is at risk. It is the United States’ turn to have falling real estate prices, just like Japan had for the past decade. When it’s all over, the opportunities will be endless. Until then, if you are a long term buyer, you will be forced to buy only in areas that have positive cash flow. If you are a short term buyer, the foreclosure deals are just beginning to heat up all over the country. If you are in trouble, you may want to consider a lease option. If you want to wait it out, build your credit and maintain a strong cash reserve. We also recommend holding gold bullion up until the point that the news media tells everyone how bad real estate is as an investment. That should signal the top in gold and the bottom in real estate.
March 2007: THE MEANING OF VACANCY RATES
The Homeowner Vacancy Rate (HVR) has climbed to its highest level since the Census Bureau began tracking it over forty years ago. In the last quarter of 2006 there were 2.1 million vacant homes for sale across the U.S., which equates to an HVR of 2.7 percent. In 2005 the HVR was 2.0 percent, and it had never been above 2.0 percent until 2006. Unfortunately, the nation’s HVR is still rising.
Most of these vacant homes are owned by investors; not owner occupants that decided to move before their house sold. These investors are selling because they have negative cash flow, not because they want to sell into a declining market. Vacant housing tends to reduce the value of everyone’s home equity since the sellers tend to reduce prices faster and steeper. Since about one third of the homes sold during the boom years of 2000-2004 were to investors, it is no wonder that we are experiencing a staggering inventory of vacant homes for sale. Until the buyers catch up with the excess sellers (today’s sellers were previously the excess buyers that created the boom), we will have a less than robust housing market. The only thing that will bring the buyers back will be prices that buyers can afford.
The HVR for condos is even higher than that for single-family homes. The vacancy rate for condos was 11% in the fourth quarter of 2006! For a while there it looked as if condos were a great investment, since they were appreciating in 2005 when single-family homes were flat. Now investors are bailing out of condos faster than single-family homes because condos must compete with apartments for renters. We all know that it is much easier for a tenant to find a vacant apartment than it is to find a vacant condo because apartment complexes have on-site management.
The combination of high Homeowner Vacancy Rates and high inventory means the current slide in the housing market could be far from over. One factor that can reverse the negative trend in housing is a decrease in lending interest rates, which would further devalue the U.S. dollar compared to foreign currencies. Since the federal government can manipulate the numbers they provide that measure consumer prices, and increased prices are a result of inflation, which has never been a true concern of any government, we believe the Federal Reserve will be forced to lower interest rates to stave off a recession. This next round of interest rate cuts won’t be as severe as the last cycle, and when it’s over, get ready to make some money in precious metals.
Feb. 2007: TIMING THE FORECLOSURE PARTY
As a real estate investor, you should be getting ready for the deluge of foreclosures that are about to occur for the next few years. Many homeowners across the country purchased properties with no money down and obtained sub prime adjustable rate mortgages that are just starting to reset this year. For many, they have no equity and a new loan to income ratio that exceeds 60%! In 2006 there were 42% more foreclosure filings than in 2005, resulting in one filing for every 92 households. That will pale in comparison to what we are going to see in 2007 and 2008. Keep monitoring states like: Michigan, Ohio, Indiana, Colorado, and Nevada, which are the nation’s foreclosure leaders.
For now, it is still proving to be a challenge to find actual equity utilizing a foreclosure as your investment property source. The reason what you think are ‘Deals’ turn out to be ‘Duds’ is because the banks are not feeling any real pain yet. In addition, most real estate investors are ‘chomping at the bit’ to get back into the game and buy at the first sign of equity. The reality is that we are experiencing the first leg down in a real estate market that will most likely have two to three total downturns. This first leg down is designed to fool the buyers into rushing back into the market once the plunge in prices turns into a plateau. We expect to see at least one more downturn, which should result in prices that reflect positive rental cash flow. Cash flow is the key. If you can find a foreclosure property that is priced to achieve positive rental cash flow during this first price decline, Buy It. If you can’t achieve positive cash flow, then wait until you can. Even if the value of a property declines after your purchase, as long as you are making a monthly income you can ride the storm out. As we increasingly see and hear from the news media how ‘Bad’ real estate is, we will be approaching the bottom.
We recommend that you now take the time to sharpen your system to obtain real estate through the foreclosure process. Learn the ‘Notice of Default’ timeline in your area, or the area you plan on investing. In Las Vegas, the Notice of Default is recorded after a borrower is over 120 days late on their payment. At that time you can sit at your computer and decide which properties you want to pursue. Then comes the ‘Redemption’ period, which is the best time to negotiate with the lender and obtain a ‘Forbearance Agreement,’ which stops the foreclosure process. After that the ‘Loss Mitigation Department’ takes over, which will fight for all the back payments and legal fees to be reimbursed. Then the court seizure and sale ends the process. If there is no buyer, then the lender becomes the new owner and tries to sell the house on the open market at retail pricing.
As more and more properties without equity hit the Notice of Default list, the lenders will be more willing to offer a ‘Short Sale’ just to get the bad loan off their books. We are not there yet, but it is coming. Remember that the owner must provide you written authorization to communicate with their lender directly, which is what you will want to do. You will have to present a ‘Buyer’s Packet’ to the lender, and optimum communication is the secret to success. Learn the Intent of the lender to collect as soon as possible in the process. Remember that everything will be negotiable, but the seller in default never gets any money back from the lender.
We strongly recommend that you learn and implement the foreclosure process as part of your real estate investing business plan. Work (or farm) an area and review the Notice of Default list every day or week. Your ability to provide clever solutions to the seller will directly correlate with your success. To learn more, please order consulting time at the ‘our store’ section of the website.
Jan. 2007: THE DIFFERENCE BETWEEN INVESTING AND SPECULATING
It has come to my attention that those entering the world of financial education and the management of one's own assets often use the terms 'investing' and 'speculating' interchangeably. While there are similarities, the two terms carry one important difference.
Speculating refers to a short time horizon. Speculators in the stock market, i.e. daytraders, will move in and out of trades in a matter of minutes, hours, or a few days. They usually rely on a technique called 'technical analysis,' which studies and predicts every individual upswing and downturn of a market based on mathematical analysis of historical movements and human behavior. Speculators in the housing market will buy and sell, i.e. flip, a house either the moment after buying it or after a few months. They buy based on appreciation.
Investing refers to a long time horizon. Investors in the stock market, or any market, make their decisions based on 'fundamental analysis,' which studies logical drivers and the interrelationships between those drivers and a particular market. Investors buy based on value and will work an entire bull or bear market trend; ignoring the short term peaks and valleys. Investors in the housing market will buy and hold a house based on cash flow more than appreciation.
There is nothing particularly right or wrong with either technique, they both work at any given time for any market. Those that want to grow their portfolio quickly usually speculate, which carries more risk but faster rewards. Those that are content with growing their portfolio slowly usually invest based on a long-term trend.
As for the housing market, now may not be a good time to be a speculator, or flipper. Housing appreciation is predicted to be modest at best and even negative at worst. However, there is never a bad time to be a real estate investor that buys undervalued property that cash flows.
Dec. 2006: THE BEST WAY TO MAXIMIZE CASH FLOW
The ultimate cash flow situation to be in is having no underlying mortgage on your investment properties and owning them free and clear. No MORTGAGE equates to No DEBT, which means you are only responsible for property taxes and insurance (We recommend paying these). What a great situation to be in, yet few investors ever reach this optimum status because all investors are taught to manage debt wisely using the bank’s (or another lender’s) money. While this is almost always a great strategy, it can backfire if you have too many properties with negative cash flow, or if you need to sell and have negative equity.
There are a few well-known ways to accelerate the payment of your mortgage, thus minimizing your total interest expense. Most of us are aware of the tried and true bi-weekly payment plan, which adds one additional full mortgage payment per year. You can also just send in one extra principal and interest payment per year, or just add 1/12th extra payment each month. In all of these scenarios, you will essentially reduce the term of a 30-year amortized mortgage into about a 22-year mortgage. Not bad, but there is an even better and more clever way to reduce the term of all your mortgages.
We recently learned about a ‘Money Merge Account’ program that lets you utilize the money from a bank line of credit to pay down your mortgage in one third to one fourth the usual time. We have researched the technique and read the review articles for the past few months. Our conclusion is that this system is real and will work for everyone.
What you do is open a line of credit from just about any bank, then use your line of credit account to replace your existing main banking account where you deposit your checks and pay your bills. For investors, you would open up a line of credit for each property, deposit your rent or additional income each month, then write all your property expense items from checks drawn against your line of credit account. An online computer program then tells you when and how much to send as additional principal to your lender. At this point you may be thinking, “So What!” Well, did you realize that your mortgage is a compound interest loan, but your line of credit is based upon simple interest? That means it doesn’t matter when in the month you pay each monthly mortgage payment, because the principal and interest amount is fixed per month you send in your payment. Remember your amortization schedule? However, the line of credit interest is computed on a daily basis. Therefore, it is theoretically possible to beat the banks at their own game, and the people that wrote the algorithm for the ‘Money Merge Account’ system did just that. The interest expense you will incur by having the line of credit is far exceeded by the reduction in interest you will pay by having a reduced mortgage term.
There is one downside to having excess equity in your real estate holdings. You become a bigger target by those that profit from other people’s wealth, including the lender holding your promissory note, i.e. the mortgagee. Fortunately, there is also a clever and simple way to have excess equity in your real estate holdings but not be a target for frivolous lawsuits or foreclosure. All you need to do is record a lien on any property with excess equity. As you build more equity, just release the lien and replace it with another. The trick is to make the lien holder a business entity that you control. That way you can’t lose if somebody comes after your real estate holdings, even if your real estate is inside another business entity or trust that gets pierced.
If you enjoyed this article, or would like to learn more about the ‘Money Merge Account’ software, please send us a reply.
Nov. 2006: FEDERAL TRADE COMMISSION TARGETS LISTING SERVICES
Real estate listing services have been accused of illegally restraining competition by denying home sellers who utilize discount brokerage services access to regional real estate listings that are controlled by major real estate companies. The bigger issue is the FTC also wants the national real estate industry to alter its anticompetitive practices regarding the listing process.
Multiple Listing Services (MLS) are made up of groups of real estate brokers who agree to post their properties to a common list. We all know that the entire MLS system is a monopoly that the national association of realtors will not relinquish easily. The current concern is that some of the discount brokerages are not getting their properties on the popular realtor.com website, which any consumer can search.
Dr. Brewer, along with his affiliation with West USA Realty as Director of Training and Education, has added a new website where anyone can search the Multiple Listing Service (MLS) for the Las Vegas area. One can also view over fifty properties available with ‘Lease Option’ financing. The site is: http://realtydoctor.las.mlxchange.com. To search the MLS, click on ‘Property Search’ and follow the instructions. To view the Lease Option properties, click on ‘Featured Property.’ This site should provide our membership with a great search tool when identifying investment, second home, or even primary resident purchases. It’s also great for those considering relocating to the Las Vegas area. Please give it a try and let us know what you think about it. Also, please provide the web address to anyone you think could benefit from the information contained on the site.
Oct. 2006: HOW IS THE HEALTH OF YOUR REAL ESTATE PORTFOLIO?
New York city is considering a ban on partially hydrogenated vegetable oils in all of its restaurants due to the artery clogging effects of trans fats. In essence, the politicians appear to be concerned for our health, or maybe they have another agenda. Anyway, most of us are concerned about our physical health and want to avoid foods that cause us harm. Whether we actually avoid them is another story. The same can be said for most of us concerning our real estate portfolios. We want to avoid properties that will cause us economic hardship, but sometimes we can’t resist.
It’s no secret that today’s real estate market is considered a ‘buyers market’ in most areas of the United States. Inventories are high, prices are decreasing, and sellers are motivated. So let’s recognize what that really means. It means that we want to be BUYERS! The only decision one needs to make is to determine how good a deal one needs to protect from further price declines. In a perfect world we would always buy at the bottom of the real estate market and sell at the top. Since real estate is a slow mover, it’s not too difficult to have our transactions within 10% of market highs and lows, thus realizing at least 80% of any given cycle. However, we still must consider interest rates and the rents to obtain a complete picture of the real estate market. Since interest rates are still relatively low, and the rental market is strong due to fewer renters converting to owners, we are actually seeing flashing BUY signals on all fronts.
So what is the problem? The problem is a weak economy, huge budget deficits, a declining dollar, and a Dow that has no business making new highs. Is our economy headed for our typical ‘inflation to the rescue’ or a deflationary collapse? Does the current pause in interest rate tightening mean rates are going to do down next year? (Don’t expect rates to get as low as they did in 2004) People are confused, scared, and don’t know what to do or who to believe. Welcome to investing. Our modern communication systems allow an increasing amount of misinformation and disinformation to get mixed with the actual facts. Our news media warns of disaster in the real estate market as if they were our financial advisors. Where were they six months or one year before the stock market collapse during 2000-2002? We were never warned of a stock market collapse, and even when the stock market was making new lows, we were told all is well. So how good is the credibility of the news media acting as a financial advisor? There is plenty of confusion for the average person who relies upon classical belief systems.
We would like to provide a simple solution with respect to housing market uncertainty. We have all looked back over the years and realized we should have either never sold a particular piece of real estate, or should have never bought a particular piece of real estate. In reality, we rarely want to sell a goose that lays golden eggs, i.e. a piece of real estate that produces positive cash flow. Therefore, under any and all market conditions, when you can buy a piece of real estate and achieve positive cash flow from renting or lease optioning, DO IT and build a healthy portfolio. Positive cash flow is a gift, similar to receiving a dividend from owning shares of stock. Right now, there are plenty of motivated sellers all over the country that are willing to sell their houses at prices that make financial sense to an investor. If prices drift lower over the next year, just keep buying for cash flow. Now is not the time to be a seller if you can avoid it.
Sept. 2006: NOBODY KNOWS FOR SURE WHAT IS NEXT
Most investors take great pleasure in learning the opinions of experts in a particular field about the future course of a market. After we hear enough information to satisfy our thirst for expert advice, we finally take action and either buy or sell. Unfortunately, nobody knows for sure what the future markets will bring, and both short and long-term timing is everything. The reason for this uncertainty is that every market is interdependent and linked to many other markets. It’s like a web of interconnectedness with actions and reactions, probabilities, and human interference that make consistently accurate and timely predictions virtually impossible.
Let’s look at the real estate market in the summer of 2006. We were provided some shocking statistics by the national news media regarding the July home sales. New home sales dropped by 4.3 percent compared to June and 21.6 percent compared to last July. In Las Vegas, the year-to-date total of new home sales is up 6.1 percent compared to last year, and the median price for a new home is up 11.9 percent. However, the year-to-date total of resale home sales in Las Vegas dropped 22 percent, yet the median price of a resale home increased 3.6 percent in the past year. Do we at LP Education believe the new home median price increase of 11.9 percent and the resale home price increase of 3.6 percent? No Way! Everyone in the real estate business knows that prices in Las Vegas, as well as every other major city that had yearly double-digit appreciation in the past five years, have been going down all year. Yet the national average for home appreciation this past year is 10.06 percent, and in Las Vegas it is 11.87 percent. How can that be?
Well, they (the providers of the housing data) manipulate and change the numbers to such an extent that they should all be charged with fraud. There are very few areas in the United States where real estate is appreciating at all. From our analysis of the housing market, both the actual sales numbers and price numbers are being misrepresented to the public. We have noticed that the providers of home sales and price data like to include land sales when it improves their desired results. Also, sales numbers don’t provide us any information concerning the quality of those sales. New homebuilders are including lavish incentives to keep both their sales and price numbers high. That is why the resale market looks so bad compared to the new home market. Yet the most manipulated numbers are the price numbers. Last year the news media reported median prices for both new and resale homes that are completely different than those reported this year. What they did was change last years median prices to lower values, thus making this year’s median price numbers look like there was an increase in price!
So what is going to happen next? First, you must realize that the investor buying frenzy that created the huge price appreciation we experienced the last few years could never be sustained. Yet there is always a constant baseline demand for housing by owner occupants. It is this baseline demand that must catch up to the investor selling frenzy we are experiencing now. Also, remember that real estate values and interest rates work in opposite directions. Nobody really knows if interest rates are going up in the short term, down in the short term, up in the long term, or down in the long term. We all have our theories, but there are too many factors to allow a truly accurate analysis. What we do know is that today we have a buyers market in real estate. Will we have a buyers market next year? Maybe yes, maybe no. That is why our advice is to acquire investment real estate for cash flow and tax favoured reasons, then let the appreciation take care of itself. We are running out of areas in this country where you can buy real estate and rent it for positive cash flow. (We recommend you e-mail us and request a package of information for our favourite city in Texas where you can achieve positive cash flow.) Finally, consider the inherent opportunity arising from the fact that eighty percent of adjustable rate mortgage borrowers are making the minimum payment each month. That means those folks are in the negative amortization arena. Couple this fact with the negative savings rate of –0.5% in 2005 for the average American and it spells OPPORTUNITY to buy low.
Aug. 2006: ECHO BOOM MAY BE ON ITS WAY
A few weeks ago my broker was discussing with me the concept of an ‘Echo Boom’ occurring in Las Vegas this summer. Well, the summer is almost over, and if we had a so-called ‘Echo Boom,’ I missed it. He described an ‘Echo Boom’ as a phenomenon where pent up buyer demand from the children of 'Baby Boomers' finally gives in to actual buying, thus resulting in reduced supply and a price increase. I agree with the logic, but I think the timing is off.
The people that are buying in Las Vegas are the people that are moving here, but the people that are doing most of the selling are the investors. The investors were buying in Las Vegas for years before deciding to ‘Take Profits,’ which is tipping the supply/demand curve to the supply side. However, this excess supply of unsold homes will not last forever. At some point the balance between supply and demand will be restored, which is when prices will continue their upward trend and mirror the state’s leading economic growth. Until then, new investors must make the difficult decision of ‘when to buy.’ Nobody wants to wait so long that prices begin to increase, yet nobody wants to buy now if prices are going to fall further. It is this concept of further falling prices and their end that produces an ‘Echo Boom,’ when Baby Boomer offspring buyers finally decide to buy at the same time.
Yet most areas of the United States are not going to experience an ‘Echo Boom.’ Their real estate values are going down for all the same reasons as Las Vegas, but they don’t have a positive influx of new residents. The only areas of the country that are going to experience appreciating real estate in the next few years are the ones with a positive influx of new residents. We all know the negative factors that are dragging down real estate values across the nation, such as increasing interest rates, increasing interest rates, and increasing interest rates. As I said in last month’s newsletter, expect to see Bernanke increase interest rates in the long term, but maybe the increases will be mixed with a few ‘no change’ cycles or even a few reductions.
The nation’s financial string pullers are perfectly aware that a collapse of the real estate market must be avoided at all costs. Look for 40 and 50 year mortgages to replace our traditional 30-year mortgage. Does anybody remember when 20-year mortgages were the norm? Longer-term mortgages will minimize the effects of higher interest rates. Look for continued and increased tax deductions for home ownership, thus serving as a reward to people who pay property taxes. Unfortunately, I expect to see increasing negative publicity for real estate throughout next year. Public opinion and perceptions greatly influence consumer spending, and consumer spending accounts for over 70% of our gross domestic product, i.e. our economy. As more and more people realize that the real estate downturn is actually a crisis, our economy will suffer.
Therefore, I don't expect to see an ‘Echo Boom’ in Las Vegas, or any other area of the country. What I do expect to see is a severe real estate downturn that will be felt around the world.
July 2006: IT'S NOT OVER YET
On a national basis, prices of homes dropped 4.3% in one month. Interest rate increases may be coming to an end. Baby Boomers are buying second homes. Americans are moving to the outer suburbs, or exurbs. But it’s not over yet! Sure, we are starting to see motivated sellers in many areas of the country, and real estate is always a good investment if you can buy and achieve positive cash flow. But we at LP Education expect more weakness in some housing markets before they get stronger.
If you are selling some of your investment real estate, we recommend getting it over with and reinvesting your profits in an area of the country where you can achieve positive cash flow. One such area is most of the state of Texas, however, there are other areas in the country where houses sell for less than the national average and rents are strong. What do we mean by ‘getting it over with?’ Simply pricing your real estate so it will sell before your competitors, instead of gradually lowering your price and increasing your stress level. The decision to sell in a weak market is often difficult, but it must be done if you want to take advantage of the next growth area. Remember, real estate prices can go down in one local market, while increasing in a different local market. Don’t make the mistake of riding a weak local real estate market down until you lose most of your profits from the past few years.
A few years ago you could have bought real estate in just about any area of the U.S. and earned double-digit appreciation. Now you want to limit your purchases to those areas of the country that did not experience double –digit appreciation a few years ago. The rules have definitely changed, and they will keep changing. That is the only constant. There is always a way to make money through real estate investing; it’s just that now you need to be more educated than before. Real estate has returned to a long-term investment.
We expect to see more interest rate increases from our new Fed chairman, Bernanke, even though we expect him to tell the news media that the rate increases are about to end. The Fed is walking a fine line between raising interest rates, which will hurt the economy; and pausing or lowering rates, which will result in runaway inflation, also hurting the economy. Actually, he has no choice but to continue raising interest rates very slowly, as it is the lesser of two evils, and it must be done. We will have to pay the price for having ridiculously low interest rates at some point in time.
Therefore, in any housing market, there are factors that are in your favour and those that are against you. We still have relatively low interest rates, so I recommend a fixed rate mortgage when you buy. Inflation is increasing rents, which means higher cash flow as time goes on. Commodity prices are increasing, and since houses are built from commodities, don’t expect the housing market to wipe out. As mentioned earlier, baby boomers will continue to buy second and vacation homes, thus providing steady demand for housing.
The weakness that we are observing in the housing market is not over, but it does represent the beginning of great buying opportunities. We expect to find more foreclosure opportunities once the first round of bank owned homes get purchased by novice investors willing to pay full retail for the increased risk. We also expect to find more seller financing as interest rates increase. For now, it keeps getting easier to simply find motivated sellers that have had their vacant houses on the market for more than four months. Happy Hunting.
June 2006: DON’T BECOME A VICTIM OF KICKBACK SCHEMES
May 2006: BE CAREFUL!
As most of you already know by now, USA Capital, a private lender in Nevada that makes short-term mortgage loans secured by real estate, has filed bankruptcy. About 58 percent of their loans are delinquent, yet most of their loans were made to companies with ties to USA Capital's executives. Their founder claimed that they grew too fast? Of course they did. They put all their eggs into one basket by not funding enough arms length transactions.
There are 30 private lenders in Nevada alone, where the investors are individuals looking for short-term and high-yield loans secured by real estate. These private lenders are basically 'Hard Money Lenders;' a business that most would consider to be very safe and secure. Unfortunately, like all markets, real estate does not always go up. Markets go up and down in cycles, and real estate has already entered its so called 'down cycle.' What's great about a real estate down cycle is that it more closely resembles a flat market than a down market. We began our real estate down cycle in the autumn of 2004, yet our news media will not admit any such negative news until we begin the next up cycle. Then they will look back and disclose to us that real estate just came out of a five-year period of weakness and consolidation. Note that our news media is always reluctant to equate real estate with any negative terminology like 'down market' or 'down cycle.' Yet history has repeatedly shown us that real estate market cycles are usually 5-7 years, and are usually similar to interest rate cycles.
So why should you be careful? Because just like USA Capital, you too can go bankrupt if you are over leveraged with real estate debt and are dependent upon appreciation. If your real estate investments produce even a small positive cash flow, you are in a position to keep on buying in an intelligent manner. (Remember, the savvy investors buy when a market is down, and sell to beginners when the market is up.) But if you need to refinance your loans just to compensate for negative cash flow, you may be falling into a trap that was set by our large investment bankers and financial leaders. You may not even realize how much trouble you are in. If you suspect you may be getting in to trouble, contact Dr. Brewer for a free one-on-one consulting session. You won't regret it.
April 2006: LEASE OPTION AND CREATIVE FINANCING
Most of us think about 'All Inclusive Trust Deeds,' 'Private Notes,' or 'Subordination Agreements' when someone mentions 'Creative Financing.' Now you can add 'Lease Option' to the creative financing list of techniques.
A few years ago I was challenged to think outside the proverbial box and develop a creative financing program for tenant/buyers who will never be able to obtain bank financing due to social security number or citizenship issues. At the same time the program had to protect the landlord/seller's ownership interest. My solution was to utilize a lease option, but to expand the option term from 1-2 years to 20-30 years.
Normally when a seller offers financing to the buyer, the actual ownership, or title, is transferred to the buyer. The seller ends up becoming the banker, which means that if the new owner decides not to make the mortgage payment, the banker needs to begin a complicated, expensive, and long foreclosure process. However, with a lease option, title is not transferred until the tenant/buyer exercises their purchase option. There is nothing to stop us from making the option term the same length of time as bank mortgages! Then if the tenant/buyer fails to make the monthly payment, all the owner has to deal with is a simpler, less expensive, and shorter eviction procedure. The owner (landlord/seller) can charge a much higher than normal monthly rent because the tenant/buyer will be in the process of buying the house a little bit each month. In addition, the landlord/seller can charge yearly option fees that match the value of the house divided by the option term minus rent credits. During the option term, the owner isn't paying any rehab costs and has 100% occupancy. The tenant/buyer essentially does a long-term rent to own without ever securing bank financing. At the end of the option term, the owner transfers title to the tenant/buyer. Think about the tax advantages!
A long-term lease option works great in lower income areas where a majority of the occupants are tenants. Usually it is difficult to find quality tenants in such areas, and the rehab costs are burdensome. All you need to do is find just one family that is willing to buy the house they are living in over the course of many years. You will instantly transform yourself from the negative stigma of a 'slumlord' to a 'saviour.'
As always, we cover all the details of this and other techniques at our seminars, workshops, and customized consulting sessions.
March 2006: MIND YOUR OWN BUSINESS?
I am often asked, "What does Robert Kiyosaki mean when he says 'Mind your own business?'" It's actually a very important and vital philosophy that has ramifications for our entire economic system.
On a financial level, you should spend as much time as possible on the tasks and goals that provide income to you and your business. You should strive to eliminate spending any time on tasks that can be provided by another professional. For instance, if your small business plan is based upon real estate investing, then you should have a laser focus on tasks related to finding under priced properties, keeping your credit score high, networking with other investors, etc. You don't want to spend any time completing tax forms, changing the oil in your car, or mowing your grass. These later tasks can be performed by someone else whose business is accounting, car maintenance, or yard maintenance.
When you perform a task that is not part of your business plan, you are not only hurting your business, you are hurting the U.S. economy. You hurt your business by substituting an efficient use of your time for potential profits with an inefficient use of your time for a potential cost reduction. I mention 'potential' cost reduction because in most cases you will spend more time performing a task in which you are not a professional than the actual professional will spend. As I teach in my seminars, "Money is a function of Time," meaning if you waste time, you also waste money. You also hurt the U.S. economy by taking the job from an otherwise qualified businessperson. Since two thirds of our economic engine is supplied by consumer spending, you actually help our economy by hiring business professionals to perform the tasks that are part of their business. Then their business will be profitable enough for them to hire you when they need your professional skills and talents.
Of course, this all depends upon the level of profitability of your particular business and any personal satisfaction you achieve by performing a task outside of your business. If your business is not making enough money for you to hire someone to work on your car and you pride yourself with maintaining your own car, then by all means work on your own car. Just realize that you are not minding your own business.
Feb. 2006: ALL CONTRACTS ARE NOT CREATED EQUAL
We are often asked what makes LP Education's lease option contracts superior to other lease option contracts available from the Internet or office supply stores. The answer is quite simple. Most lease option contracts do not separate the lease portion from the purchase portion of the contract. They either utilize a single form, or if they utilize separate forms, they reference each other. If this is the case, then the tenant/buyer can claim an 'equitable title' interest in the owner's property. If the owner is taken to court and the judge notices that the lease agreement mentions purchase terminology, the judge can easily rule in favour of the tenant/buyer. To avoid this dangerous scenario, an attorney advised LP Education to not only separate their lease agreement from the purchase agreement, but to have the lease agreement as a stand alone document. In addition, for the purchase agreement to be valid, there must be no violations in the associated lease agreement. That is, to have the purchase agreement refer back to the lease agreement, but not the other way around.
Some lease option contracts utilize a separate set that favors the tenant buyer, and another set that favors the landlord/seller. We found this to be quite cumbersome and confusing, and completely unnecessary. We believe that a simpler way to achieve the same result is to begin with fair contracts and modify them as the need arises with check boxes and an addendum section. As a result, LP Education's contracts have stood the test of time, can be utilized in all fifty states, and are evaluated by an attorney each year for additional upgrades.
LP Education provides an electronic (i.e. editable) version of its lease option contracts to all its clients. Anyone purchasing the lease option manual, compact disc set, consulting, or attending a workshop is not only provided all necessary contracts and forms, but also taught how to complete the forms and contracts. Remember, the contracts are useless unless you know how to complete them for multiple scenarios. That is why we advocate education for our clients so that they can become independent.
Jan. 2006: NO MORE LEASE OPTIONS IN TEXAS?
A recent newspaper article talked about a 'crackdown on lease-option deals.' I was also asked about the demise of lease-options in Texas at our last workshop, so I looked into the matter further. It turns out that the state attorney general in Florida is investigating an unscrupulous lease-option promoter that keeps tenant/buyer option fees with no intention of letting the tenant/buyer exercise their purchase option. In Texas, however, there are two issues. The state legislature has passed a new statutory standard whereby lease-option promoters will be prohibited from terminating contracts over minor lease disputes or late rental payments, which is similar to the Florida complaint. In addition, a landlord/seller in Texas will need to have clear legal title, i.e. ownership, of the property before offering a lease-option to a tenant/buyer. What this means is that 'Sandwich' lease option transactions will no longer be allowed in Texas. If you remember, a 'Sandwich' lease option is where the investor signs a set of contracts with the owner, then signs a second set of contracts with the end user. It is a technique where one can realize cash flow on a property one does not own. Unfortunately, a few bad apples have tainted the lease-option concept in Texas; however, lease-options are still legal in all fifty states. The only change is that 'Sandwich' lease option transactions will not be allowed in Texas.
You can still perform a typical lease option transaction where you are the landlord/seller (owner) and work directly with the tenant/buyer. Just remember to maintain the Win-Win philosophy we teach at our seminars and don't take advantage of tenant/buyers. If you are interested in receiving a copy of some of the best lease-option contracts in the business, they are complementary with any manual, compact disc set, or workshop purchase from LP Education.
Dec. 2005: ARE YOU PREPARED?
One of my mentors taught me the concept that a good plan is all that is necessary to be successful in each of the major areas of one's life. It is especially true with respect to the financial aspect of our lives. I remember him telling me that only fools try to predict the future with any certainty, but the rich are constantly prepared for any outcome. He went on to show me how to make money when the stock market moved in any direction, then challenged me to figure out how to make money when the stock market remained relatively flat. Then came the real estate challenge.
I don't think that I have ever met a person that couldn't make money on real estate when it was appreciating. In fact, most people traditionally think that the only way to make money in any market is to buy low and sell high. However, the more educated investors make money any time a market moves, regardless of direction. The highest-level investors know how to make money even when a market is flat. Therefore, an important level to reach in one's real estate financial education is to learn how to make money in an appreciating, depreciating, or flat real estate markets. Once you learn this, it is time to make your plan.
Financial plans are not made in a few minutes, or even a few hours. They require many weeks or even months of refinement as your brain digests more and more information that you constantly feed it. So what is your plan if real estate in Las Vegas and/or California continues to appreciate in 2006? What are you going to do if the market depreciates 10-20 percent this year? What are you going to do if the real estate market hardly moves at all? Remember, there is no completely correct or incorrect answer, since your response is highly customized for your particular situation. But you must be prepared for all three scenarios and be ready to respond without emotion. If you can do this, you will survive the next phase of our previous bull real estate run.
Here is a sample plan for an investor with a few houses in Las Vegas that have positive cash flow and a few with negative cash flow in various price ranges.
I plan to keep my homes valued at $300K and less since they have the best chance for further appreciation. If the market drops, I will ride the storm out and rely upon the homes with positive cash flow to balance the ones with negative cash flow. Since my homes valued at $300-400K did not appreciate in 2005, I will sell them as the rental leases expire throughout the year, regardless of appreciation or depreciation, since I don't want to go down with the ship. I will learn how to buy and sell real estate using Options and Foreclosures to my advantage. I plan to begin increasing my cash reserve in order to purchase Foreclosure properties and to cover any losses from homes I am selling.
This plan may or may not make sense to you, but it is a plan, a course of action to follow. After you make your plan you will be prepared for anything that may or may not happen in this real estate market. Remember, nobody knows if real estate is going up or down next year, yet the news media seems to want it to go down. Why does the news media continue to predict a decrease in the real estate market? Is it for our own good? I think the financial powerhouses in this country will do anything to avoid a collapse in the real estate market, so they are promoting a very gradual release of the air making up the bubble. But real estate can still continue to appreciate in select areas. It may also depreciate by more than 20% in other areas. So my advice is to be prepared for as many scenarios as you can think of by making a detailed plan.
If you would like assistance at making your plan, give us a call at 702-372-8413 for a free consultation. You can also increase your financial education by listening to 'The Realty Doctor' every Tuesday from 10:00-11:00 a.m. on the radio or by attending a seminar and asking questions.
Nov. 2005: IS NOW THE TIME TO SELL?
I am often asked the question, "Should I sell my real estate now or wait?" The answer depends upon why you bought the real estate and your tolerance to risk.
If you bought your owner occupied residence because you like its features, the neighbourhood, the schools; and nothing has changed, then you have no reason to sell. If you like your owner occupied house, have plenty of equity, but are running into economic challenges, then you probably cannot tolerate a decrease in your home's value. In this case, I recommend you sell your owner occupied residence and take advantage of the under priced rental market until your situation changes. While most 'experts' would recommend pulling out that equity and increasing your debt level, I say you are making yourself too dependent upon an appreciating real estate market. Remember, real estate, like any market, can go up, down, or sideways. Nobody knows the future for any market. That is why when you decide to sell a stock or any commodity; there is always somebody else ready to but it.
There are also people that buy their owner occupied residence for investment reasons. They hold the property for at least two years, wait for the desired appreciation, then sell for a tax-free capital gain and repeat the process. The only downside of this system is one is forced to move every few years. However, it is a great gift from the government. If you are one of these people and you have reached your desired appreciation, I suggest you sell now and start your cycle over again.
Now for those of you that purchased investment real estate, you rarely want to sell the goose that lays golden eggs. In this analogy, the goose is your investment real estate, and the golden eggs are positive cash flow. So if your investment real estate produces positive cash flow, and you need money, borrow it from the equity and make sure you still maintain a positive, though reduced, cash flow. If your investment real estate produces negative cash flow but has plenty of equity, I recommend you sell the property and purchase one or more replacement properties using a tax deferred 1031 exchange. Remember, you don't have to purchase in the same area. If you would like information on Texas real estate opportunities, call Barbara Dennis at 702-499-6791.
If you would like a free list of comparable values for your Las Vegas real estate, give me a call at 702-372-8413 or e-mail me at DrBrewer@LPEducation.com.
Oct. 2005: REAL ESTATE BUBBLE?
I find it very interesting that the news media has been warning us of a bubble in real estate prices the past few months. Where were they at the end of 1999, or the beginning of 2000, when the stock market was about to collapse? Could it be that the average Joe, the common man or woman, or the lemmings, were supposed to lose their retirement savings in the stock market, but those same people who turned from stocks to real estate after the year 2000 are to be given a fighting chance? I believe the answer is 'Yes.' There is absolutely, positively, a real estate bubble. If you don't believe it, then you are in a state of suspended disbelief. However, there is no rule that all bubbles must pop. This one may just let out a little bit of air very slowly before expanding again at a more reasonable rate.
Let's look at the ramifications of a popping of the real estate bubble. Since the money pulled out of real estate in 2004 represented over one half the source of consumer spending, and two thirds of our GDP can be attributed to consumer spending, the investment bankers that run our economy cannot afford a real estate collapse. No, No, No. What they want is a very gradual release in certain markets and continued appreciation in others. If you own real estate in a slowly depreciating market, then your equity build-up will be the result of paying down your mortgage, and you will never reach a state of panic. (Wait for the news media to start telling you that you don't need appreciation to build equity.) If you are in an appreciating market, you get to pat yourself on the back like you did in the late 1990's when you were choosing mutual fund winners. Now, what are we real estate investors supposed to do?
First, you have to realize that the rules have not changed. Real estate is always going to be a fantastic investment over the long term. It's just that recently it was a good investment over the short term. Don't ever forget the leverage and tax advantages of real estate. We just have to be a bit more sophisticated very soon. I recommend buying real estate anytime you can attain a positive cash flow with 5-10 percent down. That means I am still a buyer if I find a property that is undervalued in an area that has had high appreciation the past few years, like Las Vegas condos. I am also a buyer in sun belt states like Texas that are about to experience high appreciation and have a steady influx of new residents. However, now is the time to begin to adjust your portfolio and consider selling your problem properties if you need cash or want to reinvest your gain in another area of the country. (If you are interested in Texas real estate or adjusting your portfolio, send me an e-mail at drbrewer@lpeducation.com)
There is no need to panic. Real estate is a slow mover, unlike stocks, which change in value every few seconds. I don't expect to see large swings in value for real estate located in the Sun Belt states like Florida, Texas, Arizona, Nevada, or California. The reason is that a whole generation of baby boomers are still buying second homes in which to retire. I do expect to see prices coming down in areas where people are losing their factory jobs and migrating out, such as large cities in the Midwest and Northeast. History has repeatedly proven that when real estate prices come down, it's a buying opportunity. My advice is to stay educated and study the market drivers like jobs, jobs, and jobs. Remember, the reason people move into or out of an area is because of jobs.
I also believe that our society is experiencing the beginning of an economic revolution in which the 'Haves' will own the real estate and the 'Have Nots' will be the tenants. It will become increasingly more difficult for the 'Have Nots' to break out of the 'Rent Trap' and buy their first affordable housing. In fact, 'affordable housing' is becoming an oxymoron as the cost of labor and construction materials continue to increase. Look for a continued splitting of the middle class into upper and lower classes. Those moving into the upper class will be the ones that are educated and prepared for the economic revolution.
DISCLAIMER
The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither LP Education nor Dr. Thomas Brewer shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.
Copyright 2005, LP Education, LLC. All Rights Reserved.
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