House Approves Bailout Plan To Stop “Economc Pearl Harbor”

Market News & Commentary by Chris McLaughlin, October 3, 2008
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The U.S. House of Representatives approved the Senate version of the Bailout plan to stave off what Warren Buffett has described as an “Economic Pear Harbor.” The final vote was 263-171, a much larger margin than the failed attempt earlier this week. President Bush is expected to sign the legislation immediately. But stocks lost their excitement since news from the Labor Department that employers eliminated 159,000 lobs last month, the worst reduction in 5 years, providing further evidence of a weakening economy.

Thanks but no thanks is what Wachovia told Citi today as the bank announced that it would rather merge with Wells Fargo in an all-stock deal for $15.1 billion. The Wells Fargo deal would not require the backing of the Federal Deposit Insurance Corp. (FDIC) and would value Wachovia at around $7 a share, much more than the Citigroup deal would have offered. But Citi is balking and has indicated that its agreement to merge with Wachovia cannot be terminated and that Wachovia could not sell to Wells Fargo. This will be an interesting one to follow for sure…

Now on to our real estate market commentary…

Short Sales and Leasebacks

When it comes to short sales and lease backs there seems to be a lot of confusion. Should you consider buying a property then immediately leasing it back to the owner/occupant? As an investor you obtain a stable asset with consistent cash flow and appreciation without a lot of headache…when it works right.

The idea isn’t new although it fell out of vogue after the relative stability of the 90’s and early part of this decade. Chances are, the name Billman comes to mind when you think of lease backs; Billman, considered by many to be the king of the lease back, created LLC’s to buy model homes from builders and then leased them back. Today, builders and commercial developers are once again turning to leasebacks as a way to generate revenue – but does it work for the average short sale investor? Will it remain legal? How does it work? Here is what you need to know about short sales and leasebacks…

1. Pending legislation may limit or prevent future short sales. Maybe. Many investors follow a modified version of Billman’s LLC model to create a separate entity which then enters into the lease on behalf of the buyer/seller relationship.

2. Built-in renters. Depending upon the reason for the short sale, many current homeowners would be more willing to consider a short-sale if a leaseback option is allowed. Medical bills, desire to remain in the same school district or other personal considerations often keep a homeowner in a home long after all hope is gone. By meeting their emotional needs, both parties win.

3. High Risk. Obviously you are dealing with people in financial distress who may be facing severe economic constraints. It should come as no surprise they are often poor credit risk, non-collectible and at higher than average risk for non-payment or default.

4. Interest Rate Spread. For those short sale investors that eventually decide to sell the property, today’s low interest rates remain an attractive proposition; obtain an instant income without the hassle of rising property taxes, escalating insurance or maintenance simply by selling back at a higher fixed rate. Low rent gives the occupant time to get back on their feet while living in the home then buy back the property at a later date. Playing banker by taking advantage of the interest rate spread combined with rising home values expected to take place within a few years creates a home run for those with the wherewithal to put the plan into effect.

House Approves Bailout Plan To Stop “Economc Pearl Harbor”

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