Real Estate News & Commentary by Chris McLaughlin, April 3, 2009
http://www.shortsalesriches.com/welcome.html
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Budget plan for 2010 approved
Barack Obama’s $3.5 trillion budget plan was approved by the U.S. congress but not before the Republicans showered it with criticism. John Boehner (R – OH), the House Minority Leader, commenting on the “expansionary” budget that aimed at increasing spending, increasing taxes, and leading to increased public debt, called it “a roadmap to disaster.” Incidentally, the fiscal deficit is expected to touch $1.8 trillion in 2009, for anyone still counting. Steny Hoyer (D – MD), the House Majority Leader, said, “Our budget lays the groundwork for a sustained, shared, and job-creating recovery.” With all the Republicans voting against the budget, there was no sign of the bipartisanship Obama had hoped for. Obama was pleased with the outcome, calling it “an important step toward rebuilding our struggling economy.”
Disclosing information on borrowers
The Federal Reserve, as the lender of the last resort, does not disclose the names of its borrowing banks on account of the concern that there could be a run on them. After all, public confidence could take a beating if it became known that a bank had to go to the Fed to tide over a liquidity situation. If the U.S. Senate has its way though, the Fed will be required to disclose the names of its borrowers in future. As part of an initiative to enhance the quality of regulation of the financial sector, the Senate introduced a budget amendment on April 3, 2009 requiring the Fed to disclose the names of its borrowers. While the Fed is not required by law to make the disclosure, it may not find it easy to ignore the budget amendment, particularly in the current financial crises. Can the Senate’s writ be challenged by the Fed, and will the disclosure do more harm than good to the stability of the banking sector? We’ll know in the days to come.
U.S. unemployment rate expected to hit a 25-year high
According to a Bloomberg News survey, ahead of the March jobs data to be released by the Labor department, the unemployment rate in the U.S. in March is estimated to be 8.5% (a 25-year high). The total number of job losses since the beginning of 2008 now stands at 5.1 million – 2 million of those in the first 3 months of 2009. Large companies like IBM have announced job cuts in the thousands and the situation is showing no signs of improvement. Given the slump in the manufacturing sector and the likelihood of bankruptcy for General Motors, analysts are talking about a significant increase in the unemployment rate. Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities, estimates that the unemployment rate could reach as high as 11 percent. Will the $3.5 trillion budget rein in job losses or just cause inflation on top of everything else?
Mortgage rates leading to a rebound in the home-loan market?
Freddie Mac announced that the 30-year mortgage (fixed) rate fell to 4.78% (lowest since 1971) in the last week of March. Ben Bernanke, Chairman of the Federal Reserve, in his testimony to the U.S. House of Representatives last November said, “It is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met.” The Fed’s announcement in March 09 that it would buy $1.25 trillion in home-loan securities in 2009 is a clear sign of Bernanke walking his talk. How effective will the Fed’s initiative be? The initial signs are encouraging, with mortgage applications on the rise. According to the National Association of Realtors (NAR), the sale of previously owned homes rose by 5.2% in March over the previous month, and the rise in “affordability index” (released by the NAR) in January indicates that the lower home values and mortgage rates are having an impact on the home market.
CEO Pay Falls
According to an analysis prepared by Hay Group for the Wall Street Journal, median cash salaries and bonuses for chief executives of 200 big U.S. companies fell 8.5 percent in 2008 to $2.24 million. CEO compensation decreased more sharply at banks and brokerages, and median annual cash compensation for CEOs in the financial industry fell 43 percent, to $976,000, while total direct compensation fell 14.2 percent, to a median $7.6 million. The decline was the first in seven years.
Now on to our real estate investing education section…
Perceptual Contrast & Other Short Sales Strategies
Executing effective short sales isn’t always about financial calculations or even locating the perfect property – more often than not it boils down to good old fashioned psychology or what many would coin “people skills”.
While people skills sounds relatively low-tech, there are a few ways to spice it up to sound much more sexy. For example, using “perceptual contrast” techniques certainly adds a bit of flair and sophistication to something that is both effective and quite easy. Try it on these common problems:
Denial & Indecision
The next time you are working with a client, lender or other real estate contact that is sitting on the fence try this technique; explain the most expensive outcome or worst case scenario first. That “primes the pump” so to speak by providing a foundation or baseline measure from which to compare. Once that concept is firmly planted in their mind, the remaining options appear much more feasible or even desirable as compared to the first scenario. There isn’t any need to use “fear tactics”…typically the cold hard reality is more than ample motivation especially given the current economic uncertainty gripping the nation. Stick to the facts and demonstrate how you are able to provide a viable alternative or solution to their problem then allow them to weigh all options and make a decision. In most cases, once people truly face the depth of the problem and possible outcomes, it is actually quite easy to step in and provide a solution.
Overwhelmed, Fearful and Uncooperative
Another frequently encountered psychological problem encountered by short sale investors is the feeling of fear or simply being overwhelmed to the point of taking no action. It’s simply astounding how many people do not take even the most rudimentary steps to help themselves – but the fact remains, many people respond to stress by shutting down. At times, it can become so complete they even fail to cooperate with those best suited to help them. An effective strategy for this situation is to break down each task into itsy-bitsy tiny steps and do most of the work for them. Don’t bog them down with granular details – just provide the basic information they need to know then make the rest easy to comply with.
A Few Pointers
Finally, there are a few pointers to keep in mind when dealing with short sales or any other emotionally charged real estate investment.
Crunch the numbers first. Break the numbers down into user-friendly amounts that relate to the client. Target each to be specific and meaningful.
Stay positive. Put on a smile and air of confidence – it’s contagious! People enjoy doing business with people they like and trust.
Use comparisons wisely. Perception matters so use it properly.
Numbers to Know – Short Sale Quick Ratio or Acid Test
While many short sale investors and real estate pro’s use the current ratio on a regular basis, few take advantage of the relative benefits to be derived from making the quick ratio (aka Acid Test) readily available for review. Fortunately, the quick ratio really is quick…so take a few minutes to learn how to calculate this handy helper.
How to Calculate
The quick ratio or acid test basically equals cash plus short-term investments plus net receivables divided by current liabilities. For example, let’s assume you have $20,000 cash in the bank, another $30,000 in savings bonds gramma gave you, $35,000 in stocks or bonds that you can cash out and $15,000 in rent payments due with total current liabilities of $90,000. The numbers would look like this…
Cash and cash equivalents + Net Receivables = $100,000/ Current liabilities $90,000 = 1.11
How to Use
The quick ratio or acid test is increasingly used by lenders and others instead of the current ratio – because the quick ratio is even more “severe” or stringent, it is a quick and dirty method to measure the short-term debt paying power of an applicant. Essentially it is another liquidity measure albeit on steroids.
The standard is 1:1 ratio…the higher above 1 the better. For those of you able to demonstrate a 1+ ratio then toot your own horn! Make a point of showing this to prospective lenders to let them know you are good bet with something to offer.
For those at or near 1:1 the quick ratio is still a strong indicator as well as goal to consider. If you are able to trim just a little to better your current liquidity standing it might make the difference between mediocre versus the VIP treatment.
Eyes Wide Open
Finally, for those well below the 1:1 ratio consider going back to the current ratio or re-examining your assumptions. Review your cash equivalents to be sure you have the staying power in the event of an emergency or unexpected delay in funding or cash flow.
One of the few areas likely to cause a savvy short sale investor to falter is not the lack of profit but rather lack of readily available cash on hand or liquidity. In fact, this is a common problem that plagues investors and business owners at all levels; unfortunately, the average short sale investor does not have the benefit of a wide open federal window ready and waiting to hand over temporary loans to keep you in operation. The acid test provides a firm footing to keep you in the black and away from the risk associated with a liquidity crunch.
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com/welcome.html
P.S.
Don’t miss out webinar Saturday at 3:30 PM ET, 12:30 PM PST:
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Copyright Loss Mitigation Institute 2009.
All Rights Reserved.
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid flipping of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner and Supervising Broker of one of Florida’s
largest Real Estate firms, running 4 different
offices, supporting nearly 450 agents, uniquely
positioning him to help thousands of investors
make money in the biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
seminar leader for current trends and hot topics
in Real Estate Investing, Entrepreneurship, and
Wealth Building
* On twitter: http://twitter.com/mclaughlinchris
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