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TARP Bailout Criticized by Oversight Group

Chris McLaughlin — Wed, 10 Dec 2008 19:55:16 +0000

Mid-Day Market News & Commentary by Chris McLaughlin, December 10, 2008
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Ouch! The Government Accountability Office, along with the Congressional Oversight Panel for Economic Stabilization, blasted the Treasury Department’s management of the $700 billion TARP program. The 38 page document noted that “Treasury cannot simply trust that the financial institutions will act in the desired ways; it must verify.” The report further commented that the Treasury had “administrated the TARP without seeking to monitor the use of funds provided to specific financial institutions.”

And other eyes were on Capitol Hill today as the Big 3 Automakers got a lot closer to sealing a $15 billion bailout package. The package will lead to the creation of a “Car Czar” to oversee the loan grant, in order to avoid the “take the money and hoard it” approach that many banks have taken after receiving their bailout. But several Senate Republicans were outraged, with Sen. David Vittner of Louisiana called the approach “ass backwards” and promising to filibuster it.

More money is headed out the window to the morons at AIG, the folks who partied it up at the St. Regis and seem to have no ability to control their spending. The Wall Street Journal reported that the insurance conglomerate owes other Wall Street firms about $10 billion for because of speculative investments that didn’t pan out.

Now on to real estate investing information …

Gross Income Multiplier

Short sale investors are a different set; they take action when others are too cowardly to act. They remain informed while others rely upon others for information and perhaps most telling of all…they crunch numbers. Last week we examined how to calculate the Cap rate of a property in order to determine the price of an income producing property. Although the Cap rate is a favorite among many bankers and brokers alike, another widely used formula is the Gross Income Multiplier.

How to Calculate

To calculate the Gross Income Multiplier you will need to divide the asking price or market value of the property by the current gross rental income (or potential rental). For example, let’s assume a home is listed for $150,000 with an annual rental income of $10,000. The Gross Income Multiplier would = 15. The higher the better. To provide some perspective, it may be useful to draw examples from other industries and areas. For example, if you were purchasing a publishing concern then you (and the banker) would expect to see earnings worth 5 to 10 times the pre-tax earnings on an annualized basis whereas insurance agencies sell for 150 percent of annual commissions.

When to Use

Using the GIM provides an excellent method to compare the asking price with industry norms or as a potential negotiation tool when making an offer for a short sale property. It is a good idea to use conservative numbers when calculating the GIM since it does not take extraneous expenses or future tax and insurance rate hikes into account. Repairs, utilities and other considerations may wreck havoc on even the most robust calculations so it isn’t a good idea to use the GIM when dealing with older properties or those in need of extensive renovations and/or repairs.

A Quick Word about Hedonic Pricing Models

No discussion of GIM would be complete without a quick word about hedonic pricing models. Like the government itself, builders and brokers alike will often try to maximize value by including the full “value” of hedonic measures. While that is a valid method during robust economic times, during downturns in the economy those same granite countertops, luxury pools and other customized features tend to lose value – or worse – may actually be considered a liability by some buyers. Short sale buyers would do well to base GIM calculations on conservative building alternatives or sharply discount hedonic estimates especially during tough economic times.

Caution is Advised

There is a reason the GIM is favored by corporate raiders and strategists; as a general “rule of thumb” price estimate it often results in an aggressive method for determining valuations especially when dealing with more “favorable” properties that require minimal maintenance, upkeep or repairs. Short sale investors may find this a more desirable alternative than the Cap rate formula for some properties; just keep the limitations and risks in mind or you may find yourself on the losing end of a tough negotiation strategy.

Government Seeks to Drop Mortgage Rates to 4.5%

Chris McLaughlin — Thu, 04 Dec 2008 18:07:52 +0000

Mid-Day Market News & Commentary by Chris McLaughlin, December 4, 2008
http://www.shortsalesriches.com/welcome.html

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What if there was someone who would lend you money for 24 hours, regardless of your credit, your income, and whether you just filed bankruptcy? What if you could then re-sell a property in that time and make a fortune? Join us for our amazing webinar tomorrow! We’re holding this again because of the tremendous demand that jammed up our servers 2 nights ago … Right now there are only 7 spots left:

Recession Proof Investing Webinar (Thursday, 3 PM EST, 12 PM PST):

http://www.recessionproofinvestingwebinar.com

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It is about darn time! I’ve been waiting around for this news…I was getting rather sick of the Fat Cat corporate bailouts, the automakers jet setting in on their fancy corporate aircraft, and the executives from AIG partying it up at the St. Regis.

What did we hear about today? A plan to encourage new buyers of homes! Yes, this isn’t one those “stop foreclosure” plans that never work that the government bureaucrats have been touting, this one has a darn good chance of making a meaningful impact…getting interest rates on the 30 year mortgage to 4.5% for new purchases.

Not for refis … just for home buyers! Pretty neat if you ask me, since it gives a disincentive to just refi and stay put and an incentive to sell and buy another home. The Treasury will offer to purchase the mortgage backed securities for the price equivalent of 4.5%. So keep on the lookout for a major announcement next week regarding this plan’s details.

After a lot of negative news, loan officers, realtors and title companies were cheering the latest statistics from the Mortgage Bankers Association. The group reported that the number of new loan applications tripled as consumers hurried to lock in interest rates below 6%. The Wall Street Journal cited a report from Barclays Capital that indicated nearly 85% of conforming mortgage holders might benefit from refinancing to a newer rate, as opposed to the 7% at the beginning of November.

All eyes are in Washington, DC today as the Big 3 Automaker CEOs, all who arrived by car instead of jet, were set to begin asking for more money. And they are prepared to ask for even more than last time … this go around they want $34 billion.

The humility could certainly be felt in the room. “We’re here today because we made mistakes,” GM CEO Rick Wagoner told the Senate Banking Committee. Banking Chairman Senator Christopher Dodd, a clear supported of the automaker bailout, said that allowing the automakers to file for bankruptcy “plays Russian roulette with the entire economy of the United States.”

And in some good news, new jobless claims dropped less than was anticipated. Initial claims for unemployment insurance dropped to 509,000, while analysts were expecting around 537,000. While the news was indeed positive, the number of people on unemployment is still at a 26 year high.

Now to on our real estate investor education section…

Calculating Cap Rates

Veteran real estate investors and new short sale buyers alike often toss around terms like “cap rates” without a full understanding of the advantages and limitations of the formula. Learn how to calculate a cap rate and how to dispute an inaccurate cap rate with these quick tips.

Cap Rate Defined

The “cap rate” is short for capitalization rate or income yield; this widely used method of determining a rate of return on real estate is useful when used properly. Unfortunately, either through ignorance or outright fraud, many sellers attempt to inflate a cap rate to make it more attractive to potential investors. Fortunately, it is easy to compute your own cap rate once you understand the basics.

Calculate a Cap Rate

The cap rate or income yield is calculated by dividing the net operating income (NOI) for the first year by the total investment. For example, let’s assume you are interested in purchasing a property that will generate a net operating income of $10,000 the first year. The purchase price is $150,000. Your cap rate will be $10,000/$150,000 = 6.6.

How to Use in Short Sale Negotiations

Bankers and brokers use cap rates to determine the value of a property and compare it against other income producing properties in the area. Not only is it a good idea for every short sale investor to do the same but the cap rate is a good initial indicator to use when establishing the value of a home compared to other investments. In the above example, a 6.6 cap rate should then be compared with alternative means of investing your money; since the stock market is negative a 6.6 rate of return may be an attractive yield even though by historic means it is less than attractive. Remember, the cap rate is based solely upon the first years NOI and it does not include the additional long term return generated through appreciation therefore, the 6.6 percent could be substantially higher when appreciation is included.

On the other hand, using conservative numbers to generate a cap rate is also a useful negotiation tool investors should use when making short sale offers. Given the competitive market, savvy short sale investors can demonstrate alternative or competing cap rates when presenting offers to banks or brokers in order to reduce the bid on a property. Remember, the last thing the bank wants is to encounter the property for a 2^nd or even 3^rd time; by demonstrating a valid and reliable cap rate indicator you can show a reasonable expectation of profit required to keep the property from coming back on the market once again.

Finally, always take the time to verify the accuracy of the assumptions and numbers used by others when calculating a cap rate:

1. Be suspicious of unusually high cap rates or those that use overly generous NOI assumptions. Insist upon accurate and conservative estimates.

2. Cap rates are based only upon the first year’s NOI – your first year not that of the seller.

3. Cap rates do not include appreciation – dispute income yield’s which used appreciation to derive the final number.

Fed Seeks to Lower Mortgage Rates as Foreclosures Set to Double in 2009

Chris McLaughlin — Tue, 02 Dec 2008 16:29:32 +0000

Fed Seeks to Lower Mortgage Rates

Mid-Day Market News & Commentary by Chris McLaughlin, December 2, 2008
http://www.shortsalesriches.com/welcome.html

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What if there was someone who would lend you money for 24 hours, regardless of your credit, your income, and whether you just filed bankruptcy? What if you could then re-sell a property in that time and make a fortune? What if is now reality … join us for our amazing webinar tonight! Only 27 spots left:

Recession Proof Investing Webinar (Tuesday, 9 PM EST, 6 PM PST):

http://www.recessionproofinvestingwebinar.com

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Listen up folks. You need to start calling your investors …calling those fence sitters that have been sitting too long. The Federal Reserve just said they are going to start buying Treasury notes and bonds. Let’s review some gobbly gook FedSpeak that Fed Chairman Ben Bernanke said yesterday in Austin, Texas:

“The second arrow in the Federal Reserve’s quiver – the provision of liquidity – remains effective,” he said. “The Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand.”

Did you catch that? Folks mortgage rates are going EVEN LOWER. Why? Mortgage rate are directly tied to the 10 year treasury. As the Fed comes in and buys them up, that will send the yield on the treasury even lower, therefore reducing the overall rate on the 30 year mortgage.

And there’s more good news. Just last week the Fed announced that it would be buying $100 billion in debt from Fannie and Freddie, and around $500 billion in mortgage backed securities. Now what do markets do? They anticipate action and price it into the equation … so if you’re a Realtor, a loan officer, or a real estate investor, this is our version of a Bailout. Look for the 30 year fixed to stay well below 6%!

If, however, you agree with us that the government is mostly filled with morons that have been botching up this economic recovery after causing it, be sure to catch our recorded webinar on the topic:

www.shortsalesricheswebinar.com

Ok, on to other real estate related news of the day…

Are you ready for this new statistic, reported today by the Wall Street Journal? TransUnion LLC, the Chicago-based credit bureau, predicts that 7.17% of consumers will be at least 60 days past due on their mortgages by the fourth quarter of 2009. That’s nearly double where it is today. “There are a lot more loans that will be resetting throughout 2009 through 2011,” Ezra Becker, principal consultant in TransUnion’s financial-services group, told the Journal. “There may be an ongoing flow of consumers who may now be able to pay their mortgage but may not be able to a year from now.”

If you think that REOs and short sales are slowing you need to get your head on straight! They will EXPLODE in 2009. Loan modifications can only have so much impact …

Bank of America announced today that it would be eliminating at least 10,000 investment banking jobs as it soaks up Merrill Lynch. The combined companies will have about 260,000 employees, with 50,000 representing the investment banking division.

And finally … someone got a brain in the public relations department at the Big 3 Automakers. General Motors announced today that its CEO, Rick Wagoner, would drive to Washington instead of flying. The CEO, who flew by private jet sipping champagne (ok, I through the champagne in for effect…you get the idea!) for his last appearance, will drive a Chevy Malibu hybrid from Detroit to DC. Ford’s CEO, Alan Mullaly will also be driving from Detroit. Now … it would be a public relations bonanza, and it would certainly send the right message, if we could get the two of these guys to share a ride!

Now, on to our real estate investor education section…

All Pain and No Gain? Not so Fast!

While the most recent data released by the Federal Housing Finance Agency FHFA may initially seem to indicate “all pain and no gain” taking time to delve a little deeper into the numbers shows a few clear-cut nuggets in an otherwise pan of silt.

First the pain…

U.S. home prices fell 1.8 percent in Q3 as compared to the previous quarter…the largest in the purchase only index 17 year history.

Over the past year prices have fallen 6.0 percent between Q3 of 2007 and Q3 of 2008 – not adjusted for inflation. Since the price of goods and services increased by 6.7 percent during the same period, the inflation adjusted decline is 12.7 percent.

Four states continue to see double-digit declines including Nevada (-20.9%), California (-20.8%), Florida (-16%) and Arizona (-13.5%).

A Few gains…

Some states actually managed to exhibit price increases even while most of the nation continued to show declining sales figures; North Dakota (4.0%), South Dakota (3.9%), Texas

(3.2%), Alabama (2.8%), and Oklahoma (2.8%).

Several MSA or Metropolitan Statistical Areas also showed price appreciation including Austin-Round Rock, TX (5.6%), Augusta-Richmond County, GA-SC (5.5%) and Rapid City, SD (5.4%).

Extension of higher conforming loan limits into 2009. While the recent increase to $729,750 for high cost areas is due to end by January 1, 2009, revisions due to take effect will increase loan limits to $417,000 for all homes and up to $625,500 in high cost areas.

Quick Tip…

Take time to sign up for automatic notification of the FHFA report as it is released by sending an email to FHFAinfo@FHFA.gov. The next quarterly report covering Q4 of 2008 is scheduled for the end of February 2009 and the next monthly index is due out on December 23, 2008.

Where is the outrage? My perspective…

Chris McLaughlin — Tue, 25 Nov 2008 21:00:49 +0000

Where is the outrage? My perspective …

Mid-Day Market News & Commentary by Chris McLaughlin, November 25, 2008
http://www.shortsalesriches.com/welcome.html

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Sorry there was a glitch that brought our webinar down for a few hours … so we’re reposting it for today only:

http://www.shortsalesricheswebinar.com

Don’t miss it – everyone that has watched it says it is perhaps the most useful tool in understanding what’s going on in the real estate market, and how to make money in today’s environment!
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Where is the outrage?

The jets arrived in Washington. Corporate jets, that is. Usually cost about $20,000 per trip within the U.S. And they had all the nice amenities. Perhaps a sip of champagne while thinking of how many billions to ask Congress for? Perhaps a bon bon here or there, to help cleanse the palate.

And when they touched down, they were met with gas guzzler SUVs to help bring their big wig corporate honchos to Capitol Hill.

Three CEOs from the 3 big US automakers prepared to tell Congress who they are cutting costs left and right … and they’d like $25 billion from the taxpayers.

Yeah, let’s spend $20,000 on a trip to Washington while asking for $10 – $12 billion.

Did you know that General Motors leased seven corporate jets before everyone starting crying foul?

They’re going to get out of a few leases now.

Where is the outrage?

Here on Main Street. That’s where. No one else seems to care.

The same place it has always been. By the people that actually pay the taxes. The folks that aren’t participating in the “bailout.”

Citigroup gets bailed out by the government, with Uncle Sam backing over $300 billion in loans and providing another cash infusion of $20+ billion … and what do we learn that Citigroup has done?

They freakin’ spent $400,000,000 for the naming rights for the New York Mets stadium. That’s $400 million! And what does the CFO Gary Crittendon say about the waste? “That was a decision made in a different time.”

Well, actually Gary, Citigroup’s financials were pathetic last year as well. And I really doubt you’re going to see a $400 million influx of new business by naming a stadium after your company. Can you imagine how many new online banking relationships you could have if you spent $400,000,000 in online advertising with google and other pay for performance mediums? No, you clowns will go waste $400 million on a stadium.

Where is the outrage?

Here on Main Street. That’s where. No one else seems to care.

Here’s another idea on blowing money… Tiger Woods just lost his $7 million dollar endorsement deal with General Motors . That actually brought Buick back from the dead, and made it cool again (if it ever was cool). Citigroup should bail out on the dumb stadium idea, and then have Tiger Woods as their celebrity endorser.

The only problem is that Woods has an image to protect. He probably won’t want to get caught up in this bailout mess. But hey, I think we all know he pays a lot in taxes, so if they wanted to blow some money on him I’d be OK with it. Sure beats a stadium for the Mets.

And while we’re talking about idiotic ideas, let’s not forget about the clowns working at AIG. These folks actually spent $100 million to sponsor Manchester United, the UK soccer team. And when word got out about the $150 billion bailout from Uncle Sam, some folks wondered whether AIG would try to unwind out of the deal, perhaps sell its new found marketing concept to another company that’s not essentially broke?

Nope, and AIG spokesperson confirmed it was still business as usual.

Where is the outrage?

Here on Main Street. That’s where. No one else seems to care.

But I bet you do!

Now on to our real estate investor education section…

The Top Trends to Watch in 2009

As the Thanksgiving holiday approaches in the midst of one of the most volatile financial markets in decades, it might seem there is little for short sale investors to feel thankful about. As the old adage goes, there is a silver lining in every cloud and despite the downturn in the real estate market, it could turn out that investing in short sales is the best decision you ever made. Not only does it diversify your earnings potential but if these top trends for 2009 hold true, it may turn out to be one of the few ways to hold your own during the next year. I’m about to tell you some brutal facts…but keep your head about you when you read them—remember that if you know what you’re facing you’ll be able to figure out how to benefit from it!

1. Lowered Retail Sales. During what is typically the most robust period of retail sales, stores are showing more than sluggish results; they are showing downright discouraging spending patterns as the seasonally adjusted retails sales experienced their largest decline ever for October 2008. Experts expect the trend to continue well into 2009 and only worsen after this holiday season.

2. Reduced Motor Vehicle Sales. As the Big Three auto makers line up for their turn at federal funds just to make it to 2009 it should come as no surprise that motor vehicle sales have experienced their worst performance since WWII. Experts agree this is a long term trend for 2009 and perhaps beyond.

3. Housing Starts = Housing Stops. The 2009 forecast for housing starts is so bad it actually resembles a stop instead. Not only is there a 1 to 2 year existing inventory for homes but housing starts for single family homes have recently posted a low of .54 in September 2008 with no end in sight.

4. Negative New Home Sales. While existing home sales recently experienced a slight upturn, new home sales are still falling and expected to lag throughout 2009.

5. Stagnating Treasury Yields. The world is seeking safety over substance in any form they can obtain it so don’t expect Treasury bonds or securities to do more than the bare minimum throughout 2009. After adding taxes and the impact of inflation, actual yields are zero or actually negative…which still beats the stock market!

6. Dropping Consumer Confidence. Rising unemployment, reduced access to credit and diluted retirement accounts have finally taken their toll on typically optimistic Americans; in fact, the perpetual optimism has given rise to abject fear as they scramble to reduce living expenses and cut back to the basics. Short sale owners holding affordable housing will find their properties in high demand in the coming year.

7. Rising Unemployment. Outside of the government (not exactly known for its high paying illustrious positions), most industries are cutting back or planning to cut back during 2009. Expect to see more demand for homes located near convenient locations and short commute times combined with Escalating Consumer Debt. As the cost of food, insurance and other necessities merges with unemployment and other costs consumers are turning to credit cards and other debts to make up the difference. Meanwhile, banks are increasing lending standards and raising interest rates. The result is a toxic combination sure to take a toll during the next year.

Now hold on! I know you’re thinking, I’m tired of reading all this negative stuff! Folks, the reason I’m telling you this is so that you’ll get excited about the opportunities that distressed properties will bring. You need to know facts about what’s really going to happen. There won’t be a “bailout” of everyone … so there is going to be plenty of opportunity for those in the know to make money!

See you at the top!

Chris McLaughlin

P.S.:

Sorry there was a glitch that brought our webinar down for a few hours … so we’re reposting it for today only:

http://www.shortsalesricheswebinar.com

Don’t miss it – everyone that has watched it says it is perhaps the most useful tool in understanding what’s going on in the real estate market, and how to make money in today’s environment!