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.

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TARP Bailout Criticized by Oversight Group