investor

Wall Street continued to send its messages of anxiety to Capitol Hill today, with the Dow Jones Industrial Average dropping 161.52 to 10,853, or 1.47%.  But in a positive sign for the Bush Administration, legendary investor Warren Buffett told CNBC’s Becky Quick: “It’s what I would do if I were there.” 

In real estate news, the Office of Federal Housing Enterprise Oversight’s House Price Index showed that home prices slipped 5.3% over the last 12 months ending in July and slipped .6% from June to July.  This is the largest decline since another period that ended in April 2007 (the index began in January 207).  All regions were affected, giving further proof that the decline in prices is a national rather than regional issue.

Now, on to today’s topic …

Real Estate versus Bonds and the Flight to Safety

The recent financial crisis has many investors seeking “safety” above returns as the emphasis shifts from creating above average returns to preserving capital. As millions of Americans watch their stocks, bonds, retirement accounts and general investment portfolio’s drop by 10 or even 20 percent (or more) they are turning to the safety of Treasury Bonds. Is this the best an investor can hope for? Is it even wise? Let’s take a critical look at short sales versus the “safety” of Treasury Bonds to see if the numbers really add up.

Treasury Bonds

The flight to government securities has taken on a new urgency as investors seek safety above returns. While it is true that the principle amount is guaranteed by the “full faith and credit of the United States government”, not everyone would agree that government bonds are truly safe. In fact, some may argue they are some of the most risky investments possible.

Few people would argue the low yield of Treasury or Savings Bonds leave much to be desired especially when adjusted for inflation. Even if you agree with the governments estimated rate of inflation as recorded on the CPI, the real return on government securities is close to zero…in fact, last week it went negative for a short period! Since inflation is not calculated into the “profit” but rather the nominal rates only, taxes earned on the “profit” further reduce yield leading to an actual loss of purchasing power. Let’s use a deliberately simplistic example to demonstrate.

 Assume you had $100,000 to invest into treasury backed securities with a current rate of inflation at 5 percent and a yield of 4 percent.

At the end of one year, the balance in the account would grow to $104,000 showing a “profit” of $4,000 which is then taxed at a minimum of 15 percent or $600 for a total of $103,400. However, inflation of only 5 percent (the government estimate is higher and most analysts put it into double digits) means that $103,400 can now only purchase $98,230 worth of goods. In only 12 short months you have actually lost nearly $1,800 of purchasing power. Unfortunately, the actual numbers are much worse since inflation is rising rapidly. As the real rate of inflation approaches double digits, the actual loss of purchasing power can reduce your investment by half in as few as five to seven years!

Short-Sales & Real Estate

Now let’s examine real estate. Let’s assume you had the same $100,000 to spend and used it to put 20 percent down on five short sale properties (a nice hefty sum to be sure…and with the Short Sale System something you can likely avoid) with an average price of $200,000 each. Let’s further assume that each of these properties was formerly priced at $250,000 and have each lost $50,000 prior to being indexed to the current rate of inflation. Since this is a short sale, we will assume the sales price is close to the actual value of the property today but notice, even if it continued to fall for a short period of time, you have other options available to offset the losses (tax incentives for example). You now control $1 million of real estate. “Real” or physical assets tend to increase in value with inflation as it drives the cost of goods and services to higher and higher levels. Using the same 5 percent rate of inflation, the holdings would grow by 50k in just the first year alone…nearly ½ your total cash outlay! 

This is a very simplistic example but it demonstrates the power of inflation to build or destroy wealth. Throughout history there have been two primary means to building wealth in this nation: building a corporation or building real estate holdings.

So where do you go with this information? What are you doing right now to help investors understand that it is time to move money away from equities and into real estate?  Are you continuing on the sidelines of real estate hoping for a market rebound, or are you mastering the market of the moment and learning everything you can about short sales and REOs?  I hope it is the latter.

See you at the top!

Chris McLaughlin
Attorney at Law, Licensed Real Estate Broker
http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com

P.S.:  If you haven’t checked out our short sales system, you really need to.  It is at http://www.shortsalesriches.com/welcome.html.  Nate told me he has 4 closings this Thursday.  And his Realtor, Jason Turk in Tampa, is making over $30k in commission. Not bad for an investor-Realtor combination, huh?

Yesterday, I was talking about how I was getting nervous over handling two different lenders in a short sale.

Finally, after one sleepless night (we had 5 business days until the end of month and we were nowhere near getting close to closing as I was still waiting on the approval letter from the second. It was verbally approved, but I needed it in writing.)

I finally decided I had nothing to lose and only much to gain if I did my homework. I remembered that I had the payoff letter from the first in the file, so I knew exactly just how much of a loss the first was really taking. I also looked up the case status on the court website to see how far along the whole foreclosure process was.

I was amazed to discover that the Motion for Summary Judgment was scheduled for the end of the next month!! We all know (don’t we?) that that hearing is only one of the first steps necessary in order for the lender to foreclose on someone. With that information in hand, plus a little bluffing about talking with Fannie Mae, I typed up a fax and just summarized the above information.

After stating that the “investors” still had a bunch of money to spend in order to foreclose on my poor client, wouldn’t it be much smarter to grant an extension in order for my well qualified buyer to purchase the home?

I faxed the letter and ten minutes later my cell phone rang. Guess who? Yes, it was my loss mitigator from the first, and boy was she friendly this time, telling me that my extension had been granted!!!!! We close in two weeks and all parties involved are happy.

Now, that’s what I call turning a bad situation into a win-win with the knowledge learned from Chris and his amazing short sale techniques!!

-Elaine Boxterman

Do you have a short sale going on right now, and there are two lenders involved? Well, if you do, and you have been trying to make it work, this might be very interesting to you…….

Let me start off by saying that my preferred short sale listing only involves one bank.

This particular listing had a first and a second equity line of credit. The second was really dragging their feet. The balance was almost 40K, and they wanted 30K. The first was only willing to give 1K. Going back and forth, I was finally able to get the second a whopping $6500!! The first wanted to close by the end of the month, but the second hadn’t even approved the $6500. I was literally pulling my hair out calling and trying to sweet talk the female loss mitigator into granting an extension. She kept on saying, “The investors need to close by the end of this month, or the file will be closed.” I would fax, I would call, but nothing swayed her in my favor.

More tomorrow

-Elaine Boxterman