TARP

Mid-Day Market News & Commentary by Chris McLaughlin, December 26, 2008
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Are you ready to get 2009 rolling?  Then it is time to come to our LIVE “Recession Proof Real Estate Investing” webinar tomorrow, Saturday, at 4 PM ET and 1 PM PST! 

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GMAC Financial Services got a huge Christmas present this week when the Federal Reserve approved its application to become a bank holding company, thereby enabling it to tap into $700 billion of TARP rescue funds.  Not only will GMAC be able to tap into the bank stabilizing funds, it will also be able to borrow from the Fed’s discount window for virtually no interest. 

Somber retailers took note that the Grinch showed up this holiday season.  According to Mastercards’s SpendingPulse division, total retail sales dropped 5.5% in November and a whopping 8% in December as most Americans kept their money in their bank accounts.  Luxury items were hit the hardest, with a drop of 35%, while electronics dropped 27% and women’s apparel slid 23%.  But there was so positive news from retailers, but it just so happened to be online…

There’s more proof that Americans are tired of crazy malls and rude drivers that steal your parking spots: Amazon.com announced that its 2008 holiday season was its “best ever.”  Get this: orders came in at a record-breaking 72.9 items per second! 

Here are some pretty cool amazon.com holiday facts they released today:

• Amazon.com sold enough “Breaking Dawn” books that stacked end to end they would reach the summit of Mt. Everest eight times.
• During the period from Nov. 15 – Dec. 10, Amazon sold one copy of Microsoft Office Home and Student 2007 every 2.5 minutes.
• The weight of all GPS devices sold from Black Friday through December equals the combined weight of 151 Mini Coopers.
• Amazon sold enough high-performance headphones that everyone attending the last three Super Bowls could grab a set and rock out.
• Amazon Grocery sold enough coffee to give each resident of the highly caffeinated city of Seattle a cup per day for two months.
• Amazon sold enough Casio G-Shock watches to outfit every Kanye West fan attending the 2008 Glow in the Dark Tour concert at Madison Square Garden, N.Y.
• Amazon sold enough Coldplay CDs that laid side by side they’d stretch from Seattle to Violet Hill (a street in London and the album’s first single) and more than halfway back.
• Amazon sold enough Munchkin Mozart Magic Cubes to fill every seat in the Sydney Opera House five times over.
• Amazon sold enough Wild Planet Hyper Dash games that the total weight of sets sold is over 81,000 pounds — almost the size of two 747 aircrafts.
• Amazon sold enough Spalding basketballs to fill three C-130 cargo planes.

Now, on to our real estate education section…

The Misery Index and Short Sales Negotiations

The Misery index is derived from taking the unemployment rate and adding it to the rate of inflation to gauge the economic and social climate of the nation. The higher the misery index, the more negative and desperate the average consumer tends to become. The low was 2.9 percent in July of 1954 with the high reaching 21.9 in June of 1980. Today the misery index stands at 7.77 and rising as of the end of November 2008.

So, how should short sale investors use this information? Well, in a couple of ways. First of all, watch the macro trend…as the index increases so too does the uncertainty of the average American consumer (and by proxy, business owners). Their spending habits tend to decrease and they often start to save for a rainy day.  People, business owners and even banks in this stage tend to think it is short-term and less inclined to negotiate more than a minimal reduction.

Next, watch for a shift. The second stage takes place as momentum builds and the rate of change increases at a faster and faster pace. Uncertainty gives rise to outright fear as people begin to worry about their own job or financial future. Banks and business owners begin to think this could last longer than expected and begin to pad their own balance sheets for the long run. There is a decidedly motivated response to downsize unnecessary assets, overhead or other non-performing holdings.  Short sale investors will find these individuals and banks much more motivated especially if approaching with fast closing and minimal escape clauses. The emphasis of 90 percent (or more) of people will be a flight to “safety” during this  stage as evidenced by the purchase of government bonds or other items that provide little to no real return.

The third and final stage is recuperation. Banks, investors and others realize the properties or other holdings were now over-sold and represent financially desirable long term investments. Even more importantly, there is a renewed interest in actual earnings due to the erosion of real earning power. Every short sale investor will do well to remember that earned income represents only a relatively modest allocation of most income…over the long term few people can actually live entirely on their own earned income. At this point, the money tends to flood into tangible assets and commodities including oil, real estate, farm and agricultural lands or products, oil, minerals, natural gas and other related holdings resulting in rapidly rising prices…and profits for those with the foresight to buy during stage two.

So, where are we today…most experts agree we are now transitioning from stage one into stage two making this the perfect time to begin buying foreclosures and short sales in earnest.  To keep track of where the misery index is heading, visit http://www.miseryindex.us/default-pda.asp at least quarterly. 

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See you at the top!

 

Chris McLaughlin
http://www.shortsalesriches.com/blog

P.S.:

Are you ready to get 2009 rolling?  Then it is time to come to our LIVE “Recession Proof Real Estate Investing” webinar tomorrow, Saturday, at 4 PM ET and 1 PM PST! 

https://www2.gotomeeting.com/register/521115603

 

Mid-Day Market News & Commentary by Chris McLaughlin, December 12, 2008
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Tired of being sick and tired of this economy and all the negative news that goes along with it?  We have an amazing recession proof investing strategy that we’ll reveal to you on our webinar that we’re hosting tomorrow, yes SATURDAY at 2 PM ET LIVE.  This is your opportunity to learn about RECESSION PROOF INVESTING.  We’re going to share with you TRUE STORIES of investors who made over $80,000 and over $115,000 using the methods we’re teaching!  Go here now, there are just 18 spots left:

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The good news keeps coming for mortgage rates: they hit a 4 year low at 5.47% and then dropped further to 5.33% yesterday, with no points or origination fees. The new rates have encouraged fence sitters to jump off and begin making purchases, and loan officers have reported a bounce in mortgage applications as well.

Bank of America announced late yesterday that it would be giving pink slips to over 35,000 employees as it finalizes its merger with Merrill Lynch.  The reduction will account for approximately 10% of the combined companies’ total employee base.  The announcement comes on the heels of a similar one from Citigroup, which announced last month that it would eliminate 52,000 jobs, or about 15% of its total workforce.

And in a sign of the greedy times on Wall Street, get this: the former Chairman of the Nadaq Stock Market was arrested for what investigators have described as a “stunning fraud that appears to be of epic proportions.” The fraud is estimated to be a “50 billion Ponzi scheme,” where the assets that Mr. Madoff would tell his investors about actually didn’t even exist.   I wonder whether Madoff will ask the Treasury for a bailout?  Think about it … banks lied about the value of their mortgage bank securities and induced people into loans they weren’t suited for, so why given them money and not Madoff?  Ok, I’m just kidding but you get the point!

And in the latest on the Big 3 Bailout, it appears that Congress hit a snag and can’t come to agreement … so the Bush Administration is reversing course and now suggests that the money might be able to come from the $700 billion TARP.  “Under normal economic conditions we would prefer that markets determine the ultimate state of private firms,” White House press secretary Dana Perino stated. “However, given the current weakened state of the US economy, we will consider other options if necessary, including use of the TARP program to prevent a collapse of troubled auto makers.”

Now, on to our topic of the day: Recession, Depression, Inflation, Deflation…What’s it all About and How Does it Impact Real Estate?

Ronald Regan once stated “A recession is when a neighbor loses his job. A depression is when you lose yours. If we were to apply the same logic to the real estate market, then the nation has been in the midst of a recession for some time as people have been steadily losing (or walking away from) their homes. In fact, there is a great deal of recent debate on whether the nation is already in a recession and heading for a depression or whether the easy money economics of the Federal Reserve will prevent a depression at the risk of creating further inflation…or perhaps world-wide deleveraging will actually result in massive deflation instead. Let’s take a few moments to examine real estate in each of the above scenarios’…

Recession. Unlike employment figures (or stocks), real estate doesn’t act the same as jobs during a recession. When a worker loses a job the position may be completely eliminated (or the stock completely wiped out). When someone loses a house it reverts back to the prior owner, heirs, bank or local government. Short sale buyers realize the inherent value in the home or property and act like a middle man to obtain a percentage of that value for themselves in the form of resale, rentals or retained equity.

Depression. During a depression the entire economy may slow down so much that little to nothing is being produced. Job loss often runs rampant as prices drop below the cost of production. Unemployment drives labor costs down – creating a downward spiral as unemployed workers are unable to afford more than the basic necessities. Again, jobs and stocks alike may all but disappear during a depression but a house remains standing. Housing is a basic necessity and tends to take top priority even during the most critical economic crisis.

Inflation. Inflation tends to drive the price of all commodities and assets higher as the replacement cost rises; real estate is no exception. With the Federal Reserve practically printing money out of thin air, the ability to own or control physical assets with a fixed rate of interest is often the best way to preserve wealth during periods of escalating inflation. On the other hand, the increased cost of production and labor often leads to more work for less pay among employees.

Deflation. Falling assets prices and world-wide deleveraging tend to drive down the price of commodities and assets including real estate. However, short sale buyers are often purchasing property at or near the fully depreciated value. Even those who experience further price drops still have other options available to bridge the gap until the market recovers; rentals, owner financing and factoring may each help raise needed capital or reduce individual debt repayments until the property has regained full value. 

 

More on Monday!

See you at the top!

 

Chris McLaughlin
http://www.shortsalesriches.com/blog

P.S.:

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Mid-Day Market News & Commentary by Chris McLaughlin, December 10, 2008
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Investors who truly leverage the power of Internet and “Web 2.O” strategies BEFORE everyone else jumps on the bandwagon will have an opportunity to set themselves up for a lifetime.  I’m not talking about you being able to do a few more deals this year… I’m talking about a complete lifestyle change.  We promise to blow your mind!  Tonight at 9 PM!  Implement “Web 2.0″ strategies in a way that will have a profound impact on your business.  Just register here today:

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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.

More on Thursday!

 

See you at the top!

 

Chris McLaughlin
http://www.shortsalesriches.com/blog

P.S.:   Investors who truly leverage the power of Internet and “Web 2.O” strategies BEFORE everyone else jumps on the bandwagon will have an opportunity to set themselves up for a lifetime.  I’m not talking about you being able to do a few more deals this year… I’m talking about a complete lifestyle change.  We promise to blow your mind!  This Wednesday at 9 PM!  Implement “Web 2.0″ strategies in a way that will have a profound impact on your business.  Just register here today:

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Understanding Depreciation in Real Estate

Mid-Day Market News & Commentary by Chris McLaughlin, December 3,  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 last night … Right now there are only 27 spots left:

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In the latest on the botched government bailout, the Government Accountability Office blasted the internal controls over the handling of the $700 billion allocated for the TARP bailout.  The report specifically noted that the ultimate outcome – providing liquidity and getting banks to lend –is not being monitored.  As it notes: “Treasury has no policies and procedures in place for ensuring that the institutions are complying with these requirements or that they are using the capital investments in a manner that helps meet the purposes of the act.” 

 

So let’s give the banks $300 billion … but put no requirements that they actually lend it.  Hmm… and guess what’s happening?  They are hoarding the cash, so Main Street still gets hurt.  Our bet: the next $350 billion that goes out has a lot more strings attached to it, not just restrictions on executive pay and dividend payouts.

 

And in the latest sign of desperation from the Big 3 Automakers, Jim Press, the Vice Chairman of Chrysler said the big D work: depression.  “We’re on the brink with the U.S. auto manufacturing industry,” Press told The Associated Press.  “If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it’s a huge blow. It could trigger a depression.”

 

Depression?  Really?  That’s really pushing the envelope folks.  First they fly in with corporate jets asking for help.  Now they’ve gone to scare tactics because the American people are not happy about another bailout.  How about designing cars that are fuel efficient?  Novel idea, eh? 

 

President elect Barack Obama nominated New Mexico Governor Bill Richardson as the Secretary of Commerce.   “We have everything we need to renew our economy, we have the ingenuity and technology, the skill and commitment — we just need to put it to work,” Obama said.

 

Now on to our real estate educational section …

 

Understanding Depreciation—Especially on Short Sales & REOs

 

When it comes to buying and selling short sales, foreclosures or other distressed real estate an understanding of depreciation is essential. To begin, let’s use a working definition of depreciation; depreciation is simply an accounting method of reducing accounting income by spreading the deductible fixed asset cost over the estimated life-span. Two questions should quickly come to mind; “what is a fixed asset” and “what is the estimated life span”?

 

When dealing with real estate the house and property are considered “fixed” assets; other items such as appliances are also assets but not long term. For tax planning purposes, the government has established typical life-spans associated with most assets; for example, buildings often have a life-span of 27.5 years, appliances 5 to 7 years etc…land, which doesn’t deteriorate or become obsolete, never depreciates.

 

There are several ways to calculate depreciation depending upon your specific needs and situation but it is important to understand the benefits and consequences of each; once you select a method it is difficult to impossible to change to another formula in future years.  The two most common methods are the straight-line  and units of production however, for the purpose of real estate, most short sale investors will only use the straight line formula.

 

The straight line formula is easy: Depreciation = cost-salvage value/number of years of useful life. So for example, if you purchase a new HVAC unit for a home at a cost of $5,000 then subtract a salvage value of $500 for a total of $4,500 divided by a 10 year lifespan you would derive an annual depreciation of $450.

 

Alternative depreciation calculation methods include “Sum of the Years’ Digits” and “Double Declining Balance” are useful when additional depreciation is needed earlier in the lifecycle of the asset. Keep in mind, whatever method is used, the total depreciation will result in the same amount by the end of the period. It is only the annual amount of depreciation that changes.

 

A few depreciation tips to keep in mind related to short sales:

1.     Bonus depreciation is currently authorized for investment properties – this accelerated depreciation is a major tax advantage to those seeking a shelter or hedge against gains. If you currently need additional tax breaks then take it; otherwise, use the standard straight line depreciation method without the acceleration.

2.     Calculate depreciation when crunching numbers; depreciation can turn marginal homes into the black rather than the red.

3.     Consider selling or doing a 1031 exchange on properties nearing their full depreciation schedule; be careful to calculate depreciation recapture.

4.     Depreciation isn’t optional; short sale investors that fail to take depreciation will still be liable for it later.

5.     Always review accumulated depreciation expenses reported on income statements/other of investors/sellers etc; accumulated depreciation on a fixed asset is a solid method of determining book value and the real “worth” of a fixed asset.

 

 

More on Thursday!

 

See you at the top!

Chris McLaughlin
http://www.shortsalesriches.com/blog

P.S.:

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