wachovia

Mid-Day Market News & Commentary by Chris McLaughlin, October 22, 2008

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The stock market was lower in early afternoon trading as investors feared more bad news would come out as corporations report their earnings.  At 1:35 PM EDT, the Dow Jones Industrial Average was down 410.83 to 8662.82, the NASDAQ was down 52.25 to 1,644.42 and the S&P 500 was down 44.93 to 910.12. 

Wachovia reported dismal earnings this morning – a huge loss of $24 billion.  Yes, that’s billion, not million!  Part of that loss was an $18.7 billion “goodwill impairment charge,” a fancy way of writing down the company’s value to prepare for the upcoming sale to Wells Fargo. 

Storm related losses negatively impacted the earnings of Travelers Cos., the St. Paul, Minn. based commercial and personal property insurance company.   Earnings dropped to $214 million versus $1.2 billion in the year ago period.   Hurricanes Ike, Gustav, and Dolly cost the insurance company around $682 million. 

But in a positive sign, credit markets appeared to be stabilizing today.  The interbank rates continued to drop, which means that banks are lending to other banks on better terms.  The London Interbank Offered Rate, also known as Libor, fell to 3.54% from 3.83%, demonstrating the credit is in fact easing. 

Now on to our real estate investing educational section…

Affordability Measures & Pricing Strategies

In the past we have discussed various valuation methods above and beyond the typical “comp value” so loved and over-used by bankers and brokers throughout the nation. Today we will spend a little time covering alternative affordability measures as a basis by which to make an offer on a short sale property.

Like its cousin the comp value, determinations of affordability have typically centered on a debt-to-income ratio that makes little sense in today’s market. It goes something like this…
Person X wants to buy a home and makes $150,000 per year. Their current car payments, credit cards, student loans and other obligations qualify them for a mortgage payment of $$3,000 per month based upon a typical ratio of 25-35 percent.

Unfortunately, few people remain in the same job for 30 years like their parents before them and decent jobs are hard to find. The company downsizes and unemployment tops out as a miniscule fraction of their monthly income. Before long, they are behind on their mortgage. Sound familiar? It should because as a short sale investor you have probably heard this story dozens if not hundreds of times.

A common sense alternative measure of affordability is to take the “average” income for a given geographic area and correlate it to the type of earning capacity. For example, if Person X is a white collar worker located in Los Angeles their earning capacity is higher than the average earning capacity of the same job located in Boise Idaho. That does not mean individuals cannot make more money –but rather what they can expect to earn should they experience a job loss and need to replace the income. Communities and the United States government use affordability as a measure for determining whether homes are priced too high for a given area and so should you. It’s a strong argument to use when working with bankers and brokers who may feel your bid offer is too low. Simply use the following steps:

1. Determine the average household income for the zip code.

2. Determine the cost of a home that would equal 25-35 percent of the average household debt at the prevailing interest rate – don’t forget taxes and insurance.

3. Deduct the cost of major repairs or other required work.

4. Drop the price by 10 (or more) to account for reduction of anticipated fees the bank would normally incur to hold the home.
Another affordability measure that can be used to support a low bid price is rental rates. Many areas have low rental rates below the actual cost of PITI should someone opt to buy the same home. The Federal government actually uses rental rates to calculate CPI so it should come as no surprise it tends to derive a lower value.

1. Determine the average rental rates for similar homes in the area- not asking rentals but actual rentals without a vacancy.

2. Compare against the PITI, vacancy rates, repairs, HOA fees and other costs. If rental rates are lower than the cost of ownership, use the rental rate as a basis to determine the selling price.

More on Thursday!
See you at the top!
Chris McLaughlin, J.D., M.B.A.
web: http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com
Phone: (800) 452-7627

P.S.: 
Interested in learning how to make over six digits a month flipping real estate short sales on autopilot? 

Join us Thursday, October 23th at 9 PM EDT, 6 PM PST:
https://www2.gotomeeting.com/register/745919360
RSVP early as spaces are limited!

P.P.S.: If you already have the system, are you ready to really take it to the next level?  Go to http://www.shortsalescoach.com to learn how.

Market News & Commentary by Chris McLaughlin, October 3,  2008
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The U.S. House of  Representatives approved the Senate version of the Bailout plan to stave off what Warren Buffett has described as an “Economic Pear Harbor.”  The final vote was 263-171, a much larger margin than the failed attempt earlier this week.   President Bush is expected to sign the legislation immediately.  But stocks lost their excitement since news from the Labor Department that employers eliminated 159,000 lobs last month, the worst reduction in 5 years, providing further evidence of a weakening economy. 

Thanks but no thanks is what Wachovia told Citi today as the bank announced that it would rather merge with Wells Fargo in an all-stock deal for $15.1 billion.  The Wells Fargo deal would not require the backing of the Federal Deposit Insurance Corp. (FDIC) and would value Wachovia at around $7 a share, much more than the Citigroup deal would have offered.  But Citi is balking and has indicated that its agreement to merge with Wachovia cannot be terminated and that Wachovia could not sell to Wells Fargo.  This will be an interesting one to follow for sure…

Now on to our real estate market commentary…

Short Sales and Leasebacks

 When it comes to short sales and lease backs there seems to be a lot of confusion. Should you consider buying a property  then immediately leasing it back to the owner/occupant? As an investor you obtain a stable asset with consistent cash flow and appreciation without a lot of headache…when it works right.

 The idea isn’t new although it fell out of vogue after the relative stability of the 90’s and early part of this decade. Chances are, the name Billman comes to mind when you think of lease backs; Billman, considered by many to be the king of the lease back, created LLC’s to buy model homes from builders and then leased them back. Today, builders and commercial developers are once again turning to leasebacks as a way to generate revenue – but does it work for the average short sale investor? Will it remain legal? How does it work? Here is what you need to know about short sales and leasebacks…

 1.     Pending legislation may limit or prevent future short sales. Maybe. Many investors follow a modified version of Billman’s LLC model to create a separate entity which then enters into the lease on behalf of the buyer/seller relationship.

 2.     Built-in renters. Depending upon the reason for the short sale, many current homeowners would be more willing to consider a short-sale if a leaseback option is allowed. Medical bills, desire to remain in the same school district or other personal considerations often keep a homeowner in a home long after all hope is gone. By meeting their emotional needs, both parties win.

3.     High Risk. Obviously you are dealing with people in financial distress who may be facing severe economic constraints. It should come as no surprise they are often poor credit risk, non-collectible and at higher than average risk for non-payment or default.

4.     Interest Rate Spread. For those short sale investors that eventually decide to sell the property, today’s low interest rates remain an attractive proposition; obtain an instant income without the hassle of rising property taxes, escalating insurance or maintenance simply by selling back at a higher fixed rate. Low rent gives the occupant time to get back on their feet while living in the home then buy back the property at a later date. Playing banker by taking advantage of the interest rate spread combined with rising home values expected to take place within a few years creates a home run for those with the wherewithal to put the plan into effect.

More on Monday …

Chris McLaughlin, J.D., M.B.A.
web: http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com

Phone: (800) 452-7627

P.S.: 

Want to know how you can pull in six figures a month doing short sales on autopilot?  Join us for our fr.ee Webinar that will reveal the Top 12 Strategies on Getting Rich with Short Sales:

 

https://www2.gotomeeting.com/register/967993793

 

P.P.S.: If you want to have a great laugh, check out this latest  YouTube video about Nathan’s autopilot system where he doesn’t talk to banks, doesn’t talk to sellers, and doesn’t talk to buyer.  What does he do?  Click here to find out:

 

http://www.youtube.com/watch?v=QsOLmgTY–U

 

and if you like what you see in the video, then go here and take action:

 

http://www.shortsalesriches.com/welcome.html

Market News & Commentary by Chris McLaughlin, September 29, 2008
http://www.shortsalesriches.com/welcome.html  

Financial and credit markets are in crisis.  Congress failed to pass the Administration’s bailout today.  Fear, panic, and calamity overcame investors as many threw in the towel after the US House of Representatives gave a stunning rebuke to the Bush Administration as well as Congressional leadership.  The Dow Jones Industrial Average plunged 777.68, nearly 7%, and the S&P 500 dropped 8.79%.

 Investors were wondering what bank was going to be next after Citigroup announced that it would scoop up Wachovia for just $1 a share (Wachovia shares plunged over 81% today).  But Citigroup is not necessarily getting the bank for cheap—it must write down much of Wachovia’s $312 billion loan portfolio.

So let’s take a deep breath.  All within a month Fannie Mae, Freddie Mac and AIG are owned by the government.  Washington Mutual is gone, bought on the cheap by JP Morgan.  Lehman Brothers is history.  Bear Stearns was already history.  Wachovia’s shareholders have been wiped out and are now Citigroup shareholders for pennies on the dollar.  Brand names that Americans recognize are gone.  All within a month.  Wow.

What’s next?  You can see that regional banks are under intense pressure.  Banks like Fifth Third dropped ‘43% today, First Federal Financial dropped 25% and KeyCorp plunged 33%.  “Who’s next?” is now the topic of conversation across the nation.

If you’re trying to get a sense about the level of anxiety about economic activity, just look at energy prices.  Crude oil dropped $10 a barrel today as many believe that with the slowing economy so too will there be less gasoline and oil used.  Crude oil has dropped over 20% in just the past two weeks. 

Now, on to our Realtor and investor education section…

Now that the stock market is in utter chaos, typically investors look again to “hard assets” like gold and housing to invest in.  Many of you reading this are either investors or realtors … so let’s take the approach of understanding how to best advise clients to get into real estate versus gold.

On September 17^th, gold recorded the largest ever advance as it soared $120 within a 24-hour period. Just a few months ago, gold reached a record-breaking $1,000 plus per ounce for a short period of time. Considered by many to be “Gods Money,” gold has enjoyed a long and illustrious career as a “hedge” during periods of rapidly escalating inflation or other economic uncertainty but does it deserve the reputation? Should you run to liquidate holdings and buy gold bullion? Most of all…how does it compare to real estate when the going gets tough?

To answer these – and maybe a few other burning questions – today we will spend a little time discussing real estate and gold as a hedge during uncertain economic times. Every portfolio has room for both but use these facts when deciding what percentages to allocate to each:

Fact #1: Real Estate as an Index. The Gold Standard is long gone. Whatever your opinion of removing the dollar from the gold standard, the fact is the dollar is a fiat currency without a gold backing. That has been – and remains – the current state of affairs. The fiat – or paper currency – has not been backed by gold for decades and despite the occasional lone voice crying in the wilderness, little serious attention has been given to restoring the currency to a gold-backed standard. During a period of time when many doom-and-gloom types are calling for a complete collapse of the dollar, savvy real estate investors may well turn to the Weimar Republic as a working example of what happens after a currency collapses: Germany turned to real estate (rather than gold) holdings as the foundational index for the newly created currency!

Fact #2: Shelter is a Primal Need. As any student of psychology or human behavior knows, during times of uncertainty, people tend to seek out the most basic needs of food, clothing and shelter. Although gold is an item of intrinsic value, it does not compare to that of shelter. The worse the economy – the more people return to the values of home and hearth. In fact, much of the value of gold is due to its ability to be used as a unit of exchange for food, clothing and shelter during times of need. On the other hand, if you own real estate – ie, shelter, land able to grow food, water and other essentials then you have the most sought after commodity of all.

Fact #3: Gold can – and has – dropped significantly in the past. Like all recent investments, gold has seen highs and lows. Real estate has experienced 20 percent drops in price but so has gold. Looking back at the late 70’s and early 80’s, gold momentarily reached a high of $845 per oz only to steadily decline for the next 20 years when it finally bottomed out at approximately $250 per oz…NOT adjusted for inflation! On the other hand, while real estate also experienced a sharp price increase during the late 70’s and early 80’s it then remained stagnant for approximately a decade – barely keeping pace with inflation (but still managing to hang on).  Those who held gold rather than real estate – lost.

Remember, those who don’t learn from history are doomed to repeat it. Learn the lesson from Weimar Germany, the United States in the late 70’s and early 80’s and even man himself…men steal gold but go to war for land.

So let’s get this straight.  Mom and Pop don’t have much money anymore, but what little money they do have is now losing money and now banks aren’t safe.  Credit has tightened beyond all recognition and the thought of getting a loan that isn’t government backed is laughable.

  

But it is the single biggest gift many of us will ever be given in our lifetime!  Wherever the public runs one way, I say run the other.  And I have made a lot of money because of it.  It is time to buy foreclosures and start understanding how short sales can build major wealth.  It is time to get excited about being a Realtor or real estate investor again!

 

So we’re going to do it again tomorrow night (Tuesday).  We’re hosting a Webinar (you need a computer and a phone to participate).  Last week’s webinar was nearly sold out, so if you’re interested in learning how to make money in this market jump on this now and register while we still have openings:

https://www2.gotomeeting.com/register/759612505

 

The webinar will be both Nathan and I discussing how you can turn this crazy market into the biggest opportunity in a lifetime.  It begins at 9 PM ET (6 PM PST) so that our friends on the West Coast can join us, too.  Sorry if you’re East Coast you might have to stay up a little late but the fr.ee content is well worth it! 

 

So remember … in this market, you can now buy low, and not only sell high, but sell fast.  And that means less risk, less holding costs, and money in the bank.  But you have to do more than read this and agree … you need to take action, too.

 
See you at the top!

Chris McLaughlin, J.D., M.B.A.
web: http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com

Phone: (800) 452-7627

P.S.:  If you want to have a great laugh, check out this latest YouTube video about some hate mail that Nathan and I received!   Here’s the link:

http://www.youtube.com/watch?v=AHWX_2oXdm8

 

and if you like what you see in the video, then go here and take action:

http://www.shortsalesriches.com/welcome.html

 

Market News & Commentary by Chris McLaughlin, September 26, 2008
http://www.shortsalesriches.com/welcome.html  

Bye bye WaMu.  It was nice knowing you. 

Washington Mutual finally went bust – everyone was expecting it, and its stock had been in the tank for months.  But it finally happened.   Any who benefited?  Certainly not WaMu shareholders…but it looks like JP Morgan Chase will be the winner here.  JP Morgan Chase bought WaMu’s $307 billion in assets and $188 billion in deposits for a mere $1.9 billion, which actually goes to the FDIC.  The bank will also re-capitalize by selling some of its stock to raise $8 billion.  The combined entities will have 5,400 branches in 23 states.  JP Morgan shares jumped 10% on the news, as investors believe the company continues to gobble up assets on the cheap that will ultimately provide a solid shareholder return.

But the fall of WaMu certainly could put more investors in a panic and tighten up liquidity.  The good news is that the White House says that by Monday a deal should come together.  In the latest political twist, a group of conservative house Republicans, led by Representative Boehner, said that instead of buying the illiquid securities the government should just insure them. Other proposals have reduced the proposed $700 billion to $250 billion with another $100 billion provided at the President’s discretion and a final $350 billion would be provided after the next President is elected (subject to Congressional approval).  We’ll know more Monday.

Wachovia also tanked today, as shares slid 31%.  Investors are still nervous that Wachovia’s 2006 purchase of Golden West Financial, which has $122 billion in exposure to subprime mortgages, could lead to the company’s ruin.  But in after-the-bell news the New York Times reported Wachovia is in early talks with Citigroup to be acquired.  Looks like the only ones making money these days in New York are the mergers & acquisition attorneys. 

In real estate news (although all this news is related to real estate!), KB Home reported a 56% decline in revenue.  “These difficult conditions have now been exacerbated by the recent, unprecedented turmoil in financial and credit markets,” said Chief Executive Jeffrey Mezger.  The company lost $144.7 million for the three month period ending August 31^st.  But in typical Wall Street fashion, the results weren’t as bad as some were expecting, so the stock closed up 1.89% today.

Now on to a real estate discussion…

I’m still hearing from people, Chris, how does this all affect my business?  I’m a realtor…I’m a real estate investor.  Or I’m thinking about getting into real estate investing.  Is now the best time?

Folks, there’s never been a better time!  When equity markets are awful, and investors are looking for hard assets, where do you think they are going?   Well, precious metals that’s for sure.  But don’t forget about bricks and mortar.  Some investor pulls out $500,000, does a self-directed IRA into real estate, and gets a 8% to 10% return on the cash just based on rent alone.  Then they get the upside appreciation, too. 

I’m telling you.  Read me loud and clear: when financial markets plunge, the real estate market will be the beneficiary.  Just watch.  Only so much money can go to gold.  Or better yet, start taking action!

So who gets us out of this mess?  You do.  If you’re reading this, you’re probably a real estate agent or investor.  Once you get going, and do your thing, and start telling people that the real estate market is A LOT more stable than the stock market, you’ll begin to make sense.

And guess what else?  Banks are tanking.  They have to unload nonperforming assets. So short sales will become easier.  REO’s will become plentiful.  And realtor bank accounts will start filling up, not depleting.

So hang in there.  Sure it is painful for your 401(k), but you better be able to make it back in spades with the opportunity you’ve got in front of you.

See you at the top!

Chris McLaughlin, J.D., M.B.A.
web: http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com

P.S.:  Thank you for the hundreds that joined our Webinar last night!  What an amazing opportunity to learn about short sales and investing.  We’ll be doing another one NEXT THURSDAY at 9 PM as well as one during the day (to be announced), so go ahead and setup your DVR to record your favorite shows next week so you can attend our Webinar!

P.P.S.: Have you thought about building an investor-focused short sales business? There’s never been a better time. Go now to http://www.shortsalesriches.com/html and take action today!