Sunday, November 14, 2021

Are We In A Bubble?

Many people are looking at today's housing prices and wondering will they keep on going up, will they hold at this new level or will they come down with either a giant crash or a slow hiss of deflation. I tried to polish my crystal ball the best I could, but it remained cloudy. This is probably because housing prices, like food and energy prices do not exist in a vacuum. There are many factors pulling them in different directions.

There are a few factors that are abundantly clear. Although we have our own opinion, we will present the facts as we see them and stand back so you can draw your own conclusion.

Unique Markets

Although housing prices have reached the outrageous stage, there are a few areas where they have begun to retreat. Keep in mind that in spite of general trends, individual real estate markets can be unique. Urban areas can witness a mass exodus while suburbs and country are booming. At other times the reverse is true.

Among the recent trends is one caused by the fact that many people have figured out they don't have to deal with crowded cities and they can work from home – almost anywhere. That is another story, but with a more than tangential impact on our topic.

Obstacles To Overcome

We see these high real estate prices at a time when some are experiencing job insecurities brought on by economic conditions such as supply chain disruptions and government mandates. Consider the plight of pipeline workers who bought homes based on the better than average income this construction gave them. With a stroke of a pen, those jobs were gone. At this writing, the powers that be are considering shutting down still another pipeline. Then we have medical professionals, who also generally make good money... last year's heroes are this year's zeroes if they don't take a medicine they may have little confidence in. Whether you agree with these actions or not, the impact is real and the money may no longer coming in to make payments on the homes they bought or were thinking about buying.

Beyond that, we are seeing inflation coming upon us at a near record rate. There is less to spend on housing after paying more for food, clothing and gasoline. Whether this actually would keep some from paying the price in the current market or if it just makes people feel less confident and wealthy is really immaterial if it changes their behavior.

So except for the few who have figured out how to prosper in these unusual times it looks like higher and higher prices will be creating economic headwinds. But – remember local markets do not always follow greater trends. Mortgages remain unreasonably low, even as prices for materials used in new construction continue to be a drag on the market, along with shortages of skilled workers.

Institutional / Corporate Influences

Recently Zillow announced that they were dropping out of the housing market. Their entry was treated like the eight hundred pound gorilla entering the market because of the vast resources at their disposal. As it happened they bought high (perhaps helping to push prices higher for everyone) and could only sell not so high. I have seen reports that say they lost over eighty thousand dollars on the average house. Most of us would be out very quickly at that rate... and eventually it caught up with them and they are gone. It kind of gives one pause when they base their deals on the Zestimates.

Chicom backed Evergrande recently missed payments on three hundred billion in debt obligations and Oceanwide Holdings has had two of their major developments foreclosed. While these are most commercial projects in California and New York these, and financial troubles of smaller Chinese investors can have negative impact on the financial markets and individual housing markets.


Even with problems in the Chinese housing markets ricocheting around America, there is also the impact higher end markets – usually outside many major cities – as some who have managed to prosper financially in the communist environment are looking to get their money out of the reach of said Chicoms.

Here in the Tampa Bay area construction is booming – as it is in some other areas. The area is already built out pretty well so there are not a great deal of single family homes being built, but there are some. Near me there was a fairly nice house sitting vacant on a large lot. A builder bought the place and knocked it down. Now they are building four homes where one once stood. They may not be as grand as the former structure, but the demand is being met as people come for the milder climate, lower taxes and a less stressful environment. Much of the construction taking place is either condos are apartments. Neither fits the cry for “affordable housing” as the economics simply do not work without hitting the already burdened tax payers.

On the Horizon

However word out of the nation's capitol is that they are working to see that those who have been underserved in the past should have an opportunity to buy a home. Here is where good intentions and economic reality collide. This is the same thinking that led to the 2008 housing debacle. The reason these communities were underserved is that, in many cases, the people could not survive the financial colonoscopy the banksters perform before granting a home loan.

The solution back then was the no doc loan. You could just go to a lender and give them a song and dance about your booming financial situation. Since the federal government was scrutinizing the banksters, you could get a loan with a credit score in the 400s and a body temperature somewhere around 98 degrees.

The results were predictable. Many people moved in to their new homes and some never even made the first payment. The government stepped in and attempted to keep the market from going south too rapidly, but it was not particularly effective in preventing masses of foreclosures that eventually came on the market and down came the prices. This is something that may be in our future depending on how the people in DC want to serve the underserved.

We are already facing a wave of foreclosures in the making, brought about by rent and payment moratoriums that have expired. Again there will be efforts to slow their entry into the market, but is it possible they will be more successful than in the past?

Trends Are Made Up Of Individual Stories

Buying at what may be the top of the market is best if you can be there for a while. During the last crash, I got a call from a couple that bought a house with no money down. I don't recall if it was one of those deals with negative amortization during the first few years, but they owed $200,000. They were getting a divorce and neither one could afford the place themselves. They had consulted a realtor who told them the house was currently worth 190,000. No room for commission and no listing! They could not come to the closing table with enough money to either pay off the shortfall in the sale price or the realtors commission. With what I have learned over the years, I might have been able to do something for them – not get them much cash, but avoid the foreclosure. As it was, I wished them well and suggested they reconsider the divorce.

Are we headed down the same path? My crystal ball is still quite cloudy so I picked up one of the novelty Eight Balls. I shook it up and flipped it over. It told me: The future is uncertain.


Sunday, October 10, 2021

Ditching PMI – Part 2

Last time we discussed ways of getting the PMI payment out of your life once it is there. Most would agree that it would be better if you didn't have it in your life at all. There are some strategies a new home buyer can look into to eliminate the burden of PMI. They don't always work out, but are worth pursuing.


Many years ago, we were buying a house and only had about 10% to put down. Since we had done business with this representative before we discussed our options. Here is where it is good to work with someone who actually has your interest at heart rather than someone who just wants to sell you a loan. Yes, it is true, not a lenders are pure of heart.

The normal procedure would have to put down the 10% and get a loan for the balance. What our “friend in the business” suggested was two loans: one for 80% with no PMI and a shorter term second at 10%. When we looked at the numbers, it was a no brainer. The second mortgage payment was fairly close to the amount we would have paid for PMI and the payments went toward knocking down the amount owed, rather than giving piece of mind to the banksters somewhere across the country. I've spoken with some lenders and some will do this. Shop around. If you are putting 3% down, I'm pretty sure this approach won't fly.

Seller Carries Second

Depending on the seller's financial situation, some can be induced to take back a portion of the payment. Why would they do this? Now multiple buyers for every property may not be be optimal time for this strategy but in buyers markets, it may help them sell the home more quickly. Also, if they are not needing the funds to buy their next home and have no investment plans, you can give them 25-50 times more than the amost non-existant interest paid by the banks and still get a good deal.

Private Lenders

Since you are not looking for a full term loan, there are many people who have found making private loans are a better investment than the banksters can ever offer. Talk to friends who invest in real estate, many will know of these people, but, they may be hesitant to share the information so their favorite lenders don't run out of money before their project can be funded.

One Caveat

Thanks to Messrs Dodd and Frank protecting the American public, balloon mortgages for your home are now longer legal. The logic for this is that during the Great Depression, many mortgages had lower payments for so many years and then the entire balance came due. People could not get more financing an many lost their homes. This applies to both sellers and private lenders. Regular institutions know not to create such loans.

On the other hand, if you are buying an investment property, it's like the wild west. For the most part, whatever you and the lender can agree to will make the deal work. Just be careful you don't get so excited about the deal that you sign anything just to get it done. Read the paper and if you don't understand it... paying a couple hundred to a real estate attorney can save you thousands.


Sunday, September 26, 2021

Ditching PMI – Part 1


PMI, or Private Mortgage Insurance, is a fact of life for many home buyers these days. Most sort of understand it as a requirement to get the loan. What the insurance does is protect the lender (and the underwriter) after they have given you the usual financial colonoscopy in case you stop making payments. Just be aware, PMI is part of the price or admission but it does nothing to protect you or your interests.

This is usually required if you are unable to put the down the desired 20% when buing a home. Yes, you can get a home loan for 3% down, or sometimes less, but it will cost you, in terms of interest rate and PMI premiums. While I am no fan of the banksters doing this, in reality, lower down payment loans do present a higher risk. Of course they can always boot you out on the street (maybe not now though) and take the property back, but that is expensive for them, and rarely a winning proposition. We will look at PMI from the perspective of homeowners already caught in its clutches. Next time, we will look at it from the buyers angle and what they may be able to do about it.

Is PMI As Certain As Death And Taxes?

If you've been in the property for a while, there are several strategies available to remove this financial waste from your monthly budget. There are even some approaches you can look at if you are just buying currently... but more about that next time.


If you have built up some equity over time and watched real estate values rising, taking you to the desired 20% equity position, you may be able to refinance with new terms. If your current lender won't do it, and your payments are current, there are many of other institutions anxious to sell you a loan. However, don't go looking to pull out a wad of cash as you take advantage of the increased value... otherwise you will be back in PMI territory once again.

Get A New Appraisal

By this I mean a thorough appraisal from a licensed appraiser. Not that you friendly local realtor wouldn't be happy to give you an idea of what your home is worth, but lending institutions have more confidence in a bona fide professional appraiser. You can take this to your current lender and stand their with your hat in hand while they run it through the various, hidden (to you) people who will make the decision to allow you to remove the extra charge each month. If that doesn't go well or your patience runs out, you can use it as you pursue a refinance else where. It could be well worth the several hundred dollars in the money saved.

Pay The Balance Down Faster

Given the nature of most mortgages, the early years show small reductions in the principle owed and most of the payment goes toward interest, adding what you can to each payment will help increase your equity faster and shorten the length of your loan. It will help if you can get an amortization schedule for your loan so you can see what is actually going on with your payments. Doubling the amount that goes to the principle each month will increase your equity to the point of releasing PMI more quickly and save you even more money as it reduces the number of payments to pay off your home. However much more you can pay off will be to your benefit.

Wait Patiently For The Banksters

In theory PMI should be removed when you achieve 20 to 22% equity in your property. However since this is of greater concern to you than the lender, you may have to initiate action to get the job done. Sometimes they are a little slow to respond and they may need to be reminded that the Homeowners Protection Act of 1999 makes removal mandatory and forbids the lender from keeping PMI in place for the life of the loan.

Look at what you are paying each month and think about what you could using the money for you rather than protecting the banksters. Putting PMI behind you may not be as difficult as you think.

Sunday, August 15, 2021

More Equity In Your Home - Now What?

With the rising home prices, many home owners are seeing their equity increase dramatically. This is not necessarily an unmixed blessing since the value of the dollar is falling as inflation reduces everyone's purchasing power. But still, you have an asset that is certainly worth more than it was a year ago.

So now, what are you going to do about it, and will you benefit or get burned? There are several options. You may see the increased value as an opportunity to sell your property and buy a better, or larger one. I hate to carry bad news, but those better and nicer houses are hitting higher prices as well. Your higher price will probably give you a better down payment, but, unless there is a source for more money, it will also get you a larger mortgage, even though it is moderated by the fire sale interest rates.

Free Cash?

You do have the opportunity to pull cash out by way of a refinance or HELOC. On the plus side the proceeds are not taxable. If you are stuck with PMI, the increased value may let you ditch the extra expense.

However, it is not free money. It feels good to get a big check, but you are signing up for more payments that do have to be paid, The larger payments may put your home at risk if things begin to go badly. As much as some progressives would like to see it, eviction moratoriums cannot go on forever.

What Do YOU Want To Do?

On the other hand, If you still have your heart set on a bigger, better home, the increased borrowing power your home affords may just be the way to make your current home fit the bill – even in the era of increased material prices. This is called forcing the value to increase instead of merely waiting for inflation to take a hand.

If you are looking to invest, the equity in your property could provide the capital to get you going. Real estate purchased now may be at the top of the market or it may be higher than last year but cheaper than next year. In that case, if the property cash flows, paying a little more than in the past may not be such a big deal as historically when houses become more expensive and fewer people can afford them, more people turn to renting – and those prices go up as well.

Inflation? Going Up Or Down?

Speaking of inflation and increased prices, it is anyone's guess what the future holds. The people in DC believe the inflationary spike is only temporary. If this is true, the housing prices that have been rapidly rising may just as rapidly come down in a repeat of the housing bubbles of the past.

On the other hand, others believe the monetary polices that put more dollars into the market without real productivity increases will keep food, energy and housing prices on the upward path. I was polishing my crystal ball but it still seemed a bit cloudy.

The best path depends, in part, on which way the market goes and in part, what your goals are. You could end up more valuable assets or you could find you owe too much on your home to sell it, or even to stay in it. Unless you have a particular purpose for what ever you do – you may decide not to do anything at all.


Monday, July 12, 2021

Think You Can Make Some Money in Real Estate?

Have you been watching the skyrocketing prices and see potential in the real estate for making some good money, but you aren't sure you want to have a go at it by yourself? Well that is a very real concern. Along with big profits there some comes the possibility of suffering some big losses during times like these if you aren't careful. If you want to begin investing, just remember, you don't know what you don't know. I should add right now, this is not a pitch for some high priced training. Some is good, but you won't find it here.

If you have the idea of buying a property cheap and selling it at today's inflated prices, remember that “cheap” is a relative term. Even people who own terrible places see the prices going up, and, naturally, they want their share of the prosperity. I was at an auction several years ago where the house needed quite a bit of work, including a complete heating system as someone removed the old one – including the duct work. The pros shut down when the price reached about $75K. However two women, looking for a ”bargain” ran the price up to around $130K. That is pretty close to what they place would have been worth after fixing. You have to watch what you are doing.

What the Pros Do

Even experienced real estate wizards don't operate as one man bands. Some may seem to be that way, but everyone needs connections to a title company that understand investors, possibly an attorney, real estate agents – even though most rarely buy through the MLS, contractors, a source of financing (unless you are independently wealthy) and, often, a good property manager along with other supporting characters you will meet along the way. Where do you round up a team that will help you build your business? This is a subject for another day but a good place to start is the local REIA group. Many people there can help you make the contacts you need. Just keep your eyes open as there are occasionally some sharks who will be only too happy to help you shed your invesment capital. I once sat across a table from a guy who was offering hard money at 15% with 5 points. I wasn't interested in building his retirement account.

You Don't Have To Go It Alone

For those who aren't quite ready to jump in with both feet there are several alternatives to consider. You can look at investor groups and REITs. Each one appeals to a different type if investor depending on their financial capability, time availability, and risk aversion – to name a few factors.

With investor groups, members pool their capital and, as a group, buy, rehab and manage investment properties. There are various structures and goals. Some buy and hold properties. Some rehab and flip them. Some concentrate on commerical deals. In any case, the newcomer can get an idea of how things are done. The down side is it would take a chunk of money to join the group and memberships are not particularly liquid – but then neither is actual real estate ownership. However you may get a taste of what is involved and make contacts useful in the future.

REITs or Real Estate Investment Trusts are corporate entities that allow you to participate in major projects like shopping centers, large appartment complexes and other developments. These are exchange traded securities like stocks. This means that, while investment capital is needed, it's not necessarily as much as actually purchasing rental property but you don't have the leverage usually associated with real estate. It also means the investment is fairly liquid. The down side is that you watch it from a distance and have little if any educational participation.

Check It Out First

Before you decide on either of these it is important to do your due diligence. For investor groups ask around the investor community, which is usually means local REIAs. You may get a variety of answers – some people don't like competing against groups. However you may still get some valuable information to guide your choice. Check public records for multiple property owners, lawsuits and that sort of thing. Ask a lot of questions and don't just go by their answers, but pay close attention to the way they answer the questions. For REITs – they are publicly traded and there is plenty of information available there as well... it's required by law.

Of course neither of these is that helpful without some funds to invest. If you have little or none, try looking into some of the “buy real estate with no money down” gurus as a possible place to start. Be forewarned that it's never quite as easy as it is taught, but it can be done – you just have to look and work a little harder for the deals.

We will look at some of these concepts some time in the future. For the time being. if either of the two opportunities interests you there is plenty of information available. But be sure you look into them thoroughly before you write the check. As Ron LeGrand says: you can't lose a big check if you don't write a big check.

Monday, June 28, 2021

Hammering the American Dream

Owning a home has long been part of the financial stability plan of American families. Once that becomes a reality, many continue follow the advice of Will Rogers, “Don’t wait to buy real estate. Buy real estate and wait.” Some invest in raw land, but many more understand that the economy may go up and down but people always will need a place to live. Rental properties have long been the path to wealth – what a deal, your tenants make the payments and after a while you gain a substantial asset.

This value of this strategy has not been lost on major financial players. Chief among them is Blackrock, Inc. The giant has over $8 trillion in properties under their management with offices 30 countries. Additionally, they have been buying up entry level homes, and because they could, they bumped the rents up around 30%.

They are not alone. Other institutional investors, including giant KKR, private equity funds and hedge funds are reported to have spent more than $25 billion – with a “b” - to buy up over 150,000 single family houses since prices dipped in 2012.*

Five of these corporate single family landlords sold shares in public offerings and there were eleven debt offerings totaling $6 billion in the past year alone. This covers the price they paid for homes and remodeling – and more importantly, allows the real estate gobbling juggernaut to continue. Whole neighborhoods have been turned from owner-occupied into rental properties. When there weren't enough to satisfy the institutional appetite, they even bought new homes.

In spite of this, there are some not following this pattern because, they say, single family homes are generally not constructed as rentals. The maintenance costs are proportionally too high. This would indicate the institutional buyers are working under different economic thinking and expectations than traditional investors.

What Does This Do To The Market?

In some areas this took many starter homes off the market making it more difficult for families to find, let alone, buy, their own home. Anyone with an understanding of the Austrian school of economics will tell you that this puts upward pressure on home prices. It is as simple as reduced supply in a time of increasing demand, Even Keynesians will grasp this.

This was going on long before the covid fear closed down businesses and sent many people home to work remotely. The shutdown showed them two things, among others. First that they needed more room if they were to work from home and secondly, they didn't need to live so close to their employers.

Carried to its logical conclusion, those who could, began migrating from the over taxed and over regulated environs to more friendly regions, even to the point of buying properties sight unseen because of the highly competitive market. Put this together with the reduced number of homes available in some areas and you find the outrageous increase in real estate values that are only moderated by outrageously miniscule interest rates.

I might add at this point that low interest rates are not necessarily a bad thing – particularly to an industry so dependent on the availability of affordable financing. However, it is a double edged sword. For people just starting out and looking to put together a down payment for a home, a business or any other large purchase, the banksters are pretty much useless with the with their almost non-existant interest rates on savings – but then most investors already know about this.

Is This a Good Idea?

Blackrock found itself on the Forbes list of 50 Most Admired Companies in 2013. This is understandable – as an investment, the company leveraged it's commanding position to expand in the relatively safe market of single family home rentals. People need a place to live and this dominant position enabled them to rent to them for top dollar.

It is doubtful that those who would have liked to buy and could not, either because of the twin curses of limited availability and inflated prices probably didn't take part in the survey. They could not experience the increase in equity over the years as they paid down a major asset and watched their home's value grow. They did not have the privacy or security that comes with owning their own home. They did, however, have the opportunity to pay rent and live with the landlords terms.

This is not to say that rental properties are bad things. I have rental properties and people are quite happy to live in them. The point is that renting should be a choice. So should the ability buy investment property without dealing with out of town competition with almost unlimited funds. Here is where personal relationships become even more important.

We can't roll over and play dead like many mom and pop hardware stores did when the blue store and orange store came to town. I get emails every day hawking plans for different ways of working. Some of the ideas may work, but one thing is sure, we need to be aware of the environment we are working in instead of wondering where the deals went. It isn't just the dreams of home ownership that is getting hammered in some areas, but, for some, the dream of successful investing.

    *source Keefe, Bruyette & Woods


Sunday, June 13, 2021

Listening to Sellers

Many investors and home buyers have a hard time hearing anything the sellers have to say beyond the price. They dismiss talk about the property as mere puffery. Unfortunately, many of us have gotten to the point where we don't believe much of anything we hear anywhere. Then again, a lot of us don't even believe the price.

It's true and sellers try to present their property in the best possible light, but then, that is why we hire inspectors – or do a thorough job ourselves. This is fine as we tend to discount much of the things we are told, but there is a time we need to listen to the property owners. It is the answer to a simple question, and, possibly a couple of follow up questions to be sure we understand.

The Question

A friend of mine who has been in the business forever looks around a property, looks at the people and asks, “why are you selling a nice house like this”. Never mind the imperfections you've just seen, and now is the time close your mouth and wait for the answer. Unless it is someone trying hustle you, you will usually get a pretty straight answer. It could be they are facing foreclosure, or perhaps they just can't afford to stay in the property. It may be that they found employment in another city and they have to move. Perhaps they want to retire to a warmer, less expensive and safer location. There are a variety of reasons – and, to the seller, they are all valid.


You may have to poke and prod a little to understand completely, but you will learn what will move them to accept your offer – and it may not be the highest number. Summarize what they tell you to be sure you understand... and they know you understand and you can make an offer that meets their needs – this does not mean offering two hundred thousand on a one hundred thousand dollar property!

For example, I was looking at the proverbial ugliest house in the neighborhood. When the woman bought it said she didn't realize it was beyond the scope of her budget and ability to make it livable. I sat down with her and she told me about the various investors who came by with their formula driven deals and those with their creative financing plans. Some were newcomers and some old timers in the business.

Meet Their Needs

All this woman wanted to do was get enough money in hand to move up to Tennesee to be with her grown children. Creative deals didn't fly with her... even ones that gave her considerably more than I offered. I've done creative deals as well, but listening to the seller allowed me to meet her needs for less money than others had been offering.

On the other hand, if they don't need the money to buy another home and plan on putting the money away with the banksters, asking them to hold the paper on the property at many times the interest rate the institutions offer, may just be the ticket to giving them a better alternative while getting yourself a much better rate than the hard money guys are willing to offer.

How Do You Look?

Perhaps even before you get to the big question, thinking about how you approach the sellers can go a long way toward getting the deal. For instance, many of us do his business to get nice cars, But showing up with a new Corvette or Cadillac to talk to someone who can't afford the payments on a simple two bedroom house may not be the best way to open lines of communication.

Also consider there feelings. They may have contacted you because they saw it as the only way avoid foreclosure. On another property I sat down with the owner, As we were talking about her situation she explained how this big shot showed up in his fancy car along with his son. As they walked through her home, this guy made his disdain for the place quite evident as told the young man that they would tear this out and replace that. I don't know what they offered, but the lady was almost in tears thinking about the way they bullied their way around her home and she had no intention of working with them. Egos can be expensive.

A little humility can go a long way sometimes – and that is not a lack of confidence. It's understanding that sellers need to feel good about dealing with you. If you are looking to beat sellers into a win-lose deals.... good luck, I wouldn't even deal with you.

Looking at the property and making notes is fine, and, unless the owner has unrealistic expectations, you probably don't have to point out the flaws in the property – they already know. There are times when the sellers have an unrealistic idea of the value of their property, you may have to lay a little truth on them. Try not to make them angry or the deal is gone anyway. Many people would rather give their house away than sell it to someone who doesn't respect them.

So listening will get you the information you need and, most of us, myself included, tend to talk too much. They don't care how wonderful we are, who we know, or any of that stuff. All they care about is what you can do for them. They need to know enough that they believe you can follow through and solve their problem,

So as we talk to sellers, we need to listen more and talk less.


Sunday, May 30, 2021

Is This Really A Good Time For You To Sell?


Real estate appears to be in the middle of a crazy sellers market. Inventory is low and most anything that is placed on the market is snapped up almost immediately by desperate buyers – sometimes sight unseen.

Much of this comes as many buyers migrate from colder, more expensive and restrictive northern and western states to warmer, less costly locations in the south. However, this is not the whole story as the pandemic induced practice of working from home reduces the need for proximity to urban environs. Then there are the usual reasons for moving like new job, downsizing and retirement. Whatever the individual reasons, buyers significantly outnumber sellers with the predictable upward pressure on the prices.

Home for sale

For instance, a simple cape cod – nice, but nothing for HGTV – that was located across the street from my son's home, was listed at a substantial increase in price over comparable sales. He says the street was lined with cars when the house hit the market. The eventual buyer, after just a few days paid twenty thousand over the asking price. Then, when the inspection revealed mold in the basement, they just took the house as-is and paid for the remediation without going back to renegotiate with the seller.

An associate of mine had a nice two bedroom condo they wanted to sell, but were not in a hurry. They priced it high to give them time to get ready to move, etc. It was gone in three days.

Is it time for YOU to sell?

Given that it would probably not be difficult for you to sell your property, unless something is dreadfully wrong with it like being adjacent to a landfill or politicians office, is selling now the best decision for you? It depends on your circumstances and what you plan to do with the windfall.

If you've been in the place for a while and have some equity AND are heading to a less costly location, this choice could be a winner for you. That is moving from the city to the suburbs or from the high tax north to a more southern location, could go well for you. If you are looking at going the other way, from the suburbs to the city – unless it is somewhere like New York City where some prices have taken a beating as many people have fled the area – it may not go as well.

If you've had your eye on the five bedroom center hall colonial or the nearby waterfront home a few miles down the road and you see your house has increased significantly in value, don't get too excited since, although your house is now worth what those homes were selling for – they have gone up as well. So, when you sell your house for a pile of money, that pile of money will buy you pretty much what you had if it is in the same market.

On the other hand, if you are not needing the money to buy another home or it is an investment property, that is an entirely different situation. It may be time to take the money while prices are high and run – just consider carefully what you would do with the cash.

If you are looking a selling investment properties, there are a few factors to consider. Will the cash from selling a property that is producing a steady income replace that income? This may not be a factor if you are cashing out and retiring to a tropical island, or even a nice Florida beach.

If you have significant equity, the cash from one property may provide the down payment for several more properties and increase your cash flow... or it may provide the capital to take advantage of the outrageous retail prices and allow you to rehab and flip some currently undesirable homes.

There is a lot to consider beyond just the inflated selling prices. If you don't think prices will remain this high, just like many stock market investors do, moving into a good cash position may well permit to buy more with your money as a potential bubble bursts and prices fall. This whole process would be so much simpler if only we had a crystal ball to see the future.

The Taxman Cometh

No discussion of the potential for greater profits would be complete without recognizing that your greedy uncle in Washington is looking at more and better ways of increasing his share of your income. Books have been written on the subject so what we have here is, at best, a brief overview of some of the things to keep in mind. Whatever is written here could change tomorrow, so it would be well to pay attention to events in DC and keep in touch with your accountant and tax advisor.

If this is your personal residence, you get somewhat of a break. As a single tax payer, $250,000 of the profit is sheltered from the taxman. That is profit, not selling price. As a married taxpayer, each of you is eligible for that amount, or $500,000 profit is yours before they look for tax payments. Unless you are in the realm of point houses (as in 2.4 million), you should have little problem here.

Investment properties are another story entirely. Currently long term capital gains are taxed at a lower rate than regular income. Word out of Washington is that some are salivating over the potential windfall they would get from more than doubling their share of your profit. All this in view of the fact that a considerable portion of the price increase is because of inflation and not increase in intrinsic value.

Is There A Defense?

There are some things you can do to soften the bite of the taxman. Here is where a good tax advisor or account can be a valuable addition to your team. Just be sure that he or she is on the up and up and stays on the straight and narrow as the IRS can do nasty things to you if they think you are chiselling rather than filing.

While books have been written on tax strategies, we will look at a few. First thing that comes to mind is that you receive payments over several years as this will show a lower profit each year than if you recognized the whole amount in one year. This generally lowers your tax bill as it can keep you in a lower bracket.

If you hang around real estate investors for long, you will become aware of a number of creative ways to purchase property... and they are legal as I don't know any of these people that would look good in an orange jump suit. We don't have room to go into detail here, but options can be useful in spreading income over a few years. Partial ownership and lease options are other paths to explore. You can work with 1031 exchanges. Although both properties would be valued at the inflated prices you would still get the tax saving benefits of the arrangement.

As the saying goes: It's not what you make, it's what you get to keep that matters. If it is right for you, sell and take your profit, but be careful so you get to keep as much as possible.


Sunday, February 28, 2021

Who Owns Your Property?

Some will jokingly tell you that the bank really owns their property, just like it does the new car you just bought with the seven year payment book. Even though your name is on the title, is it really yours?

That's not exactly what I am talking about today. Stick around, you may or may not have heard some of this before. Before I go any further, I need to point out that I am not a lawyer and I've never played one on TV. I confess to spending some time watching Matlock and Perry Mason, but that didn't do me much good. However I have learned a thing or two over the years and hope to help you ask a few more of the right questions of the esquires in your life.

Is That Your Name on the Title?

When you get a property or two, it feels good to see your name on the deed and get the feeling of owning something solid like real estate – even if you are in debt up to your neck with the lender. In time, you gain another property, then another. You are on the road to becoming a major property owner in your community.

You are also on the road to becoming a major target should anything go wrong that an ambulance chasing attorney believes he can turn into a big pay day for himself, maybe even, his client. These guys love to go after the “evil rich”, who they define as anyone who as enough assets to justify suing.

By holding five, ten, twenty or more properties, you are in his cross hairs and he is just waiting for something bad to happen. You are ripe for the picking. When you don't have anything (at least in your own name), there are no big pay days for the shyster lawyers and they are hesitant to work of nothing, which they will do if they sue some poor schlub who has nothing to take.

You can stay safe if you don't accumulate many assets and some have chosen that route...but that is not the route to financial success.

Don't Put Them In Your Name

Some folks will tell you to form an LLC to hold the properties. There is some wisdom in this, but it is not fool proof. While there is some liability protection with an LLC, holding a dozen properties in an LLC makes it the same kind of target as an individual holding as many properties.

Some have recommended a separate LLC for each property, or at least for every two. However this can be an administrative and tax reporting nightmare. Rules are different in each state, but here in Florida there is an annual report with a hundred dollar plus filing fee for each one and much higher penalties if you should not get the reports in on time.

This is not to say that LLCs are bad, just that this isn't the best use of them. I have one and it functions well, but it does nothing to conceal the ownership of the properties since all anyone had to do is go to and see the names on the registration. It is probably just as easy in other states to find the true ownership of a company.

What Do You Do?

You want to accumulate real estate without advertising you wealth – that is the best way to keep it. Here in Florida, this is easily done by holding the property in a trust. It sounds complicated, but it is not, once you actually do it. This is not an instruction on how to create a trust – like I said, I am not an attorney and I have never played one on TV. It is, however, meant to encourage the reader to look into it and explain some of the benefits. We'll discuss how to get this information shortly.

Generally one property in one trust will serve your interests nicely. If anything really bad happened and a court order penetrated the protection of a trust, there will be no way to link it to other trusts you happen to control.

As an example of how this works, I was rehabbing a house a few years ago and needed a fairly large window replaced. I got a couple of estimates, but the interesting thing was one salesman told me that they like to check out who they may be dealing with and all they saw was the trust name on the property and they had no idea who actually owned the house. I smiled and told him that is exactly how it is supposed to work.

Some Things to Think About

Here in Florida, the trust has a trustee. The trustee legally has complete control of the property. Even if he (or she) receives a subpoena, there are somethings they generally are not able to do... but they can sell the property, rent it or do anything an owner would do. So the first thing you need in a trustee is someone you can trust – someone who actually believes in integrity.

Then you need a trust agreement. I will not begin to outline this agreement, but they are not complex. If you are in the Sunshine State, I would recommend looking up the Land Trust Service Corporation. It is operated by an attorney who can create these documents for a reasonable fee and can even serve as trustee. I understand the readers reservations, but Mark Warda is a good guy and his business would not last long if he were not a straight shooter.

In other states most real estate attorneys can put together an trust agreement, but you really want one that deals with and understands investors. They can often be located through REIA groups or title companies that work with investors. The point is that it is not very expensive and it is not worth doing wrong.

So, go out and buy some properties and do it in a way that you can keep them,

Sunday, January 31, 2021

Robber Barons Return

Robber barons flourished in the late 1800s and acquired the label because of practices that mimicked those of organized crime – such as corruption, intimidation, conspiracies and, on occasion, violence. They amassed great wealth though monopolies and manipulation.

Many think of today's hedge funds in the same terms. It appears that nobody really likes them, except those reaping the profits of their activities. We have witnessed this week something we hardly ever see in America: an almost universal condemnation of efforts by stock market elites to protect the hedge funds that held short positions in Game Stop. I was dumbstruck to see AOC, Elizabeth Warren and Ted Cruz singing off the same page.

This whole dust up has little to do with the intrinsic value of the stock or the corporation itself. As with much of the market, it is more driven by the perception of the investors. Logically, the funds were right in expecting the stock price to fall as the Game Stop stores are facing increased pressure from online competition.

A Brief Explanation

Photo by BP Miller on Unsplash
For those not familiar with the process, I will give a very brief outline. To sell a stock short, means that you borrow shares from someone who doesn't share your belief or who, at least, takes your “rental fee” as a hedge against falling prices. To maintain this position in the presence of rising prices means being certain the brokerage has sufficient funds to buy the shares to cover the ones you borrowed. Because of this the fund managers were meeting calls for more and more cash.

This is the reason for the panic on Wall St. when the short sellers were faced with calls for funds to cover stocks they thought were going to $4 a share when they went to $300 and $400. It cost them billions. Some sold other stocks to cover themselves. Nobody really felt that sorry for them except some brokerage houses halted trading in Game Stop and a few other stocks. Prices began to fall, but public and public official pressure made them open trading again.

Many public figures proclaimed, this halt in trading was proof that the system was rigged in favor of the major investors and when the “little guys” figured out a way to win and beat the hedge fund operators at their own game, they had to be stopped.

Application For Real Estate

Hedge funds, Zillow and others have been moving in on our territory for years. Hmmmm... even that terminology smacks of organized crime. I understand that many of us who have been at this for a while have made connections with private investors, etc. that we have access to funds for our deals. However, often it takes more than just purchase and rehab money.

There will always be people who would rather deal with an individual or small business man or woman than a corporate entity. However, the economics of the corporate buyers are different than individual investors. The kung flu has already created a shake up in the real estate business, and these new players have added to it. Many who don't adapt will be gone.

The Defense

Personalized service is an advantage we have over the formula driven competition. We can listen and adapt our approach more easily than corporate types even though most of out pockets aren't quite as deep as theirs. Will that be enough? I don't know. Big money almost always finds a way to squeeze out the “little guy”. That's the way the robber barons of the past have done.

The events of the past week should give us hope. I am not proposing a particular strategy for two reasons. First, until it is ready to be implemented it is best to keep it under wraps and, second, I really don't have one at this point.

I am suggesting that we begin to look for one that, similar to the Game Stop crowd, uses their massive resources against them as martial arts practitioners often do. We need to keep a watchful eye on their activities – and keep thinking. There are flaws in their systems and we need to find them, just as the gang on Reddit used the public knowledge of the short position to burn the hedge funds.


Sunday, January 17, 2021

What's Up for 2021?

There are a lot of articles telling us what we will be living with in the coming year. Everyone seems to have an opinion, and that is a good thing – that we are all free to see things through our own lenses. So, I thought I would put in my two cents, although due to inflation, it may be up to a nickel or even a dime.

Some are predicting a real estate boom, although I am not sure what the see as driving it, but that is what they see. Others see doom and gloom on the horizon. I find more evidence for that, but I really don't believe there will be a universal collapse.

The Great Migration

One of the factors we have to consider is the exodus from states like New York, California, Illinois and, to a lesser degree, other similar places that have not handled the Chinese flu or fiscal policies well. But it cannot be blamed soley on the actions of the communist regime – the one in China that is. Restrictive regulations, high taxes and general lack of concern for middle class Americans who make the country function has pushed many who can afford it to pack up and leave for friendlier places.

It is not just the worker bees leaving, but corporations are leading the pack in some cases as they look for a more favorable environment for themselves and their employees. Two notable examples are Elon Musk bringing his operation to Texas, as is Oracle as they desert the silicon valley environment. The NRA is reconstituting in the Lone Star State as well.

These actions do not bode well for the economies of the donor states, but what does it mean for their states with expanding populations? The influx of affluent residents would indicate that even if it doesn't result in an actual real estate boom, the market will have more support than areas with collapsing populations.

All this movement is on top of the normal movement of those of us who have had enough ice and snow to last a lifetime and headed to warmer climates.

The Caveat

This may not necessarily be good news for those of us who see fleets of moving trucks in our neighborhoods. If our new neighbors have not learned from their experience and want to create a world something like they left, it could be bad news for all of us, only we would be more comfortable when we are all out of work and can't afford to pay for heat.

The Opportunity

Obviously an expanding population puts sellers in a better position, whether they are regular homeowners, real estate agents or investors. It is possible this prosperity could be just an illusion. Homeowners who jump at the chance to sell their property for a price they never dreamed of will benefit them little if they are looking for another place to live in a similar area, as the house they are looking to buy will be selling at a premium as well... unless they want to move up north to retire. Who in their right mind does that?

However, agents will be cashing larger checks. Investors, if they watch their pennies, can turn larger profits. Businesses that cater to consumers will have more people to serve – if they are not in a business that has much online competition.

For those with deep pockets and the intestinal fortitude for long term plays may actually be able to make a profit from falling prices in the areas losing population – if they believe it will come back in the foreseeable future. Even in bad times there are always people who find a way to prosper. Fortunes were made even during the great depression. One good thing about looking for the golden ticket in these places is that you probably won't have a lot of competition.

One Certainty

There are always opportunities. Sometimes they are disguised as work. While occasionally they will come knocking on your door, most of the time you have to chase them down and catch them – but you can't even do that if you aren't looking.