Category Archives: Finance

Housing Recovery Consistently Inconsistent

Larry Martel was a TV news reporter at KPHO Television, the CBS affiliate in Phoenix.  I worked with him there as a photojournalist for about 10 years.  Larry was a wordsmith and his timing was impeccable.  He was “telling it like it is” long before the station started using that tag line in all of their local promotions.  I didn’t work with him side by side very often because we were on different schedules.  However, I would hear about his colorful comments from fellow photojournalists, reporters and news anchors.

In 1990, the Interstate 10 deck park tunnel opened up.  Larry was asked to report live and describe the scene to our viewing audience.  The tunnel walls were lined with small white tiles from the guard rail all the way up to the ceiling.  He accurately explained that it looked like “the world’s largest men’s room!”  During another live appearance from the site of a rattlesnake removal operation Larry told our viewers that these critters would “no longer have a pit to hiss in.”  The news anchors on set were laughing so uncontrollably that the director had to run an unscheduled commercial break.

Larry once told me that the KPHO news department was “consistently inconsistent.”  We would never earn ratings supremacy because internally we lacked leadership and planning.  As I sit here today and try to make sense of Bank of America’s 50 state foreclosure moratorium and Arizona joining other states in a probe of the mortgage industry I can’t help but compare our newsroom woes to the foreclosure crisis of 2010.

Uncertainty of any kind generally paralyzes people – especially if they have to make decision that involves money.  Toyota is a perfect example.  After decades of selling reliable, economical cars their sales plummeted when faulty brake pedals forced them to make numerous recalls.  The problems have been corrected but Toyota’s sales are still struggling because the public remains uncertain.

Homebuyers on the fence may likely stay there now.  Fear, and a news media that seems to enjoy promoting the idea that anyone who buys a foreclosed home today may have to give it back to the original owner in 3-5 years after all this plays out in the courts, could bring any hope of further recovery to a dead stop.

There don’t seem to be any simple solutions.  But this much I do know for certain – the homeowner in foreclosure borrowed the money to buy the house – the homeowner in foreclosure hasn’t made a payment in at least six months, probably more AND the homeowner agreed contractually (even if the bank can’t find the contract) to surrender the home if default occurred.  In the end this fact, above all else, should trump whatever irresponsible, reprehensible and unorganized system the big bad bank used to initiate the foreclosure proceedings.

Now don’t get me wrong.  I believe the banks should be held accountable and severely penalized for their misconduct.  I just don’t think they should stop foreclosing on homeowners because these self-imposed moratoriums prolong the inevitable and hurt everyone.  Mix together the creation of the homebuyer tax credit, the extension of the tax credit, the expiry of the tax credit, the sporadic lowering of interest rates and now the foreclosure moratorium and the result is a housing market recovery that is consistently inconsistent.

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Future of Real Estate Marketing guest blogger this week – Marty Boardman

I have a lot to celebrate this week.  On Friday, I’ll be catching up with my classmates at our 20 year high school reunion.  Sunday is my 12th wedding anniversary.    

I’m also incredibly honored to be chosen the Future of Real Estate Marketing (FOREM) guest blogger for the week. FOREM and Inman.com are two of my favorite real-estate related websites.  Here’s a sneak peak at what I’ll be writing about:

  • Tuesday, 10/5 – 3 Steps to Writing a Better Blog
  • Wednesday, 10/6 – Facts Tell, Pictures Sell
  • Friday, 10/8 – The Man Who Mentored a Billionaire

 Your feedback is always appreciated.  I could also use a few suggestions on an anniversary gift for my wife.

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How About a Homebuyer Mulligan?

The story is part urban legend, part sports folklore.  David Mulligan was driving to the golf course one crisp, early morning when he nearly crashed his car after crossing a rough bridge.  His nerves were understandably frayed by the time he reached the clubhouse.  As he gripped his driver at the first tee box the events from earlier that morning flashed through his mind and he shanked his golf shot into the woods. 

David’s friends, a very forgiving bunch, took pity and gave him another shot without a penalty.  The rest is sports history.  The “do-over” shot, more popularly known now as the ‘Mulligan’, became a part of the golf glossary forever.  As a matter of fact, the term ‘Mulligan’ has transcended golf.  You can now hear it used in other sports and life situations whenever someone needs a do-over.

The median home price in Phoenix dropped 2.26% from June to July and sales are down 26% from this time last year, according to Tom Ruff of the Information Market. Much has been written lately by economists, analysts, pundits, politicians, columnists and bloggers about what can be done to turn this housing market around.  It appears as though the homebuyer tax credit has done more harm than good.  It artificially boosted prices and now that it is gone sales are plummeting faster than my golf handicap after a few cold ones at the turn (for you non-golfers that means my game falls apart after I have a few beers between the 9th and 10th holes.)

Last week, the Treasury department held a Future of Housing Finance conference to discuss this issue.  Bill Gross, who runs PIMCO, the world’s largest bond fund, was there and advocated that all government backed loans over 5.75% (Fannie Mae, Freddie Mac, FHA) be readjusted to today’s interest rate.  This plan, according to Gross, would provide much needed stimulus and boost home values by 5-10%.  Sounds like a good idea right?  Unless, of course, you are a bond investor.  They argue that’s robbing Peter to pay Paul.

No one invited me to this conference.  I recently moved so it may be because they didn’t have my new address.  But, I’m not that hard to find so I can only conclude that they could care less about what I think.  Nevertheless, I’m going to submit my opinion here and hope this gets passed on to the powers that be.

I know a doctor, attorney, physical therapist, social worker, church pastor and engineer who are all upside down on their mortgages and are going through short sales.  These are responsible, educated, hard-working people that, besides the mortgage on their primary residences, are current with all other payments.  They have good incomes, cash reserves and assets.  Their only mistake was buying a home at the absolute worst time in American history.  These people deserve a do-over, a homebuyer Mulligan.

Banks should loosen up their lending criteria and lend money to people who:

  1. Have just one blemish on their credit report (i.e. a short sale or foreclosure).
  2. Have an income greater than 3 times their mortgage payment.
  3. Have at least 20% to put down.

The banks wouldn’t even have to offer rock bottom interest rates.  I’m fairly certain they could get at least 3-4% above prime for a loan product like this.  It would allow hundreds of thousands of Americans to become homeowners again and increase demand at every price point.  There would be dancing in the streets and I would finally get invited to the big Treasury department meetings.

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Your Home is Not an Asset; it’s a Place to Live

I was standing at the checkout line in Target on Sunday with my 7 year-old daughter, Allyson.  She desperately wanted me to buy the spearmint Icebreaker breath mints.  Now I’ll admit…these things are good.  But, at $1.99 they are a want, not a need (unless of course I just ate Mexican food.)  I decided that this was an opportune teaching moment.  I explained to my daughter that Icebreaker breath mints are a liability, not an asset.  They cost a lot of money and within a few hours she will have nothing to show for her investment.  My comments didn’t stop her from wanting the breath mints but they did make her think.

I can’t really take credit for this clever parable.  It just so happens that I’m reading Robert Kiyosaki’s ‘Rich Kid, Smart Kid’ book.  Among the many lessons he writes about is the importance of understanding financial statements.  Poor people buy liabilities.  Rich people buy assets.  If we can instill this fundamental concept in our children can you imagine how much better off they will be financially as grown-ups?

As adults we frequently mistake liabilities for assets.  Your home is a perfect example.  How much are you paying to live there?  There’s the mortgage, utilities, HOA dues, repairs, taxes and insurance.  Yes, your home will eventually go up in value and if you’ve been paying down principal you may actually have equity.  However, when you sell and move away then chances are the next house you buy will have gone up in value just as much, thus negating the increase in value and reduction of principal in your old home. 

The same can be true in a real estate market moving downward.  My parents sold their house at the peak and purchased a new one closer to me and my family.  Within a year the bottom dropped out and they watched values in their neighborhood drop by more than 30%.  I did some quick research on their old neighborhood and found values there had dropped by more than 40%.  I explained to them that in the end they were no worse off – the market in both neighborhoods was almost identical.

Once you understand this it’s easy to see that your home is not an asset or investment; it’s just a place to live.  When you hear someone say your home is an asset they are not lying to you.  As Robert Kiyosaki points out in his book, your home is an asset – the bank’s asset. 

The bottom line is ANYTHING that costs you money is a liability.  I recommend getting in the habit of asking yourself these questions every time you reach for your wallet:

  1. Is this a want or a need?
  2. Will this cost me money or make me money?
  3. Is this an asset or liability?

More assets and fewer liabilities – that is how wealth is created.  It’s like Robert Kiyosaki’s Rich Dad once said, “One of the main reasons people work so hard is that they never learned how to have their money work hard.  So they work hard all their lives, and their money takes it easy.”

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Seller Financing Strategy an Oldie but Goodie

Last week I tuned into the oldies station here in Phoenix.  Huey Lewis and the News’ 1985 hit, The Power of Love, was playing.  You may recall that this song was the title track from the movie Back to the Future.  It’s memorable for me because the main character was named Marty McFly (I was often called McFly in high school after this movie became popular.)  The other reason I enjoyed this flick was the time machine they used – a 1981 DeLorean.   It was a very cool car made of stainless steel with winged doors.

After my stroll down memory road was complete I came to the stunning realization that a song I love and identify with was playing on an oldies station!  I’m only 38.  How could that be?  Oldies stations play the Beatles, Elvis, and the Beach Boys.  This got me wondering –  when does a song officially become an oldie?  My local station believes 25 years makes a song old enough to play on their airwaves, however I’m told there is no official industry standard.

Last month, I closed the sale of one of our properties using a seller financing exit strategy.  The buyer put 15K down and our spread is 29K.  The term of the loan is three years and the ROI to our group will be 30%.  After I got the first interest payment of $877 in the mail a few days ago it occurred to me that this exit strategy is a real estate oldie but goodie.  The last home I sold with seller financing was in 2001.

With loose lending criteria and stated income loans the norm who needed seller financing from 2001-2006?  Rent-to-own, lease-option, lease-purchase and seller carry back transactions virtually disappeared like 80’s rock bands.  If you could fog a mirror the bank would lend you money during this time. 

With the collapse of the real estate market in 2007 millions of homeowners with stellar credit histories began walking away from their underwater mortgages.  And while industry experts and moralists continue to cry foul, seasoned real estate entrepreneurs smell opportunity.  These former homeowners, many with steady income and cash reserves, got burned by a bad real estate market and deserve another chance.  The banks can’t lend them money to buy a house again because of draconian government and self-imposed regulations.  But private real estate investors can and will.

Since I started offering a handful of our properties for sale with seller financing my phone started ringing off the hook.  In less than two months I have built a list with more than 70 prospective buyers.  Most of them don’t have two nickels to rub together but I’m working with several that have solid incomes and significant cash to put down.

So I’m thinking of a few requests my local oldies station can play.  For the musical equivalent of the real estate market from 2001-2006 how about ‘Easy’ by the Commodores?  From 2007 to the present I dedicate ‘These Boots are Made for Walkin’ by Nancy Sinatra.  And the future…I can’t think of a more appropriate band or song then REO Speedwagon’s ‘Roll with the Changes’.

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Dress for the Business You Want, Not the Business You Have

dress to impressI worked in TV news for 15 years before I got into real estate.  I was commonly referred to as the “cameraman”, but I liked the title “photojournalist” much better.  Because I was behind the scenes the dress code wasn’t nearly as strict as it was for the on-air “talent”.  Many of my colleagues chose to dress down every day, probably because it was cooler and certainly more comfortable.

One day a tape editor came in to the station wearing his pajamas.  Can you think of many jobs that pay more than $8 an hour and allow you to wear a worn out T-shirt, sweat pants and flip flops?  Lori Allred, his manager and a good friend of mine, admonished him on the spot.  To this day I remember her telling him “dress for the job you want, not the job you have.”  So what does any of this have to do with business and real estate?  If you are an investor this translates to dressing for the business you want, not the business you have.

Now I’m not talking about your wardrobe.  That should be a given.  What I’m referring to here is your business.  Are you treating it more like a hobby?  Because let’s face it, hobbies are expensive.  I’m embarrassed to admit that from 2001-2006 I ran my business like a hobby.  Sure, it didn’t appear that way from the outside.  I had a beautiful office with dark cherry furniture, a receptionist, office manager and sales staff.  I even had my logo printed on water bottles.

However, if you asked me to produce a profit and loss statement or balance sheet my eyes would glaze over.  I used QuickBooks but I didn’t use it properly.   To me it was really nothing more than an expensive check register.  I didn’t understand basic accounting principles at the time so in my mind everything was either income or an expense.  The only reason I was able to raise capital and prosper during these years was because the market was red hot.  Everyone wanted to join the party.

financial statementTo succeed today your financials must dress to impress.  I have found that there is no better software tool out there to help you do this than QuickBooks (by the way, the folks at Intuit don’t pay me anything for this endorsement.)  Mastering this software will take time.  Since May I’ve invested about 12 hours to this, including an 8 hour class on QuickBooks at the Nouveau Riche College, 3 hours with my accountant and 1 hour with another investor’s bookkeeper.

The result?  Since July 7th, $273,000 raised, 6 properties purchased, 3 closed, 3 currently in escrow and a 70% ROI to my investors.  Not bad.  Could I have done this without a P&L and balance sheet?  Maybe.   But why try?  It’s like Abraham Lincoln once said, “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”

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Putting the Credit Score Puzzle Together

credit score puzzleIn the 1960’s, the Fair Isaac Corporation started working on a system designed to help lenders analyze the probability that they would be repaid on a loan. Fair Isaac sought to develop a system that could dependably predict one’s statistical likelihood of creditworthiness, thus the FICO score was born. The evolution of Fair Isaac’s research became the standard of credit scoring by the 1980’s.

Credit scoring has a tremendous impact on one’s ability to purchase high dollar items such as a home. One’s credit score can determine whether the consumer receives a good interest rate to whether or not one can even qualify for a home. For this reason, consumers should understand how credit scoring works and how it impacts their personal ability to borrow funds.

What the credit scoring model quantifies is how likely the consumer is to repay their obligations without being more than 90 days late. Credit scores can range from 350, which is considered a very low credit score, all the way up to 850, the highest possible credit score achieved. Only 1 in 1,300 consumers will achieve a credit score over 800. Consumers with 800+ credit scores are the most likely to obtain the best interest rates available on the market, effectively saving thousands of dollars in interest. On the other hand, 1 in 8 consumers with credit scores between 500 and 600 face the possibility that they won’t qualify for financing. This is why it’s so important to understand how credit scoring works and how it impacts your financial future. 

So how is your credit score derived? Here is a simple guide to help you understand what factors contribute to the composition of your credit scores.

  • Payment History:                              35% Impact.
  • Outstanding Balances Carried:     30% Impact.
  • Credit History:                                    15% Impact.
  • Mix of Your Accounts:                    10% Impact.
  • Inquires:                                                10% Impact.

Payment History: Paying your debt on time and in full has a major impact on your credit score. Charge off’s, late payments and judgments will negatively impact your credit scores. Missing a higher payment has a more severe impact than missing a lower payment. Delinquencies that have occurred within the last two years carry more weight than older delinquencies.

Outstanding Balances Carried: This factor marks the ratio between outstanding balance and available credit. Ideally consumers should try to keep balances as close to zero as possible. The general rule of thumb is that consumers should keep their balances at or below 30% of their available credit limits.

Credit History: This factor marks the length of time a consumer has had credit. The longer the duration of time a consumer has had credit, typically the stronger the consumers credit scores will be.

Mix of Your Accounts: A mix of auto, credit cards, and mortgages are typically more beneficial to obtaining higher credit scores than solely having credit in just one segment such as credit cards.

Inquires: This represents the number of inquires made on a consumer’s credit history within the last six months. Each hard inquire can potentially cost the consumer from 2 to 50 points to their credit score. The consumer’s credit score can be impacted by the first 10 credit inquires in a six month period however at the 11th inquire; the consumers credit will no longer be impacted.

Having a complete understanding of how your credit scores are derived is essential to making positive decisions regarding the management of your credit. In next week’s article, we will help explain how people with credit challenges can make simple changes that can positively increase their credit scores as much as 100 points in 40 days.

By Eric Fowlston of Desert Hills Bank, Phoenix Arizona – efowlston@deserthillsbank.com, 602-324-6725

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