April 1984
Vol 6 No 7
AMERICANS WANT TO FLY NOW, BUT WHO'S GOING TO PAY LATER?
The winning candidates have highlighted more than ever the total inability of Americans to face the economic facts of life – and the politicians know it! This decade will mark a turning point in our value system in which we sacrifice both our parents and our children in order to avoid paying the piper. Ronald Reagan has generated the same kind of “guns and butter“ irresponsibility as Lyndon Johnson did almost 20 years ago. We can expect the same results – spirit sapping, spiraling inflation coupled with higher and higher taxes regardless who wins the elections. Look at some of these statistics:
Reagan's “tax cuts“ still mean that the average family earning $20,000 will pay $63. more and those earning $40,000 will pay $246 more. Americans will pay over $300 BILLION more in taxes over the next 5 years without any additional legislation. It took us 174 years to spend $100 Billion per year in 1962. Nine years later we reached $200 Billion. 11 more years to go to $800 Billion. The Reagan Administration's DEFICITS in 4 years have reached that level! About half the population receives some sort of free lunch, check or below market loan at the expense of the other half. What have these expenditures done for us? Not much. Look at what Government has done to us so far.
As a Nation, America is a silly millimeter away from becoming a debtor nation owing more than is owed to us for the first time since 1917. For the first time, in spite of massive government grants to education, the educational skills of the kids are lower than those of the parents. Without the PIK program of 1983 the most productive farmers in history wouldn't be able to remain solvent. The budget has been balanced only once in the past 22 years during which time the Federal Debt has soared from $298 Billion to ALMOST 1k TRILLION DOLLARS. Interest payments alone exceed the total budget for 1962, and by 1989 they'll reach $250 BILLION. It will take 50% of our personal income tax just to pay that interest. That's going to equal 40% of the average family's food budget. Even with these costs, Social Security, Medicare are going broke. We have more poor people than at any other time in our history. We'll have even more next year. We can't count the numbers of illegal aliens who've flooded into the country.
It's clear to me that nothing is going to be done by elected representatives whose naked ambition overrides all other considerations of doing unpopular things which would advance our long term National aspirations. Let's not be too harsh on them. As Jimmy Walker once said, “The voters always get the politicians that they deserve.“ And as Plato also said, democracy will only survive until the voters find out that they are able to vote money out of the public purse for their own welfare. Now more than ever it's crucial that you prepare for inflation like we've never seen before for the last half of the 80's. BEWARE OF LONG TERM MORTGAGE PAPER OR NON-INDEXED LEASES!
Overlooked by many people is the fact that the dollar bill is a long term Note. It never pays off! It carries no interest! It is totally unsecured try to cash one in sometime! Now is a good time to buy hard assets with yours. United Services Gold Shares, Inc. P.O. Box 29467, San Antonio, TX 78229 offers a Mutual Fund with “switch“ privileges which allow investors to switch their funds from U.S. Treasury Securities into South African gold shares by telephone. Meanwhile, you've got check writing convenience. If the dollar is going to begin to lose value, this would give you the option of converting your dollars into gold shares which should begin to move in the opposite direction.
Copyright © Sunjon Trust All Rights Reserved, www.CashFlowDepot.com. 
(888) 282-1882
Quotation not permitted. Material may not be reproduced in whole or part in any form whatsoever.
If you'd like the direct approach, you can buy a CD denominated in Japanese Yen through Deak National Bank, Fleisckmans, NY 12430 in minimum amounts of $5000, but with maturities of 3 and 6 months. Your principal is insured by FDIC. There are a number of un-insured international currency hedge account managers. Noteworthy among them is Alex Herbage 'Director General of the International Newsletter Association (of which I'm a founding member) and publisher of the IMAC ECONOMIC NEWSLETTER. You can write to him at Harman House, Andover Road, Winchester, Hampshire S023 7BS, United Kingdom for information about his service or his excellent newsletter. Putting your savings into several currencies hedges your dollars.
Indexed and short term mortgages are another way to hedge your income stream. Back in the 1970's I started selling property and carrying back the loans on one year installment contracts. They're called by various names: Agreement for Deed, Contract for Deed, Bond for Title, Uniform Sales Contracts, Contracts for Sale, etc. I indexed both the principal and the interest by having them mature in one year. At the end of that term, the buyer had the option of paying the contract off in full, returning the property to me without recourse or penalty, or of replacing his current contract with one carrying the adjusted price and terms. Here's one example.
The sale price in the slow mid-70's market was a bargain at $45,900. The first year's payments were based upon a loan balance of $42,900 after I took a smaller house in trade and gave a $3000 trade in on the equity. Principal and interest payments at 10% “interest only“ terms were $357.50. The following year interest rates went to 12% and “stagflation“ (Remember those years?) increased the CPI by 8%. His new balance was $46,332 and his payments rose to $463.32. But the next year saw 9% inflation and a 14% interest rate. His new balance was $52,818. and his payments would have jumped to $616. At that point he gave me back the house. This was an option under his contract.
The point here is that, had I NOT indexed the loan, I WOULD HAVE BEEN INFLATION POOR. The amount that his payments increased was precisely the rate at which his dollars were losing purchasing. power as measured by the Federal Government. Regardless of the attractiveness of mortgage paper you're buying or generating, in any period of high inflation, it loses value inversely to the rate of inflation. This includes Bonds too! Think with me for a moment. What could be automatically indexed to rise at MONTHLY intervals? RENTS! In 1979 I raised rents three times during that year to keep pace with Jimmy Carter's inflation. My Rental Contract calls for increases to offset the decline in purchasing power of the dollar as I see fit. Even my commercial office leases were indexed. For one building my rents went up each month for 14 months. I kept my tenants because market rents were also rising in vacant houses and offices at the same rates too.
Long term leases without indexing can be a trap or a boon depending upon the side you're on. From the point of view of the landlord, inflation increases all his costs of doing business. His utilities, labor, management, insurance, hired help all cost more. With long term, fixed rents; his operating cash flows fall farther and farther behind. In some instances, the desperate owner might try to refinance his property to help carry his losses only to find that interest rates have skyrocketed because lenders DO index rates. All those adjustable rate loans, under any name, are merely indexed loans designed to protect the lenders. Usually a loan indexed to inflation will outperform real estate in in terms of net yield if the starting point is high enough. Today's 12-14% is that high.
Property values tend to lag inflation rates in the general real estate market mainly because appraisals rely on prior sales history in determining mortgage values. And our lenders tend to become more conservative as prices climb swiftly, lending lower ratio loans to value. This is the way the sales market views houses, not the way the houses themselves perform as income property investments when landlords use indexed leases and are aggressive in maintaining purchasing power of rents. As the perception of inflation seeps through to the consumer, he rushes out to buy, driving up prices in spectacular panic surges. This happened in 1978 and 79 until costs and interest rates drove houses beyond his reach. But landlords continue to thrive with their older loans and lower prices.
NEGOTIATION PAVES THE WAY TO SUCCESSFUL OWNERSHIP.
Real Estate limited partnerships are having a field day in today's markets. The word is out. Real estate is in! Millions of people and billions of dollars are rushing into the market competing for desirable properties. It's a lot easier or syndicators to find and to manage larger projects so they tend to concentrate on shopping centers, office buildings and apartment complexes. This concentration of buying power has created a new seller's market in which buyer competition's increased costs by some 30 – 35% over normal market prices. There will be practically zero appreciation in these properties over the the first 5 – 7 years of ownership until the market catches up to the purchase prices.
For the small single family house investor, in “hot“ areas, the same thing can happen unless he's careful. Being in a hurry to buy “something“ is not the way to invest. Houses are a lot like race horses; one good one is worth a dozen bad ones! The real key to buying at the right price and with the right terms is in being able to negotiate them once the right house has been located. The same thing holds true when buying discounted loan “paper“. In fact negotiation is ultimately the foundation for profit at every level in a free market economy whether you're buying or selling any product or service competitively.
As a small investor, every dollar is important. Think for a moment about the ramifications of that statement. When you buy a house there are myriad costs which are subject to negotiation. Price, terms, interest rates, cash payments, closing costs, the disposition of the tax and insurance impounds, which lawyer or escrow company to use, any release of liability for the seller, whether or not the interest can be increased by the original lender and if so, how much. Then there are “tangibles“ such as personal property being thrown in with the property, rents the seller will pay until he vacates, repairs he can complete, improvements such as utility sheds he can leave behind. Let's talk about the intangibles too. The seller can warranty the roof, built in appliances, water heater, well and pump if any. He can lease the property back and his lease security as well as the lease terms are all negotiable. The buyer can be given occupancy before sale closing with or without rent. Contingencies can be built into the transaction such as a price based upon 3 appraisals, 30 year fully assumable fully amortized financing at no more than a stated interest rate, seller “buy down“ of payments or interest, seller lending back a portion of the cash received at point of sale. You can see, there are endless opportunities
The art of negotiation commands some of the world's highest fees. There are several books on the subject. I like “You Can Negotiate Anything“ by Herb Cohen, Gerard I. Nierenberg's “Fundamentals of Negotiating“ and my own favorite: Chester L. Karrass' “Give and Take“. Of course one of the best negotiators that I know is Jimmy Napier. I've talked him into presenting his “Negotiation” course and book at THE MAIN EVENT in Anaheim at the DISNEYLAND HOTEL starting March 28th – April 1st. Understandably, Jimmy has been a little reluctant to show all of us just how he does it – he might want to buy something from us in the future and wouldn't want to give us too many tools to negotiate against him with. But we already know how Jimmy does it, don't we? He's learned how to listen! Not talk!
LISTENING CREATIVELY HOLDS THE KEY TO SUCCESSFUL TRANSACTIONS.
We all like to think of ourselves as “special“, but we're really not. Most of us want the same things out of life – security, a good family life, a feeling of self-worth and respect from our peers, some fun, and maybe a little peace and quiet too. Carol Kelby, one of the Chicago area's top saleswomen told me the secret of her success. On everyone she sees a sign which says, “MAKE' ME FEEL IMPORTANT“. By being able to do just that, she is able to work with them to sell property to or for them. Learn to listen for the things the seller NEEDS, not what he WANTS. Structure your offer ground them to get a bargain.
Listen too for the things that lust don't ring true. Project yourself into his reasons for selling or needing special terms or cash. Validate them in terms of your own experience and attitudes. Question, bore in, ask for amplification and more detailed facts on every point that doesn't “compute“ with you. Try to empathize without sympathizing. As you listen, jot down notes on points you feel you can negotiate concessions to you. Also note the things which are important to the seller that you can give up in order to get the things you need out of the deal. It isn't merely a case of your bidding low and his asking too much, then meeting in the middle. It's more a shaping of each of your needs to match each other's at a price and on terms each of you can accept.
Think of it this way. The seller has an itch he can't scratch without your help. If you can locate it and scratch it, he'll be satisfied with that benefit. If you fail to locate it, you may throw away thousands of dollars he really doesn't need and leave his itch unsatisfied. Patience can win the day more than assertiveness in most cases. Don't be greedy or obnoxious. That just offends the seller. Get to know him as well as you can and establish an environment where you're both at ease. Did you ever notice that good salesmen tell jokes to get you to laugh? Did YOU ever buy something when you felt ill at ease or threatened? Weren't you usually happy and relaxed when money was passed?
THE MORE YOU PUT INTO NEGOTIATION, THE MORE YOU'LL GET OUT OF IT.
Even a master negotiator can pay too much or sell for too little if he doesn't know his market or product. When you're dealing with houses, thousands of dollars are at stake with every error. KNOW true market value before you start. KNOW what you expect to do with the property in terms of specific time frames. BECOME INFORMED as to market trends, rents, interest rates, management costs, repair/re-hab expenses, potential profit. What about neighborhood trends? School districts? Tax assessments? Zoning changes? All these things will impinge on your profits and the quality of your investment. You have to discount the terms you negotiate to offset any negative factors both now and when you sell. Be especially careful about “hidden“ property defects such as faulty foundations.
As you can see, buying property isn't as simple as it appears to be if you're going to make money at it – but then, nothing is. You're going to have to do your home work. Study your market. Learn to structure terms to fit the particular needs of each transaction so your offer will be profitable to you and acceptable to the other party. In one case I was buying an office building from a middle-aged retiree. He had 7 children. His disappointment in their development kept creeping, into the conversation. Ultimately he accepted my offer of a 2 year lease option with all payments convertible to a down payment at the end of the-period. Purchase terms required him to carry back an 8% Note with “interest only“ payments FOREVER. There was no balloon payment. This way he was able to provide his estate with an income which could be divided among his offspring in payments over the rest of their lives. Otherwise he was convinced they'd dissipate any lump sum he might leave them. His kids were the key to the purchase, not the offices. My investment was able to earn income for me because of the financing he accepted, not from any intrinsic value in the property itself. A long time ago someone said, “The key to success is to find a need and fill it.“ No truer words were ever spoken about negotiation.
Some final thoughts on negotiation. Don't lose sight of your goals. Know what the property will do for you before you buy it, then make sure you don't pay too much. Make it easy for the other party to grant concessions. Knowledge is power. Get to know him and his needs. Watch for “body language“, signs, eye contact between spouses, pauses, enthusiasm or lack of it to clue you as to the direction your negotiation should take. If you don't feel comfortable about “free wheeling“ in a dynamic buying situation, give yourself an “out“ by making all contracts valid only after your spouse, lawyer, banker, etc. validates it with his signature. Never forget, good deals aren't born, they're made!
Copyright © Sunjon Trust All Rights Reserved, www.CashFlowDepot.com. 
(888) 282-1882
Quotation not permitted. Material may not be reproduced in whole or part in any form whatsoever.
