When Charles Dickens wrote the lines in our topic heading he was contrasting the turmoil present in France during the revolution with the comparative serenity that existed in England. In many ways 1990 – and indeed the decade of the 90s – reflects the same contradictions experienced then. In the face of mounting unemployment and inflation most Americans are concerned about a stagnant economy and the threat of recession. The RTC^'s efforts to cushion the banking collapse have resulted in record lender losses and mounting estimates of the cost of the bailout – now approaching $500 Billion. And your Government is now the largest holder of real estate and mortgages in world history. Yet, in spite of this, the stock market continues to set records on the Dow.

The events of the past year on the international scene have been breathtaking. Surely they rival the French Revolution in terms of their effects on world history. Even with our geographic isolation between our shining seas, we'll be directly affected for decades by these changes. What^'s all this got to do with single family investments? Let^'s see.

I just got a call from Seattle where a subscriber is getting his 'peace dividend^'. He^'s being laid off in the defense cutbacks. He may have to relocate across country to another location just to work. In Washington, another subscriber Civil Servant is being pushed into early retirement – ahead of any of his long range planning. He may have to liquidate some of his properties to get time to make his financial adjustment. In a major area – credit – overseas developments are changing our costs of doing business. Cashflow projections are going to fall short as indexed mortgages adjust for inflation. At the same time, the trade-offs between tax increases (don't read my lips anymore), phased out passive losses, increased audit activity, capital gains and estate tax changes still being negotiated in Washington are upsetting personal and State financial planning, making markets cautious. This is felt in a variety of ways from Section 8 and other housing to subsidies, development and construction financing, appraisal values, and interest costs.

 

CREDIT AVAILABILITY IS BEING AFFECTED BY INTERNATIONAL MOVEMENTS!

West Germany wants to be ^'firstest with the mostest^' with money to develop both manufacturing capacity and markets behind the old Iron Curtain. The Deutchbank offers new Bonds at higher interest rates, attracting long term investment funds from both European neighbors and out of the T-Bond markets here. Meanwhile, the Japanese, sensing the threat of both the European Economic Community and American trade policy toward exports encourage DOMESTIC CONSUMPTION by the Japanese – a drastic change from 50 years of personal saving in the Japanese society. With the fastest aging population in any major economic power, they are having to confront budgetary problems of their own. Interest rates begin to rise in their highly leveraged economy dragging down their margins. Their stock market suffers a 30% drop in equity values. Investors start to liquidate. Suddenly there^'s a rush to cash. Uncle Sam feels the pinch between competing European dollars and Japanese liquidity needs. T-Bond prices must rise to attract lenders to fund our exploding deficits. So mortgage and consumer credit prices must compete.  The housing market sags to a stop. What to do?

George Bush has a problem. He doesn^'t want to raise taxes, but is willing to have them forced down his throat by Congress (spelled Democrats). They don^'t want to be blamed in this election year, so do nothing. The cost of borrowing is creating monster increases in his deficit projections. So he tries a little inflation in hopes that he^'ll be able to walk the tightrope between a softer dollar and tighter credit.

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In simpler times, inflation can save a politician^'s career. It^'s hard to spot. Initially, everyone perceives the beneficial effects of higher wages, more jobs, rising real estate prices, lower tax RATES (even though most people would have higher tax BRACKETS). But there^'s a downside. Costs swiftly rise to absorb higher incomes. Indexed interest rates rise too. A 1% increase in a $100,000 loan costs a landlord $83.33 more per month. He has to raise rents to meet the costs or start to lose money. Leveraged owners with millions of debt on real estate and on corporations as a result of leveraged buy outs swiftly start to hemorrhage. At the same time, foreign investors start to sell the inflated dollar and to buy into stronger currencies to avoid losing purchasing power. They increase their prices to Americans to offset the loss in their currencies. What better currency than the German Mark – and German Bonds? The cycle begins to tighten.

Rising prices hit all Americans. Consider that there are no longer any automobiles manufactured wholly of American-made parts. No TVs, No VCRs. Our global economy has created vast interdependent networks among nations. As our currency becomes cheap, foreigners buy more of our products, real estate, control of our corporations. The multinational corporation owes allegiance to no single country. It^'s hedged POLITICALLY. It can influence elections with huge sums of money. It can control spending even at local levels. Without the underwriting guarantees of a Japanese CORPORATION, Massachusetts would have been unable to raise money to fund its social programs through bond sales. In this way, private business is going to keep government honest – or they can break it!

 

WE^'RE ALL IN THE FOOD CHAIN SOMEWHERE . . .

Each of us must produce something of value to someone else who will pay us a profit for providing it. Each of us has a need for CAPITAL – whether it^'s money, time, space, talent, property and we either have to create it or rent it so those who provide it also earn a profit. We all must be consumers as well as producers in order to keep things in balance. When citizens only consume, they soon run out of money which their production would have provided. So they borrow until they run out of credit, then they leave the marketplace. If they only produce, their customers soon find they have nobody to sell to in order to raise the money to pay for the items they consume. Without paying customers, producers also must fail. When Henry Ford astounded the world with $5 for an 8 hour day, he wisely understood that his highly paid workers would be buying Fords. At a profit for him. For some reason or other, Government doesn^'t understand this. It consumes part of the profits of producers and vendors without producing a corresponding good or service in return. Hence it depresses economic activity, interfering with market forces.

The RTC is a classic example of government bureaucracy at play. Formed to provide an orderly marketing mechanism to dispose of the assets of failed lenders, they have steadily INCREASED the numbers of properties in idle inventory while using funding to pay for administrative costs. It^'s estimated that some $18 BILLION per year is being lost because of DETERIORATION AND DEFERRED MAINTENANCE on buildings. Even more can be blamed upon inept management of assets entrusted to them. I think the dam is about to break in this election year. Who can resist criticizing the Administration^'s mismanagement of this fiasco. In the next few months I expect many RTC properties to be dumped on the market at much lower prices. TEXAS, OKLAHOMA, LOUISIANA, ARIZONA AND COLORADO will offer the best selection at the lowest prices. But New England, New York, New Jersey, Florida and in fact many other areas will offer spectacular real estate bargains when it happens.

ALL IS NOT GOLD THAT GLITTERS . . .

Don^'t be too eager to chase bargains without understanding a few maxims. First, understand the local ground rules and current true values in the area in which you buy. Don^'t rely on HISTORIC or FUTURE values. Don^'t compare the distressed property with good property in your own home town. Don^'t expect to be able to accomplish more with a property than the prior owner unless you possess special skills and financial resources he didn't have. Remember, he struggled valiantly to avoid losing it and failed. So might you too. Don^'t expect to finance the property in an area with wide spread distress. Lenders may be wary of being twice bitten. CASH IS KING WHEN NEGOTIATING FOR DEEP PRICE DISCOUNTS. You^'d best raise the cash in another area where lenders are more liberal. Or syndicate cash from small investors and bring it with you.

 

A small syndicate I was associated with purchased a 20 story building for only $10 per square foot and the distressed lender/owner agreed to lease back a third of it for $7 per foot. That^'s a 70% yield on the space, sheltered by the depreciation. Another one of our subscribers bought an office building leased by a Fortune 500 company with a cash flow yield on the net lease of more than 28% long term. Huge yields are magnets to people who are willing to invest cash, but first you have to understand the market. While the RTC is busy saving Banks and S&Ls, THEY IGNORE SMALL INSURANCE COMPANIES OVERLOADED WITH EMPTY REAL ESTATE. In other instances, lenders are reluctant to foreclose defaulted loans when they foresee management and maintenance problems, or liability. They'll usually sell their bad loans for pennies on the dollar. Remember, lenders comprise the bulk of distress market opportunities, and under duress, they behave just like distressed individuals.

 

The distressed seller is like someone wandering the Mojave looking for water. If you own a source of water – spelled C-A-S-H – you can work wonders negotiating with it. On the other hand, you wouldn^'t get very far trying to borrow water then lend it back. That's why you can't use typical financing techniques when buying from distressed owners. That^'s only a part of your strategy. You'll need reserves of cash, patience and skill to turn a distressed property around. You may have to get rid of non-paying tenants and squatters, make major repairs to restore serviceability, up-grade and renovate to meet health and safety codes. Then there are costs associated with securing the premises – fences, guards, etc. Insurance on an empty building can be priced at prohibitive levels – if available. A general rule of thumb is to buy at a price which will enable you to restore a property to profitability or marketable condition and have no more than 60% of sale price invested at time of sale. Obviously, this means that you have to buy at super deep discount prices.

 

IF THEY HAND YOU A LEMON, MAKE LEMONADE . . .

Many readers are already victims of too much leverage, a collapsed market, cash crunches. Some have been wiped out in one fell swoop. Others may have become secondary victims. One reader in Colorado refinanced his small apartment, then sold it with a low down payment to another party. For added security, he got the buyer to pledge his home as collateral for a wrap-around mortgage (all inclusive Trust Deed in Colorado). Then his buyer fell behind and filed for Bankruptcy. Now our reader has to continue to make his personally endorsed loan payments while the Trustee determines who should get the rents from his formerly owned building. Signing personally was his undoing. He could lose it all. But he and others like him have a quick route back by switching from investor to entrepreneur and entering into all the opportunities a distressed area affords.

 

Look at the new needs of a distressed area. APPRAISERS tell banks and the RTC what property is worth – and investors how much to pay. Owners need MANAGERS to protect vacant properties from deterioration and vandalism. They need special contractors to put PLUGS IN WINDOWS, FENCES AROUND PROPERTIES, HANDLE SECURITY DOGS, PROVIDE SECURITY GUARDS. They'll either have to buy them or rent them from small businesses. In Texas, LISTS OF FORECLOSURES sell for $40 per week. COLLECTION COMPANIES, SKIP TRACERS, WORK OUT TEAMS, all find business to spare. Grounds maintenance companies, pool specialists, leasing companies, Buyer^'s Brokers, Negotiators, Syndicators all have a niche to fill. During those exciting days of the mid-70's when Florida was having its own recession, I became an active Buyer^'s Broker. I charged an advance, non-contingent fee of $500 which gave the client a look at 3 properties which met his requirements. He needn't buy, but if he did, the $500 was credited against a 10% fee based upon his final price. If he failed to buy, he could look at 3 more properties for another $500. This saved us both a lot of time and trouble. It made me a comfortable living while my peers were losing their shirts. Where it isn^'t prohibited by law, anyone could do this without a licence. Or those with truly entrepreneurial attitudes could OPTION distressed property then re-sell to the carpet baggers at a profit. Remember, having been up and down the ladder, you're in much better position to empathize with both buyer and seller. And you'll also know how to put your financial house onto much sounder footing next time up.

 

SO, WHERE DO WE GO FROM HERE?

First the BIG PICTURE: For most of the decade things are going to be looking up! THE EEC AND THE EMERGING MARKETS WILL HAVE AS BIG AN EFFECT AS THE DISCOVERY OF THE NEW WORLD! 350,000,000 CONSUMERS are going to start chasing relatively cheap American goods. The European market will be awash with dollars that will have to come home to buy from us. I recently returned from a scouting expedition. Things are humming. Border barriers are mere formalities across which consumers and goods are flowing virtually unimpeded. American companies are buying in at record levels and these profits are going to come home to us. We can expect a 'period of adjustment^' during which some of us will have to change jobs and occupations. We may have to restructure our portfolios. Learn to live with STAGFLATION during which prices and UNEMPLOYMENT rise while personal incomes fall. But in a few years we^'ll see dramatic improvements in our balance of payments, deficits, standard of living and future prospects SO LONG AS POLITICIANS LEAVE THE SYSTEM ALONE AND LET IT FUNCTION.

 

Our housing markets have to change too. Manufactured Housing now accounts for a third of all new sales. Dollar for dollar, it offers the most viable solution for both the elderly and the homeless at a price all can afford. It also offers the highest yields for landlords and investors. Mobile Home PAPER, PARKS, SYNDICATES, MANAGEMENT, SALES, SERVICING, DELIVERY, CONDOMINIUMS, AND PUDs are blooming now. They^'re using mobiles for FOUR-PLEXES, HOSPITALS, SCHOOLS, ACLFs, CHURCHES and the uses are increasing. Do yourself a favor and visit a dealership to explore the state of the art for yourself. You'll see. Remember, you can do all those creative things with mobile homes that you did with houses. And make a lot more money in the process.

 

No one ever got rich without a piece of the action. Employees earn wages only so long as they provide their employer with a profit on their labor. Entrepreneurs get to keep that profit – and a lot more. But they have to OWN the business. That^'s the scary part. What do you do first? How do you plan? What are your start-up costs? How do you budget? Where do you find the money? What about insurance? Materials? Site selection? Your image? Licenses? There^'s a lot to starting up your own business. I started a pawn shop when I was 17, had owned half a dozen businesses by the time I was 20. Have never had a business that didn^'t make money from the first year. I'm dying to tell you how to do it.

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Quotation not permitted.  Material may not be reproduced in whole or part in any form whatsoever.