January 1982
Vol 4 No 4
Last month we participated as panelists at the National Committee on Monetary Reform Convention in New Orleans. Under one roof were gathered the elite among the hard-money investment advisers of the world. They presented their predictions and views to almost 4000 concerned investors and analysts who had seen their 1980 investments in gold, silver, diamonds, bonds, and commodities plummet. Ignoring real estate for the most part, they advocated a wait-and-see attitude with cash reserves held in T-Bills until later in the year when the economy’s trend could be more clearly defined.
Interestingly enough, during the same time period when real estate was supposed to have crashed, existing single family houses averaged increases of 7% – 13% in various parts of the country. The NCMR conference pointed up an essential difference between real estate and other markets. All over the world investors can pick up the Wall Street Journal and find the current market value of their non-real estate investments with the exception of a few collectibles. Nowhere can a real estate investor do this. He or she needs specific local information in order to find out how a particular investment in performing. There is no reliable National statistic except as stated in historical terms as an average. Therein lies the key to individual opportunities as one person perceives a “crash” while another sees an “opportunity”, and each acts upon their own assessment.
Thus, while the non-real estate investor hopes to make a profit by picking the time WHEN to buy or sell, and knowing WHAT to invest in, the single family investor makes a profit by choosing WHERE and FROM WHOM to transact business, and by knowing HOW to best structure the financing. Thus far, over the past decade, single family house investments have outpaced everything. The new tax benefits will just add more icing to the cake! More and more, the key to production of outstanding profits will lie in being creative.
One innovative marketing approach is the NON-INTEREST BEARING HOME LOAN which started in Chicago and is spreading across the country. Here’s how it works. A builder (or anyone who needs cash) marks his $80,000 house up about 8% to $86,400 and offers it for sale with one third down and the balance to be paid over the next 72 months. Payment will be $800 per month. The house will be owned FREE & CLEAR IN 6 YEARS! Contrast this with a 30 year loan at 15% on the same house with 10% down payment. The monthly payment would be almost $100 per month MORE at $899.16. But look at the total amount paid: with no interest it would be $86,400. With financing over 30 years, the total would amount to $323,697.60! That’s almost a quarter million dollars difference!
We can use this technique to raise cash in this tough market. Assume you have a $40,000 mortgage on the above house. First, offer the lender an inducement such as a higher interest rate, more security, faster pay-down, etc. to allow you to substitute the collateral on your loan. You might place a blanket mortgage in second position on several other properties for example and leave your house free and clear. Then you could sell it as illustrated above, picking up $28,600 on the down payment. Next, you could pledge the newly created mortgage payments of $800 per month to secure a $38,306.90 loan! Payments would fully amortize that loan in 72 months at 15% interest. You would have picked up a total of $66,906.90 in cash. That’s a handy sum to have in today’s distress marketplace.
DISTRESS BUYING – THE COMPETITION IS HEATING UP!
This may be the last real chance to buy SFH at bargain prices for years to come. There are two areas of opportunity within today’s economy: delinquent mortgages and unpaid property taxes. Often owners will decide to let their property go because of the back taxes which have accrued – yet these total far less than the actual property value in these inflationary times. With a fax millage rate of 30, even at 100% assessment of today’s value, the tax bill would only be 3% of the property value. And usually it is even less. Even 3 or 4 years of accrued taxes would total a small fraction of the market price. If you could get a list of owners with delinquent property taxes from the county tax collector’s office together with legal descriptions of the properties it would be simple matter to generate a form letter offering (i.e.) $1,000 for a Deed to the property with an agreement to pay the back taxes.
$1,000 could look like a bonanza to someone who had mentally “written off” the property. Buying property this way, or at the public tax sales, is less competitive than buying houses in mortgage or Trust Deed foreclosure sales, because the property is often raw acreage or timber land tracts at some distance removed from the sale site. Still, in heavily wooded areas, timber land bought at a fraction of its true value could be a real bargain. And if you specialize in sparsely settled regions of the country, you’d find the tax collector to be quite cooperative especially where his county is cash poor.
R.F. Brauer, P.O. Box 882, Chatsworth, CA 91311 will sell you a kit detailing tax information for any 4 states of your choice for $8. Try it! You might like it. The key to buying loan foreclosures is to avoid ruthless competition by buying “early” or “late”. Buying at the first hint of default usually enables you to deal with the owner before extensive legal costs must be incurred by the lender. One tactic is to buy up the defaulted loans of small loan companies when they’re secured by mortgages or Trust Deeds. Defaulting owners may be contacted and negotiations entered into to cancel the debt in exchange for either an Option or a future interest in the property versus foreclosure. Remember – small loan companies often sell defaulted notes with big discounts.
Say you bought a $10,000 note for $1,000 at discount which had $700 in back interest accrued and due. At foreclosure, providing another party bought the property, you’d be paid the face value of the note plus the accrued interest. In this case your competition would have bid up the value of the property sufficiently to pay you off in full. On the other hand, if they failed to bid high enough, you would have gained title for a fraction of its value, subject to any superior liens such as a first Trust Deed. At this point, the scenario gets to be interesting if the court order instructs you to take over the payments on an un-assumable loan; the lender would probably cooperate and allow it. Your profit would be about 1000% in just a few months regardless of the outcome.
How do you make money buying “late”? Many states have a law permitting the foreclosed owner to REDEEM his property within a specified period AFTER THE SALE by paying off the defaulted lien. In an actual case, the investor and the foreclosed owner worked together to save $50,000 house. A $13,750 first mortgage was in default. The successful bidder had bid $28,500 but the owner used the investor’s funds to redeem the property for $13,750 and simultaneously deeded a ½ interest to the investor as Tenant in Common. This was a classic win/win situation wherein the investor received a passive income producing investment for less than 50 cents on the dollar while the owner saved his home which was now free and clear. He was able to rent the half owned by the investor for ½ his former loan payment quite comfortably. Both will share in the future appreciation effortlessly.
INFLATION CONTINUES TO THREATEN THE FUTURE OF AMERICAN CITIZENS
Don’t be mislead by the falling prime rate. It’s fallen swiftly the past 3 years only to rise to higher levels. Long term mortgage rates may drop off to about 15% before summer, but they can’t stay down without massive intervention by the Government. Reagan’s administration is already fighting a deficit which some say will exceed $100 Billion. In a tax-cut year he has to compete with house buyers to raise the money or add even more inflated dollars to the pot. If he does that he will have created even more inflation than Nixon, Ford, or Carter before him. He’s already trying to juggle the book to make it appear as if he’s making progress even as the printing presses print more money.
The cost of housing is being eliminated from the Consumer Price Index! In its place they’re going to substitute the cost of rents! They also want to change the base year from 1967 to eliminate the unfortunate comparisons between then and now. This way the Bureau of Labor Statistics in one fell stroke can dismiss the costs of labor, money, materials, land, government land-use restrictions, and other costs of housing from their computation of inflation as if those costs had actually disappeared from actual expenses. They can systematically rob everyone whose income is pegged to the CPI. This includes Unions, Retirees, VA Pensioners, and those who have invested in indexed leases, corporate pension funds, etc. For every 1% of CPI that the Government can conceal, they can reduce benefits by $3,000,000,000 per year. They can also reduce the benefits of having income taxes indexed. They’ve managed to charge us more money for doing less! What else is new?
If you’re counting on a hefty corporate retirement check, better think again. Inflation has created massive pension funding shortfalls mounting into the BILLIONS of dollars in hundreds of corporations. This is too much for even the Government’s Pension Benefit Guaranty Corporation to cover. The next 20 years could see retirement disaster for millions of hard working, trusting American citizens regardless of the solutions that have been proposed for Social Security! 1982 might offer the last chance for you to start building the asset base you’ll need if you ever intend to stop working – time’s running out!
In October I wrote a Chapter called “THE DAY INFLATION DIED” to be put into a collection of hard money articles by Bob White’s Duck Book. I sent a copy to President Reagan since he was mentioned in it. Apparently it got passed around, because Senator Charles H. Percy has introduced a Senate resolution implementing my solution to the debt problems of the Government. Both of us favor sale of surplus government lands and use of the funds to retire outstanding debt. With 39% of America owned by the Feds, there should be enough to go around, and after all, who has a better right to it than the public?
PRIVATE TOWNS – THE WAVE OF THE FUTURE?
Corporate transferees have become accustomed to employer subsidies in the form of guaranteed purchase plans and/or loan assistance prior to accepting an assignment which requires a move. Housing-related costs have soared, putting pressure on profits. One employer, Pepperdine University, has responded by building its own housing for staff. This trend is being continued by Fluor, Lockheed, Northrop, Hughes, and Rockwell in one form or other. Jacobs Engineering of Pasadena is studying building a “company town” just as was done by companies in similar straights in the early 20th century. It follows the lead taken in Europe and Japan of complete employee support.
It seems almost certain that guaranteed HOUSING may soon become a critical fringe benefit for employees subject to transfer under a myriad of approaches. Shared Equity, Corporate guaranteed loans and direct mortgages, company leases are all being considered. Corporately owned SFH is just one aspect of the trend to fewer and fewer owner-occupied homes. We’re becoming adjusted to the idea of renting and leasing many of our tools, vehicles, house wares. Perhaps we’ll once again become a nation of renters and landlords as the pendulum begins to swing away from individual home ownership. The days could be numbered for the opportunity for the average citizen to own his own home.
MANAGEMENT PERFORMANCE: A KEY CASH-FLOW GENERATOR
If you’re experiencing negative cash flow, are you charging market rents? Are you being creative in increasing net income from rentals? If you could increase net rent by $100 per month, you could borrow $4000 and pay it back with the increase in 4 ½ years. And you could do this each year ad infinitum for each $100 per month added cash flow. It doesn’t take a genius to see how important cash flow management is to financial well being. Here are some ideas sent in by subscribers to generate more cash flow.
When your house has a septic system, YOU’VE PROVIDED THE SEWER SYSTEM and you should be able to charge extra for it. $15.00 extra per month sounds fair. You might elect to convert slow paying tenants into WEEKLY renters. One person went from $495 per month to $150 per week. THAT AMOUNTS TO $1800 PER YEAR increased cash flow! The tenants prefer to pay in smaller increments even when it is more expensive. Putting an end-of-the month rents into a Money Market Fund for 2 weeks, then making payments earns about .5% per month interest on the float. We’ve charged $25 per month extra for a “first right of refusal” option to purchase in the event we ever offer the property for sale.
Of course, the amount of pure option consideration is not taxable until the option is either exercised or abandoned, so with the proper allocation of payment to the option, the taxable portion of the portion allocable to “rent” can be adjusted accordingly. And “extensions” of the option can delay ultimate taxation for several years.
IN THE POTPOURRI DEPARTMENT
Effective April 1, 1982 Federal Reserve Board Regulation Z will require brokers who arrange SELLER CARRY BACK FINANCING to develop a full financial disclosure package for all parties. Avoid either developing or negotiating seller financing if you want to stay outside the purview of this new regulation. A word to the wise. . .
Florida’s TAX CAP PROPOSITION, similar in effect to California’s Proposition 13, is aimed at a constitutional amendment restricting tax increases in any year to 1% of the prior year’s assessment. Write Roger Henderson, 1388 Plumosa Drive, Ft. Myers, FL 33901 if you want to obtain a petition form to sign. The dollars you save may be your own!
Money-Market Funds are great for storing liquid assets over the short term, but which funds? How safe are they? Donoghue’s MONEY FUND DIRECTORY @ $15 rates the funds for performance and safety twice a year. Write to P.O. Box 411 Holliston, MA 01746. I still prefer funds with assets invested in Federal Obligations, but others earn more at slightly higher risk. It pays to select carefully based upon your particular situation.
CommonWealth Trustees will be meeting January 16th at the Holiday Inn at Tysons Corners, McClean, Va. Jimmy Napier and Pete Fortunato will be speakers at this regional meeting. Call Donna Milling (215) 459-0841/358-3200 or Bill Hacket (617) 749-8718 for details. These meetings are brought to graduates of Miller/Schaub advanced seminars to enable them to share opportunities, ideas, experiences in acquisition of SFH.
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