February 2008 A few weeks ago, Judge Christopher S. Boyko, of the U.S. District Court in Cleveland, Ohio opened a can of worms that won’t soon be closed. He threw out 14 foreclosure suits that mortgage investor, Deutche Bank, had filed. He ruled that a security backed by a mortgage is not a mortgage itself; thus, because Deutche Bank could not produce a chain of assignments of the debt to itself to prove that it was the holder of the defaulted mortgages; it had no legal standing before the court. Unless overturned by the Supreme Court, or remedied by Congress, this far reaching ruling has the potential to shake up the trillion $ plus secondary home mortgage market, and ultimately, change the ways houses will be bought and sold.
January 2008 Long time readers of the CommonWealth Letters will recognize the title line for this month’s letter. I use it just about every time there is a major shift in the market, tax laws, or political scene. All of these are going to manifest themselves during 2008. Those who can adapt to these changes will prosper. Those who either can’t or won’t change the things they do, and the way that they do them, will go the way of the dinosaurs, leaving only the fossil remains of past successes. In the final analysis, your future is really up to you.
December 2007 A few days ago I got a letter from a person who wanted to borrow money in order to “survive” until things got better. Conversely, I also heard from someone who is starting a new lease/sandwich business managing houses to replace the income he’s no longer able to make waiting for houses to go up. Each of these represents two ends of the financial spectrum today for entrepreneurs. One is content to sit passively by waiting for some one else to improve his lot. The other is trying to see how to best use his skills and experience to take advantage of the changing housing picture. How would you categorize your own position?
November 2007 There are two books that I should write if I want to make millions of dollars. One is “Wealth Without Risk” and the other is “Wealth Without Work”. Those seem to be a central theme in the psyche of many Americans. Millions of them pour billions of dollars each year into various State lotteries hoping that lightening will strike. I live in a gambling town. The hopefuls pour in every weekend to try to get rich simply by chance. When they run out of money, the casinos are quick to accept credit cards. Casino ATM machines charge lower service fees as more dollars are withdrawn. Oh, warnings are posted near the machines about borrowing too much, but casinos know that gamblers will bet their financial futures on the slim chance that they will return home winners.
October 2007 A falling tide lowers all boats regardless of their size or the skill of their crew. When real estate sales slowed, and the market top was reached, desperate speculators, builders, lenders, and assorted middlemen were caught with too much money tied up in unsold residential real estate. Then the market began to correct with a vengeance. Until the pending Sub-Prime meltdown runs its course, it’s probably going to get worse before it gets better; but not for everyone.
May 2007 The history of commerce is studded with the financial remains of those who bet their entire financial survival upon mastery of a single skill. Type setters were replaced by computers. Buggy whip manufacturers were made obsolete by the automobile. Computer programmers saw their market value destroyed by equally skilled people in India at about the same time as Fortune 500 companies began to “outsource” many of their operations off shore where labor and materials costs were lower. Today, drug company profits are under assault by off shore suppliers of drugs at mere fractions of the costs of U.S. manufactured pharmaceuticals.
March 2007 This letter is being written for those who are still waiting to get started on their personal paths to success. To that end, it’s going to be a little preachy. I hold Open House most Friday nights where subscribers are invited to drop in after work to punctuate the end the week. The composition of the gathering changes from week to week, so it provides for lively discussions of the weeks events, and the passing on of scraps of information separated by snips of juicy gossip. I recommend that you hold your own T.G.I.F. in your own area. It’s entertaining and enervating. On a recent T.G.I.F. night, one person who was just getting started was asking a lot of questions of every one there. It was as if she were trying to learn all there was to know about investing in houses before buying her first one. She confessed that she had spent thousands of dollars attending seminars and buying “Home Study Courses” from a host of migrant gurus who had passed through town, and had been reading as many books as she could on the subject, yet hadn’t actually done anything yet to put all this information into practice.
February 2007 I don’t know where the above quote came from, but I have been through enough changes to know it is true. For half a century I’ve had to learn how to adapt to change to make a living. I built my first house when everybody was crying doom and gloom over mortgage interest rates being hiked from 5.25% to 5.5%. Housing slumped, but I adapted and began lending money on risky 2nd mortgages. I was able to get 8% on my money mainly because I was willing to take chances on marginal borrowers. Then, the market turned down during the Cuban missile crisis and my loans’ underlying first mortgages were defaulted. I took over the defaulted loans in return for the owners deeding me their properties; then had to learn the gentle art of remote management. In retrospect, I would have been far better off to just lose my investment and walk away, but I stayed the course and managed the properties with high negative cash flow until, one by one, I lost them all. Needless to say, what I got out of this little lesson was to be wary of lending money on, or buying, long term rental properties situated a long way from home.
January 2007 As single family house entrepreneurs or investors, we are all affected by the availability and cost of credit in our areas. How would loss of institutional financing by entrepreneurs for acquisition and remodeling of houses affect the way you make your living? How would requirement for 10% down payment for new buyers occupants change your market? The length of time you had to hold houses in order to sell houses for cash? Your holding costs? The numbers of houses you could buy and sell in a year? Your annual income?
Suppose your doctor told you that you had exactly one month to live; how would you spend it? A few thoughts come to mind: For instance, I might stop any thought of exercising and order in a truck load of pie and ice cream. A diet would be far down my list of priorities. Or, with little need to conserve money, I might decide to take a final trip to see all the things I haven’t yet seen. Or I might buy expensive gifts for my family, friends, property managers, and business associates; or I might gather my family and friends around me and throw a month-long farewell party in some exotic locale. I’d spend very little time worrying about lawsuits, tax audits, or convoluted transactions that I might ordinarily have been involved in. I would not be doing any last minute estate planning. I can do this because I’ve taken the time from a very young age to have an estate plan in place so that my family would be spared all the hassle of trying to settle my estate.