The State Of The Union Is Shaky . . .

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February 2009
Vol 32 No 5

          Each day seems to bring worsening economic news.  Despite random flashes of resurgence in the stock market, the current trend is for lower prices.  Falling prices mean lower profits.  Slimmer profits make businesses scale back expenses; and this leads to higher unemployment and less consumer spending.  Rising unemployment leads to more credit defaults and more uncertainty in the financial markets.  Without consumer spending, the economy can’t grow new companies and new jobs.  

          The impact of this can readily be seen in the shortage of mortgage credit.  
Without mortgage credit, there will be no recovery in the overall single family house market in areas where it has tanked.  The economy and credit markets can’t recover without a housing recovery.  This sets the stage for massive government interference both in housing and in the financial markets. This might provide temporary relief for some, but bodes ill for the longer term for everyone.
3b   My first foray into the world of creative finance was simple:  I stopped taking listings and started paying $100 for a 6 month Option to buy or sell a house subject to the existing mortgage.  My strike price was 80% below current fair market value, net to the seller.  That 20% discount came directly out of the seller’s equity, so the amount of actual cash above the loan was not very high.  In the slow market that had been created by lack of buyers, I was able to enter into three or four Options a month with very limited cash.  From time to time, my Option gave the seller a little higher price, but at the cost of his carrying back a zero interest or single payment Note that came due only when the house had been sold for cash.  

          By structuring in terms that enabled rents to cover operating expenses, I rarely wrote an Option that failed to make money.  My Options gave me three alternatives:  I could sell the Option at a wholesale price.  I could retail the house and make more.  I could exercise the Option and rent out the house long term.    
My first objective was to earn a living, so I sold every Option or house I could when I had a cash buyer.  But what really got me to the top of the heap were houses that I Optioned and held for long term income and appreciation.  When inflation came, my cash flow houses with low interest rates began to leapfrog in value.

          As the market tightened, I made better deals.  I traded houses I had Optioned from those who were downsizing to people who were trying to move up.  I made a profit on both sides of the deal.  When there was a disparity between the equity values of the houses, I created 2nd mortgages (Deeds of Trust) that paid the difference.  Then I discovered a new twist:  When a seller needed cash, I found an investor to buy the mortgage at discount to provide the desired yield; plus a profit to me.  At this point, I started buying deeply discounted mortgages on other people’s deals to help them sell houses; then re-sold them to investors for cash.

          It was just a hop, skip, and jump to buying houses without any money at all by taking title subject to existing loans (so long as they were well below the value of the house), then making up the difference between the loan and the price by creating a couple of Notes for the difference.  The third mortgage Note would be at a high enough interest rate to attract investors who would pay cash for it to the seller.  The second mortgage Note would be at a zero interest rate and call for no payments until the third mortgage Note had been paid off.  This gave me cash flow from rents, and built equity via very fast amortization on my second mortgage Note.  

          The foregoing techniques work with 401Ks, Pension Plans, and IRAs.  By convincing investors to set up Self Directed IRAs to invest in discounted Notes rather than losing money on stocks and mutual funds, you’ll make lots of money.            

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

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1 Comment on “The State Of The Union Is Shaky . . .”

  1. This Commonwealth letter is exceptionally short for a Jack Miller newsletter. This letter contains approximately 700 words — the typical Commonwealth letter contains approximately 13,000 to 14,000 words. This version may be incomplete.

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