Have a Wonderful 4^th of July and remember that the liberty and freedom you enjoy were paid for in blood, and continue to be so.

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Happy 4th of July - The Declaration of Independence

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Tomorrow is our nation’s birthday. Happy 4th of July to one and all.

With what is happening today, it’s a wonder we’ve lasted as long as we have. I think one of the reasons we seem to keep overcoming depressions, recessions, housing bubbles, credit crisis, etc is because we are naturally givers. We the people always are willing to help those who have been stricken with problems.

I will mention only one problem solver in this post out of the myriad of candidates. The fellow was the son of Lebanese immigrants who made it big in Hollywood and whose family name still has credibility.

The Man, The Myth, The Legend

I don’t know how much myth is involved with the Thomas family. Everyone has heard of Danny and his daughter Marlo. Danny is no longer with us but his daughter Marlo is alive and well. This post isn’t as much about her as it is him.

His movie and TV credits are well known but I’d bet most of us couldn’t name one film or TV show in which he starred. But, on the other hand, I’d bet we could all mention his creation - St. Jude Children’s Research Hospital located in Memphis, TN. It opened in 1962 and had such personalities as Frank Sinatra, Milton Berle, Dean Martin and Elvis Presley as supporters/endorsers.

Not many of us know Thomas founded the American Lebanese Syrian Associated Charities to raise the money to build, operate and maintain the hospital. How about that for a surprise in today’s environment?

Four Pillars

Thomas founded the hospital on four pillars that still stand today. It was to provide unsurpassed patient care. It was to provide unparalleled scientific research. It would be a hospital without walls taking in children from all over the world and never deny care because of race, religion or ability to pay.

Doesn’t this sound like the basis for today’s equal opportunity mantra? Just agree because it does.

One of their accomplishments include raising the survival rates for childhood cancers from less than 20 percent to more than 70 percent. Read that again, it is that impressive.

Mind you, through all of the adversity the hospital still stands committed to the four pillars.

Stretch Our Imagination

Danny Thomas certainly wasn’t the only celebrity to charge down charity lane and he won’t be the last. However, how many celebrities can you name today who are this committed to a cause?

Given tomorrow is a big day, why not use part of it to stretch our imagination and wonder out loud in letters to the editor, community blogs, phone calls to talk shows, etc. to encourage celebrities to imitate Danny Thomas. In these days of multi-million dollar draft picks, big dollar sport contract re-negotiations, record high CD sales and the like, why can’t we start the leverage the celebrity movement.

Celebrities enjoy a status second to none so it would be easy to leverage their celebrity in the face of any problem we have. Most of today’s youth are already hooked on celebrity. They would be the worker bees that keep the movement rolling.

I don’t say any of this tongue and cheek because we are in real serious dookey. I’ll use GM as a proving point. Who owned GM?

If you believed in what our system of economics told you, it was the stockholders. The stockholders were the actual owners because that is how ownership was created by corporations. In fact, the government made corporations follow a certain blueprint through laws and tax codes or they didn’t qualify as a corporation.

As I write this, the stockholders no longer exist. The government has taken their place. It doesn’t make any difference how this happened, because it did.

But what if we had celebrities leading the opposition to the governmental takeover? What if these celebrities stood foursquare with the stock and bond holders?
I bet the new owner wouldn’t be the new owner.

Leveraging Celebrity

Let me repeat myself and say we as a people can solve any problem or crisis as it hits us with the right kind of leadership. This of course begs the question will celebrities be the right kind of leadership?

The answer is a resounding yes if we tie their performance to their celebrity status. Fail and they lose celebrity status. Succeed and they keep celebrity status.

We know celebrity can be leveraged. I wonder if we are willing to do it? Happy 4th of July…

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Leveraging Celebrity

Get ready for the roller coaster if the Cap and Trade Bill that was passed by the House of Representatives last week becomes law. Those who are living in older homes or homes that are not the most energy efficient are essentially screwed.

Over the next few days I will be outlining what is in the bill and scaring the crap out of you.

I did a quick excel spreadsheet and according to the numbers the Secretary of Energy will expect by 2029 that homes will use 62 percent less energy, or else they will be subject to Federal intervention. We will get into Federal intervention and inspectors on a later post.

(A) effective on the date of enactment of the American Clean Energy and Security Act of 2009, 30 percent reduction in energy use relative to a comparable building constructed in compliance with the baseline code;

(B) effective January 1, 2014, for residential buildings, and January 1, 2015, for commercial buildings, 50 percent reduction in energy use relative to the baseline code; and

(C) effective January 1, 2017, for residential buildings, and January 1, 2018, for commercial buildings, and every 3 years there after, respectively, through January 1, 2029, and January 1, 2030, 5 percent additional reduction in energy use relative to the baseline code. US Congress Bill 2454 page 200

And if this is not scary enough, look at the power it gives the Secretary of Energy:

(4) ADDITIONAL REDUCTIONS IN ENERGY USE.—Effective on January 1, 2033, and once every 3 years thereafter, the Secretary shall determine, after notice and opportunity for comment, whether further energy efficiency building code improvements for residential or commercial buildings, respectively, are life cycle cost-justified and technically feasible, and shall establish updated national building code energy efficiency targets that meet such criteria. US Congress Bill 2454 page 202

You will have given the Secretary of Energy the power to decide unilaterally what the energy use codes for the country will be. One person will have the power to decide what homes have to do to comply with his or her whims.

And you think we have problems now with real estate, just think of the fun times we will have if this bill gets enacted into the law of the land.

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Cap And Trade Will Make Homes Cut Energy Consumption 62 Percent

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Think the big banks would be at least a little grateful to American taxpayers for bailing them out with their money? Yeah, right!

A published report the other day says these “too big to fail” institutions are doing everything in their taxpayer fueled power to head off a proposal by President Obama for a consumer protection agency.

The proposed agency would, among other things, regulate home loans.

Did I say “regulate?” Now, there’s a word banks don’t like very much.

But regulation was exactly what was needed–stricter regulation–when banks and other lending institutions were helping create the worst economic disaster in this country since the Great Depression.

The New York Times quotes the president of the American Bankers Association as saying, “It’s going to be a huge fight. This agency would have broad powers that go beyond every consumer law that has ever been enacted.”

Well, that sort of sounds like a good thing to me!

The fact is, the banks, and many real estate brokers, have and are getting away with fiscal murder….and, they know it. That is why they are fighting so hard to head off anything that might get in their way of business as usual.

We may or may not be at the very beginning of a modest,at best, real estate recovery—declines in home prices in some places are slowing–and prices actually are up in cities like Denver, apparently.

But lending institutions can’t be allowed to simply pretend that nothing really bad has gone down…that would only set everyone up for yet another real estate bubble followed by another real estate burst.

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Banks Want Free Field That Could Lead To Another Real Estate Bubble-Burst Cycle

While the government is spending money to fix our problems, the resulting rising interest rates are putting pressure on the mortgage market. So much so that mortgage lending has dropped to an 8 month low as higher interest rates and rising unemployment is convince homebuyers to remain at home.

The scary thing is that this genie is out of the bottle. It will be hard to get interest rates back to their levels of even a couple of months ago with the amount of borrowing by the Federal Government. Interest rates should be rising for a while as the Treasury Department sells the trillion dollars in debt and the rest of the worlds investors worry about the health of the dollar.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan dropped 19 percent to 444.8 in the week ended June 26 from 548.2 the prior week. The group’s refinancing gauge declined 30 percent to the lowest in seven months, while the index of purchases fell 4.5 percent.

Unemployment, which touched a 26-year high in May, and rising borrowing costs discouraged homeowners from refinancing, while a growing number of foreclosures sidelined potential buyers waiting for house prices to stop tumbling. Pending home sales showing contracts signed in May rose 0.1 percent, compared with a gain of 6.7 percent in April, the National Realtors Association said today.

“The run-up in mortgage rates is exacting a toll in terms of depressing mortgage applications,” Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts, said in an interview. “The economy is in a phase of attempting to find a bottom. Anything that comes in the way of that, like higher rates, is going to mean it takes longer.” via Bloomberg.com

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While the turmoil in the residential real estate markets continues to make headlines, some analysts and prognosticators are questioning whether we will see the same kind of meltdown and mass foreclosures in the commercial real estate side of the industry. And the general consensus of those quoted in various news services and website across the United States is not good.

Overview of Commercial Market Status

The commercial real estate market, including retail malls, multifamily buildings, office buildings and other non-residential buildings has already been hurt by falling prices, unemployment, economic decline and foreclosures. However, as already mentioned, commercial real estate includes many different property types, which perform differently under the same economic conditions. For example, retail malls have been adversely affected by numerous issues such as the credit crisis, lower consumer spending, retail competition from the internet and changing consumer behavior. These economic factors that have already caused the bankruptcy of major malls across the United States may not have the same affect on the multifamily real estate market due to the fact that the demand factors influencing apartment buildings are completely different from those of a retail mall. In fact, some of the issues now hurting retail malls could actually increase demand for affordable multifamily housing.

Can Multifamily Thrive in This Down Market?

Millions of people have seen their homes foreclosed upon over the past two years. These people may not be shopping every weekend at the local mall for a new pair of designer jeans but they will still need a place to call home. With tightening credit guidelines for residential mortgages and falling residential home prices it is a logical presumption that many of these displaced people will be seeking multifamily housing. As most apartment building investors understand, it is difficult to find reliable statistics for multifamily housing demand. This is due to the fact that demand for multifamily housing varies according to local economic factors. For example, demand for multifamily housing may increase or decrease according to the local job market.

One of the factors that does seem to be affecting all property classes in the commercial sector of the real estate market are commercial mortgage backed securities. According to Forbes.com the issuance of commercial mortgage backed securities reached its highest point in 2007. Most of these bonds are for duration of ten years and have a fixed rate of interest. These bonds become due in 2017. While this is true for the majority of large retail commercial projects, many apartment building owners have five year loans that become due in 2010 or 2012. Because of stricter underwriting guidelines and depressed values, these owners may find it difficult to refinance without having to put up more cash to facilitate the loan.

Photo Credit: sashafatcat

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Is Multifamily Immune from Commercial Real Estate Decline?

With so many ways to make money in real estate, how are you going to choose to make your money?  Investors can make loads of money in residential flips or rehabs or commercial buildings, apartments, self storage, mobile homes, even vacation property.  There are even different ways to profit in each of these asset classes, it just depends on how you wish to exit.

Here is a list of different exit strategies

1. Flip
2. Rent and Flip
3. Rent and Hold
4. Lease Option
5. Wholesale
6. Refinance
7. Sell the entity that holds title to the property

So which one do you choose?  Many investors do not wish to use any of their own money or take any risk and they wholesale deals.  Others flip or rent and hold for positive cash flow even lease option or refinance.  But what if you run into an unpleasant surprise or your exit strategy does not work?

Items that could ruin your exit strategy

1. Tenant issues - a bad tenant trashes the place and does not pay rent
2. Cannot flip - demand does not exist, or escrow falls out because the buyer cannot close, lender backs out of the loan, etc
3. Unexpected maintenance – surprises and maintenance can add up and cancel out profits
4. Poor property management – vacancy, bad tenants and poor operations can diminish value and hurt cash flow
5. Depreciation – the value of a market is out of your control, recently dropped in half in some areas

These are just a few reasons why savvy investors avoid losing money on deals by having multiple exit strategies. If you are unsuccessful flipping a property you may be able to rent, lease option and even get a lower payment or take cash out with a refinance. Or if you cannot find good property management or good tenants then you can flip the property.  Multiple exit strategies give investors backup plans if your 1^st exit is unsuccessful.  Most investors that have done enough deals have run into surprises or exit strategies that did not go as planned.  Avoiding loses is crucial, you may ruin credit, ruin good relationships with investors and integral parts of your team, even end up bankrupt.  Avoiding the valleys will also allow your portfolio to grow more over time.

Simply put, multiple exit strategies will lower risk, not to mention, let you sleep at night. My advice, always have multiple exit strategies.

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The Benefits of Multiple Exit Strategies for Real Estate Investors

Almost nobody gets rich quickly in the real estate business. You will probably get rich slowly like most of us. You will make $5,000 off a wholesale deal, $30,000 off the back-end of a lease option, $10,000 from another wholesale deal and $50,000 from a pre-foreclosure. Making this money takes time, but once you get good at this business the money slowly begins to add up.

Have You Caught Fire Yet?

However, there comes certain times throughout your real estate career where you “catch fire”. For one reason or another you will catch fire and you’ll get more deals than you can possibly handle. This happens in spurts and I’ve experienced it multiple times.

Perhaps it will be a call from a landlord who owns 25 houses and wants to dump them all. Or maybe you just sent out a direct mail letter that’s getting an awesome response rate and the leads just pour in.

Now, when this happens guess what? Many investors freeze up. They get so overwhelmed that they do nothing and just bury their heads in the sand. I know this for a fact because I’ve witnessed it with new investors and I’ve had to convince them to snap out of it.

You see, when the floodgates open, this is your chance to get-rich-quick. You never know when you will “cool down” so you need to take advantage of every deal that comes your way. I don’t care if you have to work 80 hours per week and seven days per week. While you have the magic touch you need to milk it for all it’s worth.

Do You Know When to Take a Vacation?

And when I say milk it for everything I mean it. These days I get the majority of my deals from referrals. Often I will get my referrals from people who are too overwhelmed or uneducated and they don’t know how to handle everything or they don’t want to work a little extra to make more money. Just the other day I got a call from an investor who was going on vacation and wanted me to handle some deals for him. Can you believe that? He is passing off thousands of dollars to me at a time when he is “hot” to go on vacation (I know this investor personally and he’s moving and shaking right now).

So what do you do when you “catch fire”? Well, take it one deal at a time and get organized. First, get a folder for each deal that you’re working on. Next, get out your calendar. There are seven days in a week, so that means you could have seven meetings with sellers each week (Yes, seven meetings. You have to temporarily sacrifice now, if you want the good life in the future). Also, if you don’t understand a deal don’t forget to call upon your network of more experienced investors to help you out (I wouldn’t try and involve them in the deals, just pick their brains for information).

Don’t Squander Opportunities

Listen: I don’t know how many other ways I can say it. But when you get in the groove, don’t let anything stop you. You might close 15 deals in two months and then it could be another three months until you get your next deal. And that’s when you take your vacation or relax…when things are slow.

I guess it just ticks me off to see people squander opportunities, or to be too lazy to take advantage of them. So, when your “hot period” happens just roll with it, with everything you got. And don’t be stupid and take a vacation, or cancel a meeting with a seller because it’s your bowling league night…

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This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Most People Don’t Take Advantage of Getting Rich Quick…Will You?

As the Treasury Department training company, Goldman Sachs, records incredible profits, the housing market is fighting a battle to save the economy. The 275 billion that the Federal Government allocated to infuse into the housing market is failing to get into the hand of the borrowers. It is staying with the bankers paying down their debt and fix their bottom line.

And if you are looking to buy an investment property, God bless you. With 2.1 million empty homes on the market, there is a great deal of excess inventory that needs to be absorbed before the market will have a firm foundation.

The group that could buy up this excess housing is the investor class to turn it into productive rental properties or fix them up (spending more money) and sell them. Instead the assets are sitting idle, a weight on the market and the economy.

Four months after President Barack Obama pledged $275 billion to shore up home sales, the engine that powered every U.S. recovery since 1960 is stalled. Bankers’ reluctance to finance buyers who won’t live in properties is one barrier to a turnaround. Stricter qualifying rules and a rise in the cost of residential loans to 5.42 percent have impeded new mortgage lending, which is at a 13-year low. An inventory of 2.1 million unoccupied houses on the market, created by the fastest foreclosure pace in history, may be a drag on a revival.  Bloomberg.com

But as the late Billy Mays said, that’s not all:

If we do not see a housing stabilization soon, many more families will be underwater on their mortgages. Even Alan Greenspan, the retired Fed Chief, is scared. While things are slow right now, restaurants are still humming and people are still spending. Housing is the vehicle that will lead the recovery, but housing could also plunge us into another level of recession just as quickly.

The consequences of a further steep decline in house prices on the overall economy are severe because it would cut so significantly into the American middle class, the vast army of consumers, the ones with conventional Fannie- and Freddie-backed mortgages, dubbed “conforming” in the trade. Any equity that subprime-mortgage borrowers had in their homes is gone. But about eight million conventional mortgages were made for home buyers in 2005 and 2006. House prices have fallen significantly since then.

“The bulk of conforming mortgages made since 2005 are close to being underwater,” says Mr. Greenspan, meaning their mortgages are greater than the market price of their homes. Wow. Although many underwater homeowners will keep making monthly mortgage payments, they can’t refinance or take out home-equity loans — and are at greater risk of default and foreclosure.

“We can take another 5% decline in house prices without much macroeconomic impact,” Mr. Greenspan says. But if prices fall by 12%, more than four million additional homeowners will be underwater. via WSJ

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Housing Plan Stuck, National Recovery In Hands of Real Estate Market

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No fewer than three times in the past week I heard someone use the expression “when life hands you a lemon, make lemonade.” Twice it was used in the context of real estate and the other in reference to the economy in general. What that says to me is that people have, for the most part, come to the realization that things will never return to the way they were.

image via Flikr

 Last week I discussed revisiting your business plan, getting back to basics, and remembering why you went into this business in the first place (article). Often that is easier said than done. Everyone understands that there are going to be setbacks, or lemons, along the way. But now it seems as if the lemon harvest has been a bumper crop. How much lemonade can we drink?

The Carnegie Solution

I remember reading a book by Dale Carnegie many years ago. He had a fairly simple process for dealing with problems and it’s one that I’ve always remembered. He suggested following three simple steps:

1. Determine the worst possible outcome
2. Accept that outcome if necessary
3. Take steps to improve on the worst case

People have a tendency to let things get out of hand by ignoring problems altogether. The worry and stress impacts every area of your life including your business, family life and your health. Stress takes an enormous toll and there is certainly no shortage of it today.

Facing Trouble Head On

Let’s look at a typical problem facing real estate investors. Tyler Tycoon gets caught up in the buying frenzy of a few years ago. He purchases an investment property in 2005 using an Option ARM and very little money down. He rents the property for enough to cover the teaser rate on the loan with very little left over to cover other expenses. He isn’t worried because prices are appreciating rapidly and he was assured that he would easily be able to refinance into a better loan before the teaser rate resets and caused the payments to jump by 50%. What could go wrong?

It’s now 2009 and prices have dropped significantly from the purchase price. Worse yet, the teaser rate is about to reset to a rate that will cause the payment to jump to a point that puts the payment much higher than the rental income, never mind the other expenses. Tyler has no reserves and is faced with foreclosure and is considering just walking away from the property.

Using the three step process:

1. The worst case is that he loses the home to foreclosure and the lender obtains a deficiency judgement forcing him to declare bankruptcy. His credit is now ruined for ten years as a result of the bankruptcy.
2. Instead of worrying about it, accept that this could very well happen and mentally prepare for it.
3. Look for ways that will improve the situation. You may not be able to solve the problem but you may be able to lessen the impact. Perhaps a short sale or modification of the loan or a deed in lieu of foreclosure with an agreement that there will be no deficiency judgement.

Ignoring problems won’t make them go away but it can make them worse. Those who prefer to cry over spilt milk will, no doubt, be signing the blues for a long time to come. Those who choose to make lemonade out of life’s lemons will wind up whistling a happier tune.

“When we have accepted the worst, we have nothing more to lose. And that automatically means- we have everything to gain!” - Dale Carnegie

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Making Lemonade