GoHuman Blog

A hot topic lately has been the issue of loan modifications.  Loan modifications can take several forms – principal reductions, interest rate reductions, extended repayment schedules or payment deferrals.  Opinions on this topic are quite polarized.  On the one hand, there is the camp that proclaims, “I played by the rules, so it is unfair for others to get special treatment!”  The people who make this argument are missing the bigger picture.  If your neighbor’s home gets foreclosed on, the value of YOUR home will most likely go down.  It is in your best interest to have fewer foreclosures in your neighborhood.

If a bank doesn’t modify the loan for a struggling homeowner and proceeds with foreclosure, the best case scenario is that the home will quickly be sold to someone else.  In that case, the loan balance for the new homeowner will most likely be less than it was for the owner who was foreclosed on.  In essence, the loan balance gets modified anyway.  It is a matter of who benefits from the lower loan balance – the current homeowner or someone else.  If the home doesn’t sell quickly after foreclosure (which happens all too often), the home will most likely fall into a state of disrepair and can become a target for squatters, thieves and illegal activity.

Ultimately, it makes financial sense in many cases for banks to modify loans for struggling homeowners.  This is especially true in cases where the current homeowner can afford the home at or near the current market value.  The foreclosure process is lengthy and expensive.  A typical foreclosure costs a bank in excess of $50,000, or between 30 to 60% of the loan balance.  The vast majority of people who took on mortgage debt had every intention of doing “the right thing” and paying their mortgages on time.  But unexpected economic hardships can put people in the position of having difficulty making their mortgage payments.  The double whammy of economic hardship and a seriously underwater mortgage can force people to make the decision to stop paying their mortgage.  They realize that it makes little sense to throw good money after bad.

Loan modifications are not a matter of charity.  People who argue against loan modifications might want to ask themselves whether they would prefer to keep their current neighbor or have a meth lab next door.   It is more logical to plug the holes in a sinking ship so that we can all stay afloat than to sink together on the basis of fairness or morality.

• Your expectations may not be the same as the expectations of others.  You may be a bit more demanding than others.  Ask the subcontractor to show you a place where they have done work before.  Verify their quality of work with those who have hired them.
• NEVER pay for labor in advance; an honest contractor should not make that demand.  I will buy the material or pay for it in advance, however.
• Pay them every Friday for what was done during the week, or when the work is complete.  I always pay immediately when a job is done.  Cash flow is important for any small business and they are more likely to help you out and go the extra mile when they know you will follow through with your end of the bargain.
• When contractors quote a job, make sure the quote is based on a specific list of things to do on which you both agreed.  If additional work becomes necessary along the way, COMMUNICATE!
• Don’t let them leave a mess.  Communicate ahead of time what level of clean-up you expect from them after the job is done.  When plumbers and electricians need to open up a wall or a ceiling, communicate with your carpenter and dry-wall person to make sure they do not create more of a mess than what it’s worth.  (One more electrical outlet may not be worth ripping open an entire wall).
• Treat them with respect and seek their input, even if you make the final call on things.  You do not want mindless robots; you want partners who enjoy working for and with you.  People love to share their experience and their knowledge. Let them!

Since I live in a small town, word goes around fast and people are concerned about their reputations; however, if you are new to an area, it might not be so easy to find reputable help.  Let GoHuman help you to connect.

• Make it ready to move in.  A lot of home buyers will not consider a house that they do not see themselves moving into as-is.  Help them to envision themselves in the house.
  • Kitchen and bathrooms must be clean and in good repair.  Tile or high quality vinyl are good floor choices.  A dishwasher is almost a must and it won’t cost you that much more if you have a new kitchen.  The 24-inch cabinet may cost you $125 and a dishwasher $250.
  • My bathrooms always have white towels over the towel racks, a soap bar on the vanity sink, toilet paper on the holder and a shower curtain that pops.  The smaller the bathroom, the more important the quality of the vanity and fixtures.   Make sure the vanity is not too small to look cheap and not too big to make the bathroom look small.  Spending just a little extra for a nice vanity, mirror and lights will go a long way in making the bathroom inviting.
  • All rooms should have new paint (or paint that looks new).  Especially in older homes, it is a good idea to use a technique called “knock-down” which gives the walls a texture and covers a multitude of sins (imperfections).  It looks sharp, too.  Use light, neutral colors.  Get rid of all wallpaper; they are just not popular and you need to go with what the majority of potential buyers will like.
  • Avoid carpet.  If the carpet was still good when you bought the house, have it professionally cleaned.
  • Switches and outlets.  They are cheap and should all look new. (no paint on them).  They all should have the same color, ideally white.
  • Registers often look rusty and dirty.  They are just $6-$8 per piece and look so much better when new.

Enjoy the process, and if you don’t have a good feel for colors or for decorating, find a friend who does. They usually love to provide their input.

In my next blog, I will be discussing sub-contractors. As luck would have it, GoHuman can help you to find the right ones.

I am not an economist, but I do know that the basic economic model of supply and demand plays a major role in any determining the prices of goods and services.   In order for prices to rise, demand must exceed supply.  If supply significantly exceeds demand, then prices will continue to fall.  So, in order to determine if we are really on the road to real estate recovery, we need to look at the supply of homes available for sale and compare that to the demand of homes for sale.  And that is where it gets tricky.

A recent report by the National Association of Realtors (NAR) proclaimed that there are currently 2.3 million existing homes for sale, or a 6.1 month supply.  A “healthy” real estate market is generally defined as one which has approximately a 6 month supply of inventory.  So this report suggests that indeed the crisis is over and the real estate market is again “healthy”.

But that is not the whole story.  The NAR numbers don’t include that pesky “shadow inventory”.  The estimated number of homes included in that elusive category varies wildly.   The basic definition of shadow inventory is the number of homes currently in the foreclosure pipeline PLUS the homes likely to be added to the foreclosure pipeline.  While the number of homes currently in the foreclosure pipeline can be counted with some degree of accuracy, the number likely to be added to the pipeline is almost impossible to pin down.

Currently, the estimates for shadow inventory range from a conservative 1.6 million homes to a whopping 10.3 million homes.  Several reputable sources put the number in the 3 to 4 million range.  But no matter which estimate you choose to believe, the end result remains the same.  When the shadow inventory is included in the total, the inventory of homes exceeds a six month supply, so the real estate market on a national level is not “healthy”.

While it is difficult to accurately measure the supply of homes available for sale, estimating the demand for homes poses challenges as well.  The best we can do to estimate demand is to look at historical data and make adjustments to reflect the current situation.  The real estate bubble caused both an increase in the price of homes as well as an increase in the percentage of Americans who owned a home.  From the late-1960s until the mid-1990s, homeownership rates remained fairly stable at about 65%.  The rate peaked in 2004 at almost 70% and currently sits at about 66%.  Foreclosures have forced many former homeowners out of the housing market.  Unemployment and low consumer confidence have kept many others from getting their foot in the door in the first place.  Given that over 11 million homeowners currently have negative equity in their homes, it is unlikely that many of them will be buying a home anytime soon.  Given all of these variables, it is hard to predict where the homeownership rate will land when the dust ultimately settles.

Another recent NAR report, which detailed positive January sales data, spawned more optimistic headlines. But when you dig a little into the data, the picture is not as rosy as these headlines make it seem.  Most focused on the comparison of the January 2012 numbers to the December 2011 numbers.  This is not really a valid comparison as December is generally a slow month for home sales.  A more revealing comparison is the year over year change.  When you compare the number of homes sales in January 2012 to the number in January 2011, the number of sales increased by .7%, hardly cause for celebration.

The January sales data also reveals a few other telling statistics.  All cash transactions represented 31% of the sales in January and 23% of the homes sold were reportedly purchased by investors.  These numbers highlight the fact that a large portion of the current demand is NOT being driven by average Americans.   The bottom line is that we are not out of the woods yet – and that we probably still have not reached the bottom.

However, this is a cautionary tale to all current and would-be landlords. Markets work. The cure for high rental prices and lower vacancy rates… are higher rental prices and lower vacancy rates. In other words, as real estate sales prices stay low, financing remains cheap, and rents continue to rise, the pool of available rental properties will increase. More competitors will enter the market or expand their portfolio. Foreclosures will continue to be dumped onto the market for hungry real estate investors to consume. The “easy money” will eventually disappear and the rental business will get back to a more normal (less profitable) footing. It won’t happen overnight, but it will happen. Therefore, you must keep your wits about you and be realistic about the market conditions. Otherwise, you may find yourself in an uncomfortable situation as so many did when the real estate sales bubble burst – more outgo than income. And if you multiply that times several properties you purchased on the way to becoming the next Donald Trump, you may find yourself in a rather unpleasant predicament.

As you look to expand your current portfolio, or even look to purchase your first rental property, keep in mind that real rental rates (adjusted for inflation) will not continue on an upward path indefinitely. I know this sounds rather elementary. However, please remember that real estate buyers forgot this little fact en masse in ’04, ’05 and ’06; much to their dismay during the last five years. So learn from the real estate bubble: structure your purchases and/or refinancing so that the carrying costs are conservative and you can maintain cash flow once this trend has reversed.

It is a good time to look for potential rental properties as an investment. However, if you are in the market to purchase rental property, don’t count on an unrealistic rental rate to make the deal work for you. Make sure the deal works at today’s rental rates, and maybe even rates that are a little lower just to be safe. You make money when you buy real estate, not when you sell – meaning that you must buy low and buy right. We are not out of the woods yet economically. In fact, I would argue, the worst is yet to come. So the lesson is to take some risk, but be prudent and selective. My most successful property management clients have taken the path of the tortoise, not the hare, when it comes to their real estate investments.

Leverage and excessive optimism wiped out many people’s finances over the past five years; don’t let it happen to you. Structure your deals to include a little cushion for vacancy, repairs and – should they arrive sooner than any of us were planning – lower rental rates.

We encourage all of you who have an interest in these and other topics related to Real Estate to spread the word about this industry focus, and to help us grow the community of communities needed to own, vs. just occupy.  This is yet another way in which GoHuman is working to “change the way your world works” —  for the better.

1. You do not want to have any of your own money invested in the properties. Otherwise, the number of homes you can buy is limited by the amount of money you have.
2. You never buy a property for more than what you can borrow.  Most banks lend up to 80% of the appraised value, some a bit higher.  A good rule to set is to never spend more than 80% of the market value for an investment property.  That includes the purchase and the fix-up.  This way you can finance 100% of what you have in it.
3. The 80% a bank will finance applies to either the purchase price or the appraised value, whichever is lower.  So, if you buy a $100,000 house for $80,000, the bank will only finance $64,000.  Here is how you can get all the $80,000 you want from the bank:
1. You buy and fix up the property using cash. There are three ways to get that cash:
1. You have that much available yourself in savings.
2. You have a line of credit (such as a home equity line of credit on your home).
3. You have a cash partner.  This person is a good friend or relative in whom you can trust (and they in you). You get a short term loan from them to purchase and fix up the property. Be generous in your terms. My partners get a one-time 5% loan origination fee, then I pay them 10% annual interest starting the 2nd month, until I refinance.
2. Once you have the property in your name, you can refinance.  When you refinance, the bank will only go by the appraised value and will not look at what you actually put into the property.  This allows you to take money out at the front end
4. Find a partner!  If you reached your financing limit with the banks because your debt-to-income ratio is too high or your credit score too low, you can again partner with somebody who has no time to devote to real estate investing, but would love to get in on the game.  For example, you could link up with a professional who has good credit; he or she can get the loan for the property and you can split the cash flow while you lease it and the profit when it sells.

A word of caution when using partners: put everything in writing and review your agreements together to ensure there is good communication.  But as my father, who was a contract lawyer, said:  “The best contract is worthless, if there is no trust.”  So make sure there is mutual trust when you seek an investment partnership.

The term speculation has been given a bad name in recent years.  Speculators are those “evil” people who profit from the misfortune of others.  They make money by trading paper.  No “real” work is done by these leaches on society.  Right?  They are elites that derive undeserved material gains from hard working members of society.  Right?  They serve no good or useful purpose.  Right?

Let’s first define speculation.  According to Dictionary.com, speculation is defined as: engagement in business transactions involving considerable risk but offering the chance of large gains, especially trading in commodities, stocks, etc., in the hope of profit from changes in the market price. 

Reality Check

OK, that’s a decent workable definition to start with.  So, by looking at this definition, a speculator is someone who is willing to take a large risk as long as the potential reward is commensurate with that risk.  So, is this a problem?  Does the potential to make 10-to-1 or 100-to-1 on your money represent a bad thing?  Do we want people to stop risking their capital?  Do we want to limit profits and therefore discourage people from risking their capital?  I would contend the answer is no.  Furthermore, I contend that we are much better off and benefit tremendously from those “evil” speculators.  In fact, we should thank them.  Thank them for our health, our standard of living and the knowledge we have today.

Got Cancer?

Some of the greatest advances in the treatment of cancer at this very moment are being made possible by speculators.  Not by governments, not by federally funded university grants, not by sucking taxpayer dollars away from productive citizens to be mis-allocated by politicians and bureaucrats.  The free market is coming up with better, more effective ways to treat cancer.  One example is a company called Curis (CRIS).  How is Curis getting all the money they need to come up with these advances?  By now you probably know the answer: speculators.  How?  Well, when markets work, information flows and individuals are allowed to allocate their resources as they see fit.  People are willing to take informed risks with the potential for a big payday.  Casey Research publishes several well written and in-depth publications, mostly involving speculation in early stage technology, energy and natural resource companies.  In their technology publication (Casey’s Extraordinary Technology), the following was written about Curis when it was first recommended:

Curis’ multi-target pathway inhibitor programs may treat a wide range of cancer types with lower toxicity and greater efficacy than chemotherapy, using more targeted therapies.

Highly speculative. The stock’s short-term performance will depend on results from a pivotal Phase II trial expected this quarter. Longer-term performance will depend on advancing pipeline, particularly potential blockbuster CUDC-101. If the company is able to do this, the stock is a multi-bagger. If not, the share price could fall considerably.

Simple translation: This new cancer therapy could be a game-changer in the treatment of cancer; should this come about there is a huge potential for extraordinarily high profits (and tremendous benefit to society); if they fail you will lose most or all of your investment.  This is the classic speculative model.

Now, consider this: Without speculators, this technology (and many more) to save and improve lives would not have come about at this point in history; nor as quickly as it has.  Should it succeed, those who speculated on Curis in the early stages will see a multiple of their original investment returned to them.  Those with certain kinds of cancer will get treatment that is less invasive and destructive as well as more effective.  Evil?  Not from my point of view.  In fact to me, it is the beauty of free-market capitalism.  Now, do the speculators care about a cure for cancer or just about profit?  I don’t know.  And I don’t care.  The profit motive is funding the research and advancement that has the potential to benefit humankind in countless ways.

Mind Over Chatter

In the interest of full disclosure, as of this writing I am a shareholder of Curis (CRIS) and I am not in any way making a recommendation to purchase shares in this company.  It is extremely risky and I speculated at a much lower share price.  Do I hope my speculation pays off?  Yes.  Do I care that that my money is going to fund a possible game-changing treatment for cancer?  Actually, yes.  Should this cancer treatment come to pass, I will take great pride in my partial ownership of a company doing such incredible work.  However, I would not have risked my capital, at the price at which it was risked, if I didn’t think they have a possibility of succeeding.  Is there potential that my entire investment could be wiped out?  Absolutely.  It has happened many times before and that is the nature of speculation.  The few wins have to amortize the larger number of losses.

It is my hope that the next time the media or an over-zealous friend or family member starts discussing “speculators” in a negative way, you consider this post.  Realize that many of the wonderful advances in health, technology, energy and other areas of our lives are made possible by those willing to take a chance by speculating on a small, early-stage company.  Also realize that for taking that chance, speculators are paid very handsomely for the small percentage of times that they do succeed.  And that’s OK.