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Whither The Real Estate Market…

There is absolutely no lack of folks out there with a viewpoint to be espoused about what’s going to happen in the real estate market in the next 12 months or so.  Need I add my opinion to the heap?  Need to, maybe not, but it’s hard to resist and, who knows, it just might provide refreshing and new insights for those of you who have not already had their fill of blogs, tweets, and buzzes on the subject.

The news, however you acquire it, is chock full of confusing information.  It’s not that it’s contradictory so much as inconsistent. New home sales are up and then they are down.  Housing starts pick up but then falter.  Existing home sales are happening, but perhaps it’s due to foreclosures and REOs.  FHA wants to keep the market fluid, but finds the need to tighten lending requirements.  If a clear direction has been set, if the economy has truly righted itself, it’s pretty hard to discern and few are willing to certify it just yet.

The interpretations of what this all means, and the predictions about where it’s heading are all over the map.   Those that are constantly sought out by the media for quotable prognostications would have us believe that what they say is based on complex models that take into account hundreds or thousands of variables.  We hear the pundits talking doom and gloom.  However, it seems that as soon as one notable variable, say last month’s housing starts, changes for the better, everyone quoted seems to trending in the same upward direction.  Sophisticated multivariate models are unlikely to change on a dime because of one component.  It seems to the outside observer that they are not doing much more than straight lining the latest statistics for lack of better information.  If that is indeed what is happening, no one is well served.

Maybe they really do have good models and it’s the fault of the media’s nature to report only surface level quotable information.  It’s unlikely that the local paper or even the Wall Street Journal is going to provide an in-depth analysis of someone’s economic model on a regular basis, but one would think you’d see such a discussion once in a while.  I haven’t.

Something else that would be interesting would be to go back a couple of years and see what these folks were saying, individually and collectively and compare that to what has actually transpired.  We do occasionally get a prediction from someone who is identified as the person who “called it right” two or three years ago as a contrarian, but then why do they keep quoting all those other folks who got it wrong?  Why are we to believe that they are now any better at this than they were just a short time ago?

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By Warren Tessler – February 17, 2010

Intra-family Loans, Part 1

It’s easy to think of examples of situations in which a loan to a family member would be appropriate – helping out during a period of financial distress or assisting the purchase of a home, for example.  It’s a time honored form of assistance that has enabled many to get through a tough time, acquire a new home, or start a new business venture.  In many families it’s easier to go to the Bank of Dad than the Bank of America – and the rates can be better too.

When someone does make a loan to a member of the family, the question of what to charge for interest must be addressed.  It’s important to understand that to qualify as a loan under IRS rules, the money must be repaid and interest must be charged.  If the principal is not repaid, the IRS may consider it to be a gift (if the amount is above the annual and/or lifetime exclusion amounts) and apply the gift tax.  If no interest is charged the IRS may impose penalties as well.

Generally speaking, the lender is making the loan to help someone, not to make a large profit.  The interest charged can be a nominal rate, but it cannot be too low.  The IRS requires that a certain minimum rate be charged or, once again, the question is raised as to whether this is a loan or a disguised gift.  The rate that the IRS requires is called the Applicable Federal Rate (AFR) and is adjusted each month.  The rate is lowest for loans of less than 3 years, higher for 3 to 9 years, and highest for longer than 9 years, but in all cases is lower than what banks would charge for personal loans.  One can charge more than the AFR without IRS concerns, but rates that are lower can attract scrutiny and result in penalties.

When making a loan to a family member, it’s advisable to formalize it in a written document such as a promissory note.  This is recommended for several reasons.  It lays out the details of the transaction, i.e. repayment terms, security (if any), due dates, etc., thereby avoiding misunderstandings at a later time.  It provides documentation of the nature of the transaction for the IRS if they should come knocking.  And, it provides legal documentation of the lender’s rights if the borrower defaults.  A list of issues to consider when making such a loan and drawing up the documentation are contained in an earlier post to this blog.

By the way, everything discussed here would apply equally to a loan to a friend.  The issues relate to structure and form, not to the legal relationship of the parties.

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By Warren Tessler – December 23, 2009

Seller Financing Goes High Rise

Seller financing has a wider appeal than many people might think. It certainly works for the individual homeowner who wants to appeal to the broadest market possible and to sell and close as quickly as possible. It also works for the business owner looking to sell and realize the most from the deal.

The above examples deal with how seller financing works for individuals. For many of the same reasons, corporations and large developers are realizing the benefits of seller financing as well. In Las Vegas, for example, developers involved with the $8.5 billion CityCenter project are using seller financing to their advantage. City Center is intended to have 2,400 high-rise condominiums priced from $500,000 to $9 million. 1,100 are still unsold as the project nears completion. The developers have lowered prices by 30% with some promising results. Deposits are starting to be made on units nearing completion.

Now, in this post in The Casino City Times, Howard Stutz says, “the challenge will be closing sales. Realtors said banks are not so quick to provide funding for high-rise purchases….”

Stutz spoke to Tony Dennis, executive vice president of CityCenter’s Residential Division for MGM Mirage, who said that “CityCenter is looking at potential seller financing possibilities, similar to a program the Palms began using to close sales on units inside its high-rise condominium tower. “ He broadened that by saying
“we’re looking at everything that can be supportive to our buyers.”

This is clearly a case of what happens in Vegas need not stay in Vegas (it’s not like they originated the idea of seller financing). Developers of all sizes are sitting on unsold units all over the country. Seller financing is one way to make sales happen. Granted, with seller financing the developer does not get the entire sales price all at once as would happen with conventional financing. What he does get is the down payments and a substantial income stream that can be used to pay off current obligations such as construction loans. If the developer wants to cash out before the balloons are due on the financed properties, the notes can be sold, preferably after a bit of seasoning, to investors who seek these types of financial instruments.

By offering seller financing the developer accomplishes the goal of selling the developed properties, likely at a profitable price. Getting whipsawed by construction loans and other obligations is avoided. The bank doesn’t get dragged down by non-performing construction loans. Renters become homeowners. What’s not to like?

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By Warren Tessler – December 8, 2009

Foreclosure Abatement?

Much of the news generated during this deep recession has to do with mortgage foreclosures.  We’ve all seen report after report of the high numbers of foreclosures and the toll that they take on families forced to abandon their homes.  Some economic forecasters feel that we may be in for another big wave of foreclosures within the next six to twelve months.

A report by attorney Ellen Brown says that there may be legal relief coming for millions of people facing foreclosure.  She writes about a recent decision of the Kansas Supreme Court that ruled that foreclosures initiated by Mortgage Electronic Registration Systems (MERS) are not valid.   MERS is a nominee company that registers mortgages electronically and then keeps track of changes of ownership.  Brown’s article explains that if the original mortgage was registered through MERS and then sold, the court held that there is no party with legal standing to foreclose.  Reportedly there are 60 million mortgages registered through MERS.

What this means at this point is hard to determine.  A ruling by the Supreme Court of Kansas applies only in the state of Kansas.  Courts in other states can take note of the decision, but may choose not to apply it if they feel that the laws of their own state differ in material ways (or if they disagree with the legal reasoning used by the Kansas court).  Brown states that the legal reasoning is sound, but I have found no other corroboration of that as yet.

If this decision contains legal principles that are indeed applicable in other states, then we can likely expect a flurry of lawsuits being filed.  If some of those cases result in decisions agreeing with the Kansas case, confusion would soon reign in the mortgage world.  Those who had been buying mortgages, often in bundled and collateralized forms, likely would stop doing so if they could not effect a foreclosure in the event of non-payment.  Lenders who routinely sell their mortgages would find that the market had evaporated.  Lawmakers likely would be tying themselves in knots trying to decide between a frozen credit system (again) and putting even more people out of their homes (again).  Not a pretty picture.

The major caveat at this point is that so far it is one case that affects only one state thus far.  It remains to be seen where, if anywhere, it goes from here.  Stay tuned.

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By Warren Tessler – October 13, 2009

Pay off debt to restore your financial stability

Debts have always been toxic and you should try to pay off debt at the earliest so that you are in a position to restore your financial stability. There is a chain reaction that occurs when you are in debt. It ruins your credit rating and this in turn limits your options to available financial benefits. Getting out of debt is a harrowing experience and it upsets not only your financial well being but it also ruins your sense of reasoning.

There are number of ways in which you can pay off debt. You can do it on your own or take the help of a professional. In case you are unable to hire the services of a debt help company due to financial limitations, there are many non-profit making debt help organizations operating in the industry. These non-profit making companies earn their revenues from donations received. Some of the debt help programs offered by these companies include debt counseling, debt settlement, debt management etc. Bankruptcy is also a way of getting out of debt although this should be your last option.

Whether you are opting for debt consolidation, debt settlement or a debt management program, the main aim of these debt help options are to assist you in paying off debt. You are able to enjoy lower rate of interest. And this in turn lowers your monthly payments to a considerable extent. You also get a new repayment plan that makes your monthly payments more organized and systematic.

If you are confident enough to wrap up your debt on your own, you can take the following measures –

Pay more than the minimum

The minimum payment you are required to make each month is usually 2% to 3% of the outstanding balance. So, if you can keep aside some cash and pay it for reducing your debts it will lower the principal amount too. So, you can get out of debt much faster.

Pay off debt having higher interest rate

It is better to pay off debts that attract higher rate of interest. If you are not being able to do so, pay off debts that have lower outstanding balance.

Curtail use of plastic money

If you have been using plastic money a lot, try to curtail using credit cards. If you make purchases with cash, you tend to spend less. This can act as a check in your spending habits.

The mantra of staying out of debt is to manage your finances better. If you are undecided about the debt help option that will suit your needs best, try to consult a credit counselor who can guide you to manage your debts better.

Posted in General finance, personal finance.

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By michelle – September 29, 2009

Principally Interest…

We all deal with interest calculations almost everyday.  There’s the interest being paid on your savings accounts at the bank.  There’s the interest being paid on your mortgage and the home equity line of credit, if you have one.  If you don’t pay your credit cards off in full you’re paying interest on that debt.  You may be paying off an auto loan as well. Student loans, furniture loans… the list goes on.  Whenever you borrow money or buy something and pay for it over time you are paying interest on the amount owed.

While most people feel that they understand how interest works, it turns out that many do not.  Even those who have a basic understanding of interest would have a difficult time telling you what their remaining principal balance will be after a year of making payments on a debt.  Does anyone ever check to see if the interest on their home mortgage is being calculated and credited correctly?  Not very often.  Or, if they do, they clearly don’t understand it.  We commonly receive calls from clients asking why, if they make a payment in the same amount each month, last month the interest paid was X and this month it is Y. (For a detailed explanation of how monthly interest is calculated, see the previous post “Keeping Interest Simple”.)

While calculating simple interest accrual is, well, fairly simple to do, other interest calculations can be a lot more work.  Figuring out the amortization of a fixed rate loan is not complex, but it can be time consuming and tedious if one does not have a calculator or a spreadsheet with that function already programmed into it.  If you are dealing with variable rate loans, compounding interest, extra principal payments, interest only with periodic balloons or any of a number of other variations on the theme things can get rather complicated.

The people who work for the various financial institutions have tools at their disposal to do these calculations for them (although given the current state of the U.S. financial system, one has to wonder if they know how to use them correctly).  Most of us don’t need to use them everyday or even every week, but we’d like to be able to verify that we are paying the correct interest on our outstanding obligations without having to acquire a black belt in spreadsheets.  Or, we should be able to recalculate the amortization schedule on our home mortgage based on alternative payment scenarios.  Or, we should be able to figure out what effect will be if the credit card company bumps up its interest rate, both in terms of how much more will the monthly payment be and how much longer it will take to pay it off if we continue to dribble along making the minimum allowable payment each month.

There are a number of websites that have calculators available to use for a specific purpose.  A mortgage website might have a calculator for home mortgages, or an auto dealers site might have one for car loans.   Frequently you can only use them on their site and cannot store your information.  The site run by Vertex42 is different in a couple of ways.  They are not a financial organization, so they don’t limit you to a tool that only works for the products they offer, thereby steering you away from other financial products that might fit your situation better.  They offer a very wide variety of financial calculators that cover just about any type of borrowing you might encounter.  Many of these calculators are spreadsheet templates that you can download to your own computer to use anytime, and they are free for personal use.

For example, the site has six different mortgage calculators, an auto loan calculator, a calculator for a loan that involves a balloon payment, and a home equity loan calculator.  All downloadable, all free for personal use.

They’ve got a calculator for estimating your 401(k) balance and one for planning the family budget.  Downloadable and free.  I counted at least two dozen calculators just related to financial matters.  They make it quite easy for you to plug in the numbers and get results quickly.  Whether you are checking the accuracy of the loan company’s monthly statement, thinking about buying a new car or home, or planning the family budget, you’ve got the ready made tools to do so accurately.

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By Warren Tessler – September 21, 2009

Keeping Interest Simple (Warning – Dry Subject Ahead….)

Whether it’s for a mortgage, a home equity line of credit, student loans or credit cards, most of us are paying interest on at least one and often more than one debt.

The interest rate is going to be different for each obligation, but it generally is calculated in the same way for all of them.

As common as it is for people to pay interest, and for as much interest as is paid out by consumers each year, many people really don’t understand how interest is calculated.  As a result, they don’t realize how much of what they pay out each month goes to interest payments to benefit the bank or credit card issuer, and how little remains to pay down principal, which benefits the loan payer.  While a good understanding of this will likely dissuade only a very few from incurring new debts, it may persuade a larger number to make a more determined effort at paying off those debts as quickly as possible.

Think of interest as the rent you pay for the use of someone else’s money.  Your rent is based on the rental (interest) rate, how much money you’ve been using (the principal balance), and how long you’ve been using the money (the time between payments).

Interest can be computed by assuming a fixed period of time between payments, called “monthly” or “360 day” interest.  It can also be computed based on the actual time between payments, called “daily” or “365 day” interest.  This is far and away the most common method employed.  Using the actual time between payments is more fair to you, since you are only paying “rent” for the number of days that you used the money before the principal was reduced following a payment.  To continue with our analogy, you are renting by the day, but writing a check approximately once each month to pay the interest accrued since the last payment.  This is to your benefit as it means more of your payment is applied to principal.  The more your loan balance is reduced today, the less interest you pay in the future.

To compute interest due, multiply your current balance by the interest rate (as a decimal) and divide the answer by 365.  The result is the interest for one day (daily interest).  Next, count the days between this payment and the last one.  Multiply the daily interest by the number of days to get the total interest.

For example:

$200,000 loan principal

8%  =  interest rate

200,000 x .08  =  16,000

16,000/365  =  43.84  =  $43.84 daily interest

1st payment

Interest began accruing on the 1st of the month, and you made a payment of $1,467.53 on the 30th day of the same month. [The $1,467.53 payment is based on a 30 year amortization schedule, which is commonly used even if the loan is for a shorter period with a balloon payment at the end.]

$43.84  x  30  =  $1,315.20

So, you paid $1,315.20 in interest, which left $152.33 to be applied to principal.

$200,000 – $152.33  =  $199,847.67 (this is your new principal balance)

2nd payment

199,847.67  x  .08  =  15,987.81

15,987.81/365  =  43.80  =  $43.80 daily interest rate

You make a payment of $1,467.53 on the 25th day of the month

$1,095.00 goes to pay interest (43.80 x 25) and the remainder, $372.53, reduces the principal to $199,465.14.

3rd payment

Let’s say you make your next payment on the 31st of the following month.  That means that there would be 36 days between payments this time.

199,465.14  x  .08  =  15,957.21

15,957.21/365  =  43.72  =  $43.72 daily interest rate

Payment  =  $1,467.53

Interest accrued  =  $1,573.92  (43.72  x  36) which exceeds your monthly payment of $1,467.53 by $106.39.  This amount will come out of your next payment first, before applying the rest to newly accrued interest and then, if any remains, to principal.

This example clearly shows how, even though the interest rate (8%) stays the same and the monthly payment stays the same, the portions of that payment that go towards interest and principal will vary each month due to the change in the daily interest calculation and the number of days in between payments.  It also illustrates how important it is to make timely payments, especially on large loans with long amortization schedules.

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By Warren Tessler – September 9, 2009

Developing Trends

The “Great Recession” has been going on for over a year now.  The financial markets went into their collapse last autumn.  As a result credit has been incredibly tight for many months, yet we are only recently seeing seller financing as a means of selling homes really picking up steam.  I’m wondering why there has been such a delay.

Certain ebbs and flows of seller financing have been predictable in the past.  Generally when interest rates are high, qualifying for institutional loans becomes difficult and we see a marked increase in activity.  Conversely, when interest rates are low, most people qualify easily and seller financing is not as prevalent.  For the past year we’ve had the paradoxical dilemma of very low interest rates, but very difficult qualifying standards that amounted to a near stranglehold on lending of almost all types.

Banks were charging in the range of 5% for a 30-year fixed mortgage, but they wouldn’t let you have one.  Savings accounts, bonds, and CDs had very low yields – less than 3% in many cases.  So, it would seem that for those folks who wanted to, or needed to, sell their homes the opportunity to carry the mortgage themselves and earn 7% or 8% or perhaps more would be a good one.  But, for a long time we did not see any surge in seller financing activity.  In fact it only seems to have begun to pick up steam in late Spring/early Summer and is still continuing.  Why did it wait so long to occur?

It’s a given that seller financing is not an option for many people.  Many of the homes that came on the market in the past year were due to the subprime lending craziness that put many people in the situation of owing more on their mortgage than the home could be sold for.  Even for those who were not “underwater” or “upside down”, if they had little or no equity in their homes, seller financing made little sense.  But, as in every market, there are those who market their homes at a time when they want to sell for the usual reasons – wanting to purchase another home, transfer to another locale – and have equity built up.  For them selling was still difficult due to all the reasons that we are all too familiar with by now.

Those people should have been offering seller financing to broaden the market reach of their properties and closing deals a long time ago.  I fully expected to see a surge of such activity beginning in January or February, but it did not seem to happen.  As we moved into the late Spring and early Summer however, we’ve seen things pick up noticeably.  Being in the business of servicing those notes we’re hoping it continues for some time to come.

We’ve all heard about leading economic indicators, and occasionally are told about lagging economic indicators.  I’m not sure if seller financed transactions fall into one of those categories or if they are just the natural result of some of the forces that are measured and tracked.  It would be nice to know more about what affects the timing of such activity as the economy goes through its seemingly inevitable gyrations.  Time for some market research perhaps.

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By Warren Tessler – September 4, 2009

Does a Past Bankruptcy Kill the Deal?

Not necessarily.

As a part of the still evolving recession, we’ve all become familiar with many stories of people filing for bankruptcy in numbers not seen in a long time.  Certainly, many of those are people with long histories of credit abuse who would have gotten to bankruptcy without the assistance of the global financial meltdown.  But there are also many who do not fall into that category.

There are those who have had years of satisfactory credit history but were forced to file for bankruptcy due to a one time event or events such as a job loss, possibly complicated by medical bills or another family crisis.  In some cases these folks have been able to regain their footing, but the bankruptcy will prevent them from qualifying for a mortgage for years to come.  They may now have a good job, put aside enough for a substantial down payment and can afford the monthly payments, but they will not get past the front desk at the bank.

It would seem to most of us that providing financing to anyone that has experienced a bankruptcy would be quite risky.  That may not be the case if, as mentioned above, the filing was due to specific circumstances that have been resolved and are not likely to occur again.  An August 28 posting in the Wall Street Journal by June Fletcher (no registration required for this link) contains a good discussion of this subject.  She includes some advice from knowledgeable attorneys and some good resource links as well.  If your potential buyer is someone with a resolved bankruptcy in the past, this article could provide you with some assistance in evaluating how to proceed.

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By Warren Tessler – August 28, 2009

Seller Financing – I’m Holding a Note, But Now I Need The Money….

Let’s say you sold your home last year utilizing seller financing.  Since you were financing the deal, the buyer did not negotiate a discount and you got your full asking price.  In addition, you’ve been receiving monthly payments of principal and interest ever since then with more to come over the next four years when the balloon payment comes due.

The down payment that you received for the sale of your home has been invested, perhaps in the new home that you are now occupying, and now a situation has arisen that calls for more cash than you have readily available.  It might be a business opportunity that you want to invest in, or maybe it’s a vacation home that you’ve found to buy, or it could be a family emergency of some sort.  Whatever it is, it’s more cash than you have and the banks are still being difficult about lending, or maybe you’d just rather not borrow the money.

That interest bearing note that you’re holding is a valuable asset that can be turned into cash.  Moreover, it’s something that can be done fairly quickly, often in a matter of a few weeks, sometimes even less, depending on how quickly all of the necessary documentation can be obtained and reviewed by the note buyer.

There are three basic ways in which you can sell your note.  One, you can sell the note outright.  This will give you the most cash at the time of the sale.  Or, you can do a partial sale or sell a fraction of the note, which will give you less cash up front, but will leave you with an income stream, albeit one that is smaller than what you were receiving when you owned the entire note.  (Selling a fraction and doing a partial sale are two different types of transactions, each of which will be explained below.)

How much you will realize from the sale, regardless of which method you choose, will vary depending on a range of factors such as the payment history, condition of the collateral, the interest rate, and others.  Most importantly you want to have all of the proper documents, including the original, signed promissory note.  Note buyers often will give you an initial quote within a few days of what they will pay for your note if everything proves out to be as represented.

Selling your note outright is just what it sounds like.  In exchange for a payment you assign all rights to the note to the note buyer and you are no longer responsible for anything to do with the obligation.  You have your cash and the deal is done.

Selling a partial means that you sell the rights to a certain number of payments to the note buyer.  If, for example, there are six years’ payments remaining on a note that has a current principal balance of $250,000, but you only need $50,000 and you would like to retain the note as an investment.  In that case you would sell some number of payments to a buyer, say the next 36 or 40 payments (I’m just picking numbers to use as an example).  Once the deal was done, the next 36 payments would be sent to the note buyer instead of to you; however, at the end of that period, you would resume receiving payments.  The principal remaining would be less than $250,000 due to the three years of amortization, but the bulk of it would still be there.  You would then receive the remaining monthly payments and the balloon at the end, just as originally intended.

Selling a fraction of a note means that you sell a share of the note, say a 25% interest.  In that case, all of the remaining payments, both the monthly principal and interest as well as any balloon at the end, are divided between you and the note buyer according to the agreement, so you would receive 75% and the note buyer would receive 25%.

In all cases of note sales, there will be legal language included somewhere in the agreement that governs who has what rights or obligations in the event of default by the person paying on the note.

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By Warren Tessler – August 25, 2009