Recently I read an article that discussed a new paradigm occurring when people can’t pay everything and decide what bills to pay.  More and more they are choosing their credit card bills over their mortgage.  But isn’t homeownership sacrosanct?  Don’t you keep a roof over your head first?  This doesn’t appear to be the case for a growing number of homeowners.  The reasoning behind the latest statistics is interesting and easy to understand.  With 1 in 4 homeowners who have a loan on their home being underwater (they owe more than the house is worth), with fears about job security, and with a low savings rate in the USA, maintaining credit is important to people who do not feel financially secure.  Therefore, they are letting their mortgage payments go and paying their credit card bills first so that they can keep that credit line if they need it.

With the banks so overwhelmed with foreclosures and short sales, many homeowners going through foreclosure get to stay in their homes for many months after they are notified they are in default.  It takes time for the process to work.  Waiting for eviction, not knowing when it will happen, and being locked out of your home is not something people want to experience, but it is happening as mortgage payments aren’t being made.  With credit cards, borrowers can lose their ability to use credit within 60-90 days if they do not make payments.

The sad thing is that many homeowners who are in default never talk to anyone to see if they can be helped.  The government HAFA program, which provides payments to the investors who provide mortgages and homeowners who are in default moves forward in April, 2010.  If you know someone who needs help, have them talk to a real estate agent who is a CDPE designee and understands what options may be available to a financially distressed homeowner.  They may be able to help lift the burden of an underwater home from the homeowner’s shoulders.  I have a team of CDPE agents who work with me and continually educate themselves on all the changes surrounding these issues.  Let us know if we can help you or someone close to you who is struggling with the decision of which bills to pay.

I was looking at information for a client on a home listed in our MLS and realized this home and seller were representational of the worst case situations that have been happening in the past few years.

They bought their home in 1998 for a great price, enjoyed having it appreciate to a current tax valuation $116,000 more than they paid in 1998, and then drained it of equity in 2002 and then again in 2006 by taking out large 1st and 2nd loans.  I don’t know the reason they did this, but it is very sad.  Sometimes people lose their job.  Sometimes they have huge medical bills to pay off.  Sometimes they use the money for other investments.  And sometimes they just treat their home as an ATM and the money ends up wasted on depreciating cars, boats, furniture, and just stuff.  And when the market changes, they are stuck and end up in foreclosure because they can no longer afford their payment.

In this case, the owner borrowed what the house was worth and did it not once, but twice.  And they didn’t use just a single mortgage, they used both a 1st and 2nd loan each time.  Remember my last post about easy money?  They were put at risk by risky loans.  I wish I knew what their story is.  Why would they do this to themselves?  The refinance in 2006 was at a variable rate over 1.5% higher than their 1998 rate.  And what was wrong with their 2002 loans that they would refinance and accept such a high rate in 2006?  Was their 2002 rate even higher?  Were their 2002 loans even riskier types of loans they were trying to get out from under?  Did they just want another $28,000 out of the house that they got by refinancing in 2006?  Why did they trust the lender who put them into these loans?  Did they realize they were putting themselves at risk?  Did they care?  Was it out of desperation?

Their 1998 rate was  fixed and they put 5% down.  They did everything right when they bought the house, but then 4 years later, everything seemed to start going wrong.  They ended up filing for foreclosure in 2008, actually managed to get a loan modification, and then went back into foreclosure in 2009.  Which, by the way, is not an uncommon occurrence.

The sad thing is that if they had stuck with their original loan, by fall of 2008 they would have paid it down by over $23,000 and with over $100,000 in appreciation, they could have sold in 2008 and walked away with cash in their pockets.  Their loan to value ratio would have been only 54%.  They would have owned 46% of their home 10 years after buying it!  Even if they had taken equity out to update the home, they still should have had plenty of cash when they sold.  A very sad case indeed.  And now an opportunity for someone else who buys their foreclosure.  Watch for posts in February about my free consumer seminars to help you avoid being one of these sad cases and instead be a story of real estate success.

What is a CRS?  Find out here:

There’s a new real estate community that just launched today - epicketfence.  It started in Colorado and I had the opportunity to be the first Featured Realtor for the Colorado Springs market.  When you click on the link above, it takes you directly to the article I wrote for epicketfence.com.  Check it out if you want to learn more about what’s happening in the Colorado Springs real estate market.  If you want to learn more about the statistical details of our market, don’t miss PikesPeakFacts.com.  It’s updated every month.

Today I went to a 2 hour class provided by RE/MAX Properties, Inc and it opened my eyes to possibilities.  I have been aware of the ability to invest in real estate in self directed IRAs for 10 years, but today’s class with Jenn Dizmang was more sophisticated and evolved than the classes I’ve attended before.  Previous classes were sales pitches for black boxes given by people who would make money from participants.  Today’s class explained what is possible and how it is possible.  And I know we only touched the surface.  The book Jenn recommended to learn more is by Hubert Bromma and is entitled How to Invest in Real Estate With Your IRA and 401K & Pay Little or No Taxes.  I’ll include it in my Recommended Books Page but I have not read it yet - just taking Jenn’s word for it.  For real estate investors who want to take advantage of the current market and put hard assets in their retirement account it is something to consider and learn more about.  Bricks and mortar.  Real estate.  Yes it is possible but it has to be done correctly.  That means understanding real estate investing before using retirement assets to do more.  You can’t take capital losses in a tax deferred account.  Everyone who has taken a hit in the stock market knows that.

Let me emphasize that I don’t give tax, financial, or legal advice.   I don’t have those credentials.  You need to talk to the professionals you know to get that type of advice.  What I want to give you through this blog is a general knowledge of all the opportunities available to people who want to manage their money and investments well.   When I was a financial advisor (no longer licensed), I always referred to real estate as the commodity portion of most investor’s portfolios.  For most people that is the home they live in.  That’s why I found myself getting my real estate license over 6 years ago - to diversify my own portfolio with real estate investments.  The current stock market shows why diversification is important.  The 4 major asset categories are cash, bonds, equities, and commodities.  A lot of people have flocked to gold (a commodity) in the past few years and the price has been driven up.  Classic supply and demand.  The real opportunities lie in real estate and other depressed assets.  Building a foundation at a time like now is the key to great wealth.  I’m looking forward to the next up cycle in the economy because I am positioning myself now to take advantage of the opportunities.

As always, I suggest reading everything you can get your hands on, either on the web or in books, to learn how people who are successful investors have done it.  You don’t have to learn everything the hard way.  By gathering ideas that make sense to you and taking calculated risks, you will be amazed at what can happen.  I grew up poor but I vowed to never be poor again.  I hated risk at first but I’ve learned to be excited about taking educated risks with things I understand.  You have to educate yourself first and then take your first steps.  You don’t want to be foolish and driven by fear or greed.  It’s an exciting time filled with potential.  I wish you much success.

It’s been a tough time in real estate since July 2008 when the stock market started tumbling and the banks took a turn for the worse, but I’m here to tell you homes are still selling.  It’s just a different market.  At our company, RE/MAX Properties, Inc in Colorado Springs, we are using new tools and techniques to address the realities of today’s market.  I’m on top of it.  In analyzing my business I also realized that since January 2007 when many Realtors started leaving the business or getting part time jobs because their business dried up, I’ve kept going and only really started feeling the impact of the changing market in the fall of 2008.  I have sold 25 homes since January 2007, my buyer specialist closed 2 for me, and I have 2 under contract now.  How many Realtors can post those statistics?  It’s less than in previous years, but I and my team are getting homes closed!

What we are seeing is that all of my sales since fall have been either foreclosure or short sale properties.  As I’ve said before, unless sellers are willing to compete with these types of properties they will find themselves in the group of homes that didn’t sell when 2009 is over.  Last year that number was 64% of homes that were in the MLS in the Pikes Peak Region.

I recently completed training as a Certified Distressed Property Expert (CDPE), so I am able to help people who are at risk of losing their homes determine whether they would benefit from a short sale.  I am actively using a great new tool for buyers to be able to check out the price and information on any home in our MLS from their car - anonymously!  And I am ramping up our new InvestorLoft tool for the investors I am working with so they can search on cash flow or Cap Rate.  Awesome!

Finally, towards the end of March I will be learning more about how to help buyers purchase real estate in their self-directed IRA.  If your stock market investments aren’t cutting the mustard or you have cash in IRAs that you don’t know what to do with, you may be interested in looking into this option.  Along with converting to a Roth IRA while your account values are down, if you qualify to do so, looking at real estate may be just what gets you going in the right direction.  Stay tuned.

If any of this intrigues you, you can learn more at carefreehomes4u.com.  To use the tools mentioned above, just email me or give me a call.  It is a fantastic time to buy!  Opportunities are everywhere.

Are you familiar with leverage?  Have you used leverage?  If you’ve purchased a home, chances are you have.  When you made that purchase did you make a down payment of 3, 5, 10% or more?  How long ago did you purchase your real estate?  Depending on that answer you have either leveraged up or down.  It’s also dependent on where you live.  Florida?  California?  Phoenix?  Las Vegas?  Michigan?  If you bought in one of those places between 2004 and 2007, you most likely leveraged down.  If you didn’t make a down payment, you may now be in foreclosure or on your way unless you locked in a fixed rate that you could afford.  If you used creative financing, you used another type of leverage and the combination can be deadly to your finances.

Leverage according to Daniel Webster is “1) the action of a lever or the mechanical advantage gained by it, 2) effectiveness, power”.  A Lever is “an inducing or compelling force”.  I like that word, compelling.  The effect of leverage is compelling.  It creates power.  It creates the power to gain or lose.  Leverage is what caused the Great Depression.  Leverage is what you use when you buy a home using a down payment or no down payment and financing.  It is neither good or bad by itself.  It all depends on the context in which it is used.

Here’s an example.  You are buying a $250,000 home and buy it with a conventional loan in the current market.  You provide a down payment of 20% or $50,000.  Now we know it isn’t going to appreciate anytime soon, but when it does, we’ll assume the average appreciation rate for the next 7 years (the average real estate ownership period) is 5% per year.  That means that in 2016 your property is now worth $351,775.  You have a gain in simple terms of $101,775.  When you divide that number by your down payment your money is now worth a little over triple what you invested.  You have made a 204% return or an average of 29.14% per year on your cash investment.  Your investment was not the purchase price of the home, it was the amount you invested as a down payment.  That’s leverage.  Is that better than a CD?  Better than the average return of stocks over the past 80 years?  Not bad.  And you get to live in the house, use it, make it your own, not have a landlord, and get tax breaks to boot.

What if you bought that same home in 2006 for $350,000 and not soon after it nosedived and when you needed to sell in 2008 you could only get $250,000.  The $50,000 you risked now is a loss of $100,000 or a 200% loss.  Again, you used leverage, but this time it didn’t benefit you.  That is why real estate, like stocks, should be considered a long term investment.  That’s why it is important to buy wisely and make sure the mortgage you get is one you can handle under most circumstances.  That’s why it is important to have additional reserves to get you through the hard times before purchasing real estate.  We just don’t know when those hard times will hit.  We don’t know when the balloon will pop or when the balloon will rise again.  Buying real estate is a lifestyle and investment choice that has to be carefully considered.  Sometimes circumstances are out of our control, but most of the time you will be able to control your circumstances by the choices you make before buying.  It does pay to be prepared.  Leverage is why the rich get richer.  That’s why paying interest on credit cards is a bad idea.  You are leveraging your debt to the benefit of the credit card company.  This market is making people think about frugality differently.  Being frugal is smart and allows you to leverage the money you have to your benefit.  Compounding is the eighth wonder of the world.  Be a winner!

So consider your current situation and how you might use leverage.  Is it a wise choice for you?  Check out the Recommended Reading List Page to find resources that will help you learn when it is and how to control more of your own circumstances.

What do real estate, inflation, and CDs have to do with each other?  Other than the obvious - that they are all part of the financial picture in the US?  Wait, we don’t have inflation.  No, not yet, but it is coming.  The stimulus package will make certain that it happens.  If you didn’t live through the late 70s and early 80s, let me explain. 

Did you know we have seen many economic cycles that occur at about 30 year intervals?  Part of my college training was in economics, accounting, and finance.  My degree is in Computer Information Systems, because when I hit differential equations being taught from an engineering perspective, I decided a BS in Computer Systems was not where I wanted to be.  So my degree provided me with an education in programming, systems analysis, and business systems.  I never regret it.  I use what I learned every day and actually wish I also had a degree in economics.  I guess I’ll just hit the public library more often.

In the late 70s and early 80s inflation was rampant.  Everything was rising quickly, there was a shortage of oil, and interest rates went to double digits.  I personally paid 15.75% for a 2nd mortgage in 1982.  Ouch.  But I also made 16.5% on a 6 month CD.  The problem is that it was all funny money.  Incomes went up but so did the cost of everything.  In 1976 our home cost $39,000.  In 1988, our next home cost $163,000.  That same home today is worth over $400,000.  In California, it would probably be closer to $1Millon.  Who in middle class America can afford that?  With creative financing, a lot of people did, but then the stream of buyers dried up - just like in the early 80s.  ARMs, owner financing, assumptions, and other creative lending tools were the only way people could buy homes 30 years ago.  Sellers paying points for the buyer to buy down their rate was common.  Our seller did it to get us to 9 5/8%.  By 1982 that rate was a bargain when new loans were at 12.5%, hence we took a higher rate 2nd when we remodeled.

So what does all this have to do with 2009?  When the government starts printing more money and there is no gold standard, inflation happens.  Where do you think that $1.4Billion is coming from?  Future debt created by funny money.  So what will you invest in?  The stock market?  It will be a wild ride and may only go sideways at best for many years.  But still a good choice depending on your time horizon.  CDs or bonds?  Lock in low rates now to be eaten up by inflation later.  How about real estate?  Yes, what about real estate?  It’s tangible.  They aren’t making any more.  It goes in cycles that rise and fall with the economy, i.e., inflation.  Right now is a perfect storm for buying real estate.  Fear is keeping many buyers on the sidelines, but for the bold with a vision, history tells us you can be very wealthy down the road by making good use of real estate, by buying wisely, and letting the rising market and tenants paying down your mortgages help you leverage those early properties into more.  My grandparents started doing this during the depression.  They retired rich in real estate they owned without mortgages.

So educate yourself.  There are pitfalls with real estate that you need to be aware of, but the future can be quite rosy when you do it right.  For a great little treatise on how to do this, read the book or get the CD of The Automatic Millionaire Homeowner by David Bach.  David writes many books with great themes.  For this market, this one is his best.  Much success to you!  For more recommended reading, check out the Recommended Reading List Page.

Check out the new street maps on Google.  This map location happens to be for a home I’m putting on the market on Friday, 11/28.  These new maps give buyers an even better idea about homes they want to see before they turn on their car. What a time and gas saver!

Check out this map:
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