Should we build something now? by Bill Roberts

For the most part economic activity slows down during a recession. That is actually the definition of a recession: two successive quarters of decreased economic activity. There are various technical descriptions but this is good enough for our purposes. The economists are trying to tell us that the recession is over. Yeah, right!

Recessions always lead to recoveries, usually about 18 months later. But how long do depressions last?

The last time we had a depression it lasted over ten years. And if it hadn't been for WWII it might have gone on a little longer.

So what do you do during the recession/depression? Save your money? Get ready to "pounce" once the recovery is announced? Sleep? Or do you take positive action?

Whatever you might want to do once the recovery starts, you would be better off doing it while the recession lurks. During a recession everything is cheaper. Everything!

If you are thinking about starting a business, then you will be able to get a better deal on the premises your business will need. Financing terms will be lower (assuming you can find financing). Supplies and inventories can be had at major discounts. Advertising should cost less. Any construction you need to accomplish can be done for significantly less money than will be the case after the recovery.

If you thinking about investing in real estate, prices, selection, and financing costs are all better during the recession than after the recovery.

And what if you want to build? With nothing selling, building during a recession is just plain crazy, or is it?

If you decided today you wanted to build something and you got started right away to accomplish that then you should finish your project just about the time the recovery begins. You will have reaped all the benefits of the recession. You will have been able to complete your project on time and for lower costs. Most of the construction bottlenecks just aren't present. Supplies are available when you need them. Sub-contractors are anxious to work. Inspectors aren't over burdened with work. Even the local building department is able to get right to your application.

Financing might be a major issue, but a little creativity can go a long way. Most commercial lenders prefer "loaning" to a single use LLC. That same LLC can be used to raise capital. The seller of the land and the broker might also be persuaded to contribute to the LLC. If the LLC owns the land "free and clear" the lender should be amenable to make the loan.

So what are you waiting for? The sooner you start, the sooner you'll finish.

Now your project is complete and here comes the recovery. How sweet it is!

Let us say you are an average American Baby Boomer. You are thinking about retireme nt.You probably have $75,000 in assets available for your retirement per Fidelity. This is your dilemma.

What exactly does this mean? Can you really use this $75,000 for your retirement? What are you going to do:

•    Consume your assets to supplement your other retirement monies?
•    Only consume the interest (growth) to supplement your other retirement monies?
•    Consume the asset and the interest it generates a certain time period to supplement your other retirement monies?

Let us look at these three strategies which represent most of the strategies Financial Planners will recommend to you.

The Analysis:

Step 1

1. What will it cost you to live after retirement?
2. How much do you have coming in to support retirement?
3. How much will you have to take from your $75.000 retirement assets to make up the difference?

1 - 2 = 3

It doesn't matter which option the Financial Planner recommended, Step 1 is the reality. For example, if your maintenance is $100,000 and your annual retirement income is $50,000, then the very first year of your retirement you are going to need to deplete your retirement assets by $50,000. This will only leave you a little over $25,000 in your asset account.

You will be BROKE in six months. There is no Step 2.

So what are your REAL OPTIONS?

1. Work until you die.
2. Cut back your lifestyle (drastically).
3. Move to another country.
4. Grow that $75,000 to more than a million dollars.

If you really want to be able to retire without cutting back your lifestyle or moving out of the country, what can you do?

First you have to come to grips with the idea that your $75,000 has very little utility.

If the first option, "work until you die" is your only real choice, that $75,000 either represents something to leave to your heirs or something to consume to make your life more enjoyable. Since you are not going retire it is NOT retirement money.

If those choices aren't that desirable, you might want to consider the fourth option: "Grow your $75,000 to more than $1,000,000."

Therefore your utility for that $75,000 is quite low (you don't really need it) , but your utility for one million dollars is quite high (you would really benefit from having it). Any risk is OK if it leads to your goal because your utility for the money put at risk is quite low.

Most Financial Planners and Advisers will tell you that as you approach retirement age you need safety such as bonds, CDs, and dividend stocks because these are your retirement funds. Just how wrong can they be?

You can now see the stupidity of that advice. "Safety" means a low return on investment (ROI). This strategy will probably get you a net return somewhere between 1% and 8% per year.

An ROI of 1% doesn't even keep up with inflation. Maybe an ROI of 8% will keep up with inflation, but who knows?

What we do know is that 8% compounded will double your investment approximately every eight years. And the gain will be taxable unless it is in a ROTH IRA or tax-free bonds. Matter-of-fact the entire asset is probably taxable.

You figure it out, the longer you persue this strategy,the worse off you will be.

This isn't a vehicle to take you somewhere, it is a merry-go-round. You keep riding but go nowhere.

If you want off that merry-go-round you need to change your attitude toward RISK. 

 The utility of that $75,000 is almost zero, but the utility of $1,000,000 (which just might allow you to actually retire) is quite high.

If you insist on LOW RISK, you will NEVER RETIRE. Keep your eye on the prize. 

Retirement can be achieved if you have enough assets. Your number 1 strategy must be to grow those assets.

Remember, if you lose that $75,000 it won't affect your retirement choices, but...

If you grow your retirement assets to at least $1,000,000, you have affected retirement choices. It is a matter of   UTILITY vs RISK.

Years ago I wrote about LAND and LAND BANKING. My observations then are just as valid today as if I just wrote them.
Land remains my main focus for investing in real estate and for securing  retirement for Baby Boomers.

Everybody knows what land is, right?

Or do they?  Sure, land is that portion of the earth's surface that is not under water.  But that definition covers a lot of "land."

To understand land we need to understand the uses of land.

Some land is forested.  Some land is desert.  Some land is prairie.  Some land is flat.  Some land is steep. We farm the land. We build our cities on the land.

Some land is desirable.  Some land is undesirable. So far, so good. But...

The desirable land has all been snatched up.  OK.  Sure.  Somebody or something owns the desirable land. However, most of that land is "for sale" at the right price.

HIGHEST AND BEST USE

What determines the "right price" for the Seller is completely different from what determines the right price for the Buyer.

It gets down to use.  What it is currently used for has a major influence on what the current owner thinks it is worth.  What the buyer will use it for influences what he is willing to pay for it.

Ultimately, there is a Highest and Best Use for each and every parcel of land.  However, this highest and best use can change over time and circumstances. Its like beauty, it is in the eye of the beholder. How you see it is how you use it. The better your vision, the higher the use.

LAND BANKING

50 years ago 20 acres east of Hwy 101 in Encinitas California might have been best used as a flower nursery.

That same 20 acres today is very desirable for a shopping center or housing development.

But you don't have to wait 50 years for use changes.  It is constantly changing.

But maybe you do want to wait because the use in 10 or 20 years might be significantly greater than the use today.

If you bought this land and held it for a period of time in anticipation of a higher and better use you would be practicing what is known as LAND BANKING.

Land Banking is a very good method of providing for your retirement.  Buy a piece of land in the Path of Progress, hold it, and then sell it when you want to retire. You have "put this land in the bank." Generally speaking, this is a passive investment. It requires very little management.

If you put the ownership of the land into a "single entity" LLC which is owned by another special LLC which in turn is owned by your self-directed IRA you could rent out the land to a farmer or other "user" to cover any costs you might suffer as a result of owning the land.

It may seem counter-intuitive, but land generally appreciates at a higher rate than adjacent improved property which makes it ideal for  long-term growth. The reason for this is because improved property is a combination of LAND and IMPROVEMENT. The LAND appreciates (generally) and the IMPROVEMENT depreciates (generally), so if value of the improved property is primarily the value of the improvement, you can easily see why unimproved property will appreciate at a higher rate.

ENTITLING PROPERTY

Land banking is great if your time horizon is far enough out, but....

If, on the other hand you want more immediate satisfaction, you can find a parcel of land that is currently not at its highest and best use.  Then you can purchase that land. 

Once you are "on title" you can change the use.  Then you can sell the property for its increased value based on its better use. This is called entitling the property.

For example, a strawberry grower has those 20 acres in Encinitas that were mentioned earlier.  He is NOT using the land to its highest and best use.  He knows that.  He also knows that the land is worth more than the typical 20 acre agricultural parcel.  But what is it worth?  It is still just a 20 acre parcel of agricultural land.

To maximize its value the zoning might have to be changed.  Also, it needs to be sub-divided into more useful parcel sizes.  If the zoning is changed and the sub-division is platted and recorded, then the property has increased value based on its higher and better use.  Maybe this value is 2 or 3 times what the farmer expected and got for the land.  Maybe more!

OFF-SITE IMPROVEMENTS

So far we haven't touched the land but we have "created" more value.  Maybe we want to actually do something to the land, like cut roadways, bring in utilities, put in sewers, put in curbs and gutters, and put up a sign announcing "building lots" available.  We have created significantly more value.  We have many options on what we can do with land.

OPPORTUNITY

Everywhere you look, you will find under-utilized property.  Vacant lots in the middle of an otherwise fully developed neighborhood.  A house along a busy commercially zoned street.  A duplex on a lot that could accommodate 10 units.

If we "believe" that certain areas of the country will continue to experience growth, then we should also believe that those areas will have many opportunities for use change.

If Southern California continues to grow, then San Diego County will undoubtedly be affected.  Land in places such as Bonsall, Ramona, and Valley Center are on the leading edge of use change.  But there are more opportunities than just that.

Older cities with Downtowns like San Diego, Chula Vista, Carlsbad, Oceanside, and Escondido are all experiencing growth and renewal at their very cores.

The real estate market is not dead!  The LAND BOOM is just getting into high gear.  There are opportunities everywhere.

HELP

If you would like to better understand your options in utilizing land to secure your retirement or as a good investment strategy, give me a call at 619-244-4610.

Bill Roberts

Is it time to invest in real estate? With everything that is going on in the economy, this is a major concern for almost everybody.

Let's look at this with a pragmatic eye:

Is America your home?

Is it going to continue to be your home?

Will our economy eventually recover?

Is inflation an absolute certainty over the next ten years?

Will interest rates stay this low?

When real estate"recovers" do you want to be an owner?

If we assume that America will continue to be your home and that when things stabilize owning real estate will be desirable, then the coming inflation is going to affect YOU and real estate in two significant ways: prices will be up and interest rates will be higher.

If you buy now, you can "lock in" a low interest rate (just make sure it is a fixed rate) and a good price. When the coming inflation hits you will be able to repay your loan with "cheaper" dollars.

Just think about it, if inflation turns out to be only 10% per year then every year your REAL payment will go down 10%. In ten short years your REAL payment will be less than 35% of what you started at. It also means that if you are making $100,000 annually NOW you will probably be earning more than $250,000 per year 10 years from now.

If you can afford the payment today, think how easy that payment will be in ten years!

This should be a "NO BRAINER." If inflation turns out to be much higher as some expert economists have claimed then the decision should be that much easier. Look at it this way: the more you borrow, the more you make.

Savers lose and borrows win when inflation hits. There is no time to waste. You've got to buy all you can as soon as you can.

Don't be left standing at the station when this train pulls out.

Fair Isaac: Fair Or Unfair? By Bill Roberts

The Fair Isaac company rates everybody's credit.

They do it for the banks and mortgage companies.

It is called your FICO score. FICO stands for Fair Isaac COrporation.

Because of the turmoil in our economy many people are seeing their credit scores plummet.

Is that fair?

The banks can't manage their own affairs. A lot of them are BANKRUPT. Many more are in big trouble. They aren't credit worthy yet they have gotten over a TRILLION DOLLARS of credit from us. The U.S. Government (that's us) has bailed them out.

It is time for them (the banks) to ease up on credit requirements to get things going again.

Who are they to demand better credit from us in order to borrow money than they themselves have? Their credit stinks.

Such Arrogance

It is time that we demand Fair Isaac to shut down FICO.

If we are going to "forgive and forget" that the banks are not credit worthy, then they should do the same for us.

Our economy needs credit in order to function. We need to be able to buy cars, refrigerators, and houses. We need credit. We all need credit, not just those with 700 credit scores.

Those arrogant bastards will only lend to you if your credit is unblemished even though they themselves don't have unblemished credit.

America needs fairness in credit. We don't nee (or want) Fair Isaac.

Our credit mess wasn't caused by people buying houses without a good credit score.

Our credit mess is the result of our financial institutions behaving very badly and not taking into account what would happen if real estate prices fell.

Well, real estate prices did fall, and as they fell the housing speculators (the flippers) couldn't maintain their investments. They needed prices to go up in order for them to get back their purchase price, their holding costs, their transactions costs, and everything else that they paid.

When prices went down they couldn't get their money back. They bailed out of the market. Prices went down some more.

People who had bought on the upswing found themselves UPSIDE DOWN. They owed more than their house was worth.

As their adjustable rate mortgages (ARMs) reset or recast they found themselves unable (or unwilling) to make their payments. So they bailed out of their houses too.

Foreclosures were rampant. Prices were in FREE FALL.

Everybody has been affected by this situation.

See my posts:

 Are Foreclosures Good For America? Part 4

Are Foreclosures Good For America? Part 3

Are Foreclosures Good For America? Part 2

Are Foreclosures Good For America?

Now it is the time to turn this around.

Easy Credit

What we need is EASY CREDIT, not tight credit.

If we can lend a TRILLION DOLLARS to the unworthy bankers without checking their credit, then they can lend to us without checking our credit.

Fair Is Fair

And to be fair we need to do away with FICO scores.

Fair Isaac is UNFAIR. They are paid by the lenders to rate our credit. These same lenders who can't keep their own credit good are asking us to have exemplary credit in order to borrow some of this money that we lent them IN SPITE of their credit.

Think about it, Is This Fair?

Our economy really needs to turn around. The manufacturing sector needs to go back to work. People need to buy cars, appliances, and other things. They need credit. They need EASY CREDIT.

The housing market needs to be stabilized. People need to be able to buy a house. They need mortgages. They need EASY MORTGAGES.

Wipe the Slate Clean

Let's start over. If the jobs come back then people can pay their mortgages. Give them a chance. Don't judge them by what has happened over the last three years.

Let's Look Ahead

Wouldn't it make more sense to let them buy a house without qualifying than it does to BULLDOZE that house because it has been foreclosed and there is nobody to sell it to? Talk about stupidity.

Everybody deserves a second chance. We gave the bankers a second chance. Now we need them to give us a second chance.

No more FICO scores. EASY CREDIT for everybody. Let's get America moving!

Bailout Reprise by Bill Roberts

This was inspired by my conversations with Jan Wood on her blog. You can read the run up to this here.

Duncan Hunter is MY Congressman. I live in his district. I am very disappointed in him. He is retiring this year. His son, also named Duncan Hunter is running for his seat. Early in the primary campaign Bill Cherry had a quiz on his blog that "matched" the respondent with the candidate that most closely reflected their values. Duncan Hunter was my closest match.

As a matter-of-fact 4 of the 5 Congress people in San Diego County voted against the bill. The only vote in favor was by the most liberal Democrat (Susan Davis) here. It is very demoralizing for me that I seem to be on the opposite side of this issue, but I believe that I am right.

I personally don't give a hoot what happens to the banks, but I do care what happens to us (all of us) and I think that the foreclosure problem needs to be dealt with summarily. If we applied some of the ideas that the conservatives advocated the banks would continue foreclosing on non-performing loans and continuing to fail as a consequence. Workouts would not be an option. Foreclosures are disastrous to our economy.

When I say I don't care about the banks I want to clarify that. I do care about the S&Ls. If the bill had passed the first time around WaMu and Wachovia might have survived. We need more thrifts not less. We need to decentralize mortgage financing. We don't need fewer financial center mega-banks controlling every aspect of our daily lives.

I just hope that the "protections" for homeowners written into the bill will cause Treasury to rewrite these non-performing loans so that more people can keep their homes. It isn't a question of "do they deserve to be helped." A foreclosed house hurts all of us.

Even though I believe in some libertarian ideas, I don't like Libertarians because they put consistency above common sense. Even a Christian Scientist needs to go to a doctor if they've had a traumatic injury. We need to be practical and pragmatic. Save the patient first, and then work on the philosophical things.

Most of the Republicans that voted for the rescue plan put "Country First." Even Newt Gingrich, who was initially against the bill, spoke in its favor because we had to do something quickly and this is what was available. Maybe if we had had the luxury of time we could have come up with something more agreeable.

I hope all is well with you. We will come through this.

Bill Roberts

Are Foreclosures Good For America? Part 4 by Bill Roberts

Everyday there are more mortgage defaults filed. The banks are suffering. Congress can't get their act together. A solution seems to be elusive.

The Secretary of the Treasury went up the hill to ask Congress for 700 Billion dollars to solve the problem.

Congress said NO.

But we still need a solution so here is my contribution to the discussion:

We need a new Resolution Trust Corporation, but this time with a different imprimatur: SAVE THE HOUSE, not sell the house.

It is clear Congress doesn't want to give the $700B to Hank Paulson but the crisis still needs to be dealt with.

It is also clear the people don't want to bail out Wall Street, which is how the media has characterized this rescue plan.

But buying mortgages from banks at 50 cents on the dollar is hardly a bailout. The banks have been duly chastised and punished. What more do you want?

If a new RTC gets your mortgage for 50 cents on the dollar then they could "restructure" the loan to more fully reflect the actual value of your house. They could "convert" your mortgage to a thirty year fixed at an attractive interest rate. Maybe then you would be willing to make the payments.

The RTC could also make all these loans FULLY ASSUMABLE. That would help you to be able to sell your house, if that is what you want to do.

All in all, a new RTC could bring stability to the housing market which would have a positive impact on the entire economy.

We Win!

When all is said and done and the final accounting of the cost of this program is determined, we will find that it actually paid us to do this rather than cost us.

Bank failures would stop or slow way down, foreclosures would almost disappear altogether, home values would stabilize, property tax revenues would return to normal, and Federal tax revenues would increase with a "rising tide" of economic activity.

And the new RTC would probably make a small profit.

See also "Are Foreclosures Good For America? Part 3"

"Are Foreclosures Good For America? Part 2"

"Are Foreclosures Good For America?"

Are Foreclosures Good For America? Part 3 by Bill Roberts

Until now banks had three options for under-performing loans:

• Workout a modification
• Accept a short sale
• Foreclose

I would be very interested to hear how successful homeowners have been in obtaining a loan modification. It seems that if they were in default the lender's customer service representative can't or won't talk to them. They will only accept "full" payments. By the time the Loss Mitigation Department gets involved, the borrower owes six payments or more and they can't really see a way out. On the other hand, if they aren't in default the lender has no incentive to modify their loan. Is this a catch-22 or what?

And I hear a lot of agents complaining that they can't get a short sale approved.

Foreclosures are at all time high with many more to come. It seems that this is the option of choice for most lenders.

It could be that there are very good reasons for the bank opting to foreclose rather than choosing to do a workout or approve a short sale:

• It is the "way we have always dealt" with defaulted loans
• Nobody wants to accept responsibility for accepting a short sale
• The Mortgage Insurance Company won't pay unless the loan is foreclosed
• The borrower wasn't insistent enough
• The servicing agent wasn't the owner of the mortgage
• It was easier for the servicing agent to foreclose
• Bankers are a bunch of arrogant jerks

Maybe you know a few more reasons.

New Rules

Well the rules have just been changed. The Federal Rescue Plan will move these loans out of the control of the banks and loan servicers and into the bailiwick of the Secretary of the Treasury. The program will require that a workout and/or a restructuring of the loan be performed. The emphasis will be keeping the homeowners in their homes and collecting money, not on foreclosing.

The terms of the act approved by Congress will require that the homeowners are treated fairly. Nobody benefits from a lot of foreclosures. In order to accomplish this the loan may need to be restructured to reflect a lower interest rate, a reduction in the amount owed, or forgiveness of payments missed. Maybe all of these will be necessary.

In the final analysis, most of these mortgages will be repaid, the neighborhoods will be more stable, real estate values will "heal," and the country will be better off. And Treasury will get our money back, maybe even a little more than we "advanced."

We Win

Maybe we "saved" the banks, but in reality we saved ourselves.

See also "Are Foreclosures Good For America? Part 2"

Are Foreclosures Good For America? Part 2 by Bill Roberts

The whole mortgage mess can be laid at the feet of Alan Greenspan and his zero interest rates which caused a huge run up in real estate prices, but it was swamped by the tidal wave of foreclosures brought on by accelerating price decreases when the rates went back up.

We all remember the Hay Days of the real estate market in 2002 through 2005. Interest rates were coming down on a daily basis. House prices were going up by the minute. Sellers were getting multiple offers on their homes with the lowest being the asking price. Home buyers were primarily concerned with how much they would have to pay each month, not the purchase price. As rates came down they could afford to pay higher prices.

Speculators saw what was happening. They realized that they could make an offer on anything and probably be able to sell it again even before it closed escrow. They could "flip" the house and make a fast, easy profit with no effort and no risk. Lenders facilitated this process by making 100% loans to these flippers. After all, there was no risk!

Then the party ended. The Fed began their program of raising interest rates. Home buyers could no longer pay higher prices for homes. The market leveled off.

Speculators could no longer buy something with any assurance of being able to sell it at a profit. They were now faced with trying to cover their transaction costs (both in and out) plus their holding costs (interest and maintenance) out of the difference between purchase price and sales  price. With a flat market this just wasn't possible anymore.

The flippers bailed out of the market. This caused a surplus of inventory. It was just a matter of supply and demand. Prices had to come down. And down they came. Faster and faster they came down as more and more property was put on the market.

Unintended Consequences

Congress wanted easier loans to extend home ownership. It is Public Policy that everyone should be able to own their own home. Expanding home ownership was the goal, but they didn't take into account what would happen if these people saw their situation as hopeless and stupid when they found that they owed more than their house was worth. Some just walked away, some tried to "sell short," and others waited until they were foreclosed. The dream of home ownership was extinguished for many people and some will never get it back.

It's the flippers that shouldn't have been in the market, not the first-time home buyers. We sucked them in and then blamed them for buying what they couldn't afford. Many here have called them undeserving and say that they shouldn't have been allowed to buy a home anyway. What a bunch of arrogant crap.

Now we are all paying the price

Bank foreclosures are threatening to totally destroy our whole financial market.  Banks that foreclose are finding themselves bankrupt because of the foreclosures.

What if there were no foreclosures?

If we look very hard at this issue we can see that foreclosing on somebody's home is destructive to all involved. We now have a homeless family, a vacant house, and a weakened bank.

First we need to deal with the homeless family. We don't want them living on the streets or in our parks, do we? If they couldn't make their mortgage payments they probably can't pay rent either. Maybe they can afford to pay rent but the landlords don't want to rent to them because the credit is not good. In any event we are going to need to step in and help them. Maybe we will have to put them into subsidized housing (section 8) or otherwise assist.

Secondly, we have the problem of the foreclosed house. It is an "attractive nuisance" that invites crime. Vandals come in and strip the house of everything of value. Other criminals come in to do drug deals or "shoot up." And then there are the squatters who move in. All of this activity has a tremendously negative impact on the neighborhood.

Finally, we are faced with the problem of the banks which are dropping like flies. Every foreclosure depletes some of their capital. Once enough capital is depleted the bank examiners are forced to declare the bank bankrupt and take it over. Who is next? Will it be your bank? Will you lose something if your bank is taken over? Are you getting the credit you need or want or has that credit dried up? Would your business be better if more people could get credit?

Something to Think About

Our irresponsible foreclosure policy has hurt everybody. And it hasn't done what it was designed to do. It has not protected those that provided the credit to purchase those homes.

If we had just left them in their home everything would have been better.

I hope we learn something by this. I hope that the foreclosure rules are changed before the next down market.