We're all Capitalists when we are making a profit

During the 90's when the stock market was booming and people were making a killing on tech stocks no one was calling for government regulations to tame the market or for higher taxes on their profits. Same thing happened in the early part of this decade. Where was the outcry for investigations when people were buying houses and flipping them overnight for huge profits?

Now we want to put all the bankers in jail and regulate the heck out of the mortgage industry and Hillary wants to nationalize the oil industry.

When we make a profit it's our great skill that at play, but when we lose money it's someone else's fault and when a company makes a profit its through stealing. Someones not thinking right here - wonder who?

The great mortgage bailout

Our politicians seem hellbent on making the country one great nanny state. The Presidents proposal to bail people out is just the latest example. Here in NY they want to keep us from smoking, eating trans-fats and taking any responsibility for our lives. Fools and speculators have driven up the prices of homes in major markets and now someone has to pay the piper. It's always the politicians solution to make all of the prudent people pay for the crooks, fools and speculators irrational behaviour. People have been speculating since the great tulip bubble in Holland hundreds of years ago and someone gets burnt. Hell, I bought into the stock market in late 1999 and lost a lot of money. I didn't sue anyone or call my Congressman to get my money back. Instead, I kicked myself for my stupidity and learned a lesson. If people lose their houses because they took out liar loans, why should I pay (and I will, as will you)?

I wish politicians would let the free market take care of itself.

Moving week

Well, this week we will be moving to a new house and am putting up our existing house as a "Rent to own" purchase. I'm not sure if the Christmas season will slow shoppers, but I've had three calls since I put out the sign Saturday. With this rent to own concept it seems that all I need is a sign. The $1000+ that I have spent advertising in papers has not yielded a single buyer and amounts to about 1% of the inquiries about the properties I have used this concept on (4 in total now).

The tenant at my trash property has been tearing the place up and seems to be pretty competent at fixing up properties. But he has uncovered some defects that neither of us saw. It seems that the roof has had a leak on one side for some time. When he tore the bath room wall off the interior of the outside wall was soaking wet. He tracked it down to a roof leak, found huge ant nests in the walls and lots of rotten wood. The property is probably worth even less now in its current state and now that we know the condition of the roof (it was very hard to access since the adjoining house is only 5 feet away).

I've fallen off blogging over the last few months for a couple of reasons. My work load at my job has been incredible the last few months due to being assigned to 2 high value Six Sigma projects. I've also been in a funk due to the inability to sell my rehab. But fortunately, thanks to the prodding of one of my readers, I have that house rented out now and feel considerably better. After moving and putting my current home in shape to lease-purchase I expect to get back on track.

Goals - review and look forward

I've been thinking about how well I did Vs my goals for 2007 in my real estate venture. I've been told that if you write down your goals and review them daily you have a high chance of making them. But that doesn't seem to be the case in our situation.

I did buy 3 houses this year, but since I didn't sell any properties this year, I look at my entire plan as flawed. Flipping houses in this area takes much more expertise than I have at the moment. Watching all the flip shows on TV where clueless people do everything wrong and still make $100K just discouraged me most of the second half of the year.

But I did meet some of my sub-goals:

I did find over $720K of funding although I did not seal the deal on the major source ($500K), so I ended up having about $220K of funding available but did not use any of it. The major source was going to cost me $6500 to finalize the deal (I did get approved) and I borrowed that money from Prosper but by the time it came around to paying out the money and signing the papers, I started to realize I was not going to sell my rehab and was stuck with a $2300k per month payment to make, so I bailed.

We did do direct mail all year to pre-foreclosures but again, do to the failure to sell any properties we scaled back our advertising to just those properties in growing towns. This amounted to less then 20 letters per week which isn't enough to really do any good.

The third goal we just didn't do after our first 2 purchases in February. When we couldn't sell the wholesale property quickly and realized I would need much more cash for the rehab I only worked with pre-foreclosures and only made a limited number of offers to banks for short sales.

I did get an operations manual in place which has been a really good way for my wife and I to communicate about what to do.

I see that most of the sub-goals were geared towards buying property and not towards selling. There were several strategies we tried for selling properties: FSBO, flat-fee listing, full service Realtors, E-bay auctions, The "Sell Your House in 5 Days" strategy and Rent-to-own. The last was the the only success that I had, which doesn't get me any of the equity out of my houses.

So now I am in the position of many real estate investors - lots of equity but little cash.

I had hoped to double the number of houses bought and sold next year when I first devised my 2007 goals, but now think that I will scale back. My experiences buying in areas where population is declining echoes my 1980's real estate experiences in WV.

In the next month I hope to come up with a plan for 2008, but for the next couple of weeks will focus on moving and fixing my current residence so I can market it as a Rent to own house.

A Solution to Real Estate Situation

One of my readers left comments suggesting that I rent out my properties to stop my financial bleeding, so for the past 3 weeks I have been feverishly trying to do that. I have received large deposits on both vacant properties that I have been trying to sell most of the year. In addition, I am refinancing my rehab from 9.7% to a 6.5% interest rate loan.

The "rent to own" strategy that I have used before is what got me a solution that works. Typically rents for homes in this area average about $1000 per month and many of the callers to my sign could or would only pay that. But I found 3 people who competed for the property and am getting $1750 per month. The couple that is renting the property with an option to buy are paying one months security deposit as well as a $1500 option payment to purchase the property in the next 12 months for a price of $199,000. At that price I will break even on this property (mostly due to the extensive carrying costs that I have incurred). So, I feel fortunate that for the next 12 months I should be cash flow neutral on this property and I shouldn't get burned when I sell. If they don't buy I will probably do the same thing again and should have a positive cash flow.

The "fixer-upper" that I have been trying to sell since February and couldn't give away at an auction has also been "sold". I've given the buyer a 3 year lease for $450 per month with a $375 per month rent credit (He paid a $1500 option price). So after 3 years he will have accumulated credits of $15,000 at which time I will Deed the house over to him. Although I'd rather have the cash this is equivalent to loaning out the $13,500 loan balance at 11% interest rate, so it is a pretty good investment.

My big education this year has been that "flipping" is for the people in growing metro areas - not any places where I have lived. But in areas with poor economic climates rent to own is a high demand product for houses.

WOW! House rented already!

Just hours after posting my house on Craigslist I got a tenant - from England no less! She's coming to the US to study for her Masters and will be sending me a check for more than the first months rent and deposit. I just need to send her some personal information and once I deposit the check wire her back the balance.

Too bad the education system is so bad in England. Poor Kelly can't write proper grammatical sentences or spell very well for someone with a college education. Maybe she's majoring in Scam 101. I'm sure she'll make a great tenant though!

How to Sell Your Home in 5 Days?? No Sale Again!

I've decided that the author of "How to Sell Your Home in 5 Days" is either a fraud or just sold his properties during the booming real estate market days. I've now tried to sell 2 homes using his methods and had either no bidders or bidders trying to steal the house. I've spent $1000 in advertising in papers and direct marketing to prospects who are most suited to purchase the property, so I don't think that I have missed anything the author suggested.

A commenter (LRK) has offered the suggestion that I try to rent out the properties and that is what I am going to try to do at this point. With winter approaching (very slow sales season) and heating bills threatening to take more of my money, that seems the only reasonable recourse. My big concern is how low a rent will I be forced to take on my Cheektowaga property. My monthly net is -$2300 and no properties here rent for that amount. I've got the properties listed on Craigslist and with various relocation/ temporary housing websites. Advertising in the Buffalo News is like throwing cash down the toilet, so signs are the only other means I can think of doing at the moment.

Location and Price in Real Estate

I have been watching real estate flip shows over the last few months while sitting in limbo waiting for my properties to sell. "Flip this House", "Flip That House" and "Property Ladder" have been standard fare on Saturday night. "Property Ladder" is the most amusing as it usually highlights clueless people who, given the advice of a professional, learn some hard lessons. Despite their mistakes and ignoring the expert advice many make lots of money. Which highlights the most important lesson in real estate - location can overcome ineptness, ignorance and stupidity much of the time. None of the shows I watch feature homes in Buffalo. The houses are always located in a thriving metropolises of CA, TX, SC or CT.

Which brings me face to face with why my rehab is not selling. This is a beautiful home that has everyone who enters it exclaiming how wonderful it is. It's located in a great neighborhood of well kept homes. I've not heard a negative comment yet about the house itself. But there are two comments people make - "too expensive!" or "taxes are too high!" We started out at at a price of $219k and are now down to $199k but one comment we still get is "taxes are too high" (taxes are $7800). Now this is a house that has 2800 sq ft of living space and at $199k is selling at only $71 per sq ft. It's assessed value is only $165k , so I guess people are thinking it will be reassessed once it is sold and taxes will go higher. Houses of similar size located in the neighborhood are all assessed the same so the possibility of getting the assessment lowered is slim to none.

Five hundred yards to the north houses are selling for over $100 per sq ft. The difference is that you cross from Cheektowaga to Amherst. Both cities border Buffalo but Amherst is known for its good schools, while Cheektowaga has schools which are not so good and rife with racial problems. Cheektowaga is where inner city blacks are moving and Amherst remains largely white.

When I had researched the house for comparables, the only house that had sold in the last 2 years of similar size and style in Cheektowaga was the one I bought (for $182k). There had been multiple sales in Amherst within 0.5 miles in the $250k-$350k range of similar homes. To the eye, the neighborhoods looked identical, but crossing the townline makes all the difference in the world.

I recently found a top notch Realtor and he told me that only 5 homes have sold for a price of over $200K in Cheektowaga last year. He blamed the taxes, but Amherst has similar taxes. So is it schools, racial composition or some other factor making Cheektowaga a bad location? One thing I have noticed is that 98% of the people viewing this home are black. It's a desirable location for blacks who want to leave Buffalo. Whites who wander into my open houses will just turn around and walk out when I tell them the house is in Cheektowaga.

But the kicker is that I have learned that there are only 785 black households in all of metropolitan Buffalo who would qualify for the loan and pay the taxes on this property. That is a very small pool of buyers. In a sense, the Realtor is right that taxes are limiting the prices of houses in Cheektowaga. But the ultimate reality is that this is a town where whites are moving out and blacks seeking to flee Buffalo are moving in. Buffalo is a poor city and the good paying union jobs are disappearing.

So what were my mistakes in buying and selling this property?

• I did not recognize how much influence a town line made in price. Even though no one would recognize the difference between Amherst and Cheetowaga driving the neighborhood, there is a substantial difference in a buyers mind.
• I did not realize that there was a strong racial component to this neighborhood. Over 98% of the 200 people that have visited the open houses have been black. It is possible that a white family will buy this but not likely at all. This also reduces the possibility that a relocating black family will buy this house.
• I did not realize how limited the pool of successful blacks are in the entire Buffalo metro area. If my assessment is correct that only a black family will buy this house, that means less than 0.079% of the people in this area can afford it. To sell I will have to reduce price drastically to increase the pool of buyers or wait longer.
• I did miss on improvements that were needed and spent ~$15k more than I had estimated. Had I used a contractor like the people in all those flip shows used I would have spent about $20k more than I did spend and would really be in the hole, so I feel only partially bad about this.

In the end though, I think it is all about location. Location influences the pool of buyers. There aren't many buyers in Buffalo able to spent the outrageous prices for home as seen on the flip shows near big cities. In my case, the demographics are working against me.

How to Sell Your Home in 5 Days?? No Sale!

I mentioned that I was going to try the technique advocated by the book "How to Sell Your Home in 5 Days" last weekend. I spent several hundred dollars advertising the property, bargain priced it below my acquisition costs at $9,900 and handed out flyers at the local REI club meeting.

The results? Four people showed up, no one was willing to put in any type of bid. So much for a "sure fire" way of selling a house.

I've advertised my expensive rehab for next weekend using the same technique. I've direct mailed postcards to every person in Buffalo that could qualify for loan for this house as well. I hope I get some offers on that house since I'm bleeding $2300 per month on it. My biggest fear now is that no real estate is going to sell until the spring.

Will there be bidders?

I've scheduled 2 open auctions this weekend and next to sell our 2 properties based on the book "How to Sell Your House in 5 Days". Per the book, I should have received 40 phone calls about the property for auction this weekend. So far I have one call. I've not yet gotten any response from news paper advertising in this city. I have the properties advertised in both the major paper and weekly community paper and the price for the fixer is set at only $9,900.

I attended the local real estate club meeting on Wednesday and passed out about 30 flyers. Typically there are over 100 members at these meetings but this week the topics did not have any draw, so attendance was lower than my expectations.

So, I'm not sure if I am going to get any bidders this weekend. On the other hand, signs seem to be the best draw, so I will put out lots of signs tomorrow.

New House

It's looks like I will be buying a new house in the next 60 days. I had a seller accept an offer of $269,000 on a 3200 sq ft contemporary home in my town. The seller had paid $290k for the house and had upgraded the kitchen and put on a new roof. The house is assessed for $339k.

After 9 months on the market and moving to Arizona they became one of the desperate sellers that you read about. The seller had dropped the price from $350k to $290k and had 3 interested parties. We all put in offers, surprisingly, the offers were all around $265k. We had included $5k in seller concessions and our offer was rejected initially. But we upped our offer to $270k without concessions and no one else was willing to raise their offer, so we got the house.

The plan is to rent out our existing house. Maybe a "rent-to-own" offer might work. There are few properties for rent in our town as it is quite desirable to live in. I think that we can still extract more value from our existing home by doing some upgrades. The new house also has potential for upgrades to add value.

At any rate, my wife (who has been unhappy with our current home since we married) is overjoyed with the new house.

Another last desperate attempt to sell property

While I was putting out signs for an open house at my Cheektowaga property the neighbor walked over and handed me a book titled How to Sell Your Home in 5 Days. After reading through it I decided to give it a try on the Buffalo property that I bought in February. I haven't had so much as a looker for months now, I tried to auction it off on eBay with no bidders, so what the heck.

The steps given by the book:

• place an add a week before the sale date in local papers (I put ads in Craigslist as well as weekly and daily papers)
• price it lower than you might want to sell it for
• hold open houses so potential buyers can inspect the property on Saturday and Sunday
• Have a bid sheet at the open houses so that the buyers can place a bid on the property and everyone can see the bids
• call bidders on Sunday evening and do a "round-robbin" bidding, calling each successive bidder and see if they want to raise their bid
• sell house to highest bidder

So, I am going to try to sell this house on the 21st of October.

I had an open house for the Cheektowaga home this weekend. I had 15 people look at it (that's 13 more than the Realtors showed in 2 months while they had it listed!). Every one loves the house- no one wants to pay @$%# Cheektowaga's taxes.

Third Quarter Net Worth update

I've updated my third quarter net worth at NetworthIQ with the graphic located on the side of my blog. My networth is down slightly from the second quarter mostly due to increased debt and decreased cash. I had never really included the profit from the potential sale of my property so that I have not shown a decrease in real estate equity. But monthly mortgage payments from the property I am trying to flip is draining all of my cash and forcing me into debt.

The first quarter of this year was a heady time as I bought 2 houses through what I thought were great short sale deals. However, the real estate market has not been kind and I have been unable to sell either house or purchase new properties. One property that I own that I have "sold" twice through lease-purchase options continues to cash flow very nicely, but this has not been a good time to flip.

Back to flat fee listing

Well, I've gone back to flat fee listing services on both my houses for sale after wasting 2 months with a full service Realtor. The first Realtor was totally unprofessional while the second just wasn't interested in selling the property. At least that is the impression he gave me.

For my wholesale house I am using a new service called IggysHouse which has no charge at all (most flat fee listing services charge $300-$700 for their service). The flat fee listing service that I had for my more expensive rehab is going to give me the balance of my listing time at no charge, but I expect there will be a renewal fee.

I'm also considering a rent to own option for the rehab house. The main problem is that it will give me a big negative cash flow and leave me with a house still unsold next fall if they renters don't buy. I feel I am in lose-lose situation with this house at this point. There are no good options.

• refinance and rent - drops payment $300 per month but lose another $4k upfront and still lose money if I rent it
• drop price under $200k per Realtor recommendation- lose money (already spent over $201k and rising $2300 per month). Unknown how long it will take to sell at this price.
• rent to own - lose probably $800 per month for next year and hope buyer gets financing. Only 30-50% chance of that, so I most likely will have the house vacant again next fall

I had convinced my wife to invest in real estate this year so that she did not have to get a job. I was sure we could make $20k. Looks like I will lose at least $20k this year with no end in sight.

Realtors aren't so great

I've kicked myself for not putting my houses with a professional Realtor, but now realize a Realtor is not a panacea.

I've had my rehab house with a Realtor for 50 days now and here are the results:

• 2 showings
• no flyer box despite repeated requests
• one open house last Sunday without my agent - no advertisements were made at all for the open house, no signs were put up in advance, no mention in the MLS and it was only open 1 hour. Not surprisingly only 4 people showed up
• no magazine advertisements.

I chose the top agency in this area and asked for a top agent. I got garbage. Last night I fired the agent and demanded the #1 seller or else I was going to change agencies.

I was getting 10-15 showings a week when I was doing FSBO using just street signs. I read all this great hype about what agents can do but don't see it.

Maybe I should kick myself instead for using an agent

Rent to Own (Lease-Purchase) Real Estate

I've been struggling lately to sell 2 of the properties that I purchased this year. One a fixer-upper wholesale flip hasn't had a bite for 6 months, the other is a nice rehab that I am trying to sell at the upper end of it's neighborhood price range. The first property is in Buffalo, the second within a mile of Buffalo.

The first house that I purchased for investment in this area was a 1.5 story brick cape in the town of Lancaster. Lancaster is the fastest growing suburb of Buffalo. We purchased the house for $80k. The basement was full of water and it had sat on the market for nearly a year. We spent about $19k rehabbing it with about $8k going to drain tile. Since our cash flow was very tight I couldn't let it sit on the market for long, I decided to try to sell it as a lease-purchase.

I had learned about lease purchase primarily from a course I purchased through Ken Preuss. For this property I put up one sign in front that said "Rent to Own". This sign generated over 500 calls last year and we quickly leased the property to a family. Rental rates are quite low here and a typical home rents for ~$900 per month. We were able to get $1050 and a $2500 non-refundable option payment. The lease agreement specified that the tenants pay the first $200 of repairs, so my maintenance for last year was $0 and the property generated a positive cash flow of $300 per month.

The tenants took care of the property and actually made improvements (installed a new bath room floor and a nice ceiling fan in the kitchen) at their own cost. In the end they decided to buy another house and have moved out leaving me with their option money. We put our "Rent to Own" sign out again 2 weeks ago and were again flooded with calls. This year we have a $3000 option payment and raised the rent to $1075. The option amount is for a sales price of $139k and we give the tenants $500 rent credit towards a down payment if they pay by the first. We quickly found another tenant.

For a rental property this method really seems to work well. The advantages:

• the rent we get is about 20% above current market rates
• the rent credits really motivate the tenants to pay on time (I used to have to chase tenants down in my previous days as a land lord)
• the upfront money we get seems to motivate the tenants to take care of the property
• we don't have to worry about the nitpicking small maintenance items that used to get me out of bed at 2 am
• the selling price is higher than what I think I would get by putting the property on the market

The one disadvantage has been that I cannot get my equity out of the property, although I was able to recover all of my down payment and rehab costs by getting a HELOC type loan on the property.

The concept does have it's limitations. For starters,we are at the upper end of the rental market here and I don't think I could do this for my Cheektowaga home. I would need to rent that one for $2000 per month just to break even and I have never seen any houses advertised for that rate here (although there must be some available through re-lo offices of local Realtors). Preuss also talks about getting $5k to $10k as option money, but that is too high for our area. $3000 seems about right. The rent and option money really drops the number of qualified people significantly (95% self-eliminate when they find out the terms) at the price range I am charging.

The courses I have taken talk about focusing on "bread and butter" homes. It seems that this house is such a house for our area. The other 2 are either too highly priced for their location or the location is so bad no one wants them. Modifying my house buying criteria might help me turn a very negative year around next year.

Selling My Fixer Upper - Real estate turns sour

I purchased a fixer upper using a short sale in February thinking I could make several thousand dollars. I initially priced the house at $25k FSBO and was probably too greedy. I had an interested buyer the first month but would not reduce my price sufficiently for him to bite.

After a couple of months I put the property on the MLS using a flat fee listing service. I got one bite from a NYC investor and thought we had an agreement to sell at $17k. But she backed out.

Last week I tried listing the house on EBay with a starting bid of $12,700. But I had no bids. Tomorrow I will list with a full service Realtor. The main problem is that local Realtors charge a minimum of $3000 commission. I bought the house for $5k but with closing cost, attorney fees, back taxes and ongoing tax and clean out I have $11k into this property. My dream of making several thousand dollars profit has been eliminated and I am just hoping to break even now.

Unfortunately, this past weekend a drive-by shooting occurred one block away with 2 people dying and several more injured, so I am not too optimistic about selling.

I got into real estate last year so that my wife could stay home, but with neither of the houses selling after 7 months, she has been forced to find work. Our other 2 properties are vacant which drains $3500 per month from us. A few more months of this situation and we will start facing the fate of the people that we have been buying from.

9/11 - Not a Tragedy

Much is being written today about the "tragedy" that occurred 6 years ago on 9/11. I can remember clearly the morning of that day while visiting my parents in Massachusetts. A friend had just rang the door bell and told us an airplane had accidentally hit the World Trade Center. We turned on the TV in time to see the second plane dive into the other tower. At that moment I knew this was no accident and hence not a tragedy, but an act of War.

Today some 40% of the population is in total denial about the threat of Islamo-fascism. And an equal number thinks that the attacks were an inside job. These people are so demented that they overlook basic science (how is steel made?, what is modulus?) and cling to hatred of President Bush over all reason.

But, like Hitler, the threats from Bin Laden and Ahmadinejad are real and to be taken seriously at our own peril. Some point to the fact that we have not been attacked since 9/11 as "proof" that this is not real. The facts are that Al Qaeda has not attacked us because they can't. Our offensive and defensive campaigns have neutralized much of their capability. However, if they see an opening, they will attack again.

And there-in lies the problem. The left is so intent on bringing down opposing views that they are willing to do whatever it takes to bring another attack on the US. The ad in the NY Times (General Betray US) is one of the most despicable, treasonous things I have seen in my lifetime.

During the McCarthy hearings, the Senator was asked "Do you no sense of decency?". This ended McCarthys credibility. Moveon.org and DailyKos have gone way beyond decency and literally make me ill.

The one fact that those who oppose this fight fail to realize is that we are dealing with evil. Evil cannot be ignored, only defeated.

Foreclosure auctions

I attended my first foreclosure auction this morning. I had bought some houses before foreclosure earlier this year but have never been to an actual auction. After I saw a real estate transaction for the first house I tried to do a short sale on (which sold for $26k after I had tried to buy for $47k by negotiating with 2 banks that did not bid at the sale), I decided to attend an auction.

This was for the nicest property yet that I have tried to buy using short sale techniques. The home is in my area where houses typically sell for $110/sq for (this was a 2500 sq ft home). I had negotiated a deal with the second mortgagee to take $12k for their $30k note, but decided not to follow through when the payoff of the first changed from my estimate of $203k to $212k. The home needs a little work and the owner is intransigent (so it will take some doing to get him out). I figured the home is worth ~$215k.

There were 2 auctions this morning. The first was a property in the next town that was owed $112k. Bidding was furious and ended at $191k. I figured that the property I was interested on would have an equal interest.

However, there were only 3 of us interested and I did not even bid. The second lien holder had sent a young scruffy man to bid on the house and he had announced that he was going to bid $240k. So no one bid on the house. Obviously, no one believes that it is worth $250k at this point. I was the only one who had been inside the house and knew the condition.

I've sent a note to the second lien holder and offered to buy it at $217k. They are a West Coast investment group that bought the note from a major bank. Obviously, they have a distorted view of real estate and especially are unfamiliar with this market. This will be an interesting one to watch. I think that they will lose their lunch on this house. I have yet to work on a foreclosure where the bank did not lose more money by going through with the foreclosure rather than accepting my offer.

People (investors) often don't know when to cut their losses. It's probably the hardest thing to do is sell when you are going to lose money. I have faced the same dilemma with stocks. Bought $50k of my company stock at $66 per share, watched it go to $84 per share and then drop to $38 per share. It took me 5 years to sell it at $48 per share and still today it sits at $46. I missed a great stock run-up holding on to a loser due to an unwillingness to take a loss. It's hard to admit a mistake.

Saving over $456k on cars

Consumer Reports wrote how y0u can save $31K by buying a car and driving it for at least 200k miles. Many people are looking at ways to save nickles and dimes while ignoring a potential windfall by buying and maintaining their cars correctly. Most people look at cars as too costly or feel a need to get rid of them when they reach 100k miles.

This is really an outdated view of the quality of today's cars and reflects thinking from the 60's. Some say "they don't build them like they used to". Well thank God for that. Today's cars are vastly superior to what was built in the 60's and 70's. Most cars today can easily go 200k miles and many probably 300k. Most cars today need only minimal maintenance before 100k miles (like oil changes). I think all cars can go over 100k without a tune-up which is a big switch from the days I bought my first car. I have written here and here about how I save money on cars.

Of the dozen cars I have owned I have only had 2 that I sold before they had 200k miles - a 92 Ford Club wagon and a 98 Dodge Intrepid. I would have kept the Intrepid. It was in great shape, I loved the design and when it was running, it ran very well. Unfortunately, it had 3 sudden electronic failures while I was travelling several hundred miles from home and it cost me ~$3k each time to have it fixed since I had to rent a car, travel home and then drive back to pick it up. So I unloaded it mostly out of frustration. The Ford was just a poorly built vehicle.

So how do I save more than $31K on a car? I only buy cars with at least 90k miles on them. So I avoid the following costs:

• I pay cash (I buy on Ebay), so I have no interest charges (saves $10k per Consumer Reports)
• I buy after the car is nearly completely depreciated. So I pay $4k Vs $30k. If I only keep my used vehicle 7 years, I pay $8k to compare with the CR example - a savings of $22k over 15 years
  
• I don't carry fire, theft or collision ( I pay less than $500 a year for liability coverage on my 2 vehicles - this saves $1000 a year (that's $15k in CR's example)
• By maintaining my vehicles I avoid costly breakdowns (e.g. changing the timing belt)

I also use synthetic motor oil, which I believe substantially reduces engine wear (and improves gas mileage). The biggest obstacle to keeping a car here is rust (they use a lot of salt on the roads in Buffalo!)

The best (and cheapest to maintain) cars I have had were Honda's, Toyota's and Cadillac's. My 2 Chevy Ventures have also done well. I think the Honda could have gone 500k miles.

Based on the CR example of saving$31k, I save an additional $45k over the 15 year example period for a total of $76k. So if you are the average family that has 2 cars for 45 years that is a savings of $456k that you can bank for retirement. This is big money. Maybe you can afford to splurge on a couple of Latte's to reward yourself and stop clipping coupons.

Update:
Is my math right? Some question it.

First, I am assuming Consumer Reports math is right. If so, that's $93,000 of savings per car over the 45 year period that is my base case (your working years). The average American family has 2 cars simultaneously during that time so that's $186,000 in savings based on CR.

Second, Consumer Reports states that you pay $10,000 in interest per car, so if you pay cash for a used car you will save another $20,000 every 15 years. As cars get more expensive and people finance them for longer periods this will go up. For the 45 year period that's $60,000 in savings. So we are up to $246,000 in savings.

Third is purchase price. I assumed that you bought a new car for $30,000. I own a mini-van and a 4 door Toyota Camry. The van retails for $35,000 plus sales tax, while the Camry retails for $24,000 plus taxes (Sales taxes would add another $5k here in NY, but I''ll ignore that for now). On average, ~$30,000 in 2007. I purchased my van on EBay for $3500 and the Toyota for $4000 - no sales taxes. Now to get the same mileage, I'll probably have to buy 2 used cars rather than the one car CR uses in their 15 year example. So my savings over 15 years is ~$44,000. During the 45 year period the price of a new car will inflate much faster than the prices of used cars. But to be conservative I'll keep the differential the same. For the two cars I will own simultaneously, that's another savings of $132,000. Now my total savings is $378,000.

Fourth is savings on auto insurance. I never buy collision or theft insurance. But if you have a loan you must carry it. How much you pay for collision insurance depends on the type of vehicle you drive, where you live, your age, gender, driving record and even credit score. So, I am only guessing about the extra cost here. But for most people, I would guess the surcharge may be $1000 per year. This will also increase as cars get more expensive. But for my example, this is $45,000 in savings.

Total savings is now $423,000 over the typical way people buy cars. Will I pay more in maintenance. Maybe, but except for 2 cars that has not been the case. The only non-routine maintenance I did on my Honda Prelude was to replace a water pump which I drove over 250,000 miles!

Ebay Real Estate Auctions

I've been thinking about auctioning off my Buffalo property on Ebay Real Estate. It's been for sale for 7 months now. I had one offer for $17k from some woman in NYC but she failed to follow through. Otherwise I have not had many calls on the property for nearly 3 months now. I've been using a flat fee listing service but have found that it is not working. Advertising in the paper brings no calls (true for every property I've tried to sell). Using a full service Realtor will cost a minimum of $3000 commission and my margin is so small that I feel that is a poor choice. So what is there left to do to sell this property? I bought it for $5k but legal fees and closing costs as well as ongoing taxes and utilities have my total cost over $11k now.

I'm not sure Ebay is the right venue to sell, but feel my options are pretty limited at the moment. Do homes sell at a huge discount on Ebay? Don't know at the moment, so I think I will monitor the sales for a week or 2 before I decide. If any one that has used Ebay, I would like to hear comments.

Acadia National Park

I just came back from a week of camping at Acadia National Park in Maine. This is a park located on Mt Desert Island off the coast of Maine. My wife and I are ready to retire and move there we thought it so beautiful. But the necessities of putting 4 teenagers through college will delay that quite a while.

The park is awe-strikingly beautiful in every way. There are oceans, mountains and fresh water lakes as well as the quaint town of Bar Harbor. The park is loaded with great hiking trails which range from easy walks to steep cliff climbs, carriage roads (funded by John D Rockefeller) which are great for biking (even our dog ran nearly 20 miles along side us), the fresh water lakes provide a warm swim though the ocean was a brisk 55 degrees. The views from the tops of the mountains are some of the best I have ever seen.

We road biked quite a bit as well and saw some beautiful homes. There was also the first opportunity for all of us to go kayaking. Saw some seals and osprey during the trip. The weather was perfect all week. Best of all we survived with 4 teenagers.

I've been to few places that I would relocate too. Seattle being the other place with similar geography. The opportunity for outdoor activity really appeals to my wife and I. The hikes and bike trips we took were pretty strenuous for our daughters but my 2 sons enjoyed them. Now we just need to make enough money to afford to buy a home there.

Reflections on real estate ventures

I watched a show called "Property Ladder" this weekend. It was about a young man who was an IT professional. One day he decided to quit his job and become a full time property flipper. His only experience was that he had read some books and course material. He didn't seem to have any experience actually doing "hands-on" work. Needless to say it was a shock to his wife who became the sole wage earner.

He purchased a house and got some advice from a real estate expert (part of the show), which he proceeded to ignore. He was acting as a general contractor but failed to stay at the job site and the subs didn't show up and didn't do the work per code. (Since he wasn't employed, I wonder what the heck he did all day?) He had a time table of 4 weeks that stretched to 12 and he doubled his budget. Finally, he overpriced his home compared to nicer homes on the market.

This was the first of these shows (Like Flip this or that House) which showed how to screw up a job. It was refreshing to say the least and at least allowed me to feel that I wasn't as bad a screw up in the flipping business. But I have made some mistakes this year.

I purchased one house in Buffalo that I thought I could flip wholesale easily. The seller owed $71k and the bank gave it to me for $5k. What a great deal- right? Well, I had taken Don DeRosa's advice and agreed to pay all seller costs - like Title search, back fees, etc. In addition, my attorney way over charged me ($2500) for what services he did. So I ended up spending $10k to acquire the house. I overestimated what houses in the market would sell for and probably got a little too greedy, pricing the house at $25k. We've had one verbal offer of $17 which I accepted but otherwise the house has not been shown for 3 months now and been on the market for 6 months.

Lessons learned: Don't offer to pay seller costs and start off at a lower price.

A second house I purchased was in a nice neighborhood. I had estimated the cost to rehab was only going to be about $10k but I doubled that. After the snow melted, I could see the roof was no good and once the curtains removed saw that the windows needed to be replaced. My wife and I did all of the work (I even learned how to install replacement windows), so we didn't need to bear the expense of contractors. On the downside, all of the work doubled our timeline from 2 to 4 months. The main killer for this house has been the carrying costs. We bought the house subject to the existing mortgage rather than use hard money (otherwise, we'd have gone broke already). Still, at $2k per month, that's $12k of carrying costs eating into any profit we had hoped to make.

Lessons learned: I need to increase my budget for unexpected problems. In the Buffalo market I also need to budget for much longer holding periods. This is not LA.

We have also tried to market these houses either FSBO or through flat fee listing. Neither has worked and now I am listing with full service agents. I'm hoping that will make a difference..

On the plus side, I didn't quit my day job, so I can make the payments and we are not facing foreclosure. Since we know a lot and learned a lot we also have not been ripped off by contractors. I had a boiler replaced in one house and 3 contractors gave me $5k estimates. The fourth finally understood want I wanted done and did the job for $2500. I was also able to get a really good price on the roof by finding a roofing wholesale company that sold me materials as a contractor.

I will probably have to write this year off as a learning experience. I'm not sure I will turn a profit yet. But it could happen.

How Mortgages are funded

Wall Street has been roiling in turmoil due to the "crisis" in the sub-prime market. I ran across this article that describes how mortgage loans are funded and what the underlying problem is.

Seems there are 3 ways for a mortgage to get funded:

1. GSE's - these are government secured enterprises like Fannie Mae and Freddie Mac and Ginnie Mae. These loans are secured by the Federal government and are limited to $417k. Duplexes, tri-plexes and four-plexes have higher limits as does Alaska and Hawaii.
2. Portfolio lending- this is where banks lend money out of their deposits. These are typically ARMs' and have very specific underwriting criteria (i.e. they screen their borrowers very carefully)
3. Securitized mortgage pools - these are made up of a wide variety of loans and sold to Wall Street investors. These loans run the gamut from sub-prime to fixed to ARMs and are assessed for risk. This is where all of the problem area is at the moment. Investors are uncertain about the underlying equity of the real estate in these loan pools at the moment and so are not bidding on the loans. In the end it is what the Wall Street investors bid that determine interest rates of these loans.

So if you qualify under methods 1 or 2 above there is no crisis to speak of. It's when you need to get a loan from category 3 that there is a crisis. For people in expensive real estate markets this is the issue. For us in lower priced markets with good credit there is no problem getting loans. In fact, CountryWide (the largest lender with loads of problems trying to sell their category 3 loans) just approved me for a $200k, 5% down payment no doc loan. It took about 3 hours to approve.'

For many, this might be the best time to buy.

1998 not the hottest year

Global warming proponents have been preaching about how 1998 was the hottest year on record and the past 10 years include 5 of the hottest. Well...it turns out that is not true. 1934 was the hottest year and most of the years during the dust bowl round out the top 5 hottest years.

According to the new data published by NASA, 1998 is no longer the
hottest year ever. 1934 is.

Four of the top 10 years of US CONUS high temperature deviations are now from the 1930s: 1934, 1931, 1938 and 1939, while only 3 of the top 10 are from the last 10 years (1998, 2006, 1999). Several years (2000, 2002, 2003, 2004) fell well down the leaderboard, behind even 1900.
(World rankings of temperature are calculated separately.)

Of course, you won't be hearing about this during the leftest newscasts or in the NY Times any time soon. As a scientist I have been suspicious of the basic data collection that was used to gather the data. Turns out much of the measurement stations are not quite up to standards. Good measurements are the basis of good science and there are lots of examples where we have not started gathering good data to determine if global warming is real or not. Much of the world is relying on urban temperature measurement points that have substantial biases from urban heat.

More here. I didn't realize Mann was not a statistician, though I am not at all surprised based on my analysis of his work.

Real Estate Taxes in NY

I just read this post at pfblog regarding whether he can afford a $1M house in Seattle. He thinks that the Taxes and insurance for his million dollar home will be add $600 a month to his PITI payment.

Meanwhile I sit with a property in Cheektowaga NY with a property assessed at $163k and am paying $8k a year in taxes. Small wonder that it is difficult to sell.

Whatever dumb move you make financially, don't move to NY.

What I've learned after buying houses for 28 years

After graduating from college I rented for a year and since then have been buying single family homes with a spattering of duplexes, triplexes and one 6 unit building. My success rate has not been spectacular, more mediocre at best. In my mind my real estate ventures are heavily linked to my career choice. I majored in chemical engineering and was so enamored with working with one particular chemical company that I have intrinsically linked my real estate purchases to locations where my company provides work. And nearly all of those locations are away from growing metropolitan areas. I've also had the ability to watch my brothers (I have 6) locate to growing areas and prosper tremendously in their real estate purchases. So here is what I have learned:

1. Location is everything. If you are not living in a growing metropolitan area the chances of making a lot of money in real estate diminish exponentially. I lived in Parkersburg WV for 20 years and population declined by 25%. What happened to real estate demand? Certainly not the same as my brothers who live - near Boston, near DC, near Philly, near NYC and Charlotte. Values of properties in WV tanked for years and then was flat. I could buy property for $0.50 on the dollar but then couldn't sell it for half of what I'd paid. I'm living outside of Buffalo now and although some suburbs are growing slowly the population of this area is and has been in a steady decline. Admittedly, some suburbs have seen some 4-6% appreciation during my 9 years here as whites have fled the city, but Buffalo and it's closest suburbs are shrinking. I've never lived in one of America's fastest growing Suburbs.
2. Timing is crucial. There have been 2 major real estate booms during my life. In the early 80's interest rates dropped from 16% to ~7% and for most of the country real estate took off. But like the past 6 years, the boom was uneven throughout the country because location is everything. I watched my brother living near NYC rehab houses and make $100k in profit. I tried the same thing in WV and lost $100k. The key to timing in my mind is watching interest rates. During the past 6 years they trended downward towards the lowest on record and real estate boomed. When interest rates are rising real estate will not do well, when there is a long term downward trend, there are large opportunities for even the dumbest investor to make piles of cash.
3. Buying from desperate people is one way to off-set the above 2 trends. Many people make money in poor markets and against the trends. The main skill that they possess is the ability and patience to only buy from people who are facing foreclosure (this doesn't mean they are behind in payments, just that some circumstance in their lives will push them there eventually). This could be people going through divorce, job loss or transfer, heirs of property, medical problems, etc. Locating these people requires lots of patience and a willingness to alienate lots of Realtors and sellers by making low ball offers. Most people buy houses based on emotion and don't have the self-discipline to wait for the right deal. I have purchased 17 properties in my life and I can say that the majority (12) were purchased based on an emotional decision rather than the numbers.

A lot of home owners have made a lot of money buying in the right location and during the right time. I watch Flip This House and Flip That House and notice that they don't do shows in Buffalo, but only in growing areas. See this Forbes article on Best Places to Flip a Home. There is a reason for this - that's where people can make money and don't have to be too smart about how much their budget or timing.

I still am a strong advocate of using real estate as a strong component of building wealth. I just need to buy smarter to offset the location and timing factors. I won't be one of these people on TV flipping a house for $100k profit after going over budget by twice, but I believe I can make small profits that will get me closer to my goals of financial security.

Change in Real Estate Selling Strategy

Well, I've given up on FSBO and flat fee listing services. I'm switching both my properties to full service agents this week I haven't gotten a single call in 3 months for my Buffalo property and not a single agent has brought a client to my Cheektowaga property. I've found a young ambitious agent to sell the later property. I'm hoping that she will have contacts with relocating people as well as get some agents into the house. I'm not sure why the Cheektowaga property hasn't sold yet (except for the $8k tax burden). As one woman said today during the open house "it's to die for".

Maybe in a hot market these other services will work, but in the two areas I have properties population is declining and real estate is not hot.

Credit Card Number Stolen Again

Got a call from my Master Card debit card company yesterday asking about charges I might have made. Seems like my number was pilfered somehow though I still have the card in my possession. This is the second time a number has been stolen from me.

A few years back I was driving through PA and bought gas. While waiting for the attendant to process the card (before the days of DIY at the pump, he motioned for me to come inside the station. The Discover Card agent was on the line and asked about purchased I had made. Seems someone was buying lots of high priced stuff in Chicago for me! Fortunately, Discover cancelled the card immediately and nothing ever showed up on my bill.

This time MC called me and asked if I had purchased anything from a Tent and Awning company for $1.39. (interestingly, I had ordered some camping equipment from another company). However, Tent and Awning was not someone I had dealt with. It turns out that this outfit puts through small, innocuous charges to see if the account is valid and once they confirm that, they make big charges. I might have looked at that $1.39 and never paid attention to it if it showed up on my statement. So, kudos to MC for picking this up.

This must be one heck of an ongoing battle between those creative types trying to steal others money and the CC companies trying to detect new schemes. Unfortunately, its costs us all money.

Real Estate Dilemma

Our real estate purchases have been stagnant since February when we purchased 2 houses on the same day. We spent the better part of 3 months rehabbing one of the houses while trying to flip the other wholesale. Neither house has sold and the nicer home is draining about $2000 a month cash from us.

So we have not been too aggressive in trying to buy more houses. We have had a couple of opportunities but just missed making an agreement with the banks. One was in Amherst which is a pretty nice area, so I had some regret that we did not get a better appraisal.

Now it looks like we have an opportunity to get a really nice house in the town that I live in. I know the values very well here and it is a high demand area, unlike the area where we own the other 2 houses. There are a couple of challenges to buying this house. Our financing does not allow us to buy properties over $150k and this house is going to go for about $220k (We have had it appraised at $268k, so that is not a problem). The rehab money we have doesn't allow us to live in the house either. So I will need to get conventional financing. My plan would be to rent out our current house and move into the other house.

The dilemma is that the down payment will use up all of our cash and there will not give us any cushion to pay the mortgages on the houses we are trying to sell. So we will have to exist purely on lines of credit until one of the 3 houses we have for sale is closed. This is a risky strategy but this new opportunity is the best house I have had the chance to buy. So what do I do? Live on faith that one of the houses will sell or pass up an excellent opportunity?

Update question: Why is this different from people that purchase a new home before they sell their old home? (I actually am against this practice, but....)

Harry Potter - The Spiritual Story

I've been traveling on business this week and have had the opportunity to devour the latest Harry Potter book The Deathly Hallows. I have been fortunate that my children were the right age to be interested in this book ( my oldest is Harry's age). I started reading the first book to them at bed time (it seems so long ago) and it's one of my fondest memories as a parent. My oldest (who struggles the most academically) has read each book several times.

I myself have enjoyed the whole series immensely. My favorite movie is the Lord of the Rings series. Although I have not read any of the LOTR books the movies are incredibly well made, but more importantly carry a great message. The triumph of good over evil, the importance of character and is loaded with Christian themes. LOTR replaced my previous favorite movie - The Sound of Music - which carried similar themes.

I categorized this post under "religion" which will surprise my atheistic colleagues who have read the series. After reading the 4th book of the Harry Potter I became convinced that Rowling was secretly creating a series like LOTR and Chronicles of Narnia. However, the crowd I associated with at that time (home shooling families) largely condemned the book as Satanic. After reading Looking for God in Harry Potter I realized the depth of Rowling's Christian themes and it was quite easy to predict how the series would end.

Although the previous 6 books hinted at Christian themes, the Deathly Hallows is the most overtly Christian. Harry is a Christ-like figure who (literally) carries a bit of evil with him. Consider:

• the prophecy of his birth
• the "cross" pulled from the frozen pond (and the baptism there)
  
• the "blood" he gave
• the themes of good Vs evil and the ultimate triumph of good
• the series begins and ends with the giving of ones life for another - a greater good that no man can give (even Dobby gets into the spirit)
  
• the resurrection theme
• the temptations Harry faced (power over death itself) and doubts (lies told about his mentor)
• the disciples that stick with Harry despite the prospect of death and the desertion of one disciple (i.e. Peter/Ron) as death approached
• an Armageddon battle of Good Vs Evil
• multiple quotes from scripture
• the Hallows is a Trinity symbol
• Dumbledore is a "Father" figure
• The place Harry and Dumbledore meet is "Kings Cross" - this is also the place where Harry was "born again" in book 1
  
• Peter, James, John and Harrys mother accompanying him into the forest
  
• the power of Love over death (why good wins and Snape is a good guy)

There are many, many more. In addition, Rowling takes aims at other evils such as Nazism and it was interesting to note that Home Schooling was banned when Voldemort took over. Some people take issue with witch craft but that is really just an allegory for technology which our generation has allowed to take over our lives.

Rowling initially was afraid that if people were aware of her Christian faith, she would give away too much of what's coming in the series. "If I talk too freely about that," she told a Canadian reporter, "I think the intelligent reader — whether ten [years old] or sixty — will be able to guess what is coming
in the books."”

Rowling's brilliance has been in writing a book that allowed millions of young people to be exposed to the basic tenants of Christianity without shoving it down their throat. In an age when the media and liberal elite don't believe in evil this is a heartening accomplishment.

Influencing Apraisals or appraising is a joke

I wrote earlier about how it might work to my advantage that I accompany appraisers when they do a BPO on a foreclosure. I thought I might be able to point out the flaws of a house and help keep the appraised price down. Well, I did it last week. Some commenter's warned that I might get in the appraisers face and it might work against me.

When the appraiser came last week I met him at the property and casually asked about how he was going to do comps and politely pointed out some flaws. As he left I told him I was not looking to re-finance and would like to see a lower price. He said simple that it was much easier to get a lower price and left it at that. I don't think I offended him at all or "got in his face".

I talked to the investor today and found out that the appraisal came in with a value of $104,000! I have estimated that this property was worth $250k after repair and offered $202k "as is". The appraisal cited replacing new cabinets for $30k(they were just installed 4 years ago) and $15k in electrical work (the basement lights don't work) as flaws. I don't know how he came up with but it didn't work to my favor (or his). The investor ordered another appraisal and they did a "drive-by" and came up with a value of $268k.

So the investor threw out the initial appraisal and will not pay them (can't say I blame them). Neither appraisal is correct in my estimate of what the house is really worth. The investor is going to put together a counter offer (I only offered him $2k for his $20k loan), but at least it may have put some doubt into his mind.

As for now the legal action has stopped on this house again (for the second time). The homeowner is determined to live there as long as possible without paying anything and is quite clever in delaying the auction.

Whether the commenter's were correct in telling me not to interfere is not really important here. The lesson is that appraising property is heavily influenced and so far from reality that it defies logic in many situations. Many blame the banks for the sub-prime mess, some blame the borrowers, but few have blamed the appraisers. Maybe it is time to focus on them.

Foreclosure Time Frames

Here's an interesting article that discusses the length of time it typically takes for a bank to foreclose on a property. I happen to live in New York which takes 12-19 months for a bank to foreclose. Add to that the time it takes to re-sell the property (especially here in the Buffalo market) and I think this would give me an advantage to getting more foreclosures. The New York Home Equity Theft Law probably doesn't hurt either. Knowing this, I may be able to get more leverage when negotiating short sales with banks.

Some states, like Alabama give owners only 30 days before they can lose their property. However, homeowners are given a long time to re-purchase the property with the buyer losing any money that was made in improvements. That would be a big loss for the investor. So I guess New York has at least one advantage over other states. On the other hand, lots of people in foreclosure here don't act on the foreclosure because they know that it takes so long.

Home Buying Strategies

There's a good post at DebtFree about buying a home. I've used purchasing at pre-foreclosure, submitting low-ball offers on houses that have been on the market for a long time, buying "as is" as my main strategies. I also look for other "don't wanters' - estates, divorces, vacant homes, etc. HUD homes have never appealed to me. Usually they are full of problems (mold) and over priced.

I was watching a show on HGTV called "My First House" and saw a Realtor give a client terribly bad advice. A young woman was buying her first home and the house had been on the market for a while with the owner already reducing price once. For some reason, the woman felt that she had to give the seller a "win-win" offer. So she offered the asking price. Unless you are in a hot market with multiple offers coming to sellers, I think that this advice is almost bordering in negligent if not malpractice. Maybe she was using the sellers agent which carries a huge conflict of interest.

Here's my rules of buying:

• never use a sellers agent
• never offer asking price
• always ask for concessions (closing costs, upgrades, etc.)
• never buy on emotions, buy on value

I always buy "as is" now so that I can reduce price, but for a first timer you probably want the option to get an inspection.

Secondary Mortgage Market

I've often read stories that banks sell their mortgages on the secondary market but not appreciated the magnitude of this. Recently I have been dealing with a seller in foreclosure and been trying to do a short sale with his loans. He had two loans on the property and when I first talked to him he told me he didn't know who the banks were.

Initially I wrote this off to his disorganization and drinking but now I appreciate that he was telling me the truth. I have been talking to the banks in order to find out where to send a short sale package and I'll be darned if I can figure out who owns what loan. Each of the original loans has been sold multiple times. Sometimes the originator of the loan has sold and re-bought the same loan! So far I have found 3 changes on the first loan and 4 on the HELOC.

I'm not sure what the game is for these banks but it sure gets confusing since they change loan numbers each time the loan is sold. It's also costing these banks money since this seller has been in foreclosure since May of 2006 and there still is no auction date set on his house.

For all of the criticism that banks get for pushing loans on people that can't afford it (as if the banks were some all powerful oppressor), the truth is that banks (and big corporations in general) are not all that organized. The paranoid that attribute all sorts of evil intentions to big business overestimate the reality of how companies operate.

Be Carefull about 0% Balance Transfers

I got an offer from Capital One a couple of months ago to make some one year 0% interest transfers to my Cap 1 card. I had some expiring 0% balances from a Lowes card and a 9.9% balance on an AmEx, so I decided to take advantage of the offer.

This past weekend I perusing my statement and noticed the interest rates on my Cap One card were the same for the entire balance. So I looked back at the last couple of statements and sure enough they had not applied the zero percent to the new balance transfers. I called Capital One and they told me there was a glitch in their system and they would take care of it. It sounded like a large glitch, not just for me.

So if you have transferred money to Capital One recently expecting to get a zero percent interest rate - better double check your statements!

Why Not Borrow Against 401k?

I have never read of any financial planner that advocated borrowing against your 401k. In fact, 100% of everything that I read says to never do this. I do not understand this at all and wonder why.

I have borrowed against my 401k since this was allowed. In my 401k I have two options for investing. One is a fixed income fund that currently is paying ~5.75% interest. This is the closest option I have to a bond fund. The second option is some mutual fund or my company stock.

When I borrow against my 401k I am paying (currently) about 8% interest on the loan. Essentially, I have created a fixed income investment for my 401k that pays 8%. It seems to me that this is a better return than the fixed income fund that is my alternative choice. Since every financial planner is advocating that I have 30% of my 401k in a fixed income fund, why is the loan fund not a better deal than the fixed income fund offered by my company?

Now, you can argue about the merits of borrowing money, but if you need to borrow money anyway, why not pay yourself rather than a bank? It just makes more sense to me that the first place you should borrow is your own bank. And that is what my 401k is - a bank that makes investments.

The major risk is that you will change or lose your job before the loan is paid. For me that has not been an issue, but for young people who feel the need to switch jobs or people in unstable industries, I can see that point. The risk of having to repay the loan with a 10% penalty is steep.

For me this program has worked out great. I've borrowed to buy houses as well as other short term needs (usually for investing). I wouldn't think that borrowing to buy an HDTV is the thing to do here (but that is a completely different issue), but it is an option that can pay dividends.

So, am I missing something or does this make sense?

See part 2 here
Also see this webpage Using 401k Loans for Real Estate Purchase

Zero Population Growth - The Scarcity Crowd

I read an excellent paper with lots of data and charts showing the effect of the tremendous population growth of the past century titled Too Many People? (pdf). It's an interesting look at how the scarcity crowd (e.g Al Gore and Earth in the Balance, Paul Ehrlich and Population Bomb, Club of Rome, etc.) are way off base in their constant predictions of gloom and doom.

Some interesting information from the report:

• world population went from 1.6 billion to 6 billion during the 20th century
• population growth hasn't really come from increased births, but from massive reduction in death rates, especially infant mortality
• birth rates have dropped throughout the world (even third world countries have seen birth rates drop in half) during the last century
• GDP has risen throughout the world despite more people (or maybe because of more people)
• prices for food have dropped inversely with population growth (by 70% for basic grains) - exact opposite trend that Ehrlich and scarcity mongers predict (supply is up and hunger down as well)
• prices for scarce commodities has dropped 80% with population growth. If we are consuming so much more of these "scarce" resources, why is this? Price indicators are showing that these resources are becoming less scarce as we consume more.
• Population density is no predictor of standard of living

Here's the conclusion of the report:

"The tremendous and continuing spread of health and prosperity around the planet betokens a powerful and historically new dynamic that anti-natalists today only dimly apprehend. This is the shift on a global scale from the reliance on “natural resources” to the reliance on “human resources” as fuel for economic growth. The worldwide surge in health levels has not been an isolated phenomenon. To the contrary: it has been accompanied by, and is inextricably linked to, pervasive
and dramatic (albeit highly uneven) increases in nutrition levels, literacy levels, and levels of general educational attainment (figure 13, tables 3 and 4).

These interlocked trends speak to a profound and continuing worldwide augmentation of what some have called “human capital” and others term “human resources” – the human potential to generate a prosperity based upon knowledge, skills, organisation and other innately human capabilities.

In a physical sense, the natural resources of the planet are clearly finite and therefore limited. But the planet is now experiencing a monumental expansion of a different type of resource: human resources. Unlike natural resources, human resources are in practice always renewable and in theory entirely inexhaustible – indeed, it is not at all self-evident that there are any “natural” limits to the build-up of such potentially productive human-based capabilities.

It is in ignoring these very human resources that so many contemporary surveyors of the global prospect have so signally misjudged the demographic and environmental constraints upon development today – and equally misjudged the possibilities for tomorrow."

This is a theme I have written about often. Paul Zane Pilzer wrote about it in Unlimited Wealth 20 years ago. The pie is growing all the time, the sky is not falling and the Gore's and Ehrlich's of the world are preaching their religious Apocalypse into face of overwhelming evidence to the contrary. For what purpose? Their Stalinist views that only government can save us from ourselves.

Short Sales - Banks and Sellers

I've had about 10 short sale opportunities this year and decided to do a look back at the results (name is street name). None of these sellers had any equity in their homes (although the Tiffany owner thought he did until I got the payoff from his bank):

• Nicholson - three loans against this property. A perfect setup for a short sale. The third lien holder (owed $16k) would not do a discount. The first 2 were foreclosing and the third did not have a clue since the seller continued to pay them all throughout the foreclosure. The third bought the property and has it for sale. Exterior looked good on this property and BPO appraiser only did a drive-by. Interior was a wreck.
• Warwick - seller owed $40k, property worth less than $15k and but bank wouldn't accept less than $30k.
• Roslyn - two loans $67k and $5k from same bank. The bank just wanted to walk away from this, but when they found a buyer they decided they were going to get some money. Bought for $5k from bank. For sale for $19k with no offers after 5 months.
• Hunting - two loans $146k and $40k. Second bank took $2500 for their $40k and I paid first $15k in fees to reinstate the first. Rehabbed and for sale at $219k.
• Knox - One loan of $64k. Offered bank $47k but they would not take less than $52K. On market by bank at $74k with no interest per Realtor
• Monroe - one loan of $179k. BPO came in at $154 and bank was willing to take $142k. I offered $135k but bank wouldn't budge. Just went at auction. BPO showed house did not need repairs but appraiser missed lots of stuff. Maybe could have gotten BPO lower if I had been there. Negotiations went down literally the last hours before the auction.
• Randall#1 - One loan of $117k property worth less than $80k. Seller backed out after wife refused to sign papers
• Randall#2 (interestingly 2 foreclosures next door to each other). One loan of $150k. Property is worth about $125k. Seller stalled for 3 months claiming husband wouldn't let her do sale (despite her saying husband is not on deed??). She just received notice of court date and now wants to proceed.
• Tiffany - great house in my area. Two mortgages - ideal for a short sale. Seller has stalled for several months. Not sure if drinking or depression is to blame but he suffers from both. This is an interesting property because seller stopped paying mortgage March 2006!. He paid $1800 to stop foreclosure and the company did, but the bank re-filed this year. Seller was under the delusion that he had lots of equity in his house but he owes over $40k in back interest and fees so he is upside down.
• Stockbridge - one mortgage of $45k. Property is trash and worth less than $10k. Bank won't go below $45k.

It's been an interesting process to learn so far, but I haven't seen any logic in how banks decide when to accept an offer or not. Some loan mitigation personnel are much more helpful while others are very hard nosed. I've got the process down to a "T" and feel pretty good when negotiating with a bank. But to make a living at this would be pretty hard in this location based on my response and success rate.

FDR and Scarcity Consciousness

It's impossible to have much perspective when living through events. Many people once called Ronald Reagan the worst president ever (and now call Bush the same) while 30 years after he left office Reagan is hailed as one of the top 5 Presidents.

That is why Amity Shlaes new book - "The Forgotten Man - A New History of the Great Depression" is quite fascinating. Many people are aware of how Hoover really set the economy in a tailspin by signing trying to isolate the US from world trade with the Smoot-Hawley Act. But few are aware of the bumbling that FDR did, which extended the Great Depression for nearly a decade.

Shlaes account of how FDR decided to set the price of gold is amusing (a lucky number). His constant need to create sub-groups of people that became dependant on the Federal Government had immediate and long lasting results (and defines the Democratic Party to this day).

Wendle Wilke - presidential candidate in 1940, called on Roosevelt to give up this philosophy of "distributed scarcity". Since 1930 this is what the Democratic Party has offered the country. The theory that there is only so much pie (whether this pie is money, food, or the environment) and we need to re-distribute it.

My own beliefs have to do with prosperity consciousness, which I've written about many times.

Environmentalists - The Fraud Squad

Sometimes laughter is the only appropriate emotion to show when a group of people acts like frauds, fools and hypocrites. That is my reaction to the outrageous event called "Live Earth" this past weekend spearheaded by none other than the nuttiest of politicians - Al Gore and his entourage of elitist entertainers who believe us little people need to "do as we are told -never mind what I do".

You can read all about the huge carbon footprint that this event had on the earth here. While these celebrities were jet-setting around the planet on their private planes (travelling 222,000 miles), creating mountains of waste at concert sites, plus TV audiences, they created seven times the carbon emissions in one day than an average person does in a year. And this is not a one time event for these entertainers. Madonna's carbon footprint is 10 times the average person and we all know about Gores lifestyle.

Here's a quote from one environmental author. See if you can see any hypocrisy here:

"Colby Cosh has some sport with "the guru of green business practices", Joel Makower, who writes:

My travels this week take me to Detroit and Chicago for meetings and speeches. By the time I return home to California on Wednesday night, I'll have taken — if my accounting is correct — 51 plane flights during the first half of 2007. I'm not bragging, mind you. Indeed, it's rather embarrassing (and more than a little exhausting).

As Mr Cosh observes:
51 plane flights in six months for an environmental author and lecturer—embarrassing? Yeah, that's one way of putting it. Another would be "I guess my entire career has really just been one long act of satire."

The green guru defends himself thus:Like many of my environmental professional brethren, air travel is far and away my biggest personal and professional footprint. And it's not likely to change any time soon. This reality notwithstanding, the airline industry seems poised to finally confront its environmental impacts — and mine.So his frequent-flyer miles
are an unchanging reality, and it's the airline industry that has to figure out a way to deal with it."

I love Mark Steyns comment to this:

"On a related note, several readers have asked how my campaign against sexual promiscuity is going. As you know, it's one of the great scourges of our society. Well, I'm still nailing anything that moves, and that's not likely to change any time soon. This reality notwithstanding, the rest of you really need to cut it out. "

"Live Earth managed to re-cycle one thing, at least – the old liberal mistake that says that citizens can’t do anything to help themselves (or their country, or their world) and their only hope involves changing government. In other words, to liberals (like all the well-intentioned bozos who participated in Live Earth) change only matters when it’s government initiated and government mandated. In truth, bottom-up changes in private, individual behavior (which are eminently possible on this issue) brings far greater impact than any top-down bureaucratic demand."

The environmental movement is not about saving the earth - it's all about politics.

Most Powerful Period of Global Economic Growth in History

This article states that the period from 2003 to 2008 is greatest economy of all times.

"Moreover, if we and the consensus are correct, then the period 2003-2008 will have been one of the most powerful periods of economic growth globally since accurate data has been collectable for much of the world."

As I have posted in the Greatest Economy Ever and Roaring 20's are Back, this is not a short term phenomena but a long term trend. Paul Zane Pilzer should get a Nobel Prize for his Economic Theory.

So, if you are having a rough time now - don't blame the economy or Bush. As Larry Winget would say "Get off your Butt".

Second Quarter Net Worth Update

I've updated my net worth on NetworthIQ which is shown in the sidebar. Looking at it, it is very discouraging (especially after watching all the Flip That House shows claiming these first time flippers making 6 figure profits, while my wife and I busted our butts rehabbing a house all quarter). My net worth for the quarter increased by only $1k despite one of the best quarters I have ever had in my 401k.

Some of the reasons:

1. My cash is depleting rapidly as I have a negative cash flow of $3k per month holding costs
2. I didn't assume any increase in value of my homes. I based this on the current uncertainty in the real estate market due to changes in interest rates and increased foreclosures.
   
3. I increased the value of my flip by only the amount that I actually spent. Many articles about home improvement talk about how certain improvements return less than 100% of the cost of the improvement. Although I am hoping that we increased value by more than the cost (especially since we did most of the work ourselves), until I have a contract in hand, I don't have any real profit.
4. My auto value decreased since I put a few dents in it with my trailer
   

10 Politically Incorrect Truths about Human Nature

Psychology Today offers an article titled 10 Politically Incorrect Truths about Human Nature. It offers lots of insight into why men prefer blonds, politicians have affairs with young women, suicide bombers are Muslim, men are more creative when they are young and why you need to buy that red sports car when you are over 40. A fun read.

Getting Good Advice

I ran across this article on my Scientific American RSS feed - Getting Good Advice. I thought most of it was right on, although the bias in these types of magazines is always against business and towards big government. The advice is geared to getting medical advise but can be applied to finances, global warming or journalism in general (the biggest source of nonsense)

Some pointers:

• Listen to people that have expertise in the field they are discussing. Al Gore and Hollywood stars have no expertise in statistics or global climate change to make them worth a listen to.
• Neutrality - people that receive government grants are just as susceptible to bias as people that receive grants from companies - be wary of both.
• Affiliations - what organizations do these "experts" join or donate money to? What percentage of news reporters are donating to Democratic politicians? That is an affiliation that shows bias.

As the bumper stickers from the 60's used to say - "Question Authority"

The Original Liberalism Vs Islamism

When I was young I was a JFK "liberal". That is, I believed in the concepts of liberalism. Most "liberals" today do not know or understand what liberalism really was and today's liberals are really Marxists, or at the least, hard core socialists. Melanie Phillips writes an erudite article about classic liberalism and what radical Islam is trying to do to destroy it.

Islamists have no room for a liberal society and are intent on imposing Sharia law onus. Meanwhile, our PC liberal elites are so bent on imposing multi-culturalism on our society that they ignore the reality of good and evil to worship the god of tolerance.

This elite class of people feel that the problem of radical Islam is new and will go away if we just reason with these people. But history shows differently. One hundred years ago Winston Churchill wrote these words in the original edition of "The River War":

How dreadful are the curses which Mohammedanism lays on its votaries! Besides the fanatical frenzy, which is as dangerous in a man as hydrophobia in a dog, there is this fearful fatalistic apathy. The effects are apparent in many countries. Improvident habits, slovenly systems of agriculture, sluggish methods of commerce, and insecurity of property exist wherever the followers of the Prophet rule or live. A degraded sensualism deprives this life of its grace and refinement; the next of its dignity and sanctity.

The fact that in Mohammedan law every woman must belong to some man as his absolute property-either as a child, a wife, or a concubine-must delay the final extinction of slavery until the faith of Islam has ceased to be a great power among men. Individual Moslems may show splendid qualities. Thousands become the brave and loyal soldiers of the Queen: all know how to die. But the influence of the religion paralyzes the social development of those who follow it. No stronger retrograde force exists in the world. Far from being moribund, Mohammedanism is a militant and proseltyzing faith. It has already spread throughout Central Africa, raising fearless warriors at every step; and were it not that Christianity is sheltered in the strong arms of science-the science against which it had vainly struggled-the civilization of modern Europe might fall, as fell the civilization of ancient Rome.

Two hundred years ago Jefferson fought the Barbary Wars against the same Islamists. Here's what he heard from the Ambassador to Tripoli:

"Let us not call this view reductionist. Jefferson would perhaps have been just as eager to send a squadron to put down any Christian piracy that was restraining commerce. But one cannot get around what Jefferson heard when he went with John Adams to wait upon Tripoli’s ambassador to London in March 1785. When they inquired by what right the Barbary states preyed upon American shipping, enslaving both crews and passengers, America’s two foremost envoys were informed that “it was written in the Koran, that all Nations who should not have acknowledged their authority were sinners, that it was their right and duty to make war upon whoever they could find and to make Slaves of all they could take as prisoners, and that every Mussulman who should be slain in battle was sure to go to Paradise.” (It is worth noting that the United States played no part in the Crusades, or in the Catholic reconquista of Andalusia.) "

Those calling for us to withdraw from Iraq are woefully mislead about this religion and the consequences of a withdrawal. The irony is that it is the same people that think themselves superior thinkers that are willing to sacrifice our liberal society to terror and Sharia Law. Nothing has changed as to Islam's intent since its founding and certainly not in the past two hundred years. We are in a war that will not end no matter the battle field and Iraq is just one of many fronts in the war.

If you doubt my words, read those of a former jihadist.