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Mortgages With No Money Down

The very expression “no money down” is enough to stir outrage and anger in many quarters, the argument being that in a transaction with no money down the buyer has little incentive to make payments or to stick with the house if things get tough. Alternatively, “no money down” also raises hope and possibility with others.

Is allowing buyers to purchase with no money down a good idea or a bad one?

No one objects to the VA loan program, a program which for decades has permitted qualified veterans to purchase with no cash up front. Everyone understands that such financing is a benefit, a reward for military service.

As well, no one objects when Mom and Pop give junior enough money to buy with nothing down while they also co-sign the note. Such arrangements are just dandy for families that can afford big cash advances, even if Junior has lousy credit and no savings.

Investment seminars, of course, have long touted deals with no money down and the use of other people’s money (OPM) to buy real estate. The pitch is that with no cash upfront novice investors — the folks who attend seminars and buy books — can make big money, even in down markets and in communities with lots of vacancies.

In too many cases, the real objection is the thought of giving “poor people” a head start, “poor people” sometimes being a code word for those of a different race or individuals whose relatives did not immigrate here before 1920.

Decades ago I bought investment property with no money down by borrowing from private parties. There were strict terms, lawyers and lots of paperwork; I’m pleased to say that all such loans were repaid in full and with interest.

Given this background, it’s hard to say that I don’t like or somehow do not approve of financing with no cash up front.

After all, it worked out pretty well for me.


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Should We Dump Real Estate Investors?

When it comes to bailing out giant banks, huge companies and massive stock brokerages there’s no shortage of government interest and activity. After all, it’s in our national interest to protect investors — unless, of course, they’re folks who merely bought a house or two.

The investor double standard is hardly hidden. It appears everywhere and is never challenged, as if real estate investors are somehow disposable players in the foreclosure mess.

Alan S. Blinder, a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve, could not be more clear: He suggests that the government should develop a federal program to buy out mortgages from lenders, just as it did during the Depression — to “refinance only owner-occupied residences. Speculators can fend for themselves — or go into default.” (See: From the New Deal, a Way Out of a Mess,, The New York Times, Feb. 23, 2008)

Our Secretary of the Treasury, Henry Paulson, says “as our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures. However, none of these efforts are a silver bullet that will undo the excesses of the past years, nor are they designed to bail out real estate speculators or those who committed fraud during the mortgage process. These efforts are to help American families who both want to and can, through a loan modification or re-financing, stay in their homes.”

Introducing the Hope Now program in August 2007, President Bush said “we’ve got a role, the government has got a role to play — but it is limited. A federal bailout of lenders would only encourage a recurrence of the problem. it’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.”

Why is someone who invests in real estate a “speculator” while corporations that lose billions of dollars hedging mortgage-based securities can count on the Federal Reserve to reduce short-term interest rates to bail them out?

The idea that we can pick and choose among borrowers with toxic loans produces several false notions.

  • Misconception #1: If we only make owner-occupants whole then local real estate markets will recover. This is untrue. Why? Because investor properties lost to foreclosure will continue to flood the market, driving down all home values.
  • Misconception #2: it’s not a public policy problem if large numbers of real estate investors fail, they should have known better. This also is untrue. Why? Because when buyers look at recent home sales they do not distinguish between homes sold by owners and homes sold by investors, they merely look at sale prices.
  • Misconception #3: Real estate investors who fail are universally frauds and thieves. Mr. Paulson equates real estate investors with those who commit fraud, an outrageous comparison. When Mr. Paulson worked on Wall Street and earned millions of dollars, did he once say that those who invested in stocks and bonds were also swindlers?

Who Is A Real Estate Investor?

Economists believe there are four basic sources of wealth: land, labor, capital and entrepreneurial ability. there’s no shortage of seminars, books and tapes which explain in glowing detail how you too can become rich with real estate, even if you lack experience, cash or credit. While program developers always have success stories to share, they never say what percentage of their readers, attendees or listeners actually become rich. The reason, of course, is that the real money is not in real estate, it’s in seminars, books and tapes.

But get-rich-quick plans aside, real estate has been a major source of personal wealth for many people. Long-term holders of real estate have commonly benefited from property prices which have increased faster over time than the rate of inflation, thus creating increased buying power and real wealth. According to the National Association of Realtors, the median price of an existing home rose from $124,800 in 1998 to $201,100 as of January 2008.

it’s not just individuals who benefit from real estate investing, it’s also local communities.

Why Investors Count

The Census Bureau says that in the third quarter of 2009 there were 130.3 million housing units in the U.S. These units can be divided into two categories, the 75.2 million that were owner-occupied and the 52.8 million that were not. In latter group we have second homes and investment property.

Imagine the cost of housing if we discouraged real estate investment. Does anyone seriously think that the government would — or could — step in to create the housing stock required to replace millions of investor-owner units?

The value and importance of investment real estate is obvious and overt: In many communities there’s a homestead deduction for owner-occupants but not for identical properties owned by investors. In other words, investors commonly pay higher tax rates than homeowners for properties that are exactly alike. Does it make sense to drive away those additional tax dollars by discouraging investment?

Lenders, of course, gleefully finance investor properties with higher rates and tougher qualification standards than they require from owner-occupants. They would not make such loans if they produced ongoing losses, and they surely would not originate such mortgages without proper underwriting and appraisals.

Government policies encourage the purchase of investment real estate by allowing investors to depreciate property over time; engage in tax-deferred exchanges; and deduct mortgage interest, property taxes, insurance and repairs. In many cases small investors can write off paper losses against ordinary income.

Given the enormous fall in home sales, would it not be smart to encourage investors to enter the marketplace, absorb inventory and increase the number of buyers looking for properties? Alternatively, if unit sales continue to plummet, does anyone doubt that home values will follow?

“The exclusion of investors from government programs needs to be reconsidered,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the leading online marketplace for foreclosure properties. “Saving investors from foreclosure would keep additional properties off the market, thus reducing inventories and perhaps returning home values to normal more quickly than would otherwise be possible. In addition, we should encourage investors to enter the marketplace to absorb as much inventory as possible. By increasing the pool of potential buyers there would be less pressure to reduce home prices.”


Published originally by RealtyTrac.com in 2008 and posted with permission.

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Inflation, Deflation, Mortgages & Wealth

Freddie Mac’s weekly mortgage rate survey shows that the average 30-year fixed-rate mortgage (FRM) was priced at 5.59% with .7 points. This is a huge jump from last week when the rate stood at 5.29 percent and a vast leap when compared with the rate for the week of May 21st: 4.82%.

Higher rates are never a good thing for buyers (higher rates mean a smaller pool of qualified buyers at every income level) or for sellers (a smaller pool of buyers means less housing demand and less pressure to raise prices).

Historic Mortgage Levels

The interest level for a fixed-rate mortgage is well below 6 percent. That’s a terrific rate in the context of the last 50 years. In fact, the current rate is less than 1/3rd the rate paid by many borrowers around 1981 and 1982 according to a May 6th presentation by Freddie Mac chief economist Frank E. Nothaft — just follow the blue line below and see for yourself.

Inflation or Deflation?

There is now a huge debate regarding the question of whether we are headed for deflation or inflation. In basic terms, deflation means that a dollar gains value. A loaf of bread that used to cost $1 now costs 75 cents. Inflation means that the value of the dollar is eroded — it takes more cash to buy goods. With inflation, a loaf of bread that used to cost $1 now costs $1.25.

With deflation debts become more difficult to pay because you’re paying with dollars that have greater buying power. With inflation you want to borrow because you can repay today’s debts with future and cheaper dollars, dollars that buy less.

Fixed-Rate Loans or Adjustable-Rate Mortgages?

While you would rather have inflation than deflation as a borrower, you don’t want too much inflation. A lot of inflation will cause interest rates to soar. That’s a problem if you have an ARM and rates rise steeply — especially if your income does not.

Whether we have inflation or deflation you want a fixed-rate loan. If there is deflation interest rates may go down but the principal amount must still be repaid with dollars that buy more goods. With inflation, interest rates may rise but if you have a fixed-rate loan you don’t care — you’re repaying the debt with dollars that have less buying power.

One of the reasons why real estate has traditionally been a source of wealth is that it can be held over a long period as inflation gradually reduces the buying power of the dollar. Sounds bad — unless you’re a debtor, especially a big debtor with a mortgage. Then you win because you borrowed dollars when they bought more and repaid the debt with dollars that buy less.

It is because of inflationary worries that lenders are so eager to provide ARM financing. This is done by making the qualifications to borrow easier with an ARM than with fixed-rate financing. The result is that you can borrow more with an ARM and typically pay less per month up front. That’s the good news. The bad news is that if the value of the dollar continues to erode the interest rate on the ARM will rise in the future, thus protecting the lender — and not you, the borrower.

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Why Stocks & Houses Don’t Compare As Investments

There must be a million side stories to the bankruptcy of General Motors, a terrible event for the company, its workers and shareholders. One of those stories concerns the Dow Jones Industrial Average which at this momment seems to be free of any companies that are actually, well, industrial.

The Dow has just announced that the Travelers Companies, Inc. (TRV) and Cisco Systems, Inc. (CSCO) are replacing Citigroup, Inc. (C) and General Motors Corp. (GM) on the list of 30 bellweather companies as of June 8, 2009.

“The parlous state of GM has left us with no choice but to remove it from The Dow. A bankruptcy filing immediately disqualifies a stock regardless of a company’s history or its role as a cultural icon,” said Robert Thomson, managing editor of The Wall Street Journal and editor-in-chief for all of Dow Jones. “We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake. We genuinely hope that once the bank has refashioned itself that we will again be able to consider it for inclusion — Citigroup is a renowned institution, not only in this country, but around the world.”

Misleading Indicator

In fact, changing the DJIA does very little for the country. People watch the Dow daily, it’s a fixture of the news, but it doesn’t make for a very good benchmark because we keep changing the 30 companies it tracks. In other words, it’s not an apples-to-apples comparison because the list of companies is constantly in flux.

For instance, if we continued to keep GM on the list then the Dow would fall. Why? The company is bankrupt. Citigroup is with us today only because the government has chipped in some $45 billion in direct federal funding as well as billions more in programs that buy assets of suspect value — if the value of such assets wasn’t suspect then there would be no need for the government to buy them.

Meanwhile, stockbrokers keep telling folks that stocks are a great investment, certainly better than real estate. The evidence? Well, have you seen how the DJIA has risen….

With houses the story is different. We know not only average values on a local, state and national basis, we can see what happened with a specific home over time. Such information is typically as close as your nearest real estate broker or local property tax office. When the value of a home goes down we don’t remove it from average.

Prices Don’t Always Go Up!

One of the financial theories which got so many people in trouble — and so many lenders — was the idea that real estate values always rise. They don’t. That’s plain today, but for some folks not obvious until the bottom fell out of the real estate market in most areas.

Real estate. It’s great for tax benefits and sleeping indoors. Sometimes, but not always, it’s also a great way to build equity — but not a sure way.

Stockbrokers should say as much about the stuff they sell.

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Why Some Real Estate Still Pays

Across the country retirement dreams are falling with the speed of 401K balances. People are discovering that the easy life they had planned for their “golden days” no longer exists.

The issue, of course, is that it takes money to retire. For most people, “money” means funds from IRAs and 401Ks and Social Security — in other words from private pensions and from a government system which many people regard as nothing short of socialism.

Private Pensions

But in the real world performance counts and while the Social Security system is with us the private pension system is in tatters. Apologists tell us that the pension system is actually fine but that the public simply made lousy investment choices. That, of course, is an outright lie because savers depended upon and paid big fees for financial advice from stock brokers, mutual fund managers and financial planners, advice which in too many cases turned out to be hideously wrong.

However, there has been and there is another way to fund retirements. It’s not glorious and Wall Street doesn’t get a dime, therefore it’s a strategy that’s frowned up.

Long-Term Real Estate Investing

That strategy? Investment real estate.

It’s absolutely true that the value of real estate has fallen in most markets, and those losses also include investment real estate. However, the long-term investor is not particularly interested in values, he or she is more interested in cashflow.

In today’s marketplace we have:

  • A huge number of foreclosures — which means many people who have lost their homes need housing.
  • A stiff decline in new home construction — which means there are fewer units being added to the supply of inventory.
  • A growing population, people who typically prefer to live indoors.

The result is that for long-term real estate investors — people who don’t flip — the current downturn in many markets means more rental demand.

Marketplace Results

For instance:

“About 900 apartments were added to El Paso’s apartment rental market in the past three years, but city and Fort Bliss officials say the construction pace needs to pick up substantially to support the more than 20,000 new Army soldiers and more than 30,000 family members coming into El Paso in the next several years.” El Paso needs 8,000 multifamily units for influx, El Paso Times, April 18, 2009.

“A national survey of rental housing costs shows Utah has become an expensive place for low-income residents to rent an apartment.” Survey finds Utah renters squeezed by high rates, Salt Lake City Tribune, April 16, 2009.

“The survey found that rental rates within the county rose 1.9 percent year over year to an average rent of $1,340.” County’s rental market ‘loosening up a little,’ The San Diego Union-Tribune. April 8, 2009.


These numbers, of course, do not show the impact of leases. Think about it: If you have a lease would you move to save a few dollars each month? Given the costs and bother of moving, not if you can help it.

The argument here is not that long-term real estate ownership is a foolproof hedge against downward markets, rather the idea is that if you have a growing population, increasing demand and a limited supply of housing the end result is exactly what it should be: Higher rental rates. That’s not a bad result in tough times and that’s exactly what we are now seeing in many markets.

In addition, of course, you don’t have to worry that some derivatives trader 2,000 miles away will make a bet that dooms your company, your IRA, your pension and your retirement.

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How Much Will Home Values Increase In The Future?

Question: What is a reasonable rate of future appreciation?

Answer: No one knows or can know. No less important, rising values are not guaranteed.

You may find that appreciation in a given community has grown at an average rate over a period of many years. However, such history does not tell us what will happen in the future.

A better approach is to buy real estate with the intent of owning over a period of many years. For example, in some markets a home may show little if any appreciation during the first few years of ownership. Over time however, with rising local values and inflation, prices may rise, sometimes substantially. And sometimes, in addition, loan costs fall. That’s the situation seen by millions of homeowners bought years ago and now have both equity and a low mortgage even when times are tough in many markets.


Syndicated originally by Content That Works and posted with permission.

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Why Suze Orman Is Wrong

I find many of the financial suggestions and strategies offered by Suze Orman to be sound and sensible, especially her recommendations to eliminate credit card debt and bulk up savings. Her efforts to encourage thrift and common sense should be applauded.

That said, she has an article with which I disagree in the January issue of O, The Oprah Magazine entitled Suze Orman’s 10 Tips for a Fresh Financial Start. It’s when she gets to tip #7 and retirement plans that I think, whoa, not so fast.

Specifically, she says “the 2008 market slide is the tenth bear market (commonly accepted as a decline of at least 20 percent) since 1950. If you’d put your money in stocks in 1950 and stayed invested through the ups and downs, your average annual return through 2007 would have been more than 10 percent. That’s not to say you can count on an average of 10 percent over the next 50 or so years (7 to 8 percent is probably more realistic), but it illustrates how keeping focused on the long term pays off.”

What bothers me here? Three things in one paragraph — but they’re biggies.

First, defining a “bear market” as a 20 percent decline is simply an artificial construction.

Does anyone think a 19 percent loss is good news? However, the more important question is how how we measure average gains and losses over time. Did the market really fall 20 percent — or something different?

Second, you cannot find a consistent average rate of return over many years by looking at common indexes such as the Dow Jones Industrial Average or the Standard & Poors 500.

Why not? The indexes change. The same stocks are not being measured. (For the full story, see Do We Need A Dow 2.0?)

As I have said previously, stocks on both lists are constantly being replaced thus the results are not consistent. How can you have “average” index results when the stocks being compared are different?

“For instance, whatever happened to such DJIA stalwarts as U.S. Cordage (added in 1896), Standard Rope & Twine (1896), Federal Steel (1899), Central Leather (1912), Studebaker (1916), Corn Products (1920), Woolworth (1924), Paramount Famous Lasky (1925), Remington Typewriter (1925), Nash Motors (1928), Postum (1928), Victor Talking Machine (1928), and Hudson Motors (1930)? If we are to fully reflect the path of American commerce, then surely we must account for the direction, destiny, and descendants of these firms.” (For a look at the companies which have composed the DJIA over the years, see the Dow Jones Industrial Average History. For an example of an S&P change, press here.)

Since the composition of the indexes is constantly in flux, the idea that we can track “average” increases over many years is not logical. As an example, on September 22, 2008 Kraft Foods Inc. replaced American International Group Inc. on the Dow Jones Industrial Average. As of January 2, 2009, AIG was priced at $1.69, down from the 52-week high of $59.42. Kraft, meanwhile, was valued at $27.34 on January 2nd while its 52-week pricing ranged from $24.75 to $34.97.

Does anyone not think the Dow would have sunk further by year-end had AIG remained on the list? Or that the Dow would have closed higher at year end with the substitution of Kraft for AIG?

Third, and last, the future is unknown.

Orman says with regard to market returns “that’s not to say you can count on an average of 10 percent over the next 50 or so years (7 to 8 percent is probably more realistic), but it illustrates how keeping focused on the long term pays off.”


Even Suze will tell you, I hope, that she is not a fortune-teller. There is no evidence whatsoever that future rates of return will “probably” be 7 to 8 percent, or 1 percent, or minus 2.8 percent, or whatever. Nobody knows. As those on Wall Street constantly say, past performance does not guarantee future results.

It’s one of the few ideas from Wall Street you can believe.

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What Happens To Home Sales If Mortgage Rates Rise?

Interest rates reflect the cost of money nationwide — but real estate values are established locally.

If you look at the question in general terms, higher interest rates mean larger monthly payments, high monthly payments mean a smaller pool of buyers, so in theory home prices should remain steady, rise less or even decline.

But — and here’s the catch — there’s more to home pricing than interest rates. For example, suppose rates rise and, at the same time, the job base increase in your community? Or new home construction declines while the local population grows?

No less important, homes sell even when rates are far higher than today. In fact, in 1981 the prime rate hit 20.5 percent. That same year, according to the National Association of Realtors, home prices rose 6.8 percent and 2,419,000 existing homes were sold, evidence that high interest rates do not necessarily result in lower home values or an end to home sales.


Syndicated originally by Content That Works and posted with permission.

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Are Florida Condos The Right Investment?

Question: I\’m a retired teacher and interested in buying a place in central Florida to escape Ohio winters. If I buy one what do you think the chances are that they will be selling for more money a few years down the road? Real estate brokers tell of people coming and buying half a dozen condos at a time.

Answer: It would be useful for you to review condo sales during the past six months. What has been selling, what are the prices, how long have homes been on the market, etc. Is there a price difference between walk-up condos and condos with elevator access? How much?

It may well be true that some buyers are purchasing six units at a time — it is equally true that people bought large numbers of Enron shares. Such things are not a test of value and not a guarantee that prices will rise in the future. No less important, those investors may have more money than you so that if prices go down they won\’t be in the poor house.

Try this: Find a unit you like that meets your immediate and prospective needs. If it appreciates, great. If not, you’ll still have a nice place in the Florida warmth.

Syndicated originally by Content That Works and posted with permission.

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Is Now The Time To Buy A Duplex?

Question: I\’m ready to purchase a 2-unit property. I\’m trying to buy and rent, hopefully with enough income to break even on the mortgage, taxes, insurance and upkeep if I can. Houses in the $400K range aren\’t that available, and given mortgage rates and perhaps $95,000 down I am lucky if rents at $2,200-$2,400 per month will enable me to break even. I know there are three-year ARMS out there with lower initial costs, but they’re risky because rates could rise in the future. Should I still be thinking about this strategy as a 6-12 year investment?

Answer: Essentially you want to buy a two-family property and instantly have a situation where one unit covers all costs. That would give you a rent-free unit. Then you want to know if such an investment is a better choice than the stock market.

Let’s assume that you now rent and that you also obtain a benefit from the $95,000 in cash you have available. As a first step you have to look at the cost you now pay for shelter and subtract the interest, dividends or whatever other benefit you receive from your cash. How would owning a two-unit property with a given rental compare? (You have to subtract the benefits of the $95,000 because when the money is used to purchase the two-unit property the interest, the dividends and other benefits it now represents will be gone.)

A second issue concerns the matter of whether you want to be a landlord. Have you considered vacancies, maintenance, having tenants nearby, lifestyle issues, etc?

Third, no one knows what properties will be worth in the future — and the same goes for stocks. Moreover, you are not buying all real estate or all stocks, you’re buying a particular property in a given community. What the market does generally and what specific properties do specifically may be different.

There are some things which cannot be calculated without assumptions and it follows that such calculations are only as valid as the underlying estimates and guesses. In the case of future values, there’s no way to know beforehand whether today’s presumptions will be on the money at some point down the road — or way off base. History has little value because past performance does not guarantee future results. As proof, think of all the people who invested in Enron, Fannie Mae and Freddie Mac because the numbers looked so good….

Before going further, speak with several local real estate brokers who work with investors. Also, check with the local community planning office to see how they envision the future in terms of population growth, jobs, etc.

Syndicated originally by Content That Works and posted with permission.

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