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June, 2007
Your House has Doubled in Price.
Are You Wealthier?
Setting value on a home with worthless promises
A house was bought in 1990 for $100,000; it is now worth $200,000.
A reasonable person would assume the owner is $100,000 richer:
That's an assumption that can lead to catastrophic financial decisions.
As a general rule, houses DO NOT automatically go up in value with the passage of time. Sure, there are instances when proximity to trendy areas increases the real value of properties. Some properties are situated in extremely desirable, locked-in cities - where there is no more room for development - and demand for housing in them far exceeds the available stock of housing. The Park Cities just north of downtown Dallas is a good example; multi-million dollar remodeling projects are not uncommon in Highland Park; often large houses are torn down to build larger houses. Except for these instances, most houses remain at a constant value when compared to almost any other commodity EXCEPT the dollar.
Here's how it works. A house worth $100,000 in 1990 might be worth $200,000 today. The value of the property is represented by a medium of exchange that is decreasing in value in relation to almost everything else that people buy: the dollar. The owners of that house hold onto the unfortunate illusion that their wealth has increased by $100,000. But if we look at the house in relation to other goods and services, the value has remained constant.
I'll give you a couple of examples to illustrate my point. Let's say you had ten brand new Honda Civics in 1990; they were each worth about $10,000. It's reasonable to assume that you could have traded them for that $100,000 house. It is now 2007; you have ten brand new Honda Civics today; they are worth about $20,000 each; again, it is reasonable to assume that you could trade them for the same house today.
Okay, so not many people want to trade their house for ten Honda Civics. How about trading them for REAL money: silver? Towards the end of 1990 silver was trading for about $4.00 per ounce. It would have taken 25,000 ounces of silver to buy the house back then. Let's say the owners would sell it today for silver. How much could they get? The current price of silver is a bit over $13 per ounce. Hold on to your hats with this figure: they would only get 15,384 ounces of silver! If the house were priced in REAL money, it would have lost 38% of its value! The owners would NOT feel richer; they would feel poorer.
What happened? First of all, let's not look at how much each one of these goods - the house and silver - has gone up in value. The point here is that the DOLLAR has lost more value in relation to silver than it has in relation to the $200,000 house. But the ratio doesn't matter to understand what happened; the fact is that the dollar has lost a huge amount of value. Whether we like it or not, the dollar is headed the way of the Dodo Bird. What is a dollar? It is simply a piece of paper with a promise: the full faith and credit of the Federal Government; that promise is as rock solid as an IOU from Enron some time before its demise. Why is the dollar sinking to oblivion? The short answer is overprinting of a fiat currency that is not backed by anything of value to pay for an infinite number of promises made by politicians to rich and poor alike; to pay for bloated bureaucracies; to pay for wars; to pay for programs and entitlements we cannot even imagine; and finally - apologies to those in my generation - to pay for Social Security, Medicare, and Medicaid.
Overprinting of dollars is the real cause of inflation. Increase in the "value" of goods is the symptom of that inflation. Back to our $100,000 house; we now realize that we cannot assume it has doubled in value. It just takes twice as many dollars to buy it today as it did in 1990. The owners should not for a minute think they are $100,000 richer, because if they sell it they can still only buy ten Honda Civics, and a whole lot less ounces of silver than back in 1990.
But here's where so many people have made catastrophic financial decisions following the assumption that because their house was worth more, they could tap into that additional wealth to do neat things like consolidate credit card debt, take overdue vacations, even buy Honda Civics. The owners of those $200,000 houses have borrowed an additional $100,000 on refinances and made it very difficult to ever own their homes free and clear. Unfortunately, I get calls every week from one or several owners in trouble because they need to sell their $200,000 house and they no longer have enough equity to cover the selling and closing expenses, much less receive any money at closing.
The most important rule in real estate for most homeowners is this: DO NOT REFINANCE!
The cost of a refinance is excessive - I've seen some exceed 10% of the loan amount - the interest savings through lower payments often will not recoup the cost of the refinance for a decade or more; and if the existing loan had 20 years left to pay out, a new loan will set the clock back to 30 years.
Maurice Dubois
The Housing Wiz
June, 2007
Can Everyone be an Investor?
In this world of limited commodities, limited population, and limits placed on everything and everyone by the grand scheme of nature, the obvious answer is that there is no field of endeavor from which everyone can benefit. The answer here, then, is that not everyone can be a real estate investor.
Judging from the number of calls I receive weekly from investors with problem properties, it’s obvious that a large number of folks have entered the real estate field anticipating massive profits from one or more real estate purchases just by the fact that they own more than their homestead. Any business must operate at a profit; that profit comes after ALL expenses and contingencies are taken into account. In addition, the business must be run by someone who is proficient, experienced, and capable of running the business. I’ll give you an example in a moment, but to understand what I mean, let’s look at the medical field.
Just because someone can inject a medicine or suture a wound doesn’t mean that person is a medical doctor, or that they can run a medical practice. Reading a book or attending a three day conference on the subject won’t make that person a medical doctor either. I’m not suggesting that real estate investing takes the degree of skill or amount of knowledge that’s required to become a physician; however, I wouldn’t be lying if I said that to be a true professional in the real estate investing field it takes ALMOST as much knowledge and experience.
I don’t mean to imply that you should not become a real estate investor; there’s plenty of room for many knowledgeable investors in real estate. I simply want to caution you about joining the ranks of naïve beginners who labor—waste vast sums of money and their good credit—under the delusion that success is a signature away on a real estate note at the title company. So beware that it is still too easy to buy property with good credit, little cash, and a lot less real estate knowledge.
Here is and example of real estate investing gone wrong. A house we listed in 2006 closed towards the end of the year; it sold for around $110,000. The buyers were “investors” who painted the house and replaced the carpet immediately after acquiring it. I drove by the house last February and noticed a FOR LEASE sign in front of the house. A few days ago—four months later—I again drove by the house. The same sign stands leaning in the front lawn amid a sea of high grass. Please understand that I was the listing agent; the buyers had their own agent. That house, at that price, was not a good rental property; the rental values in that area are $1,000 to $1,100 per month.
I don’t know how many times I’ve heard real estate “gurus” explain that monthly rent of 1% of the value of a property is a good deal—that would be $1,100 on this property. Baloney! Even if bought for cash it’s not a good deal—including factoring inflation, depreciation and any other reasons that might tempt one to overpay for a rental property. Real estate investing is a business; it must provide a profit. Don’t buy a property under the assumption that it can be rented for minimal profit or merely to cover the mortgage payments. Holding on to a losing rental just to wait till inflation kicks the value up and you can sell and make a killing is not a good idea; you might not last long enough in the business to make your killing.
I will assume the house in the above example has a monthly payment to the lender of $1,100—including taxes and insurance. It would be a good investment as follows:
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1
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Monthly loan payment
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$ 1,100.00
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2
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Reserve for vacancy
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$ 110.00
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10%
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3
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Reserve for repairs and maintenance
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$ 110.00
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10%
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4
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Owner's profit
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$ 275.00
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25%
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5
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Required monthly rental income
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$ 1,595.00
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There is no way the lender will let you keep the house if you ignore #1 above; if that’s the case, you should also NEVER leave out #2, #3, and especially #4. That means you must be able to easily achieve #5 and nothing less; you can ascertain that prior to your commitment to buy. Can these expectations be met in this market? Absolutely! And things should get better as the next few years unfold. Print this little spread sheet and use it as an example of the VERY LEAST that you should strive for in your real estate investing endeavors. It CAN be done; which means you WILL get rich investing in real estate.
Want to know how to get rich investing in real estate with minimal risk? It’s coming later this year: Starting Real Estate Investing.
Maurice Dubois
The Housing Wiz
April, 2007
Is there a way to buy a house with
NO money, NO job, and a credit score under 100?
Can Fido buy a house?
Foreclosures started rising in the Dallas/Fort Worth market over a year ago; every month more people are losing their homes. You’ve probably heard the story in the evening news.
Many more people are in trouble; foreclosure rates will continue to climb.
Homeownership is declining as a result of foreclosures, and vacancies on rental units are coming down because those who have lost their homes can only rent.
Wait! Is that true? Can they only rent? That’s what everyone and his brother would tell you; that’s what the talking heads on TV will tell you as this story unfolds during the coming months and years.
I have good news for those who want to buy but have NO money, CANNOT prove their income, have TERRIBLE credit. It’s so easy to buy a house even Fido might be able to pull it off; with help from his master.
Here’s the secret. You must step out of the “conventional thinking real estate box” to understand how it works. Common knowledge says that to buy a house buyers pay for the house with cash, or borrow money to pay the sellers. The sellers in turn sign a deed and hand title to the buyers.
But let’s delve a little deeper in the sellers’ position. What if they owe money on the house? Do they really own it? Yes and no. What if the house is worth $100,000, and the loan amount is $100,000? Do they own the house? Not really. Well then, who owns it?
The lender is the real owner. So can the lender sell it to you? Not hardly…unless it were to foreclose sometime in the future.
Oops, this is getting confusing. Let’s simplify it. Is there a connection between the owners and the house? Yes, they have title; they got a warranty deed when they bought the house. Is there a connection between the lender and the house? Yes, it sort of has title; it got a deed of trust when the owners bought the house.
That didn’t help. It might still be confusing. Let’s simplify it even more. Let’s say the owners of that $100,000 house with a $100,000 loan balance don’t want the house anymore; perhaps they can’t afford it. What if you want it? Can they just hand you a warranty deed and give you the house? Yes, they can. Is the lender going to check your credit, your bank account, your job? No. Will you own the house? Yes! Of course, you’ll have to continue to make the payments.
Whew, that was easy!
There’s only one Slight Little Problem (SLP). It’s called the Due on Sale Clause in the deed of trust. Oh, bummer! You knew there might be a catch; an SLP.
Yes, that’s actually a big catch. But it’s not an impossible catch. During the last 20 years I’ve discovered the secret for completely eliminating that SLP. The secret is a series of steps—lengthy and complicated, but completely effective—that allows buyers to take title to a property from the original owners and continue to pay on their original loan. At some point the loan gets paid off and the buyers are left with a home that was bought under the buyers’ most adverse credit position.
During those 20 years I have bought countless properties for investment and speculation. We still service a large number of other people’s loans. Was it profitable? Absolutely!
If you’d like to learn how to buy a house with NO money, NO job, and NO credit, drop me an email: Maurice@HousingWiz.com. I’ll put you on our list of people to contact later this year when I will teach a select few how to…
buy a home with NO money, NO job, NO credit check while completely avoiding the SLP.
The Housing Wiz.
March, 2007
How to NOT go broke investing in real estate...get rich in the process
In any investment situation, whether it is stocks, gold, or real estate, the most important consideration is preservation of capital; simply stated, that means being safe; not losing money that you have earned through your job or other investments. If you can do that you are well on your way to becoming RICH by investing in real estate.
Here’s what you want to avoid. If a person makes $1,000 per week at her job, and she loses $5,000 in a poor investment, that’s a loss of five entire weeks of income. That’s ten percent of her income for an entire year. That’s a serious loss.
You do not want to get into real estate investing with highly-leveraged, high-cost properties. In the Dallas/Fort Worth area an example would be any property that costs over $80,000 with a loan over $50,000. If you’ve heard the late night gurus, or more scary yet, have attended one of their seminars, you’ll think my advice is nonsense. In a minute I’ll show you why it makes complete sense.
With due diligence you can buy a $100,000 house for $80,000 in this market; you might have to spend a little money cleaning the carpets and doing some paint and minor repairs. There are a lot of $100,000 houses in the DFW area; they are houses that in a good market would sell for $110,000 to $120,000. We’re not in a good market for sellers; we’re in a good market for buyers.
Okay, so it takes money to make money. You can’t be a safe real estate investor buying houses with zero down. It can be done, but it is either risky for your bank account, your credit rating, or the credit rating of the person who hands you a house coupled with a loan (taking title subject to the loan).
Here’s how the above deal would work:
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$ 80,000.00
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Purchase price
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$ (30,000.00)
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Down payment
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$ 50,000.00
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Loan amount
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Loan term
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Int rate
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$ (349.61)
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Monthly loan payment
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30
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7.50%
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$ (233.33)
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Taxes
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$ (2,800.00)
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$ (50.00)
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Insurance
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$ (600.00)
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$ 995.00
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Monthly rent
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$ 362.06
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Gross monthly income
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$ (49.75)
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Reserve for repairs
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5%
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$ (49.75)
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Reserve for vacancies
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5%
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$ 262.56
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Net monthly income
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$ 3,150.71
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Yearly net income
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$ 30,000.00
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Down payment
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$ 1,500.00
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Closing costs
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$ 3,000.00
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Repairs
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$ 34,500.00
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Cash invested
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9.13%
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Return on investment, first year
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Is this a good deal? Yes. You have a home potentially worth $110,000, with a potential $60,000 equity; it only cost you $34,500 in cash outlay.
Is this a safe deal? Yes. If the rental market were to spin and crash to the ground, you would be the one to survive. You could cut the rent all the way down to $632.94 and still pay your mortgage, taxes, and insurance. You would not have reserves for a while, but you would not need much at that rate since you could pick the very best tenants.
Is this a good return on investment? Yes, considering the safety of the investment, and the fact that rents will increase in the future due to the government’s propensity to print money and cause inflation.
This example works in the real world; it’s working for us now, and after decades of owning and managing rental properties I can assure you that in this day and age, rents under $1,000 per month are very easy to accomplish; this property would always stay rented, to good tenants and not to Section 8 tenants.
I want to show you a better deal; this was one of a number of houses we owned about 15 years ago (that we should never have sold):
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$ 2,400.00
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Purchase price
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$ (2,400.00)
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Down payment
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$ -
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Loan amount
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Loan term
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Int rate
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$ -
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Monthly loan payment
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30
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7.50%
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$ (50.00)
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Taxes
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$ (600.00)
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$ (25.00)
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Insurance
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$ (300.00)
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$ 395.00
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Monthly rent
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$ 320.00
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Gross monthly income
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$ (19.75)
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Reserve for repairs
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5%
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$ (19.75)
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Reserve for vacancies
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5%
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$ 280.50
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Net monthly income
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$ 3,366.00
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Yearly net income
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$ 2,400.00
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Down payment
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$ -
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Closing costs
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$ 3,000.00
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Repairs
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$ 5,400.00
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Cash invested
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62.33%
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Return on investment, first year
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These two examples show you how NOT to go broke investing in real estate. They show you how to eventually get rich while you sleep well at night.
Now here is what people are doing today; a real world example from someone I spoke with not long ago. This is how to go broke investing in real estate:
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$ 210,000.00
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Purchase price
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$ -
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Down p | | | 
