Filed under: Blogroll, businness advice | Tags: creative financing, real estate, wrap-around mortgages
I have a candidate: creative financing. Creative financing began to show its ugly head in the late 70s and early 80s. Before it was used by ‘ordinary’ consumers Robert Allen made a splash on the real estate scene.
For those unaware, Robert Allen claims to be the first with the “No money down,” principle of real estate investing. He made a name for himself by proving he go into a town and sign a deal with no money down. What I don’t think he mentioned was that he had excellent credit and this wasn’t going to be his first purchase in real estate. Translated this means that he had collateral to offer as a part of the loan.
The other factor is simple. There was no way on earth Allen was planning on keeping those homes. He was going to flip them in the years when the value increased in big numbers every year. So selling in a short time for a higher price was how he made a profit. Good logic for him, but not for consumers wanting them as a long term investment or a home for their families.
That’s not happening now. It might not happen again for years. This equates to the fact that it makes no sense buying with no money down.
Initially, no money down was just the beginning of the history of creative financing. During those times, right after Prop 13, it appeared as if the ability to buy homes would be in a downturn for a long time. (Sound familiar.) Anyway, the prices were still horrific despite the caps promised by the passage of Prop 13. Interest rates also were out of sight. I remember the day prime rate hit 22 per cent. I don’t think mortgage rates ever got that bad, but they were up there in the double digits.
Fixed rates were close behind and no one was standing in line for a home mortgage that was going to cost double digits in interest for the next 30 years. Someone came up with adjustable rates. They were eased into the financial institutions. It didn’t happen over night. In fact, I remember the year California passed a law allowing banks to write mortgages with them, 1981.
The trick was then to get in and cross one’s fingers that when the balloon payment came due, oh yes, they had them; the fixed rates would be down enough so you could roll over into a fixed.
However, some owners were so eager to sell then when a potential buyer couldn’t qualify to finance the whole amount, after down payment, they agreed to carry a second. This became known as a “wrap-around” mortgage. Many times the amount of paper was for the total amount of the house’s value. In some cases, even more. When those folks’ money got tight, they simply walked away from the homes since they had no equity and no ties to the house. They only thing they lost by leaving was their credit rating for a good number of years. This is the history of creative financing.
However, loans, in that day, no matter how allegedly creative they were, still were based on some of the traditional guidelines. You know: proof of income, credit reports and how much you could logically afford for a mortgage payment.
Fast forward to today’s market. There was a big potential consumer base for home ownership untapped because of their bad credit and questionable income. Greedy folks started rubbing their hands together with the idea that after all, everyone is entitled to a piece of the American dream. They started writing loans with introductory interest rates and the dubious consumers were signing on the bottom line as fast as they could pass the paper across the table. They couldn’t afford to keep up those loans and now the credit market is suffering because of greed basically.
We have millions losing their homes. Congress is passing laws to offer government backed loans for those who are about to be homeless; another government bailout by any other name. Banks are going under and the mortgage industry will probably never be the same.
So if you want to find something or someone to place the blame it on, creative financing is a good candidate (along with greed). It’s time we got some common sense back in the world of financing. This litany of troubles is just another further example that it was thrown out quite awhile ago. If a loan in the long term doesn’t make common sense, then don’t sign. That’s the problem in a nut shell.
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I just had a Linkedin member ask me to consult on a project in exchange for equity. And, perhaps down the road, three to six months, they would have the money to pay me. Ah, gee. Well, no.
I am sure he wouldn’t answer my email, which explained I can’t buy groceries with promises of equity. Oh yes, he also told me I could have the exclusive on the story of his company.
You would think alleged business owners would have learned by now. There was a recent article in Vanity Fair, which gave a widespread history of the Net. One quoted individual relayed a conversation about a company who not only wasn’t profitable, but was on their third round of financing.
It seems that this craziness continues. I figured that the dot.com explosion had taught everyone that businesses need to be capitalized with money to run their daily activities.
Back in the early heydays of Net, people were willing to take a chance your company was going to be the next one with a great IPO. After all, there had been a string of others who had done it. However, great IPOS don’t mean that the company is profitable or hopes to be anywhere in the future. There was a comment on that in the same article in Vanity Fair.
When companies aren’t funded/budgeted properly they ask the rest of their world to go along with the gamble. That’s what I equate to asking vendors, me for instance, to take their pay in equity or to wait three to six months to get paid.
I have another great example of these nutty practices. I have a friend who is a partner in a business incubator. She got an inheritance, which she used to buy a partnership, and was worried the last time I talked to her because she never had any money. She lamented, “We should be rich by now with all the companies we got off the ground, but we keep putting all the money that comes in back into the company.” I explained to her that was a recipe for disaster, but her answer was, “Oh, well.”
Running a business successfully means have enough in the budget to pay for its expenses along with your own personal bills. The first time you take personal money for business, consider it the first step towards bankruptcy court.
If you are running a business or thinking about running one, please read this advice carefully. Also go back over some of the lessons that we witnessed, and were very well documented, during the dot.com explosion. We should be past the stage of thinking someone else is going to plunk down hard cash if you don’t use your first round of financing wisely.
Do not be the next one who asks vendors for their wares and services for future payment. Don’t be the employer who let’s his employees know there is no more money in the bank when they were suppose to have gotten a paycheck that day.
Frivolous business planning doesn’t just hurt you, it hurts everyone you have interacted with during the time your doors were opened. Please think hard about these principles and make sure you don’t find yourself trying to explain why you make similar errors.
For more samples of my work: www.bellbusinessreport.com
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It’s been brought to my attention that the increased scarcity of water is looming on the horizon as a massive problem.
This is a link to a list of articles on the subject: http://www.alternet.org/tags/water%20scarcity/ . Take a look at this long list and it will set you back a moment. I live in the Los Angeles area and the subject of water, do we have enough, and where can we get more is a part of the city’s history. When I hear mumblings about how this is going to be an issue again, I tend to put in the back of my mind, on the shelf of troubles that the rest of the world is going to fix.
Under this link, I found an article entitled, “”Those who control oil and water rule the world.” Think about it. If we stand back and let the major powers be the ones that deal with this issue, it will turn into a big mess. We all know how well they, the powers-that-be, deal with the ongoing scarcity of oil.
Now, if you are having doubts that a water shortage is an issue, check out the link and look at the number of articles on the subject on just this one website.
Dams are needed in California and there is a chance the Las Vegas will run out of water completely. This doesn’t include the troubles abroad with droughts and famine.
One of the biggest solutions mankind needs in the next couple of decades is a more efficient way to utilize the water we have. We also need a way to provide more and just maybe a solution to an age old problem, how to use sea water to our benefit.
All of this is time consuming and costly. The party and government that comes up with efficient solution to these problems will be controlling the strings of the rest of the world.
There are some attempts already at easing this problem. This is a link to a story about a system that deals with saving rain water: http://www.prweb.com/releases/2006/12/prweb484772.htm
We all know that the world is fascinated with getting a jump on what the next big thing is going to be. I am here to tell you that is and will continue to be water.
Keep your eyes peeled on the news coverage and any techie potential solutions. If opportunities for potential investment crop up, don’t think twice before jumping in.
This is sure to be ongoing topic for the foreseeable future. I doubt the problems with water will ever completely be resolved.
Technology for delivering water will without a doubt one of the next big things.
For samples of my work: www.bellbusinessreport.com
Laura Bell
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Filed under: Blogroll, businness advice | Tags: collectibles, investment, money, plan, saving
This is a good question to ponder when the country is awaiting their economic stimulus checks with baited breath. Consumers tend to think checks are going to keep coming. If you run your life on that premise, it means that you are planning on working until the day you drop dead. If you spend your life waiting anxiously for your next check, your money controls you.
Stop presuming that checks will continue to show up in your life as they can stop for a myriad of reasons. Nowadays, even government checks can be delayed.
I know. You are shaking your head wondering how to get control when all your money disappears as you soon as you pay your bills. Getting one’s financial accounts under control is a primary goal. However, it doesn’t mean that you can’t save. Nor, does it mean that you can’t put away unexpected rewards, such as the economic stimulus check. I know several working folks who are planning to use it for a vacation or new ‘toys’ they could do without.
This type of behavior simply is saying to the universe that I will keep on working. I have absolutely no hope of ever putting my money to work. You either make a plan to put some of it to work, with more later, or you will be working until your funeral.
I know times are hard and money is stretched money is stretched to the point of snapping. My point is that you have to put money away, no matter what the circumstance. This is even more important when it comes to unexpected windfalls. You only spend that $600 on a vacation if you already have an investment plan in place.
This problem, of acting as if checks will continue is so widespread in this country that even the top-earners run up bills they will never be able to pay. They are under the illusion the good times will keep rolling forever. All you have to do to realize how nutty that idea is to look at the movie stars that have gone broke once shows were cancelled.
The lower end of the earning curve can start small. There was an interesting article in the business section of the Los Angeles Times just the other day on how one can find treasures at estate sales. Don’t shake your head until you investigate. Children start out with small stamp collections that eventually end up being passed on to the next generation. Collectibles can be a starting base for building wealth. They can be accumulated with small purchases in the beginning. Forbes used to have a section that talked about the ups and downs of the market value of various collectibles.
For the long term, one needs an investment or savings plan. Suze Orrman, the current national financial guru, continues to talk against using retirement money early. Whatever problem is bothering you currently should be dealt with other options besides taking out retirement funds. There are penalties, not to mention the loss of a nest egg for the down the road where the only sure thing may be a social security check. Once a retirement account is established, however, it can be used as collateral for a short-term loan without penalties.
Spend some time finding out how you can grow your money if you have only a small amount to play with. Online investment firms offer bank accounts which offer higher than normal interest rates. When you have enough put away, you can start trading a little at a time.
If you accumulate enough, open a CD, a certificate of deposit, and don’t crack it open, the first time something goes wrong. You can still buy United States Savings bonds and other investment bills issued by the US Treasury. Here is a link with more info:
http://www.savingsbonds.gov/indiv/research/indepth/ebonds/res_e_bonds.htm
If you feel the need to understand more about your finances, do some reading and then start a plan of action. You are losing money every day you put it off.
For more examples of my work: www.bellbusinessreport.com
Laura Bell
writer@well.com
-30-
Prices are rising, credit is crunching and unemployment is rising. The Fed is dumping money into the system more vigorously than previous. We see nonstop headlines about rates cut and worries over cheap money. What’s it all mean? What’s it going to mean; and most important how is everyone going to cope?
There is no way to know all the answers. There are certain things that are different than previous economic crunches. Monies are being offered to investment banks to keep them from folding. Legislation is in the wings in an attempt to minimize the mortgage rate mess.
The credit crunch is trickling down to credit card companies. A tighter hold on credit means a slow down in buying, investing and jobs. Slow downs or the threat thereof usually means demand in all markets slows. A decrease in buying prompts a decrease in prices, the exact opposite of what’s going on.
This influx of money into the system, better known as the money supply, has a nasty side effect. It has been referred to in the media without an adequate explanation. The more money in circulation, the cheaper the money. This means it takes more to buy the same amount of goods: rising prices, not good.
How all of this pans out is anyone’s guess at this point. There are some things you can do to ensure you make wiser choices.
Uncertain times means you need to be more careful with purchases of durable goods. Think of this as anything that will still be around after you are finished paying for it, hopefully. Making long term commitments, tying up funds, long term payments, is not wise now. Things may change where you have to move in a hurry. You may be forced to move out of your home. You may be forced to change jobs. Investors may also see chances at making money when stocks, gold/silver, make a quick change in prices. All this boils down to a needed shift in your liquidity preference. Can you get your hands on cash in an emergency or will you have wait until your escrow closes. If you are employer and you are forced to cut back, it is much easier to get rid of temporary workers than letting go long-standing employees. Having more liquid assets means you are equipped to move quicker when changes come and come they will.
Sellers of durable goods are keenly aware that buyers are thinking harder before signing on the dotted line. They are up nights thinking of lures to bring you into their market. The latest I heard was a radio commercial offering car deals with no payments for 12 months. The announcer also encouraged listeners to get themselves pre-approved before arriving at the showroom. Car dealers’ aim is to get your signature. They create an atmosphere with promises that make you not think past tomorrow. The problem is they want you to forget about extra charges they have in the contract. Anyone promising durable goods without payments in the beginning is going to charge you at the end of the contract. Don’t be lured into thinking the salesperson is your friend. The only person they are looking out for is themselves. Bigger lures are bound to appear in our future.
The best thing you can do for yourself is to ask whether or not you can get out of a commitment easily six months down the road if your finances change. If not, forgo the purchase or the hiring of the extra employee. This also applies to investments that wouldn’t allow you to withdraw your funds without a stiff penalty.
Long-term planning has probably never been so important. Think twice and wait a day or so before signing any contract. You’ll be glad you did.
For examples of my work: www.bellbusinessreport.com
Laura Bell
writer@well.com
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Filed under: businness advice
I have an ex-husband who thought the answer to his financial worries was his current job and working his own business on the side. The side businesses started and stopped ten times during the course of his working life. He even took up one I was successful with when I fell ill. He never followed through because it was just too much for him. ( I admit that getting out of the 9-to-5 rut requires multi-tasking skills)
He read a book which convinced him that you could still end up rich while keeping your 9-to-5. This gave him just another excuse to stay stuck in the job rut, which, gee, ended up phasing him out of the company after he was injured.
I realize that there are some jobs which have added perks. What comes to mind are partners in a law firm and real estate agents. Both bring in extra cash flow based on their annual performances. Realtors also have the side benefit of knowing where the good real estate deals are.
Most jobs are just what my eldest daughter described to me years ago when she was starting her own business and just quit her legal secretary job. She said, “Mom, remember this. The only thing any job is: JUST OVER BROKE.”
Most ordinary employees, those not receiving extra perks, simply feel like there will be nothing they can ever do to get out of living paycheck to paycheck. Making this change is hard work, but yes, possible.
The first step to changing this cycle is admitting that punching someone else’s time clock does nothing but give you cash flow to barely cover your needs. There is the benefit of an employer’s savings plan. Long range, you will get that money and a kick out the door when the time comes. The pushing out the door comes much quicker these days. One hasn’t got a clue as to when a takeover or a switch in management might put them in a position of being without a job and looking at that 401k account as the only thing to pay your rent with. I am presuming here that most folks can’t cover their bills with their unemployment checks.
The only way not to end up in that position is to plan to maneuver yourself out of depending on your 9-to 5 employer. The first step requires you having more cash in your hands. I know for most it sounds impossible.
I am not going to get complicated here. We are just going to go into two techniques. Oh yes, you also will need a goal for what direction you want to pursue once you free up some cash and start to see a light at the end of the tunnel. If you haven’t got a clue as to what else you might want to be doing, then I suggest an old book, with great principles, “What Color is my Parachute?” There is also the chance you want to start your own shop doing the same thing you are doing now. I ended up with my own public relations business quite by accident once upon another lifetime.
First: if you are stuck at this pay-check-to-pay-check routine, you have to find a way to make things ease up. In many cases, one might be wondering how since you are leaving some bills unpaid, because there just simply isn’t enough. I understand because I was there for years when I was married.
The first thing you have to do is know where your money is going. Many haven’t a clue. If you don’t create a budget, even including daily spending money, you are lost before you even get out of the gate. You will find ways to cut down after you see it on paper. Write down your daily expenses.
Then you need to start something on the side. This isn’t necessarily going to be your last goal for running your own business, or maybe even investing. If you can’t think of anything else, become the area’s Avon lady. I tried it just recently and it worked for my immediate needs. This will enable you to file a profit and loss statement every year. This means that you are going to increase your tax refunds. You can also change the tax form which dictates how much the IRS can take every check. For specifics on this, be sure and check with the IRS website or a tax person. This one action alone will increase your tax return to amounts you only dreamed of. Now, this takes keeping great records, but it is necessary. It’s also possible to file more than one profit and loss statement. If you are married, have your spouse find something to fit the same bill.
None of this is going to happen overnight. If you start with these simple steps, you are on your way out of the 9-to-5 trap. You will be able to put these returns together to help finance a business.
There will be a part two to this.
More of my work: http://www.bellbusinessreport.com
Laura Bel
writer@well.com
Filed under: businness advice
Ok, I read a news story that deserves commenting. This week’s issue of AdWeek, western edition, has a story regarding Microsoft’s continued effort to try and improve their market share of digital advertising. Last month’s quarter result showed they are failing at this big time. Google made $1B, while Microsoft’s MSN’s unit lost $250 million.
Instead of staying at war with Google, Gates is attempting to expand his digital advertising with mobile and Internet-enabled TV. He is also planning on using the X-box as a way to break into TV.
Since no one has a crystal ball, time will only tell how this endeavor will do. But, those numbers certainly show there is a rough road ahead. What’s important about this is that it is a lesson on what road to choose to grow your business.
Microsoft is basically saying that they want in this market despite the picture the numbers paint. They are going so far out the limb, that they are reaching out and grabbing another branch. Let it be clear, Microsoft is about the only company on the planet that can afford such a gamble.
You don’t go after the market your competitor is virtually controlling. Even inventing a new slice of the market is ripe with risk. He is still telling the world that he is willing to fight for a good portion of digital advertising. Take it one step further, what he is doing is fighting for business in a market that doesn’t exist yet. This is familiar territory sort to speak. After all, he used to write programs for machines that hadn’t yet been built. It might work. But this is not a path recommended for small business.
We will deal more on how to deal in a competitive market for the entrepreneur.
Laura Bell
writer@well.com
