Business advice

Everyone is looking for a culprit for the real estate mess
July 29, 2008, 7:22 am
Filed under: Blogroll, businness advice | Tags: , ,

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.



Bank failures are in the news
July 19, 2008, 6:39 pm
Filed under: Business Advice | Tags: , ,

Unless you have been hiding under a rock, you will know that there has been a bank failure in California. Below find the nity gritty from the Wikipedia page on the subject.

“IndyMac Federal Bank, FSB (Federal Savings Bank) is a bridge bank created to manage assets and liabilities of IndyMac Bank, FSB until they can be disposed of. IndyMac Federal Bank is the largest savings and loan in the Los Angeles area and the seventh largest mortgage originator in the United States. The failure of IndyMac Bank on July 11, 2008, was the second or third largest bank failure in United States history, and the largest failure of a regulated thrift

(A thrift is a financial institution other than a bank.)

IndyMac Bank was founded as Countrywide Mortgage Investment in 1985 by David Loeb and Angelo Mozil.”

Now that you know what the headline writers left out, this might sound like something you have heard of. Countrywide has been in the news for months because of their sloppy mortgage lending. It was only a matter of time because this house of cards came falling down.

The question is do you know your banker well enough to sleep well at night. You don’t want to find yourself in the same position as these poor folks standing outside wailing about they are scared they will not see their money. Even though they had been assured that anything up to $100 k was safe, some customers still wanted to simply “…get my money and out it where it is safe.”

There were a couple of links in one Los Angeles Times article that some other banks might find themselves in the near future because of their own mortgage lending. Take a look at your bank and research their mortgage loan business. Think this might be too much trouble? You might just be reserving yourself a seat in a line down the road when the Feds come calling.

We all know that the blame is being laid on bad mortgage lending. Consumers have to take accountability for some part of this mess. If they hadn’t gone along with the mortgages, this wouldn’t have happened. If they had known enough to pay heed to the FDIC warning about them covering only $100K, they might not have been on the losing end.

If consumers learned to follow the basic rule of all investment advice, ‘diversify their assets,’ we wouldn’t be in half the trouble that is probably coming down the pike.

Take responsibility for your investment and do your research as this not the last bank failure. And, don’t think for a minute this only happened because customers got worried and started demanding their money.

The personal financial health rests only on one set of shoulders, your own.


Keep your eye on prices
July 14, 2008, 8:15 pm
Filed under: Business Advice | Tags: , , ,

We are all seeking the best price on everything these days. We are clutching those dollars so tight the images might jump off.

Retailers have become sneakier than ever in an attempt to get our dollars. A large grocery store chain recently announced it was going to offer sales like the departments stores, “eight hours only.” When the news finally got around to the story, it didn’t surprise me to see prices that didn’t make me think twice about not wasting my time shopping there.

The stores are making loud noises in hopes that you will jump just because they say so without thinking twice. One grocery chain that I shop in has a few extras that help from time to time. They have buy one get one free deals. However, only once have I found an offer that the initial price on the product hadn’t been upped. I almost grabbed a big container of ice cream one day when I saw, “get one free” sign on the most expensive ice cream. I looked a little longer and discovered that the store brand was half the price and equaled the same if you bought two. I only really needed one.

Then there is the something I started noticing more lately. If you see a good price, look at the amount you are buying. More often than not, when it comes to items where there are few choices, a lower price may mean a smaller container. I snatched a big container of ice cream at the corner store today because I didn’t want to take the time to go the few extra blocks. It occurred to me that the container just didn’t seem to be as big as it used to be. What used to be a two quart container is now just 1.5.

One could get eye stain trying to read all the fine print.

Those of us on tight budgets have an even harder time. No one is charged more than those in this demographic category. A recent episode of Judge Judy dealt with a woman who had used one of those chains that rent you furniture with the idea that you eventually buy it. It appeals to those with bad credit and low incomes. It turned out that the game console ended up costing twice as much if the consumer had been able to go out and use a credit card and buy it.

For those stuck with buying minutes on cell phones, they are getting phone coverage but paying outrageous costs compared to those who have a contract with a phone company.

There will be more lures to try and get you into stores. Don’t jump every time you see the word sale. Sales are only relevant if the price is really a good one and if you are in need of the object.

On the other hand, when it comes to your business, make sure if you offer a discount to customers, make sure that it truly is a discount. Don’t fall into the trap of everyone else out there. If you are true and honest with your business, then you will still be ahead of the rest of the crowd.

Times are going to get tougher with the rumbling in the economy. California had a bank failure last week, allegedly the second worst in history. The Dow fell so far that the news commentators were asking whether or not it was time to panic.

Keep your nose to the ground for changes. Read the fine print on every transaction you take on. Make sure you keep your mind open for more than one way to make money. Anyone who doesn’t is going to have it even tougher.

But, on a cheery note, there will be an increasing number of sales than ever before. Keep your ears open and jump on the ones that are right for you.


Work for equity?
July 10, 2008, 7:10 pm
Filed under: businness advice | Tags: , , ,

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 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 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.

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The economy is trashed
July 3, 2008, 8:04 pm
Filed under: Uncategorized | Tags: , ,

One of the main reasons is America’s addiction to debt. I posted this theory on and got so many responses I could barely get through them. Truly, this is a subject on everyone’s mind..

US consumer debt has reached staggering levels after more than doubling over the past 10 years. According to the most recent figures from the Federal Reserve Board, consumer debt hit $1.98 trillion in October 2003, up from $1.5 trillion three years ago. This figure, representing credit card and car loan debt, but excluding mortgages, translates into approximately $18,700 per US household. This is to found at:

Comments from users were a combination of useful and extreme. One user, from out of the country, thought we ought to penalize drivers if they drive over a certain number of miles and put a limit on the number of credit cards allowed an individual.

Others included the suggestion that we change the usury laws so credit card companies can’t charge over 12%. Another commented, that, “Americans were made addicted to credit’

This is one major mess. Big messes can’t be swept up quickly.

An added factor is greed. Many lures of financing today offer the buyer a chance to wait several years before making payments. This gives buyers the feeling of getting something for nothing. They don’t think about the giant payments and usury laws broken with the accumulated interest. All they think about is the furniture, i.e., that just got delivered and they didn’t have to pay a thing to get it there.

What’s worse is the automobile dealers are using the same incentives in order to get their buyers across their threshold and the cars off their lots’ inventory.

Lest you think I am exaggerating. There is a prime time commercial for new televisions. It shows a couple having to deal with a tv that just bought the dust. Wife says, “Ok, go and buy one, but don’t get carried away.” The theme in the background is, “I want it al. I want it now.” It’s repeated more than once.

That is the theme for the majority of the buying consumers in the United States. No longer do people think about saving up for something. Why bother, flip out the credit card. I will worry about it later. It used to be that we hoped as years went by we would be earning more money. There were decades of cost-of-living raises. I sometimes think that the majority of the population makes decisions as if that trend was still in play. Of course, younger workers hope for promotions and an onward climb up the ladder. Times are such right now that anyone is just lucky to hold onto the job he/she has. Never mind dreaming that cash flow will increase.

We have to self-regulate ourselves back to sanity. We know that most likely interest on credit cards are going to stay high despite the fact that most constitute usury. No law is going to come into effect mandating that a person can have only one or two credit cards.

The credit card companies are not going to voluntarily stop sending out cards to good customers, hoping someone will bite because they see a new one in the mail.

We all know that some consumers are struggling to keep the roof over their head and food on the table. In order to do that, they are making unwise use of credit. Helping them is a bigger picture.

Those who have a choice need to draw a line in the sand and make changes within their family and circle of acquaintances. Don’t take on any new credit cards. Try to pay down the balances you have. When considering purchases of durable goods, they are going to last awhile and paying them will take years, what will you do if you lose your job after you take on this new debt.

Stop using credit cards for goods that will not be around when the bill comes. Stop fooling yourself into thinking it is a way to keep better records. Unless you pay off each balance monthly, money is going down the drain on interest.

Look for ways to eliminate interest payments in your life. Consolidate bills on one card if you will pay less, but look into the fine print before making a decision.

The next time you think about going out for dinner or to the movies, don’t if you don’t have the cash. Changing our purchasing habits can only happen one step at a time. You are going to have to replace this old habit with a new one.

Teach your children and talk to anyone around you willing to listen. The financial life you save will be your own.

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