mudpuddle

Many times in my sideline of helping distressed homeowners, I work with manufactured homes. As a Realtor, manufactured housing is just another type of property. But, when dealing with distressed owners, manufactured housing raises issues that don’t come into play with other types of property.

First, we need are some definitions. Manufactured housing comes in several flavors. Most people traditionally think of a manufactured home as single and double-wide homes. (We don’t use the T-word. A trailer is something to haul your four-wheeler or horse.) For the purpose of this article—and because they are classified that way in the MLS—we will refer to these as “manufactured housing”.

A step up is the modular home. The problem with modulars is that the lower priced ones look a lot like a double wide. The most common difference is in the construction and set-up. A manufactured is built on a steel frame. The frame is integral and stays under the house after set-up. A modular is built to be transported to the site on either a frame or flatbed and set-up on a conventional foundation. These homes are identified in the MLS as “modular”. A short-cut I use to tell the difference on site is to check the electrical meter. If it’s attached to the house it’s probably a modular, if the meter is on a service pole or meter stand, it is likely a manufactured. If you want to be sure, look under the house for a metal frame. Either way, the manufacturer’s plate will identify the type of construction.

The higher you go up the modular food chain the less “manufactured” they look. At the high end, modulars come in contemporary, traditional and even Victorian styles that can cost more than an equivalent site-built home.

For the most part, modulars are treated like stick-built for financing and insurance purposes. Some HOA’s restrict modulars in that they require them to look like the other homes in the neighborhood.

The confusion comes with the single and double-wide homes. They start life, not with a deed, but a title. This means that, legally, they are not real property. They are personal property, like a car or boat. This affects the type of financing and insurance for which they qualify. It also can have a big effect on the value going forward.

Last time, we looked at a way of structuring for retirement that was out of the box. Clydette, our 70 year old bookkeeper wants to retire and do volunteer work. She has some savings and a paid for residence. By using a combination of a reverse mortgage and carrying the note on another mortgage, she can live in her home and produce an income of over $26,000 a year.

Sounds great! Everyone should do this, right? Wrong. There are up sides and downsides to this strategy, let’s take a look.

In our example, Clydette will be 85 when the mortgage she invests in is paid off. This means she will lose $1200 a month in income. However, if her nest egg of $100,000 grows at let’s say at 2% a year—very, very conservative—it will have grown to somewhere in the neighborhood of $150,000. She can draw $1200 a month off of this money for at least 10 years. She will be 95 and still living in her home without mortgage payments.

In this scenario, Clydette will have produced $660,000 in income from her starting assets of $400,000. She did this without the risk associated with stocks or interest rate fluctuations. By comparison, if she had drawn down her IRA at a rate of 5% a year, her monthly income would have been about $1050. That is $150 a month less than what the investment mortgage produces, but the money would be exhausted in roughly 22 years. When you are 92, another three years of income is quite large.

Now all of this assumes that Clydette is ultra-risk adverse and wants her finances to be as automatic as possible. Someone with more risk tolerance could invest the nest egg in securities and potentially maintain their lifestyle and grow the money. But this would entail the acceptance of the downside risk.

Clydette could also sell the house and move into a small apartment at a relatively low rent. However, over the course of the twenty-five years we are talking about, she will experience rent creep. This means that her rent will go up even as her resources go down.

There’s being broke and then there is homeless and broke. The value of a roof over one’s head—especially during the senior years—cannot be understated. This is the value of a reverse mortgage; you get to take the equity out of your property while living in the home. How good a deal it turns out to be is dependent on how long you stick around after the ink dries. Kick the bucket in two years and the bank wins. Pull a Methuselah and it’s like robbing the bank. Of course, if you do kick off in two years, will you really care that the bank made out?

In this age of strained social welfare nets, hyper low interest rates, high unemployment and mind rotting reality TV, those of us who are at or within earshot of retirement age need to look at all the options. It is an absolute necessity to find the strategies that maximize the income that can be squeezed from personal resources.

While the boys and girls in Washington stomp and scream that the social welfare compact is sacred. It is the height of folly to depend on the word of the folks who made the mess and can simply duck the responsibility by not running for re-election.

If you can, use Social Security as a hedge against inflation. Don’t count on it to fund your retirement. Me? I’ll be buried with a keyboard in my hands.

Well, the stock market is swinging like a slinky attached to the Swamp Fox roller coaster and the governmental bean movers are saying that they will keep interest rates near zero for “the fore-seeable future”. In the meantime, Social Security and Medicare cannot continue very much longer in their current form. There is not enough money--in government, private hands, in businesses or on the moon—to live up to these commitments. People who tell you differently are…well…bless their hearts.

But, folks in the US are living longer and need more retirement income. What to do, what to do. In past columns, we have looked at various ways to use real estate to help fund life’s little speed bumps like college tuition and retirement. The problem is what if you suddenly find yourself within ten years of retirement and the economic landscape looks like the current one? Do you really want to be at the mercy of the same ding-a-lings in Washington who put us in this mess to begin with? Of course, to be honest, we do elect them again and again.

Retirement is like life, each person’s situation is unique and each person’s situation is the same. Unique, in that everyone makes different choices and acquires a different amount of assets. Same, because everyone needs a nest-egg to live off of if they reach a point where they are no longer working.

In this column, I occasionally make suggestions on possible strategies to reach life goals. Keep in mind, I am not a CPA, MBA, estate planner, attorney or double-naught spy and I didn’t stay at a certain discount motel last night. So, get professional advice before making any moves concerning your finances. Two strategies we have discussed in the past are the reverse mortgage and investing in mortgages.

A reverse mortgage is when your home is paid for and you sell some of the equity to the bank in return for monthly payments while you continue to live in the home. It’s an annuity backed by the property’s value. When you pass on, the property is sold and the bank gets paid off. Part of the deal is an insurance policy that protects the bank if you live to be 110 and your payments exceed the value of the property.

Investing in a mortgage, also called “holding the note” means that you loan money to someone and that loan is secured by real property. If you don’t get paid, you get the property. This means you have to be careful and do your homework on both the borrower and the property being offered for collateral. Now, what if we combine these two strategies? Huh? OK, time for an example.

Clydette is a healthy, active 70 year old bookkeeper who wants to retire and do volunteer work at the hospital. She owns her $150K home and has saved $250K in an IRA. Her father lived to be 85 and she has an older sister on a professional curling team. Clydette is probably going to be with us for quite a while.

If she takes a reverse mortgage on her home, it can generate around $1000 a month. If she moves $150K of the money in her IRA to a mortgage at 5% for 15 years, her income will be $1200 a month. Her yearly income will be $26,400 or a return of 10.6% on her savings for the next 15 years. She still lives in her home and has a $100,000 cushion in the IRA. She earns this with little risk because the collateral will appreciate over time at near the rate of inflation and any money she gets from the son of Social Security will be a bonus.

We will continue this next week.

First let me state that I share a home with one wife and two mutts. The first mutt is the 80 lbs. Miss Priss and the other is a red haired 95 pounder named Little Bit. I love animals and have always had pets. So please read these following paragraphs in the spirit in which they are offered.

When you decide to sell your home, it immediately becomes a product. Harsh I know, but true. This product must compete in the market against other similar products based on price, terms, condition and presentation. Presentation is where real estate and Cujo collide.

Unfortunately, not everyone shares a love of dogs, cats, rats, pot-bellied pigs or dare I say it...snakes. The old saying is true, “You never get a second chance to make a first impression.” This also applies to your pets.

Pet damage and smells that you have grown accustomed to can be an immediate turn-off to a buyer. If the property smells of stale kitty doo, the buyer won’t even notice the designer cabinets in the master bath. They probably won’t see much of anything in the 18.2 seconds they are in the house. Remember, in this market buyers have lots of choices and are looking for any excuse to lower the offer.

Unfortunately, not all realtors will broach the subject of pet odors and damage for fear of offending the client. They know that the feedback from the first few showings will point out the problem for them. The bad part of this strategy is; would the first or second looker make an offer if the house didn’t stink?

Now, there is one type of buyer who loves a smelly, pet damaged house: the investor. Investors love these properties because they can buy them wholesale. They discount the costs of repairs, de-odorfying and discount even more because the house isn’t getting offers. They are not mean, just smart business people. They are willing to take care of the odor and clawed finishes. In return, they expect to get paid for doing it. If the seller doesn’t want the investor/buyer to make money on the backs of Fritz and Sparky, they need to make the property appealing to retail buyers.

Another possible problem is aggressive pets. I once set an appointment to show a house with a supposedly nice doggie. I arrived ten minutes before the buyers and when I approached the door, I was greeted with the low guttural rumbling of what sounded like a 372 lbs. canine with an evil attitude. I spoke to the dog through the door and he proceeded to crash repeated against said door while offering very loud curses in dog language. When the buyers arrived, I very professionally showed them the house…across the street. One rule of thumb here: if you have to tell people Fluffy won’t bite, Fluffy needs to be penned—preferable outside-- while the property is shown.

Now, I know some of you really, really do not like having these pet problems pointed out, but you are selling the house. Right? Would you buy a pair of pants with urine on them? Would you buy a car from a lot where you had to fend off a trained attack emu just to get in the door? Would you pay a premium price for them? No! In either case, the price would have to be so low as to make the aggravation worth the cost. Why is a house somehow different?

The buyer who will pay a premium regardless of condition has gone the way of the mood ring, pet rock and saying “groovy” with a serious look on your face.

Luther here, Eddie’s off pod-blog-cast reviewing something or another so I’m in charge this week.

I ran across a situation recently that demonstrates that bigger is better, “ain’t necessarily so”. My home needed new windows and being the value buyer that I am—OK, cheap—I got several bids. By several, I mean, like fifteen.

The winner was a big national franchise. The salesman came to the house, measured the windows, noted some repairs that would be required to make the installation up to code and wrote out the quote. He was about 20 percent lower than any of the other prices I received. He said that it would take six weeks to get the windows. I gave him a 50% down payment and gave Clydette the news.

Meanwhile, our project house had progressed to the point of being ready for new windows. I called several contractors, including the big guys doing my home. It was suggested to me that I also call Mike Barnaby of Barnaby and Sons. His bid matched the big guys and he could install the windows in three weeks and didn’t charge extra for the small amount of extra carpentry work required. As to the windows, they came from the same factory as the big guys, just without the fancy name. Again, I gave a 50% deposit and Mike said, “Thank You”.

Three weeks later, the windows for the project house arrived. It took the installer a day and a half to install the windows—which look marvelous—and he even taught me a few tricks about trim work. I was very happy.

Three weeks after this, I called the big window outfit to ask about the windows for my humble abode. They weren’t in yet and a crew wouldn’t be available for another week and a half. I threatened to make the lady on the phone explain this to Clydette and she said she would see what she could do.

A week later, they had the windows and managed to free up a couple of their installers. They arrived and started unpacking. After looking the job over, one of the men knocked on the door and informed me that they were two windows short. We compared work orders and sure enough, my home had grown two windows between me placing my order and the order arriving. Not really, the salesman had written the wrong number down.

At this point, I have to admit that I share in the blame. I should have verified that he correctly counted the windows. He’s the professional, but I should have checked behind him.

Anyway, the installer called the boss at the big window place and put me on the phone with him. His demeanor amazed me. “It’s not my fault”, he said aggressively. “The salesman made the mistake and the contract only calls for 10 windows”. I was too bewildered by his attitude to even get mad. I simply told him that I would abide by the “contract”.

I walked inside and called Mike and asked him how much he could get the windows for and how long it would take. His price per window was actually slightly less and he could have them in three weeks. I placed the order.

Later that afternoon when the salesman showed up, he started telling me how long the extra windows would take when I told him not to worry about it. He was taken aback. Good.

Now, was there some underhandedness involved? I hope not. But the difference between the big guy’s attitude and Mike’s is the reason that I’ll not be calling the big guys again.

In its truest sense, real estate investing means investing for current cash flow. The idea is to create an income while at maintaining the value of the property. Commercial buildings, apartments, car washes and the like lend themselves to this type of real estate investing.

With residential property, a house is worth what a ready, willing and able buyer will pay for it at a given time. In commercial real estate, it’s the property is worth some multiple of the income the property will generate over a given time. HUH? OK, that’s a little convoluted. How about this, the property is worth a price that generates a desired return on your investment.

For example, let’s say that your 80-year-old rich uncle Mortimer finds out that his thirty-year-old girlfriend is married the hard way…her jealous husband shoots him. In the will you receive $500,000. Congratulations.

You decide to quit work and design the great American website. You want to put the money to work with little risk and a good return without touching the principle. You decide that you could get by on $40,000 a year. For your half a million to generate that amount you need a return of 8% a year. You look at CD’s, annuities, stocks, junk bonds and none of them give you that warm secure feeling you are looking for, either the returns are too low or the risks seem to high.

You are just about to abandon your digital pursuit when your accountant tells you about another client of his who has a commercial building he wants to sell. You take a look and discover that the building is a 10,000 square foot warehouse that is leased to a trucking company. The company is using it as a distribution center and has for the last five years. They have ten years remaining on the lease and the building meets their needs quite nicely.

Best of all, the lease is a net-net-net or “triple net” lease. This means that the trucking company is paying the taxes, insurance and maintenance on the building. All the landlord is required to do is not do anything dumb like losing the property in a high-stakes bocce ball game. This is referred to as “passive income”.

Anyway, the owner is retiring and wants to buy a condo in Maui for cash. He is asking $675,000 for the building based on his best guess of what the property is worth. But what is it really worth?

The owner says that the trucking company is paying $4.25 per foot per year. That translates on a 10,000 foot building to $42,500 a year or $3541 a month. If someone is looking for a return of 10%, divide the $42,500 by .10 and get a value of $425,000. Since you are looking for 8%, you divide the $42,500 by .08 and get a value of $531,250. For the seller to get his $675,000 price, an investor would have to be willing to settle for a return of about 6.5%.

At the seller’s asking price, he is marketing only to cash buyers because the rental will not cover the mortgage on a financed deal. Will a cash buyer accept a 6.5% return on his money? Doubtful. The 10% return price opens the property up to buyers requiring financing but the seller only gets $425,000.

If you offer $500,000, the seller gets a better price on the deal with no financing required. You get a guaranteed income of $425,000 over the next 10 years and your principle is intact.

Thank you Uncle Mortimer.

How you invest in real estate is governed by the purpose. What if that purpose is college tuition?

Let us start by saying you have a new baby daughter—congratulations. She has her father’s nose, her mother’s eyes and the possibility of college in eighteen years or so.

For our example, we are planning for an in-state school. We will use a figure of $150,000 for the costs of said education. Thinking Ivy League? Then triple the figure and hope for a scholarship. I’m using an all inclusive figure—tuition, housing, food, spending money, books and travel—for my estimate.

Our goal is to have a “paid for” property worth $150,000 in 15 years. A very conservative price appreciation over 15 years would make a house currently valued at $100,000 easily worth $150,000 at college time. Since our goal is college money, we are not too concerned with current cash flow. But remember, a property that breaks even makes you money at tax time.

With a 20% down payment, the mortgage is $80,000. The payment on a 15-year note at today’s interest rate is approximately $600.00 a month. Allowing for insurance, taxes and maintenance, the rent needs to be around $900.00 a month to positive cash flow. Depending on the location, a $900 rental might be a bit high. So…what if the market only will only bear a rental of $850? If it takes five years for the market rental to rise to $900, then it will cost you another $3000 over those years, but there’s a good chance that you will save that much in taxes. Only your accountant knows for sure.

Let’s run the numbers and figure out the return on investment—this is the fun part!

If the rental rate only rises $50 every five years, you will cash flow $3000 over the 15 years, but being the conservative stick in the mud puddle I am, I am not going to count it at all. More wiggle room you know. We spent $20,000 for the down payment and other people paid off the mortgage. It cost us $3000 over the first five years in negative cash flow until the rental rose to break even. Our gross cost--not allowing for depreciation and other tax benefits--is $23000. We also need to realize that you will have two years of income after the mortgage is paid off. If you count this, you are actually $1000 to the good.

So...in 2029 when you sell the property for $150,000, your real return on investment is $151,000. That works out to roughly 15% per year, Not too shabby. Because you did your homework up front and had a conservative game plan, your return is almost risk free. I say almost because the sun could blow itself out or Martians could attack, but really, the biggest danger is you losing sight of the goal and doing something silly like cash out refinancing somewhere along the line to buy a convertible.

How can I be so confidant? If you do your research, you will be buying a bargain in a down market. Even if you end up selling in a down market 15 years from now, it will still be up nicely from today. Just compare 1993 prices to today.

In the spirit of hoping for the best and planning for the worst, I used very conservative numbers. The actual return could—if you end up selling in an up market—be better.

Just a little something to think about from the mud puddle.

Premise--a proposition supporting or helping to support a conclusion.

When someone enters into a discussion or debate on a topic, they enter it from the viewpoint of their premise. The premise is that--taken for granted as fact--idea on which they base their entire concept of the topic. For example; when we are small children, we believe that there is a Tooth Fairy and an Easter Bunny because Mommy and Daddy say so and hey, money and candy. The belief is based on the premise that the world is as Mommy and Daddy say it is, period. As we get older and more experienced, we adjust our premise to, “Mommy and Daddy want me to be happy” and “when they find out I know the truth, the goodies might stop.”

While childhood premises that perpetuate the Easter Bunny and the Tooth Fairy are harmless, other rather childish premises are nothing short of dangerous. One recent example was the premise that housing prices would go up forever and people were getting richer just because they owned or owed on a house. This was called the “wealth effect” and was touted loudly on the business channels. Too many folks bought into this premise because it was on television and “hey, Master Card just upped my limit because of all the equity I have in my house.” So, even though history and math stood in stark opposition to it, this false premise ensnared many.

The next premise that proves the point was the $800 billion emergency housing bailout. The premise was that by giving all that money to banks, it would somehow cure a supply/demand problem. The problem was that there were too many, too expensive, houses. Houses were purchased, not for the purpose of living in them, but for the purpose of re-selling them at inflated values. So, even though the essence of the problem was that too much money had already flowed into housing, the premise was that a lot more money would fix it.

To show how wrong this premise was, consider this; if the government had purchased one million $300,000 houses and had just bulldozed them; it would have cost $300 billion and would have actually gone a long way toward curing the supply/demand problem. Oh yeah, the budget deficit would be half a trillion dollars smaller. Why do we see this and the boys and girls in Washington don’t? We don’t have an unlimited amount of other people’s money to throw at problems. Just sayin’.

As of this writing, Congress is still wrestling with raising the debt limit. Budget officials are crying about how if it’s not raised by August 2nd, the world will come to an end and all radio stations will only play Swahili bagpipe music. The basis for all this is the premise that the world will never trust us again if we are late on any payment of the interest on the national debt. Really?

So bondholders in China, Japan and Ketchuptown would rather that we keep going down the road toward the day when we have no choice but to totally default, than have us be late on a payment while we fix the problem permanently? Would our creditors rather get paid today and have us totally default tomorrow or have us restructure now and be in a position to pay the entire amount owed? There’s a big difference between a responsible debtor and an irresponsible one. Responsible ones are called bank customers and irresponsible ones are called Senators.

The hippies said to question authority. I say to question the premise.

What if I told you about a scam where somebody falsified an income statement to get a property and then rented that property but didn’t report the income. Then they helped their sister do the same thing. Now, what if I told you that this person was the executive-in-charge of the program that was defrauded? I want you to picture this person in your mind.

I bet your picture is wrong. The scam I’m referring to happened recently in Palm Beach County in Florida. It involved the Assistant Director of the Palm Beach County Housing Authority. The property in question is what is referred to as “Section 8” housing.

Section 8, also known as the Housing Choice Voucher Program is a program sponsored by the Department of Housing and Urban Development (HUD). If someone qualifies, they receive vouchers to subsidize the cost of housing. These vouchers are provided to individuals who meet the income and earned income requirements. This program is meant to provide affordable low cost housing to low income folks.

In this particular case, the assistant director, a lady named Kerchevella Wallace, falsified her application to get a subsidized apartment. Kerchevella, who lives with her mother, then rented the apartment to her ex-boyfriend at close to market rate. To put this into perspective, Kerchevella’s subsidized rent was $548 a month. The market rate was over $1750. Now we know why the Sherriff’s office named the case “Money for Nothing”. She got away with this for some 44 months to the tune of over $55,000. Before you start thinking that this is a victimless crime, don’t forget that while she was helping herself to Floridian tax dollars, someone who really needed the help was unable to get it.

But wait, it gets better. She then helped her sister, Dougkindra Wallace pull the same style scam in Tallahassee, where Dougkindra was attending school. This leg of the operation ran for some 28 months and cost the state around $25,000.

I hear you thinking, “Surely somebody had to know what she was doing?” They did. A lady named Stephanie Hales began work with the housing authority in 2008. By 2009, she was also receiving subsidized housing. The Police report that she benefitted to the tune of $17,594.

Two other ladies, Teronda White and Victoria Larkins were also arrested in the scam. All four ladies face a list of charges, including aggravated white collar crime, grand theft, official misconduct and public assistance fraud.

In total, the take from the Money for Nothing scam was over $97,000. The ladies are currently awaiting their day in court.

Remember way back in the first paragraph when I asked you to picture the scam artist? I doubt that you pictured four ladies working with low-income housing. The point is that all scams have a common element. Greed: the excessive desire for wealth. For some reason, society has deluded itself that greed is solely in the character of the wealthy or business class.

This is far from the truth. I’ll prove it. Two thirty year old guys are driving down the same road. One is in a new Corvette—paid for—and the other is in a smoky old Buick with ten payments left. Corvette guy has $300 in his wallet. Buick guy has $5. Both are running five minutes late for an appointment. What kind? You decide.

On the side of the road is a twenty dollar bill just lying there for the taking. Who will stop to pick it up? Remember, the money doesn’t belong to either of them; it’s someone else’s money.

Greed is the same whether it’s for one or twelve zeros behind the first digit.