Louisiana Deal Is Over!

Well, not 100% yet, but it is close enough now that I feel comfortable writing about it.

The last time I wrote about this, the mortgage holders had a conference call to determine how we should proceed at the foreclosure auction and what would happen if no one bought the properties and we ended up with control of the buildings. The auction was supposed to happen on December 5, however I fully expected "Joe" to file for bankruptcy and thus delay the auction.

It turns out, he did not do that (at least, not to my knowledge). Instead, we postponed the auction. Why? We found a buyer for the mortgage! Now, normally, when a defaulted mortgage is sold, it is sold at a deep discount. However, we were able to sell the mortgage for 100% of our cost. This was mainly because the properties secured by the note are worth much more than what we were owed. Some other factors specific to the note buyer came into play as well. Namely, the note buyers had a legal judgment against Joe in another matter, so this helps satisfy that judgment somehow (I'm not entirely clear on this though), the purchase was part of a 1031 exchange the buyer was performing, and, to put it bluntly, the buyer has a little bit of a personal grudge against Joe and enjoys taking property away from him.

So, when you combine the fact that this was part of not only a judgment settlement, but also a 1031 exchange, you can imagine the paperwork involved, which was the cause for most of the delays. (Some were due to the 1031 exchange agent not being able to follow directions.) And since we are talking about a total just north of $1.7 million, you can imagine everyone wanted to be sure all the i's were dotted and the t's were crossed.

We will get back all of our original investment, plus interest due and late fees. The only hold-up now is that the amount that the buyer wired to us was based on a December 3 close date, not December 18. With the amount of money involved, the additional 15 days interest is not insignificant. The new owners also want a new assignment of interest form from us, so we are getting that to them. Right now, with the exception of the additional interest, the buyer's funds are in our attorney's bank account, waiting to be distributed to us.

This was a great learning experience for me. It was the fist time I have ever invested in any sort of commercial project. Although I wasn't involved in the day-to-day dealings, I did get to listen in on conference calls and see how more experienced players deal with problems. We went through several possible outcomes, including one where we thought we might buy a bunch more property and end up doubling our money. At times, it was a roller coaster ride and the end game changed fairly frequently. I felt lucky to see some serious deal-making at work and also to see how different deals failed and the reasons for their failure.

The ROI I was getting paid on this was 12%. With the late fees, I probably did a little better than that. But the money I invested came from a HELOC, which was charging me about 7%, meaning my net gain was 5%. (Although during the 1.5+ years I was invested, my HELOC rate fluctuated, so my net gain varied a bit as well.) In fact though, my net ROI is infinite. Because the money I invested was not mine, any return I got from it represents an infinite return - money from nothing. Note that I would not recommend this method for just anyone! Before I made the decision to invest this way, I needed be sure that if the investment went south, I could still make my monthly HELOC payments. It turned out to be a good thought exercise, as that is exactly what happened. I think, all told, I had about 8 months of no payments. I got all the unpaid interest back eventually, but until then, I had to make the HELOC payments myself. All in all though, an infinite ROI is pretty hard to beat!


At this point, I need to thank Les. He was the one who brought this investment to my attention. In fact, I actually bought out part of his investment in the buildings over a year ago. He eventually sold all of his interest to other investors (although he still kept a small percentage of each monthly payment as a servicing fee, so he was still making some money on it). However, even though he no longer had any of his own money invested in the deal, he spent countless hours working first with Joe and then with the note buyers to make sure his investors got all of their money back. I never once felt like he was not fighting for my best interests or didn't care about helping us. I cannot even begin to image the countless hours he spent dealing first with Joe (and from what I have heard, that was a nightmare), and then with the new note buyers. He will still get some money out of this deal, but compared to the amount of work he put in, I think it won't be much. If anyone has a chance to work with him, he's got my highest recommendation. He's honest, honorable, and a good communicator (although not so good of a typist). Personally, I plan to invest with him again.

Lucy Van Pelt Has The Right Idea

I was watching A Charlie Brown Christmas the other night with my wife and daughter and was surprised by the shrewd financial savvy of Lucy. This is an exchange she has with Charlie Brown:

Lucy: I never get what I really want. I always get a lot of stupid toys or a bicycle or clothes or something like that.

Charlie Brown: What is it you want?

Lucy: Real estate!

You can see it for yourself in this YouTube clip at around the 6:50 mark.

Any German Readers Out There? Need Assistance

The Louisiana deal is still dragging on.. Hopefully it will be done today and I can post what's been happening..

In the meantime, I am asking for some help, particularly from any readers in Germany.

My father-in-law was in the Air Force and when my wife was growing up, she spent some of her teen years living in Germany on the U.S. Air Force base there. She also loves Christmas and while living there, she fell in love with an album of Christmas music by a German artist named Heino. For the last several years, she's been trying to find this album on CD, without any luck. So if there are any German readers out there who can look for and pick up a copy of the below CD for her, I would greatly appreciate it. I believe the CD is out of print - it was originally issued in 1994. A used copy is fine though. The CD is a reissue of an album that was released long ago under a different name. I should also note that this is the only CD my wife is interested in. She doesn't need any other Heino CDs (thankfully).

Thanks to anyone who can help!



Heino - Die Himmel rühmen

Flipping LLCs Update

Anonymous asked for an update on the four LLCs I am invested in that flip properties in the San Francisco area. There is not much news that is different from my last update on these. Three of the four are now ended and the fourth one ends in the next six months.

The real estate slowdown has really put the brakes on these investments. Although the terms of the LLCs are over, they are still operating. Why? Because the properties they own have not yet sold. They are being rented out now to generate some cashflow, but the return of my principle is being delayed until the properties sell. Not all of it though. Last month, the latest LLC to end distributed 20% of my initial investment. The rest is still tied up in properties.

The company that runs these LLCs has offered investors a new program where you earn 9% on your money, paid monthly. You can roll your original LLC investments into this new program. However, the program requires a two year commitment. I can earn more than 9% and I don't want to tie up my money with them for another 2 years, so I've opted to skip that investment. Now I just have to wait for the properties to sell. The way things are going, it might take two years anyway..

Hopefully, I'll have an update on the Louisiana deal later today...

Wii Update

My experiment in reselling a Wii for some extra cash is now over. I am a bit disappointed in the results, but I still came out ahead, so it wasn't a total failure.

My eBay auction ended with a high bid of $450, plus $39 for shipping, handling, and insurance. I was hoping for closer to $500 though. Here's all the details:

Sales Price	$450
Shipping, Handling, & Insurance	$39
eBay Listing Fee	- $4.35
eBay Final Value Fee	- $15.13
PayPal Fee	- $14.48
Cost of shipping box	- $8.00
Shipping & Insurance	- $24.78
Cost of Wii	- $375
Net Profit	$47.26

The profit wasn't close to $100, as I had hoped, but it is still acceptable, considering the tiny amount of time I put into this. Close to a 13% profit in five days, most of which was just waiting for the eBay auction to end. I figure I spent less than 1 hour on the whole deal.

eBay and Paypal fees killed me. I knew they were expensive, but forgot how expensive. No excuse for this. I could have easily looked up the fees before I placed the auction. However, had I decided to sell this on Craigslist or some other site instead, the amount of time I had invested would have been more, so it's a trade off between effort and cost. I also could have used a 3 day auction length instead of 5 days. No one bid until 2 hours before the end time, which I half expected, so there was a lot of wasted time there. I also only had 5 bidders. I was expecting closer to 15, based on the other auctions I was seeing. And finally, my auction ended on a Tuesday night, at around 9 PM Pacific time. Auctions that end on weekend nights tend to do a bit better.

All in all, I'm happy with my $47 profit, considering how little work I put into this effort.

Christmas Present From The Tax Assessor

I got my tax bill in the mail for the next year's property taxes at Rental #1 and got a nice surprise. When I was analyzing the property before purchasing it, I used the tax estimate calculator at the assessor's website and had estimated my yearly property tax to be $989.00, based on my purchase price for the house. But the tax bill is currently still being figured using the seller's purchase price, which means my tax bill is only $376, just a bit higher than the $371 the previous owner was paying. That gives me an extra $51 a month in cashflow! Of course, I'm sure next year the taxes will go up, but at least I got a one year reprieve from the higher tax.

And that money will come in handy. The property is still not rented yet. It's only been on the market for two weeks though. The old tenants moved out the end of October and the management company had it off the market for two weeks for cleaning. December is the first month that I've had to make a mortgage payment without getting any rental from it, so hopefully it will rent soon.

Another Christmas Money Making Venture

Last year, Tickle Me Elmo was the hot Christmas gift and Kenric did what many others did to capitalize on the craze - buy a bunch and resell them. This year, the hot gift seems to be the Nintendo Wii, at least so far in the holiday shopping season.

Working for a video game maker gives me something of a unique insight into the world of video games, but I didn't need any inside information to know that no store can keep these things in stock. I just had to listen to the tales of co-workers who have been looking for one for the past several months.

So it happened that last night I was in Costco and noticed a woman leaving. In her cart was a Wii. I immediately found a Costco worker and asked where they were. When I found them, there were only four left, so I grabbed one. I would have grabbed them all, but Costco was imposing a 1 per membership limit - much to the chagrin of the guy behind me who tried to tell me both he and his 6 year old son could buy one. His hopes were quickly dashed by a nearby Costco employee. The remaining Wiis were grabbed within 5 minutes.

I've got my bundle, which includes 2 extra controllers and an additional game, listed on eBay now. Based on the sales I am seeing, I should net about $100 to $150 on this - about a 30% return for a few minutes work. Not too shabby, considering it basically just fell into my lap.

Of course, now I think I'm going to get lucky and find one in every store I walk in :-)

Phoenix Housing Prices

Things are slowing getting back to normal here. After being gone for a week and coming back and having to rebuild my computer after it crashed, I'm slowly starting to gain control over the items that piled up while I was away. One of the things I am catching up on today is my blog reading.

Last week, Kenric posted about the housing price drop in Phoenix. One thing he said was "If you have cashflow or breakeven you can survive this. That’s why cashflow is so important." That is oh so true. I have a co-worker who has been caught in the housing slump and next month will join the ranks of those who have been foreclosed on, a group that grew by 50,000 just last month alone. This co-worker is the epitome of the uniformed investor who jumps on a bandwagon and ultimately gets burned. A year or so ago, he bought an investment property in the Phoenix area and rented it out. His biggest mistake was in renting it out for less than his mortgage payment. He had negative cashflow from the start. Never mind factoring delayed costs like maintenance, vacancies, etc. There was no way he could get a positive cashflow. What's more, he know this and went into the deal willingly. His plan, like that of so many others in the real estate mania, was to hold for appreciation and then sell.

Through a combination of circumstance and ignorance, things went downhill quickly. The housing market tanked. He thought he couldn't sell the property while he had people renting it (even though I said otherwise), so he held on to it longer than he should have. As a result, he now owes more then the property is worth. One thing led to another and now next month he will lose the house and have a foreclosure on his credit report, not to mention an huge tax bill if the bank accepts a short sale before the foreclosure. Unfortunately, he still feels his only error was in not selling the property at the peak of the real estate bubble. The problem is, you can only tell a peak once you have receded from it. Sadly, he has learned no lesson from this.

Cashflow is king. Always make sure your rental income will cover your expenses!

Update: Literally about 4 minutes after I posted this entry, I found out my co-worker has sold the house. I don't have any more details than that, but I'm sure it was at a loss. His monthly payment was $2,600 and he had it rented for $1,800. Now, with all the foreclosures in the area. rents are around $1,100.

Louisiana Conference Call

Phew.. I just got off a 1.5 hour conference call with the other mortgage holders on the Louisiana mortgage that is going to foreclosure a week from today. We basically went over the various options we have open to us and how we want to instruct our attorney to bid at the auction. The opening bid at the auction starts at an amount equal to the foreclosure auction costs, which is less than $2,000. We will instruct our attorney to bid the price up to our costs, including the back interest, late fees, etc., if anyone else is bidding. If no one bids, the place is ours for the cost of the foreclosure fees.

We had a couple alternatives. Assuming there are other bidders, we could opt not to bid up to the amount we are owed. In effect, this would be a short sale, since we would be accepting a price of less than what we are owed. No one on the call was too excited about doing this. We could also opt to bid more than what we are owed. We would do this if we felt the properties were worth more and could be worked on and improved to increase their value. Although we do feel the buildings are worth more, this raises other issues - which people will own it, who will handle the renovations, who will provide the additional capital necessary to make the improvements, etc. Rather than get into all that, everyone pretty much feels it would be better to just take our money and get out. So that is how we arrived at the decision to bid the price up to what we are owed and no higher.

Of course, all those questions will need to be addressed anyway if no one bids or no one outbids us and we end up owning the property anyway.

Lastly, there is always the possibility that Joe will file for bankruptcy the day before the auction. (Personally, I feel he will.) He is also facing 2 foreclosures on properties in Texas on that day, plus 2 more foreclosures in January, so he doesn't have a lot of other options. However, we have a couple of investors with lots of bankruptcy experience on board and they have a plan in case this does happen. All a bankruptcy would accomplish is delay the foreclosure by a couple of weeks.

Stay tuned...

Going On Vacation

I'm heading off to Kansas today for the Thanksgiving holiday, so there won't be any posts for a while. My PC also crashed and I'm having an extremely difficult time re-installing Windows, so even when I get back, it might be a while before I can post again..

Two quick notes:

Goldman Sachs today announced that mortgage lenders may need to scale back lending by up to $2 trillion dollars which could lead to a "substantial recession."

In response to the mortgage meltdown, the House voted to strengthen the rules on mortgage lenders. I don't have enough information now on the details of this particular bill, but I do think something needs to be done to help prevent the current situation from happening again. One thing that troubles me is that the bill prohibits balloon payments. As a private or hard-money lender, all of the mortgages and loans that I make have balloon payments. They are interest-only loans with the entire principle due in a balloon payment at the end of the term. However, I am not sure if this bill would apply to private money lenders, so it may not even affect people like me.

Another Louisisana Update

The foreclosure process on the Louisiana properties continues to move forward. The property will go to the Sheriff's sale on December 5. I fully expect Joe to file for bankruptcy on December 4, thus stopping the sale. Joe wants to speak with the minority holders of the mortgage note, but no one wants to talk to him and, to my knowledge, no one has. He's turned over some financials, but just his records - nothing official like a K1 or anything that has been filed with the IRS.

The "keeper", the person who has been select to manage the property while it is in the foreclosure process, has been collecting rents directly from the tenants and is in the process of paying off the bills that have been racked up by Joe's months of non-payment. The power was about to be shut off for non-payment and that has been taken care of. There were some other bills and it required some of the other mortgage investors to contribute some more money to pay them off. Of course, they will be repaid when this is all over.

So it looks like our people are finally turning the building around and getting bills paid and maintenance taken care of. Joe may file for bankruptcy and delay this further, but at least the property is being stablized and he is no longer in control of it.

And what is the exit strategy for these properties? It really depends on how the foreclosure process plays out. We have the following choices:

1. Sell our interest now at a discount. No one seems to be willing to do this. Of course, no one wants to take a loss, but I really feel we will be able to get our money back on this, so I don't see a need to sell out at a loss right now.
2. Joe can come up with money from other investors and pay off our mortgage. This is pretty unlikely.
3. Wait for foreclosure to happen. Someone other than us buys the properties at auction and we get paid off. We are then completely out of the properties.
   
4. Wait for foreclosure to happen. No one else buys, or we bid higher than anyone else and we will become the new owners, then we can sell our interest to other investors.
5. Wait for foreclosure to happen, become the new owners, and then keep the property ourselves. We'd need to discuss who will manage it, the costs involved, any monthly income we might receive, etc.
6. Wait for foreclosure, become the new owners, and one or more of the owners will get a new loan to pay off any investors who don't want to remain owners.

So there are lots of possibilites and it's too early to decide which one I will opt for, or even if these are all the choices I will have.

Good News On The ID Theft

We've got some good news on the identity theft issue. My wife got a call two days ago from the police department saying they caught a woman trying to pass a bad check with her name on it. Not only was the woman arrested, but she was singing. No kidding. The police actually said "she's singing" and naming all the people involved in the scam. I thought police only talked like that on TV!

Anyway, I guess there were several people involved and they are rounding them up now. The police asked if my wife wanted to press charges, and of course, she does. This woman is facing ten counts of forging checks - so far. We're faxing the police each bounced check notice we get and each one is another charge.

What strange is that the woman had my wife's actual driver's license! A couple years ago, my wife had her purse stolen from her car while she dropped our daughter off at daycare. The police got it back the same day and I thought everything was still in it (except for cash, of course). I guess we must have forgotten they took her driver's license. So that explains how they got her ID. So now my wife has to go get a license with a different number on it. This also demonstrates how lax clerks are at checking IDs when taking checks. My wife is about 5 foot 10 and the woman forging checks is about 5 foot 2, according to the police. Anyway, I also find it interesting that the driver's license has hung around this long without being used before. (We've been checking her credit report regularly, so I know no forged accounts have been opened in the last couple of years.)

It's Gonna Be A Long Walk Home

Nothing about real estate this time, but this is so cool, I just had to share..

Back in 1985, my friend Jim and I were 16 and on a YMCA summer camp trip that traveled up the coast of Southern California, from Orange County, where we lived, to San Fransisco and back again. On the way north, we stopped at the town of Solvang. As we did when we got to any new town, the first place we went was the local record store. It was there that Jim handed me a cassette copy of Born In The U.S.A. and said "Here. Buy this, you'll like it." I did and I've been a huge Springsteen fan since that day.

Twenty two years later, Jim now owns his own record label, Teenacide Records. He specializes in power pop and Rocket, one of his bands, can currently be seen on Fox's The Next Great American Band. Somehow, a couple of his bands caught the ear of Little Steven and now his bands regularly get picked as the Coolest Song In The World on Little Steven's Underground Garage radio show on Sirius. Little Steven has also asked his bands to play at concerts he puts on.

So my friend has a contact with one of the members of the E Street Band. And they are on tour and playing in Los Angeles. Do you see where this is going?



Monday night, we found ourselves with passes around our necks heading down to a pre-show hospitality party at the Los Angeles Sports Arena. Jim, whose music industry contacts have grown beyond my ability to keep track of, introduced me to many other famous people there: Clem Burke, the drummer for Blondie, and Kim Fowley, producer extraordinaire and Jack Skellington look-alike. (Warning: When Kim Fowley is around, hide your daughters!) As we hung out waiting for Little Steven to show up, we heard some great stories from Clem. For instance, back in 1979, Blondie and Springsteen were both recording albums in the same studio in New York, Blondie working on Eat To The Beat, and Bruce on The River. During a session, Frank Infante's guitar broke. He borrowed Bruce's and so the guitar that is being played on Atomic is actually Springsteen's guitar. You heard it here first. We also heard about a rock star who shall remain nameless whose leg fell asleep and fell down while boarding an airplane. When the stewardesses pulled off his boot, white powder flew everywhere. Turns out the plastic bags of cocaine he stuffed down there broke and his skin started soaking up the drug. Luckily, the stewardesses had a supply of baggies and helped clean up the mess. I guess they really were flying the friendly skies that day!

Little Steven showed up, looking as piratey as ever, and spent some time in a meet and greet with some contest winners from his radio show. After that was done, Jim and I stopped by and said hello and got our picture taken with him. He then invited us to a post-concert dinner that was for "just a few friends" at an Italian restaurant in Beverly Hills. Sweet! He asked for the latest Rocket CD and Jim said he had one in his car and would give it to him at the dinner.



The concert started shortly after that and it was incredible. I've been to dozens of Springsteen shows and this was definitely one of the best. I think only 2 slow songs were played and the whole show was a guitarfest whose energy level kept escalating. Bruce was obviously having a great time and I can only hope that when I am 58, I have one-tenth the energy he does.



We got out of the venue incredibly easily. It took us about 3 minutes to walk to our car and we were out of the parking lot in less than 1 minute after that. As a result, we were one of the first ones to show up at the restaurant. Nicole, Little Steven's assistant, was already there and greeted us. She asked how we liked the show and said that some people in other cities complained about the setlist. It was heavy on new material (he played 8 songs from the new album that night), so those fans who just want to hear old stuff were disappointed. She said New Jersey fans, believe it or not, are actually the roughest crowd. Of course, those are mostly fans who want to hear the old stuff. Personally, I like the new stuff and I don't want Bruce shows to become some nostalgia-fest.

We sat down at a table and waited, eating some bread and drinking wine. After a short time, other people started showing up. Kim Fowley was there, so we talked with him a bit more. Gary W. Tallent, the E Street Band bassist, showed up. And the last person to show up was Little Steven. We ordered dinner (I had lasagna and Jim had linguine with meatballs) and just relaxed. There was a group of TV people from the Sopranos - writers mainly, no actors. There was a writer who was reviewing the concert and, of course, Kim Fowley, Jim and myself. Only about 25 people in all. Towards the end of the evening, a fan stuck his head in the room and spotted Little Steven. The fan was drunk and said something I didn't hear to Little Steven. Kim Fowley saw what was going on and motioned to his driver, who also was a bodyguard for Jack Nicholson at one time, to be alert. I heard Little Steven tell the fan in a rather nice voice "Of course I fucking care. I said "Thank you," didn't I?" After that, the fan left and tension eased.

We asked both Gary and Nicole about the possibility of more shows in the U.S. after the European tour. They said that was the plan, but nothing was finalized yet. I told Gary they needed to stop in Arizona the next time around :-)

At around 1 AM, the night was wrapping up. The waiter was asking if anyone wanted coffee or espresso. Little Steven said "Bring one of everything for everybody!" People started leaving shortly after that and Little Steven started posing for more pictures. Kim Fowley started unbuttoning his shirt and said to Jim and me, "I've got a surprise to show Steve. Watch this." Now when a guy like Kim Fowley starts unbuttoning his shirt, you should be scared. Luckily though, we weren't treated to the sight of an old man's scrawny chest, but to a Little Steven's Underground Garage t-shirt that Fowley had on. Phew. Close call.



As we walked out, Jim gave Little Steven the Rocket CD and I shook his hand and told him it was a great show and thanked him for dinner. He said it was his pleasure.

It was a fantastic night and pretty much a dream come true. Everyone was very friendly and down to earth. There were no rock star attitudes. And the funniest moment of the evening? Seeing Little Steven put on a pair of reading glasses to sign the credit card slip.

Jim - thanks for the opportunity, my friend. We learned more from a three minute record...

October, Please End

This has not been the best month for me. It started off nice. I bought a new bed that cost a couple thousand dollars. My wife needed it for her bad back, so we had to bite the bullet and buy it, even though I would have preferred to wait a bit. Shortly after that, the wheel bearings on my car needed to be replaced. $800. Then I got the oil changed and was told my power steering hose was leaking. Took it to the dealer and it turns out the news is worse than that. Not only is a hose leaking, but the steering gear is leaking and the intermediate shaft is wearing. Total repair cost: $1,500.

Then my wife's identity was stolen. We received two more bounced check notices yesterday. This time, the notice included copies of the checks and it's pretty obvious the checks were scrubbed.

My uncle and grandfather had to evacuate their homes in the San Diego area due to the wildfires. My uncle watched his neighbor's house, which is right behind his, burn down on TV. No word on his home yet.

Today, I got some bad news about a co-worker who hadn't shown up for work the past two days. He wasn't responding to calls or email, so we called the police and they went to his apartment. When they knocked on the door, they heard gunshots. SWAT was called and when they entered, they found him dead.

Is it November yet?

Identity Theft! (Updated)

It appears my wife has been a victim of identity theft. We got a letter last week from a check approval company saying a check had been bounced. The account number was not ours and it was written at a store we never shop at. Further, my wife never writes checks. I mean, like never! I pay all the bills with our joint checking account and she has her own checking account that she only uses a debt card with. So when we got this letter, we figured it was some sort of database glitch that matched her name and address up with someone else's account.

Then Saturday, we got another letter, this time from the Kroger grocery company. This one said she had bounced two checks. We called them up and found out some more info. Kroger had already written the checks off as uncollectable. The checks were written at a Fry's grocery store in Peoria. They had my wife's driver's license number on them and were drawn on a Wells Fargo bank account. My wife has never had a checking account at Wells Fargo. We requested copies of the checks.

The next step was contacting the police department and filing a report. We had a bit of a problem determining which police department to contact. We first tried our local police, but they said to call the Peoria police because that was where the checks were written. Peoria said no, we need to call our local police and they would open the case, gather some evidence, and if there was enough to investigate further, they would pass it on to the Peoria police. So we finally managed to get our local police to take a report. The copies of the checks, when they arrive, will also be turned over to the police for evidence.

We also contacted all three national credit agencies and put a 90 day fraud alert on my wife's credit file. This can be done via an automated process over the phone. Once we have a copy of the police report, we can submit a written request and the fraud alert can be extended to a year. Thankfully, I have been reviewing our credit reports every four months, so I know exactly what should be on my wife's report and should be able to easily spot anything new. I believe activating the 90 day fraud alert also triggers the sending to us of a copy of her report. The checks were written the last week of September, so there's a three week window where the thieves could have been using her info without our knowledge.

We also contacted the Federal Trade Commission and filed an identity theft report with them. We don't know how much information the thieves have. We know they have a name, address, and driver's license, but we don't know if they have a social security number or anything else. You need a social security number to open a checking account these days, but they could have used a fake one. (We're hoping they did.)

Today, we're going to visit a Wells Fargo branch and try to shut down the phony checking account. We'll speak to a manager and find out what we can do. If he won't shut the account down for some reason, I figure since it's in my wife's name and address, we can just go to a different location and tell them to close the account.

I figure the theft must have been the result of a database hack at some company or an insider job somewhere. I have a shredder and shred anything that has personal information on it. We also had our names taken off the pre-approval lists for credit card offers a couple years ago and that status has been verified each time I check our credit report.

About two weeks ago, we had another anomaly that I now wonder might somehow related to this. My wife started getting phone calls from people asking about a car she had for sale. The only problem was, she didn't have a car for sale! We did some research and it turns out someone placed an ad at autotrader.com for a used car for sale. The ad listed my wife's cell phone number. I emailed the person who placed the ad and got back a typical scam email message. The seller was supposedly located in Scottland on business, but the car was in Arizona and if I would send them my name, address, etc., they would send me information on selling the car via an escrow company. Typical email scam. We filed a fraud report with Autotrader and the ad has been taken down. They told us the ad was placed over the phone at an Arizona Autotrader office.

So far, we've had no direct financial impact. The bounced checks have all been from accounts that aren't ours. There is no unusual activity in my wife's bank account or on her credit cards. It looks like someone is using her identity to open new accounts rather than take money from her existing accounts.

Update: Wells Fargo has no record of any accounts using my wife's social security number, so that's a good sign. They also have no accounts under her name at our address. They suspect what happened was someone got some checks from a valid account and "scrubbed" them - chemically took the legitimate name and address off and printed hers on. Wells Fargo can't do anything until we get the copies of the checks, which will have an account number on them.

Since they do have her driver's license number, we're going to contact the motor vehicle division and have a new license issued with a new number.

Damaged Doors At Rental #1

I received my September statement from my property management company today and was unpleasantly surprised to see a bill for $150 for some door repairs to my property. The bill states one bathroom door was repaired and two other doors were shaved to fit properly.

My lease states:

Lessee will, at lessee’s sole expense, keep and maintain the leased premises and appurtenances in good and sanitary conditions and repair during the term of this lease…Major maintenance and repair of the leased premises (reserving and excepting costs of ordinary repairs) not due to lessee’s misuse, waste, or neglect… shall be the responsibility of the lessor.

It seems quite clear to me that any damage is either due to the tenant's abuse of the property, or required as part of ordinary maintenance. In either case, it is the tenant's responsibility to pay for the repairs.

I have faxed my property manager and asked her to call me and explain what exactly was repaired and how shoe came to the conclusion that the tenant was not responsible for the cost of the repairs. I have not heard back yet.

I am quite glad these tenants will be moving out at the end of the month. I get the feeling that they thought they were living in a hotel instead of a house and that whenever they wanted anything, they just called the property manager, who was more than happy to do whatever they asked and pass the cost on to me.

General Update

My tenants in Rental #1 have opted to not renew their lease. On Monday, my property was not yet listed on my property manager's website, so I emailed her to ask if they put it up as soon as the tenants give notice, or if they wait until they have moved out and they have cleaned the place. I never got a response, but my property is now listed on their website. And the PM must have felt rents could be increased, because it is listed for $775 a month, a $25 per month increase. There are no pictures on the website, and the link to a map of where the property is located doesn't work, so there is still some work to be done.

The Louisiana project I am a mortgage investor in has gone to foreclosure. According to those dealing with him, "Joe" is pissed and is threatening lawsuits left and right. Why is he pissed? Because the rent checks ($15,000 a month on one building alone) are no longer going to him! As per the terms of our mortgage, we can step in and collect the rents directly sholud Joe default. The existing property manager has been named the "keeper" of the property, which means he is responsible for the upkeep, holding all the foreclosure documents, collecting rent, etc. Since Joe never paid this guy and we did, I think he's happy to perform this duty :-)

It's still possible that Joe will file bankruptcy and delay this further. We shall see how it goes..

Rental #1 Tenants Have Given Notice

My management company told me today that the tenants in Rental #1 have chosen not to renew their lease, which expires on November 1. This stopped me from making a decision I wasn't really looking forward to making - should I continue to rent to them or not?

The reasons for not renting to them were fairly clear - they paid their rent late several times. Given that the management company keeps the late fees, there is really no benefit to me to accept late rents. I also just didn't get a good feeling from the tenants. First, when I bought the property, the people paying the rent were not on the lease. I corrected that. There were a couple of times when I needed to have people contact them, and the phone number I had sometimes worked and sometimes didn't. To me, that means they are having trouble paying their phone bill.

The reasons for continuing to rent to them were also clear. The holiday season is coming up and it may be hard to find a tenant. And, of course, the evil you know is better than the evil you don't. Who knows what kind of tenant the next person might be.

There was a middle course I could have taken. I could have offered to continue to rent to them on a month to month basis. This would get me through the holidays (assuming they agreed to this and continued to pay their rent) and still let me get rid of them easily if I needed to.

In the end, the tenants made the decision for me by opting not to renew. It's funny, but my first thought was to be offended. I felt like their decision was a reflection on me personally. That somehow, I didn't have a nice enough house for them to live in. Of course, this is not true at all. I remember from my days of living in rentals that the decision to move rarely has anything to do with the house, but more with financial and / or employment issues. And renting property is purely a business for me, so I need to keep all personal feelings out of it. Still, it's funny how that was my first thought.

So the bad news now is that I could be left trying to fill the property during the holiday season. The good news is I might be able to raise the rent for a new tenant. I've asked the management company to raise the rent if they feel the neighborhood and property warrant it. One thing in my favor, through a little quirk of scheduling, is that I might not even have to face a mortgage payment without rental income! Due to my refinancing, I gained a month without a mortgage payment. (Actually, I didn't. The payment was just made in escrow instead.) What this means is my rental income goes towards paying my next month's mortgage. In other words, the October rent I receive pays my November mortgage bill. So if the place rents quickly, I won't even see a blip in my cashflow. Of course, that's a big if...

Foreclosure Papers Filed For Louisiana Property

When I last wrote about the Louisiana commercial property I'm invested in, the buyout of "Joe's" interest in the property had fallen through and he was once again late on his payments. We (the other mortgage investors and myself) had decided to start the foreclosure process as soon as possible.

I received word yesterday that the process has begun. On September 15, Joe was officially late for the September payment and late fees started accruing. A 10 day courtesy letter was sent to Joe in September via certified mail telling him he was late and had 10 days to become current.

Later in September, a 10 day demand letter was sent, letting him know we will foreclose unless he makes his payments. That ten day period just ran out and yesterday our attorney filed the foreclosure paperwork. We can now legally pay the building management company, whom Joe has also not paid, and include that in the amount Joe owes us. Same thing goes for the utility companies, who have also not been paid and are threatening to shut off the power.

Our mortgage specifies a 45 day foreclosure period, so if all goes smoothly, we will own the property in a month and a half. It will not go smoothly. Joe will try to fight this with more delaying tactics, possibly including filing for bankruptcy. Whatever he does, financial control of the property is no longer his, so we can take steps to get everyone paid up and happy again.

Real Estate Slowdown Hurts My Cashflow

For the past four years, I've had some investments in four LLCs that flip properties in the San Francisco area. As you might have guessed, 2004 and 2005 were pretty good years for these investments and every couple of months, I was receiving checks for hundreds of dollars - and sometimes over a thousand. Now, however, the resale market has slowed down dramatically. Instead of the checks for $1,000 or more I was getting, the last check I received was for just under $20. And yesterday, for the first time since I've been invested in them, one of the LLCs did not distributed any money at all this period. The LLCs have not been able to sell some of their properties and so they have instead rented them out, so at least they are generating some positive return. But the particular one I got info on yesterday sold a property for a loss, so even the small rental income was offset by the loss.

I'm glad I decided to stop my investment at four LLCs. At this point, I think I can get a better return purchasing property and renting it on my own. (And, in fact, I bought Rental #1 instead of investing in another of these LLCs.) Now I just have to wait until the term of the LLCs is up (between one month and one year) so I can get my principle back for use in other investments.

Got The Bug

I'm feeling the urge to buy another rental property and the blame lies squarely at the feet of Trisha for recently posting about two properties available in Tulsa. The problem is I am looking at a lot of upcoming expenses in the near future - we need a new bed, we're traveling for Thanksgiving, Christmas shopping time is quickly approaching, and next year, we're going on a cruise. The cruise is a birthday present for my 40th birthday, which will also be next year, but we will be paying for the shore excursions, and those add up quickly. Not to mention the costs of buying souvenirs at all the places we visit!

But I want another rental! Santa, are you reading this?

Garage Town

Sorry it's been a while without any posts.. I was in San Francisco on business.

The other day, one of my co-workers was in my office talking about a new property development in Mesa, Arizona that she came across - Garage Town. It's a development consisting entirely of garages. Unlike a rental storage space, at Garage Town, you actually buy and own the garage, just like you would buy a home. The community is gated, you have 24/7 access. The garages can include cable, A/C, internet and just about everything a home has. They have a community clubhouse that has showers, bathrooms, and a mini-kitchen. (So while legally, you probably couldn't live there, in reality, you could stay for a couple days without being too inconvenienced.) My co-worker also said the garages vary in size from a standard one car unit, to huge two story spaces capable of sheltering an RV. Their website claims it is "the perfect starter real estate investment!" You get all the benefits of REI, including tax deductions,depreciation, and the ability to do a 1031 exchange.

The drawback? Here in Arizona, the smallest unit starts at $80,000. Prices vary across the country, but this seems pretty expensive for a garage - my Rental #1 in Tulsa cost as much. As for a real estate investment, I have my doubts. For a true investment, you'd need to rent this out. I'm not sure there are that many people who need to rent a garage. Further, I would think this would be pretty susceptible to economic downturns. Everyone needs a place to live, but when money gets tight, I think the extra garage payment would be one of the first things to go. Still, it's an interesting concept and I would like to know if any investor actually makes money renting one of these out. I have a feeling the investors who will make the most money are the builders who sell the units for the first time.

Bankrupt AMH's Property Tax Checks Bounce

I heard about this from Savvy Saver - American Home Mortgage, the subprime lender who is in serious financial difficulty, has apparently been bouncing checks that it sent out to pay mortgage holder's property taxes in Maryland. Curiously, I can't find this story on CNN or MSNBC, but there is an article here. I did find a story from three days earlier about Freddie Mac trying and failing to take over loan servicing from AMH. However, AMH filed for bankruptcy protection before Freddie Mac could get the servicing rights.

There are a couple scary things about this. First, the escrow accounts of mortgage holders are supposed to be get separate from the other funds of the business. These accounts are protected by state law from bankruptcy proceedings, but there is a possibility the accounts were incorrectly frozen when AMH filed for bankruptcy. Being of a more cynical nature, I tend to think the company "borrowed" money from these accounts as their financial crisis escalated. We'll have to wait to see how this thing plays out to find out for sure. However, the big losers in this mess are the people whose property taxes were not paid. They are still responsible for the taxes and will need to find some way to pay the bill.

The second scary thing about this is this quote:

Anthony McCarthy, a spokesman for Mayor Sheila Dixon, said the city does not plan to notify the affected homeowners. They will get a notice in November along with all other delinquent taxpayers if the problem isn't resolved by then.

So your government officials aren't going to notify you until your taxes are past due and the penalties and fees have started accruing. That's nice. Instead of giving people an extra two months notice and more time to find a way to come up with the tax payment, they'll just hope the problem goes away by then. Yup, the mayor sure does care about her constituents.

Commentary On The Subprime Meltdown

...from the comics pages:

Louisiana Update

This investment is a textbook case of why you should always know who you invest with and make sure your objectives and styles are compatible. (Although in our defense, I will say that when we went into this deal, the problem person was not the majority partner. He only became that after buying out someone else.)

The last time I wrote about this, it appeared things were looking up - our investment was brought current, a new team had bought out the slumlord majority holder "Joe", and we were looking at a possible 100% upside potential. Not any more.

I just got off a conference call and have the latest info. Apparently, the purchase never went through. During the due diligence phase, the team went to check out some of the properties that were in Houston that were part of the sale and found out they were in bad shape. Like, ready-to-be-demolished shape. So three of the nine properties in the deal were rejected. The deal was moving forward, but Joe then contested the sale, saying we were getting the Louisiana properties too cheap. Legal counsel for the new team advised them to cancel the purchase, so the deal fell thorough and Joe is still the owner.

The good news is the investors have been brought current, at least through August. The September payment is due by the 15th, but it's looking like that won't be made. Also, the property tax still has not been paid since the beginning of the year and there are several other outstanding payments owed, including one to the property manager (someone you definitely want to keep happy).

At this point, we are moving forward as fast as possible with foreclosure. If you recall, we have both a first and second on the properties. The second has the stronger language, so that is the one that will be foreclosing. We have a couple of options here. If we don't get the September payment, we can foreclose for that. Because the tax bill is a senior lien to any mortgage, we can pay the delinquent tax bill to protect our interests in the property and foreclose for that reason. (The second actually still has a couple hundred thousand available, so we wouldn't have to come up with any more money to pay the taxes.) Speed is of the essence here because, as mentioned earlier, Joe is a slumlord and we want to take control of the property before he runs it into the ground and destroys the property's value.

In the past, Joe has threatened to file bankruptcy if we start foreclosure. At this point, we're ok with that. If he files bankruptcy, the buildings go into a trust and the court assigns a third party to administer the trust. This accomplishes our goal of getting control out of Joe's hands. Additionally, our second mortgage contains an assignment of rent clause, which means we can collect rent directly from the tenants, again, keeping the money, and therefore control, out of Joe's hands.

Once foreclosure has been filed, even if Joe brings the payments current, it still won't be enough to stop the foreclosure. Joe will need to show he has a plan and the resources to continue to make payments and effectively manage the property.

Joe has asked some investors what they want for their interests. In other words, he wants to know if he can buy them out. We've told him we will sell our interest at cost, cash only. He doesn't have the money to do that, but he may be able to talk some other investor or investors into partnering with him.

So if anyone reading this gets an offer to go in on some office buildings in Louisiana, contact me before you say yes :-)

Nevada Extends Charging Order Protection To S-Corps

This one was brought to my attention by Diane Kennedy's tax Loopholes Updates newsletter. LLCs and Limited Partnerships have enjoyed protection from charging orders in many states for some time. A charging order is a legal instrument that says if a creditor obtains a judgment against you personally, the creditor can attach a claim to your interest in an LLC or LP that you are part of. The protection comes from that fact that the creditor does not get any money until you make distributions from the LLC or LP - which you never have to do. However, they are responsible for any taxes on profits the LLC or LP makes, even if those profits are only on paper and never distributed to shareholders. Thus, if a creditor gets a charging order against your LLC, he is liable to pay the taxes, but may never get any income from it.

Nevada is one of the few states, along with Delaware and Wyoming, that is aggressively trying to attract business interests by passing laws that are very business-friendly. In continuing that trend, Nevada has no extended the same charging order protection enjoyed by LLCs and LPs to S corporations. As Diane points out in her newsletter, this is a new law and we should wait until there are several court decisions supporting it to get all excited, but it is worth keeping an eye on. And, of course, you shouldn't be holding your investment real estate in an S-corp anyway, but one could be the manager of your LLC...

Early Prosper Payoff!

When I logged in to my Prosper.com account over the weekend to check things out, I was surprised to see that one of my loans was being paid off early. This was a nice contrast to my two loans that have defaulted. Once this loan has been paid off, which should be in a day or two as the transaction settles, I will be left with one remaining loan, which is at 8.85%.

Foreclosures Up Again - Government Bail Out?

CNN is reporting that RealtyTrac says foreclosures were up another 9 percent in July over June and up 93% over the same month last year. They originally predicted a 33% increase over last year in foreclosures for the year, but have now raised that forecast to 60%.

But more ominous is this story from msnbc.com. Congress is looking at bailing out homeowners and lenders. Right now, it seems most of the possible action seems to be related to modifying the rules of Fannie Mae and Freddie Mac to allow them greater flexibility in the types of loans they can insure. I don't know about you, but I get nervous whenever the government decides to step in and "fix" a problem.

And in other mortgage related moves, there is this story that says Warren Buffett is considering buying part of Countrywide's mortgage business. Buffett has a pretty good track record at picking up good companies and discounted prices..

Natural Disasters

Growing up in Southern California, I rarely experienced the full force of Mother Nature. We had the occasional earthquake and once in a while the El Nino winds paid a visit, but for the most part, the weather was pretty idyllic. And now that I live in Arizona, I still don't really experience much bad weather. We get some pretty intense thunderstorms, but they typically don't last for too long - hours at most. So when I bought Rental #1 in Oklahoma, I mentally prepared myself for the fact that a tornado could destroy the house. After all, isn't the Midwest a swirling dustbowl of bad weather? Isn't that where Dorothy got blown away to Oz?

Of course, I know my weather stereotypes are not true, but some preconceptions persist. The bottom line is I have never lived in a an area that experiences extreme weather and so I have no idea how much it may affect buildings. I know if you live in areas that have really cold winters, you need to winterize your house. Apart from making sure your pipes don't freeze and burst, I have no idea what else winterizing your house entails. Nor do I know what can happen if you don't do something that you should have.

Hence, I am mentally prepared for my rental property in Tulsa to get blown away in a tornado. I have insurance, after all. But I wasn't prepared for flooding. This weekend, I saw images of the flooding going on in Oklahoma City and other parts of the state and was a bit worried. Flooding is not usually covered under normal homeowner's insurance, so I don't think my property would be covered in the event of a flood. Luckily, it turns out Tulsa is getting lots of rain, but experiencing no flooding, so I appear to be safe. But this weekend did serve as a wake up call.

This weekend also was my birthday! Woo-hoo!

Cashflow Day

Got my rent check today from Rental #1. I am pleased to report the tenants have finally paid the $200 they never paid back in May. No need to evict them.

I'm of two minds on this. These tenants have a history of late payments and I have already decided that I will not renew their lease when it is up in November. After reading what happened to Trisha's property after her tenant was evicted, I'm not really looking forward to having to evict someone. So to get the tenants out of the property, my choices are eviction for some reason and face possible property damage now or wait and try to find new tenants during the winter holiday season. If the tenants do decide to really damage the property if they get evicted, the property would probably be vacant for repairs close to the same amount of time as it would be if I tried to find a tenant during the holidays. In terms of lost rent, it might be a wash, but in terms of clean up costs, it would probably be cheaper to wait for the lease to expire.

In reality, I'll probably just wait for the lease to expire. August rent has been paid, so that only leaves two more months on the lease.

Reverse Stock Split Arbitrage Revisited

Several months ago, I wrote a couple of posts about some reverse stock split arbitrage plays I made. I've still been making them, but they have been a little harder to find. I've made about 6 or 7 of these trades and all have been successful except for one. That one failed because the terms of the split were altered so that small shareholders were affected instead of not being affected, which this technique relies on. In my comment here, I speculated that the terms might have been changed because the company's Board of Directors saw an unusual level of trading in their stock right before the split and suspected something was up. For that reason, I decided to stop writing about these opportunities on this blog. (Well, that and the fact that I want to keep this blog focused on real estate investing and not stock investing.)

Today, I came across an SEC filing that confirms what I suspected in that comment:

The Board's first election to reverse split the stock 100,000 to 1 with an automatic roundup to 100 shares would have accomplished the desired reconfiguration of the stockholder base, however, the announcement of the action by filing of the Company's Preliminary Information Statement caused speculation in the stock. Many speculators purchased one share in an attempt to gain entry to the reorganization. The Board contacted the OTCBB and inquired as to the possibility of stopping trading in the Company's stock, but was unable to do so. The net result of the buying by opportunistic speculators would have been to dilute the stockholder base. For this reason, Management decided to abandon the reverse split of 100,000:1.

So the companies do notice trading patterns and volumes. Furthermore, at least one company was willing to change their previously announced plans in reaction to it.

So if you are looking for these opportunities, what are you supposed to do? Well, I think the safest bet would be to wait for the definitive 14C form to be filed with the SEC. Note that the above mentioned speculation occurred after the preliminary 14C was filed. I believe, although I have not verified, that once the definitive 14C is filed, the company cannot change or cancel the actions mentioned in the filing. I should also note that I do not believe companies are required to file a preliminary copy, so some companies might not do so.

Anyway, this trading technique seems to be all over the internet if you know to look for it, so perhaps the good times are coming to an end..

House Swapping

When I need to put gas in my car, I usually stop by Costco on my way in to work in the morning. I get there just around 6 AM, when the place opens, and usually spend a few minutes chatting with the guy who unlocks the pumps. He knows I'm a real estate investor because my car has a license plate frame that says "I Buy Houses" and we often talk about local real estate trends.

This morning he told me he has seen stories of people who are trading their houses with someone else instead of buying a new one. With prices still too high in some parts of the Valley, these people can't afford to purchase a new home, so they find someone to swap houses with. The hard part, of course, is getting two people together who have homes the other one wants and are similar in price range, but that's a something the internet is great for.

I'm not sure how all the details would work out. I'm sure if one home was worth a couple thousand more than the other, the extra cash would be paid, so the typical exchange probably isn't a true house swap. However, this is an interesting concept.

I'm sure Realtors won't like this idea, since there would be no commission in it for them.

The Mortgage Meltdown Fallout Continues

Reuters reports that American Home Mortgage Investment, a REIT, could no longer fund loans and may be forced to liquidate its assets. This comes after last Friday's announcement that it would not be paying its quarterly dividend to shareholders. The company is unable to fund $300 million of loans it already committed to make on Monday. It is expected to be unable to fund another $450 to $500 million in loans today. Shares of the REIT closed at $1.04 on Monday, down from a high of $36.36 in December. But this is the important part of the article:

"It is raising concerns about the whole mortgage market because American Home really didn't do anything in subprime," said Sam Rahman, a portfolio manager at Baring Asset Management Inc.

Stop and think about the full ramifications of this. On the personal level, how many home buyers are going to not be able to purchase their houses now because AHM can't fund the loans? How many shareholders have lost substantial chunks of money due to the drop in the share price - never mind the stopping of the dividend. And how many mutual funds had positions in this company and will also lose money? And all this from a company that had very little, if anything, to do with subprime lending and accounted for roughly 2.5 percent of the U.S. mortgage market.

And then there are the collateral effects. Mortgage insurers are getting hit. MGIC Investment Corp. and Radian Group Inc. said they were going to write off a combined $1.03 billion investment in the subprime mortgage arena. Add this on top of the other $1.4 billion loss I wrote about a couple days ago and we are starting to talk about some serious money. Does anyone still think this isn't anything to worry about? That it won't have ramifications in our broader economy? Just think about those people whose loans won't get funded. Their purchases will probably fall through. This may cause them to cancel the sale of their existing homes. Moving companies won't get hired, new furniture won't be bought, money stops changing hands. The effects trickle down.

So what's a real estate investor to do? If you invest in REITs or other real estate related stocks or mutual funds, take a close look at the company's portfolio and how much exposure they have to adjustable mortgages. Check to see how much cash they have on hand and how close they are to being maxed out on their credit lines. Check the rate of defaults and late payments on their loans. Are they rising? All this information is available in the reports companies are required to file with the SEC. If you prefer to invest in properties, now is the time to stick to basics - buy below fair market value (significantly below if possible because FMV can drop like a rock in some places). Be sure the property will positive cash flow when rented at or below market rates. Don't count on appreciation or tax deductions to turn your negative cash flow into a positive cash flow. Like all else, this period will pass, but you need to make sure you can weather the storm.

Foreclosures Skyrocket

According to this report on CNN, the number of foreclosures rose 58% during the first half of this year. One in every 134 households is going into foreclosure. In Nevada, it's even worse - 1 in every 40 houses.

Louisiana Update

Another conference call for the Louisiana investment just concluded and it looks like TMG, the investment group that is taking control of this project, is giving us investors a pretty good deal. As usual, there are lots of details, but I'll try to keep it simple here.

Those of us that are currently on the first mortgage for the commercial properties in Louisiana have the following options:

1. Get cashed out. Your investment will be paid off and you'll get your money back.
2. Roll your investment into a new second mortgage. The second will be collateralized not only by the two buildings in Louisiana, but also a couple of other commercial properties in Houston (a strip mall and some apartment complexes). The second mortgage will be for about a year, although it is likely it will be refinanced and paid off early. (We will be guaranteed at least 6 months interest though.) The second will be at the same interest rate we are getting now (12%). In addition, we will be getting 4 points cash up front.
3. If we decide to stay in the investment, we will also get the option to convert our investment into an equity position in about a year (a "right of partnership of ownership"). The terms for this will be worked out later, but it is likely equity position holders will get monthly payments at 9% APR plus a preferred position on the investment, which means they will get their money back before anyone else when the places are sold. So even if everything goes south and the properties need to be sold at a loss, the preferred positions will have an excellent chance of getting all their money back. This is optional, so if we don't want to become equity holders, we don't have to. They expect to sell all the properties after an additional year for a profit of around $10 million dollars and investors could be looking at doubling their investment.
   

This whole deal is set to close the end of next week. The original investment was originally set to end in March, 2008 and this new one will expire a year from close of escrow. So if I decide to keep my money in the investment, I'll be paid 4 points to extend my investment by about 5 months. And that money will be paid upfront at the close of escrow in a week or two.

To me, this is a no-brainer. The slumlord who took over control of the investment will be gone. The new first mortgage holder will be TMG, the group that already has about $400,000 invested in the current second. The president of TMG also will be personally responsible for $1 million of the new mortgage and he is putting his personal residence up as collateral.

This investment is turning out to be pretty profitable for me. I had some months where there were no payments, but we are now current and have been paid late fees. So my return including the late fees is around 12.6%. Now I'll be getting another four points, which jacks the ROI for this year up to 16.6%. Then there is the prospect of getting 9% for another year plus a 100% or more return on our principle when the buildings are sold.

But technically, my ROI is infinite now, since my investment cash came from my HELOC, so it's not even my money I'm using. But it's just not the same to say my new ROI will be infinite-er :-)

Summertime Slowness

Nothing much seems to happen in the summer. Here in Arizona, it's just too hot to go outside and do anything and with vacations and family visits, it seems like real estate has taken a back burner for a moment.

My Louisiana investment has finally been brought current. Actually, more than current since I've already received the payment for August. That brings the mortgages up to date. The other aspect of this investment - buying out the old majority owner and possibly getting an equity share of this and several other properties - is still in process. I think escrow is supposed to close by the end of the month, but with a deal this big, I wouldn't be surprised if it took longer. No more details yet either, so I am not entirely sure how good of an investment this may be and if I'll want to stay in it or cash my money out and move to something else.

My tenants in Rental #1 still have yet to pay their $200 from May that they were mistakely undercharged by my management company. The tenants told the management company last Tuesday that they wouldn't have that money until August. If they have not paid everything by August 10, I've instructed the management company to evict them. Their lease is up on November 1 and I am 95% sure I will not be renewing their lease. It might cost more to evict them now than to simply keep dealing with their issues until their lease expires, but I would rather be trying to rent the place in August and September than in November and December.

The investors I was rehabbing and flipping properties for are evaluating their options right now. I think all the media coverage about the housing meltdown has got them a bit worried about flipping and they aren't sure if they want to keep doing that. They are looking into getting a rental property, perhaps something in the Payson area that they can rent out part time and possibly use for themselves other times, or perhaps just a straight rental somewhere in the metro Phoenix area.

Personally, I'm saving up my funds for my next REI purchase, which will definitely be a multi-unit property. I'm not saving as much as I'd like, mainly because I've been hit with a rash of big expenses lately (well, that plus a losing vacation to Las Vegas!), so I'm not sure when I'll be ready to pull that trigger. Just a few months, hopefully.

Subprime Mortgage Meltdown Begins To Gather Steam

The meltdown in the subprime mortgage market is gathering steam and beginning to be widely felt. Yesterday, Bear Stearns told its clients that two of its hedge funds were now worthless.

Bear Stearns, the nation's fifth-largest investment bank, began disclosing in March that the two hedge funds had sustained heavy losses tied to subprime loans extended to risky borrowers. At the time, its High-Grade Structured Credit Enhanced Leveraged Fund was worth about $638 million -- and now has no value.

Meanwhile, the larger and less-leveraged High-Grade Structured Credit Fund lost 91 percent of its value. It was worth about $925 million before taking on losses in March.

Ouch! That's a total loss of 1.4 billion dollars! At this is just at one firm - and a firm that was considered the "pre-eminent Wall Street firm dealing in mortgage-backed securities." And those funds were "High Grade", meaning they was supposed to invest mostly in "highly rated" securities. Wait until the other firms start reporting. Wait until more of these subprime mortgages have their interest rates reset in the next couple of years.

Rental #1 Final Numbers

As I promised a while back, now that the refinance of Rental #1 is done, I'm able to post the final numbers for the property.

Purchase Costs	Earnest Money Deposit	$1,000
	Funds Due At Purchase	$1,438
	Funds Due At Refinance	$13,335
	Property Management Maintenance Deposit	$250
	Total Purchase Costs	$16,023
Monthly Income	Rent	$750
Monthly Expenses	Management Fee	$75
	PITI	$486
	Maintenance Reserves	$25
	Total Monthly Expenses	$586
Monthly Profit		$164
ROI		12.28%

And now for some discussion of the numbers..

Purchase Costs: This is pretty straightforward. The first entry is my earnest money deposit that I paid to open escrow. The next entry is the amount I needed to bring to the title company when I purchased the house. In other words, this figure includes all the title fees, taxes, appraisal costs, etc. Since I was buying this property using a hard money loan from another company I own, the costs were pretty low. The last figure is the amount I needed to bring to the title company when I refinanced my hard money loan with a conventional lender. This amount includes all appraisals, title fees, taxes, loan fees, and funds the lender required for their escrow account (about $400). This amount also includes my down payment on the property so that I could get the loan to value ratio down to 80%, thus avoiding private mortgage insurance. The Property Management Maintenance Deposit is the amount the PM company required me to give them to hold as a deposit against any repairs that might be needed on the property going forward. The total of these fees, therefore, represents all the money that came out of my pocket to purchase this property.

Monthly Income is, of course, the rent the tenant pays.

Monthly Expenses: The management company charges me 10% of the rent, or $75, for their services. PITI represents my monthly mortgage payments and includes principal, interest, taxes, and insurance. Maintenance Reserves are funds that are saved to pay for any repairs that might be needed during the year. In the past, this has been a big point of contention with some readers, who feel this amount is too low and unrealistic. To each his own. This is a number you can make whatever you want. I chose $25 a month. Keep in mind, I have already put $250 into a maintenance reserve fund when I hired the property management company, so I actually have more saved for maintenance than this monthly number would indicate. Since it's not actually a real expense until you have to spend the money on a repair, it's possible I won't even spend this money at all this year and will therefore, end up with a higher ROI. (OK, unlikely, but still possible!)

Monthly Profit is simply monthly income minus monthly expenses.

ROI is my annual rate of return, calculated as twelve times my monthly profit divided by my purchase costs. I'm happy with over 12%.

One other item to note is that the current tenant's lease is up on November 1. I expect to be able to slightly raise the rent at that time, which of course, will increase my profit and ROI.

Back in February when I bought the place, I estimated a monthly profit of $200 and an ROI of 20%. The actual numbers turned out a bit lower. This might be in part due to the lower appraisal value that I ended up with for the refi, which required me to add another $2,000 to my purchase costs.

Louisiana Update

I took part in an hour long conference call this morning with the other mortgage holders on the commercial property project we've got going on in Louisiana. There is really too much to cover in a blog entry, but I will attempt to give the highlights. You shouldn't assume these are the complete details.

The majority holder, I'll call him "Joe," that has been causing everyone else so much trouble, has come to us asking to be bought out. Joe is in over his head on many properties, not just this one. In Louisiana alone, he already has a $1 million judgment against him and he has properties in Texas that are also facing foreclosure. Joe's style is that of the slumlord. He works hard, but he is still a slumlord and tries to do everything the cheapest way possible. For instance, one of the Louisiana buildings has three elevators and only one is working. Rather than call an elevator repair company, he took out an elevator motor and took it to a machine shop to have them fix it. That didn't work, so he tried to cannibalize other properties he owns to get the elevators working again. Needless to say, that didn't work. The other investors have also gotten calls and emails from the construction manager saying Joe is not paying all the vendors. Apparently he feels they are padding their bills and charging him for work done on other jobs, so he refuses to pay. There are more examples, but you get the idea.

However, as I said, Joe is also a hard worker. He just tends to piss people off. Despite this, he has still managed to increase the number of tenants in the property since he took over. This is probably due to local economic conditions more than his skill - the area is doing well thanks to an energy boom. Property values have risen, the town has a new mayor, title companies are reporting increases in business (meaning more people are moving in). The other minority investors feel more optimistic about the area now than they did a year ago when they first got into the investment.

Joe is out of money. He is a distressed seller and has come to us for help. He needs to save some of his other properties from foreclosure, as well as this one, so he has agreed to sell a package of properties. The minority holders, including myself, are represented by a company I will call "TMG." (Other people as well, but they are closely related to TMG.) In fact, TMG is one of the entities foreclosing on another one of Joe's properties, so we have a nice amount of leverage here. (Because the deal is still ongoing, I don't want to give names here, but when it is all done, I will if anyone is interested. I am thoroughly impressed with TMG's integrity, skill, and straightforwardness.)

The package deal is we will buy the four commercial buildings in Louisiana plus roughly 475 apartment units in Houston and about 400,000 square feet of commercial property in Houston for just over $12 million dollars. TMG figures to spend another $8 million or so in acquisition and redevelopment costs, and then the properties will be worth about $30 million, at which point they can keep them or sell them for a nice $10 million profit. The nice part about this deal is that there will be little out of pocket costs for the purchase. Remember how I said Joe was a slumlord? Turns out, the city of Houston will loan us $6 million at 0% interest just to get Joe out of there and redevelop his properties. There are all kinds of other financing terms involved in this deal, but it all looks good. Oh, and did I mention this deal should be completed by the end of the month? Just about as fast as a purchase for a single family house!

So where does all this leave me, as a mortgage lender on the Louisiana properties? First, the existing loans will all be brought current. Second, TMG will be offering us three choices:

1. We can get paid off in full, plus accrued interest and late fees.
2. We can trade our mortgage position for an equity position in the whole package.
3. A combination of 1. and 2.

Since all the terms are not yet finalized, TMG can't give us actual numbers yet, but they are estimating the option 2 will require a 2 year investment and come with an 8% - 9% annual return, paid monthly. Also, at the end of that 2 years, your equity is expected to have increased 150% - 200% (not counting the monthly payments).

So things look very interesting. I'll have to wait for some hard numbers of course, but I am very interested in option 3. Since my investment in this project comes from a HELOC, I'll likely take out some of my money to pay that down, but will keep some invested for the longer term and bigger ROI. For those of you that play Cashflow 101, this is turning into a real Big Deal opportunity!

Update On All My Projects

I'm back from Vegas, poorer, but relaxed...

Looks like my feeling that things might be improving at my property management company was correct. I've found out that the company is being bought by an employee and that they have ramped up the staffing and efficiency of the office. That makes me feel better.

I also finally received the Release of Mortgage for my refi of Rental #1. I got that notarized and will send that back today, so my private money mortgage I used to purchase the property will officially be released.

I've got a conference call tomorrow morning about the commercial investment I am part of in Louisiana. Don't have all the details yet, but the good news is that the majority owner that took control of the project midway through and stopped payments and basically screwed everything up has agreed to be bought out at a discount. More details to come!

I think that's about all the info I have on all the projects I've got going now. For the future, I think my thoughts have turned from looking for Section 8 / non-Section 8 single family homes to fourplexes... More investigation is necessary.

Keeping Late Fees Seems To Be S.O.P.

I've been away on vacation for a couple of days, but upon my return, I picked up some messages from the other property management companies I contacted last week. Turns out, keeping the late fees is standard operating procedure at management companies, at least in the Tulsa area. I don't like it, but it appears I don't have much choice.

I'm off on a other little mini vacation to Las Vegas tomorrow, so expect another slow week here on the blog.

I still have not gotten the mortgage release document for the refinance that shows the original mortgage paid off. That was supposed to be mailed a while back, but apparently, the title officer's assistant had a death in the family. Now it's the end of the month, so they are swamped with closings, but hopefully, they will get the document mailed to me soon. Nothing is being held up or anything by this, but it's just another loose end that I want wrapped up. And if I forget and it never gets done, it becomes a title issue when I go to sell or refinance.

I am also still planning to post a full analysis of the profit and ROI numbers for Rental #1 now that the refinance is complete. That'll happen sometime next week.

Looking For A New Management Company

I mentioned a while back that I discovered the late fees in the lease I inherited with Rental #1 were a bit low - $35 if not paid by the 5th of the month and $3 a day thereafter. Turns out, for me, it's even worse than that.

I received my check from the property management company over the weekend and had some questions about it. Mostly, they were issues still left over from their screw-up last month of only charging partial rent to the tenant in May. But in the process of talking about this with the bookkeeper, I discovered that the management company keeps all late fees! Lee tells me this is their compensation for having to hound the tenants about paying on time.

I checked my management agreement with the company and this is all it says about late fees:

Special Charges. If permitted by applicable law, Broker may collect and retain from tenants any or all of the following: an administrative charge for late payment of rent, a charge for returned or non-negotiable checks, a credit report fee, and administrative charge and Broker’s commission for sub-leasing. Broker need not account to Owner for such charges or Broker's commission for sub-leasing.

To me, this means the management company may charge the tenant an additional fee on top of the late fees the lease imposes. This does not, in my reading, mean the management company may keep all the late fees the lease charges.

I immediately called my property manager and asked her about this. She said yes, they keep the late fees. I told her the agreement didn't seem to say that. She was out of the office and said she would look it up and call me back when she got back to the office.

I think this is crap. First, this presents a clear conflict of interest for the management company. They make more money if they allow the tenant to pay late. If they evict them, they make even more money when they put a new tenant in place. Second, this leaves them open to the whims of the investor for their income. For example, I think I may decide that my properties will attract more potential tenants if I decide to not charge any late fees for late rents. What difference does it make to me, since I don't get any money of the tenant pays late anyway?

I've contacted three other management companies and am gathering information on their services and charges.