A HEALTHY ATTITUDE FOR A NEW AMERICAN REAL ESTATE SCENE

I spent several hours recently reading blogs, magazine and newsprint articles written by some of the country’s top economists. I was trying to get a sense of where the U.S. economy is headed and gain some sort of insight as to when things might get back to “normal.” The reality is, what we had come to think of as normal really never was.
The United States has been on a completely irresponsible fiscal joy ride (some would call it a demolition derby) for many years. Unbridled greed at all levels of the financial markets was unleashed by deregulation of the financial industry and unrealistic mortgage terms. The Madoff & Stanford revelations, the huge cost of the wars in Afghanistan and Iraq, partisan politics, etc., indicates how badly we lost our way. As a society, in some way, almost everyone contributed to the fiasco through our collective mindset. This is our wake-up call.
Our country and the rest of the world will see some extremely rough bumps and scrapes along the way, but I think the fear factor will be the biggest personal and collective challenge of all. Our imaginations can be our greatest friend or worst enemy. One thing I’ve learned over the years is that almost nothing is as good or as bad as we think it will be. And, clearly, it feels better to be an optimist than to be a pessimist, so why not look on the bright side of adversity? Those who are looking for good signs will find support for optimism, while those looking for bad signs will find support for their pessimism. Oddly enough, either one can be right if their attitude becomes the mindset of the mainstream. Collectively, we’ll hit our target because it’s the only one we can see.
I’m an optimist by nature and I believe that every adversity carries with it the seed of opportunity. While fortunes have been lost in the past year, others have been made as the economy flounders. I’ve been making the case for buying more real estate while the market is depressed. That view is stronger now than ever as the pendulum has swung way too far to the negative side, emotionally as well as price wise. Savvy investors are taking advantage of the current super low real estate prices (far below replacement costs) while they can. It’s times like these when real estate millionaires are made. And cash, as always, is king.
Direct Participation Mortgage Programs, as well as other private investment vehicles have grown very slowly recently, which is no surprise. Personally, I’m seeing only a handful of new private investors coming on board since the economic meltdown. They are the ones who want to be ready to grab the commercial real estate opportunities as they appear in 2009. We want to be sellers when liquidity is restored to the financial markets. It’s an exciting time for those who follow the workings of market cycles.
It’s important to accept the profound changes occurring all around us, changes that shake up our cozy little worlds. We need to be able to adapt. One thing for sure, American life as we have known it WILL change—perhaps permanently. Maybe the lessons we’re learning (and about to learn), aren’t so bad for us after all, even if they’re painful.
In about 50 B.C., Homer, the Roman poet and satirist said, “Adversity has the effect of eliciting talents which in prosperous circumstances would have lain dormant.” He also said, “Cease to ask what the morrow will bring forth, and set down as gain each day Fortune grants.” Although many things have changed since Homer’s time, some things remain the same. Attitude is everything!

 

The Magic Of The Wraparound Mortgage

In times like these, when the economic future is so uncertain, let’s take a moment to revisit a lending vehicle that most people aren’t thinking about at the moment, the “wrap.” I know, I know, you’re wondering how this debt vehicle would be used in a real estate market such as this. Well, why not take a look at the function and structure of this type of mortgage and come to your own conclusions.

A wraparound mortgage (also known as an all-inclusive mortgage or trust deed, commonly called a “wrap”) is defined as “a mortgage that secures a debt and includes the balance due under an existing first mortgage.” This type of mortgage will “wrap around” the current debt and include any new funds advanced.

Under the terms of a wrap, the borrower makes one monthly payment, which includes the payment due on the first mortgage and the principal and interest due on the “new money” advanced. The wrap holder then makes the payment due on the existing first mortgage. By using this method, the borrower can’t default on the first mortgage. If the borrower fails to make a payment, the wrap holder can continue to pay the existing first mortgage debt to protect its interests, while pursuing a foreclosure on the wrap.

When we talk about making a mortgage that will be in second position to an existing first mortgage, it raises the question of risk. If the borrower defaults on the payment of the first mortgage, the second mortgagee (lender) may not know about it. Any unpaid monthly payments, late charges, penalties, property taxes, insurance and legal costs can add up quickly. If this leads to a foreclosure action, these costs are paid before the second mortgage receives anything. The second mortgage is at risk of being foreclosed out if the property doesn’t sell at auction for enough to cover both loans and all the costs. However, when using the wraparound mortgage the payment on the first mortgage is included in the monthly payment from the borrower. A default cannot happen on the first mortgage without the wrap holder’s knowledge. It is an excellent instrument to use for mitigating risk when in second position, and, it can generate returns to the wrap holder that are much higher than normal.

The way to achieve the higher returns when using a wrap mortgage when in a junior position is that the principal reduction (amortization) realized by making monthly payments on the existing first mortgage goes to the wrap holder, not the borrower. This can make a significant difference in the yield of the wrap holder’s new money advanced. For instance, the actual principal reduction of an original $1,000,000 first mortgage with a 25-year term at a 7% interest rate is $20,000 in the fifth year of the loan.

When the wrap on that first mortgage includes $500,000 of new money advanced by the Grace Fund at 15.5% interest, the yield to the Fund looks like the example below.

One- year principal reduction(amortization) of 1st mortgage	$20,000
Interest -only payments on new Money @ 15.5% rate	+77,500
Total annual earnings to The Grace Fund	$97,500
Annualized yield on new money	19.5%

The older the first mortgage, the greater the annual principal reduction and the higher the yield to the Grace Fund. The amortized portion will be received by the Grace Fund when the wrap loan matures, usually in 12 to 18 months.

Grace Realty Group and its affiliates prefer property sellers that are willing to provide financing that includes an amortizing first mortgage that can be wrapped. The increased yield passes to the Grace Fund, which is how annual earnings over 15% are easily and safely achieved for distribution to investors.

I’ve written a book called, Mortgage Deed Investments – How to Achieve High Returns Through a Proven Safe Investment. The explanation of the wraparound mortgage is just one chapter in it It’s written in a quick-reference format that will aid the reader when contemplating the inclusion of mortgage deeds as part of their investment portfolio. I’ll be glad to send one out to anyone who’s interested in brushing up on some basic on mortgage deed investing.

 

LIQUID ASSETS

We think of liquid assets as something we can quickly and easily convert into cash, like stocks and bonds. With what’s been happening to investor portfolios lately, including IRA and 401k retirement funds, here’s something to think about:

· If you had purchased $1,000 of shares in Delta Airlines one year ago, you would have $49.00 today.

· If you had purchased $1,000 of shares in AIG one year ago, you would have $33.00 today.

· If you had purchased $1,000 of shares in Lehman Brothers one year ago, you would have $0.00 today.

· If you had purchased $1,000 worth of beer one year ago, drank all the beer, then turned in the aluminum cans for the recycling refund, you would have received $214.00.

· If you had purchased $1,000 of Grace Fund shares one year ago, you would have $1,150 today.

Based on the above, one of the best current investment plans is to drink heavily & recycle (call it the 401-Keg). Or if you’re not that thirsty you can try an investment in The Grace Fund. Think about it . . .

We need to keep our sense of humor, especially in the days ahead.

 

GLOOM DOOM AND OTHER POSITIVE SIGNS

The trouble with gloom and doom is that when you’re surrounded by it, that’s all you can see. While most economists don’t predict a depression, the prevailing thought is that we’re in for a very bad recession with lots more foreclosures, job losses and many personal and business bankruptcies.

I’m not going to express my views about the insanity in Washington regarding the financial market and the Detroit bailouts. I will say the new President sure has inherited a mess (some would say it’s a crime scene). His hands are full but I think he’s got the moral support of the general population and I wish him (and all of us) the best. On the bright side, if history teaches us anything it’s that this, too, shall pass. Everything changes, nothing is static. If you don’t like what you’re seeing right now, just wait a minute, it’ll change.

I’ve been telling anybody that’ll listen that it’s time to buy real estate. Great deals are made when the market is in the tank and everyone is trying to sell. In the residential market, the number of home sales is increasing but prices are still flat or falling, although at a much slower pace. This is a sign that we’re at or close to the bottom of the current real estate market cycle. Another sign of a market bottom is to look at who’s buying houses these days, and who are the sellers. In housing it’s mostly investors buying property directly from the banks.

I’ve been getting lots of calls lately from Realtors who know of commercial property owners in big trouble and need to sell. It’s definitely a buyer’s market and cash is king. We’re always looking for more great deals as we raise capital to make it happen. The market will probably slide along the bottom for all of next year before signs of life become evident, if then. However, until there is liquidity in the lending market, nothing will change. Since banks and other commercial lenders are not making loans these days, motivated owners have become much more willing to hold a mortgage with great terms.

The bottom line is, there’s lots of blood in the streets, with more to come, but the darkest hour is just before dawn. Sure, the market may languish for a while but when the recession ends and liquidity is restored to the financial markets, real estate prices will begin moving up again. And don’t forget, we’ll be seeing massive inflation in the next year or so. You can’t print dollars like the Fed has in the last couple of months (and will continue to do in it’s battle to restore liquidity and end the recession) without increasing inflation. When inflation is on the rise, you’ll want to be in assets that move with inflation, like real estate. Buy at today’s super low prices and watch your wealth grow as inflation does its thing.

Take a look at the market cycle chart in my blog www.dougmitchell123.blogspot.com to get an idea of where we are in the current real estate cycle and where the market will head as the economy recovers. The cycles usually repeat about every six to ten years, but because of the extent of the mess the economy is in right now, and Congress being clueless about what to do, I think this one will be long in duration. Remember, the time to buy anything is when everyone else selling, whether it’s real estate, stocks, cars, whatever. Those who move against the crowd now will be tomorrow’s millionaires. It happens in every recession and it’s happening again now. You can bet on it.