My way

Posted: Oct 24, 2006 4:24 PM

Almost on a daily basis I get asked about questions in my field, the mortgage and real estate industry, on how I would personally attack a certain situation. So why not just put it down on paper the way I would act, given a certain set of facts? Before I do that, I want to say loud and clear that my way is not the only way, but just the way I believe works best. Are there better ways? Without a doubt, because the field we are talking about isn't scientific, it is artistic. The way I paint the picture may not be the way you would paint it, and it doesn't make mine more beautiful than yours, only different.

Using sports jargon, the old expression "take two and hit to right" probably has been tried over time and found to be a pretty good strategy. Does that mean you can't drag a bunt on the second pitch and accomplish what you set out to do? Get on base? Of course not! Please understand that I am simply laying out some of my preconceived notions that I have been asked about for years. With that understanding I will begin.

My feeling about "flipping houses" is that the term is absurd. Have you ever tried to pick up a house? The practice of buying a house and fixing it up is overdone, not just in this market at this time, but all the time. My wife and I have been doing this for over a decade with success, but we follow a pretty tried and true formula (but not the only one) when we buy the house. We ask the question "How can we increase the value of the house at a price that we can still turn and sell it in the future and make a profit?" If the answer is fixing it up cosmetically with paint and carpet, we will pass on the house. I can't believe that there would be enough profit in the house to take the risk of holding it in any kind of a real estate market.

I believe you need to move a wall or walls and create something of value to make the investment worthwhile. Does that mean we have never purchased a house and turned it over quickly for a profit? Absolutely not. Does it mean that every house we have bought and remodeled has earned us a handsome return for our effort? No on that one also. But overall our strategy has worked out nicely for us.

We only buy custom houses, not tract houses, and generally higher priced ones, not lower priced ones. We don't buy tract houses because anything we do to the house becomes plans for anyone to duplicate with another home in the tract and not pay our price. Higher priced homes afford a better profit, but we are aware that they also could give us a larger loss if we are not careful. Those are our rules and the overall way we operate in the fast growing freelance world of housing speculation.

I am however in the mortgage business and do things differently than others because I believe in paying off my debt with the lowest interest rate for the longest time. This usually means the choice of a hybrid arm, fixed for a period of as little as three months or as long as three to five years. I DO NOT pay the coupon rate or payment, but escalate the payment to 1% of the balance of the loan. This way I get a major pay down of the mortgage because my interest rates are way under the going rates.

Writers note: The inverse yield curve makes it impossible to take shorter term rates at this time in the mortgage cycle and do better than long term rates.

At times when we are looking to be in the house for a shorter period, I will use an interest only loan, not a 30-year fixed, as I am seeking the lowest positive payment one can get. 30-year loans aren't the lowest payment, nor are 40 or 50-year loans. Interest only loans are, because you do not pay any principal.

Down payments always come from one of the other houses. I will generally pull out 20% of the new purchase from one of the other houses and then get an 80% loan, which in effect gives me 100% financing. I do this to keep as much money available as possible for other opportunities, yet I am always making maximum pay downs on my mortgages. The goal of being debt free is never changed, even though I tend to move money around. And yes I pay closing costs because they are real costs and have to be paid. If 1/2% is going to affect the profitability of the house, then I am not buying the right place.

The real estate cycle is a fact of life and shouldn't be an annoyance. No one gets a great deal while prices are on the way up and those with courage who buy while prices are slowing or falling can generally start smiling after the turn in cycle, and about several years ahead of anyone else. Any investment is a risk and should be so noted, but mitigating the risk is easier if you are going against the trend. Selling when it looks like they are going through the roof, and buying when you’re sure that only an unaware fool would do something like that could easily set you up financially for years to come. Do not kid yourself – it takes an inordinate amount of courage to do something like that, but the risk-reward ratio is usually on your side.

The most important piece of information you can take from this column is that you need to live within your own skin. What is good for me and my wife could be horrible for you. We learn a valuable lesson in grade school that we quickly forget when we mature. In grade school if someone was smarter or faster or could kick the ball further, we never worried, because they were generally older or bigger and we knew our time to grow and age was coming. Once we mature, we try to judge ourselves with everyone.

Not a good idea. There are still a whole lot of people that are older and bigger and can still kick the ball further, figuratively speaking, but your time will come. Measure yourself against yourself, or better, against your financial long term plan, and you will do better and feel better.

Now that you have seen some of the things I do my way, I would love to hear how you do it your way.