Three Steps to Wealth & Financial Security

by Gary Laturno

  Jim Allen, Esq., who has been involved in trustee’s sales as a trustee, bidder, expert witness, and counsel to bidders, trustees, and lenders for nearly forty years, commented as follows: Carelessness in investigating the status of the property, the title, condition, possession and the like can be costly.

  When you buy a property in the ordinary course, you negotiate, have an escrow, get to make inspections, examine title, look for termites, get a homeowner’s warranty, have some time to know what you are getting, even consult your lawyer, not that anybody actually does that. None of those protections are available when bidding at a trustee’s sale. It can be very dangerous to get a good deal.

  “We had a young man show up at one of our sales a few years ago, the only bidder, who outbid the lender. We gave him his deed and cashed his checks. He thought he was buying a house worth $500-600,000 for $176,000.

  A few months later he called back to ask, “Did you know about another deed of trust on that property?” It turned out he asked a title company friend who told him there was another trust deed but that it had probably been conveyed back to the owner. Well, it wasn’t. Buyer bought a house worth $500-600,000 for about $700,000, and Bank of America subsequently foreclosed on him.

  If you are the only bidder at a sale that seems like a steal, it pays to ask yourself why you are so lucky all of a sudden”.

  Bottom line: If you want to be a real estate investor, follow Jim’s advice: Do not buy houses sold at trustee sales, unless you know what you are doing.

  *California is a quick foreclosure state; foreclosures are typically done by a trustee’s sale which takes as little as four months. In a judicial foreclosure state, Florida, New York, and New Jersey, for example, a lender must file a law suit against a borrower in default, and the foreclosure process can take a year or longer.

  If you are interested in how foreclosures are conducted state by state, see http://en.wikipedia.org/wiki/Foreclosure; http://www.realtytrac.com/foreclosure-laws/foreclosure-laws-comparison.asp; or http://www.propertyradar.com/foreclosure-guides/foreclosure-101/non-judicial-foreclosure-process.

  11. SHORT SALE SUCCESS FACTORS – Tips for Buyers

  “Be prepared to close your brief case and walk away”. Bart Wolstein, Cleveland real estate developer and philanthropist

  Buyers should look for several factors to achieve a successful transaction: A listing agent with substantial short sale experience and a successful track record closing short sales.

  An owner with a hardship who stopped making payments at about the same time the house was listed on the Multiple Listing Service.

  A house in good condition with only one lien. Avoid multiple liens, especially judgment liens, state tax liens, or IRS liens. (It is not impossible to close a short sale with these issues. It can be a great deal more challenging, however, and it is especially important to have an experienced realtor working on the file.)

  A borrower/seller who did not refinance and take money out beyond the purchase price. Short sales are easier if the original purchase money loans are in place.

  Two more tips for buyers: Have your realtor search the multiple listing service for “short sale approved.” (The phrase may not be used in all areas or by all listing agents.) This is when an offer was accepted by the seller, the bank approved the short sale, and the buyer cancelled. Make an offer! If your offer is accepted, you may be able to close quickly.

  Search the MLS for “contingent listings,” (may not be used in all areas) meaning an offer has been accepted by the seller pending lender approval. Make a “back-up” offer! You may have a good chance of closing because the current buyer may cancel.

  12. IDEAL SHORT SALE BUYERS

  “Real estate entrepreneurs too often fall in love with deals”. Scott A. Wolstein, CEO, Developers Diversified Realty, Puerto Rico

  The ideal short sale buyer exhibits the following characteristics: They are pre-approved for a loan.

  They understand that the sale is “as is.”

  They put few or no contingencies in their offer.

  They are patient and can wait to close.

  They have the resources to make needed repairs or contribute to a lien payoff if necessary.

  They understand that the lender will sell the home at or near market value.

  Although a buyer may be able to negotiate with the short sale bank, s/he must understand that the lender will make the final call on terms, closing date, and price.

  13. DUE DILIGENCE IN HIRING A BUYER’S REALTOR

  “My best real estate advice sounds simple. Find a real estate professional you can trust. I mean really trust”. John Bearden, CEO, GMAC Home Services

  A good, experienced realtor can make the process of buying much easier and less stressful. Some realtors specialize in assisting investor clients. They may have the ability to calculate the return on investment on a property and also keep tabs on the market—constantly looking for appropriate properties for you.

  Questions to ask a realtor: What is your experience? How many transactions have you handled? What is your education and background? Do you own investment property? Does your office have in house counsel to assist you?

  Beware: If you are going to be a real estate investor, you must do your own due diligence before buying any property. You cannot rely on your realtor to do that for you. Recommended reading: Professor Leonard Baron’s book “Real Estate Ownership, Investment and Due Diligence 101”.

  EPILOGUE

  “There is no good excuse for anybody not to retire a millionaire”. Matthew Allen, author “How to Get Rich for Dummies”

  As a young FBI Agent, I had the opportunity to conduct background investigations regarding attorneys and state judges who were applicants for federal judgeships. In my experience, poor money management skills were the number one reason why these individuals did not receive a judicial appointment.

  The lesson for all of us: Whatever your education, occupation, and life’s work, before you spend money you do not have, before you buy a house you cannot afford, before you do anything, develop an overall financial plan. Practice smart money management and put your financial house in order. You do not want to find down the road that your failure to plan harmed your family, your ability to get the job or promotion you wanted, or denied you the retirement you deserve. Ask yourself: Where will you be when your working years come to an end? Living a Spartan existence on a social security annuity or living the best years of your life? You decide.

  APPENDICES

  A. What Gary’s Parents Taught Him about Money

  B. What John Wesley Taught All of Us about Money

  C. What You Should Teach Your Kids about Money

  D. Couples Need More Than Love

  E. Bear and Bull Markets Defined

  F. The Dark Side of Bonds

  G. Recommended Reading

  H. Twenty Signs You Might Live to be 100

  I. Annuities

  J. Reverse Mortgages – The Loan of Last Resort

  K. VA Loans

  L. Price-to-Rent Ratios

  M. Index Funds: Definition & Comments

  N. Index Funds vs. Exchange Traded Funds (ETFs)

  O. Index Funds vs. Hedge Funds

  A. WHAT GARY’S PARENTS TAUGHT HIM ABOUT MONEY

  Live below your means; save and invest regularly

  “As a parent, the best way to teach kids about finances is to be a role model”. Edward Powell, chief consumer officer, LendingTree.com

  Gary’s parents were kids during the Great Depression in the 1930s, and their experiences made them distrustful of Wall Street, the stock market and banks. They saw banks fail and many families lose their life savings.

  Gary’s parents paid cash for everything they purchased. They lived within their means, did not spend money they did not have, never used credit cards, and paid cash for their cars. They also gave modestly to their church and charity.

  They purchased a four-unit apartment building in St. Paul, Minnesota, Gary�
�s home town; the tenants paid the mortgage, and his family lived rent free. Gary’s dad religiously purchased government bonds every payday; he started to save and invest in his twenties.

  His parents “could not afford” to send him to a private college; as a result, he attended the University of Minnesota, a public university, and enrolled in Army ROTC. He received a check each month to cover his tuition and other expenses. Gary used the G.I. Bill to pay for law school.

  Gary’s parents retired at a young age to a golf course community in Arizona, paying cash for their new home, buying a new car with cash every three to four years, and living comfortably the rest of their lives. They continued to be active in and contribute to their church.

  B. WHAT JOHN WESLEY TAUGHT ALL OF US ABOUT MONEY

  “What should rise is not the Christian’s standard of living but the standard of giving”. John Wesley

  The books of Judaism, Christianity, and Islam contain advice and guidance on money management and financial planning. The Bible alone contains two thousand verses on budgeting, debt, saving, investing, wealth, and giving. Seventy-five percent of the parables of Jesus deal with money.

  John Wesley, 18th century Christian theologian and co-founder of the Methodist Movement, was known for following three principles: “Gain all you can, save all you can, and give all you can.”

  Wesley practiced the “give all you can” principle, setting and maintaining the same modest standard of living throughout his life. Even when Wesley earned many times more than required to maintain his minimal standard of living, he continued to live modestly and give the rest away.

  Wesley’s reading of the Bible led him to conclude that Christians should: Take care of their family;

  Be content with what they have;

  Deal honorably with others, even with the unscrupulous;

  Avoid debt;

  Look for opportunity to give to others and serve your community.

  C. WHAT YOU SHOULD TEACH YOUR KIDS ABOUT MONEY

  “I would as soon leave my son a curse as the almighty dollar”. Andrew Carnegie, 1835 -1919, business magnate and philanthropist with a net worth of $298.3 billion in 2007 dollars, Forbes magazine

  Kids don’t learn financial literacy at school; parents have the greatest influence on a child’s financial literacy skills.

  Give kids unconditional love—don’t give them “stuff.” Teach them to save and invest at an early age. Let them do odd jobs around the house; children benefit from earning money, making budgets, saving and spending wisely.

  Talk to your kids about money. Share with them the family’s financial challenges. Do not keep them in the dark.

  Teach them to “Give, Save, Spend.” Read the “Three Cups,” by Tony Townsley: Tony and his wife developed the idea of the “Three Cups.” They wrote a wonderful book for parents about the lessons in life and money for their son Jake.

  Jake’s weekly allowance, starting at age 5, was divided into three cups—one cup was for giving, one for saving, and one cup was for spending.

  If Jake wanted something, he had to save to buy it; he was not given “stuff” by his parents. Jake learned to give, save, and spend.

  Gifting money makes people financially inept; if adult children cannot afford a house, do not cosign for their mortgages.

  D. COUPLES NEED MORE THAN LOVE

  Money problems are the number one reason why marriages fail. So, confront financial issues in your family! Talk about money early in your relationship. Find a like-minded partner. Responsible conversations about money are a sign of a healthy relationship.

  Disclose financial records, discuss financial goals, budget your spending, treat your money as our money, keep credit cards separate, don’t split costs 50-50—split costs according to your income and ability to contribute. Above all, talk to your spouse.

  Mediate Money Disputes

  Consult with a financial mediator, family therapist, or financial adviser. The individual should be neutral and not represent either party. The advisor will listen with empathy, typically ask questions, and encourage each party to express themselves.

  As a mediator for approximately 12 years, I see how helpful it is for parties to talk and share their views, concerns, frustrations, hopes, and dreams with a neutral third party. After understanding what each party is thinking, the neutral party can attempt to bring the parties together and give them guidance and direction.

  Try mediation; best case: you will save your relationship; worst case, you will learn a great deal. Learning to compromise on your view toward money may be the most critical, important step to a healthy relationship. Recommended reading: “Money Talk before Marriage a Tip You Can’t Disparage” by Stacey Vanek Smith, The New York Times, March 13, 2013.

  E. BEAR AND BULL MARKETS DEFINED

  Thanks to Investopedia.com

  “Bear markets (falling markets) make people a lot of money. They just don’t know it at the time”. Warren Buffet

  Bear Markets: A market condition in which the prices of securities are falling, and widespread pessimism causes negative sentiment to be self-sustaining. As investors anticipate losses and selling continues, pessimism grows. Although figures can vary, for many, a downturn of 20 percent or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over at least a two-month period, is considered entry into a bear market.

  Bull Markets: A market condition characterized by optimism, investor confidence, and expectations that strong results will continue. It’s difficult to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation may sometimes play a large role in the markets.

  The use of “bull” and “bear” to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it’s a bull market. If the trend is down, it’s a bear market.

  F. THE DARK SIDE OF BONDS

  Comments by Dennis Muckermann, co-founder, Alexander & Muckermann, San Diego, CA

  Bonds suffer from default risk by the issuer. The fixed terms of bonds may be changed or reduced by negotiation or government action.

  The capital raised by selling bonds is hardly ever paid off. Bonds are refinanced or rolled over until the debt is reduced by inflation or defaulted on because of financial or government risks.

  Bonds are subject to interest rate risk. Especially now when interest rates are at historic lows, the price of bonds will fall when interest rates increase. Their price cannot increase significantly because interest rates are too low to drop much further.

  In studying the long-term outlook for companies that issued bonds in the past, most, if not all, components of the Dow Jones Industrial average in 1900 do not exist today.

  The overall reality is that bonds offer only a relatively low and fixed return if everything in the future goes according to plan but are subject to many and varied risks that can decimate both the principal and income.

  Bonds don’t yield enough to cover the risks and in the long run are poor investments.

  There is no perfect investment. All investments are subject to risk.

  Comment

  Few investment professionals would recommend a portfolio with no bonds. Review Chapter 11, “Six Guidelines to Successful Investing” for a discussion on the role of bonds in your portfolio, as well as other options to buffer the short term volatility of stocks, for example, a money market fund. You decide what role bonds should play in your portfolio, if any.

  G. RECOMMENDED READING

  Money Management & Financial Planning

  The Financial Stewardship Bible published by the American Bible Society. The Bible contains over two thousand verses on budgeting, debt, saving, investing, wealth, and giving. In this version all money management and financial planning verses are highlighted in
green.

  The Millionaire Next Door, by Stanley and Danko

  Total Money Makeover, Dave Ramsey, host of Dave Ramsey show

  Investing

  Think & Grow Rich, Napoleon Hill—a classic; one of the bestselling books of all time

  The Richest Man in Babylon, George S. Clason – a classic

  All Your Worth, Elizabeth Warren & Amelia Warren Tyagi

  The Little Book of Common Sense Investing, John C. Bogle

  Investing Made Simple, Mike Piper

  How a Second Grader Beats Wall Street, Alan S. Roth

  Millionaire Teacher, Andrew Hallam

  I Will Teach You to be Rich, Ramit Sethi

  Investing in Real Estate

  How I Turned $1,000 into a Million in My Spare Time, William Nickerson

  Private Real Estate Investing - Part I, The Basics, Roger J. Brown, PhD

  Real Estate Ownership, Investment and Due Diligence 101, Leonard Baron, MBA, CPA

  Building Wealth One House at a Time, John W. Schaub

  H. TWENTY SIGNS YOU MIGHT LIVE TO 100*

  Do Not Outlive Your Money

  (*Mind Body Sole magazine, fall 2010)

  You eat purple food.

  You have been a college freshman.

  You have a drama-free marriage.

  You enjoy good friendships.

  You have strong legs.

  You set goals.

  You feel 13 years younger than you are.