Chris McLaughlin

Wall Street continued to send its messages of anxiety to Capitol Hill today, with the Dow Jones Industrial Average dropping 161.52 to 10,853, or 1.47%. But in a positive sign for the Bush Administration, legendary investor Warren Buffett told CNBC's Becky Quick, when asked about the $700 billion bail-out: "It's what I would do if I were there."

In real estate news, the Office of Federal Housing Enterprise Oversight's House Price Index showed that home prices slipped 5.3% over the last 12 months ending in July and slipped .6% from June to July. This is the largest decline since another period that ended in April 2007 (the index began in January 207). All regions were affected, giving further proof that the decline in prices is a national rather than regional issue.

Now, on to today's real estate educational tip...

Real Estate versus Bonds and the Flight to Safety

The recent financial crisis has many investors seeking "safety" above returns as the emphasis shifts from creating above average returns to preserving capital. As millions of Americans watch their stocks, bonds, retirement accounts and general investment portfolio's drop by 10 or even 20 percent (or more) they are turning to the safety of Treasury Bonds. Is this the best an investor can hope for? Is it even wise? Let's take a critical look at short sales versus the "safety" of Treasury Bonds to see if the numbers really add up.

Treasury Bonds

The flight to government securities has taken on a new urgency as investors seek safety above returns. While it is true that the principle amount is guaranteed by the "full faith and credit of the United States government", not everyone would agree that government bonds are truly safe. In fact, some may argue they are some of the most risky investments possible.

Few people would argue the low yield of Treasury or Savings Bonds leave much to be desired especially when adjusted for inflation. Even if you agree with the governments estimated rate of inflation as recorded on the CPI, the real return on government securities is close to zero...in fact, last week it went negative for a short period! Since inflation is not calculated into the "profit" but rather the nominal rates only, taxes earned on the "profit" further reduce yield leading to an actual loss of purchasing power. Let's use a deliberately simplistic example to demonstrate.

Assume you had $100,000 to invest into treasury backed securities with a current rate of inflation at 5 percent and a yield of 4 percent. At the end of one year, the balance in the account would grow to $104,000 showing a "profit" of $4,000 which is then taxed at a minimum of 15 percent or $600 for a total of $103,400.

However, inflation of only 5 percent (the government estimate is higher and most analysts put it into double digits) means that $103,400 can now only purchase $98,230 worth of goods. In only 12 short months you have actually lost nearly $1,800 of purchasing power. Unfortunately, the actual numbers are much worse since inflation is rising rapidly. As the real rate of inflation approaches double digits, the actual loss of purchasing power can reduce your investment by half in as few as five to seven years!

Short-Sales & Real Estate

Now let's examine real estate. Let's assume you had the same $100,000 to spend and used it to put 20 percent down on five short sale properties (a nice hefty sum to be sure...and with the Short Sale System something you can likely avoid) with an average price of $200,000 each. Let's further assume that each of these properties was formerly priced at $250,000 and have each lost $50,000 prior to being indexed to the current rate of inflation. Since this is a short sale, we will assume the sales price is close to the actual value of the property today but notice, even if it continued to fall for a short period of time, you have other options available to offset the losses (tax incentives for example).

You now control $1 million of real estate. "Real" or physical assets tend to increase in value with inflation as it drives the cost of goods and services to higher and higher levels. Using the same 5 percent rate of inflation, the holdings would grow by 50k in just the first year alone...nearly ½ your total cash outlay!

This is a very simplistic example but it demonstrates the power of inflation to build or destroy wealth. Throughout history there have been two primary means to building wealth in this nation: building a corporation or building real estate holdings.

So where do you go with this information? What are you doing right now to help investors understand that it is time to move money away from equities and into real estate? Are you continuing on the sidelines of real estate hoping for a market rebound, or are you mastering the market of the moment and learning everything you can about short sales and REOs? I hope it is the latter.

See you at the top!

Chris McLaughlin, J.D., M.B.A.
Attorney at Law, Licensed Real Estate Broker http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com

P.S.: If you haven't checked out our short sales system, you really need to. It is at http://www.shortsalesriches.com/welcome.html. Nate told me he has 4 closings this Thursday. And his Realtor, Jason Turk in Tampa, is making over $30k in commission. Not bad for an investor-Realtor combination, huh?

You gotta love John Stewart regardless of your politics. He kinda summed it up best:

"Funny story. You know all that money that we've been giving to the banks. They don't have it anymore." -- John Stewart, The Daily Show

Before we get started, I think it is important that we talk about real estate, Realtors, and investors. Frankly, we got into this business because of the freedom it gave us, the tremendous satisfaction of being our own bosses, and the fun of closing the deal. Most of us never really enjoyed doing HUDs and preliminary closing statements; we don't particularly like math, right? Hey, I have a MBA from Georgetown, but even I don't really like math that much.

So what I'm about to talk about doesn't involve a bunch of math, but it involves some concepts that every single real estate professional needs to understand. Why? Everyone is going to be talking about this, and you need to understand it! You need to understand why there is a crisis in confidence, why capital markets are frozen, and how this all impacts housing and Main Street, not just Wall Street. Arguably the most powerful man in the world is not George Bush today, but rather US Treasury Secretary Henry Paulson. You're going to start hearing him called "King Henry" and other terms indicating his power and the rise of big government ... but you need to know why. It is time to get educated as a real estate investor on topics that really matter to your bottom line. He's gone from relative obscurity to a name that will be as well known as Obama or McCain before this is all over.

Let me be very clear. This is the worst financial crisis our nation has ever faced since the Great Depression. We're talking about a lot of things in jeopardy. Home loans, retirement accounts, 401(k)s, pension funds, credit card debt, and job creation. So please forward this e-mail on to your colleagues at your real estate firm. As long as you provide attribution to www.shortsalesriches.com/blog you can post this anywhere and everywhere. My goal is real estate investor education ... and hey, if I sell a few more courses of our short sale system courses, all the better.

Now, let's get busy talking shop...

I received an interesting question from a reader over the weekend:

"Chris, you are a lawyer, so can you tell me what the difference between the RTC that helped bail out the S&L and with this proposed huge $700 billion bailout. How will it affect me as a real estate investor doing short sales? How will it affect the realtors that I use to help re-sell my properties? Will we have less inventory?"

First, let's make sure folks understand the difference between the RTC and the proposed bailout. When the RTC was formed, it actually took possession of the assets and sold them. They would hold auctions and if you can recall, they had some nice fire sale prices for them.

Have you ever done a short sale and the loss mitigator says "Well, I have to check with the investor and I'll get back with you..." You see, the mortgage that Countrywide might be negotiating isn't necessarily owned by Countrywide Home Loans. It could very well be Mortgage Backed Security #122433542 owned by a Singapore or Hong Kong investment bank for all we know.

In this case, the government isn't going to own real estate. It will own the actual derivatives or securities that own the real estate. They will then give this mortgage backed-security to another lender to run on their behalf. So perhaps the government will say, "Ok Goldman Sachs, you run this $60 billion dollars worth of mortgage back securities on our behalf." So who wins? A lot of people. The bank or investor that is saddled with securities that aren't liquid will now have a purchaser - the government. Then they can turn around and get hired by the government to sell these. They then continue to hire realtors to perform REOs and continue to hire loss mitigators to get the pre-foreclosures off the books, too.

But let's add up our spending related to bad home loans, ok?

$700 billion for mortgage assets
$85 billion for AIG
$300 billion for Fannie Mae & Freddie Mac
$300 billion for FHA insurance for loans
$29 billion for Bear Stearns

For a total of approximately $1.3 TRILLION dollars. Wow, that's a lot of cash huh?

But before you start thinking we're all spending this money, let's remember that King Henry used to be the CEO of Goldman Sachs, the venerable real estate investment firm. He doesn't like to leave money on the table or lose it. So the $700 billion for mortgage back securities isn't a total loss of $700 billion. The government will buy them cheap, then try to resell them at least for what they bought them for. The government is buying illiquid assets which are clogging up the financial system.

The taxpayer isn't necessarily on the hook for $700 billion. This is money purchasing illiquid assets. The assets will be held and resold. The ultimate cost will be well below $700 billion. The effort is to stabilize the market, not to solve the crisis right away.

How will this impact us as realtors and real estate investors?

Folks, we just received another gift of the market shift. Why? Now you're going to start seeing banks actually lend again. Within the year you'll see banks come out with loan products that compete against FHA. Why? Now that their balance sheets will be improved, and the financial system will get unclogged, the banks will begin to lend again and take some amount of risk. So that person with a 700 credit score, who can't obtain 100% financing but has a track record of making her payments, will get that loan again.

So financing is going to become more available ... but guess what else is going to happen? In my opinion, more and more Americans are going to fall victim to this economy. Oil just spiked with a record $25 to $130 increase today over all the anxiety surrounding this bailout. The Dow Jones Industrial Average tanked 372 points today (Monday). Consumers just don't feel "wealthy" anymore as the equity in their home ... as well as the equity in their 401(k) has vanished. So get ready for a lot more short sales ... and a lot more REOs. We're in this for the next few years at minimum. That's great news for Realtors who are focused on this market and great news for real estate investors. For others ... well, we won't go there.

More tomorrow ...

Chris McLaughlin, J.D., M.B.A.
Attorney at Law, Licensed Real Estate Broker
http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com
phone: (800) 452-7627

P.S.: The best way to get ahead of the curve in this economy is to master the market of the moment. That market is short sales and REOs. If you've been sitting on the sidelines and want the competitive edge to get your business back up the speed and start making serious money, check out http://www.shortsalesriches.com/welcome.html

Throughout history fortunes have been made by those courageous enough to act when others were frightened out of the market; during times of financial uncertainty it takes a clear mind to differentiate the hype from the hysteria. If you have been sitting on the side-lines waiting for the perfect time to begin your short sale career then that time may have just arrived. Skeptical? Good - it shows you have what it takes to think for yourself. Keep reading to find out why shorts sales are still some of the best investments available.

•1. Interest rates. The recent Fannie/Freddie bail-out represents a major boon to buyer and sellers as interest rates take a major nose dive. Combined with first-time home buyer tax incentives and other programs designed to entice buyers back into the market, future prospects for housing are expected to recovery...but, interest rates are not expected to remain low forever. In fact, 2 out of every 3 lending institutions surveyed last month indicated plans to raise interest rates in conjunction with tightening lending standards.

•2. Inflation adjusted. Most people focus on monthly payments or the total selling price of a home. Don't make the same mistake! The fact is, inflation is a major threat to nearly every investment. Instead of evaluating the price of a home in nominal dollar amounts, it is a better idea to value it in terms of percentage of average income or household income. When viewed in that manner, a few trends become clear...not only has the nominal or dollar amount of the home gone down but it's even less when adjusted for inflation!

•3. Real Value. Unlike financial instruments (including stocks and bonds) which can drop to zero, real estate has an intrinsic or "real" value. Even raw or unimproved land has value from fill dirt, the sale of trees, rocks or mineral rights, water etc... improved real estate such as homes can be rented, used as home office, shelter and a host of other functions that either off-set or create value.

•4. Replacement Rates. Inflation adjusted rates of housing has led to a situation where some homes are now approaching a point where they cannot be replaced or reproduced for the same amount of money. The cost of basic building supplies, labor, impact fees, taxes and insurance will cost more - much more - in the future creating a further incentive for those willing and able to see beyond the short-term situation.

•5. Favorable Taxes. In just the past few weeks the United States government has been running the proverbial printing presses full time creating massive debts which will eventually need to be repaid. Of course, like all bad relatives, Uncle Sam turns to others to fix the problem...in this case, taxpayers. Real estate remains on the most tax-friendly investments possible with options to fit any situation.

Chris McLaughlin

http://www.shortsalesriches.com

Urgent: Short Sale Ban Does NOT Affect Real Estate Short Sales

News & Commentary by Chris McLaughlin
http://www.shortsalesriches.com

What a week! Aren't we glad it is Friday? If you thought as a Realtor or real estate investor you had a tough week, imagine if you worked at Lehman Brothers, AIG, or any number of major financial institutions. It was truly a historic week. And many are glad it is over.

But today was a better day than most this week. Wall Street investors applauded US Treasury Secretary Henry "Bail ‘Em Out" Paulson after he announced yet another massive bail out initiative. He's bailed out Bear Stearns, Fannie Mae, Freddie Mac, and AIG. And today Paulson announced that he would form a new entity similar to the Resolution Trust Corporation (during the S&L crisis in the late 80s) that would oversee the orderly liquidation of bad mortgage related debts. This was by far the biggest move to date, as Paulson suggested that it would be "hundreds of billions of dollars." But specifics weren't available, and Paulson plans to meet with members of Congress over the weekend to start shaping the plan.

What else happened? Well, it looks like Securities & Exchange Commissioner Christopher Cox didn't like hearing chuckles from all his friends that Presidential Candidate John McCain would fire him if elected President (I guess we know who Cox will vote for in November, huh?). So Cox made a dramatic move today to show that the SEC is doing something: banning short sales of 799 financial stock.

"This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress," Cox said. The ban went into effect immediately and expires at midnight on October 2, 2008.

NOTE: THIS HAS NOTHING TO DO WITH REALTOR AND INVESTORS NEGOTIATING A SHORT SALE, OR REDUCTION IN PRINCIPAL AMOUNT OWED ON A LOAN.

Let me make this very clear: this ban on short sales has nothing to do with real estate short sales that we're primarily focused on. PLEASE FORWARD THIS E-MAIL TO REALTORS AND INVESTORS YOU KNOW, AS THERE IS MASSIVE CONFUSION RIGHT NOW. A short sale when it comes to the stock market is generally considered this: short sellers borrow stock in a company that they don't actually own and then sell it, hoping that they can buy the stock back at a lower price and make a spread on the difference. This leads to wild swings in a stock price, and perhaps an exaggerated movement-and such was the case this week when financial stocks plunged.

And a final note... As I was walking down the hallway, one of our realtors here at Keller Williams, Alison Terry, grabbed me and said: "Hey Chris, doesn't this meltdown on Wall Street mean that more people are going to be interested in real estate again?" To which I responded that she needed to go to my blog, since I mentioned that earlier in the week. Folks there is only so much gold someone can buy. Americans aren't stupid, they are incredibly smart. They will begin moving more and more assets over to things they can touch and feel. They can't touch and feel stock in Morgan Stanley, but they can touch a foreclosure they bought on Morgan Street and Stanley Drive, right?

So, stay tune in for more commentary and announcements next week. It has been a truly exciting and memorable week. And real estate will be a huge beneficiary of all the events of late.

Chris McLaughlin
Web: http://www.shortsalesriches.com/welcome
e-mail: info@shortsalesriches.com
phone: (800) 457-7627

P.S.: I've had some rave reviews about these e-mail updates I've decided to send out. I hope you like them. My mission? To raise the level of financial awareness of Realtors and real estate investors. Why? If we really knew what was going on in this market, we all would be embracing short sales (real estate short sales) and gobbling up foreclosures.

P.P.S.: So you are welcome to post this content on your blog, as long as you provide attribution to www.shortsalesriches.com/blog as well. And you are encouraged to forward this on to clients and friends who are interested in how the financial markets affect real estate. They can get the 5 Traps to Short Sale as well as sign up for this e-mail blast by going to www.shortsalesriches.com

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Well you don't have to worry about AIG bringing down the Dow Jones Industrial Average anymore...the Ritz cracker just ate AIG. Yep, Kraft Foods will replace AIG in the Dow Jones next week. We've gone from insurance to mac and cheese. At least my 3 kids, all under the age of 4, will be happy.

And President Bush attempted to calm markets as well and indicated that the government bailouts of Fannie Mae, Freddie Mac, and AIG were essential to keep the economy sound. "These actions are necessary and important, and the markets are adjusting to them," the President noted.

Adjusting? Panicking seems more like it, huh?

Washington Mutual continued to find itself a suitor today, but The Wall Street Journal reported that Citigroup didn't want to get engaged just yet. Morgan Stanley is rumored to have been thinking about dating and possibly proposing to Wachovia Bank, but a few Asian banks-and perhaps that Chinese government itself, might come to the rescue of the firm.

Politics took center stage today as well. Republican Presidential candidate John McCain, seeking to put some distance between him and President Bush, said he would fire Securities and Exchange Commissioner Christopher Cox. The chairman of the SEC serves at the appointment of the president and in my view has betrayed the public's trust," McCain stated. "If I were President today, I would fire him."

How does this affect Main Street? Well money markets are getting a little jittery these days. These funds invest in short-term corporate and government bonds, but they have taken a hit as of late due to significant redemptions. The Primary Fund RFIXX went below a benchmark of $1, which meant that if someone held money in these funds they would actually lost money, not make money. The Primary Fund had around $40 billion in withdrawals since last Friday. And Putnam Investments said it was now closing its $15 billion Prime

What good news was out there? In a move reminiscent of the Resolution Trust Corporation (remember the good ole' days of the S&L Crisis), US Treasury Secretary Henry Paulson is developing up a plan to take the bad debts from banks and investment houses and package them up for an orderly sale. That sent stocks higher today, with the Dow Jones finishing the day up over 400 points.

So let's get this straight. Mom and Pop don't have much money anymore, but what little money they do have is now losing money in what some folks thought was risk free, a money market fund, for the first time ever. Major financial institutions like Morgan Stanley and AIG are teetering. Credit has tightened beyond all recognition and the thought of getting a loan that isn't government backed is laughable.

But I still here from some Realtors that foreclosures are just gonna be here for just another year. Well, if you think they aren't here for the next 3 years, in this economy with this type of financial turmoil, you might as well grab some of those Ritz crackers and have a pity party now, because it isn't going to happen.

But it is the single biggest gift many of us will ever be given in our lifetime. Wherever the public runs one way, I say run the other. And I have made a lot of money because of it. When a sink hole drained a local lake in my hometown, where all the fancy houses were located, I made a low ball offer on a house a few days later when everyone was freaking out thinking the lake would be a swamp. As I type this, I'm staring over a beautiful lake with a magnificent view of the water. The story is true, by the way... just Google the words "sinkhole McLaughlin buy dry sell high" for a funny story on it.

So remember ... in this market, you can now buy low, and not sell high, but sell fast. And that means less risk, less holding costs, and money in the bank. But you have to do more than read this and agree ... you need to take action, too.

I'm loving this market more and more each day. The real estate market, that is.

Chris McLaughlin

Web: http://www.shortsalesriches.com/welcome
e-mail: info@shortsalesriches.com
Phone: (800) 452-7627

P.S.: Nathan just told me he will be closing 20 homes within the next 30 days. Not bad for a kid that was home schooled with no formal education, huh? All the guys with the fancy education work(ed) at Lehman, Bear Stearns, AIG, Fannie, Freddie, and other banks .. hmm... kinda ironic ain't it? Check his secrets out at: http://www.shortsalesriches.com/welcome