mortgage

Just because you can afford it now…

Dave Farquhar Christianity, Saving money , ,

Today, the sermon at church was based mostly on Nehemiah 5. Nehemiah 5 talks about the ruinous financial situation of the children of Israel at the time the book was written. Check out Nehemiah 5:4-5.

“We have had to borrow money to pay the king’s tax on our fields and vineyards. Although we are of the same flesh and blood as our fellow Jews and though our children are as good as theirs, yet we have to subject our sons and daughters to slavery. Some of our daughters have already been enslaved, but we are powerless, because our fields and our vineyards belong to others.”

In other words, in order to pay their bills, some had resorted to selling their children into slavery. Sadly, some Americans find themselves in that situation today. Or close to it. At least it’s uncommon enough that we’re offended when we hear about it. Read more

Debt magic demystified

Dave Farquhar Saving money , , , , , ,

I see the repackaged debt snowball method is making the rounds again. Let’s not make this overcomplicated. You can do this. Read more

He likes ’em young

Dave Farquhar Personal

My two-year-old got a hand-addressed letter in the mail today from his bank. He has a kids’ club account there. They give kids some ridiculous interest rate (7% or so) on balances up to $500, up until age 13. It’s an effective tactic to get parents in the door so they can sell them other accounts and services.

The contents of the letter weren’t exactly what I expected. My wife couldn’t figure out why I was laughing uncontrollably.The letter, you see, was from the senior loan officer. It was offering him a mortgage, and offering to get him pre-approved at no charge.

I have visions of a red Radio Flyer pedal car and a red tricycle parked in the driveway of the house for sale down the street. My two year old getting his own crib, if you know what I mean. A place he can call his own, and draw on the walls with crayons all he wants.

But wait, there’s more! What if he already has a mortgage? Hey, it’s not unfathomable. Perhaps some rival bank beat them to the punch–they’ve had two years to do it, after all. In that event, they’re prepared to offer him a home equity line of credit.

I can’t tell you how badly I want to get an application form, fill it out in crayon, and send it in.

After my two year old gets a chance to scribble on it, of course.

What’s wrong with American manufacturing and industry

Dave Farquhar Society , , , , ,

I read a disheartening story today. It’s the story of an entrepreneur, making models out of his garage and selling them. A competitor took a liking to his models and started selling crude copies of them, made in China. The competitor is so much larger than him, he can’t afford to sue.

There’s something even more sad than this story, however. It was some people’s reaction to it.The whole thing started out as hearsay on a train forum. Someone noticed a striking similarity between two companies’ competing products. Fans of the larger company rushed to its defense, and someone who claimed to know someone came in with claims about the larger company copying the smaller. Eventually the person who designed the originals chimed in and confirmed that yes, the designs were his, right down to the placement of the cracks on the sidewalk being identical.

He went on to say in very human terms who it hurt. He’s a guy in southwestern Missouri who could make more money as a draftsman, making buildings out of his home for the love of making buildings. He sells the design to another small company in Maine who buy materials, produce parts, and assemble them into kits for sale, employing a handful of Americans along the way.

And, if sales deteriorate too far, eventually he may have to go back to work as a draftsman. Which most likely means some other draftsman will be looking for a job.

Buying the crude, cheap Chinese-made knockoffs from the other company hurts the designer. But not only that, it ripples over to the manufacturer/distributor and its suppliers, all of whom are employing Americans who are just trying to earn an honest wage working for small businesses.

But the copies sell for about half the price.

To some of the people hearing this story, the end–half-priced models–entirely justifies the means. The cheap copy is, well, cheaper, and more convenient–requiring less assembly and being easier to find, since the larger competitor sells its products in more stores–so that’s all just fine and dandy. Who gets hurt doesn’t matter as long as the purchaser is happy.

Maybe the guy just likes jerking people’s chain, or maybe he really believes this, but he was painting the people who felt empathy for the designer as the ones with the problem.

Others present an easy solution: Sue. Well, he’s not stupid. One look at his models should tell you that. He looked into that. The problem is that a one-man operation can’t hope to compete with a company that sells $50 million worth of product per year. Imagine what happens if the larger company generates a mere 100 hours’ worth of billable work for the smaller company’s lawyer, at $400 per hour. That’s a $40,000 legal bill. If the kits sell for $75, their wholesale price is less than 25. That means he has to sell 1,600 kits to cover the legal bill. And in the meantime he also has to sell enough kits to pay himself enough to pay his mortgage, utilities, and put food on the table.

If that $40,000 doesn’t sink him, maybe the next 100 hours’ worth of work will. All they have to do is delay the trial long enough to make giving up look like the best and most reasonable alternative. They don’t have to be right, and they don’t have to win. They just have to make sure the other guy runs out of money first.

Now I know the majority of Americans have no interest in wood and tin 1:48 scale models of general stores. But the wonderful thing about American capitalism used to be that someone working out of a garage or spare bedroom could make niche products and sell them to the people who want them without breaking any laws. It’s one of the ways our ancestors got ahead in life.

I’m not sure my son’s generation is going to have those same opportunities. Not when a big company can come steal products from guys like Dale in Carthage, Mo. with no fear of recourse, and self-centered consumers will gladly snap them up, just because they’re cheaper, even if they know they’re buying stolen property.

People can blame Barack Obama or George W. Bush or Bill Clinton or NAFTA or unions or any of the other usual scapegoats for being the reason why jobs are hard to find. But none of those guys caused the predicament that Dale in Carthage, Mo. is in.

That’s purely the fault of the people who buy knockoff products, with a narcissistic, end-justifies-the-means attitude, and the people who tolerate it.

But it’s a lot easier to blame the politicians than it is to look in the mirror.

Twice-monthly mortgage payment alternatives

Dave Farquhar Saving money , , , ,

The debate whether making a twice-monthly mortgage payment saves money is making the rounds on some popular blogs right now. The idea is paying your mortgage every two weeks rather than every month in order to save money. Whether this trick works depends on several things, but the most important part is that you shouldn’t pay a penny extra for this service. You should also consider twice-monthly mortgage payment alternatives.

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Wouldn’t you agree, more income is the answer?

Dave Farquhar Saving money , , ,

So a friend of a friend came over the other night, pitching a pyramid scheme. He just told me he’d started a business. I figured (and kind of hoped) he wanted to sell me handyman services. Actually he wanted to get me out of debt.

“But I have no debt,” I said. He told me I needed to keep an open mind.

I remember the last time someone told me that. It was two Mormon missionaries. To be nice, my wife and I let him keep talking.

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End of the innocence

Dave Farquhar Investing , ,

Honeymoon’s over. The purchase is getting rocky. I’ll tell you about my troubles so you hopefully don’t repeat them.Mistake: We used the mortgage broker our realtor recommended. She got us preapproved quickly enough for us to get our bid in… barely. The rest of the process to get approval went at a sloth’s pace. And then? She slapped us with a 5.625% interest rate and $2,600 in closing costs. She had a vaguely plausible explanation for both, but the closing costs were highway robbery and the interest rate was half a percent higher than it could have been.<p>

Having been lectured by my accountant once about closing costs, I tried to negotiate. Everything’s negotiable, he said. Nothing’s negotiable, she said.

"So I really should just pay cash for this house?" I asked.

She laughed. "If you can." She thought she had me over a barrel and she was going to take advantage of me.

Hopefully she learned a lesson, but I doubt it. Don’t give a Scotsman reason to reconsider parting with money, because once you do, you’ve lost him.

I was out of fight at that point, but my wife called the bank we use most of the time. She told the agent about our 5.625% interest rate and $2,600 closing costs, and asked if she could beat that, and if she could, how we get out of the bad deal.

She talked to us about our goals and our finances and suggested a Home Equity loan. The rate would be low, the payments would be flexible, we could get approved quickly, and there would be no closing costs.

It’s an unconventional answer to the problem. But for a first property, with uncertain expenses, it gives some flexibility. Let things stabilize for a year or two, then get a conventional mortgage if need be. The conventional mortgage gives long-term flexibility, but a HELOC gives short-term flexibility.

So it pays to call around until you find a loan officer with some creativity.

And true to her word, we had approval on the HELOC in three days. That’s how long it took sloth lady to get us just a preapproval.

The house: Now I know why the house was cheap. Superficially, it looked good. But when we started poking around with an inspector, we found out the house was an Uncle Louie Special. Uncle Louie re-did the wiring, the siding, the plumbing, and almost everything else in sight. Uncle Louie did a reasonably good job of laying tile and painting, but when it came to anything else… Well, the inspector said, "He sure didn’t let not knowing what he was doing get in the way of him finishing a project."

He said a few other things too, but it’s probably best not to repeat them.

Unfortunately, it’s going to take professionals to fix most of Uncle Louie’s work. And it won’t be cheap.

The inspector’s advice: Make the decision with the numbers, not with your heart. Which is good advice. The realtor’s job is to make you fall in love with the property. The inspector’s job is to bring you back to reality.

Sometimes the reality isn’t what it first seems. But sometimes you can still make it work anyway.

That’s what we have to learn next.

Diving into real estate

Dave Farquhar Investing , , , , , , ,

You’re not going to believe this. This week my wife and I applied for a mortgage.

Not on our primary house. We’re buying an investment property. I’m still struggling with the mortgage bit.The greatest real estate investment books of all time (for mere mortal working class people, at least) were written by a man named William Nickerson, starting in the 1950s. Nickerson took one and only one shortcut in his investing. He saved up 25% for a solid downpayment, and bought property. Usually property with something wrong with it. He liked small apartment buildings and humble single-family houses.

Then he fixed the property up. Depending on the situation, he’d sell it if it made sense, or more likely, he’d rent it out, then sell when the right opportunity arose.

And when he had enough money to buy another property, he’d buy another one. An outright sale usually would yield enough to buy multiple properties. Or if he could make a trade that made sense, he’d trade properties.

His initial $1,000 investment (which would be more like $10,000 in today’s dollars) grew to $1 million in property by the time he wrote his first book, to $3 million by his second edition in the late 1960s, and $5 million by his final edition in the mid 1980s.

Nickerson argued that his method was the safest investment in existence. He had a point. Land is the one thing God isn’t making any more of, but God is still making new people. People who need land to live on.

But how do you find tenants? What if the house sits empty for a long time? After all, my Dad rented out a property for several years and it was a nightmare. It sat empty a lot, and his tenants trashed the place.

A couple of months ago, I saw a house for rent two miles from me. The asking price was $900. Two days later the sign was gone. Now there are cars in the driveway. So someone rented it. I looked up the house on Zillow. You could buy the house for less than that, if it were available at current market value.

I kept watching. Rentals in my zip code don’t stay vacant long. So when a HUD-owned home a couple of miles away came up at a price we could afford (my wife found it), we went and looked at it. We liked it. It needs work, but that’s why it was cheap. We made an offer, and now we’re a few steps away from buying.

We have some luxuries Dad didn’t have. We’re in a hot market, so we don’t have to rent to the first guy who asks. We can get a family with references. We live close, so we can keep an eye on the place. We can use a management company to help keep everything smooth. We’ll pay more for that privilege but it’s probably worth it. And the mortgage payment is low enough that if it sits for a few months here and there, it won’t break us.

Where house flippers–at least the ones you see on TV–seem to get into trouble is dealing in big, expensive homes and being too leveraged. If the market for $200,000-$500,000 houses goes south, they’re stuck.

This house will never be on TV. Well, the Extreme Makeover guys would love to tear it down and build a sprawling, awkward castle on its L-shaped lot. It’s a low-end house, the kind of place a young family would buy or rent, live in for a few years, and then probably vacate once the kids are done with grade school–if not a bit sooner.

People want large houses in outer-ring suburbs, but they don’t need them. But a young couple that’s outgrowing an apartment does need an affordable house for a few years, and when they outgrow that, there’ll always be another family in the same situation, ready to move in.

So why don’t they just buy the house we had our eye on instead of us? I’m sure some do. But not all of them can afford the downpayment and the money it will take to fix it up.

A friend and I discussed the ethics of buying a down-and-out person’s house, back when Robert Kiyosaki was at his peak in popularity. Kiyosaki appears to have no qualms about it. We were less comfortable about that.

As far as I can tell from the records easily available, this house finished up the foreclosure process in May. A bank somewhere in New York had it for a couple of months. Then HUD ended up with it. I don’t completely understand the process yet.

As it stands now, the house is no good to anybody. HUD’s doing the bare minimum to keep it from getting much worse. It’s eating up taxpayer dollars and making the neighborhood look worse.

The best thing for the house and the neighborhood is for someone with money and who knows what he or she is doing to come in, make it inhabitable again, hopefully make it look a little better, and get someone living there just as quickly as possible.

In my wife and me, they got someone with a little money. We’ll have to learn what we’re doing on the fly.

We’re taking advantage of the former owners who got in over their heads, but when I go to work every day, I’m taking advantage of whoever made the decision to replace a working, reliable computer system based on VMS and Unix with a sprawling monstrosity based on Windows. And my wife would argue that they take advantage of me.

By buying a fixer-upper below market value, fixing it, and renting it at market value, we’re taking advantage of the house’s situation and the future tenants. But the future tenants are taking advantage of us, because they get to live in a house they couldn’t otherwise afford.

I’m not crazy about all aspects of the situation but I’m comfortable that I’m doing more good than harm.

Now, back to that mortgage question. I’m still arguing how quickly and how to pay that off. The math suggests I could ultimately pyramid at least seven properties, using rents from the first two to pay the mortgages on all of the others. And a few short years ago, a bank would have been more than happy to lend me the money it would take to do that.

One latter-day follower of Nickerson makes it his goal to pay off one of his properties per year.

I like the idea of fixing a property, holding it for as long as the tax code encourages you to hold it, then selling and using the proceeds to pay cash for more than one property to replace it. The growth is theoretically smaller, but I really don’t like debt.

But that’s really a question for another year.

I didn’t cause the depression

Dave Farquhar Saving money , , , , , , , ,

Various analysts are blaming the current depression on people like me. The reasoning goes like this: I have money in the bank, therefore, I should be out spending it, for the greater good, to stir the economy.

Let’s correct that right now.People like me “hoarding” cash didn’t cause this depression. I played by the rules. I didn’t lie on my mortgage application. I bought less house than the bank said I could afford, because I didn’t see how I could make that payment and still buy groceries. I bought a Honda Civic because I didn’t see how I could afford a car that cost $25,000 or $30,000 and I really didn’t see how I could afford to put gas in it. I made this decision when gas cost $1.59 a gallon in Missouri.

Basically, I made a budget and then I made the decision to stick with it. It wasn’t rocket science. Any time I thought about buying something, I sat down with a spreadsheet, entered in all the money I paid out each month, entered what I made, and figured out if the money left over was enough to buy whatever it was I wanted.

We were due for a depression, or at least a recession, at the beginning of the century. The dot-com boom and Y2K was a bonanza, but then two things happened. Y2K came and went, the world didn’t end, and people quit buying survival supplies in large quantities. Meanwhile, these startups failed to come up with viable business plans, continued to spend money faster than the government, and ended up going out of business. This hurt those companies, but it also hurt companies like Cisco and IBM and Intel, because as these companies went bust, their inventory of technology equipment, some of it unused, went on the market at bargain prices. There was no reason to buy a new Cisco router from CDW when you could buy the same thing, still sealed in the package, from a liquidator for half the price.

Then 9/11 happened and it really looked like we’d get our recession. But the government slashed interest rates, changed bank regulations, and encouraged people to buy like there was no tomorrow. GM started offering 0% financing on its cars in order to move them. Soon you could get free financing on anything but a house, and interest rates on houses were ridiculously low. And anyone could get a loan. Republicans loved it because it made the economy go boom-boom again. Democrats loved it because people at any income level could get mortgages.

But the problem was that many of these loans had onerous terms and conditions, and just because you could afford the payments one day didn’t mean you’d be able to afford them in two, three, or five years after some of the back-loaded terms kicked in. Of course, nobody worried about that because they were living the high life.

And then it all fell apart. It wasn’t quite as rapid as it seems. I think people started having problems paying their bills in 2005 or so, but it didn’t quite hit critical mass yet. It hit the smaller banks first. I know because the banks who had my mortgage kept going under, and every year or so, a slightly bigger bank would end up with my mortgage. But those weren’t any match for this monster either. Countrywide got my loan in 2007, but Countrywide wasn’t a dinky little bank. It went under, and when I made my final house payment, that payment went to Bank of America. Now it looks like even the mighty Bank of America might make me look like the kiss of death.

But that wasn’t the only problem. These bad loans got packaged up and re-sold. And somehow, these bad loans got higher grades than they deserved. A guy working as a slicer at Arby’s making $9/hour living in a $150,000 house isn’t a good investment. When everything’s going right, he can afford to make his payments, but the minute something goes wrong, he’s going to start missing payments and might not ever recover. So unless the guy gets a decent job, he’s not going to be able to afford to stay in that house. Yet somehow, a bank could package a bunch of loans like this and spin it as a grade-A investment.

Imagine me going around to my neighbors’ houses on trash day, filling boxes with trash, and selling the boxes, legally able to tell the buyer that the box contains something valuable. That’s great, until someone opens the box and realizes it’s just a box of trash.

No, this depression wasn’t caused by people like me. It was caused by people living beyond their means for too long, and not being able to pay the piper when the time came.

There’s another word for what’s happening right now, besides recession or depression. That word is “correction.” When the economy has been going in one direction for too long, it corrects itself. Sometime in the future, there will be another correction, and the economy will start improving again.

But I read my ultimate proof yesterday. Supposedly, if people like me would just spend their money, things would get better. So why does someone walk into a Jeep dealership with $24,000 in cash, intent on driving home in a new Jeep, and end up driving himself and his still-heavy wallet home in his old car?

And let’s look at people like me one other way. When I nearly lost my job in January, I had almost six months’ worth of income in the bank and a plan in place to be able to live off it for a couple of years, potentially. It wouldn’t have been a comfortable living, but it would have been doable. There would have been no need for me to go collect unemployment. I would not have been a burden on society. And when I retire, I’ll retire with enough money to get me through the rest of my life, with or without Social Security. I won’t be a burden on society either.

People who save their money might not spend it at the most opportune time for everyone else, so they might fail to even the economy out like a capacitor evens out electrical power. But they are never, ever a drag on society.

Self-Perpetuating Depression

Dave Farquhar General , , ,

My longtime friend Steve brought up a good point as we discussed our job situations. He said he read that some companies may be using the current DEPRESSION (I hate that r-word, let’s call things what they are) as an excuse to lay people off that they’ve been putting off because it would hurt morale.

The idea makes a lot of sense.I’ve been privvy, unfortunately, to management waiting for an excuse to get rid of people in the past. It’s a strategy that can backfire, but nobody likes confrontation, and waiting for an excuse is an easy way to avoid confrontation. Or to avoid having to fix problems you really don’t want to deal with.

But that creates a problem. While one business is using economic depression as an excuse to cut staff, so are lots of others. That puts more people out of work. That means they have less money, and that means they spend less.

So your neighbors’ former employees aren’t patronizing you anymore, and your revenue drops. Welcome to the vicious circle. At some point, you probably end up laying off people you really never wanted to get rid of.

It kind of sounds like a conspiracy, but really it isn’t. All it takes is a few people having that bad idea.

And there’s no real way to prevent it. Everywhere I’ve ever worked, going all the way back to high school, I’ve seen people in management positions who had no business being there. And that won’t change.

You can try to work in depression-proof industries, but is there such a thing? Everything’s connected together.

You can do what I did and minimize the way a depression can affect you. With no mortgage and no car payment, I could support my family on very little.

Of course, economists wag their fingers at people like me. Part of the problem is that people like me aren’t buying new cars because we realized there’s nothing at all wrong with the cars we have. Bad Dave.

Then again, unlike some people, after I borrowed large amounts of money, I paid it back. And part of the reason for that was because I didn’t sign on the dotted line until I did the math to figure out what life was going to be like with that mortgage payment and whether I was willing to live like that. If more people had actually paid attention to the amount of money at the end of the document–the amount that you’re going to end up paying over the course of the mortgage–and been scared, then we’d be in a lot better shape than we are now.

I do think this depression is forcing us to be a little less materialistic. And I think materialism and conspicuous consumption was what sucked us into this hole to begin with.

And in the meantime, it’s forcing some companies to look at themselves and make some hard decisions. Some aren’t surviving. Some will be missed more than others.

It’s affecting me a whole lot more now that I’m suddenly in the job pool with that other 7.2 percent. I’m sure I’ll complain a lot more. I know it’ll take a lot longer than I want for me to find employment because it already has. But I’ll be OK. I’m Scottish. I’m scrappy and tough.

And I think in the long run our country will be OK. Maybe we’ll even be better for it.