Why waiting to buy a house is a great idea now

The best time to buy a house is 10 years ago. Have you ever heard that? It’s true but impossible. The next best thing is to buy a property now. Actually, that’s not true right now.

There are several reasons not to buy a property now:

  • Interest rates are on the rise, shooting up past 6% and heading higher;
  • Houses/properties are way overvalued;
  • People still believe they can get top dollar for their property.

Over the past 2 years, interest rates were at historical lows. So people could buy an expensive (for them) property and pay a reasonable mortgage. But now, houses are really really expensive (in most places where people want to live.)

Now, the Fed raising interest rates has put the kibosh on selling an over-priced house. But people still have to move. And houses are starting to sit on the market because a 6% mortgage is a lot more expensive than a 2% mortgage. As these houses sit on the market, the number of houses for sale will increase. As demand decreases the housing supply will increase. Simple economics. As I said, people still have to move. And they are going to get desperate to sell their property.

That’s where you come in. You can save them by taking over their mortgage. You see it’s not the price of the property, but the cost of the monthly mortgage that matters most. And, lots of these people that really need to move have no equity in their property. In fact, a lot will be underwater as the market corrects due to higher interest rates. Selling their house will actually cost them money. Ouch!!

This technique works best if you plan to buy and hold a property. If you can make the mortgage payment, it really doesn’t matter how much is owed on the property.

Wait, but you can’t take over someone’s mortgage, there’s a due-on-sale clause in every mortgage now. Not so fast. Using a little-known technique that Attorney/Investor Bill Bronchick suggests, you can legally take over an owner’s mortgage without triggering the due-on-sale clause. Check out how to do this in his course “Buying Properties Subject To.” Use the discount code “legalwiz4u” to get a 20% discount on his courses.

But it’s not quite time to do this. Yet. Sellers aren’t motivated enough. The real estate professionals I’ve talked to suggest waiting a year before there’s enough oversupply to push sellers in this direction.

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The Dark Forest Of Real Estate Investing

The Dark Forest

The term “Dark Forest” is from the eponymous book.  Liu Cixin published his science fiction book, “The Dark Forest” in 2008. The trilogy called “Remembrance of Earth’s Past” contains the sequel to the Hugo Award-winning book “The Three-Body Problem,” however Chinese readers typically refer to the series by the name of the first book.  The premise of the Dark Forest has its roots (pun intended) in the Fermi Paradox.  Famous physicist Enrico Fermi postulated that based on the number of stars (100-400 Billion) in the Milky Way Galaxy there must be thousands of habitable planets with intelligent beings.  “But where are they?” Fermi asked fellow physicists Edward Teller, Herbert York, and Emil Konopinski.

There have been numerous attempts to explain the Fermi Paradox, with the main theories being that intelligent extraterrestrial creatures are exceedingly rare, that the existence of such civilizations is fleeting, or that they exist but (for a variety of reasons) humans find no evidence of them. (Could they be hiding?) This means that even if many intelligent civilizations formed over the course of the universe, it is implausible that two of them would ever meet at cosmic time and space scales.

Now, the Dark Forest suggests that there are plenty of civilizations out there, but there are also a lot of predators looking for resources.  If a species broadcasts its location, predators will come and take all of their resources.  So, sometimes it’s just better to keep quiet and not attract attention. 

“What does this have to do with real estate?” you may ask.  Well, there are lots of underemployed lawyers or lawsuit-happy tenants out there (AKA, predators) looking for an easy kill.  For example, a real estate investor broadcasts how many properties they own.  No one needs to know this. These people are even foolish enough to allow their names to be found on county websites.  I’ve found lots of investors’ properties just by typing in their names.  If I can find you, so can a predator. 

What I strongly encourage investors to do is hide their assets.  Appear broke.  Put the asset into a Land Trust.  Then, make the beneficiary of the Land Trust a Limited Liability Company (LLC.)  You can hire an informed lawyer to do all of this for you, but at some expense.  My recommendation is to get Bill Bronchick’s course on Asset Protection at legalwiz.com.  If you use the code, legalwiz4u, you’ll get a 20% discount on any of Bill’s courses on Asset Protection. 

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Evergrande update; Trouble with Country Garden Holdings; Banking system is collapsing, too!!

At this writing, Evergrande has failed to meet the self-imposed date for a restructuring of its $300 Billion debt. Evergrande is the most indebted company in the world!! Which is about 4x the amount of debt held by Bear-Sterns during the sub-prime meltdown of 2008.

Evergrande restructuring is a fantasy. It is totally impossible for any company without a product to sell to make any payments. Evergrande will ultimately end up being bailed out by the CCP. So will all the other property developers in China.

Now, China has over 60 million vacant uninhabitable apartment buildings referred to as Ghost Cities. And, it is unlikely they will be habitable anytime soon since they lack any utilities including water, gas, electricity, windows, fire escapes, elevators, etc. That’s all. LOL.

The housing bubble popped last year after the CCP implemented the Three Red Lines (Figure 1.) The Three Red Lines consisted of requiring property developers to have certain values before they could acquire more debt including Debt to Cash; Debt to Equity; and Debt to Assets. And, as a reminder, not one of the top 30 Property Development Companies in China met these criteria.

Figure 1 – Three Red Lines Analysis by Bloomberg News | Bloomberg
January 14, 2022

Evergrande used to be the largest property development company in China has slipped to #2. Now the largest property development company is Country Garden Holdings (CGH.) They just discounted their stock by 13% to entice investors so they can generate some cash (about $360 Million US.) They will ostensibly use this money to pay some of their offshore debt. But this is just a stop-gap. More bonds are due in 3 months, 6 months, etc. CGH has a bunch of ghost properties, too. These properties have no value, so no one is buying them. With no money, how will CGH pay future payments? This problem won’t be going away because their business model is based on a property bubble. It’s always been a Ponzi scheme destined to fail.

And if that weren’t enough, and don’t you think it ought to be? The Chinese banking system is failing because they loaned a lot of money to these property developers. Last week, there were a bunch of bank failures in China. As a result, there were lots of protests because the banks simply closed their doors to bank members. The CCP sent in groups of thugs and tanks to disperse the protestors. That’s how the CCP works.

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Time is actually Money

I remember a comic by Gary Larson in the Far Side with a mustached man in a lab coat in front of a board full of what looks like partial differential equations concluding with “= $” and the line “Einstein discovers that time is actually money.” OMG!! Too funny!

I had a recent experience that sheds multiple lights on the saying time is money. In real estate, Real Estate Guru, Ron LeGrand was fond of saying many things including “You can’t steal something slowly.” Which correlates well with my first example below.

Serious People Move Fast

I had this property under contract that was in foreclosure. It was for a condo that was worth around $85K. The condo didn’t need much except for paint and carpet. It was probably 800 ft^2 in total. Two bedrooms and a bath.

I shopped it around to a few investors. One guy was interested, but his father had to approve the deal. Apparently, they were partners. The guy, we’ll call him Dan, said he was really interested. Dan said, “just give me a day or two.” Two days turned into a week. I finally cornered Dan, “What’s it going to be?” I asked. Finally, Dan said his Dad wasn’t too sure about the project.

I euphemistically hung up the phone and immediately called another investor. Within two hours he said, “I’ll take it.” He got the deal. Simple.

But you have to think like this. If someone is interested they’ll move; if not, they’ll delay and drag their feet. It’s like they don’t want to say no to you. Watch for this. If someone is dragging their feet; drop them and move on. Most times they weren’t really interested anyway.

To Maximize your profit, Use a realtor

To make the most profit when you’re selling a house, use a realtor. Sounds pretty simple, but in the long run, use a realtor. Yes, it takes longer, but that’s the point. These people will market your property to the broadest audience giving you a chance to make the most money. The cost is worth it.

The Yin and Yang of Time and Money

When selling or negotiating for a property there are two variables that are intimately connected: time and money. Sometimes they are inversely proportional; sometimes directly proportional. For example, the longer your property sits on the market, the lower its value becomes and the less Money you usually get. There are a plethora of reasons why a property sits on the market but it usually boils down to price, i.e., money. You’re asking too much.

On the other hand, if you’re in a hurry to sell, you must discount the price for a quick sale. The shorter the timeframe, the bigger the discount and the less money you get. By discount, I mean, take less than the property is worth (in your eyes.)

In these examples, time and money act differently for each situation. But the real difference is your perspective value of time and money. Which is more valuable at this moment? This is a reasonable question because their values are constantly changing. Usually, everyone wants to minimize time and maximize money, but not always. Sometimes as an investor time is more critical than money. When someone wants a quick sale because they’re being transferred tomorrow, then time trumps money. If you can let the property sit for a while, then money trumps time.

Exchanging Time for Money

Everything is negotiable. You can exchange money and time. In most people’s jobs, they exchange money for time. In the examples above you can see how people trade money for less time but in the opposite sense of working for money. You as the investor can do the opposite, trade money for more time. In Figure 1, you see a buyer and a seller. Above them are two pie charts representing their respective value (or abundance of either time or money.) Both parties value what they have the least amount of.

Figure 1 – Example of two people’s value for Money and Time. You as the investor have more time and less money. A motivated seller has more money, i.e., equity, but little time.

If someone is willing to wait for a little (or a lot) longer time for their money, then I can give them more money because they are giving me more time. For example, in a lease/purchase situation, I may give the seller their asking price.

When I meet someone who needs to get out of their property fast, I mean like yesterday. I know that time and not money is the real issue. So that’s what I try to address. Remember when you’re talking to a seller, try to figure out what is more important to them: time or money. Then structure your negotiations with that in mind.

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What to look for when inspecting a potential property to buy

If you go to inspect a property, what are you looking for?  Below is a checklist of a few items to consider when looking at a possible investment property:

  1. Area
    • What’s your impression of the surrounding properties?
    • What’s the status of the adjoining properties?
    • How do you like the overall area?
  2. Property
    • How many bedrooms/baths/parking spots?
    • What’s the square footage?
    • When was the property built?
    • When was the roof replaced?
    • When were the furnace and air conditioning last serviced?
    • What do the downspouts look like?
    • What type of windows?  Are they double or single-paned?
    • What’s the condition of the stove?
    • What’s the flooring look like? 
    • Do the bathrooms look OK?
    • Is there a sprinkler system?
    • What does the yard look like?
  3. Current rents
    • What are the current rents?
    • Will the area support highter rents?
  4. Structure
    • Are there any obvious structural problems, cracks inside outside the property?
    • Are there any cracks in the foundation?
    • Is there any visible water damage?

These are just a few things to check.  Depending on what you’re looking for some or all of these won’t matter.  Until you get some experience have the property inspected by a professional. It will save you from making a terrible mistake in the end.

I know some investors, e.g., Ron LeGrand, that go into a house and want to smell cat urine.  Why?  Because they know that most people won’t touch a property like that making it much easier to get a great deal.  Again, this is great if you want to do a fix and flip.

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Buying a real estate course – Is it worth it?

You’ve seen the informercials. 

You’ve been bombarded at real estate seminars. 

You say to yourself, “this sounds great, but can I do it?”  With slick presentations that often leave out, or gloss over, the really hard parts, you’re lulled into spending your hard-earned money on hope.  A hope that you can do it. 

“Is it right for me?” you ask yourself or your spouse.  These are the same questions I asked myself as I saw the $5000 price tag in the Fall of 1999 during the beginning of my post-doctoral position.  We were down to the last $5,000 we’d saved for graduate school.  I got a Ph.D., not to make money, but because I love the field.  But money is what you have to make to raise a family.  So, in the way that I quit my full-time job at Texas Instruments to go to graduate school, I did the same thing.  I put up the money and headed to Phoenix, AZ for a 3-day course in buying real estate.  When I got back, I pursued what I’d been taught with vigor.  Within a few months, I’d made back the $5,000.  Within a year, I’d bought a house which I sold for double that amount a few years later.  I promptly re-invested that money in two more properties.   

But….the larger question is: will it work for me? I would answer the following questions first.

  • Are you self-driven?
  • Are you goal oriented?
  • Are you disciplined?
  • Are you able to stick with tasks?

The answers to these questions will dictate how successful you will be buying a course and your long-term success.  In the end, these are the characteristics of successful people.

So, it’s not really a matter of what course you buy. It’s what kind of person you are. The course is being sold because someone was successful at a particular technique. BTW, don’t worry, most of my successful friends in real estate don’t have a Ph.D., either.

Is it worth it? Well, when you buy a real estate course, you’re basically buying experience. Yes, you could do it all yourself and learn the hard way. This can be very helpful, but it can be very expensive.

I took a very expensive course in partnering when I had to let a lease option expire worthless in a property I’d invested $40K into. I could have saved myself that money if I’d partnered up with someone who had the money to refinance that I needed. Is a real estate course worth it?

What I’m really trying to say is that it’s not really a matter of what course you buy. It’s what kind of person you are. The course is being sold because someone was successful in a particular technique.

I got a very expensive course in partnering when I let a lease option expire worthless for a property I’d invested $40K into. I could have saved myself that money if I’d partnered up with someone who had the money to refinance. Is a real estate course worth it?

Is a real estate course worth it? A lot depends on you and your temperament.  When you buy a real estate course, you’re basically buying experience. Yes. You could do it all by yourself and learn the hard way which can be very expensive.   What you’re trying to do is optimize your expenses by reducing the learning curve. 

Will it cost more to try to do something without the course?  Is the course so prohibitively expensive that you’ll never make up the money?  An example of the latter case is billionaire Dan Pena, AKA, the $50B man, who charges $25,000 to attend a one-week event.  Pena doesn’t guarantee you anything.  Is this a scam?  Some people say yes, some people say no.  But, if you spent $100,000 getting an undergraduate degree in English Literature.  Education is usually worth the money, just be cautious.

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Evergrande is being Nationalized by the CCP!! Bondholders left out of the picture.

The Risk Management Committee (RMC) appointed by the Chinese Communist Party (CCP) is now in charge of Evergrande. The RMC consists of nine members, six appointed by the CCP, one from one of the state-run businesses, and the remaining members from Evergrande.

Last year, China announced the “Common Prosperity for All” program aimed at improving the standard of living for all the Chinese people while limiting the wealth of the upper class. To do this, the CCP changed all the rules for the property developers like Evergrande. The CCP set up a triple-test, called the 3 Red Lines, to make sure that property developers weren’t over-leveraged to add credibility to the thirty-some property builders in China. Unfortunately, all of the larger property developers, including Evergrande, failed the 3 Red Lines test! Remember, these companies are worth/in debt to the tune of $2 Trillion!! And, they are all failing. One of the outcomes of failing the 3 Red Lines test was the restriction of debt, i.e., cash, to the failing companies. This caused a tremendous slow-down in the Chinese real estate market.

As I said in my previous blog on Evergrande, the CCP has only allowed its people to invest in real estate. And, boy did they invest. The market has been going up and up and up. Until this last problem. Evergrande is in debt to the tune of $300 billion.

Now, China has a massive oversupply of real estate. The opposite of what’s happening in the rest of the world.

The CCP’s Solution: State-Owned Enterprises

China has basically guaranteed the solvency of State-Owned Enterprises, i.e., commercial organizations that are dominantly owned by the state. State-owned Enterprises are not subject same rules as other property developers, i.e., State-Owned Enterprises are allowed to “purchase” properties from troubled property developers like Evergrande, without being subject to the 3 Red Lines tests. This represents a nationalization of the assets of failing property developers. Also, State-Owned Enterprises have not been floating bonds to the international market so few people are familiar with them. They have been borrowing money from internal Chinese lenders because the CCP essential tells the banks to lend money to the State-Owned Enterprises. This is the CCP’s solution to property developers like Evergrande, Sunac, Shimao, Agile, etc.

3 Red Lines Tests

What are the 3 Red Lines Tests? They are based on following debt to income ratios:

  1. Liability/asset ratio < 70%;
  2. Net Gearing ratio < 100%; and
  3. Cash to short term debt ratio > 1x

Every one of the property developers in China would fail these tests!!

Nationalization by a Different Name

Normally, one company buys the assets of another company that’s failing. But, when the company buying assets is a State-Owned Enterprise these purchases are a form of nationalization. The CCP changed the rules such that any debt taken on by a State-owned Enterprise is excluded from the 3 Red Lines Tests. Thus, the State-Owned Enterprises have been given carte-blanche to acquire as much of troubled companies assets as they want. Allowing them to take all of the best assets from these property developers without regard to incurring more debt.

Over the last week, we’ve seen almost six deals announced transferring assets from distressed property developers to State-Owned Enterprises totaling $4.7 billion. This is just the beginning of the transfers that will take place over the next several months.

Bondholders

Some bondholders outside of China are beginning to take legal action. It looks like China isn’t going to guarantee anything to businesses outside of Chine. The hope is that legal action will force companies like Evergrande into liquidation. The only announcement from Evergrande is a request for more time. In conference call on January 26th Evergrande was explained their plan of action to bondholders with $19billion invested. Basically, they asking for a six-month delay. With that said, they’ll delay more and come back to the table with all the best assets removed from Evergrande. Say goodbye to the $19billion.

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The Next Global Real Estate Collapse is Happening Now

“History doesn’t repeat itself, but it often rhymes” – Mark Twain

The 2008 subprime financial crisis was just a precursor to the greatest real estate collapse in history.

At the time of this writing, the Chinese real estate market is collapsing.  This market tops out at $6 trillion! This is bigger than all of the Western real estate markets combined.  The 2008 subprime disaster is insignificant in comparison.   

The focus of the collapse is a Chinese real estate company called Evergrande.  Evergrande is a real estate development company.  Currently, Evergrand has assets in excess of $300 billion dollars.  Evergrande has been doing a Ponsi scheme.  They sold properties to Chinese citizens, collected the cash.  And, instead of building the units they sold, they used the money to start other projects. 

Factors contributing to the Evergrande collapse:

  • Chinese Communist Party’s restrictions on what and where the Chinese people can put their savings.  You can’t save money, but you can invest in real estate. So, no investment diversity.
  • China’s one-child policy (1980-2015) resulted in significantly more males and fewer females. The one-child policy was aimed at curbing overpopulation. But linear thinking in a non-linear world has repeatedly got the Chinese Communist Party into propblems. A characteristic of the Chinese culture is that all the Chinese people want a son.  So, they often aborted their female children.  Here’s the downside of that type of thinking. According to the website statista.com, China boasts the world’s most skewed sex ratio at birth at around 111 males born for every 100 females as of 2020.  In contrast, the United States has a male: female ratio of 97. (which begat the “me too” movement. You just can’t win, can you?)  Here’s where supply and demand come into play.  Because wives are in short supply, a potential suitor must show that he has adequate means to provide for his bride.  (This is the same thing male peacocks do.  The better the plumage, the better provider he will be.)   
  • To prove his higher status, a male suitor would own more real estate.   To help out, families would help purchase a property sight unseen from Evergrande. Just to say they own more real estate. These poor suckers, err…people would get a mortgage and start paying on a note for a property that wasn’t built yet.  Now, Evergrande promised to build them a unit.  But, Evergrande didn’t finish a bunch of these properties. When I say a bunch, there are literally 1.6 million unfinished condos in China that are being paid for by their future owners!  Some of these buildings don’t have any way to access the various floors, i.e., no stairs or elevators!!
  • In November, 2021, Chinese property giant Evergrande, the world’s most indebted company whose liabilities exceed $300bn, missed a $200 million bond payment, one in December for $285M, and another one for $85M.  The company is bankrupt!
  • Recently (Jan. 2022) Evergrande’s crowning achievement was to be Ocean Flower Island the largest land reclamation project in the world.  It’s bigger than the one in Dubai.  Recently, Evergrande got hit with demolition orders for 39 of its luxury apartment buildings reportedly because the building permits were illegally obtained.  Yikes!  How many other properties did Evergrande do this at?

In China, corruption at the mega-corporate level is looking pretty normal.  It may be because the CCP encourages corruption.  The same corruption emerged in the former Soviet Union after the Berlin Wall fell.  Two high-profile examples of corruption that involved heavy Wall Street Losses include:

  • Luckin Coffee.  Nearly $4B of investor’s cash was lost when Luckin Coffee filed for bankruptcy in February, 2021.  Luckin Coffee was the largest coffee shop in China.  Apparently they were cooking the books, i.e., fabricating figures.  Muddy Waters, a hedge fund, revealed massive fraud at Luckin. 
  • Ke Holdings, Inc., Chinese version of Zillow, 2020 largest IPO at $2.1B.  Ke Holdings developed a big online presence.  Muddy Waters, again, revealed that Ke Holdings is fabricating it figures. According to robbinsllp.com, KE Holdings, Inc. is accused of disseminating false and misleading information regarding rransaction volumes, store count and agent count, and transaction data 

Both of these companies are being investigated for various improprieties. These are just two massive examples of the business environment in China.  Both Luckin Coffee and Ke Holdings, Inc. were initially offered on American Stock Exchanges.  Luckin Coffee is bankrupt.  Ke Holdings and Evergrande are expected to follow suit.  Evergrande is now in the hands of a risk management committee consisting of a number of CCP members.  In addition, China’s $10B high-speed trains are also in trouble. 

If history is any indicator, none of this bodes well for the Chinese economy.  A similar event happened in Japan in the 1990s.  This is referred to as the Lost Decades.  The Lost Decades started with the real estate collapse in 1991.  The Nikkei index, i.e., the Japanese stock market, has yet to reach its peak from 1988-1989.  The same thing is possible for the Chinese coming Chinese real estate collapse. 

Figure 1 – Real Estate Collapse of Japan’s Nikkei (Encik Tekateki)
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