Want a quick sale? Here are 12 Tips on How to Stage Your Home

We are entering a new era in home sales. Interest rates have doubled in the last year and are expected to go up even more. The Fed is expected to raise interest rates two times after the mid-term elections and before the New Year! Happy New Year!!

But, you still have to sell your house. It used to be just put your house up for sale and let the bidding wars begin! Not anymore. Inventory is starting to pile up and that means your going to have to set your house apart to be competitive. What’s going to differentiate your house from all the others? Well, here’s a start. Whether you’re a flipper or a regular homeowner, you’re going to have to properly stage your house. Here are 12 tips to help you down that road.

1. Clean
A clean home shows potential buyers that you’ve taken good care of the property. Ideally, you should clean every part of the house, from the floors to the ceilings—and everything in between.

2. Declutter
There are two major problems with clutter. One is that it distracts buyers from your home’s features. The other is that it makes it seem like the home has less space.

3. Depersonalize
Buyers need to be able to envision themselves in your home, so remove all the family photos, keepsakes, and refrigerator art. Keep clothes hidden away as much as possible, and make sure the bathroom counters are empty (except for hand soap, of course). Likewise, put away all the toys and anything else that is highly personal or evocative of the home’s current inhabitants.

4. Focus on Fresh
A few potted plants can do wonders to make your home feel fresh and inviting. If you have a lot of plants, space them out strategically so they don’t overwhelm any one area (unless you have a greenhouse). Of course, dead and dying plants don’t do much to make your home look well-tended.

5. Define Rooms
Make sure that each room has a single, defined purpose. And make sure that every space within each room has a purpose. This will help buyers see how to maximize the home’s square footage. If you have a finished attic, make it into an office. A finished basement can become an entertainment room, and a junk room can be transformed into a guest bedroom.

6. Wallpaper and Paint
It is unlikely that a potential buyer will like your wallpaper. Your best bet is to tear it down and paint the walls with a neutral color instead. It’s best not to paint over the wallpaper because it may look shabby and send a signal to the buyer about work they may have to do later.

7. Flooring
No one wants to live in a home with dirty, stained carpet, especially when someone else was the one who dirtied it. And linoleum is outdated and looks cheap. Although pricey, hardwood floors add value and elegance to a home. They are also low maintenance, provide great long-term value, and are perfect for buyers with allergies. In other words, they appeal to almost everyone, and if not, they’re easily carpeted over by the buyer and preserved for the next owner.

8. Lighting
Take advantage of your home’s natural light. Open all curtains and blinds when showing your home. Add fixtures where necessary, and turn on all the lights for showings (including those in the closets). This makes your home appear brighter and more inviting, and it saves buyers from having to hunt for light switches. If you think your existing fixtures are fine, be sure to dust them and clean off any grime. Otherwise, outdated and broken light fixtures are easy and cheap to replace.

9. Furniture
Make sure furniture is the right size for the room, and don’t clutter a room with too much of it. Furniture that’s too big will make a room look small, while too little or too small furniture can make a space feel cold.

10. Walls and Ceilings
Cracks in the walls or ceiling are red flags to buyers because they may indicate foundation problems. If your home does have foundation problems, you will need to either fix them or alert potential buyers to them; fixing any foundation problems would be better in terms of getting the home sold. If the foundation only looks bad but has been deemed sound by an inspector, repair the cracks so you don’t scare off buyers for no good reason.

11. Exterior
The exterior and the entryway—which factor into the home’s “curb appeal”—are important points of focus because they can heavily impact a buyer’s first impression. They may even determine someone’s interest in viewing the inside of the house.

12. Final Touches
Just before any open house or showing, make sure that your staging efforts have the maximum impact with a few last-minute touches that will make the home seem warm and inviting. Put fresh flowers in vases, let fresh air into the house for at least ten minutes beforehand so it isn’t stuffy, light a few candles (soft and subtle fragrances only), bake some chocolate chip cookies and have them out, and put new, plush towels in the bathrooms.

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The Top 5 Big Bad Mistakes in a Housing Bubble

The Big Bad Wolf destroying a perfectly good straw house.

From everything we’re seeing in the news and hearing on the internet, the U.S. is headed for a recession. And, not a mild one, either.

Part of the reason for this is the rise in interest rates. Last year interest rates were around 2%, now they are above 20-year highs at 6%. They only look to be going higher.

This means that the days of easy money are over. At least from the Federal Reserve’s point of view.

And, home prices have concomitantly skyrocketed, too! Home sellers could just put their house on the market and it would sell in a few days. Often with buyers outbidding each other and jacking up the sales price. This was OK, I guess when money was cheap. But now it ain’t cheap.

So, what should you do? Should you buy now? Let me cover 5 big mistakes to avoid in the current market.

  1. Do not flip houses or lend money to a house flipper. It’s going to get much harder to buy a house at a low price because people still think that their house is worth a lot more than they really are. And, you as a flipper, have no idea how long your house will sit on the market. This is due to the fact that people who could afford a property at 2% interest, can’t afford it at >6%. Kapish?
  2. Don’t buy an expensive house. Why? Because everything is going to lose value and you’ll find yourself quickly underwater. As a homeowner, you’ll be unable to sell your house if you have to move.
  3. Don’t get an adjustable-rate mortgage. You definitely don’t want to have your interest rates go up even higher than what you’re paying right now.
  4. Avoid doing expensive rehabs in anticipation of getting more money for your house. You’ll price your house out of a decelerating market. It’s a lot like Flipping. The only exception is if you’re renting out a property. Fix it up to get higher rent. That’s all.
  5. Don’t pay off low-interest or no-interest debt. Inflation is your friend with regard to low-interest or fixed-rate money.

These are just some of the things to be wary of during a housing bubble.

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8 Easy Steps to Your First Rental Property

Everybody wants to get into real estate. But most people don’t know how. That’s why I wrote the book, “Real Estate for Beginners: Finding Your Best Path to Success.”

Figure 1 – Cover for the book.

My book mostly covers the different types of real estate investing that are possible. But if you’ve decided to buy a rental property, here are some steps you should consider.

Step 1 – Determine the property type

What kind of property do you want to invest in, i.e., single-family, multifamily, or storage units? This is critical because it will determine where you will be investing and drive a lot of where your efforts will go.

Step 2 – Determine your market area

Where are you going to invest? Usually, your local area is the best place to start because you are most familiar with it. You know the good neighborhoods from the bad ones. Once you have an idea of where you want to invest, do some investigating. Good places to start are Realtor.com and Zillow.com. Now, if you find out that the prices are too high or in limited supply, you may need to invest far away. Investing far away comes with its own set of headaches. A good resource for investing far away is “Long-distance Real Estate Investing” by David Greene.

Step 3 – Get Pre-approved financing

This is an interesting step. It’s perhaps superfluous if you don’t have some basic requirements:

  • A W-2 job;
  • Good credit; and
  • 20-25% down!!

Unfortunately, lots of folks don’t have these. If you don’t, maybe the best idea then is owner-financing or taking over someone’s note. I describe how I take over people’s mortgages (legally!!) in my book.

Step 4 – Learn how to analyze properties

Analyzing properties has many facets. Here are a few questions to ask:

  • Is the property in your area of interest?
  • What kind of repairs are needed?
  • How is the rental market in the area?
  • Will a property’s rent can cover the mortgage payment (or at least break even?)

These are just very high-level aspects you should investigate, there are lots more.

Step 5 – Look for properties

I like to drive around the areas I’m interested in. Look for “For-Sale-By-Owner” signs. Yes, they are starting to appear again. Over the last several years, people’s equity has increased so fast, there was never a reason to try and sell a property without a realtor. This is starting to change as interest rates have skyrocketed with no end in sight.

There are other resources, too. I got a tip from my accountant about properties in an expensive area in Colorado. I bought a lot, put a house (trailer) on it, and made enough money to get two other properties.

As mentioned above, you can start online with zillow.com and realtor.com. For Zillow, put in your criteria and area of interest.

Last, but not least, I’ve had success by becoming close with a real estate agent. More often than not, they will have a good feeling about the type of property you’re interested in. And, if you treat them right, they will keep supplying you with deals.

Step 6 – Start analyzing a lot of deals

This is the education process. Look at as many different deals as you can. You’ll learn to recognize good ones. Make sure that you can cover the mortgage. Try to make sure your property cashflows.

Step 7 – Make an offer

This is one of the hardest steps. Lots of would-be investors get stuck on the last step and never make an offer. Yes, you’re going to get turned down. A lot. You have to get over this. If you make 3 legitimate offers/week, you’ll have more than enough good opportunities.

Step 8 – Do your due diligence

Inspect the property. Check with your insurance agent and have them look at the property, too. Hire a professional property inspector. They’ll go through the property with a fine-toothed comb. They’ll find stuff that you never thought to look at. That’s their job. If they find something, take it back to the seller. Negotiate a lower price or have them fix it.

Here are a couple more things you line up, too:

  • A Title company
  • Get a real esate Attorney
  • Veryify rents/expenses
  • Depending on your situation, a property manager

That’s all there is to it.

The eight steps outlined here are just the basics. There are nuances to almost every step, but you should get the drift. I cover a lot of this in my book, but you can also learn a lot by attending local real estate investor meetings.

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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 because its value is going to fluctuate anyway.

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 wait, a caveat if you please….

Now, this advice actually depends on where you live. If you look at the price changes from the subprime collapse of 2007-2012 (figure 1) you’ll see the areas where the biggest drops occurred during that time. Interestingly, the areas in blue actually appreciated during that time.

Figure 1 – 2007-2012 price declines (Realtor.com)

Now, look at the areas that have the greatest increase in housing supply (Year/Year ) now (Figure 2.)

Figure 2 – Year over Year increase in listing (housing supply.)

The technique I’ve discussed here applies pretty much to the places in red. The places in blue are still experiencing a housing shortage.

Now, for the areas in red, it’s not quite time to take over mortgages. 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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