Coffee heat rising

Real estate

One Down, a Million More to Go…

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Last night we had the final exam for the real estate course. I felt like I was walking into the Jaws of Doom, so convinced was I that I was gonna bomb the thing. I was totally unprepared, and so exhausted I could hardly walk. The past 5 weeks have devolved into one time-consuming, headache-inducing screw-up, hassle, bugaboo and freaking catastrophe after another, and so I’ve had almost no time to study the content. I figured I was going to fail for sure.

Well.

When our Realtor friend said getting the license was “easy,” he wasn’t kidding. Of the 80 questions, I’d be surprised if I missed 10. Most of them were factoid questions, and of those most were so intuitive you probably could answer a good 80% of them without ever reading the book. There were five or six math questions, which of course I’m incompetent to do. Of those, I know I got three correct; I made a good guess at one, leaving two almost certainly wrong. So: two or three of the math questions wrong. Three or four of the factoid questions concerned material not covered in our textbook (the instructor draws on two texts for his questions)—had to make guesses on those. So I’m estimating I missed about six or seven questions.

To get 75%, you’d have to get twenty questions wrong! And…to get twenty of those see-Dick-run questions wrong, you’d have to be so far out in left field you’d qualify as mentally retarded.

All of which is neither here nor there, because on Tuesday, when he reminded us that because it’s a five-week course the final was scheduled for last night, not next week during the regular final exam period and I realized that on Wednesday I wouldn’t have a chance of finding time to review 14 chapters, I asked him what would happen if I failed this exam after having scored a 96 on the mid-term. And…brace yourself…at that point he said not to worry, everyone in the course would get an A or a B. No one would get less than a B in the course.

Heh.

Anyway. It is ridiculously easy. And it’s pretty interesting. You certainly learn a lot of things that you should have known before ever setting a pen to a purchase contract, a mortgage agreement, or an apartment lease.

Bitch of a week here. I told you we fired the client who converses with the dead, right? That leaves us without work, which has Tina agitated. Two incoming queries appeared today; one looking for someone to edit his thesis, another from some outfit trolling for slave labor. Last week of instruction—finals coming up next week. Students are also agitated, lobbying for hurried return of their gigantic final papers. Much nagging, whining, and nail-biting in those precincts.

This morning I’m going out to Tempe to drop by and sign some paperwork at the new insurance agent’s office. Thence to the credit union branch on the main campus. Then over to the GDU library to scour Literary Market Place for leads to publishing houses Tina and I can hit up for freelance work, and then it’s off to meet Tina for a nice lunch to celebrate the end of the semester and, more to the point, to calculate a strategy to bring in some more (and better) work. Back to the house to write up an exam for my own students and send that off to the copy center. Then have to translate their grades out of my spreadsheet into the hated Blackboard so they can view their final score, a process that takes about eight times as long as it should because it has to be done manually and because BB screws around with you as you enter Each. And. Every. Score.

So that will fill absorb every moment of productive time today, I expect.

Discovered a $1230 discrepancy in my checking account and can NOT find the error(s), so had to make a balance adjustment in that amount. Fortunately it’s in my favor; otherwise I’d have ended this month with about a $300 balance. But it looks like I’ll have to hire the accountant to untangle whatever mess I made there.

Noticed last night that the pool is busted again. Gotta get up from writing this post and go fix that, or else turn off the power and leave the thing to grow algae while I’m racing around the city today.

Had to buy a new toilet, the facility in the middle bathroom having given up the ghost. Actually, neither that one nor the one in the so-called master bathroom had a very strong grip on the ghost when I inherited them from Satan and Proserpine. I like this new one so much, I may have WonderPlumber come back after I recover from the summer’s penury and replace the one in the alleged master bathroom.

Told him about my idea to turn the fourth bedroom (now the unused TV room) into a luxurious spa, complete with vast bathtub and a walk-through into the closet-like master bathroom. He thought it was a great idea. Estimated it would cost around 10 grand.

Well…when I’m a rich old real estate agent, eh?

Home Prices…Up 20 Percent??????

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Looking for your morning hit of amazement? Check this out.

If that’s true, then the downtown house over which M’hijito and I have agonized for lo! these many months is now worth $216,000: six grand more than we owe on it.

And…last night we had a guest speaker at the real estate class: a mortgage broker. He reported that you can get FHA financing for as little as 3.5 percent. Our mortgage mod, which we obtained when I lost my job, is at 4.3 percent. So if that’s true, we should look into refinancing right now.

It’s not completely outside the realm of possibility that these little jaw-droppers could be true. Right now housing inventory in Arizona is at an all-time low, because Chinese and Canadian “investors” (read “absentee landlords who don’t care what happens to your neighborhood as their rental properties deteriorate”) have flooded into the state. Nay, they have tsunamied into the state.  A buyer looking for a place for her family to live can’t find a house for love nor money. Yesterday at the weekly network-fest, our Realtor member reported that one house he’d looked at with a client got thirty-eight bids!

We’re also told, however, that banks are about to unleash their shadow inventory of foreclosed properties. They’ll be selling empty houses to speculators in lots of 500. Investors buy these properties in cash. You can imagine what the result of dumping this stuff on neighborhoods will be, especially as most of the homes are converted into rentals with little landlord oversight.

And so, the rich get richer and the middle class gets poorer.

I guess if we’re going to try to refinance to get out from under the balloon that’ll come due in a few years, we’d better do it now.

What a Lender Is Thinking…

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Learning a lot from the real estate course. Right now we’re discussing lenders and their financing instruments. Ever wonder what a lending organization has in its collective mind when you apply for a loan? Here’s what an underwriter thinks about when he or she considers your application:

• Credit: have you used credit responsibly in the past? Do you have a decent credit history?

• Capacity: Do you have enough financial resources (income, wealth) to repay not just the proposed mortgage but also your existing debts?

• Character: This subjective assessment has traditionally been defined as your “desire” or “willingness” to repay the debt.

• Collateral: Is the value of the property to be mortgaged adequate to secure the loan?

Underwriters try to quantify their institution’s risk by calculating a “loan-to-value” ratio (LTV). To figure it, take the amount of the mortgage you’re asking for and divide it by the sales price or by the appraised value, whichever is lower. The result is the LTV, expressed as a percentage. The higher the LTV, the less the borrower has at stake in equity. Obviously, the less equity you have in a loan, the more likely you are to default, eh?

For example, at the time M’hijito and I bought the downtown house, it appraised at around $235,000. We borrowed $209,000 to buy it. Hmmmm….

209,000/235,000 = 88.9%

Today the place is worth about $180,000. Wanna see a figure guaranteed to give our lender heart failure?

209,000/180,000 = 116.1%

😯

{gasp} We’ll just keep that between you & me & the lamp-post, hm?

Moving on, what does the LTV mean when you’re trying to get a loan? Well, for one thing, according to FHA guidelines, the amount of any insured mortgage may not exceed 97.65% of the property’s appraised value (make that 98.75% if the value is 50 grand or less).

So, again using the downtown house, the maximum FHA mortgage we were eligible for, back in the day when we thought the market had hit bottom, was

235,000 x 97.65% = $229,477

In other words, we borrowed about $20,000 less than we could have, in theory. To take the place off our hands today, the most a buyer could borrow based on its alleged current value would be $175,770.

Another factor that depends on the LTV is the maximum amount you, as a borrower, are allowed to contribute to various closing and ancillary costs. These include such nicks and dings as the origination fee, discount points, the cost of a credit report, appraisal fees, escrow, title insurance, recording fees, prepaid interest, taxes, homeowner’s insurance, and the like. The seller may pay all or part of your contributions, but the total can’t exceed the allowable maximum. How does this shake out?

• If the LTV is greater than 90% on your principal residence, the maximum percentage of your contribution that may be paid by the seller is 2% of the selling price or appraised value, whichever is less.

• If the LTV is 90% or less on a principal residence, the seller may contribute no more than 6% of the selling price or appraised value.

• For a second home, if the LTV is 80% or less, the seller may contribute no more than 6%.

Any costs that are normally the buyer’s responsibility are considered to be “contributions” if the seller pays them.

 Who’d’ve thunk it?

 

Real Estate Rebounding?

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If you believe what people in the business say, it appears that real estate is recovering in Arizona. In fact, having been hit hardest, Arizona is recovering the fastest of the many states whose economies crashed on the collapse of the real estate bubble. One guru, Michael Orr, reports a 3 percent increase in sale prices. Could be: speculators are flooding into the area and buying up everything between $100,000 and $200,000, planning to turn them into rentals. Realtor friends say they can’t find moderately priced homes for normal buyers, because every such house has a dozen bids on it within a few days of hitting the market. In February, Phoenix-area single-family home sales rose 10 percent compared to February 2011. Inventory is down 42 percent. The inventory of single-family homes under $250,000 is now below a 25-day supply.

It is, in short, a buyer’s market.

It may be a pretty artificial market, since the phenomenon is being driven by speculation. However, after the savings and loan fiasco, which caused a similar real estate crash here (that was what allowed me to buy a house in the pricey North Central area: my buyer’s agent got the place for $30,000 under the asking price, which was itself under market), the recovery was similarly driven by “investors”—another word for speculators.

If in fact prices are rising by 3 percent a year, which historically has been a pretty normal rate here, the value of the downtown house will return to what M’hijito and I owe on the place in six years. The balloon payment that will happen on the 40/15 mortgage comes due in about 10 years.

We’re not going to come out of it smelling like the proverbial roses, but we should at least be OK. We’ll be forced to either sell or refinance at that time. Of course, mortgage rates will be much higher by then, and so even though we’ll refinance a lower principal, monthly PITI will probably go up. We’ll be lucky if it stays the same…and since we didn’t win the lottery, I kinda doubt that we’re gifted with some Karmic package of luck. However, we at least won’t be on the verge of bankruptcy, as we have been for so long.

Speaking of real estate, down at the college we’re told by our licensing course instructor that now is the time to get into the business. Well. I’ll believe that when I see it. But I am enjoying the course. It’s very interesting, and I’m learning a lot of stuff I wish I’d known when we (my son, my ex- and I) were buying the various shacks we’ve lived in over the past 30 years or so. I’d highly recommend that anyone who is interested in personal finance, and certainly anyone who thinks they’d like to invest in real estate rentals or fix-and-flips, take one of these inexpensive community-college courses in real estate. An enormous amount of useful information has come forth.

Whether I’ll pass the final remains to be seen. It will be over the entire book, and since I joined the group in the second term, of course I haven’t read the whole book. Though I’ve been trying to catch up, I very much doubt that over the next 18 or 20 days I can read and absorb another 11 chapters while trying to keep pace with the present assignments and prepare for a final exam. The work load here has been phenomenal, with a client who thinks we’re going to produce an entire book in an unreasonable period—we should have told this guy at the outset that we could not do it in 10 weeks, but at the time, I thought he had in mind our editing copy, not ghost-writing most of it. The amount of extra work imposed by the real-estate course has made it impossible for me to keep up the schedule he thinks we’re going to meet, and so I expect we’ll lose that client.

Not so great for Tina, but from my point of view…something’s gotta go. One little crisis like this week’s e-mail melt-down puts me completely underwater in terms of workload. Truly: a 42-hour work day is beyond the pale. I’m still exhausted from that fiasco. This business of working like an animal for little or no pay has simply got to stop.

Right now I feel torn in several directions: Don’t know whether it’s better to drop everything and focus on the real-estate licensing project, or to drop everything and focus on producing a couple of e-books that could be marketed for fun and profit, or to drop everything and focus on building the editorial business in a new direction, or to just drop everything, period.

This summer I’ll be teaching one course. It’ll only take a couple of days to clean out the website and and get new course packets printed. But next fall I’ll have a 101 course, and I haven’t rewritten that around some solid subject matter, along the lines of the 102 course (whose success remains to be seen, anyway). It’ll take about two weeks to build that, but even then, it should leave a fair amount of free time over the next three months. Now—probably right now—I need to decide how best to use that time. And the truth is, I have no clue.

Is That Light a Will o’ the Wisp? Or a Train at the End of the Tunnel?

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Real estate is definitely starting to wake up around here, thanks to the influx of Canadian and Chinese investors. Everyone thinks the market is improving and will continue to rise. In Phoenix, the inventory of houses for sale has dropped by 42.1% and the median price has risen by 34.5%, with both indicators trending positive at the end of March. Unemployment here appears to be dropping; in January it fell .3 percentage points to 8.7%—not great, but better than a continuing rise. Last night the instructor of my new real estate class remarked that the people who will be taking the licensing exam at the end of this spring or early next fall will be in an excellent position to start working.

Moi, I remain skeptical. My mother got a real estate license in southern California, back when I was in high school. She never made a penny at it. However…she didn’t work at it full time, and she knew little about marketing or business practices. Though I don’t know much, I sure know more about it than she did. And of course, she had my father and so didn’t have to earn a living; I’m pushed by an element of desperation.

Exactly how desperate that element is remains to be seen.

Last night I was noodling with the numbers and realized that if I were to take a 4% drawdown now, rather than continuing to put off drawing down retirement savings until I really can’t work anymore, I could live in reasonable comfort. Actually, there are several ways I could bring enough money into the house to restore something like a middle-class lifestyle. Each has its problems. But it could be done.

One is to draw down 4% from savings.

Because of the mortgage on the downtown house, I’d still have to teach. But not much. The amount I’d need to come up with annually, above and beyond the drawdown plus Social Security, would be $4,400. That’s 1.85 courses per year, a huge improvement on 3 +3 + 1. Since the online magazine writing course is now well established and drawing enough students to make every semester, it would mean I’d never have to go into a physical classroom again. And I’d never have to read another barfiferous fresman comp essay again.

Drawback: it wouldn’t improve my financial situation. I’d still have to pinch pennies and often would run unnervingly in the red.

A second strategy is to take a drawdown but continue to teach composition courses.

I compared my last GDU paycheck, in the fall of 2009, with what I’m making now. One regular month’s net pay came to $3,170. Today, my infinitely pared-back, rock-bottom expenses come to $3044 a month. So if I could somehow bring monthly  net income back to where it was in 2009, I could cover my living costs and pay my share of the mortgage. A drawdown of 4% added to Social Security would give me $2,674 a month, a $496 monthly shortfall, or $5,952 a year.

To make up the shortfall, I’d have to teach 3.1 sections a year—much better than three a semester plus one in the summer.

This scheme—start taking a 4% drawdown now (not later) and make up the difference by teaching (but teaching a lot less)—presents some major drawbacks.

1. I would have to teach. And I don’t want to. Nor will I be able to do so for the rest of my life, unless I drop dead soon.
2. I’d have to marshal every penny in savings. It would leave me nothing to buy a new car, and keeping my 12-year-old vehicle running is starting to cost more than I can afford.
3. It would do nothing to improve my penurious  lifestyle. I’m sick of pinching pennies.

If I taught 2 & 2, I’d net an average $3,314 a month. That would at least give a little wriggle room, but it doesn’t erase the problem that I need a newer vehicle.

Another possibility is to earn a rather small amount in another job—something in the real estate industry is what I have in mind—continue to teach while I can, and not take a drawdown.

As we noted the other day, my friend JS says he earns $200,000 a year selling real estate. That’s in the present supposedly peakèd market! Now, he’s been at it for 10 years, he has an MBA, and he’s a very fine marketer. However, a tiny fraction of that, just $30,000, would suffice to support me, if I kept on teaching—not unfeasible given that I’ve managed to reduce teaching to a minimal workload. Let’s assume I netted $15,000 after taxes and expenses:

That’s teaching three sections a semester (one of which is the online magazine writing course, a piece of cake), and nothing in the summer.

The result is more than I earned at the Great Desert University. It would be a bitch of a lot of work, at least until I could develop a business to the point where I could drop the teaching. But it would return my income to its former glory.

There’s a third alternative: take a 4% drawdown, net 15 grand in working in a real estate office, and don’t teach:

This would provide a monthly net of $3,924, significantly more than GDU was paying me. If I continued to keep an iron grip on spending, it would be enough to buy a car, which I’d have to do anyway if I were hauling prospects around to look at real estate.

And finally, a fourth possibility: continue to teach two sections a semester (only one of which would be in the classroom) while taking a drawdown and hustling a net 15 grand in the proposed other endeavor.

In this scenario, I would net $4,564 a month, more than I’ve ever earned in my entire life. It would be a lot of work. However, two sections a semester would be relatively easy, since only one would be a composition course (work for the online course is now minimal, since I have that down to a template).

The disadvantage to pulling down savings now is huge: it could mean I will outlive my savings. Women in my family have lived into their mid-90s…and they were freaking Christian Scientists! They never saw a doctor in their lives. Given decent medical care (assuming I can get it), I might live longer than that. With inflation forcing me to take larger cuts of savings, I certainly could deplete my savings before I die. And that is a real nasty prospect, given what we know of elder care in this country. One needs a large chunk of money at the end of life to avoid dying in hideous squalor, suffering, and  neglect.

The disadvantages of teaching while trying to build a new career are large, too. I figure I’ll have to hang onto two or three sections while I’m getting started, in order to guarantee enough income to pay my bills. But if the real estate plan starts to fly, then I would want to quit teaching. The question is, would teaching in that first year or two or three be such a distraction that I couldn’t make the real estate idea work?

It certainly could be. Even though I’m not putting many hours into it now, even a few hours a week could be quite a hindrance. I may need all my energy and attention to build a new business.

None of the four schemes is ideal. What would have been ideal would have been to have kept my GDU job until I was 70, by which time I would have accrued enough in savings to support me and my son would be in a position either to sell the downtown house, as planned, or at least take on most or all of the mortgage payment.

Knowing that “ideal” will never happen again, I need to figure out how to make a choice among four less than perfect strategies to keep a roof over my head, food on my table, and wheels under my feet.

Entertaining for Fun and Profit

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There! Everything is mise en place, the sausages are on the grill, the water’s heating for the coffee, and I have seven minutes to spare. As soon as my friends get here for this morning’s little brunch and tête a tête, all that will remain is to flip the meat a couple of times, toss some milk and flour in the blender, whirl the stuff around, pour it into a hot pan with melted butter, and stick the thing in the oven. Fifteen or twenty minutes later: voilà! A brunch that can’t be beat.

Well. It could be beat if I were serving something like champagne, tequila sunrises, or bloody Mary’s. But they get coffee and grapefruit juice. This is Monday morning, for hevvinsake.

La Maya and I have invited our realtor friend, whom we’ll call JS here, for a nice brunch and some prospecting conversation. He’s interested in laying the groundwork for future client relationships (La Maya and La Bethulia have expressed some disenchantment with their long-term realtor), and she and I are both interested in learning whether the real estate business is worth pursuing for retired academics.

La Maya has another eight or ten years before she can retire, though she’s expressed an interest in retiring at the earliest possible moment (like, oh…maybe tomorrow?). I’m already on the street, having been laid off two years ago and found that no one will hire an old bat to do anything, at least not anything that pays as much as minimum wage.

I need to earn more than adjunct teaching pays—not much more, actually—and it needs to come in year-round. La Maya thinks she’ll need something after retirement to keep herself active and to help her and La Bethulia continue to live in the style to which they intend to remain accustomed.

She would be a great sales person, because she has a warm and engaging personality. Me…not so much. I’m a writer because sitting in my garret suits me, and in fact it may be the only thing I can do. But still…I do stand up in front of 25 or 30 adult students on a regular basis, so maybe I can pass for something less hermitic.

* * *

Several hours later

That came off nicely. The food was good. The dog was a pest. The human company was convenable. And we learned a lot about starting in the real estate biz.

First, what we know is that JS and his wife are both MBAs from good schools. They each had respectable corporate careers, which after a number of transfers took them to Minneapolis, where they resided for some time. During that time, they each were laid off three jobs—apiece! Finding themselves unemployed for the third time, they concluded that enough was enough and decided to buy a Mrs. Field’s Cookies franchise here in Phoenix. Shortly after arriving here (he said within two weeks), they realized that would never do. But they stuck with it for about three years until they managed to sell the business. At that time they had plenty in savings and figured they would just be retired people.

About that time they had a late-life kid, by choice. “Best decision I’ve ever made in my life,” says he.

Then the stock market crashed, so one of them needed to go back to work. He was more or less enticed into real estate by a friend; took the classes planning to go into commercial property sales and then, influenced by a particularly articulate instructor, decided to try residential sales instead.

He says he loves it (and he indeed seems to): says he’s never worked so hard in his life and never enjoyed a job so much.

The trick, we’re told, is to treat the enterprise as a business, not as some sort of part-time gig. He says you have to work at it full-time (or more), always be developing leads and prospects, always keep abreast of the changing market, and have a coherent, first-rate marketing strategy. He’s very good at marketing: that’s what he did for the huge corporations where he worked in management.

Now, here’s the kicker:

I asked, as subtly as I could, how much a person could expect to earn at real estate; then La Maya put the question more frankly.

He said that in your first year, if you’re working at it full-time, you can expect to gross $30,000 to $40,000, before expenses. After ten years, he’s making about 200 grand.

After sixteen years, La Maya is earning 33% of that, in a tenured position. Prorate that nine-month salary over twelve months, and you still end up with significantly less than half of JS’s take. Me? After ten years in academe, I was earning 33% of it over a twelve-month contract. Now I’m making $14,400 a year.

WTF!?!

As you can imagine, this got our attention.

La Maya now thinks she will take a year to enroll in the required courses on the side, get a license, and, if she can get away with it, begin slowly to build a following. This would put her in a good position to take off when she quits her GDU job in about five or six years.

I’m thinking it would be worth trying to get the license fairly quickly (possibly even paying a proprietary school for the courses, since the junior colleges don’t offer them in a timely manner). Then start building the business forthwith. Thirty grand doesn’t sound like much. But even if you had to fork over 40% of it in taxes and overhead, you’d still be left with a net $18,000.

The net on what I earn now ranges from $11, 520 to $13,440.

So…if JS is correct, even on the low end, first-year income would still net significantly more than I’m making now. An extra $4,560 would make a huge difference for me, to say nothing of an extra $6,480. It would mean the difference between scrabbling along, pinching every penny and not even being able to go to a movie or a concert, and living a fairly normal middle-class life.

Before this afternoon, I was wavering about the real estate class. It takes place on the evenings of the two days I teach, which means I get two Days from Hell each week, and I double my commute cost because I have to drive out to campus twice on each of my teaching days. I’ve wondered if the results would be worth it.

However, I now think it’s a good idea. I’m just gonna do it. It’s only five weeks. Then I’ve got to find the second course somewhere and take the ½-credit contracts seminar. Once I have those things in place, I’ll try to get a job as a flunky somewhere, carrying an experienced agent’s luggage. I’m not going to quit teaching until I see if I can succeed at this enterprise—I now have the classes down to such an art they don’t take much time to manage. But if 30 grand comes in the door during the first year, you can be sure I’ll never set foot in a classroom again.

Good-bye to the schoolhouse!