fairytale house by ~Siska92

I bought a house for $150,000 eight years ago and had a loan of $120,000. The value of my house increased to $350,000. I took advantage of the situation and refinanced, being a conservative person, only borrowing $280,000 at a favorable 5.5% rate fixed for 30 years paying $1,600 per month for the mortgage and another $400 per month for real estate taxes and insurance. I was conservative and spent the $135,000 of home equity that I took out on improvement to my home (new kitchen, new bathrooms, hardwood floors, finished basement, and a small swimming pool for the little ones). This caused my tax bill to increase by $200 per month due to higher assessments. After a few years, the real estate market crashed and my house is unfortunately now only worth $180,000. I still owe $270,000 and have to pay $2,200 per month to live in “my” house. My choices are a) continue paying the high monthly payment with a giant negative balance sheet or b) rent a place for $1,200 per month, let the bank have the house and start from a clean slate.

I wish the situation was as nice as the above description. Here are a few additional realities:

• All my neighbors got foreclosed and my whole neighborhood has been downgraded whereas before I thought I lived in a decent part of town.
• My town is unable to meet budget demands and has to increase taxes to pay its bills.
• I actually spent the money on Made in China products worth $0 today and a GM vehicle that’s lost a lot of its value instead of home improvements.
• My bank let me borrow up to 100% of equity so I borrowed the full $350,000.
• The loan I got had a variable interest rate and my payments are more than $2,200.
• The $30,000 stock portfolio cushion that I had is now only worth $15,000.
• I am about to lose my job even though I work hard. They say that the company has to cut back because of the economy.
• I also had a credit card balance of $38,000 and student loans of $24,000.
• Even though my wife really loves to shop, we just cannot afford to buy anything any more.
• I had never signed any contracts before buying this house, let alone the sixty thousand mortgage documents they made me sign at the closings.
• I’ve called the bank every month for the last six months asking for help or a way to get me out of this pickle.

What are my choices? I think I better let the bank have the keys, declare bankruptcy if I have to, move out into the $1,200 a month apartment and hope I can find another job so I can pay the rent before the economy gets any worse. How is any of this bull shit they talk about on TV going to help me this month? I voted for Obama to make a change but so far I see more of the same. There is little they can do to make me stay in this house given the reality I am facing.

Asphalt story by ~JK89

“5 Trust in the Lord with all your heart and lean not on your own understanding; 6 in all your ways acknowledge him, and he will make your paths straight.” ~ Proverbs 3

This might be a bit long but I have to share. A couple months ago I met with a few paving contractors (actually their salesmen). One of them (let’s call him Chief), an elderly man, in poor health with difficulty speaking came by, measured, gave me the lowest quote and left. He came across as trustworthy. In all my recent dealings I look for integrity and trustworthiness above all. The other salesmen were… stereotypical and  their quotes were very high. So, I told the Chief he had the job but I needed to get a few other projects completed before we were ready for the asphalt. He called me every two weeks to check on my status. We met a couple more times and during the last meeting I got a surprise. He raised the price of the job stating that the cost of asphalt had gone up considerably. My first thought… what did I miss about this man earlier when I got the impression he could be trusted. My second thought… I was too tired to have a second thought. I told him I did not like surprises and would have to get back to him with our decision.

I found out that the neighbor had also used the same company and was very happy with the end result but the owner had a very poor attitude and had tried to cut corners until confronted (typical story). I also found out that the price of asphalt had increased though it was hard to know exactly what part of the total job cost increase could be attributed to this. I decided to go ahead because the other salesmen were not people I wanted to meet again and Chief’s proposal was still lower than their estimates.

Having been through similar situations many times, I was dreading the day of the job perhaps because I had not insisted on meeting the owner, I had been surprised once already, I had not been through this type of job before, and a few details still had to be worked out on that day. In the morning, I reminded myself Proverbs 3 and the Golden Rule and marched ahead.

The Chief was already waiting for me. He told me that a different company would be doing the job… the second surprise! I looked straight in his eyes and said that this was the second surprise and he already knew I did not like surprises. I also told him that I had trusted him and was sure he would not let me down. Then I reminded him the terms of our agreement, the price, and the main requirements. He nodded  and told me I’d be much happier with the new company.

The crew showed up, and did their work going the extra mile in a number of different ways. Half way through the job, the owner, a 51-year-old man strong as an ox, said that his daddy had taught him the Golden Rule and promised that he’d never go wrong if he practiced it. He and his brother did the work the way I had expected, often smiling, making jokes and laughing as if trying to lighten up the grueling physical job of spreading and compacting tons of material.

Four police officers stopped by and left shortly after speaking with the Chief. After the fourth one left, I asked him why they had come. He said they wanted to have a police detail at the site (this would have cost me more money) but he had convinced them that none was needed. Seeing my puzzled face, he said he had been the police chief in the town next door for over thirty five years.

The job was done as best as it could have been done (as best as I could judge quality). While writing the check, I asked the Chief why had he switched companies. He told me that he was recovering from a major lung cancer operation and the owner of the other company was a very mean, untrustworthy man who often made him feel bad to the point where it was affecting his recovery. The owner would often not respect prior commitments making him appear untrustworthy. All I could think of was Proverbs 3…

house by Galadrielbg

Having experienced the house building process, I have learned a lot and wanted to share a few thoughts here in case you ever face the dilemma of building vs. buying. There is an Armenian saying that every man must “plant a tree, have a child, and build a house.” I think the last one is questionable in the literal sense (though in the saying it’s really about making a home for a family).

The Emotional Dimension: The project of building your home is unlike any other project. It is an emotional project directly hard wired to your self esteem. After all your house may be one of your largest assets. Your house is also most likely one of the key elements in your external and internal image. As if trying to make this even more emotional, building a house is about your ability to take on a large, expensive, and complicated challenge and seeing that through to completion. You might be trying to make a statement to your spouse, your in-laws, many others but most importantly to yourself.

The Business Dimension: At the same time, building involves many business relationships where trust, money, specifications, deadlines, and quality matter a lot. This project comes with numerous interdependencies between many parties such as the banker, the builder, the subcontractors, the family, the city, the designers, the lawyers and the suppliers. In addition to everything else that you do (work, home, school, activities, etc.), you must make quick and correct decisions daily and sometimes hourly for months. Large sums of money are handled in legal transactions. There is significant uncertainty in all aspects at all times.

Should you build? Success requires the ability to balance these two separate yet intertwined dimensions constantly which is extremely difficult. Furthermore, the benefits are a bit overrated given the massive investment. By investment, I mean the financial, emotional, but more importantly time investments required for a successful house building project. As a result, I believe building a house makes little sense for most people who are not in the residential construction business already. If you are seeking the knowledge or the experience that comes with building a house, why not build a house for someone else or manage a few smaller house remodeling projects instead? Buying a house is generally also much more economical.

Should you buy? I think so. In good markets, you may be able to get a great deal on a house of your dreams. The buying process is far simpler with greater odds on your side. Given the thousands of homes for sale, chances are that you can find one that’s very close to your needs and need not build a house to satisfy the family. Also, given today’s dynamic lifestyles, you can sell what you bought easier than what you have built (due to amount of hard work invested) even though in the case of buying emotional attachment also takes place. If maintenance is your main concern, why not buy a recently built house.

Looking back at all of the details that we had to consider, all of the work that we put into the process, and all of the time that we invested, I feel the reasons to build hardly justify the price you pay.

Know the work. This is a difficult one as the more you know the less pleasant it is to see the various shortcuts that are employed at your expense. However, “ignorance is bliss” does not apply in this environment as “bliss” could turn into “nightmare” quickly if you have no clue what to expect. Read about good workmanship for each project and sub-project, talk to people who might offer you their experiences, but more importantly get a few estimates (at least 3 when the job is over $500) and ask the contractors what they think a job well done entails and how they feel others will shortchange you if you do not give them the job. This task is really about knowing the scope of the work. If you do not know what the scope should be, do not waste time on other elements. One issue here is the contractor does not always know the scope by looking at the job. For example, replacing a sink might involve plumbing, electrical work, plastering, painting, and all kinds of other activities. The contractor knows that unexpected items come up and tries to compensate by overestimating or by underestimating (to get the business) and then coming up with change orders. Numerous other variations also exist (walking from the job part way, using less or less expensive materials, cutting scope in less visible areas, etc.) The “good” contractors often charge so much that even if unexpected items arise, they can eat into their profit for maintaining a good reputation. The issue here is that it’s a zero sum game where your gain is the contractor’s loss or at least it’s often perceived this way by both parties. Knowing the job is required for properly overseeing the work.

Know the contractor. This is another difficult one because unless you are in the business, chances are you do not need a plumbing contractor every month. You tend to not know people in the different trades as well as you would if you had to deal with them more frequently. Also, opinions of others are often misleading. A few recommendations from trusted friends have completely backfired for me in the past. The way I try to figure out who they really are is by asking direct questions with clear cut answers. It is difficult to say but this is a character examination where you are trying to determine the integrity of a person. I try to stay clear from contractors who give less than clear answers. The questions could include pricing issues. For example, they often like to secure a payment of at least half the work in advance to ensure they are not at risk. I try to avoid paying more than a third in advance. I disclose this rule up front and see how they react. I also try to gauge how responsive they are. Recently one of them did not call me back for two days and when I gave the work to someone else he was surprised. What you are trying to assess is if you could trust such a person with important work. You are trying to determine if trust is even important to him/her, if they would be proud of their work and would stand by it for a long time, if they value your deadlines, and if they would be honest and reasonable with you throughout the process.

Know the contract. Often the contract is missing important details or does not exist at all. The key missing elements are often the start date, and even more importantly, the end date. Most contractors do not have these on their contracts. The second issue is that the scope of work and the breakdown of the costs are not spelled out. The third is that payment details are skewed to minimize the contractor’s risk. As in any negotiation, all of the details are up for discussion. I did not fully appreciate this until very recently. It takes some courage to bring up difficult issues but it’s far better to address them at the beginning instead of having to deal with them when some work has already been done. Recently, I have gone to the extreme of having my own contract and requiring the contractor to accept the terms or discuss in advance the issues with the contract. So far, this has worked better for both parties.

In the real estate business, I have heard people crudely refer to these updates as “lipstick and bows.” As someone gets ready to sell a house, the real estate agent or the owner updates some key elements with inexpensive replacements. They also paint and perhaps do a few small touches here and there so the property looks better and sells easier. The advertisement will have a few nice keywords like “brand new appliances, new kitchen, move-in condition, etc.” that may sound like music to buyers who do not want the hassle of dealing with replacements. Add to this a showing complete with chocolate chip cookies from the oven and you’ve almost sealed the deal. I hope that the couple I met did not fall into the “lipstick and bows” trap. I especially hope that when you are shopping for a house, you pay little or no attention to appliances or the paint. Appliances, paint and a whole bunch of other finishing touches are inexpensive to replace.

I would go as far as saying that you should be even more careful when buying an older home with very new finishing touches. Are the owners trying to mask a larger problem? Why would they go through the expense of these finishing touches if the house was a great deal? Are they trying to get more money for cheaper goods?

When looking at houses assuming you have passed the location check which is the most important, I would suggest you pay attention to the structural integrity of the building, roofing, siding, decking, foundation, every component in its plumbing, electrical, and HVAC systems. These are expensive to repair and replace. Everything else can be considered some degree of “lipstick and bows.” I have heard of few non-professional home buyers who look under the bathroom sink or check out the basement first. Even home inspectors often miss critical steps like opening a circuit breaker panel to check for proper grounding. In this process, you need to also assess if the seller is good quality seeker and conscientious homeowner.

Furthermore, if the building and its main systems are in good shape and worth buying, you should invest in a home inspection which will more than pay for itself during your price negotiation. Having newer appliances and newer looking home makes it more difficult to negotiate the price down. A condominium price is even harder to negotiate because it has fewer systems or elements that could be used during such a negotiation. Therefore, a newer looking condo with updated appliances is perhaps the hardest to negotiate down assuming the asking price is around the market value for its location.

Considering these factors, the appliances which were purchased for $1,200 (cheaper models) to make it easier to sell the property could end up costing as much as five to ten thousand dollars more in the house purchase price. Furthermore, replacing these with stainless steel equivalents (nicer models) will end up costing a few thousand more. I hope the couple I met did not fall for this and I hope you never fall for this either.

Where do you find yourself in this spectrum of good and bad masters in your profession? It is amazing how often people with no support, no tools, no money, and often no formal education can build great businesses, create classic works of art, or play piano perfectly. The opposite is also amazing. How many people born to great fortune waste their tools, squander their parents hard work and create absolutely nothing of any value. At work, I come across many who claim they can do the job but when faced with the actual challenge, fail miserably or deliver something of little value. They have the tools, they have the support, they have access to people who are smart and willing to help. Is it their willingness or is it their ability preventing them from succeeding? Make sure you are a master, don’t complain about not having the best or the right tools. The tools are given to great masters after people realize the extent of their potential.

Finally, great masters think creatively and build their own tools when needed. These tend to be so effective, that often others who want to be like the masters copy the tools thinking they can also be as effective and efficient as the masters by just having the tools. Next time you are faced with a situation where no tools are provided or you have no support, think hard and try to see what else you can use to do the job well. You may just be surprised at your own potential and effectiveness when you stop thinking about the lack of whatever it is you need and instead focus on the goal! This is as true in a corporation or in government as in the house building example. Progress requires resources and hard work. Instead of complaining about lack of resources, think of creative ways of channeling even inferior replacements and make the progress. Others will come up with more resources once they realize your potential and ability to lead.

You will invariably hear rules #1-#3 in real estate as location, location, location… This is not entirely true. Be careful since deception is not uncommon as we have seen in recent past!

Your home is not an investment; it is an expense. Investments have returns, your home only has expenses such as taxes, heating/cooling expenses, water bills, etc. As long as you live in your home, it has zero return. The money you invest in your home is frozen and earns nothing. If you consider the appreciation of your home as your main investment strategy, then you ought to instead focus on two other topics — how to increase the income from your job or business and how to decrease your living expenses so you can save more and invest in other assets.

I am not trying to discourage home ownership. There are numerous advantages to home ownership such as better communities, schools, etc. You should own your home if you wish as long as you can afford it — just do not consider it an investment. Quite a number of people bought houses in the past five years without having the means to weather a real estate storm such as the current one.

Various factors contribute to the misunderstanding that our homes are investments. First, home ownership generally requires a mortgage with a set monthly payment consisting of interest and principal. This principal would have been spent in most cases if the bank was not there to collect it. The mortgage enforces a form of savings discipline which is further encouraged by government tax deductions and other minor benefits. Even if the real estate and currency markets remain flat over time, these principal payments add up to result in sizable savings — especially if the home is held long enough. Again, this factor might make your home a sound purchase (certainly better than your car) with low risk and possible long-term benefits. I am certain you can do better than rely on a mortgage to save. Second, home ownership is perceived as an investment because of constant inflation. You can borrow $100 today and by the time you pay it back (even including all of the interest payments), it might be worth $10 if government acts with sufficient recklessness. Third, home ownership brings leverage and any appreciation seems like an incredible percentage of return but remember so does depreciation during falling house prices.

You should only invest in real estate in one case — to diversify. I am probably being a bit too strict for a number of reasons:

• Diversification implies you have lots of cash already invested in other assets (CDs, stocks, bonds, gold, etc.) and need to invest in yet another asset class, real estate, for higher long-term return.
• By its nature, diversification requires that you not invest all of your cash in real estate, which is a much safer mode of operation.
• When you borrow (get a mortgage), you will consider the earnings potential of the real estate alone, rather than all your other sources of income as in the case of buying your home.
• You will not get emotionally attached to the property as people get attached to their homes because it will simply represent another investment.
• You will be free to sell without worrying about uprooting your family, driven strictly by investment strategy and without any emotional family bias.

There is one danger here: do not under any circumstances speculate in real estate. I would go as far as saying do not ever speculate in any asset. Your chances in speculation are not that different from gambling at the casino.

When used appropriately real estate can be a good source of return with lower risk but the opposite is also very true, you can lose thousands of dollars in a short time.

The Harvard Management Company is one of the best money managers in the world. It invests Harvard’s endowment in almost a dozen asset classes. If real estate was the ultimate money maker, why own the other assets at all? Their asset mix changes annually but gradually. I hope you will be careful with real estate and will avoid the misfortune in the form of foreclosures that many around the United States are experiencing today.