Wednesday, July 16, 2008

House Flipping In The Real World--Part 3-Fast Freddy

(This blog is turning into another mini-series, this one on the joys(?) and perils of real estate investing. I repeat, that anyone can make money at real estate BUT it is not painless and not easy. To go to the beginning, scroll down.)

Went to the closing, signed a bunch of forms, and wrote very large checks to the realtor and for last years taxes. But told myself I had followed the rules--fixed the house, interviewed realtors, put the house on the market, found a qualified(?) buyer, and paid a bunch of money at closing. And was helping a young couple get a start in life. As a friend put it, let no good deed go unpunished.

But I was feeling pretty good about myself and sat back and waited for that first payment...and waited. One problem surfaced immediately--Freddy and Celia didn't have a phone, or at least not one they told me about. Called the realtor. He would try Freddy's dad. Gave me the number as well and the number for Celia's parents. Called both and got Spanish only speakers or so they said. (Phone tricks are something I've dealt with for years. I was in international finance and we had a controller in Brazil that often got phone problems when asked difficult questions. It was only after we had become friends that he admitted to crumbling typing paper next to the phone when things got too hot for him. Try it, it sounds exactly like a cell phone breaking up.) Celia finally called and said could I come by and they would have the money for the first payment. Didn't like it but ok.

This happened a couple of times and finally said, no more nice guy, mail the money order. Worked a couple of times, then more phone calls, then nothing, then a summons from the city to clean up the backyard. Called the city, said I didn't own the property but, just out of curiousity, what was in the backyard? A junkyard, the city said. Oh, great.

Then payments on schedule for a couple of months and then nothing. I started to dread the first of the month--would they or wouldn't they? Called the realtor and he called around and found out that Freddy was having cash flow problems because Freddy was in jail. Wonderful. Seems Freddy was having a mid-life crisis early, brought down by the burden of the wive and two kids. Fooling around with some buddies he got busted for something and discovered it's hard to paint houses when you are locked up.

By now about a year has gone by and I'm getting a little curious about whether they had paid property taxes. Stupid me, of course not. And they were in arrears and incurring late charges of about $100 a month. Note: The city is not a friendly creditor, don't get late on your tax payments.

I hit the ceiling and then cooled off and then did the smart thing--I abdicated. Called a lawyer I knew casually, how much to foreclose? $400 plus fees of around $100. Go for it. He said the process would take about three months. What? That's the way it goes. Ok, get cutting.

And I thought of Bill Smithburg. Smithburg was chairman and CEO of the Quaker Oats Company when I worked there early in my career. Bill was a hero for having the 'vision' to buy Gatorade and turn it into a powerhouse. A few years later he was vilified and canned for buying a tea company that I can't even remember the name of right now.

I remember Bill for sending out a memo to finance saying, roughly, don't bring me small projects or acquisitions. Bill figured out that you spend the same amount of time on a little project as a big project, sometimes more. I finally figured out that Freddy and Celia were a small problem that was taking up way too much management time and effort so I flipped it to the lawyer and said, call me when this mess is over.

Sound cruel? Perhaps. But I would soon find out that Freddy was really a nasty little person.

Tuesday, July 15, 2008

June 2008 Goals Update

Plod and trod. Here we go. Q2 2008 closed and there’s not much to tell on the half year update.

Goal #1

Specific - Contribute to my 401k plan

Last month I wrote that I was considering bumping this up. In the meantime however, I am eligible for the Employee Stock Purchasing Plan now. So I’m still contributing to the 401k, and increasing my after-tax savings.

Grade: Pass

Goal #2

Specific - Reduce my credit card debt

Measurable - By 50% or $9,137 (rounded up to $10K)

Achievable - Monthly payments of $762

I cannot see the forest for the trees here. But examining my balances closely, I see I have not done well and realistically, I’ll only be down to about $10.5K by Christmas.

Grade: Fail, perhaps terminally.

New Goal #3:

Specific - Reduce my credit card debt on my highest balance card ~$13K

Measurable - By 50%

Achievable - ~$825 a month

I put down about $1800 on this card last month and another $850 in July. I think I can salvage this new/revised goal for the end of the year. I think I can. I think I can.

Grade: Pass

Monday, July 14, 2008

Should I get a paying job or not?

We've been living here for about two months now, and I've had a couple of job interviews but haven't heard back from them, and at this point I am wondering if I should even bother with trying to get paid employment. It may not be worth the hassle. It might. If I get hired with either the company I interviewed with two weeks ago or the tax preparation firm I worked with in Virginia (surprisingly, employment is NOT as portable as they'd have you believe), I'll take the position, but I'm trying to decide if I should even try for more.

Reasons I should get a job:
  • Boredom! I have quite a bit of free time on my hands, and while I am engaged in volunteer activities, I could easily handle a part-time job and not sacrifice any family time or fail to accomplish any of my regular errands.
  • The gap in my working resume is only getting longer with every day I fail to work. Same thing with my salary history.
  • A supplemental source of income would provide Mr. Dimes and me with greater ability to fatten up our short-term and long-term savings (and a matched 401k would be totally awesome if I could get it). We've got the three-month emergency fund taken care of, but a car-replacement fund or home down-payment fund would be great to get started on.
  • My student loans, which I have earnestly been paying off with my income, are now starting to become my husband's responsibility with no earnings coming into the household from my efforts. Even earning $200/month would enable me to fully cover the loan payments.
Reasons not to get a job:
  • Potential lack of flexibility. I am doing hundreds of practicum hours for my AFC certification, and a full-time job would cut off my ability to do those at the pace needed to complete them on time. A part-time job is ideal, and what I'm looking for, but even some part-time schedules are unworkable with my volunteer commitment.
  • Interference with family planning: Mr. Dimes and I are thinking about starting a family within the next year or two. It would be difficult if I were to start a job and then immediately get pregnant, as I have no plans to work after giving birth.
  • Possible relocation. As I mentioned a few posts ago, we might be relocating onto base housing. Currently we live about 20 miles away from the base. If I had a job close to where we currently live, it would be just as far from our new residence as his workplace is from our current one. In that case, we'd just be trading commutes. My car gets better gas mileage than his does, but do I want to drive so far every day for supplemental income?
  • Allegedly, there is a lot of nepotism in this area for jobs. I've heard that a lot of people get passed over due to internal hiring decisions or choosing friends or acquaintances instead of the most qualified applicants. While this wouldn't keep me from applying for jobs in general, it would probably cause me to throw in the towel sooner than if I weren't thinking the process was rigged.
So I'm not sure. I guess another thing to keep in mind is that Christmas is coming, and a new job might keep me from being able to go and visit family in December, though I'm not sure that's necessarily a bad thing. ;-) We'll see what happens.

Thursday, July 10, 2008

Positive net worth!

I updated my NetWorthIQ page a day or two ago and it looks like I finally have a positive net worth! Click here to see my NetWorthIQ profile.

OK, so it's only $367 above zero, but it's a start! (Although I am currently only including my retirement contributions, not the actual value of the account, so if I used actual value it'd be about $2000 more.)

I have some pretty audacious savings goals for this year. I'm already trying to max out my retirement savings and I want to get up to a $10,000 emergency fund (right now at $4000 and change) as well as save up the money to pay off my 0% balance transfer when it comes due in December (I'll need about $4600, have about $2700 right now) so I've still got some work to do. I have some other goals to meet if I can do those, but those are the first priority.

I'm really not worried about paying off my student loan though - it's fixed at 3.9% and I'm getting 4.5% at ING, so it makes more sense to save right now than pay down the debt.

Wednesday, July 9, 2008

Get packing, Wesley

Wesley Snipes has been granted court permission to leave the United States in order to work on a couple of films.

As blogged about here, the action film star asked for the travel OK to head to London and then Bangkok in connection with movie roles.

Snipes, just in case you've forgotten, was convicted in March of three misdemeanor counts of failing to file returns on $13.5 million in earnings. He was sentenced to three years in federal prison, but has been free on bail while appealing the conviction.

Judge William Terrell Hodges signed off on the
work travel request just before the Independence Day holiday, despite prosecution
objections to the Thailand project's open-ended return date.

Monday, July 7, 2008

Six-Word Memoir Meme

A really long time ago, Maria at Cents and Sensibility tagged me for the Six-Word Memoir Meme. I've totally broken the meme, as she made her post on April 15 (guess where I was that day?), but I won't leave her hanging forever. My memoir is...

Whoops! Got distracted by something else.

My mind is a cluttered field of thoughts and ideas, and my life and household are no different. My parents and husband think I have Attention-Deficit Disorder, and maybe they're right. I'm just a little undisciplined in my thinking, and I have better things to do than to stay on top of everything all the time. I ultimately accomplish all my goals, I just don't always finish them in the order they were started. :-)

Saturday, July 5, 2008

House Flipping In The Real World-Part 7-Doing The Numbers

As they say at NPR, when we do the numbers we find that, well, it depends on how you do the numbers. Analysis is in the eye of the beholder. Just ask any finance guy told to justify the corporate jet. I prefer, with a few twists, to do the cash in, cash out method so here goes.

The HUD asking price was $39,900. I got it for $27,000 after some long negotiations. Dealing with HUD is tricky so a realtor that specializes in this is important. HUD picks the realtor and the realtor cannot opine on a bid but they will do so in code. "They may have an issue with this" means too low. "Perhaps in the ballpark" means you got it. Anyway, as I said before, you make money when you buy the house, not when you sell it.

Here are the cash flows (Sorry about the numbers going all over the place, programming ignorance):

Money out

Purchase Price $27,000

Maintenance/Repair 3,400

Property Taxes 3 Years 3,600

Insurance 600

Freddy and Celia Closing Costs 3,500

Foreclosure Legal Fees 750

Back Taxes and Penalties 3,000

Patricia Sale Closing Costs 500

Total Out 42,350

Money In

Rent $16,275

Freddy/Celia Mortgage Payments 7,920

Patricia Sale Proceeds 49,000

Total In 73,195

ROI = Cash In minus Cash Out divided by Cash Out=$73,195-$42,350=$30,845 divided by $42,350=72.8%. Not too shabby, at first glance. I held the property for 4.5 years so the annual return is 72.8% divided by 4.5 years equals 16.2%.

At this point, any analyst out there worth anything should be shouting "Wrong, wrong." And they would be right. You can't divide 72.8% by 4.5 years because it ignores the time value of money and a few other things but that's my story and I'm sticking to it.

There is a more glaring error. There is no expense in there for me but let's not quibble.

Let's do look at what is in there--The cost to renovate the house was only $3,400 because I did most of the work myself. It was a controllable variable. Uncontrollable variables are property taxes and penalties ($7,600), insurance ($600), closing costs ($4,000) and legal fees ($750). Actually, closing costs can be reduced significantly by avoiding real estate agents as I did with Patricia but it ain't a done deal yet so an agent still may be necessary.

What ate up a large amount of cash was FEES and you cannot avoid them but most people forget about them. If you invest in real estate, don't forget them.

BUT we still haven't come up with the most GLARING error in the analysis. The Donald and Co. would say "Don't do it this way. Use OTHER PEOPLE'S MONEY." Let's try that. You put 20% down and borrow the rest for repairs and everything else at 10%. So that is $5,400 for the downpayment and $15,350 for everything else and 4.5 years of interest payments=$31,899 plus the interest not paid you for the downpayment but let's not split hairs. Income of $73,195 minus expenses of $31,899 generates a return of $41,296 divided by $31,899 for a return of 129%, or an annual return of 29% doing it my way.

Not bad. In fact, great. The Donald is vindicated except for the fact that OPM is based on the assumption the OP are either idiots or charities because...

Who is going to lend you this money? Not HUD. Oh, there may be a government program out there that will lend you the money but I don't know about it and I wouldn't qualify. Maybe you would but I doubt it. Will a bank lend it? Lend $31,899 for a property worth currently, maybe $27,000? Remember OPM assumes you can borrow just about everything. I don't think so. Maybe Mom and Dad will lend it. Give it a try. Or private individuals may lend it but they will charge a lot more interest and take a lot more of the profits.

Please feel free to take a whack at the analysis or come up with a better one. I'm going to send this to a friend that is much better at finance than me so we will see what he has to say. For now my head is spinning and I probably made some major mistake BUT no matter how you do it you will come up with the same conclusion--yes, you can make money in real estate but it isn't as easy or painless as the guys on TV would have you believe.