[davelj]

Stan,

If you post your email address I’ll email you a copy of the contract.

It’s an unusual deal, however, that requires a few elements to be present. First, the seller has to be a “true believer” in that s/he believes that the price of the property is going to come back within the term of the contract. Second, the seller must have enough equity – or be able to write a large enough check at closing – to collateralize the downside protection portion of the guarantee for the buyer. And third, despite the previous two elements, the seller has to have some urgency to unload the property.

I think it’s very unusual to find all three elements present regarding a property that you’d actually be interested in purchasing. Frankly, I just got lucky.

Nevertheless, I’m happy to send you a copy of the contract.

[davelj]

Stan,

If you post your email address I’ll email you a copy of the contract.

It’s an unusual deal, however, that requires a few elements to be present. First, the seller has to be a “true believer” in that s/he believes that the price of the property is going to come back within the term of the contract. Second, the seller must have enough equity – or be able to write a large enough check at closing – to collateralize the downside protection portion of the guarantee for the buyer. And third, despite the previous two elements, the seller has to have some urgency to unload the property.

I think it’s very unusual to find all three elements present regarding a property that you’d actually be interested in purchasing. Frankly, I just got lucky.

Nevertheless, I’m happy to send you a copy of the contract.

[davelj]

golfgal… I don’t mean to be overly critical (or maybe I do)… but for someone who’s in the financial services industry you have a woeful misunderstanding of how the world works. In your previous post you wrote:

“I think its interesting that so many people believe wealth is just simply lost. Where do you think the money goes? Is there a vacuum I’m unaware of that sucks dollars out of the world? All while someone is buying MSFT or CSCO, there is another person shorting it. So if the price of MSFT goes down, certainly the person betting long loses money, but the person who shorted it makes money.”

I’ve got news for you: LOTS and LOTS of times wealth “is just simply lost.” To use but one simple example, let’s say I’ve got a publicly-traded mortgage company that’s valued at $1 billion dollars and $100 million of that market capitalization is sold short. And let’s say the next day before trading the company announces it’s going BK and the market cap goes to zero (just to simplify things) on the first trade. Well, the shorts doubled their money, so the “shorts’ wealth” increased to $200 million. But the longs just lost $1 billion. So the NET LOSS to overall global wealth was $800 million. That $800 million… poof… disappeared. Considering that less than 5% of all the shares of S&P 500 companies are sold short at any given time, when stock prices increase, wealth increases (in the short term) and when stock prices decrease, wealth decreases (in the short term). The world is always long stocks by a HUGE margin. (This is why economists talk about “the wealth effect” in conjunction with rising and falling asset prices.)

To use an even clearer example, let’s say I own an apartment building worth $10 million. And to simplify things let’s say that I have no mortgage and self-insure the property. And let’s say that an earthquake reduces the building to rubble the next day. What happened to my $10 million? It’s gone; it disappeared. The economic utility and financial rents went *poof* into thin air. Indeed, you could think of it as disappearing into a vacuum if you like.

The bottom line: Wealth absolutely disappears and “is just simply lost.” It happens all the time. Conversely, wealth is also created via innovation, etc. Fortunately, over the long term, more wealth is created in aggregate than is destroyed due to increases in productivity. But with any given security or asset, wealth can absolutely be destroyed, and often permanently. To be quite frank, that you’re in the financial industry and don’t realize this is somewhat… well… disturbing.

[davelj]

golfgal… I don’t mean to be overly critical (or maybe I do)… but for someone who’s in the financial services industry you have a woeful misunderstanding of how the world works. In your previous post you wrote:

“I think its interesting that so many people believe wealth is just simply lost. Where do you think the money goes? Is there a vacuum I’m unaware of that sucks dollars out of the world? All while someone is buying MSFT or CSCO, there is another person shorting it. So if the price of MSFT goes down, certainly the person betting long loses money, but the person who shorted it makes money.”

I’ve got news for you: LOTS and LOTS of times wealth “is just simply lost.” To use but one simple example, let’s say I’ve got a publicly-traded mortgage company that’s valued at $1 billion dollars and $100 million of that market capitalization is sold short. And let’s say the next day before trading the company announces it’s going BK and the market cap goes to zero (just to simplify things) on the first trade. Well, the shorts doubled their money, so the “shorts’ wealth” increased to $200 million. But the longs just lost $1 billion. So the NET LOSS to overall global wealth was $800 million. That $800 million… poof… disappeared. Considering that less than 5% of all the shares of S&P 500 companies are sold short at any given time, when stock prices increase, wealth increases (in the short term) and when stock prices decrease, wealth decreases (in the short term). The world is always long stocks by a HUGE margin. (This is why economists talk about “the wealth effect” in conjunction with rising and falling asset prices.)

To use an even clearer example, let’s say I own an apartment building worth $10 million. And to simplify things let’s say that I have no mortgage and self-insure the property. And let’s say that an earthquake reduces the building to rubble the next day. What happened to my $10 million? It’s gone; it disappeared. The economic utility and financial rents went *poof* into thin air. Indeed, you could think of it as disappearing into a vacuum if you like.

The bottom line: Wealth absolutely disappears and “is just simply lost.” It happens all the time. Conversely, wealth is also created via innovation, etc. Fortunately, over the long term, more wealth is created in aggregate than is destroyed due to increases in productivity. But with any given security or asset, wealth can absolutely be destroyed, and often permanently. To be quite frank, that you’re in the financial industry and don’t realize this is somewhat… well… disturbing.

[davelj]

Four out of five times I’d say find the best 1031 exchange you can, do your due diligence and if it makes sense then do the exchange and avoid the taxes.

Right now, however, unless the exchange really looks juicy… I’d just pay the taxes and wait. That’s just me.

Don’t get me wrong, the 1031 exchange is a great thing. But I’ve found that a lot of people go through a lot of brain damage to avoid paying taxes and end up just wishing they had paid the taxes and been done with it. Just something to think about.

[davelj]

Four out of five times I’d say find the best 1031 exchange you can, do your due diligence and if it makes sense then do the exchange and avoid the taxes.

Right now, however, unless the exchange really looks juicy… I’d just pay the taxes and wait. That’s just me.

Don’t get me wrong, the 1031 exchange is a great thing. But I’ve found that a lot of people go through a lot of brain damage to avoid paying taxes and end up just wishing they had paid the taxes and been done with it. Just something to think about.

[davelj]

While unfortunate, this should come as no surprise. When you purchase shares in a huge publicly-traded company with a Board largely hand-picked by the CEO, and the ownership of the company is so dispersed and unorganized that management can do practically whatever it wants with impunity… you’re begging for trouble.

This is another reason it amazes me that publicly-traded stocks trade at such ridiculous valuations (at certain times, like now). More often than not, you’re paying $1.00 for three quarters and management screws you at the same time. I just don’t get it.

[davelj]

While unfortunate, this should come as no surprise. When you purchase shares in a huge publicly-traded company with a Board largely hand-picked by the CEO, and the ownership of the company is so dispersed and unorganized that management can do practically whatever it wants with impunity… you’re begging for trouble.

This is another reason it amazes me that publicly-traded stocks trade at such ridiculous valuations (at certain times, like now). More often than not, you’re paying $1.00 for three quarters and management screws you at the same time. I just don’t get it.

[davelj]

pw, the short answer is: I don’t know. I bought in 2000 and sold in 2004 (long story) and then bought again late last year in a very unusual transaction that protects me from 30% of the downside between when I bought it and 2010 (and the price was already marked down 15% from the seller’s cost basis). If it weren’t for the strange deal I’d still be renting. My advice – worth exactly what you’re paying for it – is that you just keep looking and when you find something you can comfortably afford that you feel is “reasonably” priced (not necessarily the bargain of the century, that is), you buy it. I’d like to buy a condo to use as an office – I rent space right now – so I’m hoping to find something in 2010 or so. I’ve never felt the need to get the absolute best deal in my business life or personal life. I try to find a good deal and leave something on the table. Life’s too short to get caught up in agonizing over every last dime. Just my opinion.

gg, I think the buying trend was started by simple exhaustion of the selling trend. Builders stopped building, employment stopped dropping and people started moving back to SD and it just picked up steam after that. I think I kind of addressed the rent vs. buy decision above. Everyone’s got their own situation. The most important thing is that whatever you’re doing it fits comfortably into your financial picture. As an extreme example, there are plenty of people for whom it makes sense to buy right now. If you have a family that needs to get settled, you’re wealthy and have a lot of liquidity and don’t mind watching your home decline in value by 30% then why wait to buy? Sometimes it’s not worth losing your sanity… especially if you’ve got a lot of cake to begin with.

[davelj]

pw, the short answer is: I don’t know. I bought in 2000 and sold in 2004 (long story) and then bought again late last year in a very unusual transaction that protects me from 30% of the downside between when I bought it and 2010 (and the price was already marked down 15% from the seller’s cost basis). If it weren’t for the strange deal I’d still be renting. My advice – worth exactly what you’re paying for it – is that you just keep looking and when you find something you can comfortably afford that you feel is “reasonably” priced (not necessarily the bargain of the century, that is), you buy it. I’d like to buy a condo to use as an office – I rent space right now – so I’m hoping to find something in 2010 or so. I’ve never felt the need to get the absolute best deal in my business life or personal life. I try to find a good deal and leave something on the table. Life’s too short to get caught up in agonizing over every last dime. Just my opinion.

gg, I think the buying trend was started by simple exhaustion of the selling trend. Builders stopped building, employment stopped dropping and people started moving back to SD and it just picked up steam after that. I think I kind of addressed the rent vs. buy decision above. Everyone’s got their own situation. The most important thing is that whatever you’re doing it fits comfortably into your financial picture. As an extreme example, there are plenty of people for whom it makes sense to buy right now. If you have a family that needs to get settled, you’re wealthy and have a lot of liquidity and don’t mind watching your home decline in value by 30% then why wait to buy? Sometimes it’s not worth losing your sanity… especially if you’ve got a lot of cake to begin with.

[davelj]

golfgal, I think the confusion lies in the following from your previous post:

“MBS or any ABSs for that matter are tied to assets. Those assets don’t just vanish – we’re not talking about worthless bonds that are issues – they are backed -hence their name. The value of those assets may decrease, but they do not go to 0…”

Your statement might lead one to believe that you were trying to convince someone that there aren’t any MBS or ABS that are truly worthless. Obviously, this is incorrect, as I pointed out in my response to your previous post. Also, in the case of some Z tranches, actually, yes, “the assets just vanish,” for all intents and purposes.

Now, I think what you’re trying to say is that PORTFOLIOS comprised of VARIOUS tranches of MBS and ABS will not be worthless due to the presence of real collateral. I agree with you there. (But that’s patently obvious. In the same vein, I will point out that stocks won’t go to zero because there are real companies that underly their values.) But that’s not the point you made – unwittingly or not – in your previous post. Nevertheless, I think we’re on the same page now.

[davelj]

golfgal, I think the confusion lies in the following from your previous post:

“MBS or any ABSs for that matter are tied to assets. Those assets don’t just vanish – we’re not talking about worthless bonds that are issues – they are backed -hence their name. The value of those assets may decrease, but they do not go to 0…”

Your statement might lead one to believe that you were trying to convince someone that there aren’t any MBS or ABS that are truly worthless. Obviously, this is incorrect, as I pointed out in my response to your previous post. Also, in the case of some Z tranches, actually, yes, “the assets just vanish,” for all intents and purposes.

Now, I think what you’re trying to say is that PORTFOLIOS comprised of VARIOUS tranches of MBS and ABS will not be worthless due to the presence of real collateral. I agree with you there. (But that’s patently obvious. In the same vein, I will point out that stocks won’t go to zero because there are real companies that underly their values.) But that’s not the point you made – unwittingly or not – in your previous post. Nevertheless, I think we’re on the same page now.

[davelj]

Maybe I’m nuts but I (still) think we’ll see the bottom in 2010-2011 or thereabouts. I think this time around, as opposed to the early-90s, we’re going to see more violent price moves each year going forward as institutions realize that things aren’t getting better and just start dumping properties. But, I think we’ll bounce along the bottom for several years after we hit bottom this time around. A philosophical question: If prices decline 35% peak to trough between 2005 and 2011, and then decline by another 5% cumulatively over the next 3-4 years, where was the bottom? The bottom will “feel” like 2011 but the stats will say it was 2014 (or whatever). I guess what I’m trying to say is that I think the lion’s share of the real price declines will occur by 2011, although there may be some nominal declines thereafter. But that’s just a gut guesstimate, of course.

[davelj]

Maybe I’m nuts but I (still) think we’ll see the bottom in 2010-2011 or thereabouts. I think this time around, as opposed to the early-90s, we’re going to see more violent price moves each year going forward as institutions realize that things aren’t getting better and just start dumping properties. But, I think we’ll bounce along the bottom for several years after we hit bottom this time around. A philosophical question: If prices decline 35% peak to trough between 2005 and 2011, and then decline by another 5% cumulatively over the next 3-4 years, where was the bottom? The bottom will “feel” like 2011 but the stats will say it was 2014 (or whatever). I guess what I’m trying to say is that I think the lion’s share of the real price declines will occur by 2011, although there may be some nominal declines thereafter. But that’s just a gut guesstimate, of course.

[davelj]

One thing that drives me a little bit nuts is when people like Patrick point out the 1.36% (or thereabouts) annual increase in real estate prices and come to the conclusion that, ergo, purchasing a house is a generally a bad investment (or, even worse, it’s corollary that it’s better to be in the stock market). This conclusion ignores two important facts: (1) You can borrow money to buy the house, therefore the return on real estate should reflect the ability to use leverage (that is, the return on your equity), and (2) if you get a fixed-rate loan, your “rent” will never increase and you hold an explicit option to put the mortgage back to the financial institution and re-finance at a lower rate if one should become available. Anyone who ignores these two issues simply cannot be taken seriously, in my opinion.

I would argue that at least 50% of the time (assuming normal swings in the real estate market) a person will be financially better off in the long term by purchasing as opposed to renting (assuming that they can comfortably afford the mortgage, of course). Although clearly we’re not in one of those 50% chunks of time right now in SD.

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