REAL ESTATE AND NEGOTIATING SKILLS.

Do you want to be a real estate investor? If you do you had better learn to negotiate. The more complex the transaction, the more your negotiating skills come into play. As an example, consider the recent offer I received on a property I badly need to sell. The offer was for full price and I accepted the deal with few changes. No need to negotiate there, right? I wish. Obtaining a meeting of minds from buyer and seller is only the beginning. There are several major hurdles in a transaction even after the contract is signed. Perhaps the most critical of these is the inspection. Since it can be expensive to obtain a professional inspection, few buyers will bear this expense without first making sure they can agree with the seller on price and terms. In the example I cited, the buyer spent several hundred dollars for a professional inspection which took about five hours to complete. The result was that the inspector thought the building needed a new roof and the buyer wanted a substantial price reduction in order to replace the roof. I was able to produce a document that showed the roof had been replaced within two years. So much for the competency of the "certified inspector". Deal over, I won. Right? I wish it were that simple. I question the competency of the inspector and the buyer questions the competency of the roofing contractor who did the job. What was the outcome? Negotiations still in process. In a complex real estate transaction, you don't know the deal is done until you sign the final papers and cash the checks. Even then, there is the possibility of lawsuits for such things as misrepresentation and withholding material facts. The main point of this post is to let you know that some of what you read and see on TV about the huge profits in real estate investing don't tell the whole story. If you enter into this investing arena, you will need negotiating skills beyond those required for other types of investments. You also need to make sure you are willing and able to handle the stress involved. I could make several posts with examples of some of the negotiating problems I've encountered over the past 30 years. If you would like to see others, send me an e-mail or give me a call.

ENERGY PRICES DOWN

In one of my recent posts entitled, "If you can't beat 'em, join 'em" I recommended investing in energy companies as a hedge against rising utility and transportation prices. Shortly thereafter, one of the companies, Devon Energy rose almost 20% due to their partial ownership of a huge new discovery in the gulf which is estimated to increase our country's reserves almost 50%. This sounds almost too good to be true and may well be; however, it does serve to calm the markets in view of some of the predictions that we will be running out of oil. All of the stocks I spoke of in that post, including Devon Energy have since gone down substantially. but I make no apology. That's what a hedge does. Since I don't know the direction of energy prices, I buy these stocks to protect me if they continue to increase. If this happens, I pay more for my gasoline and utilities but benefit from increases in the prices of these stocks. If energy prices drop, I benefit by paying less for energy but the prices of the companies I buy will probably drop. I frown when I look at the value of the stocks I purchased but I smile when I fill up my truck. If I had known energy prices were in for a drop, I would not have bought these stocks but I didn't know. My position is that you can make bets on the direction of a given stock but there is no way you can know. Your only hope is that you will be right more than you are wrong.

CASH OUT MUST EQUAL CASH IN.

When I told my brother, a banker for the past 30+ years that this was an important part of financial planning, his response was "Duh!" Since when is a common sense statement like that worth mentioning? If this is just so much common sense, why are so many Americans trying to fool themselves into thinking that they can circumvent this rule. Perhaps one reason is that you can circumvent it for a short time and, on occasion, you can even circumvent it for a long time, but eventually, you have to face the music. The longer you continue to spend more than you earn, the more painful the eventual correction will be. Suppose you have $5,000 a year to spend on discretionary items and you want to spend 10,000 this year. The result is you have $5,000 less to spend next year which means you have no discretionary income or you can drag it out for five years and have $1,000 lest to spend for the next five years. This is the case even if you have no interest. If you pay 15% interest, a rate not uncommon for consumer credit, you will have $1,000 less to spend for 10 years. I am not one of those guys who hates all debt but you have to ask yourself, Is it worth it? Over the 20+ years I have spent in financial planning I have encountered many who feel that they are entitled to a certain standard of living, even if their income doesn't support it. It may sound obvious if we say that there is no way you can do this forever but that is the simple, unvarnished truth.

Retirement Insurance.

Given the fact that there are so many unknown factors facing today's retirees, it is mandatory that we remain diligent to guard against an interruption in retirement income. We don't know how long we will live, how well our investments will perform, how much we will need to spend for our health care, or even if social security will be able to continue without cutting benefits for current retirees. There a number of things we can do to make our retirement more secure; however, the two that work best are the two least popular among the people I work with. The first is to maintain your ability to earn income. I know that sounds like retirement isn't really retirement and perhaps that's true, but we need to re-think this issue since changing times require changing strategies. In the event of a disaster, you most important asset could well be your ability to earn income to fund your living expenses. The second means of enhancing your security is to simplify your lifestyle. I have many clients who left the work force in their late 40's or early 50's. Most will tell you that they have been able to do this because they have maintained a simple, low cost lifestyle. Think about it. It may not be as hard as it sounds.

A DAY TO REFLECT

The first thing that came into my mind when I woke up this morning was the tragedy of five years ago and the way that it changed life as we knew it. An estimate of the cost to our government is in the neighborhood of a trillion dollars. It was a trillion dollars we had to borrow. We have still not realized the effect of all these expenditures which are continuing. Another thing I thought about was the determination of our enemy, as illustrated by the docu-drama on television last night and scheduled for tonight. We almost certainly underestimated the severity of our situation in the past and we may be continuing to underestimate it. It is becoming evident that we have to broaden our views as to who our enemies really are. A case in point is the recent evidence that Iran and Syria are funding massive infusion of weaponry to the Hezbollah terrorists. Last, but not least, is the division among our own people. We need a comprehensive policy to fight this war and we need to be united in implementation of this policy. This should include everything from cultivation of relationships with our true allies in this battle to strengthening homeland security and seeking energy independence. While this may not sound like a post about your personal finances, it definitely is. The pursuit of this war will have a profound effect on your future quality of life and your path to financial independence.

SIGNS OF MARKET TOPS.

Do you ignore radio or TV commercials? If you do, I can't say I blame you but there are things you can learn by paying attention to what is being touted in the financial markets. For example, a few years ago there was a commercial by a well-known talk radio host telling you it was time to get started in rental real estate. A developer was offering you a chance to own a brand new $330,000 duplex with a $16,500 down payment. The commercial promised a positive cash flow from the beginning and stated that if you had made a similar investment 10 years ago, you would have a return of 90+% per year. Although these facts were mostly true, the developer was recently indicted on a number of counts, not the least of which was securities fraud. The developer took earnest money from over 1000 borrowers and ended up delivering only 40 finished units. This was a bad deal from the beginning but that is not my point. The more ads like this one air, the more likely it is that we are nearing a market top in that investment sector. In a normal market, no one would believe these "too good to be true" promises. Another example is the plethora of ads touting gold as an investment vehicle. The ads state that if you had invested in gold three years ago, you would have made a 20% return. Again this is true but it fails to mention that if you had bought gold 25 years ago, your return would be negative. I believe gold has a place in some portfolios but these ads lead me to believe that the easy money has already been made for this cycle and we are very near a market top. There are other signs of market tops which we will discuss in future posts. In the meantime, if you would like to develop a clearer picture of your financial situation send me an e-mail.

SLOW PROGRESS.

I guess some progress is better than no progress. Finally got my picture up. The old coot with the guitar in the upper left hand corner is me. Although I have spent the past 25 years in the financial services business, my main passion is playing the guitar. Fortunately, I am better at finance than I am as a guitar picker. Another change is that the address of this site is stormysvision.blogspot.com. Seems that reflects the philosophy of this blog better than the old address. Hope to learn more about how to do this as time progresses. Reader comments are welcome. Send me an e-mail with your questions.