WHAT GOOD IS A BROKER

Broker: A person who acts as an intermediary…Webster’s New Collegiate Dictionary.

The Above Definition Is Woefully Inadequate. The main problem is that it does little to help the reader understand the value to be expected from a broker in a transaction. Occasionally, articles appear in the financial press that question the value of many types of brokers, including real estate brokers. Most of these articles reveal that the writer has little understanding of what a broker brings to the process. Although there are many kinds of brokers, including those in real estate, insurance, securities, and mortgage transactions, this discussion will be confined to the role of real estate agents

Agents Have Knowledge Of The Marketplace. Unless you are a very experienced, full-time investor, chances are this knowledge is much more extensive than yours. A typical investor may only participate in one or two transactions per year while the agent is out there every day seeking to help their clients accomplish their goals.

Contacts. Agents have relationships with allied professionals including title examiners, lenders, property inspectors, and attorneys. These relationships help agents get things done because these professionals see the agent as a continuing source of business. As a result, the agent has much more influence than a buyer or seller who only brings in a limited amount of business.

Familiarity With Standards and Practices In The Industry. A real estate transaction can be incredibly complex. Unforeseen problems can arise such as title defects, boundary encroachments, and ownership disputes can and do occur. An agent brings problem solving skills that can resolve these problems and allow the transaction to proceed.

Negotiating Skills. Nothing gives you a negotiating edge like information. The more you know about a property, it’s location, the supply and demand of similar properties, and the market value, the more likely you are to be able to structure a transaction that meets your needs. In addition to information the agent already has, the agent should know what additional information might be helpful, and where to find it. The agent may also be in a position to find out about the motivation of the other party and what kinds of offer would be most appealing to that party.

What’s Going On In The Denver Market? Perhaps the most encouraging sign in the Denver housing market is the drastic reduction in the number of building permits being issued. Just about the only builders still producing now homes are those with land inventory who have to build new homes in order to sell the land reduce costs required to hold it. The number of building permits being issued has reduced significantly over the past 4 years and it is difficult to believe they could still be going down but, during the second quarter of this year, total permits fell from a very low level of 2871 in 2008 to 1194 in 2009. That represents a drop of 58%. I expect this low building activity will continue until the foreclosure rate drops. Does this mean that it’s a good time to invest? I believe it is; however, only for those with adequate liquidity to hold out if the recovery takes awhile to materialize. The last time this happened was in the early 90’s. At that time, it took awhile for new building to begin since developed land inventory was low and the lead time to get new projects through the approval process was extensive. This long lead time is likely to continue to exist for some time.

Back To Denver. I’ll be back in town late next week. Those who wish to arrange a meeting should call Susan at 720-449-0200.

MORE NEW STRATEGIES.

If inflation continues to soar, you're going to have to work like a dog just to live like one. ~George Gobel.



George Gobel Has Been Gone a Long Time. So has inflation. In the early 80's, if you would have told me that we would have inflation levels below 5% in the new century, I would have laughed in your face. For the year 2009, we will actually have negative inflation. Those on social security have a surprise coming in 2010: There will be no cost of living adjustment. In fact, depending on what happens to Medicare Part B premiums, many may actually see their net social security income go down. Combining this with reduced investment income could make things difficult for many seniors.

Inflation May Not Be Dead After All. The current low inflation environment is not likely to continue if the predicted future federal deficit levels actually occur. The combination of low revenue, due to the slow economy and high spending levels will make it extremely difficult to reduce these deficit levels. If this trend continues the probability for increased inflation is difficult to ignore. For this reason, most investment portfolios need to contain some exposure to assets that do well in a higher inflation environment. Here are some areas to consider.


Energy. Oil prices have rebounded strongly since the low levels earlier. Most oil stocks have rebounded off their earlier lows; however, if the economy rebounds and inflation picks up, the shares of most oil companies will become more valuable. One of my favorites in this area has been Marathon Oil, a 22 billion company selling for around 8 times last year's earnings. Natural gas is selling at historic lows relative to oil and is almost certain to rebound; however, it is difficult to find a company to recommend at this point because the shares of companies producing natural gas have not fallen as much as the basic commodity. Finally, pipeline companies such as Kinder Morgan Partners have an excellent history of increasing dividends and should benefit as more products go through their lines.



Real Estate Securities. Shares of Real Estate Investment Trusts have been beaten down in the market place as investors fear their exposure to the credit markets and potential higher vacancy rates. I have done well in selected companies such as Health Care Properties and Pro Logis Trust. The key to safety in this area is low debt levels or their ability to handle higher levels. While many have loans coming due that will be difficult to refinance, their lenders may find it beneficial to renew these loans on a short-term basis rather than foreclose and find themselves responsible for managing properties, a task for which they have little or no experience.


Direct Ownership Of Real Estate. I have worked with real estate investors for many years and participated in acquisition, development, financing, management and sale transactions. This type of ownership is more complex than investing in listed securities. Successful direct ownership investment requires considerable skill in negotiation and management. Poor performance in either of these areas can keep you from realizing the full potential of your investment. Conversely, you can create a good investment from a mediocre one by superior skills. Small investors will likely do well buying in this environment. The combination of low interest rates, low sale prices, and limited new building bode well for those who buy in this environment. Unless you are a very experienced investor, your interests would be well served by retaining the services of an experienced agent to represent your needs. One additional note, there will probably be less competition for the acquisition of lower end properties after the government's $8,000 tax credit expires at the end of November.



Precious Metals. Although there are several precious metals available for direct purchase, the most widely traded of these is Gold. It is virtually impossible to listen to the radio without hearing commercials touting the ownership of gold as an investment. Most will tell you that if you had bought gold in 2003, the value of your investment would have increased by 203%. This represents a compound return of 20.7% per year, outperforming virtually any alternative investment. What they won't tell you that if you had bought gold at the average price 29 years ago, your investment would have increased by 55%, an anemic 1.53% per year. Another thing I dislike about gold ownership is that it provides no interim cash flow during the holding period. Finally, unless you make sizable investments, much of your potential profits will go to dealers in the form of mark-up from the price at the time of purchase and a discount from the market price at the time of sale. Despite these disadvantages, there is no argument that gold has done very well over the past seven years and it can provide some stability in certain environments. If you decide to devote some of your capital to direct ownership of gold, the best bet is an established product such as Krugerrands or Canadian Maple Leafs. These have very little premium value over the price of the metal and are most easily traded.


These Are Not Recommendations. They are ideas for you to consider. Every person needs an investment portfolio designed to meet his or her needs. Selection of the investment that is right for you will require considerable research and constant monitoring.

ITS NOT ALWAYS ABOUT MONEY

To The Memory of J. L. Neeley, An Uncommon Friend

Costs and Benefits of Growing Old. Growing old has its advantages. One benefit is that you have some really good friends you have known for many years. One of the costs is that those old friends are growing old and either you die and leave them or they die and leave you. I knew J. L. Neeley for 42 years and and, although we sometimes went for years between visits, each new visit was just like we had just been together the week before. I know you didn't stop by this site to hear about my grief but I couldn't resist a small tribute to him the day after I learned of his passing. My life was better for having known him.

I Bet You're Tired of Hearing Depressing News on This Site. I'm a little tired of it myself. In my last post, I discussed some of my expectations for the future which also sounds a bit pessimistic but, as a notable TV personality says, "There's always a bull market somewhere." Perhaps its more important to discuss coping strategies for a recessionary environment than wealth maximization strategies for a growth environment. What are some of the things we can do to cope with this environment?

Control Your Expenses. I have spent considerable time with clients discussing the fact that retirement security is really about replacing the cash flow from your employment with cash flow from other sources. Clients are very interested in these discussions as long as we are talking about income opportunities but, when the subject of decreasing expenses is brought up, the atmosphere can become almost hostile. Like the lady who spent $300 a month at an upscale coffee restaurant who informed me that this was her main form of daytime recreation and elimination of this activity was "off the table." She maintained this position even after I informed her that it requires $60,000 in investment capital to generate that kind of income at 6%. In Colorado, I recently changed my phone, cable TV, and internet service, from $160 per month to $40. That reduces the capital I need to generate income to pay those expenses by $24,000 and, considering the small amount of time I spend there, the sacrifice is well worth it. Of course, you might remind me that the best thing to do is sell the Colorado property. I'm working on it.

Analyze Your Mortgage. Having spent many years counseling mortgage clients, this is one area in which I have a lot of confidence the expertise of myself and Susan at Westmont Companies. One of the biggest mistakes I see from retiring clients is over-emphasis on the interest rate of their current mortgage. For example, let's consider a soon-to-be retired client with a $200,000 5% mortgage with 10 years remaining. Payments on this loan are $2,121 per month. In order to generate cash to pay $2121 per month you would have to invest $425,000 at 6%. Granted the loan has an attractive interest rate but the principal payments of approximately 1300 a month is murder on the cash flow. There are a number of strategies for dealing with the situation, from paying off the entire balance with funds from other sources, to a reverse mortgage, to refinancing to a longer term mortgage. As an example consider the possibility of refinancing the entire balance with a 5.5%, 30 year fixed rate and payments of $1,135. Even though the interest rate is increased by .5% per year, the payment drops by almost $1,000 a month. It's about cash flow, not interest rate. Of course, you may have to give up on your idea of a free and clear house in 10 years but is the sacrifice worth $1,000 a month during the most enjoyable years of your retirement? This discussion just scratches the surface of the many things that can be done to improve retirement cash flow by restructuring a mortgage. There is no single answer that fits everyone but there are many opportunities available.

What About An Annuity? A lot of people don't consider fixed annuities because they consider them to be poor investments. While this may be true, an annuity is not really an investment but an insurance product. You are insuring that you will have an income as long as you live. A 66 year old male can purchase a guaranteed income of $1,500 for life with a payment of $250,000. Under this plan, a spouse or other beneficiary is also guaranteed to receive this income for 20 years from the purchase date in the event that you die during this time. Again, this may not be that great from an investment point of view but, in an environment with high investment risk, this may be highly beneficial for risk averse investors. Again, there are a number of different annuity strategies available each with different opportunities.

Investing With Options. I have attempted to discuss options strategies on this site several times but it have given up because they are often too complex to discuss with inexperienced investors. The most important thing to mention here is that, many investors and experts alike consider them to be highly risky. This can be true; however, there are a multitude of different strategies, some of which are considerably less risky than conventional investments. If you want to take the time to learn these strategies, the best place to start is a 1000 page book by Lawerence McMillan entitled, Options as a Strategic Investment. I have been reading and studying this publication for several years and am convinced that I am a better investor because of the knowledge I have gained from this publication.

Coming Back To Denver In September. The main purpose of my visit is to attend a gathering of several friends I have known for almost 60 years. You might guess that the death of my old pal, J. L. Neeley had something to do with that.

NEW TIMES CALL FOR NEW STRATEGIES.

Some Things Never Change, Others Never Stay the Same.

It's tempting to do what you are comfortable with instead of what you need to do.... George Guerin.

It's Been An Interesting two Weeks. I've been here in Colorado for almost two weeks and neither my body nor my mind have slowed down during the whole time. I've had interesting conversations, picked up some new ideas, and have reached some new conclusions, one of which is that we can't continue to do what we've always done. The the picture above shows a scene that Native Americans could have seen hundreds of years ago. It looks pretty much the same today as it did then. As you head down the mountain towards civilization, you can see immense changes that have occurred even in the short time I have occupied this planet. If i had my "druthers," I might prefer fewer changes but times are different and we must adapt.

The Demographics Of Our Society are Changing. Anglos will represent a smaller proportion of voters, consumers, and workers in the future. Even if immigration slows, differences in birth rates will force this change. The anglo section of society is rapidly aging and will place pressure on entitlement programs such as social security and medicare. Continuation of these programs in their present form is highly unlikely.

Growth In The Financial Markets Is No Longer a Foregone Conclusion. As older Americans look to liquidate their investments to fund living expenses, selling pressure may increase making it difficult for markets to grow as much as they did in the past. We are quite fortunate that the recent rally in the markets has allowed us to recoup much of our losses, it is unlikely that this rally will continue for long.

We Will Consume Less In The Future. Americans have rapidly changed their spending habits. Consumers can no longer borrow on their home equity to buy luxuries because many have no equity. Credit cards are being restricted. Despite a perfect payment history, Bank of America recently cut my credit card limit in half. I really didn't need the $33,000 limit they gave me but it illustrates my point. I also no longer receive five or more offers of new pre-approved cards a week. An aging population will also affect this trend since older people have less energy to roam shopping malls looking for things to buy. Since the consumer accounts for 70% of our economic growth, this will continue to put a damper on things.

Tax Rates Will Increase Regardless of Which Party is Elected. Eventually, we will have to support our government instead of vice-versa. Foreign investors will grow weary of buying our treasury debt unless they see that we are serious about reducing our debt levels.

Increased Government Regulation In The Future. Lack of responsibility in corporations and on wall street has resulted in the call for more government regulation. If what they have done in the real estate and lending industry is any example, this won't work. It takes longer to get a mortgage loan because of new regulations which will do little to help the consumer. Changes in the appraisal process will echo through the economy as appraisers will be selected at random rather than being directed towards the more competent practitioners. While I admit that free markets may not work perfectly, these industries are so complex that effective government regulation unlikely.

Stay Tuned For Strategies To Cope With The New Reality. I am leaving Denver to go back to Texas on Tuesday. I will continue to think about these changes and propose new strategies for dealing with them in future posts.