Future Dollars

My first idea was to write about loans and the loan process. The thing is that there are so many loan originators today who are pssing thenselves off as experts it would be hard to refute the scams going on today. Owning and controlling Real Estate is the phrase used by Real Estate professionals who talk about creating wealth. A generous loan is a key to maintaining cash flow while holding a property. A good loan has the lowest costs associated with the acquisition of the property. The ideal loan has you purchasing a property with no out of pocket expenses while having terms that keep your monthly payments low. It’s all negotiable and I leave all of that up to my very good friend Scott Cunningham at www.primewestfinancial.com.

Scott for many years, almost twenty, got every low life loser scum buyer that came to me looking for an eazy squeezy loan. Scott was referred to me by a person who came to me with bad credit, no income, and a tax lien. The person bought a commercial building that did have great income potential. Scott did the loan as an owner occupied triplex using the building income to qualify the buyer. Oh those were the days. I was shocked. Ever since that transaction I would simply refer people to Scott. There have been very few times that the buyer didn’t get a loan.

OK, here’s how it works. People lend money. Investors buy the loans, and people lend more money.

We think of banks when we think of lending money. The old concept is that depositors give the bank money, the bank makes mortgages with the deposits, and as the money comes in they make more loans. Just like in “It’s A Wonderful Life” those were the wonderful old days of happy lending.

Our United Satates government weighed in with Fanny Mae and Freddy Mac. These government agencies buy packages of loans for cash to be relent out to home mortgages. Banks, lenders, and lending institutions, would sell the loan packages to the government at a discount based on a future return. Simply put a lender (private individual, bank, or group of investors lending money through an institution) would lend money for you to buy a home. The loan you make with the lender is then sold to the government agency for cash at a discounted rate. The lender keeps one per centage of the loan. The lender then relends the cash gotten from the government to make more loans to purchase or refinance properties.

Let’s talk a minute about per centage points. One percent of one hundred thousand dollars is one thousand dollars in a year. An investor has his or her money sitting somewhere; stocks, bonds, gold, commodity futures, or Certificates of Deposit. The bank is offering them a three percent return. The stock market is shakey, commodiities are volitile, gold is useless, literally, and the bond market isn’t very sexy. So if you are offering an investor a four percent return secured by Real Property, a house, it looks pretty good. The property has the potential to go up in value the same as any other investment instruments with the added value of Real Property has a long term use.

So over the course of time one per cent can add up to real dollars. One percent being paid on money that is no longer yours is even better. A thousand dollars a year for money you lent then got back is really good. Let’s take that one hundred thousand dollars and only stay with that number in the course of it’s economic life for you as an individual. You lend one hundred thousand dollars. You sell the loan for eighty thousand cash to another investor and keep one percent or one thousand dollars per year for the life of the loan. You lend the eighty thousand  and keep the one per cent, sell the loan for sixty and keep one percent, forty, thirty, twenty , fifteen, ten, and so on.

OK you spent one hundred thousand dollars for a yearly return of three thousand six hundred dollars. It would take you thirty years to recover your investment in full. There are two ways to look at this. One is that you have traded present dollars for future dollars or it could be a 3.6% return on your investment.

That’s a simple formula for you to get your head into the lending process. Now let’s take a look at all the possibilities along the way. The first and formost is the one percent loan origination fee. The loan originator gets to keep one percent of the loan for setting the whole thing up. The loan origination fee is taken off the top so it’s not a part of the loan. Usually there is a one percent loan servicing fee. Just for keeping the whole thing moving along a servicing company charges one percent. Those are usually the companies that call you when you are late with your payments. You get one per cent for putting the money up to begin with so you are partnering with the loan service. Then the securities broker who handles the sale of the loan back to an investor pool or the government charges what they charge and the money comes back to the lending process, at a discount.

Remember when you sold your one hundred thousand dollar loan for eighty thousand dollars at four percent? If the home owner refinances the investor gets one hundred thousand dollars for spending eighty thousand dollars plus the four per cent return on one hundred thousand dolars during the time they hold the loan. That’s a whole buch of money that investor gets. This is the example that I would want to to keep in mind. You may have your 3.6% spead out over a large number of loans as the investor and you are in a pretty secure position. The secondary invostor or secondary market as it’s called is where the risk pays off.

The question comes up about the people who don’t pay back the loans. They just stop paying. It’s a per centage game again. Earlier when I was talking about loan packages they are literally a group of loans that are sold as a secured investment; Secured by homes. Some loans are good credit risks some borrowers are questionable. The theory is that the good performing loans at a lower interest rate and the questionable loans at a higher interest rate will together make a viable investment. The same is true about properties. Some properties are good investments and some a bad investments. This is the role appraisers, loan officers, Real Estate Brokerages, and securities over sight play in the process. It’s in every ones interest to have a smooth working system. There are after all billions and billions of dollars at stake.

Foriegn investors came in with cash from outside the United States hoping to buy into the American Dream. This changed the dynamics of lending by expanding the pool of money. Some people are claiming these foriegn dollars are a way for foriegn investors to buy our country. As we saw with Japan, Iran, Saudia Arabia, and now the Chinese, this game is not for the faint of heart. The government is ultimately in control of the lending process by issueing the securities backed by Real Property in the United States. In Iran’s case the government of the United States has frozen billions of dollars in assets. Many of the Japanese investments have been sold at severe discounts to pay debt caused by the recession in Japan. The United States trading partners found cheaper goods in China.

While many people talk about easy credit pushing up the price of property the reality is that there is so much money sloshing around the world today it’s hard to keep it circulating. There is a tendency for money, economies, or commodities, to languish without working. So yes it is easy to get a loan, and yes there have been abuses to the system. There are people today who who think the internet is a source of good information. There is a credibility gap as far as I can see. Many internet companies are run by people practiced in the art of creating the impression of credibity on the internet. What’s interesting is that as these companies that generate revenue from the internet in turn need a place to put the money. So they lend it in the form of second mortgages over the internet.

Well I guess I did kind of go on about lending. For you it’s important to remember there are people looking for opportunities today. People want to lend you money for a well priced property. Scott at www.primewestfinancial.com has made a market niche of finding those investors. On the internet there are a group of between thirty to sixty lenders who are considered legitimate sources of funds at any given time. Banks have formed groups called sub prime lenders to fill out the loan packages they sell. In the past they simply bought high yeild loans, now they have departments that generate them. The potential for abuse is always very real. The fact is that the price of real estate is a function of time. As there are babies born every day the demand for housing rises. The half a million dollar home today will be worth a million by the time that baby is thirty. The only question is what those dollars will be worth at that time.