ThomasGoodwin.com

If you’ve ever purchased a home before you’ve probably taken out a loan (mortgage) to finance at least part of the purchase. In doing so you were probably told that the bank would order an appraisal of the property. The purpose of the appraisal is to make sure the property is not being purchased for far more than its true market value, thus endangering the bank’s ability to sell the property should you, the borrower, not be able to repay the loan. On the other hand, the bank would not care in the least bit if the property was worth more than the sale price, or in cases where there is a significant downpayment the bank would not care to any greater degree than the amount that they had loaned you.

While it may sound like the appraisal is an excellent tool to help protect you, the buyer, there are several problems with how the appraisal process works that I want to alert you to:

1. The appraiser works for the bank, not you. I find it rather funny that you don’t see appraisers assigning a home value that is ever higher than the sale price. This is a flaw that assumes the market price (the price that you the buyer have agreed to pay to purchase the home) is always the correct price.

It therefore ignores the fact that sometimes people pay too much or sellers charge too little for the property. It assumes the market is ALWAYS correct in the price of a property and that every transaction is at arms-length. If the sellers are not very sophisticated and the buyers realize that the property has a greater value than is being sold for, the sale price does not truly reflect what the appraised value should be.

Why is this problem important to you as a buyer? If the bank requires you to put down say 10% or 20% in order to qualify for the loan… and let’s say the contract sale price states $100,000 - you would need either $10,000 or $20,000 for a downpayment. Let’s stick with the 10% for simplicity sake. If the property’s true value is believed to be $125,000 and you have a contract to purchase it at $100,000 then you already have $25,000 of equity the day that the sale of the property changes hands (closes). $25,000 is 20% equity in a $125,000 property, but the bank is requiring you to tie up an additional $20,000 of your own money as a downpayment. If you meet the equity requirement you shouldn’t be forced to tie up additional money as equity in the property.

2. The appraiser knows the contract sale price and terms before doing the appraisal. This builds off of the previous problem… in # 1 above we saw that the appraisal typically does not come in higher than the sale price, but rather right at the sale price. You will NEVER be able to convince me that the appraiser is being objective in his or her reporting of the property value if the contract sale price and terms are known in advance of doing the appraisal.

To truly be objective, the appraiser should not be told the contract terms and price and be left to find comparable properties and recent sales as well as calculating other methods of value such as the income approach for rental/income producing properties and construction replacement costs for buildings that are being used for other purposes than they were orginally constructed.

3. The appraisal is only the opinion of ONE person. If I went out to buy a car, or to buy insurance, or even to buy groceries… I am going to look around and shop around. For a car, I am going to visit multiple dealerships, use multiple car valuation sources (like NADA, Kelly Blue Book, Edmonds, etc) and same is true for insurance… I am going to get multiple opinions before I make the purchase. With an appraisal you are getting ONE person’s estimate of the property’s value. To be truly objective you should take # 2 above, the appraiser not knowing the sale price and terms… and add to it, by having more than one appraiser calculate a value and then compare the two (or more) appraisers’ reports and how they came up with their values.

I know this may seem like I am taking a small portion of the home buying process, but people rely on these appraisals to keep them from being taken advantage of and from getting in over their heads. This is far more common place in refinances, where it’s just you and the bank… no seller involved. The bank has every incentive to use an appraiser that is more likely to inflate the value in a refinancing situation so that they can make you a bigger loan during the refinancing process… a bigger loan that might translate into you never being able to sell the house or property and recoup your loan amount.

Yahoo! Finance recently posted an article about this very topic and I thought it was appropriate to end this blog post with a link to the article. I think as loan interest rates go up and therefore adjustable rate mortgages (referred to as ARMs or ARM loans) become more expensive, you will see more people going into foreclosure on their home loans and this issue will be receiving more attention in the media and by state legislatures and Congress. The Yahoo! Finance article is entitled Appraiser Coercion Fuels Mortgage Fraud.

When you go to buy a property you need a certain level of trust with your Realtor, your lender, and you need to feel comfortable that you are getting a good value for your money. If you don’t feel comfortable, by all means walk away from the deal before you get locked into a contract… or hire your own independent appraiser before you agree to a price or any other contract terms. A typical appraisal won’t cost you more than $200 to $400 and when you are thinking of spending hundreds of thousands of dollars, that $200 independent appraisal could very easily save you far more in the future.

As always, I welcome your comments and feedback…

If the overall real estate market is in a slump, should this be considered a time to BUY stock in real estate companies and Real Estate Investment Trusts (REITs)?!

The quick answer is no, or probably better said… not necessarily. But let’s examine why that is…

1. There are many types of real estate companies out there. Some focus primarily on office space and commercial properties. Others might focus on retail space such as malls, or even hotels and hospitality locations. Not all of these areas are in a funk like the residential market. For instance, since the collapse of the World Trade Centers in New York there has been an office space shortage in Manhattan while there is a surplus of office space in other cities. So just because there is a slow down in many areas for residential real estate, those same areas could be quite healthy for commercial properties, etc.

Also, some REITs are diversified or focus on mortgage products. Those stocks that are tied more to mortgages are more dependent upon the movement of key interest rates.

A quick side note on what a REIT is… this is essentially a real estate company that has complied with an IRS rule to designate the company as being primarily engaged in the real estate business and furthermore pays out 90% or more of its earnings in the form of dividends to its owners. You can read a more detailed answer in the Investopedia.com article entitled What are REITs?

2. Real Estate is a long-term investment for most individuals… well the same holds true for most companies. Not many (if any at all!) of the companies that are traded publicly are into “flipping” properties. Most companies hold these properties for many years to make money on the rental income. The transaction costs of buying and selling real estate makes it cost prohibitive to buy and sell property on a frequent basis (much like the transaction costs to your stock broker makes it prohibitive to trade stocks rapidly).

Many of these real estate companies have been buying property before, during, and even after the market’s ascent and then into its decline. The effect of such buying can be similar to the concept of dollar cost averaging the purchase of stock. So to think that these companies are at a low, well, we go back to the first item and say it depends on what type of real estate they are involved in and how well that sector is doing. Various companies will have different strategic methods of operation, even within the same industry, leaving some companies in better position than others to take advantage of a soft market (acquisition/buying opportunity) or better guarded against a slowing real estate market.

3. As interest rates climb, the real estate companies’ cost to borrow money increases limiting the amount of real estate investment the companies can do as well as limiting the number of buyers they would have for their existing owned properties. Another excellent article from Investopedia.com points out that there is a strong correlation (link) between the falling stock price of a real estate investment trust (REIT) and a simultaneous increase in key interest rates. The article is titled The Impact of Interest Rates on Real Estate Investment Trusts

The bottom line here is this… before you decide to purchase a real estate-based stock or some stock in a real estate investment trust, do your homework on what type of real estate the company is involved in. Look to see how the company’s stock will be impacted by changes in the interest rates or how that company’s peers are doing in comparison. It pays to find the “best of breed” as Mad Money tv show host and TheStreet.com co-founder Jim Kramer would say… and this is true regardless what the housing market or any other type of real estate market is doing.

As always, I welcome your comments and feedback…

Last month, June 5th to be exact, I posted a new topic to my blog regarding a financial health checkup or something to that effect. I thought it would be fitting, today being Independence Day in the U.S. and all, that I revisit this topic.

Make TODAY the day that you declare YOUR financial independence.

Here are some simple things you can do to start paying down your debt:

1. Spend less money than you make. I know it sounds obvious, but if you don’t spend it all then you are more able to pay down existing debt or save for the proverbial rainy day. Everyone should strive to not live paycheck-to-paycheck. Doing so only puts you in jeapordy of running up your debt in the event of an unexpected expense like car or home repairs, etc.

2. Once a week I want you to forgo something simple that is not a necessity. This could be drinking water from the fountain at work instead of buying a drink from the vending machines, or reading the news online instead of buying a newspaper. Make a conscious effort to think about the purchase when you are reaching for your wallet or purse.

If you catch yourself saying “do I really need this?” or “what could I do instead of this that doesn’t cost any money?” then you have made an excellent step toward saving money. Start by doing this on just one or two days a week - say Monday and Wednesday. This will help identify things in your normal routine without making you feel like you are totally shutting down from your normal lifestyle.

3. Find something in your house/apartment/condo/garage… where ever… that you don’t like, have never used, etc. and put it up for sale on ebay, in the classifieds in the newspaper (but only those publications that are free or cheap to advertise), yard sale, pawn shop, bulletin board at work, you get the idea. But sell it. Don’t give it to Goodwill or charity (unless of course you are unable to sell it and you still don’t want it!). Craig’s List is an excellent online service that you can use if you can’t think of anything else. This item is not meant to punish you but rather to encourage you to simplify your life while simultaneously trying to achieve your goal of financial independence.

4. Consider debt consolidation as a last resort; before doing that, contact your creditors and work out payment plans that don’t involve harming your credit. If you are in significant debt the odds are good that you are regularly contacted by debt consolidation companies that promise to help lower your monthly payments, etc. BEFORE you consider using one of these services do yourself a huge favor, contact your creditors yourself and let them know you want to repay them but you are trying to get out of debt and you need to work out terms that make it easier to pay them back.

Most lenders would much rather you approach them directly and work out a way to repay them with their agreed upon interest rather than going through a debt consolidation company that is seeking a portion of the money from your creditors (that’s how most of these companies stay in business… they charge you nothing but get a cut of the money from your creditors).

5. Look for an extra source of income. Do you know someone who manages a local restaurant or business that needs part time help? Look in the classified section of the newspaper or at the help wanted ads online, around town, etc. Don’t get pulled into anything that requires you to chip in money to “get started” like selling cosmetics as an independent consultant or hosting parties in your home for rubber/plastic bowls and spoons… I think you know which companies I’m referring to!!!

Getting out of debt for good…

It won’t happen overnight, and depending on the amount of debt that you carry it may take anywhere from a few months to many years. But the relief that comes with not worrying about making ends meet is something most people only get to dream about… and there are countless personal finance books out there whose authors thrive on people who are trying to get out of debt. For the most part, there is really nothing wrong with any of these books so I am not writing to bash them. In fact, I highly recommend Andrew Tobias’ book The Only Investment Guide You’ll Ever Need as well as several other authors, like Suzy Orman. Anything from Suzy’s collection of personal finance books is excellent in my opinion.

But you can also find free advice on the Internet or by checking out books from the library. So if you’re in debt, don’t go buy a book… read up on these topics online and at your library.

As always, I welcome your feedback…

A sure sign that we might be heading back toward another dotcom bust… my dog has his own website now. He just started it so let’s try to be encouraging and supportive. Please take a moment to hop on over to GarbanzoTheDog.com. I know it doesn’t look like much when you click around but keep in mind that he doesn’t have thumbs so it’s kind of hard for him to do a lot of this stuff.

Or if you’re more interested in making the Internet work for your small business take a moment to look at the recently updated Solo Signal website. It features a good explanation of how to structure your links instead of simply typing “Click Here“. It’s worth a read.

Ok, ok, so this blog entry was mostly shameless self-promotion. But I will be taking a short break from blogging due to the July 4th holiday. I hope you all have a great holiday and I look forward to reading your emails and comments when I get back.

As always, I appreciate the feedback!

Will investors find a lucky windfall this week to start the second half of 2007?! The week ends with the date 7-7-07… a lucky combination if you’re playing the slot machines at a casino. Let’s face it, it’s better than last year having to confront the dreaded 6-6-06.

Let’s see what’s in store for us this week…

Investors should see a relatively quiet week until Thursday and Friday. The markets will be closed Wednesday, July 4th, for the Independence Day holiday here in the US.

July 3rd… Factory Orders are reported by the Dept of Commerce. I wouldn’t expect the stock market to hold it’s breath awaiting this news. The durable goods that were previously reported are a component of this (we simply add nondurable good to the report) so much of this information and what we can expect is already built into the market.

Also on July 3rd are those car and truck sales. As I mentioned in my June 24th blog when I first announced this new weekly series, this report will probably go unnoticed. I believe I contrasted the low importance of these reports with the high importance of the unemployment levels that will be reported this coming Friday, July 6th.

July 6th… Unemployment data is released along with a few reports that coincide with the unemployment data - namely nonfarm payroll levels, hourly pay, and the average workweek in hours. The unemployment data is what you need to watch. The change in the unemployment level should be down slightly in my opinion. I would expect a very modest decrease but I wouldn’t expect to see the stock market rally on this news unless the number is significantly lower than the expectation.

The expectation is that the unemployment rate will be around 4.5%. I think we will see it around 4.3 or 4.4% but even if it comes in a little higher, say 4.6%, you won’t see the market move radically. If the unemployment level came in above 5% you will see some afternoon selling on Friday.

Watch the number Friday morning, if the unemployment level comes in lower you might be able to do some profit-taking if your stock portfolio ticks upward. If the unemployment level is up significantly, you may find some good deals if there is a sell-off. It might be a good time to buy if you have done your homework and find some stocks with a solid balance sheet and have met their earnings expectations consistently. Don’t let short-term economic data news affect your long-term investing strategy!!!

Here’s looking to the week ahead… as always, your comments are welcome…

Most people don’t know that I’ve spent several years in the big leagues. I try to be low key about it, but then someone like ESPN goes and creates a webpage devoted to my career and my statistics. I guess it’s good to show that I’m a well-rounded person and not just a talking head on the Internet…

Tom Goodwin, Major League Baseball Veteran Player

Ok, so if you see the picture you will realize that there is more than one Tom Goodwin in this world. But it’s nice that we share a name where each of us is a good, upstanding citizen. I would probably not be too happy if I shared a name with someone like Chris Henry, or similar pro athlete that always seems to make the news for reasons other than his or her athletic talent.

As always, I welcome your comments…

Let’s recap what happened in the stock market last week:

Last week marked the end of the 1st half of 2007.
The Dow finished the second quarter of the year up 8.5%
The S&P 500 - up 5.8%
The NASDAQ - up 7.5%

Interesting to note, the Dow and the S&P 500 finished this past week roughly around the same place that they started the week (see the charts above that I copied from Yahoo! Finance)

About those economic indicators…

Housing, both existing home sales and new construction, continued to disappoint by posting lower than expected numbers.

Surprises… the market, i.e. investors, HATE surprises!!!

There was a bomb scare in London when authorities found a Mercedes Benz parked in a busy part of town (the articles that I read noted a lot of night clubs in the area) packed with explosives and nails… a reminder that terrorism has not been eliminated and even if it had been wiped out, there are still some crazy people out there.

Final thoughts on last week…

I think some hedge fund managers, mutual fund/pension/portfolio managers, and yes even some individual investors and day traders did some profit-taking this past week to lock-in (realize) gains that they made during the first two quarters of 2007. I had speculated that this might happen in my blog last week titled “The Week Ahead”.

Here’s to a successful second half of 2007, regardless what your investing strategy is… I hope your investments do well as we continue on this journey together. As always, I welcome your comments and feedback…