UNITED WE STAND DIVIDED WE FALL
By Howard Spiva
National Banks are afraid they are drowning so they are standing on the shoulders of customers to survive. Twenty banks have failed recently in Georgia. If it comes to them vs. you, you are going down.
In case you missed part one of this article please read it here:
What exactly did you do wrong? Did you lie, cheat, steal or fail to make you payments? No? Well then what happened to common sense in business practices?
I am generally an optimistic person and I prefer “positive” over negative so I won’t just complain, I will offer some ideas.
Solutions? One is dump national banks.
This story occurs more often with national lenders than it does with small community banks, who often are your friends, neighbors and who truly care about you. So I suggest that you close any accounts with national banks and open deposit accounts and do business with your local community banks. That is a start.
What else can we do?
Interestingly, I saw an ad in the newspaper where a bank was bragging about paying 1.1% interest. That is terrible.
How can someone survive on an investment paying less than inflation rates? Even local investors are paying private lenders 5% or more in interest.
Banks are worried about the economy so few are lending, and as discussed in part one of this article, most aren’t renewing loans. Many banks are surviving on overnight deposit returns.
Consumers are slowly starting to spend again. Retailers, builders and car dealers are still hurting (except Wal-Mart.
Families, investors and retirees who have savings and retirement plans are worried about where to "park" their money. They don't know who to trust and even then the returns are terrible.
Stocks are scary to many. Banks are paying rates below 2% and 3%, even then the consumer may not get their interest until maturity. Businesses can't get business credit lines to finance their growth. Landlords and Investors can't get loans to buy properties.
If a consumer won't buy a new car, the car dealer can't give their salesmen a bonus to buy that big screen, the electronics store goes out of business, the unemployed worker can't buy or rent a home, the landlord or seller can't pay the mortgage, the bank forecloses and has a "non-performing" asset. And so the circle continues.
Things are improving; the final section of the Truman parkway is in its 14th month and closer to completion. The new Wal-Mart has opened by the Savannah Mall. Tourism, the ports and Gulfstream are reporting record results. Unemployment is inching down.
True the economy has been at a standstill. People seemed to have paralysis of analysis. The government has tried to stimulate the economy. Some things have improved.
The new industry of pine wood pellets has started in Savannah. The VA is buing land to build a new hospital. Gerber auto glass, a national company has opened in Savannah. One of the world's largest car dealers. DriveTime will open in a few months. The spring home buying season came in like a lion in March. Gulfstream is building a 253,000 square foot new manufacturing building. Savannah area unemployment decreases in April, to 8.5 percent. Mercer University's Stetson School of Business and Economics has launch a program in Savannah. Georgia DOT Awards $48 Million in Statewide Work. A culinary school is open at Savannah Mall. Mitsubishi has opened a new manufacturing facility in Savannah. The Georgia Port sets new container records in Savannah and Brunswick.
All this good news and Banks are still saying the sky is falling?
Something must change to get everything moving and growing and prospering. What can we do? The national banks clearly won’t help.
So,I suggest that "we" start doing business with each other until the lending institutions, Banks, the stock market and the rest of the economy join in.
How do we do this?
First, as I said about community banks also do business local in your community, as opposed to on line purchases, out of town or big national retailers like Wal-Mart. Go to the farmers market or buy fresh local seafood. A famous quote is "all Politics are local", well so are all "Economics".
As it relates to businesses, landlords, home owners, home buyers, Investors, retirees, here is what we do. We do business with each other and in combinations of multiple "players". Let me explain.
Some folks own a home free and clear. According to Fannie Mae, currently 20 million+ people are older than 65. Of these, 77 percent are homeowners and 84 percent own their home free and clear. That is almost 13 million people who have no mortgage on their home. It also could be a rental property or a 2nd home or a vacation home.
Some of these homeowners will go the trend of reverse mortgages to cash out so they can stay in their homes. Some will want to sell and live in a retirement community or assisted living.
Those who want to sell, can sell their homes with a sizable down payment (10% to 25%) and then they can provide "owner" financing and remain the mortgage holder or the lender.
The homeowner who is selling the property would hold a 1st Mortgage filed at the court house protecting their interest with the same authority a Lender or bank would have if they loaned the buyer the money. If the buyer doesn't pay the payments as agreed, the seller could foreclose and take the home back.
They could sell it again or rent it out. Either way, they keep the down payment and all the payments that have been made.
If you choose your buyer carefully, the odds of that risk diminish. The buyer may make the payments as promised. If the seller did a credit check and made sure the buyer had good credit, a stable job and collect a large down payment, the risk of any problems would be lowered.
The seller could also accept additional collateral for security like the buyer's car, RV, motorcycle or boat title. Perhaps the buyer owns other real estate like a vacant lot that could be offered as additional collateral to insure they paid the seller.
Both parties would benefit in other ways.
The seller would not receive all the money at once so any capital gains or profit that may be taxable would be "deferred" to later years as they received the money. (Keep in mind under IRC 121, most sales of personal residence are tax free) (Must live there 2 of last 5 years, be your primary personal residence, and not received in a 1031 tax free exchange) (exempts taxes on $250K profit per person and $500K per married couple).
Selling in this manner, the seller could get an interest rate of 5 to 9% (based on buyer's credit) which is much higher than the 1% to 3% paid by a Certificate of Deposit or a Bank money market account.
The seller would receive their money every month instead of having minimum periods of limited access to their money.
The buyer benefits in that seller financing requires much less closing costs, and financing fees, often saving origination fees, points and other charges associated with lender financing. Also the buyer often gets a lower interest rate than offered by lending institutions.
Another alternative is that the buyer gets a bank loan of 50 to 75% and the seller can take back a second mortgage to help the buyer reduce some of the down payment.
A second mortgage is riskier to the seller than a first mortgage; however the bank loan will put a significant amount of money to the buyer now.
Also if the buyer has a 15 to 20% down payment they are much less likely to default on a loan. Otherwise, the second mortgage carries all of the other benefits to the parties as does a first mortgage.
In my early years of beginning to invest and buying properties, I was in school and I didn't have much money to pay as a down payment. I started in the 1980s and seller financing was how I was able to afford a purchase, the seller was the 1st mortgage holder or they “took back” a small second mortgage to help me with the down payment.
Over the years this increased from small home sellers to large homes and big commercial properties. Every seller who did this with me was always paid and happy that they had the extra income. Many don't want to be paid off if I later sell the property, they are accustomed to the income.
Okay, that is one example of a home seller and a buyer doing business together regardless of the economy.
Let's look at some other ways.
YOU ARE THE BANK
Many people have savings, IRAs, 401Ks, and other retirement plans with cash sitting and earning little or no return. These people could place their money with local established investors and have their money secured by real estate that is rented out.
I am not talking about "hard money lending". That is loaning money for short terms at high interest rates and at pretty high risks. This usually involves a real estate speculator borrowing the money for a purchase and maybe a renovation to "flip" for a quick profit. With homes selling slower that is a risk.
In the first example, under " seller financing", suppose the seller didn't own the house free and clear, you as the "Bank" could loan the buyer the money to buy the house and you take a first mortgage just as any lending institution would. Again you would make sure the buyer was credit worthy, had a stable job and had a large enough down payment to insure that they would not want to lose the house to you.
Once again you would get a nice interest rate and be paid monthly. Suppose you don't want to lend your money out to a home buyer. Well you could lend it to an established investor who would then rent or sell the home. You would have the security of the first mortgage on the home and the personal guarantee of the investor. The investor would be obligated to pay you your monthly payment regardless of rather or not the rent or mortgage was paid by the third party.
Many investors are professionals and have other streams of income that would be available to make your payment to you. In addition other safety measures could be in place such as assignments of rents, additional properties as additional collateral and if the loan was for significant amount, the investor could list you on their life insurance policy.
Just as if you were loaning directly to the home buyer, you could require a financial statement, bank references and testimonials from their other and prior "lenders".
Over the years, I have had many happy retirees thank me for the guaranteed income at above "saving" interest rates, but my favorite story is a Church who has loaned us money and often tells us the good deeds they have done with the income.
No board of director at a lending institution has written or called me and told me the "good" my payments made in someone's life that month.
People helping people, what could be better?
Make it a great day!
A local savannah attorney, real estate broker, investor, landlord, talk radio host and instructor, Howard Spiva publishes articles and offers community service talks to educate the public. There is no charge for the classes and nothing is sold to participants.