Another Christmas Money Making Venture

Last year, Tickle Me Elmo was the hot Christmas gift and Kenric did what many others did to capitalize on the craze - buy a bunch and resell them. This year, the hot gift seems to be the Nintendo Wii, at least so far in the holiday shopping season.

Working for a video game maker gives me something of a unique insight into the world of video games, but I didn't need any inside information to know that no store can keep these things in stock. I just had to listen to the tales of co-workers who have been looking for one for the past several months.

So it happened that last night I was in Costco and noticed a woman leaving. In her cart was a Wii. I immediately found a Costco worker and asked where they were. When I found them, there were only four left, so I grabbed one. I would have grabbed them all, but Costco was imposing a 1 per membership limit - much to the chagrin of the guy behind me who tried to tell me both he and his 6 year old son could buy one. His hopes were quickly dashed by a nearby Costco employee. The remaining Wiis were grabbed within 5 minutes.

I've got my bundle, which includes 2 extra controllers and an additional game, listed on eBay now. Based on the sales I am seeing, I should net about $100 to $150 on this - about a 30% return for a few minutes work. Not too shabby, considering it basically just fell into my lap.

Of course, now I think I'm going to get lucky and find one in every store I walk in :-)

Phoenix Housing Prices

Things are slowing getting back to normal here. After being gone for a week and coming back and having to rebuild my computer after it crashed, I'm slowly starting to gain control over the items that piled up while I was away. One of the things I am catching up on today is my blog reading.

Last week, Kenric posted about the housing price drop in Phoenix. One thing he said was "If you have cashflow or breakeven you can survive this. That’s why cashflow is so important." That is oh so true. I have a co-worker who has been caught in the housing slump and next month will join the ranks of those who have been foreclosed on, a group that grew by 50,000 just last month alone. This co-worker is the epitome of the uniformed investor who jumps on a bandwagon and ultimately gets burned. A year or so ago, he bought an investment property in the Phoenix area and rented it out. His biggest mistake was in renting it out for less than his mortgage payment. He had negative cashflow from the start. Never mind factoring delayed costs like maintenance, vacancies, etc. There was no way he could get a positive cashflow. What's more, he know this and went into the deal willingly. His plan, like that of so many others in the real estate mania, was to hold for appreciation and then sell.

Through a combination of circumstance and ignorance, things went downhill quickly. The housing market tanked. He thought he couldn't sell the property while he had people renting it (even though I said otherwise), so he held on to it longer than he should have. As a result, he now owes more then the property is worth. One thing led to another and now next month he will lose the house and have a foreclosure on his credit report, not to mention an huge tax bill if the bank accepts a short sale before the foreclosure. Unfortunately, he still feels his only error was in not selling the property at the peak of the real estate bubble. The problem is, you can only tell a peak once you have receded from it. Sadly, he has learned no lesson from this.

Cashflow is king. Always make sure your rental income will cover your expenses!

Update: Literally about 4 minutes after I posted this entry, I found out my co-worker has sold the house. I don't have any more details than that, but I'm sure it was at a loss. His monthly payment was $2,600 and he had it rented for $1,800. Now, with all the foreclosures in the area. rents are around $1,100.

Louisiana Conference Call

Phew.. I just got off a 1.5 hour conference call with the other mortgage holders on the Louisiana mortgage that is going to foreclosure a week from today. We basically went over the various options we have open to us and how we want to instruct our attorney to bid at the auction. The opening bid at the auction starts at an amount equal to the foreclosure auction costs, which is less than $2,000. We will instruct our attorney to bid the price up to our costs, including the back interest, late fees, etc., if anyone else is bidding. If no one bids, the place is ours for the cost of the foreclosure fees.

We had a couple alternatives. Assuming there are other bidders, we could opt not to bid up to the amount we are owed. In effect, this would be a short sale, since we would be accepting a price of less than what we are owed. No one on the call was too excited about doing this. We could also opt to bid more than what we are owed. We would do this if we felt the properties were worth more and could be worked on and improved to increase their value. Although we do feel the buildings are worth more, this raises other issues - which people will own it, who will handle the renovations, who will provide the additional capital necessary to make the improvements, etc. Rather than get into all that, everyone pretty much feels it would be better to just take our money and get out. So that is how we arrived at the decision to bid the price up to what we are owed and no higher.

Of course, all those questions will need to be addressed anyway if no one bids or no one outbids us and we end up owning the property anyway.

Lastly, there is always the possibility that Joe will file for bankruptcy the day before the auction. (Personally, I feel he will.) He is also facing 2 foreclosures on properties in Texas on that day, plus 2 more foreclosures in January, so he doesn't have a lot of other options. However, we have a couple of investors with lots of bankruptcy experience on board and they have a plan in case this does happen. All a bankruptcy would accomplish is delay the foreclosure by a couple of weeks.

Stay tuned...

Going On Vacation

I'm heading off to Kansas today for the Thanksgiving holiday, so there won't be any posts for a while. My PC also crashed and I'm having an extremely difficult time re-installing Windows, so even when I get back, it might be a while before I can post again..

Two quick notes:

Goldman Sachs today announced that mortgage lenders may need to scale back lending by up to $2 trillion dollars which could lead to a "substantial recession."

In response to the mortgage meltdown, the House voted to strengthen the rules on mortgage lenders. I don't have enough information now on the details of this particular bill, but I do think something needs to be done to help prevent the current situation from happening again. One thing that troubles me is that the bill prohibits balloon payments. As a private or hard-money lender, all of the mortgages and loans that I make have balloon payments. They are interest-only loans with the entire principle due in a balloon payment at the end of the term. However, I am not sure if this bill would apply to private money lenders, so it may not even affect people like me.

Another Louisisana Update

The foreclosure process on the Louisiana properties continues to move forward. The property will go to the Sheriff's sale on December 5. I fully expect Joe to file for bankruptcy on December 4, thus stopping the sale. Joe wants to speak with the minority holders of the mortgage note, but no one wants to talk to him and, to my knowledge, no one has. He's turned over some financials, but just his records - nothing official like a K1 or anything that has been filed with the IRS.

The "keeper", the person who has been select to manage the property while it is in the foreclosure process, has been collecting rents directly from the tenants and is in the process of paying off the bills that have been racked up by Joe's months of non-payment. The power was about to be shut off for non-payment and that has been taken care of. There were some other bills and it required some of the other mortgage investors to contribute some more money to pay them off. Of course, they will be repaid when this is all over.

So it looks like our people are finally turning the building around and getting bills paid and maintenance taken care of. Joe may file for bankruptcy and delay this further, but at least the property is being stablized and he is no longer in control of it.

And what is the exit strategy for these properties? It really depends on how the foreclosure process plays out. We have the following choices:

1. Sell our interest now at a discount. No one seems to be willing to do this. Of course, no one wants to take a loss, but I really feel we will be able to get our money back on this, so I don't see a need to sell out at a loss right now.
2. Joe can come up with money from other investors and pay off our mortgage. This is pretty unlikely.
3. Wait for foreclosure to happen. Someone other than us buys the properties at auction and we get paid off. We are then completely out of the properties.
   
4. Wait for foreclosure to happen. No one else buys, or we bid higher than anyone else and we will become the new owners, then we can sell our interest to other investors.
5. Wait for foreclosure to happen, become the new owners, and then keep the property ourselves. We'd need to discuss who will manage it, the costs involved, any monthly income we might receive, etc.
6. Wait for foreclosure, become the new owners, and one or more of the owners will get a new loan to pay off any investors who don't want to remain owners.

So there are lots of possibilites and it's too early to decide which one I will opt for, or even if these are all the choices I will have.

Good News On The ID Theft

We've got some good news on the identity theft issue. My wife got a call two days ago from the police department saying they caught a woman trying to pass a bad check with her name on it. Not only was the woman arrested, but she was singing. No kidding. The police actually said "she's singing" and naming all the people involved in the scam. I thought police only talked like that on TV!

Anyway, I guess there were several people involved and they are rounding them up now. The police asked if my wife wanted to press charges, and of course, she does. This woman is facing ten counts of forging checks - so far. We're faxing the police each bounced check notice we get and each one is another charge.

What strange is that the woman had my wife's actual driver's license! A couple years ago, my wife had her purse stolen from her car while she dropped our daughter off at daycare. The police got it back the same day and I thought everything was still in it (except for cash, of course). I guess we must have forgotten they took her driver's license. So that explains how they got her ID. So now my wife has to go get a license with a different number on it. This also demonstrates how lax clerks are at checking IDs when taking checks. My wife is about 5 foot 10 and the woman forging checks is about 5 foot 2, according to the police. Anyway, I also find it interesting that the driver's license has hung around this long without being used before. (We've been checking her credit report regularly, so I know no forged accounts have been opened in the last couple of years.)