Money Management

In today’s real estate market there are thousands of great foreclosure properties for sale, and many of them are once-in-a-lifetime bargains. But before rushing out to bid on or buy a foreclosed home, it is important to first understand that foreclosed real estate can be a minefield of hidden risk and liability. Without knowing those disguised risks it is possible to purchase nothing but problems, but if you are aware of some of the pitfalls associated with foreclosures you can work to avoid them and take advantage of some legitimate bargains and values.

Many homes are foreclosed on because the owners owe considerable debt not just to the mortgage company that is doing the foreclosing but to others such as contractors or the IRS. If you accept ownership of that kind of home you also accept legal responsibility for those other debts. Many people buy foreclosures, for example, and then find that they owe the government tens of thousands of dollars in back taxes that the previous owner did not pay. To avoid buying into this kind of financial trouble it is important to do a title search and check the records at the courthouse to determine whether or not the home is being sold free of debts and liens.

Another common problem with foreclosures is that they may have serious structural problems that require expensive repairs. In order to evaluate a house for this kind of issue it is necessary to hire a licensed home inspector who can study the property and give you a full report on its current condition. But usually it is not possible to inspect a foreclosure before you buy it.

One safer alternative is to wait and buy foreclosures after they have become what are known as REO properties – which stands for “Real Estate Owned.” These are homes that went to foreclosure auctions but did not attract a high enough bid so the mortgage company didn’t sell them but kept them in its own portfolio. When that happens the lender will hire a Realtor who specializes in REO properties and the Realtor will market them just like a regular real estate listing – except that they usually sell at a deep discount.

REO properties can be inspected, they can have a complete title search done, and you can buy them with a standard mortgage – instead of having to pay cash like you do at a foreclosure auction. So you can invest in a foreclosure without the added risk if you shop for REO properties instead of full-fledged foreclosures, and for the novice investor that is usually a less risky way to participate in today’s attractive foreclosure markets.

Almost anyone who knows about real estate also knows that springtime is the peak time to sell a house – because the weather is warm, buyers are out looking at houses, and houses also look their best with flowers blooming in the yard. But one of the smartest buying tips – and one that nobody ever tells you about when you are in the market to buy a house – is to buy in winter. That is perfectly logical if you think about it, because if spring is the season that is best for sellers, the opposite season will naturally be the best one for buyers.

Many houses for sale in the cold months are still on the market because they could not attract a buyer over the summer. Homeowners in winter usually have to pay more money for utilities to keep them warm, and the longer they hold on to unsold property the more eager they are to accept an offer. Negotiate reasonably, but push for discount prices and you may get a great deal on a home that would sell for a lot more in a warmer time of year.

Not only do winter real estate shoppers get the benefit of looking when there is less competition from other buyers, but they also buy a house at a time when sellers are the most desperate and willing to offer discount prices. Realtors are also experiencing their slowest time of the year in terms of business, so they are more apt to give you their full attention. Wait until warm weather and many real estate agents – at least the really successful ones – may be too busy to show you houses. The same is true for other people who work in the real estate industry, such as mortgage brokers, appraisers, and home inspectors.

The one exception to this rule is Florida, of course, because that is where everyone goes to escape cold during the winter months. But you may save yourself enough cash by buying in the middle of a frigid winter that you can then afford to take off and fly south to Miami for a celebratory vacation.

Although very few people take advantage of it, one of the fastest paths to significant tuition savings is to buy rental property. That’s because the biggest cost in terms of tuition is out-of-state tuition, which is typically as much as 10 times higher than discounted in-state tuition. But many students do not want to go to a university close to home, and to pay for going to a college in another state they have to pay an extraordinary amount of money.

In order to qualify for in-state or local tuition discounts, you have to be a resident of the same state where the college campus is located. The way that most states verify residency is that they require that you can either prove that you have lived in the state for at least a year – by showing them things like utility bills or tax returns. But many states also allow residency status to people who own real estate in their state. Owning real estate means you have to pay local taxes, and it is those taxes that fund or subsidize tuitions to make them more affordable.

So you can buy a home – even if it is just a small condo – in a college town. Your kid who is going off to college can live there and share the rent with another student to help generate some rental income to pay the mortgage. Buy a house and you may be able to rent to several students and even make a profit on your college town rental property. If owning the home qualifies you for in-state tuition discounts, the money saved on a college tuition over several years is probably enough to cover the whole down payment.

Owning rental property also allows you some tax deductions for landlord-related expenses like trips to go check on your property, so you may be able to deduct the cost of visiting your child while they are away from home by combining the visits with your landlord responsibilities. Once your child graduates you can either sell off the real estate or keep it as rental property if it is a profitable venture.

Every year around this time the financial experts and tax planners come out of the woodwork and inundate us with last minute tax advice. They always emphasize the importance of taking advantage of any eligible deductions, and we tend to agree – with a few significant exceptions. If you’re planning to write off some expenses for such things as a home office; a personal car that you also use for work; and travel, meals, lodging, and entertainment deductions because those activities and expenditures were all business related then you think twice.

There are lots of deductions you can take – especially if you run your own business or work from home – but just because the IRS offers them to you it does not mean you should take them. Why? The reason is really simple. Research shows that the IRS and other tax agencies look for so-called red flags or telltale signs that someone may be cheating on their taxes by filing false returns or inflating their eligible expenses in order to get away with paying less.

We also know from studies and patterns that some of the most conspicuous red flags and warning signs are 1) people who deduct because they have a home office, 2) people who deduct for travel related business expenses, and 3) people who claim a deduction because they use their personal car for work.

That’s because if you use your car for work – but also to stop off at the grocery store, to pick up the kids at school, or to go visit your relatives at Thanksgiving – you are mixing business with pleasure and personal life. That’s against the IRS rules. Maybe you use your den as a home office but watch the football game in there with your buddies when you aren’t working. Rack up a bunch of expenses for “business trips” to South Beach and you are just begging for an audit.

Of course you may be doing everything totally legal and completely above board. That’s not the point. The reason you don’t want to raise your statistical chances of getting audited is that it is huge hassle and it might uncover some honest mistake you made one year and wind up costing you a bundle. So before you take any business deductions, consider the risk and the potential consequences. If the money saved is not compelling enough, forget it – just pay a little extra and enjoy the added peace of mind as you get a good’s night sleep not worrying about the IRS coming to visit you.

The ROTH IRA is one of the simplest and most cost effective ways to save for retirement, especially for those who are self-employed and do not have the advantage of a company pension or employer-managed retirement savings plan. The ROTH represents one of the best deals ever offered by the Internal Revenue Service in terms of an easy way to save money for retirement, and if you do not yet have a ROTH account you may want to open one as soon as possible.
The limits on how much you can contribute each year to this kind of retirement savings account were raised back in 2007 from $4,000 to $5,000, and a ROTH can even be started by a teenager. Or if you are already in your 50s and are worried about how to save for retirement, you can open one and the IRS will let you contribute up to $6,000 a year, which is $1,000 more than younger people are allowed.

Plus if you need to use the money you have already put into your ROTH account, the IRS allows you to take it out for a number of eligible reasons without having to pay any extra penalties. That’s not the case with most retirement accounts, where you will get hit with a huge tax if you suddenly decide you need to get the money and spend it on something urgent. Direct contributions to your ROTH (those that did not come, for example, from another type of retirement account) can be taken out with no penalties, because you already paid your normal income tax on those dollars.

Your contributions – while not deductible – grow tax-free. That means that you have to pay income tax on the money you make in the year that you earn it and contribute it to your ROTH – just as you have to do anyway with ordinary income. But once you reach retirement age and you take the money back out of the ROTH, you can do so without having to pay any taxes on your withdrawals – and that includes any interest you earned or other growth you made through such things as the price appreciation of your stocks. That’s a pretty sweet deal and is very easy to manage, making it probably the best retirement savings plan in the world – especially for those who are young and still have time on their side.

A practical and easy way to reveal problem areas in a personal or household budget is to simply track every single penny you spend for an entire month.

 

The hardest part is just doing it, because there are times when we are in a hurry, don’t keep receipts, or don’t think that documentation of rather insignificant amounts of money is all that important in the greater scheme of things. But the fact is that those who do manage to keep a record of every single penny they spend for an entire month will have a practical and useful tool for managing expenses and recession-proofing their budgets.

 

Keep a small notebook or digital recorder handy to make it easier. Get in the habit of taking notes each time money leaves your hand, whether to pay for gasoline, buy a cup of coffee, or leave a tip in the jar at the café. Have one large notebook where everything gets listed at the end of the day, entering how much you spent and what you bought. At the end of the month, add up and categorize expenses, looking for the unexpected surprises. You may already know that you spend $75 a month for pet food, for example, but you may be surprised to learn that you spent $150 for parking meters and parking fines, $300 for lattes, or $25 for movie tickets but $80 for movie popcorn and drinks.

 

The reason this system works so well is that it helps to identify the money that slips through our fingers unnoticed. More sophisticated financial strategies may help manage the big expenditures, but many household budgets suffer from slow and steady erosion, not a conspicuous avalanche. Just as putting coins into a piggy bank can create significant amounts of savings over time, losing a penny here and a dollar there will likewise undermine a budget, bleed away potential savings, and create totally unaccounted for ongoing expenses.

 

But just as counting small calories in every meal or snack makes it easier to manage weight, keeping an expense journal helps put you back in control of your budget by making you more conscious of your money. That’s a good idea for anyone managing a budget, especially during a recession.

If the company you work for doesn’t offer a retirement plan, such as a 401(k), you should lobby for one. So says an article in summer issue of Kiplinger‘s Personal Finance magazine. If that doesn’t work, or you’re self-employed, you should set up and fund an IRA. The right plan will enable you to put aside money on a tax-deferred basis.

The same issue also has an article entitled “Where the (Few) Jobs Are” and mentions a large (very large) employer you may not have considered: Uncle Sam. “The federal government could hire nearly 600,000 new public servants over the next four years,” the article stated. “Nearly every federal agency will be looking for talent as retiring baby-boomers are replaced, staffs are expanded to keep pace with greater workloads, and new hires are brought in to oversee the Obama administration’s economic-recovery plan.”

Also in the July issue: “Scams Exploit Hard Times.” This full-page article warns against scams that involve:

• Stuffing envelopes—you’re told to run ads to get others to pay for information on stuffing envelopes (legitimate firms use high-speed automated machinery to stuff envelopes; they don’t need help)

• Acting as a mystery shopper (the check they send you to test a money-wiring service will bounce—after you deposit it in your checking account and use your own money in the “test”)

• Advance-fee loans—if you pay a fee of $500 or more upfront, they guarantee you’ll get a loan (but you never do)

Although “The Savage Truth on Money,” a book by personal finance columnist Terry Savage, was published a decade ago, many of the facts and figures are still meaningful. Here, summarized, are 11 financial facts about women, from the book (with our comments in parentheses)...

1. Women live between five and six years longer than men. (The oldest person in the world, a woman in California, was 115. But the next oldest person, a man in Japan, is 114.)

2. A 65-year-old woman today has an average life expectancy of 19.2 years. (These days, it’s about 20 years, vs. 17.2 for a man.)

3. Women earn, on average, 76¢ for every dollar that men earn, resulting in lower Social Security and pension benefits.

4. Women spend more time out of the workforce, resulting in lower pension benefits.

5. Women outnumber men in part-time jobs, two to one. (But since the recession began, more men are seeking part-time work.)

6. Women who work part-time are less likely to work for firms with retirement plans. (Many firms hire only part-timers so they won’t have to pay benefits.)

7. Half of the women over 65 are divorced or widowed.

8. Women make up 75% of the elderly poor. (See above for reasons.)

9. Elderly unmarried women get 51% of their total income from Social Security.

10. 80% of women living in poverty were not poor before their husbands died. (In 2007, “poverty” meant an income of less than $10,590 for a person living alone, or under $13,540 for a couple.)

11. An average woman’s standard of living drops 45% in the year following a divorce, while a man’s rises 15%. (Draw your own conclusions.)

Would you like to buy a foreclosed home, so you can live in it, resell it, or rent it to somebody else? If so, the 3rd (2008) Edition of Keys to Buying Foreclosed and Bargain Homes can prove very helpful, even though the recent federal actions have affected the situation to some degree.

If you know little or nothing about buying foreclosures, the book’s glossary of 186 common terms can prove very useful. See if you can define the following; then see (below) what the book says:

Forclosure Terms:

1. Absolute auction.

2. Acre.

3. Bridge loan.

4. Contingency.

5. Dutch auction.

6. Encumbrance.

7. Et ux.

8. FHA loan.

9. FSBO.

10. Gross rent multiplier (GRM).

11. Inside lot.

12. Origination fees.

13. Pre-foreclosure sale.

14. REO.

15. Short sale.

Definitions:

1. All properties are sold to the highest bidder; seller has no reservation prices.

2. Measure of land containing 43,560 square feet.

3. Mortgage financing between the termination of one loan and the beginning of another.

4. Condition that must be satisfied before the party to a contract must purchase or sell.

5. The price is gradually lowered until a purchase occurs.

6. Any right to or interest in land that affects its value.

7. Abbreviation of the Latin et uxor, which means “and wife.”

8. Mortgage loan insured by the Federal Housing Administration.

9. For Sale By Owner.

10. Sales price divided by the rental rate.

11. In a subdivision, a lot surrounded on each side by other lots, as opposed to a corner lot.

12. Charges to a borrower to cover the costs of issuing a loan.

13. Purchase of a home from a borrower who is in default on the mortgage loan before the lender forecloses the mortgage.

14. Real Estate Owned (by banks other than that used for banking operations).

15. A pre-foreclosure sale in which the lender agrees to take less than the outstanding balance of the mortgage loan. 

First, you have to learn the lingo. The 2009 book, Investing in Gold, by Jonathan Spall, has a helpful Glossary of Terms following 12 chapters that cover gold mining, refining, lenders and borrowers of gold, bullion banks, gold exchanges, myths and reality, etc.

See if you can define the following, then see the book’s definitions (below):

Terms:
1. Aliquot.
2. At the Money.
3. Backwardation.
4. Bear Market.
5. Bull Market. 6. Bullion.
7. Call option.
8. CIF.
9. European-Style Option.
10. Fineness.
11. FOB.
12. Gold Fixing.
13. Krugerrand.
14. Maple Leaf.
15. Precious Metals.

 Definitions:
1. A small representative sample taken from a precious metals bar for assay to determine its fine precious metals content.

2. Refers to an option strike price that is equal to the current market price of the underlying asset.

3. A market situation when prices for future delivery are lower than the spot price, caused by shortage or tightness of supply.

4. A market in which the trend is for prices to decline.

5. A market in which the trend is for prices to increase.

6. The generic word for gold and silver in bar or ingot form.

7. An option that gives the purchaser the right, but not the obligation, to buy an asset at a predetermined price on or by a set date.

8. Cost, Insurance, and Freight.

9. An option that can only be exercised on the expiry date.

10. The proportion of precious metal in an alloy expressed in parts per 1,000.

11. Free On Board. A FOB price usually includes the cost of transport, insurance, and loading onto a vessel at the port of departure.

12. Held twice each working day at 10:30 a.m. and 3:00 p.m. in the City of London.

13. South African gold coin first issued in 1967 with a fineness of 916.6.

14. Canadian gold coin with a fineness of 999.9 or platinum coin with a fineness of 999.5.

15. Metals of great value being gold, silver, platinum, palladium, and other platinum group metals.