Consumer Debt – Page 9

Stealing Money With Lease Options

July 20, 2011

If you missed Part 1, check it out now (funk soul brother)

This is what happens on the 365th day of most lease-option agreements. Either that, or someone reups.

Don’t confuse a lease option with its sturdier sibling, a lease purchase, in which you’re obligated to sell the house and the tenant is obligated to buy (unless you mutually agree not to.) Because clearly you should avoid this, we’re not going to explain why you shouldn’t. You shouldn’t smoke cigarettes either, but if you don’t know why we’re not going to waste time telling you.

Again, it’s called a lease option. You want the tenant to be in a position where she can choose to buy the house. If she’s required to buy the house, that means you’re required to sell it. You want to hold on to your asset if at all possible.

We’ve left one crucial piece of information out so far. How many tenants exercise their lease options and live happily ever after?

Some estimates range as low as 5%, which common sense should dictate is a reasonable figure. Again, to exercise the option the tenant has to be able to diligently save for 12 months (or however long the lease is.) Leopards don’t change their spots. Why wasn’t the tenant able to have saved that money in the first place? The vast majority of lease-option tenants simply don’t have the self-control to build up a down payment. What they do have are dreams built on gossamers.

Would you buy a lottery ticket with a 95% chance of winning? For a smart landlord, that’s what a lease-option is. The downside here is minuscule. Not negligible, but tiny. Remember, the worst-case scenario is that you got a year’s worth of free money. For that worst case to happen, the appraised value of your house has to have risen enough that it’s worth the tenant’s while to make an offer. Plus the tenant has to be good for the money. Future housing prices and your tenant’s ability to save are two variables out of your control, but the odds are still hugely in your favor.

One advantage to lease-options is that they work in both expensive and cheap housing markets. In the former case, tenants are looking to lock in a price for fear that eventually they won’t be able to ever buy anything. In the latter case, when the likelihood of the tenant exercising the option is greater (yet still small), you the landlord protect yourself against any potential losses. While still charging premium rents.

(Obligatory paragraph about the morality of this, and seriously, we’re not going to address this again. The tenants know what they’re getting into. They have to sign the lease-option agreement, which means they’re obligated to read it or get someone to explain it to them.)

Really, the only downside is the 5% chance that you could “lose” (i.e. have to sell) your house. Even if that’s a conservative estimate, it’s still overwhelmingly likely that once your lease-option term expires, you’ll still have a house and your tenant will have nothing. That house remains an asset, and not just in that it’s got a dollar value attached to it. At Control Your Cash, we define an asset as something that’ll help you grow wealth (You really need to read the book.)

The house doesn’t just have an intrinsic worth, it enables you to increase your own worth by letting you rent it out – over and over again.

One more thing. Make sure your lease-option agreement prohibits the tenant from coming to the end of the term, not having the money to purchase the house in hand, and thus simply assigning the option to someone else whom she can then buy the house from at her convenience. This is called a “non-assignability” clause. You don’t want the tenant’s rich uncle covering for her and taking your asset.

Rent-to-own is how certain enterprising furniture and appliance sellers got obscenely rich. If there are enough people out there who can’t even muster up the requisite money to buy a sofa without making a year’s worth of payments, imagine how many more can’t do the same thing for a house.

**This article is featured in the Carnival of Personal Finance #319-Summer Heat Wave Edition**

Filed Under: Consumer Debt, Healthy Living, Making Smart Choices, Real Estate Tagged With: lease option, lease-option agreement

Public Enemy #1

June 20, 2011

Anthony and Mrs. Weiner during gayer times, apparently at the Mauritius Independence Day parade

This is the problem with our economy, right here. Get ready for the one Anthony Weiner piece that has nothing to do with sex. Or sexting. Or sextuplets.

The man pictured above, as you probably know, is America’s newest ex-congressman. Some embarrassing details recently came out about him, each revelation more damning than the previous one, culminating in by far the most shameful one of all. From the London Daily Mail:

Anthony Weiner owes between $10,000 and $15,000 on his American Express card.

This man was entrusted with 1/435 of congressional spending decisions. Considering that the current year’s budget sits at $3.8 trillion, you could argue that Weiner was responsible for spending $8.8 billion of your money.

Read that again: a man with a 5-digit credit card bill was making financial decisions for you and me.

It gets better. Over each of the last three years he averaged more than $700 in parking tickets. Well, that’s how much he averaged in unpaid tickets. We’re not sure how many parking infractions he incurred and actually paid for. Weiner also committed fraud by placing the registration sticker for one of his cheaper cars on his more expensive SUV.

The story implies that Weiner owns at least 3 vehicles. While living in a two-person household. And carrying up to $15,000 in American Express debt. (Not sure if he has other cards.) As to why someone who lives in the most urbanized part of the country and doesn’t have kids is driving a Nissan Pathfinder (current models run about $30,000), you’ll have to ask private citizen Weiner.

Maybe he paid cash for all the cars, and isn’t carrying any monthly payments. And maybe he and his wife have a healthy marriage, too.

And – we’re so not done yet – that part about not having kids? Weiner recently announced that he and his wife of a year are expecting a child. A fortuitous announcement, made a couple of weeks ago, because the pregnancy status of congressmen’s wives is routinely of interest to the nation. Good for the Weiners, though: when you’ve got a large liability on your books, one that’s costing you probably 19% interest, that’s the time you want to create another mouth to feed. (Never mind that Weiner will be in his mid-60s when the kid graduates high school.)

Look at the details of his expenditures. See those monthly processing fees? Weiner was paying for the privilege of spending his own money – money he collected as a servant of the United States taxpayer.

If you’re on the fence about leaving a comment on today’s post, leave one in response to the following question: What would be the harm in requiring candidates for Congress to carry zero credit card debt? Or at least in requiring them not to be paying processing fees, which are among the most idiotic and unnecessary expenditures a person can incur? Such a requirement would never become law, because the mice are in charge of the cheese, but still.

A man in his mid-40s, with zero dependents (his wife has a full-time job), and a (useless, political science) degree from a state college, making a six-digit salary, and this is what his personal finances look like.

That Weiner’s inability – no, refusal – to build wealth and take responsibility for his finances barely warranted a mention during his recent story arc in the news is yet another symptom of a fatal disease. His negative cash flow isn’t even remarkable by congressional standards. And again, every sentence in this post could be followed by the following: he’s partially responsible for authorizing federal expenditures.

If you’re nonchalant about your credit card bills to the point where you’re incurring processing fees every single month, many of them in the high triple-digits, while incurring parking tickets regularly and buying more cars than you can possibly drive, why on earth would you bother being judicious when spending other people’s money?

Weiner represented less than ¼% of the problem, too. His ilk remain and continue to spend taxpayer money at uncontrollable (and uncontrollably accelerating) rates. It bears repeating that every dollar confiscated from taxpayers doesn’t only carry the potential to be wasted, but reduces the taxpayers’ own autonomy proportionally. That’s one fewer dollar that could have been invested back in the economy as its original owner saw fit. Meanwhile, the congressman who carries no credit card debt, earns money by providing a legitimate service in the private sector, doesn’t draw a pension on principle, and refuses to let his kids put taxpayers on the hook by financing their educations via student loans, is beyond rare.

Weiner can find money when there’s a sufficiently important purpose in the balance, however. He had somehow managed to scrounge up $3 million for a run at a forthcoming New York mayoral race. The people get the government they deserve, indeed.

**This article is featured in the Carnival of Personal Finance #315: Bring on the Long Weekends**

Filed Under: Bad Examples, Consumer Debt, Credit Cards, Making Smart Choices, Personal Finance Tagged With: anthony weiner, congress, fiscal irresponsibility, taxpayers

My bank! My precious bank!

June 8, 2011

Presumably, they had at least $4,250,000 in the vault

What do I do if my bank fails?

Relax. You’re not going to lose your life’s savings. Worst case, you’ll only have a quarter-million dollars left in each of your accounts. Thanks to the Federal Deposit Insurance Corporation, which guarantees you that much when it shuts down a bank. Notwithstanding the debate of whether it’s the federal government’s business to protect depositors from insolvency, the FDIC hasn’t missed a depositor guarantee since its founding 77 years ago. Yet when a bank goes under, people panic – as opposed to panicking before the bank goes under, which would seem like a more appropriate time to lose one’s composure. Many people, for whatever reason, think that among all commercial enterprises it’s banks and banks alone that should be immutable and constant.

What distinguishes a bank from a clothing store or an oil-change place? A bank is a business like any other, selling a service (loans) while trying to do so for more than it costs to stay in business. If the bank fails, it liquidates its inventory and sells it to the highest bidder. Just like a failed sporting goods store or furniture retailer.

So you read that there were 154 bank failures in 2010?

Guess how many restaurant failures there were. You have to guess, because no one keeps a nationwide tally.

But banks are different! They have our money!

Actually, they loan most of it out, but that’s beside the point.

When a bank fails, the people who get hurt the most are the same people who suffer the hardest when any business goes under – its owners. If you’re conditioned to think of the “owner” of a business as someone who’s already rich and is now out one toy, think again. Most small businesses have one, maybe two owners, whose lives are inextricably tied to the fortunes of the business. Sure, the employees might now be jobless, but – they were never invested in the business in the first place. Lose your job, and that’s all you lose – not your life’s savings, not the active nest egg you were building. If you get laid off, your 401(k) goes with you. You do know this, right? You don’t? You really need to read Chapter IV of the book.

Homo sapiens embraces technology, but as a species. There are plenty of outliers – non-adopters who keep their money in something non-institutional. Millions of people, some of whom live a couple doors down from you and/or share your DNA, still don’t trust banks and think the internet is every bit as futuristic as interplanetary travel. Not all of those people lived through the Depression, either.

Still, 154 banks is a lot.

Really? How many banks do you think there are in the United States?

About 8400.

98% of which didn’t fail last year.

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Addendum! It’s like 2 posts in one today!

It’s great when people look at absolute numbers when they should look at relative ones, or vice versa. Heck, even the concept of absolute vs. relative is too much for most people to handle.

Example: Did you know that the Avocado Marketing Board estimates that Americans ate 69.6 million pounds of guacamole on Super Bowl Sunday?

Wow! 69.6 million! If that were money, it’d be more than I’d see in a lifetime! If it were people, it’s…more than would fit in any stadium I’ve ever been in, that’s for sure! 69.6 million! That’s like – the number of grains of sand on all the beaches of the world, right?

If 2/3 of the country watched the game, then that’s 5 1/2 ounces of guacamole per person. (Assuming no one ate guacamole that day and didn’t watch the game. A subset that might include just Tim Ferriss and Rosie O’Donnell, perhaps.) Furthermore, has any bowl of guacamole ever been worn down to the nubbin? Of course not. Any party you’ve ever been to, or held, the guacamole goes mostly uneaten. So it’s probably closer to 2 ounces consumed per person. But OH MY GOD 69.6 MILLION! I FEEL FAINT makes for a ostensibly remarkable superlative. Why? Because the moment a number becomes hard to visualize, people start losing control. You’ve never seen 69.6 million of anything, so it stands to reason that 69.6 million pounds of guacamole is a number sufficiently large to cover the entire contiguous United States 4 miles deep in viscous and tangy chartreuse goodness.*

So 69.6 million pounds (or as we say in Largest-Convenient-Unit Land, 34,800 tons) isn’t a big deal. It’s a very workaday deal. Just like 154 bank failures in a country with more banks than it knows what to do with.

*At least 4 people reading this, all of them female, are unsure if this is sarcasm. They’re wondering if that’s indeed enough guacamole to fill that big a volume, but see it as a math problem and have decided not to get involved. “If McFarlane’s playing with our minds, it’s probably to compensate for his deficiencies in other areas.”

**This article is featured in the Carnival of Personal Finance #313**

**This article is also featured in the Yakezie Carnival-Happy Father’s Day Edition**