Archives for September 2007

Open House Stories: Short Sales, Timeline of a House Flop

Posted on September 3, 2007 // 15 Comments

It’s becoming our weekly ritual to browse Open Houses on Sundays. We usually try to have a theme, from “cheap condos we’d eventually outgrow” to “houses that would be a stretch, but we could live in forever”. Last week, we actually did “beautiful multi-million dollar homes we’ll never afford” just for fun and possible remodeling ideas.

More and more short sales
One common theme that we’ve been noticing across the board is more short sale houses. Whenever you see a house listed for sale that just seems too cheap, it’s likely a short sale. A short sale is a type of pre-foreclosure situation where the buyer is already in default of the mortgage loan, but the bank has not foreclosed yet. Here, both the lender and borrower agree to sell the house for a price that won’t pay off the entire loan balance. The lender avoids a long foreclosure process and potentially lower price upon the eventual auction, and the borrower prevents an foreclosure from completely killing their credit history.

From the buyer’s perspective, it can be both good and bad. You might get a good deal, but it can get complicated. Instead of a seller accepting your offer within 24 hours, you’re looking a 2-4 weeks while the lender takes multiple offers, checks you out, demands pre-approval letters and sometimes large upfront deposits. There are more details than this, but that’s my basic understanding.

Flip or Flop
Today, we got to see the results of a house flip gone bad, just like on the TV show Property Ladder. They had the classic mistakes – they took too long with the remodel, they priced it too high and stayed stubborn, and they ran out of money before they could sell. Here’s the general timeline:

6/05: Bought house for $850,000. Remodeled… adding the obligatory hardwood floors, fixed up the bathroom, did some painting.
7/06: Listed for $1,100,000
8/06: Dropped to $1,050,000
9/06: Dropped to $1,000,000
3/07: Taken off market, decided to wait things out
8/07: Short sale at $800,000

The carrying costs for the loan were probably around $5,000 a month, although I think the “owners” did live in it or at least rented it out, as there was clothes hanging in the closets. Add in the remodeling costs, and things look pretty bleak. Even if they do get a short sale, forgiven debt is considered taxable income. I wish I could feel sorry for them, but the signs seem to indicate that just they got too greedy.

Filed Under: Real Estate //

PayPal Money Market Account Review: Is It Safe?

Posted on September 2, 2007 // 23 Comments

For a while now, online payment service PayPal.com has offered an extra reason to keep money in their accounts – a money market fund paying around 5% interest annually. I get asked about it regularly, and here I will explain in detail why I do not recommend keeping any significant amount of money in this account.

Now, when you think about a money market account, what are the top three things you look for? Here are mine, from most important down to least important:

  1. Safety. This is cash savings, so the top priority is that you don’t want any risk or chance of loss.
  2. Liquidity. This is not a certificate of deposit; You want to be able to access the money at any time.
  3. Yield. You want to earn a competitive rate of interest.

I’ll address them in reverse order:

Yield
Its 7-day average yield as of 8/16/07 was 5.04%. This isn’t bad, and historically the fund has offered competitive rates, although they are not necessarily the highest. In looking at the prospectus [pdf], these higher yields appear to be the result of temporary fee waivers. Without the ongoing fee waivers, the yield would be about 0.70% lower. Whether or not they will keep the yield competitive with these waivers in the future is unknown.

Safety Concerns
As with all money market mutual funds, they are not FDIC insured. PayPal is not a bank. However, the money market fund is still subject to the same restrictions as any other retail money market fund, and must invest in the highest rated securities out there. In addition, PayPal is a subsidiary of eBay, and the fund is run by Barclays Global Investors, a big name that manages trillions of dollars of assets. A retail money market mutual fund has never gone below the standard $1 per share for an individual investor, and I don’t expect it to here.

However, there is also the different safety concern of what happens if someone fraudulently gains access to your account. If someone hijacks your bank account, what can they really do? They can’t just go out and buy something. In order to set up an online transfer, they still need to provide account and routing numbers to a bank account with the same name on the account. Even if you do lose money, you are protected by Federal Reserve Board?s Regulation E and have your personal liability capped.

On the other hand, PayPal is inherently risky because it allows the instant ability to spend your money! In fact, they can send money to anyone with an e-mail address. If someone steals your password, they can start sending money right away to various vendors and other users. Such fraud can be very hard to track. And then who decides if you get your money back? PayPal.

There are countless complaints of people who’ve been on the bad end of a PayPal dispute. I’d be very careful. Worst case – you lose money!

Liquidity
Again, here PayPal gets to write it’s own rules. It is not a bank, and is not subject to the many regulations that a bank has to follow. They can freeze your account at any time. PayPal froze my account once for no good reason. (Unless you count a complaint of one nervous buyer who mistyped his tracking number and thought I was scamming him.) This can lead to weeks if not months of faxing them different documents in order to prove you’re you, or you didn’t scam someone else, or whatever. Meanwhile, you can’t withdraw any of your money, and they may even take some of it away from you.

The point here is that you are not guaranteed access to your money. Again, PayPal is sole judge and jury.

Conclusions
The PayPal Money Market Fund account, while offering a decent interest rate and a little bit of added convenience, fails to satisfy the two most critical requirements of a cash savings vehicle – to maintain the highest levels of both safety and liquidity. Sure, if you use PayPal a lot, you might sign up for it to earn a bit of interest on your in-transit money, but I wouldn’t keep large sums of money in such an account.

There are so many other FDIC-insured, highly-regulated banks that offer similar levels of interest and easy online access, why would you want to?

Filed Under: Banking, Insurance //

Financial Festivals and Carnivals

Posted on September 2, 2007 // 2 Comments

Here are some happenings from the blog festivals and carnivals that I’ve participated in recently:

The Carnival of Personal Finance included our Roth or Traditional 401k decision process.

My pick from this Carnival was the sarcastic Ah… The Joys of Home Ownership by Grad Money Matters. He talks about how the accessories for a microwave can cost as much as the microwave itself! I found this timely as we were looking at washing machines the other day, the optional pedestals they come with cost upwards of $200! Is it me, or are these things just empty metal boxes. You could buy a entire new washing machine for around $250.

The Festival of Frugality at FILAM Personal Finance included my MagicJack Phone Review.

Here I liked the Is This Frugal? .. Or Just Not Quite Right? by Money, Matter, and More Musings. While I don’t hoard ketchup packets, I’ll admit that I do grab a few extra salt packets when on one of my rare fast food visits if they are the “dual cylinder” type. You know the ones… the salt is finer than usual, and I keep them around to put on microwave popcorn. Once I get two or three, I stop collecting them. Whew! It felt good to get that off my chest.

Filed Under: General //

Marriage and Money: Allowances For Adults?

Posted on September 1, 2007 // 84 Comments

You and your significant other love each other. Still, I bet there is still something that one of you loves spending money on that the other simply doesn’t see any value in. It might be manicures, gadgets, designer clothes, online poker, or Star Wars collectibles. If you have joint finances like we do, this can cause some resentment. Why is our money being spent on Yoda PEZ dispensers??

One possible solution to relieve such stress that we are currently trying out is the Adult Allowance, where each person is given a certain amount of money that they can spend with no questions asked. I’ve seen it in a few places, including Him and Her over at Make Love Not Debt. No rolling your eyes, no passive-aggressive sighs, no exasperated “Why would anyone buy that?”. Actually, one annoying question from me is “Why didn’t you let me spend 10 minutes researching the best deal for your XXX purchase?” The idea of paying more than needed may cause me physical pain, but why should I let that ruin her purchase?

Yes, this is essentially budgeting, but many couples view budgets as tedious and restrictive. I see this as a specific subset of budgeting which focuses not just on the ability to track spending, but the freedom of enjoying your spending without guilt. This may be a good place to start if one of you is spender, while the other is a saver.

On a technical level, some people use cash in envelopes, while other use completely private and separate bank accounts. That way, after you run out of money there’s no going back for more. However, we’re keeping it simple and just tracking it on the honor system.

We mentioned this to some of our friends, and some of the responses were the expected “An allowance? Whoa, that’s harsh.” But one of the couples actually implemented it for themselves as well! It turns out that the guy was getting some flack for driving around his gas-guzzling 4WD beast around instead of the econo-box they also own. Now, he’s been given a monthly gas budget each month so he can still have fun, while she can feel that the gas bill is under control.

What do you think about adult allowances? Good idea for resolving potential conflicts? Or unnecessary for those in a good relationship?

Filed Under: Budgeting, Family //
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