Thursday, July 28, 2011

Property Taxes Rising

Your home's value is underwater.

Your job is either gone or at risk.  Maybe your kids had to move back home because they can't find a job after spending $50,000 for a college degree.

Inflation has returned to energy, food, and nearly all commodities.

Two bubble markets in less than ten years have crushed your 401(k) and your retirement savings.

So get ready for another shock.  Increasing property taxes.

Virtually everywhere I look I see legislatures and city councils getting ready to hit homeowners and rental property investors with a host of new taxes and fees.

The government is broke, and perhaps lonely, so it feels you should be broke too.

Here are just two examples I found in about four seconds.   I read about sixteen others.

Wyandotte County, Kansas:  Property taxes rising 8.9%.  City official calls the rise "nasty."

Palm Beach, Florida:  Tax rate rising to maximum allowed by state law, $10 per $1,000 valuation

In my city of Seattle, a new rental property inspection and licensing program is being launched in 2012.  The goal is to protect tenants from all those evil landlords who rent unsafe apartments to tenants much too dumb to think of moving from a filthy or dangerous place.  The fees?  So far I haven't seen them announced anywhere but the "program will pay for itself."

In other words, rental property owners get poorer while the city gets more money from them.

The idea of taking yet more money from taxpayers and property owners is revolting.

To do it in the midst of the worst real estate market since 1931 is downright mean.

If government cannot live within it's means, then it must do what every other entity faced with this challenge must do.  CUT EXPENSES.

Until this happens, God pity the real estate investor for they have the only deep pockets that cannot be put on a truck and moved out of town.

Wednesday, July 27, 2011

Towers of Gold

I read a large number of business biographies every year.  Most either dwell on the mundane and intricate details of a titan's business machinations in excruciating detail while others offer a few tips on how a mogul made their money but focus more on how they spent it.

Occasionally, a book comes along with the perfect mix of both numbers and advice.

Towers of Gold: How One Jewish Immigrant Named Isaias Hellman Created California by author Frances Dinkelspiel is precisely such a book.  This biography tells the utterly fascinating and largely forgotten story of Isaias Hellman, a Jewish immigrant who arrived in California almost penniless but fifty years later controlled an empire worth more than $100 million (in 1906 dollars).

That is about $2.3 billion in today's money.

Hellman literally built the modern city of Los Angeles, transforming a sleepy and largely ignored town miles away from the booming San Francisco into one of the most important cities in the world.

The enormous wealth and power of this one man was staggering, especially when you realize he came to the United States with virtually nothing.

Hellman started and owned many banks, the most famous of which is today Wells Fargo.

He built trolley and railroad lines, prospected and discovered huge deposits of oil, and was a large investor in the Los Angeles Times newspaper.  Hellman built the Wilshire Boulevard Temple, the first Jewish synagogue in Los Angeles, as well as starting the University of Southern California, eventually serving as Regent for the University of California.

His ambition and drive seem to know few limits.  For nearly twenty years, Hellman owned and controlled nearly the entire wine industry of California.  After the 1906 San Francisco earthquake, he provided not just the capital for rebuilding the city but also calmed the world markets about the calamity.

Author Frances Dinkelspiel writes with mastery, walking the fine line between too much detail and not enough with great precision.  I loved this book so much after reading a library copy I bought one for myself.

Any real estate investor or developer who cannot learn two dozen money-making tricks from this book is not trying hard enough.  I cannot wait to read more from Ms. Dinkelspiel.

This book gets an enthusiastic recommendation from me.  Business biographies just do not get any better than this one.  This is a MUST READ BOOK!

Tuesday, July 26, 2011

Michael Mastro Update

Lately I have been getting a steady stream of inquiries from people asking me for information about Seattle real estate developer Michael R. Mastro.  I wrote about him in this blog in July 2010.

Mastro has been a Seattle developer legend for decades and very well known for his projects.  But when the market tanked in 2007, Mastro like many others could not pay his bills.  He eventually filed for bankruptcy leaving $325 million of unpaid debts. This is one of the largest bankruptcy filings in the history of Washington State.

The irony, noted by this reporter at the Seattle Times, is that if the banks that forced Mastro into bankruptcy had waited just a bit longer these impatient lenders might have recouped most or all of their money.

But that is just the beginning of the story.

Mastro continued to lead a luxurious lifestyle while at the same time telling a Federal judge he was broke. And he quickly became notorious for his personal spending while simultaneously claiming poverty to the bankruptcy trustee.

$2,900 dinners at Canalis, one of Seattle's most famous and expensive restaurants.

Ski trip vacations to Switzerland and Jackson Hole.

While in bankruptcy Mastro was driving a Rolls Royce costing $8,000 a month in lease payments.

He lived in a $15 million mansion in Medina, WA (very near Bill and Melinda Gates).

Mastro also had time to take more vacations in Paris, Rome, and Palm Springs, CA.

After claiming he had detailed all his assets to the bankruptcy trustee, 10,000 one-ounce silver coins were found behind the furnace in his basement.

Mastro and his wife Linda were ordered to turn over two giant diamond rings worth $1.4 million to the court to satisfy creditors and they didn't.  In fact, they left town when asked for the ice.

Today, the Mastros are fugitives from the U.S Marshals.  No one knows where the Mastros are.  Even their lawyers claim they can't reach their own client and have no idea where he is.

This case is so sad because Mastro is a talented real estate developer.  At the age of 86 he should be working on his magnum opus, the last great project of his storied career.  Instead, we read each day about his mysterious disappearance and all the creditors he has left behind.

I'll post more when I learn more.

And no, I don't know where Michael Mastro is.

Monday, July 25, 2011

Example of Short Sale Fraud

Get-rich-quick real estate gurus like to claim that they have all the answers.  But in reality their advice is literally a legal mine field of half-truths and quarter lies.  Few buyers who are dumb enough to try some of the techniques used in these high priced courses and seminars will remain unscathed for long.

This is the very reason why most get-rich-quick real estate gurus also sell Asset Protection Courses on avoiding lawsuits and court judgments.

Get the relationship between the two?

I recently reviewed a "Get Rich in Short Sale" home study course by a relatively famous real estate guru.  Numerous opportunities which they characterized as "profit centers" in my opinion were nothing short of fraudulent activities.

One of them involved the flipping of short sale properties by failing to make EXPRESS disclosures to lenders.  They believed IMPLICIT disclosures or inferences were enough to satisfy the legal requirements.


Here is what happens when that is tried in the real world.  It involves a trip to U.S. District Court as a criminal defendant.  What is important is that the VERY SAME ACTIVITY detailed in the guru's home study course was used by this real estate agent facing Federal jail time.

Can you REALLY make money in short sales?  Sure, of course, but it is NOT NOT NOT as the gurus with their slick haircuts and shiny shoes contend.  Speak to genuine real estate agents who specialize in short sales or investors who make a living in the area.  It is LOTS of hard work and even then many decent deals fall through for no reason other than bank capriciousness.

The bottom line here is simple.

The more a real estate course screams EASY MONEY or FAST PROFITS, the faster you need to close your wallet and run away.

For the record, I am not naming the guru or their course because they asked my opinion privately and I agreed to give it.  That said, this warning is a general one and applies to many short sale courses, not just one in particular, and this guru knows exactly how I feel.

Sunday, July 24, 2011

Tax Reform to Generate Additional Revenue

Watch this ABC interview with Treasury Secretary Geithner from this morning and count how many times he uses the Orwellian euphemism for tax increase.

"Tax reform to generate additional revenue."

America, that is called a TAX INCREASE.

Think only millionaires and billionaires are going to be taxed?  Think again.  One of those nasty tax loopholes of the rich that may be reformed away is the ordinary mortgage interest deduction.

Here is one tax almost certainly on the table.  TWO new taxes on airline tickets.  $27.50 new taxes per ticket on the OUTRAGEOUS number of taxes you already pay.

On a typical airline ticket of $300, how much is just tax?  Just guess....

$63.  That is a 21% sales tax when you want to fly.  Get ready to cough up some more dough when you want to travel because the government has decided that the best way to control excessive spending is to give the government more tax money to spend.

Oh, I'm sorry.  Do tax reform to generate additional revenue.

Saturday, July 23, 2011

Seattle Tourism Tax

Seattle has decided to impose a new hotel room tax of $2.00 per night on visitors to the city to replace $2 million that was cut from the Washington State budget for tourist promotions.

Seattle already has the third highest hotel room tax in the nation, right behind New York and Chicago.

The current hotel room tax rate is 15.6%.  The tax on rental cars in Seattle is 18.6%.

So why are these rates NEARLY DOUBLE the current Seattle 9.5% sales tax rate, the one city residents pay every day when they buy things?

It is called "taxation without representation."  Our Founding Fathers in 1776 talked a great deal about it.  Perhaps the Seattle City Council could break out a copy of the Federalist Papers and learn something new.  As James Otis, a good friend of Thomas Paine during the American Revolution, reminded us, "Taxation without representation is tyranny."

Well, not in Seattle I guess.

Taxing visitors to a city is easy for politicians.  People who do not live in Seattle cannot vote in local races so there is no chance of retaliation at the polls for the excessive taxes.  Such a policy might make sense in a childlike way but this unfairness just invites tax retaliation from other jurisdictions who will tax Seattle residents when they visit other places.

The idea of encouraging new tourists by increasing the taxes and costs on their visits is as dumb as it sounds.  If a $2 per night hotel tax will bring in new tourists, why not raise the tax to $20 per night and bring in ten times as many visitors?

If you visit Seattle and stay in a $200 per night hotel room for five days and have a $50 per day rental car with you as well you pay more than $200 in taxes to the city of Seattle alone during your stay.

And of course nearly 10% on everything else you buy too.  Plus another 10% a day for the parking spot for that rental car.

With so much financial encouragement like this, I'm sure a tidal wave of new tourists can't wait to visit the city.  Who doesn't like being taxed at nearly 20% rates?

The idea of promoting PRIVATE places like hotels and tourist attractions with PUBLIC money is deeply offensive.  If the downtown hotels, amusement parks, and sightseeing destinations want to promote their locations, let them pay for it.  These corporations and LLCs will reap the financial rewards.  Why ask tourists from Omaha, Peoria, Spokane, and Detroit to pay their public relations and advertising budgets?

Even the Space Needle is Seattle is privately owned.  Why should any government spend money to get tourists to buy tickets there?

Tourism is falling in Seattle for one reason and it is not for the lack of taxes or glossy visitor brochures.  Crime is rising in the downtown tourist core of the city which is quickly becoming one large encampment for vagrants and transients.  Here is what the professional meeting planners who visit Seattle have to say about the problem.

The effect of all these sales taxes on hotel valuations and cap rates will be discussed in a future article.  These real estate investors are the real losers here.

Friday, July 22, 2011

Eminent Domain as Weapon

Read this fascinating article about the city of Hoboken, New Jersey using the threat of eminent domain proceedings as a "negotiating tool" with land owners in the city.

While such threats have always been implicit in such bargaining it is rare that I have seen the promise of state action so transparently celebrated by city officials.

This trend is DANGEROUS.  Who knows best how to develop land and actually make a profit?  Politicians (elected and appointed) or real estate developers?

Hoboken is an old city in need of renovation and development.  Eminent domain threats is not an effective way of attracting investment capital.  It reeks of unfair bargaining power.  Even members of the general public who are not fans of real estate development or growth generally despise the practice.

Does anyone remember Kelo v. City of New London?


Wednesday, July 20, 2011

Home Sale Contract Cancellations Increase 400%

The dismal June 2011 home sale figures were released today with the added specter of sales contract cancellations on the rise.

The cancellation rate rose from a normal 4% to a whopping 16% in just one month.

A 400% rise in contract cancellations is pristine evidence that the problems of the U.S. residential real estate sector are far from over.  In fact, they are, if anything, getting worse.

The problem is not overly conservative appraisers.  It is a market where sellers believe their properties are worth more than they really are and many buyers are tagging along on the unreasonable valuations because they fall in love with a house.

It has been said that the U.S. has a "buyer's market" for housing.  REALLY?  Sounds like many buyers are still overpaying for houses but the banks this time are catching many from making yet another unsound purchase.

Monday, July 18, 2011

Gold Breaks $1,600

Gold closed at $1,602.40 per ounce today.

I recommended buying gold to the readers of my Investing in Land email newsletter in 2005 at $420.  Here is a ten-year gold chart and where I priced in for my subscribers.

Other real estate authors in 2005 were enthusiastically recommending that flipping properties or lease/options were the tickets to wealth.  Sorry how that turned out.  Or in the end who was right then and who is still right now.

It would not surprise me if gold hits $2,000 per ounce in the years ahead.  The bullish case for gold is overwhelming because the fundamentals are so strong.

Sunday, July 17, 2011

Seattle Jungle Gets Bike Path

I have previously written about a dangerous part of Seattle called The Jungle, a piece of downtown that literally is ungovernable and lawless.

I have also previously written about Seattle Mayor Mike "McSchwinn" and his seemingly endless obsession with building bicycle paths while ignoring major social problems within the city.   (His real name is Mike McGuinn but few people call him that anymore. That's him in the picture to the left.)

Who would have known that these two independent themes would meet this week when Seattle began a "secret" building project.  A new bike path through Seattle's notorious Jungle.

I call this move secret because the project was started without all the usual fanfare.  Seattle media, especially the local TV outlets, discovered the existence of this new public works project and City Hall quickly reacted to explain all the new construction.  Here is an excellent KOMO-4 TV report on the new project.

The idea is to "reclaim" The Jungle for Seattle by giving local residents in the besieged bordering neighborhood of Beacon Hill a chance to use the land for recreational use.  If the public begins to use The Jungle, then the small army of criminals that use the place as a base for their drug, prostitution, and other crimes will be chased away.

Nice idea, but it won't work.

The bike trail as being constructed merely underscores the danger of The Jungle.  The bike trail will wind through The Jungle fenced in on both sides by two ten-foot parallel chain link fences capped by twelve foot lights.  In other words, a path has been cleared through The Jungle but bicyclists and hikers on the trail have just a fence and some lights as protection against the criminals lurking just feet away in the dense underbrush.

When I first heard the project described, it reminded me of the old fortifications on the Berlin Wall.  Compare this photo with what I just described above.  Ignore the guard towers and take away the barbed wire and you have the proposed bike trail through The Jungle.  Looks lovely, very peaceful, eh?

Few people will ever use this bike trail, especially at night when the real character of The Jungle gets menacing.  I suspect that within a few weeks of the project's completion the fence will have a thousand holes cut through it by Jungle residents who get tired of walking around it and the copper wiring from the lights will be stolen.  It happens in Seattle all the time, maybe by the same residents of The Jungle the city hopes to displace.

Would you walk through a park at night with chain link fences on either side protecting you from what lies just inches away in the shadows?  The Seattle Police frequently find dead bodies in The Jungle.  Who wants to be the next one on the coroner's slab?

So how much is this new bike trail going to cost Seattle taxpayers?  The normal ebullient Mayor is tight lipped on this project.  Even the media sources reporting the new bike path are not quoting estimates, just the sources of the funding.

The best guess I can come up with is a 2010 estimate costing the project at $3.4 million.  Knowing the way Seattle public works projects come to fruition, the current budget must be $5 million with more cost overruns certain.

The problem with The Jungle is not its location or its geography.  The issue is the dense underbrush that permits extensive homeless and criminal activity at the site.  You literally cannot see five feet in front of you in places.  The solution is obvious.  CLEAR THE BRUSH and DEVELOP THE SITE.  The area has both genuine recreation and commercial uses but not when dozens of acres of good land are covered with weeds and shrubs, none of which are worth preserving.

Such a clearing solution would anger the homeless advocates in the city.  Just hauling away the TONS OF DEBRIS left behind by homeless (and dead) men and women causes an outcry over public "fascism" and insensitivity.  Such protest on City Hall are frequent and extremely vocal.

For example, in 1994 when they tried to clear The Jungle they hauled away 450 TONS of debris left behind by the vagrants and homeless who "live" there.

Mayor McSchwinn needs to understand that Seattle already has plenty of bike paths.  Here is the official City of Seattle Bike Trail Map.  The goal is to build 450 MILES of bike trails in Seattle by 2017.

So how many miles of bike trails does Seattle currently have?

About 285 miles of shared use and on-street pathways.

But the entire City of Seattle is only 142 square miles in size.  So today each square mile of city already has more than two miles of bike trails.

Last year the Mayor's Office proposed spending $30 million for more bicycle trails.

But even the Seattle Department of Transportation admits only 4,000 to 8,000 people a day commute to work on bicycles.  Do we really need to spend tens of millions of dollars on LUXURY bicycle riding paths for weekend professionals to use between trips to their health clubs?

This lunacy needs to stop.

The Mayor is an avid bike rider and enjoys commuting so work.  God Bless Him.  Here he is on yet another "Ride with the Mayor" photo op.

But guess who is paying for all these new bike paths?  Not bike riders, but car owners.  Seattle recently raised street parking rates and guess where the new money is going?

Seattle bike riders are not taxed.  No license is required to ride a bike.  No bike registration fee is paid.  If you can believe this, the City of Seattle even gives bike riders FREE lights for their bikes.  All at taxpayer's expense, of course.

The unfairness is obvious.

Someone recently stole Mayor McShwinn's bicycle while he was at his office in City Hall.  This criminal act speaks volumes about why people are not EVER going to commute to downtown Seattle in large numbers, especially in a city where there is little else but many big hills and constant rain.  If the Mayor cannot park his bike downtown without risking theft, can you?

Monday, July 11, 2011

$600 Potholes

The City of Seattle today announced that it is selling one of its transportation storage yards to the State of Washington for nearly $20 million.  Here is the actual street location.

View Larger Map

Both the city and the state are broke so this is typical of the accounting games they are playing in order to balance their budgets.  I wouldn't be surprised if next year the state sold it back to the city and tried to book a profit.

But one of this storage yard sale provisions is that the funds, $19.6 million to be precise, can only be used for "transportation purposes."

So, with great fanfare and public pride, the City of Seattle today announced that $3 million of these funds will be used to employ 21 people to fill 5,000 potholes.

There is no dispute that Seattle has MANY potholes that need filling.

But do the math.  $3 million divided by 5,000 potholes means each one costs $600 to fill.


Let's assume the city is actually twice as efficient as it believes it is.


Seattle's profligate public works spending is out of control with the most visible dollars being spent on bike trail projects that few people support.

Case in point, a $10 million bike path to connect two roads that are connected to each other already.

Or $80,000 for art for a bike trail.  Yes, $80,000 for up to four pieces of art.

Or $14 million to complete a bike trail that even advocates say does not need completion.

Mayor Mike "McSchwinn" as he is called by critics, needs to understand that the quality of everyday life in Seattle is quickly deteriorating and the lack of expensive and artsy bike trails is not the reason.

Crime is the culprit.  Specifically, the petty criminal acts caused by the so-called "homeless" population of Seattle that range from car theft, assaults, prostitution, drug trafficking, and more.

Just this weekend, two vagrants got into a knife fight outside the Washington State Convention Center and one was stabbed.  Not in the middle of the night, but at 3PM in the afternoon while the streets were filled with conventioneers, shoppers, and hotel guests.

Tourists visiting Seattle get to see not only murders and attempted homicides right outside their hotel doors but also can take in all the new homeless encampments springing up everywhere around the city.  Here is one such camp just four blocks from the mayor's office in City Hall.  This collection of garbage that meth addicts and alcoholics call a "home" stinks of urine, feces, and rotting trash even from a distance.

So today we learn that Seattle has received a $20 million windfall and will spend part of the sum filling potholes at $600 each.

I bet within the next few weeks the mayor will announce a new bike path initiative for the rest.

Residents of Seattle, like me, are waiting for someone to come to the defense of civilization.