Hitting Home

As I was driving home yesterday, I was listening to the Randi Rhodes Show on Air America and she was talking about the economy and interest rates and how many people are starting to have difficulty meeting their adjustable rate mortgage payments as interest rates rise. Now intellectually, I've known this was happening for some time, but hearing the people that were calling in to her show really made it much more concrete for me. People were calling in from all over the country - Florida, Michigan, Washington. All were telling similar tales - they got an adjustable rate mortgage or an interest only mortgage and over the past couple months, their payments have risen steadily, in some cases more than doubling, leaving them with payments they can't meet. And most stories had another common thread. Real estate agents had encouraged them to buy as much house as they could afford. Mortgage brokers had pushed interest only mortgages or, worse, negative amortization mortgages to get them the lowest monthly payment. Very little, if any, time was spent explaining what would happen if interest rates went up and it was just assumed that the value of their houses would continue to follow the recent trend of exponential growth, leaving them free to refinance any time in the future.

With declining property values, they are now trapped in a mortgage they can't afford to keep and can't get rid of. Add rising medical and medical insurance costs to the mix, and you've got people who are in serious financial straights.

Most disturbing was the fact that these weren't all financially stupid people. I mean, there were some who you could tell didn't have a basic grasp of economics, but there were a surprising number of self-employed people, white collar workers, and educated, middle class people facing these problems.

Randi suggested that interest only and negative amortization loans should be outlawed. I don't believe that interest only mortgages should be outlawed; as a real estate investor, I know they have their usefulness. But I can't really think of a good reason why negative amortization mortgages shouldn't be, apart from the generic opposition to having more government invention in our lives.

I don't have all or even some of the answers for how to fix this, but I do know that, as a real estate investor, I can help these people. As the real estate market drops, now is the time investors can make money but at the same time, I don't think we should be so concerned about profit that we hurt these people even more. We have the ability to create a win-win situation that helps these people and lets us make a fair profit at the same time.

Sick Days

I've been sick the last couple of days with a bad cough that has prevented me from sleeping for the last two nights. Needless to say, I'm in no shape to do any sort of real estate deals right now. I was able to see a doctor yesterday and got some medicine, so I should be on the road to recovery. Of course, the prescription cough medicine has codeine so that knocks me out a bit too.

I saw on the news today that new home sales are up for the second straight month, but prices are down. Builders are giving massive incentives and lowering prices to move their inventory. Some people point to the sales increase and claim the housing decline has bottomed, but I have my doubts.

Phoenix Area Radio REI Show

Gregg Reichman of Active Finance Group will be on KFNX 1100 AM today and every Wednesday for the next 3 months from 2 PM to 3 PM. He will be discussing current real estate market conditions, wholesale real estate, foreclosures, and hard money financing. If you want to call in and talk to him, the number is 602-277-KFNX (5369). Active Finance Group is closely affiliated with BuyAZForeclosures.com. Both companies specialize in foreclosures and wholesale properties in the greater Phoenix area.

Possible Reverse Split Arbitrage Play

I was searching the SEC filings database and came across this possible reverse split arbitrage play: Dolce Ventures, Inc. This stock trades on the "pink sheets" under the symbol DLCV.

The company will be undergoing a 304.44 for 1 reverse split with shareholders owning less than 15,222 shares being unaffected by split. For more details, read the company's SEC filing. Pertinent details are in the section titled "The Reverse Split" (surprisingly enough). Here is an excerpt:

At the time of the Reverse Split, holders of outstanding shares of Common Stock will receive one share of post-Reverse Split Common Stock for each 304.44 shares of pre-Reverse Split Common Stock held as of the close of business on the date the Amendment is filed. No fractional shares of Common Stock will be issued in connection with the Reverse Split. All fractional share amounts resulting from the Reverse Split will be rounded up to the next whole new share. In connection with the Reverse Split, the Company's Board of Directors, in its sole discretion, may provide special treatment to shareholders to preserve round lot holders (i.e., holders owning at least 100 shares) after the Reverse Split. In the event the Board determines to provide such special treatment, shareholders holding 30,444 or fewer shares of Common Stock, but at least 15,222 shares of Common Stock, will receive 100 shares of Common Stock after the Reverse Split, and persons holding less than 15,222 shares of Common Stock would not be affected. The terms and conditions of special treatment afforded to the Company's shareholders to preserve round lot shareholders, if any, including the record dates for determining which shareholders may be eligible for such special treatment, will be established in the discretion of the Board of Directors.

The last quote I can see shows a price of $0.013 per share. Now for the bad news. The split should take effect 20 days after the date of mailing the notice to the shareholder's of record at the close of business 10/16/06. You need three days for a stock trade to "settle," so you must buy any shares today (Oct. 11) if you want to be a shareholder of record in time. The company will also be changing its name on this date, and most likely, will change its stock symbol too. I do not know what the new symbol will be, but the new name will be Sino Gas International Holdings, Inc.

As always, do your own due diligence before investing. This is neither financial advice nor a solicitation to buy or sell any security. Any number of things can happen with these plays, so I recommend only investing what you are comfortable losing.

Another Reverse Arbitrage Deal Completed

A while back, I completed a stock deal that gave me a 2,567% ROI in 212 days. This was accomplished through the magic of reverse merger arbitrage - a play where you buy a few shares of a stock that is going to undergo a reverse split with special handling for odd lot shareholders. See my previous post about this for more details.

The deal I just completed was for far less in terms of dollars, but again provided an astounding ROI: 364% in 59 days, which works out to an annualized rate of 2,251%! Here are the details.

VTUD, a stock that trades on the "pink sheets" (OTCBB), had announced a 1 for 40 reverse split with special instructions that, after the split, no shareholder would have less than 100 shares. The reason given for this split was to increase the per-share price so that the company would be more attractive to potential buyers. Full details about the split can be found in this SEC filing. The reverse split was effected last week and the stock now trades under the ticker symbol VNUN. Today, the new stock was reflected in my brokerage account (it usually takes a while after the split happens for the brokerages to get the new stock from the company) and I sold.

I purchased 30 shares of the stock at $0.05 per share plus a commission of $12.95, for a total cost of$14.45. After the split, I had 100 shares, which I sold today at $0.80 per share plus a $12.95 commission, for a total of $67.05. My net profit was $52.60 in 59 days. I could have made a couple more bucks by only buying 1 share instead of 30. However, I choose 30 shares because that was a number used as an example in the company's SEC filing and, if I had to argue with my broker about how I should have 100 shares after the split, I wanted a crystal clear example. Besides, at five cents a share, the extra 29 shares only cost me $1.45.

Now I know I said I would alert you guys to any more reverse arbitrage opportunities I found, but there was a big unknown with this play that caused me to not tout this one (although it was discussed in the comments of my other post): the company wasn't actually merging with anyone yet. The reverse split was just being done to make the company more attractive to potential buyers. So there was much more uncertainty about what the post-split stock price would be. And this proved to be a valid concern. A true 1 for 40 split would mean the post-split price should be 40 times greater than the pre-split price. My 5 cent stock should have been worth $2.00. The stock was instead trading around $0.80 for the last couple days and that's what I sold for. This uncertainty also stopped me from making this play in the four or five different brokerage accounts I have and instead, I only did this in one account, thus limiting my gains further.

So, dollar-wise, I didn't make tons on money on this. However, I did get a very nice ROI and picked up some more experience with these penny-stock plays.

Back In Business!

I had a brief talk with my investors this weekend. That had previously asked that I hold off on purchasing any more properties until we could have a meeting. After all was said and done, they have decided not only to continue with the buy-fix-sell strategy I have been using, but to also add some more money to the game.

As many of you know, I work on an all-cash basis. When I started out a couple years ago, prices were quite a bit lower than they are now. With the recent appreciation the Phoenix area has seen, my bankroll, even with the profits from my previous deals, has lost some buying power. Right now, I'm on the border between being able to buy newer houses in good parts of town and older houses in not so good areas. I prefer the newer houses and those are getting tougher to find in the price range I am working in. So my investors have decided to allocate another $25,000 or so to help with this issue. They've got some other financial matters to clear up this month and once those are wrapped up, they will invest the money with me.