there are also as many OPPORTUNITIES if you’re willing to be non-emotional and look for them.
In Canada, recent numbers show that in February, the country added a stunning number of new jobs and here in Calgary, the unemployment rate dropped again, to under 3% in February. The labour market is getting tighter — employers are NOT laying off, they continuing to add people whenever they possibly can.
With the Bank of Canada recently dropping interest rates, that will fuel the real estate market to some degree in 2008, which means we’ll end up pretty much on track where I predicted we would in January (see my January 1st Blog Entry for my 2008 Predictions — which, I must say, I’ve done pretty good on so far this year!)
As for the U.S, things are not as rosy, but this is just an economic cycle that’s part of the deal. It doesn’t matter where you are or what you invest in — there are ALWAYS opportunities, and the more volatile the market becomes, the bigger the opportunities there are.
Unfortunately, I’m seeing more and more people trying to take advantage of the current fear and panic that are prevalent in the markets right now.
I’m seeing investments being offered that are not short of IDIOTIC, but against the current backdrop of economic carnage, they appear to be safe and intelligent for some investors.
I’m seeing people pitch pre-construction investing in the U.S. even TODAY, in the face of all the economic and housing data we know that will have an adverse impact on the real estate market.
Pre-construction is risky at the best of times, but you have to be insane to be gambling right now on the future value of real estate that isn’t even developed yet, in a market such as the U.S., with all the economic risks at work!
There are bad deals in all shapes and colors, and it concerns me, because if you don’t ask the right questions, you may just get sucked into these terrible deals.
Let me give you an example.
Recently, an investment company came out with they call a “spectacular investment” that is designed to give the investor a regular cash flow. Depending on how much you invest, you get paid interest of 12-15% on your money.
Ok, sounds good so far.
The questions EVERY investor should ask about an investment include the following:
- when do I get my money back?
- how is my money secured?
- who or what am I lending my money to?
- where are the cash flow interest payments coming from?
Well, on this particular investment, you have to commit to investing your money for 2 years at a minimum .. AND, the borrower has the right to extend that for ANOTHER 2 years, if THEY choose.
So really, that means
you’re committing your money for 4 YEARS on this deal.
On top of that,
the borrower can choose to repay your money any time they want in advance, so if they find a better place to borrow from, they give your money back.. and now you have to go and re-invest it somewhere.
For a smart investor,
this isn’t good, because now you end up with money back far sooner than you expected, and then you’ll have to go re-deploy.
So you have no idea how long this investment goes for when you go into it .. somewhere between 6 months and 4 years (assuming they can actually pay out you at the end).
Well, how are you supposed to plan your investing if you have no idea how long your money is going to be tied up?
Ok, next question.
How is my money secured here? Well, this is another big problem.
In this deal, IT’S NOT.
There is NO security.
What’s being offered is a
promissory note that is virtually WORTHLESS. So, if things go wrong, you’re likely never going to see your money again. Collecting on a promissory note is
almost impossible, regardless of what you might be told.
For the borrower, however, this is
GREAT, because they can raise as much money as they want and never worry about being “over leveraged”. It doesn’t matter how much money they borrow on promissory notes ..
they can borrow 10 times the value of their assets if they want – there’s no way to know how much equity (ie: protection) you have as an investor in this situation.. PLUS .. virtually EVERY creditor they have is ranked higher than you are.
It doesn’t MATTER how much there are in assets that they own .. what matters is
EQUITY .. and
rank of debt. In this deal, you know
NEITHER.
All you’re told is that they have a bunch of assets, way more than they’re borrowing, so that means everything is hunky dory.
WRONG.
That’s just CRAP .. and telling people that is dishonest.
For the investor,
this is TERRIBLE, because
the risk of loss is HUGE.
It is crazy to lend money on a promissory note for returns in the low to mid teens. Absolutely crazy. There are GREAT ways to lend money for those rates, but actually
GET SECURITY so that if things go wrong, you have an
ASSET pledged against the loan that you can go after.
But not here.
They’re suggesting they’re going to use the money to finance real estate development.
If that’s the case, why aren’t they offering to secure the loan against their supposed real estate empire?
The answer —
because they don’t have to .. they’re relying on unsophisticated investors not asking these kinds of questions and just
blindly following them into the deal like sheep.
I don’t know this that is true, but one possible reason they’re doing it this way is because
they’ve already leveraged the real estate as much as they can .. and no banks will give them more financing because they feel it would be too risky.
So, they go to individual investors who aren’t in a position to understand risk or ask the right questions.
Integrity? What’s that?
Ok, back to the questions.
Who am I lending money to? Well you really have
no idea, because that’s not discussed or disclosed. It’s likely a new entity set up specifically to provide these promissory notes so there is
NOTHING for investors to go after, should the deal go wrong. Again,
the value of underlying assets is MEANINGLESS if they’ve already been pledged or indebted before your promissory note.
And
where are the payments coming from? Well again,
we have no idea, because they don’t share that kind of information with the little people.
It amazes me that investments like this can be brought to the market, with NO disclosure, and investors don’t ask the most fundamental questions about them.
I am not saying that this deal is a ponzi scheme — but
if you analyze what a ponzi scheme is, this particular offer seems to meet a lot of the standard tests of a ponzi scheme:
- promises of amazing returns, way above what is in the market
- little discussion of “what if things go wrong” — how are they going to pay you back?
- no disclosure whatsoever — no idea what the money is really being used for .. what the underlying equity really is .. who’s getting paid with this money .. NOTHING!
- no explanation of where the payments to investors are coming (because it’s usually from other investor’s capital as it comes in, which is then paid back to older investors to keep the scam going)
- no security on the investment WHATSOEVER! (again, promissory notes are basically worthless when things go bad)
- unknown payout timelines
- high pressure to invest because “it’s going to sell out in a few days”
There is NO doubt that we’re in times of fear and concern when it comes to money and investment markets.
However,
NOW is NOT the time to be foolish with your money.
Yes, it’s more difficult to be confident in the deals you are looking at, with all the noise you’re hearing in the market ..
.. but
it is never a good time to stop asking good questions about investments .. especially now.
In my next entry, I’ll talk about
HOW you can achieve double digit returns,
WITHOUT putting your money into high-risk investments with no security.]]>