A couple recently lost out on a property deal because their agent sold off the unit without their knowledge.In another case, a couple paid cash for a deal that did not materialise.
In every property downturn, some agents will get 'creative', though a deal can fail for many other reasons, property agency bosses said.
Buyers should always take precautions and do their homework when presented with what seems like a really good deal, they said.
Case 1
A couple thought they had bought a unit at Yishun Emerald when they paid $5,000 cash for the option to purchase, as well as another $20,000 upfront to the seller, of which $8,000 went to the agent.
The seller let them move in early while they waited for the $550,000 sale to complete. They held their housewarming party and settled in.
But the deal fell through. The condo's management could not transfer the unit to them because of the seller's debt arrears.
The $12,000 upfront cash was for the seller to pay that debt. Not only did he not pay it, he also asked to borrow money from the couple on a few occasions, said the husband, MrJumari Osman, 34.
'We realised the seller was also defaulting on his housing loan and that his flat was later repossessed by the bank,' he said.
By then, the couple had forked out nearly $40,000, including legal fees and the bank mortgage penalty fee. The agent refused to return his commission to them and the seller said he was flat broke.
'It was a negative sale, so we knew the seller wasn't going to get anything out of it, and that he had a debt with the condo's management,' said Mr Jumari.
'But we were not told at all that the unit was in danger of being repossessed.'
The agent, Mr Jumari said, claimed that he did inform them of the problem. In any case, he was the one who instructed them to pay the $20,000 to speed up the sale, said Mr Jumari.
In this case, 'the buyer should have made the cheque out to the MCST (management corporation) instead of the seller, knowing that the seller has debts', said Mr Chris Koh, director of Dennis Wee Properties.
What the agent should have done was to get a lawyer to add a clause in the standard option to purchase document, saying the $12,000 is for the payment of the MCST debts, he said.
As an added precaution, the clause could have also said that the $12,000 was conditional to the sale, he said.
As a sign of goodwill, the agent should refund the commission, agency bosses said.
In general, buyers should avoid paying more than 1 per cent option money in a resale deal, said PropNex chief executive Mohamed Ismail.
This way, their exposure will be limited if the deal gets terminated for various reasons, such as the death of the seller or if the seller becomes bankrupt, experts said.
Case 2
Mr Kenneth Chia and his wife were so keen on a Spring Grove unit in Grange Road that they were prepared to offer a cheque on the spot.
They offered $990,000 - $10,000 more than the previous offer - and were willing to raise it if there was more competition.
The seller's agent told them not to bother with the cheque (the asking price was $1.08 million) and later sold the unit to another party for $1 million in a co-broke deal.
The couple's beef was that the agent did not inform them of another higher offer that came later.
When confronted, the seller's agent said she was not bound by duty to tell them about it, said Mr Chia, 32.
'We bought a much better unit for a bit more ($1.08 million). But if we had known about the $1 million offer, we could have bid at $1.05 million and the seller would have got $50,000 more.'
In hindsight, everyone may be willing to pay a bit more, experts said. 'What keen buyers should do is to make an immediate offer that is close to the seller's expectations,' said PropNex's Mr Ismail.
In this case, if the couple did not raise their offer on the spot, it meant their offer was only $990,000, said ERA associate director Eugene Lim.
'If another buyer later offers a cheque at a higher price that the seller agrees to, it will be a done deal. The agent is not obligated to inform the previous home-hunter of the higher offer,' he said.
The key is whether buyers are serious about their offers, experts said. 'When the buyer makes an offer to the seller through our agent, we do it officially through a document called the offer to purchase. It is never verbal,' said Mr Lim.
Case 3
There are sellers out there desperate for cash, and agents may thus structure an attractive deal for the buyer.
In these cases, the buyer may be tempted by the extra discount, which is all right as long as precautions are taken, said Mr Ismail.
Let's assume a seller is willing to sell his $1 million property for $950,000 on the condition that the buyer gives him 10 per cent of it in cash immediately.
Typically, the buyer pays 1 per cent, and a further 4 or 9 per cent within four weeks, to the seller's lawyer. The money will be transferred to the seller when the deal is completed three months later.
So if the buyer agrees to give him 10 per cent cash, it means that only 90 per cent, or $855,000 is going towards the property purchase.
Problems will arise if the seller's housing loan is more than that amount. 'If the seller cannot redeem the loan, the property will not be transferred to the buyer,' said Mr Ismail.
To avoid this problem, a buyer should get his lawyer to check on the seller's outstanding loan on the property, he said.
Another risk is that the seller becomes a bankrupt within the three months it takes to complete the deal, said Mr Ismail.
A buyer should therefore also check to see if there are any pending legal suits against the seller to ensure he won't be made a bankrupt before the deal is sealed, he said.
This article was first published in The Straits Times.
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Tuesday, June 9, 2009
Monday, May 18, 2009
China buying more US Treasury bonds
(WASHINGTON) China is pumping more money into US Treasury bonds, recent data show, despite concerns expressed in Beijing in recent months over the safety of dollar-linked assets.
Mainland China's holding of Treasury securities jumped to US$767.9 billion in March from US$744.2 billion the previous month, according to US Treasury data.
The figure does not include those of Hong Kong, China's special administration region, which climbed to US$78.9 billion from US$76.3 billion.
The statistics showed China sitting comfortably as the top purchaser of Treasury bonds despite years trying to diversify its reserves from the US dollar.
Chinese Premier Wen Jiabao had expressed rare official concern in March over the safety of Beijing's huge US bond holdings but in the same month, according to monthly US Treasury data, Beijing scooped up US$23.7 billion of Treasuries, the largest inflow since November.
'This flies in the face of the 'China is diversifying' stories,' said Andrew Busch, analyst at BMO Capital Markets, commenting on the fresh Treasury data.
Mr Wen's concerns came amid frustration in Beijing that the nearly US$800 billion huge US stimulus measures to prop up the world's largest economy could drive down the value of dollar-based assets.
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In addition, China was concerned that a US Federal Reserve move to buy up to US$300 billion in long-term US Treasury bonds to ease credit flows could dampen returns on its future bond purchases.
'As much as China is whining about the impact of quantitative easing on the US dollar, their purchases of dollar denominated assets was the strongest since November,' said Kathy Lien, director of currency research at Global Forex Trading.
Being the top holder of US Treasury bonds, China is automatically the largest creditor to the United States.
It is also the world's biggest holder of dollar reserves, at nearly US$2 trillion dollars - roughly double that of Japan, and four times more than either Russia or Saudi Arabia.
'Note that in the first quarter of 2009, China's holdings of US Treasuries have increased by US$40 billion, whereas its foreign exchange reserves have increased by only US$7 billion dollars, indicating a continued preference for US Treasuries,' said Barclays Capital analyst Chirag Mirani. - AFP
Mainland China's holding of Treasury securities jumped to US$767.9 billion in March from US$744.2 billion the previous month, according to US Treasury data.
The figure does not include those of Hong Kong, China's special administration region, which climbed to US$78.9 billion from US$76.3 billion.
The statistics showed China sitting comfortably as the top purchaser of Treasury bonds despite years trying to diversify its reserves from the US dollar.
Chinese Premier Wen Jiabao had expressed rare official concern in March over the safety of Beijing's huge US bond holdings but in the same month, according to monthly US Treasury data, Beijing scooped up US$23.7 billion of Treasuries, the largest inflow since November.
'This flies in the face of the 'China is diversifying' stories,' said Andrew Busch, analyst at BMO Capital Markets, commenting on the fresh Treasury data.
Mr Wen's concerns came amid frustration in Beijing that the nearly US$800 billion huge US stimulus measures to prop up the world's largest economy could drive down the value of dollar-based assets.
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In addition, China was concerned that a US Federal Reserve move to buy up to US$300 billion in long-term US Treasury bonds to ease credit flows could dampen returns on its future bond purchases.
'As much as China is whining about the impact of quantitative easing on the US dollar, their purchases of dollar denominated assets was the strongest since November,' said Kathy Lien, director of currency research at Global Forex Trading.
Being the top holder of US Treasury bonds, China is automatically the largest creditor to the United States.
It is also the world's biggest holder of dollar reserves, at nearly US$2 trillion dollars - roughly double that of Japan, and four times more than either Russia or Saudi Arabia.
'Note that in the first quarter of 2009, China's holdings of US Treasuries have increased by US$40 billion, whereas its foreign exchange reserves have increased by only US$7 billion dollars, indicating a continued preference for US Treasuries,' said Barclays Capital analyst Chirag Mirani. - AFP
How the Libor is determined
May 18 (Bloomberg) -- The cost of borrowing in dollars between banks dropped by the most in two months as record low interest rates and rising customer deposits quicken the thaw in lending.
The London interbank offered rate, or Libor, for three- month loans fell four basis points to 79 basis points today, the biggest decline since March 19, according to British Bankers’ Association data. It declined 11 basis points last week, the most since January.
“The rate of decline has increased the last few days and it seems there’s more money around,” said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment- banking unit of Credit Agricole SA. “Things are progressing nicely. It’s looking positive.”
The availability of credit has improved as the Federal Reserve committed $12.8 trillion to stem the longest recession since the 1930s and central banks around the world cut interest rates to near zero. Libor, used to set borrowing costs on about $360 trillion of financial products globally, according to the BBA, has declined from as high as 4.82 percent in October, after the collapse of Lehman Brothers Holdings Inc.
The TED spread, the difference between what banks and the U.S. Treasury pay to borrow for three months, narrowed one basis points to 66 basis points, the lowest level since August 2007, when the credit crisis began. The Libor-OIS spread, another gauge of banks’ reluctance to lend, narrowed five basis points to 58 basis points, the least since March 24, 2008.
Still Wary
Libor has dropped more than two basis points for the past four days. The last time it fell so much was in the four days through Jan. 13.
Some measures show financial institutions are still wary of lending after banks racked up more than $1.4 trillion of writedowns and losses since the start of 2007.
The difference between the Fed’s target rate for overnight bank loans between banks and three-month Libor was 53 basis points today, compared with an average of 22 basis points in the five years before credit markets froze.
“People have become a bit more relaxed now because we haven’t had any bad news recently,” said Jan Misch, a money- market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany’s biggest state-owned bank. “On the other hand, I doubt the turnover has increased at the same pace. We’ve now reached a level where I wouldn’t expect further declines.”
Rising Deposits
The drop in Libor has less to do with rising confidence among financial institutions than it does with surging customer deposits, Jim Vogel, an analyst at FTN Financial said last week. Deposits at U.S. banks jumped by almost $400 billion in the past six months, contributing to reduced demand for loans in the interbank market, Vogel wrote in a note to clients May 11.
Libor is derived from a survey of banks conducted by the BBA each day in London. Institutions are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. The BBA then calculates averages, throwing out the four highest and lowest quotes, before publishing them before noon.
The London interbank offered rate, or Libor, for three- month loans fell four basis points to 79 basis points today, the biggest decline since March 19, according to British Bankers’ Association data. It declined 11 basis points last week, the most since January.
“The rate of decline has increased the last few days and it seems there’s more money around,” said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment- banking unit of Credit Agricole SA. “Things are progressing nicely. It’s looking positive.”
The availability of credit has improved as the Federal Reserve committed $12.8 trillion to stem the longest recession since the 1930s and central banks around the world cut interest rates to near zero. Libor, used to set borrowing costs on about $360 trillion of financial products globally, according to the BBA, has declined from as high as 4.82 percent in October, after the collapse of Lehman Brothers Holdings Inc.
The TED spread, the difference between what banks and the U.S. Treasury pay to borrow for three months, narrowed one basis points to 66 basis points, the lowest level since August 2007, when the credit crisis began. The Libor-OIS spread, another gauge of banks’ reluctance to lend, narrowed five basis points to 58 basis points, the least since March 24, 2008.
Still Wary
Libor has dropped more than two basis points for the past four days. The last time it fell so much was in the four days through Jan. 13.
Some measures show financial institutions are still wary of lending after banks racked up more than $1.4 trillion of writedowns and losses since the start of 2007.
The difference between the Fed’s target rate for overnight bank loans between banks and three-month Libor was 53 basis points today, compared with an average of 22 basis points in the five years before credit markets froze.
“People have become a bit more relaxed now because we haven’t had any bad news recently,” said Jan Misch, a money- market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany’s biggest state-owned bank. “On the other hand, I doubt the turnover has increased at the same pace. We’ve now reached a level where I wouldn’t expect further declines.”
Rising Deposits
The drop in Libor has less to do with rising confidence among financial institutions than it does with surging customer deposits, Jim Vogel, an analyst at FTN Financial said last week. Deposits at U.S. banks jumped by almost $400 billion in the past six months, contributing to reduced demand for loans in the interbank market, Vogel wrote in a note to clients May 11.
Libor is derived from a survey of banks conducted by the BBA each day in London. Institutions are asked how much it would cost them to borrow from each other for 15 different periods, from overnight to one year, in currencies from dollars to euros and yen. The BBA then calculates averages, throwing out the four highest and lowest quotes, before publishing them before noon.
Wednesday, May 13, 2009
10 things to note to start a business right
SO YOU - a budding entrepreneur - have finally decided to start your own business. But bear in mind the common pitfalls everyone should avoid at all cost. There are 10 things one should take heed of when starting a business.
Related story:» The 4-step guide in starting your own business
1. Don't constantly change your business model
As a new business owner, you cannot afford to spend time reinventing every process in your business.
Your resources are probably limited and your focus should be on revenue generation. Stick to standard business processes and improve on them along the way. Avoid experimenting with processes if they are already working for you.
2. Being on the job rather than taking care of business
Many entrepreneurs get too bogged down with the operations, rather than in the management of the whole business. It is only natural that you would want to work in areas of your business that you understand best.
Yet as an entrepreneur, your job is not to specialise in any one aspect of your business but to manage your company. While it is important to get involved operationally, your ultimate goal is to grow your business.
3. Don't leave the running of your business to others
It is common for business owners to delegate key areas of their businesses to experienced partners or employees. However, key decisions must still be made by the owner.
The responsibility of running the business is still yours. You are accountable for the success or failure of your business. You can pass on work, but not leave it to others to make important decisions for you.
4. If you think small, you will remain small
If you model your company to sustain only your income, you will never grow big and expand your business. Many entrepreneurs start a business with the sole purpose of creating that dream job for themselves.
True entrepreneurs always have big visions that go beyond their limit. They imagine how they can make the world a better place with their product or service - and work towards it every day.
5. A cheaper price doesn't mean more customers
Competing on price will not garner more sales. Offering a lower price does not mean that customers will switch from your competitors to you; it's product or service quality that people look for.
By offering lower prices, you will have smaller profit margins, translating into a smaller budget for product research and development.
Fighting over low prices will never benefit you in the long run. Solely banking on price adjustments as a competitive edge can be your fastest route to bankruptcy.
6. You get what you pay for
Cost-cutting on every aspect of your business, especially for staff, can be detrimental to your business.
Hiring employees on the cheap may appear to save you cost now. But you will be paying more in the long run by losing the opportunities you could have obtained with the right people supporting you.
Talented and capable staff would not want to be paid less than their market value. Don't compromise on the quality of your staff.
7. Cost-cutting damper efficiency
The key is not about cost savings, but to balance out a cost-benefit ratio on everything you do.
Instead of paying people to help you, you choose to do it all by yourself. You avoid using new technology that is deemed too expensive and prefer to keep that old machine, not counting that it actually costs more than buying a new one due to high maintenance cost.
Being efficient is a must for every start-up company where resources are limited, but you should not focus on cost-cutting as a business growth strategy. Instead, you should focus on bringing in more revenue that will cover your cost.
8. Don't focus on just one aspect of your business
Every business needs three legs for it to run: marketing and sales; administration and finance; and operations.
Entrepreneurs who are born salesmen will believe that sales is the most important aspect of their business. Entrepreneurs with experience in operations may believe that a solid business process is the key success factor for companies.
Every business requires marketing and sales, finance and administration, and operations. All of these areas are equally important and it is up to you, the entrepreneur, to balance them, regardless of your field of expertise.
9. Have a proper yardstick in place
Without proper reviewing processes, a business will not have a clear view of its current strengths and weaknesses.
Many business owners rely solely on their instincts to make business decisions. The true entrepreneur takes advantage of data available to help him set appropriate goals, measure the company's performance and implement necessary measures to bring the business to the next level.
10. Work towards a long-term relationship with customers
Relationship management is essential to the survival of any business. Entrepreneurs often make the mistake of chasing after new customers, seeing potential only in new, untapped markets.
Previous customers can often bring in repeat or referral sales which are just as important. Building a good customer relationship management system in your business can help generate additional sales from existing customers.
Having a good business relations framework is also important as it upholds the image of your company for long-term success.
The writer is founder and managing director of Talentpreneur Hub, an independent company that promotes entrepreneurship in Singapore.
Related story:» The 4-step guide in starting your own business
1. Don't constantly change your business model
As a new business owner, you cannot afford to spend time reinventing every process in your business.
Your resources are probably limited and your focus should be on revenue generation. Stick to standard business processes and improve on them along the way. Avoid experimenting with processes if they are already working for you.
2. Being on the job rather than taking care of business
Many entrepreneurs get too bogged down with the operations, rather than in the management of the whole business. It is only natural that you would want to work in areas of your business that you understand best.
Yet as an entrepreneur, your job is not to specialise in any one aspect of your business but to manage your company. While it is important to get involved operationally, your ultimate goal is to grow your business.
3. Don't leave the running of your business to others
It is common for business owners to delegate key areas of their businesses to experienced partners or employees. However, key decisions must still be made by the owner.
The responsibility of running the business is still yours. You are accountable for the success or failure of your business. You can pass on work, but not leave it to others to make important decisions for you.
4. If you think small, you will remain small
If you model your company to sustain only your income, you will never grow big and expand your business. Many entrepreneurs start a business with the sole purpose of creating that dream job for themselves.
True entrepreneurs always have big visions that go beyond their limit. They imagine how they can make the world a better place with their product or service - and work towards it every day.
5. A cheaper price doesn't mean more customers
Competing on price will not garner more sales. Offering a lower price does not mean that customers will switch from your competitors to you; it's product or service quality that people look for.
By offering lower prices, you will have smaller profit margins, translating into a smaller budget for product research and development.
Fighting over low prices will never benefit you in the long run. Solely banking on price adjustments as a competitive edge can be your fastest route to bankruptcy.
6. You get what you pay for
Cost-cutting on every aspect of your business, especially for staff, can be detrimental to your business.
Hiring employees on the cheap may appear to save you cost now. But you will be paying more in the long run by losing the opportunities you could have obtained with the right people supporting you.
Talented and capable staff would not want to be paid less than their market value. Don't compromise on the quality of your staff.
7. Cost-cutting damper efficiency
The key is not about cost savings, but to balance out a cost-benefit ratio on everything you do.
Instead of paying people to help you, you choose to do it all by yourself. You avoid using new technology that is deemed too expensive and prefer to keep that old machine, not counting that it actually costs more than buying a new one due to high maintenance cost.
Being efficient is a must for every start-up company where resources are limited, but you should not focus on cost-cutting as a business growth strategy. Instead, you should focus on bringing in more revenue that will cover your cost.
8. Don't focus on just one aspect of your business
Every business needs three legs for it to run: marketing and sales; administration and finance; and operations.
Entrepreneurs who are born salesmen will believe that sales is the most important aspect of their business. Entrepreneurs with experience in operations may believe that a solid business process is the key success factor for companies.
Every business requires marketing and sales, finance and administration, and operations. All of these areas are equally important and it is up to you, the entrepreneur, to balance them, regardless of your field of expertise.
9. Have a proper yardstick in place
Without proper reviewing processes, a business will not have a clear view of its current strengths and weaknesses.
Many business owners rely solely on their instincts to make business decisions. The true entrepreneur takes advantage of data available to help him set appropriate goals, measure the company's performance and implement necessary measures to bring the business to the next level.
10. Work towards a long-term relationship with customers
Relationship management is essential to the survival of any business. Entrepreneurs often make the mistake of chasing after new customers, seeing potential only in new, untapped markets.
Previous customers can often bring in repeat or referral sales which are just as important. Building a good customer relationship management system in your business can help generate additional sales from existing customers.
Having a good business relations framework is also important as it upholds the image of your company for long-term success.
The writer is founder and managing director of Talentpreneur Hub, an independent company that promotes entrepreneurship in Singapore.
Sunday, March 29, 2009
Potential Pitfalls in Property investment
IF YOU are looking to buy a property, beware of potential pitfalls, including those related to getting a housing loan.
In the past, most home buyers would pay the one per cent option to secure the property before looking for a housing loan. If you do this now, you might regret it and here's why.
It has been clear over the past few months that property prices in Singapore have turned down. And with global economies expected to weaken further, the trend for property prices is more likely to be down than up in the months ahead.
So, even before you put money down on your option, check the market valuation of the property. There have been instances where buyers checked the market valuation of a property with the bank only to get a nasty surprise some weeks later when they finally write out a cheque for the option. That's when they find out that the bank's valuation of their property has gone down.
Latest valuation
We know an instance where someone purchased a property for $2 million and then found out some months later that the valuation had fallen by about 10 per cent to $1.8 million. In other words, he ended up having to fork out an additional $160,000 in cash as the bank was only willing to grant a loan of $1.44 million, or 80 per cent of the revised valuation of $1.8 million, rather than the original loan of $1.6 million.
The buyer could have avoided this pitfall if he had gotten a mortgage broker to check the latest indicative valuation within a few days of buying the property.
Another problem can arise with deferred payments. In 2007, properties were selling like hot cakes and many people had bought them from developers under the deferred payment scheme. That's where buyers were only required to come up with 10-20 per cent of the purchase price and pay nothing more until the property obtains its temporary occupation permit (TOP) about three years later.
According to estimates, more than half the buyers who bought property under the deferred payment scheme have yet to apply for a housing loan. In the past year or so, many properties have seen their values fall by 10 per cent to 30 per cent, so when these buyers finally apply for a home loan, they are likely to have to cough up an additional 10-25 per cent of the purchase price.
For example, someone who bought a property for $1 million in 2007 would see the current valuation of the property drop to about $800,000. In other words, he would probably be able to get a maximum loan of 80 per cent of $800,000 - or $640,000. That's $160,000 extra that he would have to foot in cash or CPF savings. In effect, he is putting up 36 per cent of his purchase price upfront.
With global stock markets falling further in recent weeks as economic conditions deteriorate, property valuations might drop further. Thus, if you have bought a property under a deferred payment scheme but have yet to apply for financing, I strongly advise you to get financing as soon as possible.
There are housing loan packages out there which offer free loan conversions. If you apply for a housing loan now and a better loan package comes along when the property reaches TOP, you can always convert to a more attractive package without penalty.
Getting financing earlier is safer too, should there be any adverse change in a home buyer's financial position, such as a pay cut, or deteriorating credit standing due to delays in paying existing loans. Then, the home buyer might not be able to obtain any financing for his property at all!
To mitigate the risks of falling collateral value, banks have become more cautious in granting financing for properties. Very few banks are willing to offer 90 per cent financing, and if they do it would primarily be for first-time home buyers.
Banks are also more stringent in assessing the borrower's ability to service and repay debt. There are instances where property speculators might only obtain financing of 70 per cent for properties bought for investment purposes. For borrowers who have a slightly weaker credit profile, financing might even be capped at 60 per cent of the purchase price or valuation, whichever is lower.
Prudent step
To be prudent, property buyers should approach a mortgage broker to help secure a prior bank loan approval before committing to a property. By doing so, you would avoid the danger of being unable to obtain sufficient bank financing for your property.
The silver lining in all this is that interest rates are also dropping. Over the past year, the Singapore inter-bank offered rate (Sibor) - the interest rate at which banks borrow from one another - has fallen from over 2 per cent to about 0.7 per cent currently.
If you had taken a home loan one to two years ago, chances are you might be paying an interest rate of 3-4 per cent. It is possible for you to refinance your loan today and end up paying as low as 1.65 per cent, from say, 3.5 per cent. Assuming an outstanding loan of $300,000 and a remaining loan period of 20 years, by refinancing, you might save as much as $5,500 in the first year alone! Even after deducting the cost of refinancing of about $1,000, you are still $4,500 better off.
Thus, refinancing your existing housing loan now might be one of the best ways to 'create money' for yourself by cutting down on your interest expenses.
You can also take advantage of cheaper mortgage rates by borrowing more if your property has appreciated from its original price. If you had bought your property a few years ago, chances are its current valuation is still much higher than your purchase price.
Say, you had bought a property costing $1 million five years ago and have an outstanding loan of $500,000 on it. The current valuation might be $1.5 million. Thus, even if you take out an additional loan of $500,000, bringing the total loan amount to about $1 million, it works out to just 67 per cent of the property valuation and well within the 80 per cent financing limit for a property.
The good news is that the additional loan of $500,000 comes at a low interest rate of about 2 per cent, which is possibly the cheapest loan a typical consumer can obtain.
Securing a housing loan has become more tricky with fast-changing circumstances in terms of property valuation and loan-approval criteria. One's financial situation might also change due to pay cuts and threat of retrenchments. So to be safe, get your home loan approved before you commit to buying your property.
The writer is a Certified Financial Planner with 15 years of experience in bank lending. He co-founded an independent mortgage consultancy portal www.HousingLoanSG.com in 2003.
In the past, most home buyers would pay the one per cent option to secure the property before looking for a housing loan. If you do this now, you might regret it and here's why.
It has been clear over the past few months that property prices in Singapore have turned down. And with global economies expected to weaken further, the trend for property prices is more likely to be down than up in the months ahead.
So, even before you put money down on your option, check the market valuation of the property. There have been instances where buyers checked the market valuation of a property with the bank only to get a nasty surprise some weeks later when they finally write out a cheque for the option. That's when they find out that the bank's valuation of their property has gone down.
Latest valuation
We know an instance where someone purchased a property for $2 million and then found out some months later that the valuation had fallen by about 10 per cent to $1.8 million. In other words, he ended up having to fork out an additional $160,000 in cash as the bank was only willing to grant a loan of $1.44 million, or 80 per cent of the revised valuation of $1.8 million, rather than the original loan of $1.6 million.
The buyer could have avoided this pitfall if he had gotten a mortgage broker to check the latest indicative valuation within a few days of buying the property.
Another problem can arise with deferred payments. In 2007, properties were selling like hot cakes and many people had bought them from developers under the deferred payment scheme. That's where buyers were only required to come up with 10-20 per cent of the purchase price and pay nothing more until the property obtains its temporary occupation permit (TOP) about three years later.
According to estimates, more than half the buyers who bought property under the deferred payment scheme have yet to apply for a housing loan. In the past year or so, many properties have seen their values fall by 10 per cent to 30 per cent, so when these buyers finally apply for a home loan, they are likely to have to cough up an additional 10-25 per cent of the purchase price.
For example, someone who bought a property for $1 million in 2007 would see the current valuation of the property drop to about $800,000. In other words, he would probably be able to get a maximum loan of 80 per cent of $800,000 - or $640,000. That's $160,000 extra that he would have to foot in cash or CPF savings. In effect, he is putting up 36 per cent of his purchase price upfront.
With global stock markets falling further in recent weeks as economic conditions deteriorate, property valuations might drop further. Thus, if you have bought a property under a deferred payment scheme but have yet to apply for financing, I strongly advise you to get financing as soon as possible.
There are housing loan packages out there which offer free loan conversions. If you apply for a housing loan now and a better loan package comes along when the property reaches TOP, you can always convert to a more attractive package without penalty.
Getting financing earlier is safer too, should there be any adverse change in a home buyer's financial position, such as a pay cut, or deteriorating credit standing due to delays in paying existing loans. Then, the home buyer might not be able to obtain any financing for his property at all!
To mitigate the risks of falling collateral value, banks have become more cautious in granting financing for properties. Very few banks are willing to offer 90 per cent financing, and if they do it would primarily be for first-time home buyers.
Banks are also more stringent in assessing the borrower's ability to service and repay debt. There are instances where property speculators might only obtain financing of 70 per cent for properties bought for investment purposes. For borrowers who have a slightly weaker credit profile, financing might even be capped at 60 per cent of the purchase price or valuation, whichever is lower.
Prudent step
To be prudent, property buyers should approach a mortgage broker to help secure a prior bank loan approval before committing to a property. By doing so, you would avoid the danger of being unable to obtain sufficient bank financing for your property.
The silver lining in all this is that interest rates are also dropping. Over the past year, the Singapore inter-bank offered rate (Sibor) - the interest rate at which banks borrow from one another - has fallen from over 2 per cent to about 0.7 per cent currently.
If you had taken a home loan one to two years ago, chances are you might be paying an interest rate of 3-4 per cent. It is possible for you to refinance your loan today and end up paying as low as 1.65 per cent, from say, 3.5 per cent. Assuming an outstanding loan of $300,000 and a remaining loan period of 20 years, by refinancing, you might save as much as $5,500 in the first year alone! Even after deducting the cost of refinancing of about $1,000, you are still $4,500 better off.
Thus, refinancing your existing housing loan now might be one of the best ways to 'create money' for yourself by cutting down on your interest expenses.
You can also take advantage of cheaper mortgage rates by borrowing more if your property has appreciated from its original price. If you had bought your property a few years ago, chances are its current valuation is still much higher than your purchase price.
Say, you had bought a property costing $1 million five years ago and have an outstanding loan of $500,000 on it. The current valuation might be $1.5 million. Thus, even if you take out an additional loan of $500,000, bringing the total loan amount to about $1 million, it works out to just 67 per cent of the property valuation and well within the 80 per cent financing limit for a property.
The good news is that the additional loan of $500,000 comes at a low interest rate of about 2 per cent, which is possibly the cheapest loan a typical consumer can obtain.
Securing a housing loan has become more tricky with fast-changing circumstances in terms of property valuation and loan-approval criteria. One's financial situation might also change due to pay cuts and threat of retrenchments. So to be safe, get your home loan approved before you commit to buying your property.
The writer is a Certified Financial Planner with 15 years of experience in bank lending. He co-founded an independent mortgage consultancy portal www.HousingLoanSG.com in 2003.
Monday, March 16, 2009
Jim Rogers on US aid and future oil prices
March 17 (Bloomberg) -- The U.S. risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital, investor Jim Rogers said.
“The U.S. is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist.” “That’s bad economics.”
The U.S. government should let American International Group Inc., whose fourth-quarter loss was the worst in corporate history, go bankrupt, Rogers added in a Bloomberg Television interview today. Congress approved a $700 billion bank bailout package in October, and President Barack Obama’s administration has suggested it may need an additional $750 billion.
The U.S. is repeating the mistakes made by Japan in the 1990s and risks creating “zombie banks” by rescuing failed financial services companies that should have been allowed to go under, Rogers said.
New York-based AIG has received $173 billion in government aid, and had earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave.
The Treasury this week intends to provide more information about a $1 trillion plan to remove distressed mortgage assets from banks’ balance sheets. The Federal Reserve is also scheduled this week to start the first phase of a $1 trillion program to revive the market for securities backed by consumer and business loans.
Oil Prices
Oil prices may rise to record levels in the future because of depleting reserves and a lack of major field discoveries, Rogers said. Crude oil in New York hit a record $147.27 a barrel in July and traded at $46.98 at 12:13 p.m. Singapore time.
“Reserves of oil are going down all over the world,” Rogers said. “The price of oil has to go much, much higher. I don’t know if the oil price will go up to record level in three years or five years. I don’t know when but I know it is.”
People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure, Rogers said.
“We’re going to have serious, serious inflation down the road,” said Rogers, who owns gold and silver. “I wish I knew when.”
Calls to return to the gold standard, when currencies were backed by bullion owned by governments, are flawed because it is “not going to solve our problems,” he also said.
“The U.S. is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist.” “That’s bad economics.”
The U.S. government should let American International Group Inc., whose fourth-quarter loss was the worst in corporate history, go bankrupt, Rogers added in a Bloomberg Television interview today. Congress approved a $700 billion bank bailout package in October, and President Barack Obama’s administration has suggested it may need an additional $750 billion.
The U.S. is repeating the mistakes made by Japan in the 1990s and risks creating “zombie banks” by rescuing failed financial services companies that should have been allowed to go under, Rogers said.
New York-based AIG has received $173 billion in government aid, and had earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave.
The Treasury this week intends to provide more information about a $1 trillion plan to remove distressed mortgage assets from banks’ balance sheets. The Federal Reserve is also scheduled this week to start the first phase of a $1 trillion program to revive the market for securities backed by consumer and business loans.
Oil Prices
Oil prices may rise to record levels in the future because of depleting reserves and a lack of major field discoveries, Rogers said. Crude oil in New York hit a record $147.27 a barrel in July and traded at $46.98 at 12:13 p.m. Singapore time.
“Reserves of oil are going down all over the world,” Rogers said. “The price of oil has to go much, much higher. I don’t know if the oil price will go up to record level in three years or five years. I don’t know when but I know it is.”
People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure, Rogers said.
“We’re going to have serious, serious inflation down the road,” said Rogers, who owns gold and silver. “I wish I knew when.”
Calls to return to the gold standard, when currencies were backed by bullion owned by governments, are flawed because it is “not going to solve our problems,” he also said.
Monday, March 2, 2009
How Banks are assessed for financial soundness
Bank Stocks Are Hated, So Here Are Four I Like: John Dorfman
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Commentary by John Dorfman
March 2 (Bloomberg) -- Banks are unpopular these days, as President Barack Obama observed in his address to Congress last week. Even more despised are bank stocks.
In the 12 months through Friday, the diversified banks group within the Standard & Poor’s 500 Index fell 54 percent. Regional banks fell 49 percent.
For investors courageous enough to swim against the tide, now may be a good time to pick up bargains in the rubble of the banking industry. How can you tell which banks are on the safest footing?
The newly mandated federal stress tests for banks haven’t been run yet. Still, investors can get a pretty good idea of a bank’s viability based on two traditional financial-strength measures.
Start with the Tier 1 capital ratio, sometimes called the core capital ratio. Tier 1 capital is basically a bank’s book value, or corporate net worth. Banks are required to have Tier 1 capital equal to at least 4 percent of their assets. Assets for a bank usually consist mainly of the loans they have outstanding and can also include Treasury notes, bills and bonds held by a bank, and other investments.
While 4 percent is the required Tier 1 capital ratio, some banks have considerably more. Of the 119 publicly traded banks in the U.S. with a market value of $250 million or more, 73 have a Tier 1 capital ratio of 10 percent or better.
Grading on Risk
Next, turn to the risk-based capital ratio. In assessing this ratio, regulators grade the safety of assets held by a bank. The safest assets such as cash and Treasury bills are given a multiplier of zero. Those deemed to be moderately safe such as (ironically) mortgage loans have a multiplier of 0.5. Those considered riskier, such as commercial loans, carry a multiplier of 1.0.
If Gravel City Bank hypothetically had $30 million in Treasury bills, $40 million in mortgage loans, and $50 million in commercial loans, its risk-weighted assets would be $70 million (zero times $30 million, plus 0.5 times $40 million, plus 1.0 times $50 million).
A bank’s total capital is supposed to be at least 8 percent of the risk-weighted asset total. Total capital includes Tier 1 capital plus loan-loss reserves and certain types of debt.
Among the 119 publicly traded banks mentioned above, 22 have a risk-based capital ratio of 16 percent or better, as of their latest filings.
If one takes the intersection of the 73 banks that have better than a 10 percent Tier 1 capital ratio, and the 22 that score 16 percent or better on the risk-based capital ratio, the field narrows to 17.
Four Good Banks
Last week I looked at those 17 banks to select a handful that I think are good investment candidates now.
The ones I like are not household names, and many of them are small. They include the likes of Republic Bancorp Inc. of Louisville, Kentucky (with a market value of $392 million), SVB Financial Group of Santa Clara, California ($547 million) and Washington Federal Inc. of Seattle ($1 billion).
Republic Bancorp traded above $30 a share as recently as September. Lately the stock is about $19, trading at 12 times earnings and 1.4 times book value. No Wall Street analyst follows it; the only brokerage house that does is a Louisville regional firm, Hilliard Lyons, which rates it a “buy.” SVB Financial Group is the parent to Silicon Valley Bank. With its Silicon Valley location, it is heavily exposed to the ups and downs of the technology industry. In the fourth quarter it earned only 9 cents a share, down from 96 cents a year earlier.
Attractive Fundamentals
I like SVB nevertheless, partly because it trades at less than $17 a share, down from more than $50 as recently as October. That is only seven times earnings and 0.7 times book value.
Washington Federal is participating in the U.S. Troubled Asset Relief Program. It sold preferred stock and warrants to the Treasury Department in return for about $200 million. The stock, trading below $12, has been cut in half from a year ago. It trades at nine times earnings and 0.7 times book value.
For those who prefer a somewhat larger bank, I recommend BB&T Corp. of Winston-Salem, North Carolina (market value $10 billion). So far, BB&T has weathered the recession well. For example, earnings in the fourth quarter were 55 cents a share, down from 76 cents last year.
BB&T stock fetches about $16 a share, down from about $31 a year ago. It trades at 6 times earnings and 0.55 times book value. The dividend may need to be cut this year, but in the meantime the stock yields more than 11 percent in dividends.
The banking crisis seems as if it will go on forever, but it won’t. I suspect investors will make good money in selected bank stocks purchased now and held for two years or more.
Disclosure note: Neither I nor my clients currently own the banks discussed in this column.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
Email Print A A A
Commentary by John Dorfman
March 2 (Bloomberg) -- Banks are unpopular these days, as President Barack Obama observed in his address to Congress last week. Even more despised are bank stocks.
In the 12 months through Friday, the diversified banks group within the Standard & Poor’s 500 Index fell 54 percent. Regional banks fell 49 percent.
For investors courageous enough to swim against the tide, now may be a good time to pick up bargains in the rubble of the banking industry. How can you tell which banks are on the safest footing?
The newly mandated federal stress tests for banks haven’t been run yet. Still, investors can get a pretty good idea of a bank’s viability based on two traditional financial-strength measures.
Start with the Tier 1 capital ratio, sometimes called the core capital ratio. Tier 1 capital is basically a bank’s book value, or corporate net worth. Banks are required to have Tier 1 capital equal to at least 4 percent of their assets. Assets for a bank usually consist mainly of the loans they have outstanding and can also include Treasury notes, bills and bonds held by a bank, and other investments.
While 4 percent is the required Tier 1 capital ratio, some banks have considerably more. Of the 119 publicly traded banks in the U.S. with a market value of $250 million or more, 73 have a Tier 1 capital ratio of 10 percent or better.
Grading on Risk
Next, turn to the risk-based capital ratio. In assessing this ratio, regulators grade the safety of assets held by a bank. The safest assets such as cash and Treasury bills are given a multiplier of zero. Those deemed to be moderately safe such as (ironically) mortgage loans have a multiplier of 0.5. Those considered riskier, such as commercial loans, carry a multiplier of 1.0.
If Gravel City Bank hypothetically had $30 million in Treasury bills, $40 million in mortgage loans, and $50 million in commercial loans, its risk-weighted assets would be $70 million (zero times $30 million, plus 0.5 times $40 million, plus 1.0 times $50 million).
A bank’s total capital is supposed to be at least 8 percent of the risk-weighted asset total. Total capital includes Tier 1 capital plus loan-loss reserves and certain types of debt.
Among the 119 publicly traded banks mentioned above, 22 have a risk-based capital ratio of 16 percent or better, as of their latest filings.
If one takes the intersection of the 73 banks that have better than a 10 percent Tier 1 capital ratio, and the 22 that score 16 percent or better on the risk-based capital ratio, the field narrows to 17.
Four Good Banks
Last week I looked at those 17 banks to select a handful that I think are good investment candidates now.
The ones I like are not household names, and many of them are small. They include the likes of Republic Bancorp Inc. of Louisville, Kentucky (with a market value of $392 million), SVB Financial Group of Santa Clara, California ($547 million) and Washington Federal Inc. of Seattle ($1 billion).
Republic Bancorp traded above $30 a share as recently as September. Lately the stock is about $19, trading at 12 times earnings and 1.4 times book value. No Wall Street analyst follows it; the only brokerage house that does is a Louisville regional firm, Hilliard Lyons, which rates it a “buy.” SVB Financial Group is the parent to Silicon Valley Bank. With its Silicon Valley location, it is heavily exposed to the ups and downs of the technology industry. In the fourth quarter it earned only 9 cents a share, down from 96 cents a year earlier.
Attractive Fundamentals
I like SVB nevertheless, partly because it trades at less than $17 a share, down from more than $50 as recently as October. That is only seven times earnings and 0.7 times book value.
Washington Federal is participating in the U.S. Troubled Asset Relief Program. It sold preferred stock and warrants to the Treasury Department in return for about $200 million. The stock, trading below $12, has been cut in half from a year ago. It trades at nine times earnings and 0.7 times book value.
For those who prefer a somewhat larger bank, I recommend BB&T Corp. of Winston-Salem, North Carolina (market value $10 billion). So far, BB&T has weathered the recession well. For example, earnings in the fourth quarter were 55 cents a share, down from 76 cents last year.
BB&T stock fetches about $16 a share, down from about $31 a year ago. It trades at 6 times earnings and 0.55 times book value. The dividend may need to be cut this year, but in the meantime the stock yields more than 11 percent in dividends.
The banking crisis seems as if it will go on forever, but it won’t. I suspect investors will make good money in selected bank stocks purchased now and held for two years or more.
Disclosure note: Neither I nor my clients currently own the banks discussed in this column.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
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