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The Impact of Structured Finance on the Ghanaian Financial Services Industry in the Next 10 Years

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A Company can issue bonds to investors secured on the future profits expected to arise from part of its existing life business.

When a pool of financial assets (such as car finance, home or commercial mortgages, corporate loans,royalties, leases, non-performing receivables, and contractually pledged operating revenues) are structured and transferred to a ‘special purpose vehicle or entity'(SPV or SPE) it is known as a Securitisation transaction.

Generally, most securitisation transactions involve a two tier transaction in which the originator of the assets to be securitised transfers such assets to a wholly-owned SPV.In turn the SPV transfers or pledges such assets to another entity, which issues rated securities in the capital markets that are collaterised by such assets. This second tier entity can be another SPV or a multi-seller commercial paper conduit and can provide funding by issuing medium term notes or commercial paper.

Types of Securitisation transaction

Usually with securitisation transactions, the transfer of rights to assets can take one of two main forms, true sale or synthetic securitisation.

1. True Sale securitisation

In a true Sale securitisation, the originator (for instance a bank selling mortgages) sells the assets to the Issuer. the assets are serviced by the servicer who happens to be the Originator, with respect to say the mortgages sold to the Issuer(i.e.) and the originator continues to collect the principal and interest from the borrowers on behalf of the issuer on such mortgages and see to all default mortgages as well.

The significance of true sale is that the first-tier sale of the assets from the originator to the SPV is structured as a “true sale” such that the assets are removed from the originator’s bankruptcy or insolvency estate and cannot be recaptured by any trustee. Thus, the issuers are usually incorporated as insolvency remote entities; and may not engage into any transactions other than those necessary to effect the securitisation what is known as “limited purpose-concept” by which virtue the SPV will not be allowed to issue any additional debt or enter into mergers or similar transaction.

The transactions can be conducted as conduit, whereby the purchaser purchases and securitises assets from a number of different originators. This is done by through refinancing by issuing commercial paper into the capital market. Banks usually engage in conduits by arranging securitisation for their clients, or standalone where the purchaser only purchases assets and issues as asset-backed securities in the context of a single securitisation transaction. No commercial paper is issued.

It must be said here that, the legal characteristics and economic substance of the transfer will be the primary determining factors as whether the transaction is a true sale not a loan.

2. Synthetic Securitisation

In a synthetic securitisation transaction the originator does not sell any assets to the Issuer and therefore does not obtain any funding or liquidity under the transaction. The originator enters into a credit swap with the issuer in respect of an asset or pool of assets, transferring the originator’s risk to the issuers. Under this contract, the issuer pays the originator an amount equal to any credit losses suffered in respect of such assets or pool of assets. The Issuer’s (SPV) income streams in a synthetic transactions are the fixed amounts paid by the Originator under the credit default swap and interest amounts received on the collateral. These transactions are typically undertaken to transfer credit risk and to reduce regulatory capital requirements.

3. “Whole-Business” Securitisation

Apart from the main two forms above,” whole business” securitisation is sometimes used to finance a stake in private or management buy out of the Originator.

This type of securitisation originated in the United Kingdom. It involves the provision of a secured loan from an SPV to the relevant Originator. The SPV issues bonds into the capital markets and lends the proceeds to the Originator. The Originator services its obligations under the loan through the profits generated by its business. The Originator grants security over most of its assets in favour of the investors. In terms of cash flow, there are three most common types of securitisation transactions:

Collaterised Debt- this is similar to traditional asset-based borrowing. The debt instrument need not match the cash flow configure ration of any of the assets pledged.

Pass-Through-this is the simplest way to securitise assets with a regular cash flow, by selling participation in the pool of assets i.e. an ownership interest in the underlying assets so that principal and interest in the underlying assets collected are given to the security holders;

Pay-Through debt instrument-this is borrowing instrument and not participation. Investors in a pay-through bond are not direct owners of the underlying assets but simply investors.

One significant thing with SPV is that unlike with ordinary operating companies, whose charters typically provide for maximum flexibility, the charters of SPVs provide for the entity to have only those powers that are necessary to accomplish the purpose of the securitisation transaction. Thus the SPV in a securitisation will have the power only to purchase the particular receivables contemplated by the transaction, issue the related capital market securities, and make the payments on them and so on.

The reason for these restrictions is thought to keep the risks of the SPV’s own bankruptcy as narrow as possible: the smaller the range of the entity’s activities, the smaller the risk of a bankruptcy.

Securitisation is based on the underlying assets being securitised. Rating agencies spend a lot of time to estimate the credit risk for all underlying assets in Securitisation transaction. Other risks considered is the prepayment risk.-the risk that a portion of the assets in the underlying pool may be repaid early. Payments and settlements in Ghana are considered to be good. Prepayments can reduce the weighted average life of the pool and as a result expose investors to considerable uncertainty over future cash flows.This can be mitigated by separating the payment of the principal and interest or the conversion of fixed rate returns to floating rate.

Third Party Risk

Collateral is not the only important factor in structured finance transaction. A servicer risk would be particularly strong in Ghana. This is the case that the collection of payments, distribution to investors and performance tracking will fail. Because in Ghana credit rating is not popular.

In a Securitisation or structured finance transaction, a lot of third parties are involved who must fulfill their various responsibilities to make the transaction go on successfully .”Time is money”, it is said. Other third party risks include trustee managing succession of servicing in case of servicer default, notifying investors and rating agencies of breaches and defaults, and holding cash payments to prevent servicer misuse of cash flows; manager responsible to balance the competing interest within a transaction.

Financial Risks (Interest Rate Risks, Foreign Exchange Rate Risks, Devaluation Risk)

Financial risks usually cover interest rates, foreign exchange rate & availability, currency and inflation risks. Inflation really affects the originator in a Securitisation transaction for reasons like raising the cost of the transaction which can delay its completion. Some governments are also sceptical about foreign investment in their country and sometimes prevent the repatriation of funds by foreigners outside. Devaluation and interest rate just like inflation can also affect Securitisation negatively especially when provision has not been made in the transaction deal for that. Russia is a good example. International funds are often cheaper than local ones, but given the fact that the payment to receivables is sold locally, and paid in local currency, using foreign loans creates exposure to the risk of currency depreciation.

Political Risk

Because cross-border transactions are conducted such that assets generate cash flows in the domestic currency while the securities backed by those assets are denominated in foreign currency, there is the risk that regardless of the credit strength of the underlying assets, the issuer might default on the payment. The following relevant known political risks are identified:

Expropriation risk:

The act of taking something from its owner for public use. This involves the act where a government takes over assets or accounts of local parties in the event of financial crisis.

Nationalisation:

Transfer of business from private to state ownership. This is not usually experienced in the West as in South America and Africa. In relation to Ghana’s political situation, this is not envisaged.

Convertibility risk:

This is the risk that in a national crisis, the government might impose a moratorium on all foreign currency debts because of a financial crisis in the country.

Change of law:

The ruling government can change the laws overnight and this can affect a structured finance. Sometimes for economic and political reasons, tax laws are enacted which might not be to the advantage of the originator in terms of the cost increase to certain elements which could increase the purchase price of the product on completion and can jeopardise the securitisation transaction which must be made cheaper if it is to succeed. For example an increase in the fuel tax can affect the entire transaction because tax neutrality is paramount to securitisation transaction.

Legal & Documentation Risks

Following change of law in political risk discussed above, possible legal risks to a Securitisation transaction include inadequate legal, legislative, and regulatory framework on tax, financial and money market & securities. Sometimes the case and administrative laws in the country concerned are not developed. These issues are of great concern to investors and for that matter the originator will have to deal with this risk.

In asset-backed securities(ABS),however, the legal and documentation risks include uncertainty surrounding the transfer of assets from the seller/originator to the SPV (i.e. ‘true sale’) the need to ensure that holders of ABS receive full control over the underlying assets; the bankruptcy remoteness of the issuing SPV.

This means reviewing all the covenants in relation to the separation of the SPV from the seller; the legal roles of the trustee and servicer across all relevant jurisdiction including Ghana to curtail operational and execution risks associated with the payment and receipts of transactions.

Because of the changes in deal structures and considering the legal and financial framework of Ghana, legal and documentation risk will be very high.

Regulatory Risk

The risk that originators and other lenders will not be treated fairly. There should be a laid down regulation on profit-sharing, regulations on the rated instruments and most importantly what structure should the SPV that issues the securities be.

Liability Structure Risk

This risk is the issues associated in which with the tranching or slicing of securities brings conflicting interests which if not checked may disrupt the appropriate distribution of receivables to end-investors. The key to structured finance transaction is the payment waterfall which set the covenants for paying the interests and principal and allocation of losses among investors. This can be sorted with over-collateralisaton tests which ensure the existence of sufficient collateral in the underlying pool of assets to cover principal payments; and interest coverage test to ensure that there are sufficient interest proceeds to cover interest payments to note holders.

Levels of Risks

Rating agencies usually would have to assess the totality of the risks envisaged in each transaction before assigning a rating to the security. Thus the potential for any shortfalls in receivables and the adequacy of any credit enhancement to ensure that the end-investors are assigned the right level of default risk. Cross-border transactions for example require specific analysis regarding the potential limit that could apply to the rating of the notes because of the potential default of a government and the possible application of a moratorium by a government in times of crisis.

Benefits of Securitisation

The use of Securitisation is not limited to one specific asset or income flow. The application stretches beyond the existing bank-funding products and equity funding arrangements. The challenge is the approach with which a Securitisation is considered and the ability to measure the impact thereof on the future of the business. This stems from the fact that Securitisation is cash flow driven and not earnings-improvement driven.

Generally, securitisation can offer the following benefits and we would later analyse to see whether or not it would benefit Ghana.

Efficient access to capital markets: when transactions are for example structured with credit ratings by a recognised credit rating agency on most debts, pricing is not tied to the credit rating of the originator. This is very significant if the originator is not credit worthy.

Limitation on issuer-specific’s ability to raise capital is reduced: securitisations can minimise an entity’s inability to raise capital because capital raised under securitisation becomes a function of the terms, credit quality or rating, prepayment assumptions and prevailing market conditions.

Illiquid assets are converted to cash: Securitisation makes it easier to combine assets which otherwise could not be sold on their own, to create a diversified collateral pool against which debt can be issued.

Raise capital to generate additional assets: capital can quickly be raised such as releasing long-term capital for any allowable purposes like completing capital project and purchasing additional assets.

Match assets and liabilities to minimise risks: a well-structured securitisation transaction could create near perfect matching of term and cash flow locking in an interest rate spread between that earned on the assets and that paid on the debt. This means that Ghanaian business entities can raise enough funds without necessarily providing collateral for security because of the transfer of risk.

Raise capital without prospectus-type disclosure: A conduit securitisation transaction allows one to raise capital without disclosure of sensitive information of any sort; in fact information is kept confidential.

Complete mergers and acquisitions, & divestitures more efficiently: Assets can be combined or divested efficiently under Securitisation transaction. By dividing assets into smaller parts against which debt is issued it can become possible to do away with other business entities which are no longer profitable.

Transfer risk to third parties: Financial risk on loans and other contractual obligations by customers can be partially transferred to investors under securitisations.

More funding beyond bank lending: A structured Securitisation transaction enables the originator to raise funding while maintaining the right to the profit on the receivables. However, these funds will not be linked to its credit rating but rather the credit rating is on the special purpose entity created for the Securitisation transaction. By incorporating an offshore SPE, many businesses in Ghana with poor credit rating might potentially raise funds for any purpose.

The overall effect of securitisation of bank loans and credit aggregates is likely to be a reduction in the level of credit extension by the monetary sector and a reduction of similar magnitude in the M3 money supply. This is to say that the banking sector closes its balance sheet by setting off some loans against some M3 deposits.However,the original borrowers still have obligations but to the SPV not a bank and institutional investors still own assets which are now tradable securities not M3 deposits.

Structure of Ghana’s Financial System

The financial system comprises of

1. Bank of Ghana

I. Savings and loans bank

II. Discount houses

III. Finance houses

IV. Leasing companies

V. Forex Bureaux

2. Securities and Exchange Commission

I. Stock Exchange

II. Brokerage firms

III. Investment Management companies

IV. Trustees and Custodians

3. National Insurance Commission

I. insurance Companies

II. insurance Brokers

III. reinsurance Companies

The banking system in Ghana is structured to serve the needs of all citizens as much as possible. At the end of 2005,the banking industry was made up of Merchant banks, Universal banks, Commercial banks, development Banks,ARB Apex banks, and Rural Banks; with a total growth of its assets by 17.62%.

The Non-Banking Financial institutions (NBFI) sector is made up of Savings and Loans Companies, Discount Houses, Finance Companies and Leasing Companies. Total assets for the Non-Banking Financial Institutions also grew by 47.98% which were mainly triggered by loans and advances, investments, other assets and fixed assets. The Discount houses hold 82.61% of the overall total investments of the NBFI sector.

The new Banking Law, Act 673, which became operational in 2005 with its higher Capital Adequacy Ratio requirements, new sanctions regime, as well as higher governance standards ensured that banks remained generally compliant with regulatory and prudential requirements.

The Securities Market in Ghana

African stock exchanges face a number of challenges before they could enter a new phase of rapid growth. The most critical issue is to eliminate existing impediments to institutional developments. These include a wider dissemination of information in these markets, the implementation of robust electronic trading systems and the adoption of central depository systems. Ghana has since established a central depository system in November, 2004.

The Ghana securities market is regulated by the SEC. The Ghana Stock Exchange is underdeveloped with reference to exchanges in US, Europe and even South Africa. South Africa for example has market capitalisation of $180 billion, one of the largest in the world with Ghana’s market capitalisation of $11 billion.

Considering that Ghana has had just one Securitisation transaction -structured finance-with no records for research, and the position of Ghana’s macro-economic situation, it was found expedient to look at the Securitisation transaction in South Africa. Even though Securitisation transaction is still at an early stage of development in South Africa, it has grown rapidly in recent years and it would be a suitable “benchmark” after which to carve Ghana’s Securitisation transaction.

According to the available information, the first Securitisation in South Africa was aimed at mortgage Securitisation; developments were very slow over the 11 years. Then in 1992 Securitisation was applied to corporate equipment rentals and leases up until 1997 through 2000s with Securitisation on trade receivables, properties, future rebate flows, future cross-border flows and CLOs.

South Africa’s motive for Securitisation transaction was to benefit from more efficient financing and profit maximisation; improved balance sheet structure and finance ratios; improved risk management; and lower economic and regulatory capital requirements among others.

Although the Securitisation transaction is still in its infancy in south Africa, available records show that issuance involving domestic banks in South Africa (i.e. private banks) has increased from R250 million in 1989 to a whopping R26 billion by the end of October 2005. Based on a recent study conducted on the UK market which suggests that Securitisation provides investors the opportunity to attain a higher after tax return in comparison with after tax returns being generated by equity related property investment , Securitisation in South Africa is being applied as an acquisition tool in acquiring properties and as a portfolio optimisation and value unleashing tool.

Securitisation regulations in South Africa compares to international Regulatory Practices similar to those in the United States of America and regulate the manner with which Securitisation assets and income flows are transferred from the originator to the SPV and operational aspects and efficiencies of the SPV.

Different opinions exist in the South African market regarding conformity to Securitisation regulation. One centres on the use of specific words “Bank or deposit-taking Institution” that only South African banks can originate a securitisation.The other opinion is on non-conformity as appropriate if a company or business other than a bank originates a Securitisation.

The onus of the matter is that Securitisation transaction is also designated within the regulation as an activity which is not limited to the business of a bank under certain conditions; thus allowing companies other than a bank to embark on Securitisation transaction.

The Ghana Securities Exchange Commission’s annual report for 2004 does not mince words about the position of the Ghana Securities market. It reported that “despite the modest decline in index performance in percentage terms, the GSE still maintained its position as one of the best performing stock exchanges in the world in 2004 for the second time running.” Market capitalisation of listed Companies on the Ghana Stock Exchange increased by 84.90 trillion cedis to 97.61 trillion cedis from just 12.6 trillion cedis.In dollar terms, market capitalisation went up by 654.0% from US$1.43 billion at the beginning of 2004 to US$10.8 billion at the end of 2004.

Unlike the stock market, the bond market in 2004 was relatively low posing “a serious market development challenge to the commission”. The turnover value of listed corporate bonds in 2004 declined from US$606,600 in 2003 to US$73,414 a decline of 87% whilst government bonds also declined by 71%.The value of listed corporate bonds in 2004 was US$6.79 million compared to US8.98 million in 2003.

The corporate bond market remained relatively quiet. However, the US dollar denominated corporate bonds traded on the market increased by $41,783 to $115,200.

The government of Ghana is determined to use municipal, corporate, government and agency bonds to improve activity in the primary market. As a result of that, the Bank increased accountability and transparency in line with International Financial reporting Standards (IFRS) best practices in its financial reporting and disclosures in 2005.

Coupled with this, other relevant Government policies were strengthened to reinvigorate revenue collections and consolidate public expenditure aimed at reducing the domestic debt in relation to GDP .As a result of that the government started a programme of reducing domestic debt in relation to GDP to enable the private sector access credit and lead the growth process.

The significance of Bank of Ghana in the financial system is that the bank is the provider of technical support for the legal and regulatory reform of the financial system to minimise risks and ensure legal certainty especially for electronic transactions; and also monitor various financial laws at different stages of development.

There is no doubt that people learn from experiences of others so do nations about the successes and failures of other nations especially with regard to something new and complex like the concept of Securitisation transaction. It is recommended that Securitisation in Ghana is modeled on the experience of South Africa’s Securitisation transactions with some changes in the legislations to fit the situation in Ghana.

Ghana’s private sector is beset with many constraints for no doubt, however, the other side is that, there are so many opportunities either untapped or unidentified comparative as well as other natural and mineral resources already in large quantities. There is potential for more effective exploitation of these endowments. But continued reliance on a few commodities with low prices and wages subject to fierce international competition in slow global markets have left the country vulnerable to hardship. These products could be structured and securitised.

Training of players of Securitisation transactions like, the originator, servicer, legal advisers, accounting adviser, tax advisers and others must be continuous about the technicalities of Securitisation transaction from now till the take-off. There should not be any mediocrity as is the characteristics of government and government agencies.

Investors and potential originators must also be educated on the benefits of Securitisation as an alternative for traditional capital formation besides equity and debt which is common to the Ghanaian business community. Providing better understanding of, cash flow drivers behind Securitisation transactions, credit rating agencies and also credit enhancement issues. This would trigger a strong desire for this form of capital formation to put Ghanaian businesses in the race to compete favourably on the international scene.

The technicalities of grasping the intrinsic techniques of properly analysing the segregation of assets and income flows from the company that owns them to the SPV which is meant to control the assets for the benefit of investors, must be well understood by the investment community.

A lack of genuine understanding of the drivers behind a Securitisation transaction, the ability to measure the impact on future operations as well as the initial costs involved in Securitisation creates difficulty in clearly defining the true incentives for conducting Securitisation amongst South African companies. Thus a comprehensive understanding of such amongst Ghanaian companies will boost Securitisation transaction.

One issue that needs to be tackled very well is the Tax Laws to make the Securitisation transaction work. Ghana operates a free-zone scheme and this can be extended to encourage Securitisation transaction. Certain areas within the country could be assigned as ‘free zone for Securitisation’and ‘use as tax haven’ to nurture and groom Securitisation in Ghana.

The regulatory environment through which Securitisation is conducted, coupled with capital market infrastructure to support adequate pricing of all risks associated with all forms of Securitisation transaction-conduit, synthetic or “whole-business”.

Finally, it is recommended that, research into the legal framework on bankruptcy, tax, and commercial laws relating to structured finance and Securitisation in particular should be encouraged among the Ghanaian academia.

Ghana indeed has an enabling environment suitable for Securitisation transaction. Key issues to drive this on might include as mentioned above extension of existing laws like Tax, Bankruptcy and commercial Laws to include treatment of Securitisation transaction.

Ghanaians are strong-willed, forceful and patient. When the expertise is acquired for Securitisation with the training of the players above, good governance of the other key government policies like MIDR and Strategy for 2004-2008‎, improvement on the Ghana School Financing activity‎ they will serve as catalyst for Securitisation.

Considering the experience of South Africa over the past decade, the experience of the developed economies in Securitisation transaction and the macroeconomic and the investment climate continue to improve as it is now ,in the next 10 years, Ghana will not be too farther away from engaging in Securitisation transaction if not already there.

Reference:

1. ‘Securitisation in South Africa-a revolution for local funding’, by Bagley et al(2003) Fitch Ratings available online accessed 20/07/2007

2. ‘Securitisation: A public tool?’ Treasury working paper, by Davis,N ,available online treasury.govt.nz/workingpapers/ accessed on 20/07/2007

3. ‘Securitization.’Wikipedia, the free encyclopaedia. Reference.com accessed 25 Feb. 2007.

4. “Consider Securitisation to improve liquidity in the South African property market” by Eugene G van den Berg, accessed on vinodkothari.com accessed on 04/08/07

5. “Note on the impact of securitisation transaction on credit extension by banks” in Quarterly Bulletin December 2005 by N. Gumata and J .Mokoena

6. “The awakening of securitisation in south Africa”, by Van Vuuren online available vinodkothari.com/secafric.htm

7. Africa -Ghana organising in the informal sector(on line) Available from oecd.org/dataoecd/html (accessed 29th April 2006)

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Source by John Whonderr-Arthur, Ph.D. Esq

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Where to Find Those Efficient and Hardworking Affiliates?

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Everyone wants a hardworking affiliate, employee, associate, partner, or even spouse, and why not? It’s the next best thing to doing the work yourself. However with the massive outbreak of work and income opportunities available online, how can you beat everyone else and find that one (or more) ideal person who will make your online business explode with success? Here are some of the most ingenious and uncommon ways to snag the idea affiliates for your affiliate program

Direct Sales Agents

Direct sales people are really one of the most enterprising, hard-working individuals in business. They mostly work on commissions or rebates and are willing to literally go door-to-door offering their products to anyone and everyone they bump into. Imagine how much easier their job would be if they could be an affiliate and simply work via the Internet and a mobile device or desktop.

Also, most direct sales people tend to carry more than one brand in their product arsenal so signing up as an affiliate would be almost the same type of work but using a different approach.

Colleges and Universities

Many college kids would be interested in a part-time income opportunity if it would mean funds to help pay for their education, loan, or partying. All you have to do is make sure to offer them products they can endorse as a student.

Freelancers

Did you know that the U.S. Census Bureau’s latest annual report show that 75% of U.S. businesses used freelancers in 2011? Freelancers earned a whopping US$990 billion in 2011 which is a 4.1% increase from the previous year. The only industries where the number of freelancers decreased were in insurance, finance, and construction. Most probably your affiliate program isn’t a part of these 3 industries.

Furthermore, online business and finance experts are predicting the growth to increase incrementally every year even with an economy that is improving. People just want income security and more control over their earnings. With the spate of lay-offs, it’s understandable why many would prefer to work as an affiliate than as an employee.

Scout For Them At Affiliate Conventions

There are annual affiliate conventions held in different cities around the country. You should try to catch one when it is held somewhere near your location. The average turn-out for these types of conventions has increased regularly over the years. Last year, many of them were sold out weeks before the event.

Advertise!

The US Census Bureau has said that as of 2012, 15% of Americans are poor, 43% of young adults depend on their parents to some extent for money. Even more surprising is that the median income of young adults in 1982 was $31,583 and last year it was $30,604 for the same age group! Income is dropping and people are looking for ways to earn additional income outside of their 9 to 5 jobs. That’s where you can come in playing the hero and helping others realize their dream income.

Finally, go online and talk about your product. Make the affiliate marketers come to you and have the luxury of picking the best candidates. You will need some help in marketing your affiliate program so target a marketer who’s experienced in affiliate program and SEO.

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Source by Lina Stakauskaite

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Recession Is Here… Six Costly Mistakes Home Sellers Make During Recessions And How To Avoid Them

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The U.S. is officially in a recession. What is a recession? A recession is a business cycle contraction or general economic decline due to significant drop in spending and other commercial activities. Most pundits and politicians will blame Covid-19 crisis for the recession, but even pre-Covid-19 the proverbial writing was on the wall.

The U.S. had over 120 months of economic growth, which was the longest expansion in the modern history. Other indicators, such as negative yield spread on treasuries (long term bonds having lower interest rates than short term T-notes), were pointing to an imminent change of the economic cycle and an impending recession. The only real question was: when and how bad?

Then Covid-19 came… If the cycle was going to change anyway, Covid-19 acted as a huge and unexpected accelerant to make the recession much more immediate and severe.

Inevitably during recessions all classes of real estate, including residential homes and condominiums, will be negatively impacted as lower consumer spending and higher unemployment rates affect real estate prices and marketing times.

Here are the six costly mistakes home and other real property sellers make during recessions and how to avoid them:

Mistake #1: This will pass and real estate market will be hot again soon

First thing to remember is that real estate cycles are much longer than general economic cycles. Even if the general economy recovers, which eventually it always does, a typical real estate cycle takes as long as 10 to 15 years. The cycle has four key stages: Top, Decline, Bottom and Rise.

Let us consider the last real estate cycle, which lasted approximately 14 years:

  • 2006 – Prices hit the Top
  • 2006 to 2012 – Prices Decline
  • 2012 – Prices hit the Bottom (Trough)
  • 2012 to 2019 – Prices Rise*
  • 2020 – Prices hit the Top
  • 2020 to? – Prices Decline

*NOTE: In 2016 the national residential real estate price index reached its pre-recession 2006 peak levels. It took 10 years for the real estate market to recover.

The way to avoid this mistake is to recognize that real estate cycles take years to run and plan accordingly. Additionally, nobody knows for sure when the prices will hit the top or bottom until after the fact.

Mistake #2: Low interest rates will make the economy and real estate market rebound

Between 2006 and 2011 the interest rates (Fed Funds) were continuously cut by the Federal Reserve Board and went from low 5% to almost 0%. However, that did not stop the real estate recession and depreciation of property values.

Undoubtedly, low interest rates made the economic decline and real estate recession less severe and saved some properties from foreclosures, but it still took six painful years for the real estate market to hit the bottom and then four more years for the prices to go back to their pre-recession levels.

Some markets had never fully recovered. For example, residential home prices in some parts of California, Arizona and Nevada are still below their 2006 highs.

To avoid this mistake, one needs to realize that although low interest rates help stimulate the economy and the real estate market, they do not cure them.

Mistake #3: I don’t need to sell now, so I don’t care

If you do not need to sell until the cycle plays out, which typically is over ten years, then you will not be as affected, especially if you have a strong equity position, limited mortgage debt, and solid liquid assets.

However, it is good to keep in mind that “life happens” and either professional or personal circumstances can change and we may need to sell property before the downturn runs its course.

Furthermore, if a property has a mortgages and its value declines to the point being “upside down,” meaning the mortgage loan balance exceeds the value of the property, then the options of selling, refinancing or even obtaining an equity line of credit, will be significantly limited.

This does not mean that everybody should be rushing into selling their real estate if there is no need to do so, just keep in mind that circumstances may and often do change and property options will be affected, so plan in advance. As one wise proverb says: “Dig your well before your thirst.”

Mistake #4: I’m selling, but I won’t sell below my “bottom line” price

This is a common and potentially very costly mistake. Generally speaking, every seller wants to sell for the highest price and every buyer wants to pay the lowest price. That’s nothing new. When selling real estate, most sellers want to achieve a certain price point and/or have a “bottom line.”

However, it is important to understand that the market does not care what the Seller, or his/her Agent, think the property value should be at. The market value is a price a willing and able buyer will pay, when a property is offered on an open market for a reasonable amount of time.

Overpricing property based on Seller’s subjective value or what is sometimes called an “aspirational price,” especially in a declining market, is a sure first step to losing money. When a property lingers on the market for an extended period of time, carrying costs will continue to accumulate and property value will depreciate in line with the market conditions.

Additionally, properties with prolonged marketing times tend to get “stale” and attract fewer buyers. The solution is to honestly assess your selling objectives, including the desired time-frame, evaluate your property’s attributes and physical condition, analyze comparable sales and market conditions, and then decide on market-based pricing and marketing strategies.

Mistake #5: I will list my property for sale only with Agent who promises the highest price

Real estate is a competitive business and real estate agents compete to list properties for sale which generate their sales commission incomes. It is not unusual that Seller will interview several agents before signing an exclusive listing agreement and go with the agent who agrees to list the property at the highest price, often regardless if such price is market-based.

Similarly to Mistake #4, this mistake can be very damaging to Sellers, as overpriced properties stay on the market for extended periods of time costing Sellers carrying expenses such as mortgage payments, property taxes, insurance, utilities and maintenance.

Furthermore, there is the “opportunity cost” since the equity is “frozen,” and it cannot be deployed elsewhere till the property is sold. However, the most expensive cost is the loss of property value while the real estate market deteriorates.

During the last recession, we have seen multiple cases where overpriced properties stayed on the market for years and ended up selling for 25% to 40% below their initial fair market values.

The solution is to make sure that your pricing strategy is based on the market, not empty promises or wishful thinking.

Mistake #6: I will list my property only with Agent who charges the lowest commission

Real estate commission rates are negotiable and not set by law. A commission usually represents the highest transactional expense in selling real properties and is typically split between Brokers and Agents who work on the transaction

Some real estate agents offer discounted commissions, in order to induce Sellers to list their properties with them. But does paying a discounted commission ensure savings for the Seller? Not necessarily.

For example, if the final sales price is 5% to 10% below property’s highest market value, which is not that unusual, due to inadequate marketing, bad pricing strategy, and/or poor negotiation skills, it will easily wipe out any commission savings and actually cost the Seller tens of thousands of dollars in lost revenues.

The solution is to engage an agent who is a “Trusted Advisor,” not just a “Salesperson.” A Trusted Advisor will take his/her time and effort to do the following: 1) Perform Needs Analysis: listen and understand your property needs and concerns; 2) Prepare Property Analysis: thoroughly evaluate your property and market conditions; 3) Execute Sales and Marketing Plan: prepare and implement custom sales and marketing plan for your property; and 4) Obtain Optimal Results: be your trusted advocate throughout the process and achieve the best possible outcome.

Finding such a real estate professional may not be always easy, but it certainly is worth the effort and will pay off at the end.

In conclusion, this article has outlined six costly mistakes real estate Sellers make during recessions and how to avoid them. The first mistake is not understanding that real estate cycles are long and take years. The second mistake is a misconception that low interest rates alone will create a recovery. Another mistake is not realizing that circumstances may change and not planning in advance. Mistakes number four, five and six pertain to understanding the market value, proper pricing and selecting the right real estate professional.

By understanding and avoiding these mistakes, real estate Sellers have significantly better chances of minimizing the negative impact of a recession while selling their properties.

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Source by Robert W. Dudek

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Useful Tips To Build The Best Gaming Computer

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Every gamer will want their computer to be the best gaming computer among their peers. Sometimes, with a little knowledge and tips and tricks, it is possible to build the best gaming computer and show it off to your peers. This article will show you how:

1) You can’t get the best gaming computer from computer retailers

If you want to get the best gaming computer, you have to build your own. Different gamers have different requirement for their gaming machine. Unless you are willing to pay a high price, you will not be able to buy a commercial computer that fulfills all your gaming needs. The only option you have is to build your own gaming computer.

2) You don’t have to be rich to build the best gaming computer

It is not necessary to burn a hole in your pocket to build the best gaming computer. With some due diligence, do some market research and compare prices around the marketplace. Merchant such as TigerDirect and NewEgg give regular discount to their products and you could save a lot of money if you catch them during their promotional period.

3) Most expensive parts do not have to be the best part

Sometime, the latest model or the most expensive model does not have to be the best part for your computer. It requires various components to work together to form the best computer system. When choosing a computer part, what matters is how well it can integrate with the rest of the components. Compatibility is more important than individual performance. What use is there if you spend lot of money on the latest quad-core processor and find that your motherboard doesn’t support it?

4) You don’t need to change the whole PC to own the best gaming computer

It is a misconception that you have to change the whole gaming machine to build the best gaming computer. If you already have a good barebone system, what you need to do is to upgrade the necessary parts and your gaming computer can roar back to life instantly.

5) Brand is important

Unless you want to see your computer system malfunction every few days, it is important that you purchase the parts from branded manufacturers with strict quality control. Motherboard brand such as Gigabyte, ABIT, ASUS are some quality brands that you can consider

If you follow diligently to the tips stated above. You will be on your way to build the best gaming computer. While price can be an issue, it is better not to scrimp on important computer parts such as motherboard, CPU, RAM and graphics card as it will cost you more to upgrade in the future.

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Source by Damien Oh

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