Insurance Real Guide

“A thing long expected takes the form of the unexpected when at last it comes.”- Mark Twain. Hardly a day goes by when I don’t pick up a paper or watch the news and hear another journalist or economic prognosticator ratcheting on about the looming threat of inflation. I half expect to see people lined up outside the local Home Depot, clamoring for their wheelbarrows to carry their unwanted cash to the bank, much like the days of the Weimar Republic in Germany in the 1920s.

But as we are reminded by Mark Twain, the expected does not always occur. So let me offer a possible alternative in the form of inflation’s ugly cousin – deflation – and how that might affect commercial real estate in the not-so-distant future.

As those who followed the late economist Milton Friedman will attest, inflation is and always will be a monetary phenomenon: Too much money chasing too few goods, causing a general rise in the level of prices of goods and services.

The key word here is chasing. In real estate this means higher cost for material and labor which translates into higher building costs and ultimately higher rents. To combat inflation, central banks fight back with higher interest rates equating to higher borrowing cost to builders and owners.

The most frequent cause of inflation is the soaring deficit our government is running and the resulting massive expansion of the money supply. Under normal times this certainly would sound the inflation alarm, but in a period of de-leveraging like the one we are in today, the velocity of money is much more important than the amount of money. Too much money is just too much money when it is not moving through the system.

Consider the Japanese economy, where the mounting debt is equal to 170 percent of GDP, the largest among developed nations and almost twice that of the United States. They have been battling deflation for decades with interest rates near zero. Their stimulus efforts went to prop up “zombie banks” and did not allow the market to establish a clearing price for the collateralized assets. The net effect has been a prolonged period of reduced demand and lower prices for most assets – including real estate.

Back in the States, where our stimulus is not getting outside the banks to allow for new loans that fuel demand, it is unlikely that the velocity of domestic funds will increase anytime soon.

Changed spending habits fuel deflation

Consider the current U.S. economy where consumer spending accounts for nearly two-thirds of our economic output. With real wages in decline, excess capacity in the labor market, a contraction of available credit to consumers and a potential secular shift in spending habits among consumers – the savings rate for U.S. households has risen from nothing to more than 5 percent of income in a short period of time – it is doubtful that we will be able to rely on the Jones’ consumption patterns to stoke the economic engine sufficiently to produce inflation. When a cyclical recovery does occur, it is likely to be sluggish for quite some time.

This leads us to another assumption that foreign borrowers will no longer be willing to finance our deficits and will begin to diversify their foreign exchange reserves driving down the value of the dollar creating higher prices in commodities (most commodities are priced in US dollars) and other goods. The largest foreign holder of US Treasuries is China, where the economy is heavily dependent on exports to the US (less than 8% of the Chinese population has any discretionary income). It is improbable to assume that the Central Bank of China will not continue to support its own economy by continuing to purchase US dollars and thus make their goods more affordable to the US shopper.

So before we slip into a boring narrative on macro economics lets bring this back to the topic on hand and how deflation, rather than inflation, might be the peril we need to be watchful of and how that will affect commercial real estate in the near future. How will that affect commercial real estate in the near future? We have already seen a general decline in rents across all commercial property types by as much as 50 percent in some sectors. The cost of building continues to decline, although at a much more subdued rate, but without available credit, it is improbable that there will be enough demand to spur new development. Although the economy is stabilizing, there is unlikely to be a sustainable force of consumption to maintain historical growth rates.

With adversity comes opportunity. Investors who have over-leveraged will discover that risk does not pay during deflationary periods and cash becomes king. Opportunities will continue to arise as the calamity unravels and a new generation of capital flows into the market. This, of course, will take years to play out and good sound counsel will again be at a premium.

Mike Eyer is an advisor with Sperry Van Ness / The Group Commercial in Fort Collins, CO. He can be reached at mike.eyer@svn.com or follow his blog at http://mikeeyer.blogspot.com

If you are thinking of buying your own home, you will hear the words title insurance somewhere along the process. Many consumers are not exactly sure what this is.

For the most part, title insurance is almost always required by the lender. This insurance is used to protect the lender against loss resulting from legal claims by others against your new home. In some states, lawyers will offer title insurance as a portion of their services in examining the home’s title and providing a title opinion as to whether it is clear or not. The attorney’s fee may include the title insurance premium or in some cases it may not. In other states, a title insurance company or title agent directly provides the title insurance.

It is important for consumers to understand that the lender’s title insurance policy does not protect the consumer. The same is true with the prior owner’s policy; it does not protect you. When you need to protect yourself against claims by others against your new home, you will need what it is called an owner’s policy. The truth is should a claim occur, it can be financially devastating to the homeowner who is uninsured.

It is good to keep in mind that if you buy an owner’s policy, it is much less expensive if you buy it at the same time and with the same insurer as the lender’s policy.

Consumers should also know that the home seller may not require, as a condition of the sale, for you to purchase title insurance from any particular title company. The mortgage lender will, however, require that the title insurance is from a company that is acceptable and reliable. As the homebuyer, you can choose a company that meets the lender’s standards.

Generally speaking, a few weeks before the closing of the escrow, the title insurance company will issue what is called a “Commitment to Insure” or preliminary report or “binder” containing a summary of any defects in the title which have been identified during the title search. There may also be listed any exceptions from the title insurance policy’s coverage. The commitment to insure is sent to the mortgage lender for use until the title insurance policy is issued at or after the closing.

If you wish, you may have a copy sent to you or to your lawyer, so that you can examine it and object if need be to the contents.

Consumers should compare rates between different title insurance companies. This can result in big savings. Make sure you ask about the services and limitations under each policy so that you can decide whether coverage purchased at a higher rate may be better for your needs.

In many states, title insurance premium rates are dictated by the state and those rates may not be negotiable. If you are buying a home which has changed hands within the last several years, ask your title company about a “reissue rate.” This can be much less expensive.

When purchasing a brand new home, make sure that your title insurance covers claims by contractors. These claims are known as “mechanics’ liens”.

Mortgage lenders or title insurance companies will very often want a survey done in order to mark the boundaries of the property. A survey is simply a drawing of the property that details the perimeter boundaries and marks the location of the home and any other improvements that might be on the land.

You might be able to save some money if a past survey is available and no changes have been made to the property in the interim. You should check with your lender or title insurance company on whether an updated survey will be acceptable.

Bearing in mind, that risk itself is similar to taking a journey towards a target you are not sure to reach safely, it is fair to assume that the less knowledge we have about a particular thing we wish to engage in, the greater the uncertainty we will face.

To get the odds in our favour to reach our goal successfully, we need to study the following four points first.

1.What could be a possible cause of derailment of our proposed investment.

2.What are the things that could stand in the way of reaching a successful outcome.

3.What are the valid arguments for, and against, the probability of success or failure.

4.What is the extent of our awareness of the risk we are taking, or are we making a decision under partial ignorance.

Applying these tests before making a decision is important. Since it not easy to know the answers to all the questions, many people do not bother and tend to be guided by their intuition.

To play the forex market by intuition, to back horses by intuition, to play in casinos by intuition, all this of course, is a formula for disaster.

If the more information we have about what we need to know provides a greater chance of success, then we must make it our business to get it. Knowledge and information are the odds you need in your favour. Whatever the investment, it is not prudent to make a decision under ignorance. If you cannot accumulate enough information about the investment you want to make, stay away from that deal and wait for another.

Of course, there are different types of investments, and therefore information and knowledge has to be pertinent to the particular investment.

If we are talking about horses racing, we would need to know about the state of the going, meaning does the horse like soft ground, or hard ground, does it run better on a left hand turn track or a right hand turn track, what distance is it best at, what draw has it got, who is the jockey, what opposition is it running against etc.

When we are talking about a football game, there are equally a series of questions that have to be answered. Are all the star players in the team, are they playing at home,against whom are they playing, and so forth.

Playing the markets is a game based on a great deal of skill, but sometimes there are certain conditions which demand extreme caution, because any amount of skill can be derailed by events not always available for consideration in good time.

Currency markets are vulnerable to a large number of factors which must be taken into account, especially when volatile conditions are present.

One can either study the particular field, or be guided by experts and consultants who like some doctors, can be good, or extra good, but it is still better to take their advice than to do it alone. Of course if you only have a small cold, there is probably no need for a doctor. In the case of a major illness, you turn to the doctor. By the same ruling, if you invest very small money, you tend to use your own brains, but when playing in hundreds of thousands, it is prudent to seek the best help one can get, or certainly gather a great deal of knowledge and information before making a move.

By careful process in gathering as many odds in your favour before firing, you will find that things will turn out more profitable, and certainly less risky.

Precaution is an enemy of risk. Everybody knows that it is wise to take precaution, but not all take it. The few that do all they can, are wealthier and healthier, than the many who tend not to bother.