Norma Walton, 8 Reasons That Receivership Sales are Always at a Discount

Unfortunately I am something of an expert on receivership sales.  Back in 2013, my ex-partner petitioned our real estate portfolio into receivership without notice to our lenders. As a result, almost every property was sold via receivership or power of sale for a significant discount off the fair market value, all in a rising real estate market.  During that process, I became painfully aware of the eight reasons that Receivership sales are always at a discount.

Reason # 1:  Negative Publicity

Placing a property under receivership requires a court order.  Court proceedings are public.  As a result, there is publicity surrounding receivership sales.  When someone hears that a property went into receivership, the perception is usually that there must be something wrong with the property.  Generally receivership sales are ordered when there is controversy and contention between warring factions, be they partners, a lender and borrower, or family members.  This perceived stigma detrimentally impacts the property.  Negative publicity will reduce a property’s value.

Reason # 2:  The Process

In a private sale transaction, typically one buyer negotiates with one seller to purchase a property.  Receivers don’t have that option; they must run a sales process.  This usually means offering the property to market for a specified period of time with specific advertisements in specific publications, a real estate listing, and an offering to customers of the Receiver’s firm.  Receivers generally want to review all offers at the same time.  This tender process is a disincentive to a lot of potential purchasers.  Potential purchasers prefer to deal one on one with the seller of the property.  Most purchasers don’t want to be put in a competing arena with other purchasers.  Hence the process that Receivers need to run turns away many potential purchasers.

Reason # 3:  Uncertainty

Obtaining approval for a Receivership sale requires a Judge’s approval.  The Judge has a number of competing interests to address and if one of the parties objects to the sale, that objection often delays or stops the sale from being approved.  As a result, there is very little certainty in putting in an offer for a property being sold via receivership.  Until the sale has closed, the sale may be cancelled at any time.  This lack of ability to plan causes many purchasers to not bother offering in the first place.  The end result is so dependent on forces beyond the purchaser’s control that it discourages some purchasers from buying.

Reason # 4:  Higher Deposit Requirements

Receivers want certainty even though they cannot offer the purchasers certainty.  As a result, they usually require at least 10% of the proposed purchase price to be tendered with the offer to purchase during the tender process.  Generally the deposit cheque must be certified.  Hence a purchaser, before knowing if his or her offer is even going to be accepted, has to go to the bank and obtain certified funds for 10% of the proposed purchase price just to offer.  This is a major disincentive for many buyers and thus reduces the pool of potential buyers.

Reason # 5:  Complex Purchase Agreements

The standard TREB or OREA form is fairly straight forward.  Once you have dealt with it a few times, it is user friendly.  Not so with receivership forms.  Offers to purchase through receivership are typically at least four times as long as the OREA form.  They are full of legal language explaining all of the ways the Receiver can exit the deal and everything that must occur before closing.  A prospective purchaser usually requires legal advice just to understand the agreement before he or she can sign.  The need to seek legal advice before offering is a disincentive and reduces the pool of potential purchasers.

Reason # 6:  No Warranties or Representations

A Receiver cannot give warranties or representations.  As a result, a purchaser of a property under receivership takes the property “as is, where is”.  That means the purchaser must be comfortable with more risk than in a normal private real estate transaction.  A Receiver cannot represent the rents being collected on a commercial property, for example, nor can he or she warrant the status of the building systems in any capacity.  They guarantee nothing!  That reduces prices because purchasers must shoulder more risk than in a private sale transaction where there are almost always representations and warranties.

Reason # 7:  Lack of Specific Property Knowledge

The Receiver did not purchase the property.  They generally have not run it very long if at all.  They are not real estate experts.  They generally don’t understand the strategic buyers of a property or its highest and best use.  Their expertise is in accounting.  As a result, the property is generally not marketed as effectively as it would have been if a private owner sold it.  The person who bought it can usually market it better than a Receiver.  This lack of expertise reduces property value.

Reason # 8:  Firm Offers are Preferred

Receivers have to go to Court to recommend that a Judge accept a purchase agreement.  This takes a lot of coordination, effort and paperwork.  As a result, they ideally want to present firm offers.  Otherwise the purchaser could exit the deal after all that time and money is spent to secure approval.  Receivers generally won’t accept anything other than firm offers from purchasers.  This puts purchasers in a position to have to waive all conditions even though they may not have a good sense of the property and its perils.  Having to provide a firm offer instead of a conditional one always discounts prices.

 

Our real estate portfolio was sold at 70 cents on the dollar in a rising real estate market.  Watching that process made me acutely aware that it is a legal fiction that fair market value is ever achieved through a Receivership sale.  The eight reasons listed above guarantee that Receivership sales will always trade at a discount.

Wall Street’s Dirtiest Little Secret

As of Close of Business May 8th, no less than 53 multi-year experienced, Tax Free Income, Closed End Funds (CEFs) were paying 6% or more in federally tax free income to their shareholders.

18 issues (34%) paid 6.4% or above, and the average for the group was 6.35%. All portfolios are professionally managed by this dozen, well respected, long experienced investment companies.

Blackrock, Nuveen, Pimco. Putnam, Invesco, Alliance-Bernstein, MFS, Dreyfus, Eaton Vance, Deutsche, Pioneer, & Delaware Investors.

How difficult could it be to put together a well diversified, retirement income portfolio?

Most of these funds have paid steady, dependable, income for more than fifteen years, even through the financial crisis… several have been around since the ’90s

Yet your financial advisor has never mentioned them to you; you have never heard them advertised or reviewed in the financial press… Wall Street, it seems, would prefer that you didn’t know they exist.

But there’s even more to this story. These readily-available and much-higher-than-you’ve-been-led-to-believe-even-exist tax free yields can be purchased at bold discounts to their Net Asset Value, or NAV in Mutual Fund Terms.

A May 15th data search at cefconnect.com reveals that 85% of all Municipal Bond Closed End Funds (CEFs) were selling below their net asset values (NAVs), and of those, 20% were available to all investors at discounts above 10%.

Mutual Funds (I believe) are never available at discounts from NAV, and how many discounted munis has your advisor suggested to you since 2012 or earlier?

Municipal CEFs regularly sell at discounts, and this morning, nearly 60% were available to MCIM taxable account investors at discounts of 5% or more.

WHY THE WALL STREET COVER-UP?

Why aren’t you asking for more information?

Interest Rates Rising – the sequel

Mal Spooner is a veteran fund manager and currently teaches at the Humber College School of Business.
Mal Spooner is a veteran fund manager and currently teaches at the Humber College School of Business.

No doubt you’ve noticed about half the industry pundits cautioning that the US Federal Reserve is closer to ‘tightening’ monetary policy.  What this implies for us regular folk is that they will introduce monetary measures that will allow interest rates to rise.  We have enjoyed a very long period of inflation and interest rate stability following the financial crisis (a crisis almost forgotten by many).  Despite a recent slowdown in come economic indicators, efforts by governments around to world to jumpstart an economic recovery did bear some fruit.  The rebound in profitability, employment and growth has been particularly robust in the United States.  Both Europe and China are now making efforts to replicate this success by bolstering liquidity in their financial systems as the US did.

So what’s to worry about?  Savvy investors will have already noticed that interest rates in the world’s strongest economy have already begun to rise, even before the FED has taken any action.  This is what markets do – they anticipate rather than react.  Some forecasters predict that although interest rates are bound to trend upward eventually, there’s no need to panic just yet.  They suggest that there’s enough uncertainty (financial distress in Europe, fallout from falling energy prices, Russia’s military ambitions, slow growth in China) to postpone the threat of rising rates far into the future.

Yield Curves 2015-05-02_15-28-30

What they are ignoring is that the bond markets will anticipate the future, and indeed bond investors out there have already begun to create rising interest rates for longer term fixed-income securities.  The graph illustrates that U.S. yield curves have shifted upward.  The curve shows market yields for US Treasury bonds for various maturities back in February compared to rates more recently.  So what’s the issue?  If investors hang on to their bonds while rates are rising, the market value of those bonds declines.  This often comes as a surprise to people who own bonds to avoid risk.  But professional bond traders and portfolio managers are acutely aware of this phenomenon.  So they begin to sell their bonds (the longer term-to-maturity bonds pose the most risk of declining in value) in order to protect themselves against a future rise in the general level of interest rates.  More sellers than buyers of the bonds pushes down the market price of the bonds, which causes the yields on those same bonds to increase.

Many money managers (including me) have learned  that despite how dramatically the world seems to change, in many respects history does repeat itself.  For example, while writing my CFA exams back in the mid-1980’s, I was provided with sample exams for studying, but they were from the most recent years.  I figured it was unlikely that questions on these sample exams would be used again so soon, and managed to do some digging in order to find much older previous exams.  I reasoned there are only so many questions they could ask, and perhaps older exam questions might be recycled.  I was right! In fact several of the questions on the exam I finally wrote were exactly the same as the ones I’d studied from the old examination papers.

In my experience recent history is not useful at all when devising investment strategy or trying to anticipate the future, but often a consideration of historical events further back in time – especially if trends in important economic drivers are similar – can be very helpful indeed.

The consensus is that interest rates will rise eventually.  But it is human nature to stubbornly hang on to the status quo, and only reluctantly (and belatedly) make adjustments to change.  What if what’s in store for us looks like this:  Consistently increasing interest rates and inflation over the next decade?  This has happened many times before (see graph of rising 10-year Treasury bond yields from 1960-1970).

US Treasury Yields 1960 - 1970

Before you rant that things today are nothing like they were then (and I do agree for the most part) consider the following: Is the boy band One Direction so different today compared to The Monkeys then?  And wasn’t the Cold War simply Russia testing the fortitudes of Europe and America just like the country is doing today?  Weren’t nuclear capabilities (today it’s Iran and North Korea) always in the news?

Yes there have been quantum leaps in applied technology, brand new industry leaders in brand new industries.  China’s influence economically was a small fraction of what it is today.  So where is the commonality? The potential for rising interest rates coming out of a recession.  The US government began raising rates in 1959, which caused a recession that lasted about 10 months from 1960 – 1961.  From that point until 1969 the US economy did well despite rising interest rates and international crises.  But which asset classes did well in the environment?

Growth of $100 - 1960 to 1970

Could the disappointing 1st quarter economic data be hinting that we might also be entering a similar transitioning period?  Inflation is bad only for those unable to pass higher prices along to customers.  If the economy is strong and growing then real estate and stock markets provide better returns.  Since the cumulative rate of inflation between 1960 and 1970 was about 31%, investors essentially lost money in constant dollars (returns below the rate of price inflation) by being invested in the bond market.  They would have done better by simply rolling over short-term T-Bills.  An average house in the US cost about $12,700 in 1960 and by 1970 cost $23,450 – beating inflation handsomely.

Do I believe we will see a repeat of the 60’s in terms of financial developments?  Yes and no!  There will be important similarities – especially in terms of stock markets likely performing well enough and the poor prospects for the bond market. There will be differences too.  The outlook for real estate is clouded by the high level of indebtedness that has been encouraged by extremely depressed interest rates over the past few years.  Higher rates mean higher mortgage payments which might serve to put a lid on real estate pricing, or cause prices to fall significantly for a period of time before recovering.

Companies that have substantially financed their acquisition binges with low-cost debt will soon find that unless they can pass along inflation to their customers their profit margins will be squeezed.  Who will benefit?  Commodity producers have had to significantly reduce their indebtedness – commodity prices tend to stagnate when inflation is low, and even decline when economies are growing slowly.  In a global context, these companies have had a rough time of it.  It is quite possible that their fortunes are about to improve.  If Europe and China begin to enjoy a rebound then demand will grow and producers will have more pricing power – perhaps even enjoying price increases above the rate of inflation.

Do I believe any of this retrospection will prove useful?  I hope so.  The first signs that a different environment is emerging are usually evident pretty quickly.  If there were a zero chance of inflation creeping back then why are some key commodity prices showing signs of strength now?

recent aluminum price recent copper price data

If we begin to see inflationary pressures in the US before Europe and Asia, then the $US will depreciate relative to their currencies.  In other words, what might or might not be different this time is which countries benefit and which countries struggle. Globalization has indeed made the world economy much more difficult to come to grips with.  Nevertheless, there are some trends that seem to be recurring over the years.

There will be recessions and growth spurts.  In recessions and periods of slower growth, some formerly stronger industries and companies begin to lose steam as a paradigm shift takes place, but then other industries and companies gather momentum if the new reality is helping their cause.  This is why I’ve biased my own TFSA with commodity-biased mutual funds (resource industries, including energy) and a European tilt.  You guessed it – no bonds.

Any success I enjoyed while I was a money manager in terms of performance was because exercises like this one help me avoid following the mainstream (buying into things that have already done well) and identifying things that will do well.

 

 

 

 

 

 

 

S&P 500 Index: Morning After 401k Musings

March 2000 witnessed the S&P 500 Index breach the 1,500 barrier for the very first time… seven and a half years later, it was in just about the same position.

Inter-day October 15th, after an incredible bounce from its 56% drop through March 6th 2009, the S&P was just 20% above where it had been 14.5 years earlier… a gain of roughly 1.4% per year.

Just how low will it go this time? and are you prepared… this time?

The long term chart (Google “s & p 500 chart”, look mid page and click “max”) shows the volatility over the past fifteen years. Just for kicks, see if you can find the “crash” of 1987  (October 19th).

Could any stock market image be more beautiful? Could any be more in-your-face damning… tactically?

What if your 401k investment strategy had required selling before the profits started to erode?

What if your 401k strategy made you hold equity-destined cash until Investment Grade Value Stocks fell at least 20% before selective, patient, cautious buying began?

What if your 401k investment strategy called for at least 40% of your investment portfolio to always be invested in income purpose securities?… securities rising in price so far today, in the midst of a major sell off.

Such an approach has been available since the 1980’s for a lot of happy investors who have never had to change their retirement dates; and the same program has been available to 401k investors since March 0f this year…  but you have not been allowed to know about it!

You can’t use it because your 401k plan rules don’t allow you to invest in 40 year old “makes-a -lotta-sense” strategies, just because they have a new label and/or not enough millions under management… who’s protecting whom?

This is precisely how the big operators keep new and innovative solutions on the sidelines. Tough luck investors… you’ll just have to bite the bullet and watch your “by-design” speculative portfolios crumble  for the third time in fifteen years.

Pity, but one-size-fits-all rules are every bit as bad for your financial health as one-size-fits-all products. How are those TDFs doing… and with all that experience and mega millions under management.

 

The Investment Gods Created Volatility… and it was good

Have you noticed how paranoid people are getting about market “volatility”.

OMG, cries the DOL, we’re going to fine employers if their 401k plan participants don’t grow their balances as fast as the average plan around the country… thus making the Federal Government a participant in roughly half the 401k plans in every audit time frame.

Employers use investment plans (401ks) as an employee retention benefit… but by what stretch of the imagination are employers responsible for the financial ignorance/naiveté/ laziness/poor judgment of their employees?

Isn’t this just another overreach by regulators who seem focused on making it as hard as possible for private businesses to remain viable? Why not require unbiased investment education instead and create some productive jobs for a change… most adults are willing to accept responsibility for their own mistakes.

Since the dawn of investment time, market value change has been the lifeblood of investing and speculating… a distinction that “Modern Portfolio Theory” (itself a long-con of great imagination) has hypothetically correlated out of existence.

Without market volatility , there would be no chance of profit and no risk of loss. The absurd “Major Prediction Theater” proposes that past correlations and relationships will be repeated in the future, and that risk can be minimized by gaming with the numbers….

The investor need only select the right mix of speculations. But even if the mumbo jumbo is solid, theoretically, market value volatility remains the reality, and some funds, products, methodologies, and hypotheses outperform others… it’s the performance parameters that require adjusting, not the employer’s fiduciary responsibility.

So instead of relying on Wall Street’s most self-serving hypothesis ever, why not embrace the investment god’s gift of market volatility… as many of us have done effectively since investment puberty?

Regulators only appear to be stupid… they know that neither employers nor employees have the inclination to become proficient investors. They know that businesses fear the pox of a compliance audit… making compliance job designations the fastest growing, non-productive, industry in the economy.

And here’s the kind of decision-making the regulatory Gestapo produce:

“Mr. Jones, we’re fining you a gazillion dollars because your retired participants’ 401ks grew only 2% over the last 3 years and the markets were up 15%; clearly you failed in your fiduciary responsibility”.

“But these people are retired, your lordship.”

Their portfolios are producing over 6% in spending money, less insane federal income taxes (light bulb moment: think how a no tax on retirement income rule would benefit everyone), while the best of the best Target Date Funds pay around 2% before taxes .”

“Not my problem sucker, since when did income become the objective of a retirement program”.

2014 Resolutions – is it too early?

2014 Resolutions – is it too early to plan ahead?

Yes, it is only late October. No, no-one likes to make resolutions as most people fear the self-recriminations if they fail. So let’s call them guiding principles for 2014 instead!

1. Avoid credit to the greatest extent possible. Special offers arrive weekly in our mail box – many from institutions with which we already have a business relationship but also some of the “Dear Occupant” variety. And they all sound so tempting. Loans, lines of credit, new credit cards – the choices seem endless – and sooooo easy. For lifestyle items (toys, vacations, etc.), the wanton use of credit can be a death knell for your financial well-being. It is tough realising you are still paying for that vacation 6 months after you return and that 60 inch flat screen is rapidly losing its attraction a year later and the “interest free” purchase is starting to cause cash-flow problems.

2. When you decide you absolutely MUST borrow, shop around and keep your calculator handy. Of course, it is difficult to completely avoid debt. HOWEVER, when you do have to borrow, generally, the lower the interest rate the better it is for you – but beware of the so-called “interest-free” payment plans. NOTHING in life is free – don’t be fooled. The vendor isn’t making that offer without covering all of their costs in some manner. Maybe it is an “arrangement” or “set-up” fee; maybe the actual price is higher than normal. The seller has costs that have to be covered and they aren’t in business to intentionally lose money.

3. Pay off debts as quickly as possible. Especially credit card balances! In some cases, they can carry a rate as high as 2.4% per month compounded. That is nearly 33% annually –and yes, it is a usury rate as far as I am concerned – but tell that to our Federal politicians! To put that in real terms, a $1,000 purchase carried on a credit card for a year will actually cost nearly $1,300 in total. For a home mortgage, the shorter the amortisation period, the better off you will be. Go to www.mortgagecalculator.org and play with some numbers yourself – this site also produces some nice graphs for picture-lovers.

4. First, pay YOURSELF, not everyone else. Usually, we have too much month left over after our pay-cheque. If we wait to save money until everything else is paid, there’s never anything left. If we don’t see it, we don’t spend it. Talk to HR (yes, I know they are sometimes interesting people) and arrange to have something deducted from each pay cheque to buy Canada Savings Bonds – this is just one alternative. Some businesses will split your cheque and deposit part into one account and another sum into a different account – perhaps a savings account. Make sure you contribute monthly to your RRSP or TFSA. We make loan payments each month so why not make financial future payments the same way?

5. Plan for your future. If good things are to happen to us, we have to plan – the future will not take care of itself. We have to plan for long term goals such as education, retirement and major purchases. And let’s not forget emergencies such as unemployment, a falling economy, disability or death. We can’t rely on our employer and certainly not any level of Government – which leaves only a Fairy God-Mother. We must take action ourselves.

Talk to a financial advisor about your plans today!