MONEY 65 - REAL ESTATE SALES AGENTS

THIS IS MY 65^TH BLOG ON UNDERSTANDING MONEY TOOLS

In my last blog I briefly covered the topic of buying a new versus resale home. In this blog I will cover the employment associated with both as a new home real estate sales agent and an independent sales agent. They have pros and cons associated with the professions.

New home sales:

-       Most of the time you are an employee of a corporation, especially the large public companies, not an independent agent nor a contract person.

-       As with all sales business in real estate you need a real estate sales or brokers license in the state you are doing business.

-       Being a full time corporate employee you may have certain benefits such as health care and sometimes dental, optical, and retirement plans are offered.

-       In an employee/company relationship the company will dictate business policies and procedures.

-       Work hours are regular such as 10 AM to 5 or 6 PM certain days of the week, however meetings and completion of paper work can go well beyond those hours.  In addition you typically have weekly sales meetings.

-       “Big Brother” at its best. Your company sales office and models may have separate burglar alarms. Many times this information goes to the main office. The company knows when you arrive and when you leave. Many times phones calls go through the company’s main office, therefore they know when you use the phone and for how long.

-       A five day work week is normal for an employee/agent, and these days usually include weekends when most traffic comes through.

-       In this agency relationship you sacrifice independence, however the large companies spend millions on national, regional and local advertising to drive traffic (customers) to their developments. The customers/clients and information belong to the company, not you. Most likely the company will expect you to follow up with each person on an ongoing basis, both in writing and on the phone.

-       Work environment can vary from a trailer in a parking lot to a conversion of model home garages made into very nice offices.

-       Number of home models in a development can vary from one example to models representing each of the floor plans offered. In days past builders built more models to help sales, these days they want to limit financial exposure/risk and typically build only one to three models. Some homebuilders will sell their models to investors and lease back, other builders will retain ownership and hope prices go up.

-       Training by the company and strict policy is adhered to.

-       You don’t have to drive people to show homes, but your commute from home to a designated development can be a long drive. The company will tell you where they want you to work, and that may be temporary or permanent, either for initial training or as needed. As you are an employee the mileage to and from work normally is not an allowable IRS deduction.

-       Commissions on sales are less than the norm in the resale market place. The onsite agent receives approximately 11/2 to 1/3/4 percent of the base price of the home less the incentives that the builder gives. No commissions on options. Commissions are not paid until closing on the finished home and that can be 90 days to one year. Most big builders will place you on a “draw” applied toward commissions so that you can live and pay your monthly expenses. Many times builders place two agents on a project. In this case the norm is to split the commissions between agents. The best policy is to split commissions versus compensating each employee directly for sales. This way agents will take better care of “all” clients, not just their own.

-       As with any employee/company relationship you need to perform to meet the company’s pro-forma and expectations.

-       If you are allotted a draw against commissions and you don’t have any sales in 4-8 weeks your time with the company may be limited.

-       If you leave a company or are released from the company you need to have an understanding ahead of time in writing as to if you are entitled to any commissions on sold but not closed homes. In most cases this varies from no commissions paid to a small commission. With new home sales once the contract is made the agent “lives” with the buyer through the entire construction process along with the construction manager and other company employees. If you leave, another agent needs to take over the responsibilities and he/she will receive most of your commission.

-       Corporate paperwork. The State approved contracts that homebuilders use are longer including options and addendums to contracts.  These contracts can easily be 30-45 pages in length.

-       When a person walks through the sales door it is up to the agent to qualify the person and find out why they are there. Most companies want the agent to get as much information as possible, at a minimum name, phone and email address. This information is kept on hardcopy and also then entered into the computer and sent to the main company office.

-       The agent is involved through the entire sales process including, but not limited to, setting up meetings with the design center for options and attending to client needs/wants until home is closed. The agent takes the initial offer for purchase however the sales manager or someone else from the corporate office needs to negotiate the price and terms, and accept or reject any offers.

-       The agent does not go to the closing, but after closing will usually give out the house keys and garage door openers…and perhaps a gift from the company.

-       Some on-site agents can’t handle the idle time that can happen with new home sales. There are days you may not have any customers into the sales office. If you are the only agent on the project and can’t leave for lunch, you have an eight-hour day to face by yourself. I’ve heard it be said that new home sales is like ice fishing without the benefits of alcohol.

Why be a new home sales agent?  Many real estate agents feel that all the bureaucracy and lack of independence is worth it. An onsite agent can make a lot of money during good times, with very little out of pocket expense. Most agents I know who have done this type of work for years love it. There is a lot of flip-flopping between companies in tough market times, as the grass always looks greener.

Next let’s look at an independent real estate sales agent: 

     -     Select a good, reputable broker or brokerage firm.

-       All the independence you desire and work only the hours you want. You are compensated based upon your own performance.

-       If you are an agent you will need to have your license with a broker, this might be an individual or a large company.

-       You pick up all expenses in your own business and need to attract your own customers to make them clients. Some companies pay for national advertising and make agents pay a portion, or have a reduced commission split to help pay for this. There is no free lunch!

-       The independent agent probably will use their car more than the new home sales agent, and this mileage is normally deductible from an IRS standpoint.  Keep good mileage records in case you are audited. Many independent agents buy or lease expensive cars for reflection of success.

-       You may have to entertain to attract customers. Again, keep good records and all receipts in case you are audited. These expenses apply to customers and clients only.

-       From an outsiders perspective real estate agents make too much money and it is easy work; wrong. It takes a lot of work, and hours can be irregular, including evenings and weekends when most people are not working.

-       Commissions are usually higher than onsite sales. This range is usually 3-7% depending on whole or split commissions before the broker holding your license takes their percentage. Commission norms can vary from one area or city to another.

-       Many times agents need to have “floor time” or be in the office to take phone calls, or attend to people who might walk in the door.

-       Many sellers want their agents to hold their homes “open house”, especially weekends when there may be more traffic.

-       The independent agent gets involved directly in more aspects of the business.  Corporations have many layers of employees that work specific duties.

-       Today, independent agents may work out of their car on computers and cell phones.  They may also prefer to work from home versus an office.

-       There is no draw or salary, and it can take several months to start your business so be prepared to have 6 to 12 months cash available to support yourself and family while you build your business. It is not news that most people fail in the real estate sales business. Many people get involved in real estate as a “hobby” or after retirement and drop out in the first year. It is expensive to maintain a license with continual education requirements, board of realtor fees and state license fees.

-       To render support starting out many companies offer a team type of effort/selling. I would recommend this for people new in the business. It can give you the mental support to keep going, and you will learn from others who are seasoned in the business. Select a mentor.

-       Check with your broker as to your additional cash outlays including business cards and errors and omissions insurance. As a sales agent you need to inform your auto insurance company that you will be using your car for business. Your insurance rate will go up, but you want to make certain you and your passengers are protected if you are in an accident.

-       Normally, the customers and clients you develop belong to you, not the broker, however this is something to establish while interviewing with the company. Contracts are between the client and broker, not you as agent or broker agent.

-       You need to have an agreement in writing with the brokerage firm as to who pays expenses, such as local advertising.

Bottom line, there are significant differences between on-site sales and being an independent agent. It is very personal. Also, an independent agent can represent buyers with a new home purchases. Commission splits are normally the same as with any buyer representation in your area.  The commission is due when the home is built and sale closes.  Some builders will pay a portion of the commission through the building process before the closing to help the broker/agent financially.

We have covered generalities in two types of residential home sales in this blog. I hope that these run-downs of real estate sales give you a feel as to the occupation. With either one you should look at it as a “profession” holding high ethical business standards.

  

MONEY 64 - HOME BUYING

THIS IS MY 64^TH BLOG ON UNDERSTANDING MONEY TOOLS

In this blog we are going to cover purchasing a home, both new and resale.

Let us first look at new home buying. Is it better to buy a new home or used/resale home? That answer depends on you. I am going to use the analogy here of is it best to buy a new car or used car? A new car costs more but comes with warranties, probably little in need of repairs for the first few years, better mileage and if you are not practical in fixing things yourself maybe the way to go. The older car might cost half as much, but you may have to buy tires, fix a leak and the looks of the car are dated and the finish not so nice.

New home buying procedures and things to think about:

-       Look at all the homes in developments in the areas you have an interest.

-       Check out builder reputations and financial stability. In 2008 many builders went out of business and with that all warranties. Many developments were left unfinished and hurt prices for all.

-       Look at floor plans that suit your needs and are livable for you and your family.

-       To not waste your time or a real estate agent’s time, get pre-approved by a bank or mortgage lender to determine what price range you will qualify for.  Financing rate commitments are a tough one. Banks will not lock in loans for more than 30-60 days. Be prepared to pay a slightly higher interest rate. In warmer climates see if you can finance into the mortgage a swimming pool, if desired. This is sometimes difficult with a needed appraisal.

-       Once you believe you have the location and narrowed your selection      of builders I would recommend spending time with the on-site agent. The reason for this is that you need to feel comfortable working with the builder and the people, mainly the agent, design center people and the construction supervisor.

-       Understand the construction of the homes, and compare quality with other builders. Here are some things to ask: R-factors for walls and ceilings, is exterior construction using 2X4’s or 2X6’s, what is the energy rating of the windows, if basement window wells meet code (any chance of basement flooding?), if there is a basement what is water table in the area, if basement is foundation walls concrete block or poured concrete, if floor is slab concrete is it post tension and in colder climates is in floor heating available, is insulation bat or blown in, are the air ducts wrapped to avoid heat/air loss, and on and on.

-       Next step is to see what lots are available for the type of floor plan you want. Do you want an east/west exposure or a north/south exposure?  In very hot climates a western exposure to the great room or living area may not be what you want, or sunshades may need to be down most of the day cutting out light. Visit the model and the lot you have selected at different times of the day to see how the sun hits the lot or model home, will car lights at night rake across your windows?  Some builders will permit you to place a hold on a favored lot for a certain amount of time, perhaps 90 days; some require a refundable deposit, others do not.

-       If there is any question as to the area or development, for instance a flood plain where additional insurance is needed, confirm this yourself with the city and county departments.

-       You have been given the base price of the home, but option selections are next. Some builders include many niceties, others use a low price point to lure buyers in and you might need many options. Some builders want you to select options so the home feels more custom. (Sometimes more options for a buyer make it a little more difficult for the construction supervisor. Everything is special ordered for a particular home.) Most of the time you meet with your agent and go through the list of all options. This is coordinated with the interior design people working for the company or a design center.  Most agents are not compensated for options up and above the base price so their advice should be sound. Ask what the typical buyer is ordering, that is a good feel as to market. If you go too far on options you may never see your money back, however if you are expecting to live in the home many years you may want more options as the home will be more livable to your standards.

-       Each development will have a range that most people order options up and above the base point. Typically, a lower end price will result in lower amount of options for the norm, perhaps 10%. Higher end homes have wealthier people buying so money may not be an issue. The typical amount for options in this category may be 25-35% above base price.

-       With large developments you may have construction going on for several years around you, dust and noise. On a positive note if sales track schedule the prices of the homes should keep increasing.

-       Making an offer. Many people don’t realize that when you are buying a new home or builder spec home, you are entitled to make an offer. The builder can accept the offer, reject it or counter. The offer can be verbal, but in most states real estate contracts need to be in writing and bound by something of material value, most of the time being  money. The sales agent can take the offer but will need to consult with the sales manager, and the sales manger may need to consult with the company’s treasurer or finance person. Many times the builder has incentives for the buyer offering money toward closing costs, home options, landscaping or something else. This is all related to how strong the market is in your area. Many times builders are more flexible to offers on spec homes than new home builds. If the builder has had a spec home on the market for several months, they want to get the liability off their balance sheets and sell the home.

-       The purchase contract. This contract will be an amended form of the State approved real estate contract meeting State law. Addendums will be added to include your options and any other requirements. You will need a certain amount of money down for earnest money related to the base price of the home, and then in many cases a larger percentage down on options. The reason for this is that the builder is ordering options for your home and individual tastes. If anything goes wrong and you can’t perform on the purchase they want to be protected.

-       Building of a new home can take 3 months to a year or more. Ask your agent on the time frame. Smaller, less expensive homes should take less time to build than larger homes.

-       Do you have a home to sell?  Some builders will take a contract with “contingency of sale” of your home. Some builders work with independent outside agents to handle the sale of your existing home for you. Bridge loans from banks are next to impossible to get these days.

-       Get to know and like the construction supervisor, he can be your best friend. Give him a small present now and then, it pays off, sometimes they will do extra favors for you.  If you have issues see the agent and supervisor immediately. When under construction visit the site often and measure things. If something is incorrect, you want it fixed. If you wait, it may be too late or very expensive to remedy. Find out the hours it is permitted to be on site. If workers are around you will need a hardhat to meet city code.

-       After closing on the home most builders offer a one-year complete builder warranty. You also will get extended warranties on material items such as a roof.

-       There are normally “walk through” dates, during the construction phase and after the closing. At the one-year warranty period most builder warranties expire. I recommend you engage an independent home inspector working on your behalf at this point to go through everything completely. The construction supervisor works for the company, you need someone on your side.   A home inspector will go up on the roof, check flashing, check all electrical and give you a report you can keep for when you sell your home. Currently, this type of inspection runs about $350. and is well worth the money.

Bottom line on new home builds, it’s new, less to go wrong, warranties on materials and appliances, and a home that is more energy efficient than an old one.

Re-sale or used homes and things to think about:

-   You can buy a used home with or without a real estate agent.

-       Because of location and land value this type of purchase may be just as expensive or your only option, as in parts of California or New York City. Normally, a resale home may be less expensive than a new home, depending on age. For many parts of the country that experienced a boom period between 2003 and 2007 construction and quality may not be as good as it is today in a more competitive market. That was a period when we could not find enough trained laborers and craftsmen.

-       Let’s assume you find the right location and a home that meets your floor plan and elevation requirements. Most of the time when you buy a used home you should expect to put money into it to meet your wants after you close. The norm for the least expensive updating would be paint, new carpet and tile. The next outlay of money would probably be to update kitchens and baths that can be expensive with new cabinets, baths/showers, and appliances. After these rooms and items it would probably be new windows for energy efficiency, plumbing and electrical.

-  With or without the assistance of a lawyer you need to fill out an offer to purchase a property on a State approved form. These can be purchased on line, through office supply retailers and many times at a title insurance company. As in all offers the offer will be accepted, rejected or countered upon. Perhaps addendums to the contract are needed. All pages should be initialed or signed and attached to the offer.

-       With any used home it is highly recommended to have an independent inspector do a report on the property.  This inspection includes not only construction defects but also infestation from insects such as termites. If you use a respected real estate agent they should be able to guide you through the process, and have a stable of sources to go to for inspections. Each State is different in the time frame permitted for inspections and this will be stated in your contract.

-       A place and time will be agreed upon for closing. Generally, this may be a title company, law office or real estate company.

It is always advisable to get a lawyer if in question on legalities, such as contracts, easements, water rights, setback requirements, etc.

I hope this has given you thought to both types of purchase. As with most things I write about it only touches the surface and books can be written on the subject matter. I write to hit salient points and get your mind working.

MONEY 63 - REAL/PERCEIVED VALUE

THIS IS MY 63^RD BLOG ON UNDERSTANDING MONEY TOOLS

In this blog we are going to discuss the relevancy of “real” versus “perceived” value. Then, we will hit some practical sales applications that should benefit you in finding employment, raising money or being a better manager.

Real and perceived value can exist separately or somewhat in unison in the art world, everyday life and where we are heading in the business world. Hopefully, this will help you in finding employment, raising money, hiring employees and more.

Of the two, the most important to me is perceived value.  In every financial prospectus and red herring (that precedes the prospectus) there is a disclaimer that goes somewhat like this, “past performance does not guarantee similar future results”.  All too often decisions are made based almost entirely on past performance or what I refer to as “real” value. Real value is the historical time frame to the current time, really nothing to do with the future. The benefit of real time is that it is accounted for. “Perceived” value/perception of value only exists in the “mind of the beholder” and every individual is different. The real genius comes into play when you need to take the history of a business and carry it forward into the future with success. Like an engineer who takes the whole and breaks it into parts and pieces, the good businessman will separate out the parts of a company and look at the positives and negatives. Using this information to an advantage he/she can create a new perception of themselves or their company.

Whether it is you trying to get a new job or perhaps trying to sell your business idea or company to a private party, venture capital firm or bank it is all about perception of value. If it is a new job you are interviewing for know the problems and weaknesses of the company where you are applying and tell them how you can solve their problems, add value and make them more money. In reality there are no guarantees of this, but the perception that you can do this is all-important. It is about “painting the future picture” of where you are going. Yes, your past is important but as we know there are so many variables that affect business there certainly are no guarantees of future success.

Let us relate this to the business world. In 1996-97 Apple Computer was failing, hitting a low stock price of $4-6/share. I remember talking with two young men who were working for Apple and they were out looking for other employment.  The perception of value and success were very low and real. In steps Steve Jobs to again head up Apple. He had new perceptions as to where the company was going and Wall Street followed.  Stocks are a prime example of perceived value. Count the number of companies selling for many times their earnings, Google, Amazon included here; all perceptions of value.

All too often higher level management jobs go on the basis of history, big salaries included. That is all based on current real time, few managers hold up to what was perceived of them.

There are many stories of Wall Street people who were paid a ton of money because of their family names or education and employers had a perception of value. High-level jobs go on the history of the individual, and sometimes “the good old boy” network. Many times, in both these cases, the end results are not good.

You need to convert perceived value of yourself or your company into real value. I have worked with certain techniques to accomplish goals mainly in sports and the best is “visualization”.  Get your hands on a book called “Psycho-Cybernetics” written by Maxwell Maltz in 1960. The effects of mind over matter and visualization in sports and life is tremendous. A person who visualized themselves doing a particular movement versus one who actually did the maneuver had very similar outcomes. Using this technique in business and making money will be similar. See the end result and how you get there. Since Maltz’s writing his book several modern day gurus have used the same techniques including Tony Robbins and Zig Zigler.  Their books are very good.

Let me delve into other business related areas and examples that might help you. First, I have little respect these days for most corporate management and frankly feel they are missing the boat; may I say stupid?  Many companies are unattached and impersonal when it comes to employee relations. That is what they want. They get the same in return, an employee who is not faithful to the company, fearful of losing their job and not reaching full potential. In my many years in top management with companies and owning companies, it has been my experience that you get much more productivity with happy employees who want to be at work and are team players.  When I worked at Energetics, Inc., a very successful oil and gas exploration company, we contracted with a consulting psychologist to work with employees at all levels to accomplish this. It works. Good employees need to feel wanted, need to be happy and content with their work, and then production follows. We all have problems and issues, however if you can take a problem and not be afraid of it, but welcome the challenge and see it in a friendly manner we will overcome the problem and resolve the situation. Don’t hide from the problem, face it.  One technique is to close your eyes, picture the problem as a big balloon. As you concentrate more on the problem and the balloon it becomes smaller and less meaningful in the scope of life. 

In sales this is really so important. I see fearful sales representatives, fear of failure, not meeting quotas and fear placed on them by sales managers. Wow, the wrong way to go. Customers can feel these “vibes” and pull away, sales go down, not up.  Customers do want professional attention, but they also want the experience to be fun, happy and satisfying….a win/win situation.  They enjoy the day, you enjoy the day.

Have you ever heard of the “Peter Principle”? The term used to exist, not sure it does today. Essentially you can take an employee and raise him through the corporate ranks. At some point, you end with a barrier. The person is no longer happy at what he does, or is not capable of doing the best needed in that position. Let me give you an example. I was running a company in Denver year’s ago. Analyzing sales reports one individual just was not making expected sales quotas. We had very good sales training by an individual in the company, so training was not the answer. (Normally, I don’t blame an individual for not performing but management for lack of good training. I am only of average intelligence, the same holds true with most employees. Each individual learns differently and at different rates of speed.) In this case, I asked the employee to join me in my office. We got into a real heart to heart. He was middle aged, two kids at home, married and needed the income. What was wrong?  He hated his job and what he did for a living but needed income. So many like him today. Here is how we resolved the matter. When I found out he would be better in a different type of sales and product I told him I would get on the phone and help him get new employment through my contacts. The gentleman actually was so relieved to spill his guts out to me on this, that he started crying. It is so sad we don’t all work together for a better corporate environment and happier world! Each individual has “transferable” skills, and therefore this person needed a new product to better support his skills.

In sales some people are better with tangible products and others can sell intangibles. Let me explain this. A good example of an intangible product is life insurance. As long as a company is A rated and highly respected there is little difference between one company and another. The numbers are calculated on actuarial statistics so one company should not be much higher or lower in cost than another. It’s a tough sell. A person needs lots of relatives, friends and country club contacts!

The other type of sales is the selling of a tangible product. The closer you can get to a unique product, one of a kind with quality, the better. You may have to do an explanation of features of the product and benefits to the customer, but you hopefully have a very good product without much competition.

As long as I am on the stupidity of corporate America permit me to continue. One of my favorite topics! Many corporations don’t want to hire employees who have been trained by other companies or have certain mindsets. They want to train the person exactly how they have been doing business in the past and want a “robot”, or someone who thinks as they do. This is a perfect business plan for failure. You need a balance of left brain and right brain thinkers.  I went to school grades 1-12 with this mindset so I know: “you will do as I say”, no free thinking….only there was more of a German accent connected to it! There is a very successful and wealthy Japanese businessman who has been written up many times. He likes to hire young people who have not been tarnished by business, but positive, free-thinking young souls who bring fresh ideas to the table. Companies need new ideas from the outside to stay ahead.

I believe a good company let’s their employees have freedom. Management needs to monitor actions and only rein the employee in if they have overstepped boundaries. People want to be independent, feel like they are contributing with new ideas for the company’s advancements, success and have a feeling of accomplishment.

Here’s both a life and sales tool that could perhaps help you.  As we have grown into the “New World Order” many of the millennials have forgotten about old traditional respect. I have a good friend in sales in his mid-30’s. He is quite successful in sales and uses “yes sir, no sir”, and the same with “miss and ma’am”.  People respect him for this and above all remember him as it is unusual in this day and age of curtness.

Don’t forget the journey though life is what is important not the end. If you reach the end you are either dead or wondering what is next and that will leave you unfulfilled.

MONEY 62 - WORLD BONDS

THIS IS MY 62^ND BLOG ON UNDERSTANDING MONEY TOOLS

Sometimes things occur that have never happened before that anyone can remember so that always peaks my attention, and I thought I would discuss the topic in this blog. Perhaps many of you already realize these issues, but if you don’t this may be of interest, as the long-term effects could have a big impact worldwide.

The topic is world interest rates and currencies and the resultant impact on you and me.  Let us address the US first. By now we all know about Quantitative Easings 1, 2 and 3 with the Federal Reserve that equated to a $4.5 trillion dilution of our currency that was started shortly after the banking fiasco that was exposed in August, 2007. Now, other countries deeply in debt are trying for the same, starting big time with Japan this past October. If you look at the interest rates on bonds of the top 12, or so, countries in the world, exclusive of Russia (which is a different story altogether), you will find that the interest rates offered currently are anywhere from 1.5% to negative .75%, heralded by Switzerland. Similar to the United States many of these countries are in major debt (exclusive of Switzerland and Germany), the economies weakening and deflation is concerning. Why would interest rates go down in weakened times versus up? Why would countries, including the US do this? What will the affect be?

The world’s countries have places to go for money, the US goes to the Federal Reserve, other countries use Central Banks and the International Monetary Fund. You have heard about the liberal lending going on these days. The money does not flow to you or me, it goes to Wall Street, the big banks, the wealthy and emerging countries.

Let’s first address two points for countries initiating low interest rate policy; one is to counter deflation and economic stagnation, and second is to dilute a currency so that a country will pay back debt with cheaper currency. This is all artificially created. Common sense tells a person that if an economy weakens, to attract buyers to bonds interest rates need to rise, but just the opposite is happening. Now, we get to the “whys”.  Countries have run out of alternatives for solving economic problems and deflation. No one has an answer remaining, but to print more money, try to make exported goods more attractive and hope for the best down the road. The best down the road is normalcy, the worst and most likely scenario is higher unemployment and high inflation, making it worse on the Middle Class. Many people in the US feel they are protected from a world downturn, can’t be. We are very international. The US may only export about 12% of goods produced here, however we manufacture all over the world and those profits are booked on Wall Street. If the world’s economies weaken, there will be an adverse affect on our companies and economy. Some current stats show that of the Fortune 500 companies overseas sales account for about 45% of their business and 50% of their profits. The reason that profits are greater in other countries is cheaper labor and fewer regulations than we have here. Wall Street doesn’t want selling going on so they are turning a blind eye to this obvious issue.

One of the worst feared long-term effects is high inflation. The commodity guys are strongly selling this for people to buy gold as a hedge and other hard assets like land and real estate. As you see, commodity prices have fallen. The historical hedge has been gold, but there are no guarantees. Gold is a commodity that cycles and is volatile in price. It now is trading at 30% discounts from the highs.

Who is hurt the most with the lowering of interest rates around the world? You see this daily in America and it is no surprise. The Middle Class person and retirees are hurt the most. The wealthy have plenty of money, better lawyers and tax accountants to figure out tax loopholes. Also, they have many more opportunities for investing than the common person. The poor, on the other hand, don’t have much money.

The government encourages savings. Let’s work through an example using today’s interest rates. A bank savings account earns perhaps 1/4-1/2% interest. Are you wealthy enough to have $1 million? You are very lucky if you do. If you are ultra conservative and place that amount in your bank savings account you earn $2500 to $5000/year. That is relatively nothing and you will immediately start depleting your principal.

Here is the kicker. It almost forces people to take risk and where is the risk money going? Into the big banks/investment banks and Wall Street driving the stock markets irrationally higher.

Ending, let’s address Russia. With the Western countries sanctions on Russia it has hurt their economy. Russia relies on commodity sales of natural gas, oil, iron, etc. With their economy weakened it has forced them into doing what is the norm of a weakened economic situation. To rally their currency, the Ruble, Russia needed to significantly raise the interest rate on its bonds to attract money and investors. The OPEC nations, mainly the Saudis, wanting to hurt oil exporting countries like Russia and Iran have maintained oil production thus because of supply and demand has lowered oil prices. This may continue for some time. Russia, Iran and several other countries need $100 plus/barrel of oil to maintain their debt payments, and right now that is not doable.

Have you heard of BRICS? We have addressed this on previous blogs. This stands for a group of major countries that have united for economic reasons and reform their financial institutions. This includes a new form of currency.  BRICS stands for Brazil, Russia, India, China and South Africa. Recently, Russia has sold military equipment to India, as well as Turkey, to maintain this unification.

MONEY 61 - SHELL COMPANIES

THIS IS MY 61^ST BLOG ON UNDERSTANDING MONEY TOOLS

In this blog let us venture into the arena of taking a company public, and some ways of doing so.

Why would you want to take your small company public?  We have covered reasons in the past, but let’s recap. Money! You hope that your successful company will have the stock priced many fold from being a private company.  In this blog we are mainly going to cover shell or shelf companies as an alternative vehicle in going public.

I’ve been through the arduous task of taking a company public from square one when I was a manager of corporate finance with Energetic, Inc., a successful oil and gas exploration and development company. We worked with some of the best in the field to do so; Rothschild, Inc. in NYC, as the lead investment banking institution, a very fine accounting firm, law firm, large banks, and a stable of several hundred wealthy limited partners to come in as shareholders. The process is very time consuming and expensive. In this situation it took about 4-5 years to build and position the company to do the initial stock offering.

Most small companies don’t have the amount of money we spent going public or the time frame. One alternative is finding the right fit with a “clean” shell or shelf company. Let’s define what we are talking about. A shelf company is a public company that has been structured to go public, or has been a public company and the corporate operations no longer exist, but the structure does. These shells are offered by law firms, accounting firms and businesses that focus on this.  These days you can go to Google and up come businesses that have a supply of shells.  As with any business check out whom you are dealing with, and only deal with well reputed firms.

Why look into this way of becoming a publicly traded company?  There are several reasons, amongst them is that initially it is less expensive. A clean shell with some stockholders already exist, and less hassle than the entire normal procedure.

What are the pitfalls of a shell corporation? There is no free lunch. The shell normally has stockholders looking for the right type of company to merge into the shell, but they can be very selective regarding industry and upside potential.  Automatically, you are going to lose a significant amount of stock to these shareholders and you need to determine whether it is worth it in the long run; what is the cost to you?  A publicly traded corporation is of little value without one or more aggressive investment firms behind your company to promote the stock so that it goes up in value and receives attention.

Prior to all this you want to know where you want to head with your company, will it be regional, national or perhaps looking for growth of value and then selling out to a major corporation and taking their stock in turn for yours. Perhaps a combination of cash and stock.

Looking at shelf corporations these are a few essentials to look at:

-       A certificate from the state which is in good standing.

-       Certified articles of incorporation from the state.

-       Have all state fees been paid and current?

-       What other things does the shell bring to the table, like stock certificates?

-       How many shares of stock have been authorized, issued and recently traded (commonly called the “float” or stock being available for trading)? Sometimes a person will sell stock for essentially nothing, let’s say $.01, to take a year-end write off against profits made on another stock transaction.

-       How many stockholders remain in the shell?  Who are they?

-       Many times more stockholders are better than few as it gives diversification. With a new company doing business these stockholders may be your best market for more stock buying supporting the stock price.

-       Can the shell be registered in all states under Securities and Exchange Commission regulations? Some states are more restrictive than others, like California.

-       Is there an investment banking firm relationship in place with the company sponsoring the shell?

-       Is the sponsor related to a public relations firm specializing in financial press releases?

Place a good securities lawyer on retainer to represent you through the process; best money you will ever spend.

As with any company interested in this type of venture have audited financial statements from a recognized CPA firm completed on your company.  Above all with your company, be conservative and have a healthy cash flow. Cash is king. You only get one chance at this, you can’t go back to the well if you miss your projections; your stock value and interest in your stock will die. There is no, or little, bank financing available and factoring of receivables to maintain cash flow can be quite expensive.

Bottom line for you and your company prior to proceeding with a shelf corporation:

-       Know your product.

-       Know your market.

-       Be in a rapidly growing industry.

-       Have a strong management team and story to tell.

-       Industry competitive edge.

-       Macro picture for the future of your company and solid, realistic pro-forma statements.

-       The company needs to be strong throughout. Due diligence will bring out weaknesses and non-disclosures.

-       The shell corporations are looking at many business plans and ideas. In today’s fast pace business environment these people are doing the initial reviews off cell phones and I pads. The key for you is to get attention quickly and doing it concisely. Hit the salient points and attract attention, you only have one shot. If the company is interested and contact is made you then need to have a complete business plan available, including pro-forma for presentation.

Normally, people who hold stock in these shells think like venture capitalists. They want industries that sizzle like high tech/bio-tech, and growth of 30-50% a year.

So much for shelf companies. Another way to go public is to find a company with a product that matches where you are heading with your business. The best way to describe this is to give you an actual example.  In 1985 I and four other people got together with contacts in the gas retail business including major corporations like Amoco and Shell Oil. These two companies wanted to start an ongoing service/insurance business for on-road maintenance issues and monthly follow up with customers at their retail stations.  We started Amoco’s Certicare program and Shell’s Autocare program both run out of our office.

At that time, small in-house computer usage for storing information was just beginning. We wanted proprietary computer hardware, and then have our people design the appropriate software. We found a floundering public company on the East Coast in the gaming business called Game-A-Tron. In this case, we bought the company at “the right price”, and were able to merge our other ideas into the company, changed the name and were publicly traded with an exciting story to tell the investment community. This included major companies under contract for business.  We contracted to the gas retailers/convenience stores inclusive of auto repair. The contracts with retailers included our computers, software and training as a package to track the customers, do monthly mailings and monthly/year-end financial statements.