WILLIAM MARGRABE GROUP, INC., CONSULTING, PRESENTS
On this page:
Dr. Risk promises you at least a brief response to your important question, as soon as he has a free moment. A question of sufficiently general interest to make it into the 'Zine, tends to generate a more comprehensive response. All questions and answers become the property of The William Margrabe Group, Inc.
7/28/00 What Does It Take ... To Mend a Broken Credit History? (728/00)
Dear Dr. Risk – For the past 18 months, I have been repairing my damaged credit which came about from four charge-offs showing on my credit report. In this time, I have established six lines of unsecured credit and maintained my student loans and my car loan. These lines of credit I speak of are merely hundreds of dollars and all second chance programs.
To reiterate, I have had an excellent credit rating for the past 18 months. Additionally, I have had steady employment, have resided at the same place during this time and I have recently 'settled' all my charge-offs for 'nearly' the full amounts and have documented proof of such. However rectified, these charge-offs place me in a high credit risk for almost any personal (small) bank loan and I am consistently told they can not help me.
I have searched the internet high and low looking for that bank that would give a non-homeowner with no collateral a second chance at an unsecured persona loan. The only thing I find are credit searches where these alleged companies search to find a loan suited to your needs if you pay a fee.
The latter brings me to this subsequent question: do you know of any banks who are willing to give a second chance personal loan? Your assistance in this matter is so much appreciated. I look forward to hearing of any resources you may have available. –) Corey
Dear Corey – Fortunately for you, Dr. Risk has recently tried to help a friend recover from a personal credit crisis. This friend's problem is much more extreme than yours -- we hope. He ran through about $500,000 of inherited property, ran up nearly $200,000 of credit debt, and bought a $400,000 house with no job. About three months after buying the house he stopped making payments on his mortgage loan. A few months after that, he stopped making payments on his credit cards.
You haven't addressed what Dr. Risk thinks is the #1 issue: What have you done to make sure that your acute problem doesn't recur? Do you know how you got in your tight spot in the first place? Are you trying to spend your way into the heart or bed of a sexual partner? Do you have a problem with drugs or booze? Are you gambling? Are you a shopaholic? Dr. Risk's friend is a shopaholic who was trying to buy his way to happiness and impress his wife, without holding a job. Dr. Risk has urged him to see a therapist about this.
You have a plan for repairing your credit, which is good. You are settling your debts, holding a job, maintaining a permanent residence. Those are all positive factors in personal credit scoring. However, "'settling' all my charge-offs for 'nearly' the full amount" after 18 months suggests that the lender didn't get interest over that period, which is a significant loss that will haunt you for years.
Dr. Risk suggests that you try to learn more about retail credit scoring at www.FairIsaac.com. Not to make light of your situation, but it reminds me of a joke that an economist-turned-comedian told: “Having an economics degree is great. It may not guarantee you a job, but at least you understand why you’re unemployed.” Most credit card companies use some form of credit scoring to decide whether to lend to you, or not. FairIsaac is in the credit scoring business, and their web site provides information about it. It may not help you get the credit you want, but at least it will help you understand why you can’t get it.
Dr. Risk has no personal experience with companies that promise to either repair your credit or find lenders with low standards. However, loan brokers who take their fees up front are notorious for taking advantage of desperate people in search of credit. They take the money, but deliver nothing.Dr. Risk would bet dollars to pennies that at least some of professionals involved in credit search, credit repair, etc. run their businesses the same way.
Nor does Dr. Risk know specifically who might lend give you a chance, beyond the chance that you say some lenders are already giving you. The only avenues that come to mind are not pretty ones.
Perhaps some of the lenders who turned you down have told you what they would need to lend you money. If so, that may be a road map for your credit future. – Dr. Risk
$64 Question (6/28/00)
Dear Dr. Risk I just went long on qualcomm today and bought a heckuva lot. The price was 64. Obviously I think that is a terrific price cause I sure bought a lot. Now I need some protection. What is a call option? I am told july 70 calls are a good form of insurance. what does this mean? – Van Doren
Dear Van – Not to wallow in self-pity, but a Risk Doctor sees a lot of personal financial tragedy. To make a medical analogy, a lot of patients walk into Dr. Risk's office with self-inflicted injuries and ask for treatment. Your situation is a little like the patient with a case of gonorrhea who walks in and says, "Doc, I think I need some protection." If the patient had come to the doctor in advance, the protection would have cost about 50 cents. Now the treatment will require expensive penicillin, with no guarantee of success.
<<What is a call option?>> A call option is an option to buy or "go long". Check out our "Derivatives Dictionary". You'll find the "C"s at http://www.margrabe.com/DictionaryAJ.html#sectC.
<<I am told july 70 calls are a good form of insurance. what does this mean? thankkyou >> Assuming your question is serious, it means you're listening to the wrong person, possibly an option salesman! Ideally, insurance protection makes you whole after an insured loss. Of course, life insurance may not exactly make the beneficiaries whole after the insured's death. Some people may never recover from the loss, while others may be better off without the person - even without the insurance!
You said that you were long the stock. Dr. Risk can't think of any way to use a static position in July 70 calls to provide protection against a loss on a $64 stock. The standard protection against that loss would be a static hedge, an out-of-the-money put option on all the shares of stock, struck at 60 (say). The put option (also in the dictionary) gives you the right, but not the obligation to sell the stock at the strike price on or before expiration. For every dollar the stock price sank below 60 (say), the put option would provide one dollar more profit. The option gain would offset the stock loss.
You could use those (short) calls as part of a dynamically changing portfolio that provided protection equivalent to the put. However, Dr. Risk wouldn't recommend it:
(a) That strategy is complicated to explain and
you don't sound prepared for it until you do some more reading about options.
If you have enough money to buy "a lot" of a $64 stock, then you might consider investing some time reading some books about investing money. Then you won't have so much need for Dr. Risk's ...
Best wishes – Dr. Risk
Dear Dr. Risk thankyou very much for your well informed advice. (i didn't understand the thinking at all behind the call option strategy); I thought puts made sense also, but as you can see, I know nothing about options. Because of my heavy investment in qcom, now I must learn. (I do have one of mcmullin's books on options, but I am "sort of" already in Qualcomm pretty deep (ha!), a risky bet no doubt, but by the time I really understand option protection, (and read the book thoroughly) the stock might be a heckuva lot higher than my price of 64. I figured get the stock first at that price. One last question: I have 10K left in cash and you know my purchase price. I would spend it all on some downside option protection. Once we get to early november I think the odds are very good that qcom will go up with the rest of the tech/net sector. Therefore, should I be thinking about October puts on qcom, and if so, how much protection can I buy, and how? What are the costs, prices? I am only worried if the stock goes below 57. I can sweat bullets between my price of 64 and a retracement of 7 down point..........thankyou very very much. – Van Doren
Dear Van – You're welcome.
Dr. Risk can't respond directly to your current message.
Your situation suggest that it might make sense to reiterate a general point to our readers. In the options market, for every Rick Lazio who makes 600% on call options on stock in an associate's business, there are more than a few John Q. Publics who lose their entire investments. In the futures market, for every Hillary Clinton who turns a totally inadequate margin deposit of maybe one thousand dollars into $100,000, plus or minus change, there are probably millions of retail speculators who lose money – a little, everything they had, or everything and then some. The equity market is no more of a sure thing.
Best wishes – Dr. Risk
Where's a Pied Piper of Hamlin when you need one? (6/28/00)
Dear Dr. Risk I saw a cute little mouse, recently, near a pile of trash bags, outside a Manhattan restaurant that I frequent for lunch. I'd hate to run into one inside the establishment. What are the odds that mice are inside the restaurant? – D. Oliphant
Dear Oliphant – When you start talking to Dr. Risk about health conditions in restaurants, you're opening up a can of worms, so to speak. For many years Dr. Risk's father inspected restaurants and dairy farms, and he was a treasury of fascinating stories that people with weak stomachs didn't seem to welcome at mealtime. He tried to spread the gospel of following best practices of restaurant sanitation, and found that he was sadly not preaching to the converted. Many restaurant workers were a recalcitrant and – in this metaphor – heathen lot, who obeyed public health regulations about as well as most Christians follow the custom of tithing.
One morning a young, female food worker went into the kitchen restroom while Father was inspecting. After a while she flushed, exited the little room, and walked right past the sink without washing her hands. He said, "Excuse me, Miss ..." and proceeded to educate her about fecal-oral transmission of disease and related issues. Sullenly, she washed her hands. Around noon, she repeated the drill, except that as she walked by the sink without washing her hands, this time she smiled triumphantly at him and said, in explanation, "I'm going to lunch!"
However, you asked about mice. They created quite a stir, recently in Dr. Risk's town, where a large number of them infested one of the elementary schools. A full-page letter to the editor (paid advertising by the PTA!) contained abundant information about mouse infestation. Over spring break week, traps caught 70 mice in the school. After the break and the efforts of a professional exterminator, children were still seeing mice regularly in their classrooms, sometimes dying slowly in sticky traps. Since mice pee wherever they want, it dries up leaving an invisible residue, and that residue can contain salmonella bacteria, they can spread food poisoning. The symptoms of Salmonella food poisoning: (1) first you feel so sick you're afraid you're going to die, (2) then you get sicker and you're afraid you aren't. They can also spread the potentially fatal Hanta Virus.
Dr. Risk can't tell you the odds of finding mice inside your restaurant, but if you really want to know, you can visit the New York City Department of Health Restaurant Inspection Information web site (http://www.nyclink.org/html/doh/html/rii/index.html)! There, you can search for a summary of findings of a recent restaurant inspection, which can be compelling reading. You can order up to five full restaurant inspection reports for free by calling (212) 442-9666 between 9 A.M. and 5 P.M. Monday through Friday.
A trip to this site can raise some troubling questions. For example, on the evening of Friday, June 9, Dr. Risk took the family into Central Park for in-line skating. Afterward, Frau Dr. Risk thought it might be fun to take the kids to eat at Mickey Mantle's on Central Park South, so of course that's where we went. The food was delicious. Two days later, as Dr. Risk was writing this article, he decided on a whim to check out what the health department had to say about Mickey's. The inspection on 6/9/00 found "Vermin or other live animal present in food storage, preparation or service area." In case you are no more sure than Dr. Risk was, a hypertext link from the word, "vermin", provides a definition: "Insect or small animal that is destructive, annoying, or harmful to health. Includes cockroaches, flies, and rats." While Dr. Risk is curious about which vermin the inspectors found in Mickey's, he hasn't decided to ask for the full report. Next time he will, for sure ... in advance! – Dr. Risk
When Free Isn't Free (5/28/00)
Dear Dr. Risk Today there's no reason to pay more than $8 per trade and I've seen ads that indicate that you can sometimes trade for free. Doesn't that make day-trading a lot more sensible? – Otto Commissione
Dear On-Line – Hardly! What you and the rest of the public that takes seriously all this talk about $8 trades fail to realize is that the brokerage commission is only part of the cost of trading – ordinarily, a relatively small part. More important is the bid-ask spread. Let's say you take a quick round trip (either buy, then sell, or sell, then buy) with 100 shares of Microsoft (MSFT). The cost of that trip will be $16 commission, plus the bid-ask spread. If you had tried to do that on 5/8/00 at 12:50:26, using Island ECN (http://www.island.com), you would have seen the following in the limit order book:
As of 12:50:26
The best bid was for 435 shares at 70 7/8 and the best offer for 420 at 70 255/256. That indicates that a quick round trip (e.g., buy, then sell) in 100 shares of that stock would have cost you 100 x $31/256 = $12.109365, and the brokerage commission would have been $16. However, for a round trip in 1000 shares you would have had to sell 435 shares at 70 7/8, 100 at 70 13/16, and 465 at 70 5/8, for a round trip cost of about $243.60 from bid-ask and $16 from brokerage commissions.
By the way, if you want the current Island ECN market for MSFT, click on the "Request" button, above. If you want the market for a different stock, replace "MSFT" with a different ticker symbol. Caveat: Island doesn't always have the tightest market in every stock. For example, I just looked up FNM (Fannie Mae) and saw only an asking price for 200 shares. – Dr. Risk
How to Deal with a Traveler (4/28/00)
Dear Dr. Risk A nice man with a lovely Irish accent came to my door and offered to repair my driveway. He pointed out the poor drainage, root damage, and normal cracks and other deterioration. His first offer was to pour asphalt for $2500. I told him that I didn't have that kind of money. Then he suggested sealing the surface. I declined the offer. He asked me me what the job would be worth to me, so he could tell me if he could do it for that. I said that I wasn't picky, that the driveway was going downhill extremely slowly, and that repairs today weren't worth but about $50 to me. Finally, he said that if I wouldn't tell anybody else the price, he would do the whole thing for $2000, and I wouldn't have to put any money down, and wouldn't pay until the job was perfect. I said no. After he left, I had second thoughts. The price might have been good. – Vic Timm
Dear Vic – The first sign of spring is often the crocus, but sometimes it's the driveway repair hustler. Of course, until you're been hustled, you can't be sure that you're dealing with a hustler. For all you know, maybe the tooth fairy's branching out. Some people don't even know they've been hustled, even after they're been hustled. If you saw The Sting, you know that that sort of confusion about the outcome is the goal and result of the consummate con man. If you don't mention the price of driveway repairs to anyone, you might go to your grave still wondering if you got a good deal. Others realize that they're the victims of a hustle and refuse to speak, because they feel foolish.
This could have been your lucky day, but maybe you blew it. Dr. Risk has a woman friend who had a 1970s Cadillac in her driveway in the middle 1990s. You may be amazed to learn that this ancient vehicle could be a powerful magnet for a certain element of the population, and she received numerous visitors and notes with offers to buy the car from her, even though it had sat for two years, immobile with four flat tires, and it displayed no "for sale" sign. Dr. Risk had to marvel at the number of blue-collar men who were driving on side streets in upscale neighborhoods. Finally, she struck a deal with one of the men – he promised to do some wall and walk work to pay for the car. When Dr. Risk heard about it, he thought she was playing with fire, and recommended against it. However, the man did repairs worth one or two thousand dollars, and he hauled away the car and its flat tires. For her, it was an arb, because she would have paid to have someone remove the car. So, it's possible to deal with strangers and come out okay.
However, Dr. Risk thinks it's more likely that you dodged a bullet. In 1996, Dateline broadcast a series of television shows about Irish Travelers. Dr. Risk's knowledge about Travelers comes from two of these shows, the Internet, and personal experience. For centuries in the UK roving families of “Travelers” have ripped off homeowners.
About 150 years ago some of those families came to the U.S. Today, there are three clans of these Travelers: English, Irish, and Scottish. About 3000 Irish Travelers live in or around Murphy Village, near Aiken, South Carolina. They have a lot of fancy new homes. They’re doing well, while doing bad. The women and children stay in town, while the men roam the country, stealing. Their M.O. is to pass through town, approach homeowners about home repairs, collect cash, and do either no work or shoddy work. Sometimes they commit petty thefts, as well.
According to Dateline, in the middle 1990s, Travelers often drove around in pairs, in pickup trucks with camper covers ("turtle tops") over the back bed. They displayed no telephone numbers or company addresses on the exteriors of their trucks. The camper covers had the ordinary lock in the back, plus a lock on either side window. Apparently, this configuration for the truck is a "marker" or "uniform".
They would pick a neighborhood, identify homes with elderly persons, and go right up to the door and knock to gain entry. They would tell the victims that they (Travelers) would do repairs for a good price. But, the Travelers did shoddy work. At least, that's what Dateline said.
Eerily, one or two weekends after seeing Dateline's show about Travelers, Dr. Risk and his son were visiting Grandma Risk. While they were there, a man knocked on the front door. He said that the paint was coming off the aluminum siding, and held up his finger with white residue on it. He said that he would wash the siding and repaint it for a small sum of money. He had a vaguely Irish accent. His pickup truck had no name or telephone number on the side. He had no business card, but a local telephone number and an 800 number where Dr. Risk could leave a message. The man said he would never be there to receive the call, because he was always out working. A boy sat in the truck, which had a camp cover on back and three locks, just as Dateline had described.
Needless to say, Dr. Risk thanked the gentleman for his offer, but declined politely to accept it. Dr. Risk thinks you did the right thing by declining the offer that he made you.
Dr. Risk favors dealing with tradesmen and tradeswomen with fixed address and roots in the community. They are more likely to be accountable for their actions. Consequently, they are more likely to deliver good value for money, and less likely to cheat you or steal from you. Friends and neighbors are probably your most reliable source of such works. After that, you might try the yellow pages. – Dr. Risk
P.S. [more about Travelers]
Travelers' Update (5/28/00)
Dear Vic – More on the Travelers. Stone Phillips hosted a TV show about Travelers that appeared on The Discovery Channel during May 2000. It was probably a repeat of a Dateline show from 1996. According to that show, Wanda Mary Mary Normile, a young, female traveler, and one male and one female cohort had conspired to sting Disney World for three million dollars by staging her rape in a Disney hotel. She had intercourse with a male acquaintance to plant semen. She had another her male conspirator beat the crap out of her face. This was going to be a legendary Traveler scam, one that Travelers would talk about for years. Disney was ready to pay, when Wanda Mary's female conspirator turned her in after a squabble over who was going to hold the money. The court sentenced Wanda Mary to 18 months for grand theft. – Dr. Risk
A publisher offers Dr. Risk a chance at two million dollars! (4/28/00)
Dear Dr. & Mrs. Risk There's a very real chance that Reader's Digest may owe you a good deal of money. ... According to statistical estimates, by returning your Computer Cards IMMEDIATELY, no other entry will have a better chance of claiming that TWO MILLION DOLLARS. ... – Ronald J. Leslie, Sweepstakes Director
Dear R.L.J. – Dr. Risk was so excited at the "very real chance" of "claiming that TWO MILLION DOLLARS," that he decided to run the numbers and figure out the value of the opportunity with which you presented him, so he could prefer an offering statement for a private placement, in order to realize immediately the liquid value.
According to documents in Dr. Risk's possession, if your winner decides to take his money up front in a lump sum, your "TWO MILLION DOLLARS" prize becomes a one million dollars prize. Dr. Risk will use that figure for the prize's cash value. The document says that printed lists of prize winners will be available on or about 9/29/00, so we'll use that as the date on which the prize is worth the $1,000,000. Your disclosure statement says that the odds of winning the "TWO MILLION DOLLARS" prize are about one in 145,000,000.
tells me that your prize is worth, gross, ...
Those Who Can, Do. Those Who Can't, Manage Money? (11/28/99)
Dear Dr. Risk I would judge a good money manager by whether he's wealthy. Wouldn't that make sense? – Liza
It certainly would make sense, if all the following myths were
Let's consider those myths, one at a time. First myth: "If a manager is 'good', then he will increase your wealth." It's equivalent, contrapositive proposition is, "If a manager doesn't increase your wealth, he isn't good." Suppose your managed portfolio lost ten percent of its value in a single day. Does that mean your manager isn't good? What if that day were "Black Monday", October 19, 1987, when the Dow-Jones Industrial Average dropped 22.6% in one day? Suppose your portfolio value hasn't increased in months? Time to fire your manager? What if the market has been trending down that entire time, as during the early years of the Great Depression?
Myth #2: "If a manager is 'bad', he will decrease your wealth." Contrapositive: "If the manager doesn't decrease your wealth, he isn't bad. Suppose your manager has increased your portfolio value a steady five percent a year for three years. Do you give him a bonus? What if the market has achieved double digit returns each year over that period?
Myth #3: "A good money manager manages your money the way he manages his own." Consider a hypothetical, forty-year-old divorcee with three young children, little market expertise, and fears about being employable. Her hot-shot, thirty-something, bachelor male money manager has her investing in the same Internet stocks that made him a million dollars in less time than it takes to make a baby. Good idea? Hardly! If your manager's demographic and personal characteristics differ from yours, then it would be irresponsible for the manager to invest your money the same way that he invests his own.
Myth #4: "The only way for a money
manager to become wealthy is by managing his own money well." The
first problem is that you probably don't know whether the manager is wealthy, or
not. You can't conclude that he's wealthy, just because he dresses well and
lives large. Maybe he's putting up a front to attract impressionable customers.
Even if he has millions, you must consider the source:
So how could you evaluate your money manager's performance? Pretty much the same way you could evaluate your plumber, doctor, auto mechanic, or lawyer. The required data are
In short, you would need a lot of information and a lot of expertise, which you don't have, unless you're about as qualified as the professional that you're trying to evaluate. Then you evaluate the data, point by point, in light of professional standards. The more points to the evaluation, the better the potential evaluation.
A lot of people will say that they don't have what it takes to perform such an evaluation, and a lot of people will be right. Evaluating a money manager is probably at least as difficult as evaluating plumbers, auto mechanics, attorneys, and surgeons. Most people are in the dark about these professionals. Consequently, people can't do a good evaluation of money managers, for whom luck is a major factor that muddies the waters.
Unless you're a professional manager, yourself, you'll just have to trust someone else's evaluation of the manager, base your evaluation on past performance (and hope it's accurate and not due to good luck), take the money manager at his word, or rely on his reputation. In any event, you increase your odds of success by increasing your knowledge. – Dr. Risk
The Death Tax Break (11/28/99)
Dear Dr. Risk What is a Spyder Buy & Hold account?????? – Al
I'm not familiar with that precise term
of art in investment. A buy and hold account sounds like an account where you
buy something, then hold it. Spyder (also, Spider) is a name for the American Stock Exchange product,
Standard & Poor’s Depositary Receipts (SPDRs), with ticker symbol SPY.
Spyders are Units of Undivided Beneficial Interest in a trust that contains the
right proportions of the shares in the S&P 500 index. (You can read more
about Spyders at http://options.nasdaq-amex.com/indexshares/index_shares_spdrs.stm.)
guess is as good as Mike Babel, who heads our telephone inquiry
group, or I can
make. To extend your guess a bit, it might be the
account of someone
who wants to take full advantage of the legendary tax
Spyders by holding them for the rest of his or her life,
investor's heirs a capital gains taxfree stepup of basis.
Let me illustrate Gary's excellent point about the stepup of tax basis. Let’s say that Grandma and Grandpa sell the family home, invest all their worldly wealth ($300,000) in Spyders, and move into an assisted living unit with rent that approximately equals the monthly payments from social security and Grandpa’s pension. The stock market zooms for a few years and the value of their Spyders grows to $650,000. Now, consider three scenarios:
Also, Spiders reduce the cost of diversification. You pay the commission and a small bid-ask spread on one stock issue, rather than commissions on the 500 components of the S&P 500 index. – Dr. Risk
EE-gad! The Virtue of Patience (11/28/99)
Dear Dr. Risk I'm thinking about cashing in a EE bond that my mother bought for my daughter. Nothing could be simpler, right? Except I don't know where to go and how much I'm supposed to get. Can you help? Leeza
Dear Leeza The process is fairly simple, but it's possible to be smarter about it, and it's possible to make an expensive mistake.
Probably the most convenient place to redeem the Series EE bond is at your local bank. The banker will look up the amount due in a book that has a page for each redemption year and month, e.g., September 1999. The amount you get depends on the denomination, the issue year and month, and the year and month when you redeem it. The denomination would be something like $50, $100, $500, $1000, $5000, or $10,000. The initial purchase price was half the denomination. Each denomination has two columns interest earned and redemption value (which equals initial purchase price plus interest earned). That page will have a row for the issue year and month, e.g., 1992 April thru September or 1992 October thru December. Then, on the right page and at the intersection of the right row and column you will find the redemption value for your bond.
Let's take a concrete example. On October 1, 1992 Grandma paid $5000 for a $10,000 Series EE bond. You could cash it in on September 30, 1999 for $7,344. If, instead, you cashed it in on October 1, 1999, you would get $7564. Thus, by waiting one extra day you would earn an extra $220 on $10,000, about three percent of the principal amount. At the average yield of six percent over that period, that is equivalent to getting about four months interest.
So you may not want to take casually this simple process. – Dr. Risk
What is a straw mortgage? (11/28/99)
Dear Dr. Risk We are looking at getting a loan on a house and they are talking about a 2nd mortgage by the place we are getting the house from and saying that it will be a straw mortgage and what they are saying it means is that the dealer will forgive the 2nd mortgage once we get all the papers signed and that is why it is called a straw mortgage our problem is that everyone that we ask about if they know anything about it or what it means they say they have never heard of it and i cant seem to find any where that has information on it so i wanted to know if you knew what it means of if by chance there is also another name for this. Patti
Dear Patti In real estate, the adjective, "straw", sometimes means temporary, as was the straw house in the fable of the three pigs. For example, general partner Smith might file partnership papers, listing instead Jones as the (straw) general partner, who just holds Smith's place. After the papers are filed, Jones steps aside and Smith asserts ownership. The purpose of this straw ownership is to hide Smith's real ownership from someone.
However, "straw mortgage" is a new one on Dr. Risk. He has shown your question to an expert, Lester Kravitz (firstname.lastname@example.org), an attorney who owns a residential real estate brokerage and has a Real Estate Q & A Web page ( http://www.westchesterweb.com/realestate/quest.html). Here's his response:
"Straw mortgage" is not part of the every-day practice of residential real estate transactions. Perhaps Patti should ask the person who is proposing the "straw mortgage" to explain in writing exactly what is being proposed. Why do you need a "straw"? There are hundreds of mortgage sources all over the Internet which can provide an almost unlimited variety of more conventional financing. It's generally a better practice to shop for your financing from an independent source. While it is possible that the mortgage being offered by the dealer is a better deal than you could find yourself, it's usually not the case.
"Patti, are you buying a newly-built home? If that's what's involved, perhaps the seller is interested in establishing a high price for your sale so that other homes will be expected to sell for higher prices. For example, if you are buying a home that is actually going to cost you $400,000, but it would be advantageous for the seller to record the sale as a $500,000 sale, I could understand the reasoning behind getting Mortgage #1 from a lender for almost $400,000 and "straw" mortgage #2 from the developer for $100,000 (with the developer "tearing up" your $100,000 I.O.U.).
"You must discuss this with your lawyer before you agree to anything or you may be asking for serious trouble. It's probably a good policy not to get involved in any financial transaction where the party you are dealing with is unable or unwilling to take the time to explain to you all of the details in order for you to have a thorough understanding of what you are getting into."
Dr. Risk reiterates Mr. Kravitz's good advice:
– Dr. Risk
Derivatives DictionaryTM Terms and definitions relating to personal finance are below. The main Derivatives DictionaryTM is here.
8/28/00 "Hot for U.S. Stocks, Foreigners Get Burned In Regulatory Limbo." Wall Street Journal (2000 August 16) By John R. Emshwiller and Christopher Cooper.
A broker who went by the name of Steve Young, with an American accent, called from Brussels to Adrian Lawlor, a computer salesman in Dublin. Young had "just the ticket for entering the red-0hot U.S. stock market," and Lawlor was "absolutely green", so Lawlor sent the broker the best part of $17,000 in spare cash. The broker moved to Barcelona. Lawlor tried to sell some shares. The broker said he would -- if Lawlor reinvested the money plus $10,000 in share of ZiaSun Technologies Inc. Lawlor went to Spanish regulators, who said that they had no jurisdiction, because the brokerage firm apparently didn't sell to Spanish investors. Somehow, it's comforting that Americans are not the only people who will write checks for thousands of dollars to complete strangers who happen to want to keep it all for themselves and give the investors nothing but the runaround.
Regulation S shares are a favorite vehicle for fleecing investors outside the U.S. Here's how it works: Regulation S allows the U.S. corporation to sell the shares to a promoter -- a foreigner, outside the U.S. -- without registering them. The shares are restricted, which means in this case that no one can legally resell the shares to a U.S. investor for one year. However, foreigners may buy and sell the shares. The promoter marks up the shares beyond all reason and sells them to foreign neophytes.
Money Magic (5/28/00)
The Amazing Moola has proposed a formula for computing your daily interest on a large sum of money invested at 7.30% per annum.
So if you have a million dollars, you'll have $200 a day to spend, including spending on taxes!
Is the Amazing Moola right? If not, why not? If so, why?
Money Magic – Solution (6/28/00)
David Wilson replies, "Yes it is correct because .073 (interest rate) divided [by] 365 (number of days in a year) equals .0002."
How to Collect on Your Insurance Policy Without Dying!
Dear Dr. Risk I have a five-million dollar "key man" policy on me, with my partner as beneficiary. Recently, he bought me out and I'm outta there, so I'm no longer a "key man". Consequently, I don't want him to have a big insurance policy on my life. My theory is that it's always better to be worth more alive than dead to someone. I don't need five million dollars in insurance, either, so I figured I'd let the policy lapse.
Then a guy called me up and arranged a meeting. He said that he would pay me immediate, cash money to be the beneficiary on my policy. All I had to do was take a physical examination and name his company as beneficiary. He said that he'd pay me $20,000 to $55,000, depending on my medical report. I'm really healthy, so I'm looking at half a hundred thou! What do you think? – Methuselah
Dear Methuselah – Life insurance ordinarily starts out as a bad bet for the customer, much as playing roulette is an unfair gamble. In both insurance and roulette – the house needs to cover overhead, as well as its "gambling" losses, or it couldn't stay in business. However, working against this are some tax advantages of some insurance products. The insurance business is more complicated than the casino business, because the insurance company ordinarily gets to use the premiums for a while before it has to pay claims.
Of course, people don't ordinarily take out a life insurance policy because they think the odds of a favorable payoff are in their favor. Instead, they are trying to prevent financial disaster for their beneficiaries, people who would lose significant income and/or services in case the insured died.
However, some people try to get insurance, despite a pre-existing condition that puts the odds in their favor. Others contemplate suicide, which can make an insurance policy a truly incredible investment – unless the policy doesn't pay off in the event of suicide.
In some rare cases, it may be possible to buy insurance that is attractive on purely actuarial terms. Back in the 1970s, the late Fischer Black, one of the inventors of option pricing, wrote a paper, "How I got Free Life Insurance from TIAA-CREF." In it, he described a plan for taking out a whole life insurance policy (roughly equivalent to term insurance plus a savings account), then systematically borrowing its cash value. By his calculations, under reasonable assumptions at the time, the anticipated dividends plus the benefit of borrowing at (say) five percent when interest rates were in double digits covered the premiums on the policy. Dr. Risk ran the numbers, found them compelling, and took out a $100,000 policy. Was the policy "free"? Dr. Risk hasn't done a "post mortem", but his gut feeling is that the numbers are favorable for him.
You should know that a good medical report and a long life expectancy reduce the market value of your policy to a third party. Your policy would have the greatest value if you were clearly at death's door, and would likely die only moments after signing over your rights. Then, the buyer would promptly get the face amount of the policy, perhaps without even paying a single premium. This explains the greatly increased number of "viatical settlements" for AIDS patients in past years. Recent, successful treatments of the disease have greatly reduced that formerly booming industry. If your health were perfect, and you wouldn't die until the policy's cash value equaled its face value, then the value would be at a minimum. After all, the buyer would receive the face amount only after the maximum delay, and would need to make regular premium payments, until that time.
While you show good judgment in wanting to remove from your partner the temptation to kill you for the insurance money, you sound eager to put some anonymous investors in the same position. That may not be the best idea. Anyone who saw the classic comedy film, The Wrong Box, the only film explore the human aspects of a "tontine" pool of money, would be sure not to make that rooky mistake with the wrong buyer. Of course, the market and murder laws protect you. The bad publicity surrounding the murder of a client wouldn't be good for business, and might lead to a civil suit or criminal charges. Common and statutory law also prohibit a murderer from benefiting from his murder, as by slaying his parents to inherit their property. – Dr. Risk
What price honor?
Q: What's the difference between an eccentric, elderly
gentleman and a silly, old fart?
Q: What's the difference between an eccentric, elderly
matron and a crazy, old bat?
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