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Kevin J. Daum
This article was originally published in the June 21st,
2002 edition of the East Bay Business Times.
Last week while I was having dinner at my friend Scott's,
I was enjoying the company of four other members of the Young
Entrepreneurs Organization (YEO). Before long the conversation
among us thirty-something CEOs turned as it always does, to
a discussion about money. This time our visiting friend from
New Zealand had brought up the subject of housing and loans.
Being the Mortgage Broker of the group (every group has one
these days you know), I was immediately bombarded by inquiries
as to the current interest rates. "I am looking at refinancing.
What's a 15 year conforming fixed going for?"
I shouldn't have been surprised by the question. It's a common
loan on the East Coast and since Mike and Beth were both out
here from Jersey (where my Alameda house that just appraised
for $1.1mm would have sold for $350,000); this sort of financial
approach would not have been unusual. A paid off house outside
of California is generally 30% to 40% of a family's diversified
net worth, not 80% as is the case here in the Bay Area. What
raised my eyebrows was that the lips mouthing this question
were those of Jim, who lived down the street from me. His
house was not as big or nice as mine (of course) but still,
I knew the value to be close to $750,000 so it was fascinating
to me that he was sitting on top of $450,000 in equity locked
up in his house.
Jim had always claimed to be fiscally conservative. His company
was grossing more than a million dollars annually and he was
able to draw a decent salary, too decent, to hear the way
he whined about the income taxes he was paying every year.
I knew him to be a reasonably savvy investor with his $100,000
in retirement since he had been bragging a steady 9.5% return
even through the dot com bust. But here he wanted a fifteen-year
fixed rate that forced him to invest money at 3% less than
the yields he was earning and would eventually increase his
tax payments even more by reducing his tax deductions.
But this is the part that made me giggle. When I put those
questions to Jim he responded, "C'mon Kev, you know I am risk
adverse." This was true in business. Jim's company handles
risk management consulting for Fortune 500 companies. It was
Jim's job to instruct major conglomerates as to proper preparation
for all-out disasters. Here was my chance to prove to Jim
that so many intelligent people today allow their emotions
to take over their decision making process when it comes to
their personal residence, even though it usually represents
their biggest asset, liability and monthly payment.
"Jim" I asked, " What is the cure you preach to your clients
to mitigate risk against any crisis?" Jim responded "Kevin
it always boils down to flexibility which comes from liquidity."
Aha! I thought. Our New Zealand friend picked up on it immediately
and asked, "So if you're so risk adverse, why is most of your
own money tied up in your house where you can't get it? Doesn't
sound very flexible to me." "And why invest more with a 15
year loan?" chimed in Mike. "You must love paying taxes,"
said Beth, the other Jersey-ite. The four of us went in for
the kill like piranhas mauling a baby duck (a typical friendly
debate for this group).
It soon became apparent even to Jim that the standard approach
to mortgage shopping is done in a financial vacuum. We discussed
how lenders have turned our most critical financial decision
into an exercise of pricing rates and fees as a commodity
with no consideration for the implications to our financial
portfolios not to mention the tax consequences. No one at
the table felt stupid however everyone agreed they hadn't
approached the subject with the same concern for education
as they would for their business or their family's security.
There lies the real irony as most people associate their home
with family security.
The conclusions at the table were simple and unified (rather
unusual for a group of executives). There was agreement that
no right or wrong answers exist as to specific programs or
approaches to balancing financial security with emotional
security. Several at the table could trace their emotional
approach to their home back to lessons from parents and grandparents
whose financial decisions were based upon older economic models.
These models had little relevance to the Bay Area economy
today.
What was agreed upon was that none of us had any excuse for
not spending the time to educate ourselves about mortgages
and how they integrate with our tax and investment strategies.
With the rates at all time lows, there would be no better
time than now.
Needless to say, we all let Jim pick up the check and get
the deduction.
Kevin Daum is the Founder and CEO of Stratford Financial
Services, a Real Estate finance and education company, founded
in 1989. Stratford specializes in Purchase loans, Refinance
loans and Custom Home Construction finance and has successfully
financed thousands of clients. He is the author of "Building
Your Own Home for Dummies" (Wiley), as well as "What
the Banks Won’t Tell You." Mr. Daum was an Underwriter
for Plaza Savings and Loan and Key Bank of New York. He is
an INC 500 CEO and has been listed as one the 40 Most Influential
People Under 40 in the San Francisco Bay Area. He is the Global
Chair for the Edison Innovation Program with the Young Entrepreneurs'
Organization (YEO) and is a founding Board member of the Bay
Area Chapter of YEO.
Mr. Daum is a frequent contributor to numerous business
publications on the subjects of Real Estate and Small Business
leadership and speaks regularly on both subjects. He can be
contacted at kevin@stratfordfinancial.com.
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