Posts Tagged ‘real estate’

Do you know your defensive interval ratio? Most novice short sale investors don’t’ have a clue what this even refers to while veteran investors have probably already rattled off their ratio. If you aren’t the accounting type don’t worry – a defensive interval ratio Is really quite simple. It’s the level of liquidity that reflects the ability of your business to meet current debt obligations. Plain and simple – how prepared are you to withstand a little period of insecurity? It’s a good number to know and something to keep an eye on in order to preserve your spending power and look good at the bank.

How to Calculate

Calculating the defensive interval ratio is easy; simple use the following formula to plug in your own numbers:

Defensive assets (anything you can sell or access when in need including money owed to you by others)/Projected daily operational expenditures – noncash charges

For example, let’s assume you have cash on hand of $50,000, access to bonds in $25,000 and expect to receive another $25,000 from debts, deals and other income for a total of $100,000. Your daily cost of sales, operating expenses and other income requirements amount to $1,000 per day giving you a projected daily expenditure of 100 days

How to Use

Keep an eye on both your personal and business defensive interval ratio. As a rule of thumb, more is better but it is possible to have too much cash sitting on the sidelines. Financial managers and short-term creditors pay special attention to defensive interval ratios so they are of particular interest to those seeking OPM or outside funding for quick cash deals or other relatively short term transactions.

Personal – Strive for at least a 90 day defensive interval ratio up to whatever makes you happy.

Professional – Calculate independently of your personal ratio. 30 days is a solid score but anything above 180 days tends to work against you by reflecting an overly cautious investing style with money sitting on the sidelines. Put the money to work in order to demonstrate your ability to formulate solid returns and mitigate risk. If you are unable to find appropriate investment instruments due to a relatively minor sum of money, try pooling it with others or use it as collateral when approaching deeper pockets than your own. In either case, show that you know and understand the concept behind the approach.

Research – Finally, take time to perform your own research with potential partners and others prior to sealing any deal. Obtain a quick look at their position before lending money or going into a partnership with anyone. Looks can be deceiving especially when it comes to elusive ideas like short sales.

Make sure they have the staying power requires to become equitable partners rather than a burden which weighs you down in the long run.

Experts believe that the current level of housing inventory has to come down for the industry to get into a phase of sustained recovery. Short sale transactions offer a win-win-win situation to buyers, sellers, and lenders, and help clear the housing inventory available for sale. While short sales have risen in the last year or so, experts believe that banks are still not fully prepared to approve the transactions in a timely manner. Rick Shargo, vice president of marketing at RealtyTrac, said: “Interminable delays of six weeks to three months are not uncommon, or banks rejecting a 20% discount at short-sale only to ultimately take the property back and market it at 40 or 50% lower.”

Banks have to report their mortgage assets on a mark-to-market basis, and any sale at a price lower than the value in their books will mean a reduction in their reported profits. Bankers also complain that some buyers take advantage of the current situation, and demand a price which is way below the market price. Walter Molony, spokesman for the National Association of Realtors, said: “Short sales have taken far too long. The faster you clear off this excess inventory the faster you can stabilize home prices.”

Real Estate Econometrics, a property research firm, has estimated that default rates in commercial mortgages will rise to 4.1%, a 17-year high, in the fourth quarter of this year. Commercial mortgages are defined as loans on non-farm, non-residential buildings such as offices, retail centers, and warehouses. A loan is considered delinquent when it’s 30 to 89 days late while a default is said to have occurred when a loan is 90 or more days past due. The market for refinancing has been hit as the recession has taken its toll on rents. “The dramatic decline in real economic activity and labor markets since last September has undercut property fundamentals. The decline puts an increasing number of loans at risk,” said Sam Chandan, chief economist of Real Estate Econometrics. Commercial mortgage defaults already are at a 15-year high after climbing to 2.3% in the first quarter of this year. Real Estate Econometrics projects the default rate on commercial mortgages will reach 5.3% in 2011 before starting to decline.