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Refinancing - should I - or not?
Posted by: Joseph E Poff, CPA CITP from Auburn Software, Inc. on Monday January 16, 2012 at 3:58 PM   (-08 GMT) | Comments (4)
Tags | Loans, | Mortgages, | Real Estate | Categories: | Real Estate - Apartments, | Real Estate - Commercial Building, | Debt - Home Mortgage, | Real Estate - Personal Residence

Refinancing - should I - or not?

I'm getting lots of questions regarding refinancing - on personal residences and investment property (rentals and commercial) - and it's such an important topic - something we really need to look at and explore - so let's do that.

There are several reasons people don't refinance - one of the most common is a lack of understanding of the process and how they might fit in to that process and being afraid of the complexities.

But, first, in some cases, realistically, it just won't work. Some of those reasons would be

 - Unemployed (without any other source of income)

 - Seriously underwater on the mortgage - you owe a lot more than what your house is worth (still may be some options)

 - Bad Credit

Unemployed

If you're unemployed - it doesn't matter that you always pay your bills - I hear that a lot. From a lender's perspective - you have no way of paying back the loan. For the most part this is going to be a no starter. I'm sorry, I didn't create the economic mess - but trouble or not - this is usually a no go on the process. You need to show steady income.

Note that 'income' doesn't have to be from wages - if you get money from investments; Social Security; Rentals; Trusts; Contract Sales on property (Real Estate, Land, Airplanes), business sales and the like - well, you do have income. You would qualify - assuming everything else was ok. You don't need a 'job'.

Underwater

Being seriously underwater on your mortgage can also be a deal killer, but let's look at some options on that when we look at the process. Depending on your situation - this is ok, it may still make super great sense to refinance. We'll explore this later.

Bad Credit

A serious deal killer. I explain over and over to clients how significant this factor is and they will often say - oh, I've got great credit - yet their scores are actually quite low. Maybe not low enough to disqualify them, but low enough to where it will cost them tens of thousands of dollars. Pay attention people! We'll cover this more later too.

If you have a really low credit score you'll have a lot of work to do. Honestly, if you've got a loan, you'll probably have to stick with it until you can improve your credit.

If your credit rating is bad from the economy, for medical bills - that type of thing - I'm super sympathetic to you. If it's because you've just not paid much attention to it - and let bills get missed - well, we need to work on you - most of the time it's just being more organized.

Review your situation

Because of the constantly changing nature of terms for refinancing - we'll work on big picture - concept issues.

1. Generally, you want to be able to save about .50% (less than 1%) or more on your mortgage.

So, if your mortgage is at 6% and the rates are now 4% - well, you need to move fast - a great candidate. If your rate is 8% and they are now 4% - well, what's the problem? Have you been in a deep sleep?

Conversely, let's say your rate is 5% and you can get 4.25% - should you refinance? Most likely yes.

The general rule would be that if you can save 2% on your rate - you'll pay back the loan fees in 1 year. If you can save 1% on your rate, it will take you about 2 years to pay back the loan fees.

Again, conversely, let's say you can save 3% - well, at that you'll recover your fees in about 6 months. Save 4% - you'll recover your fees in about 3 months. See how that works?

So, look at the rate difference and use the above general rules to determine how long your recovery period would be. If it's 2 years, and you're going to live there another 10 year or even another 3 years - basically more than 2 years - then - yes, it would be worth the effort to refinance.

2. Property valuation

Getting a value

If it's a personal residence, you'll generally need a 5% difference between your mortgage and your property's value. For investment property you'll generally need about a 20% difference.

So, a home is valued from an appraisal - and there isn't a big mystery to that. Someone physically compares your house to nearby ones that have sold recently. Since obviously, two houses aren't the same - he or she makes judgments on what an extra bedroom or a view is worth.

I remember when the website Zillow was launched - and I have no connection to them in any way other than both being in the same city - but anyway, when it was launched I laughed because the whole premise seemed so ridiculous. In case you don't know, it's a free online site that 'values' every property in the US as far as I know - maybe even further.

In the beginning, Bill Gates' house - who lives here in Seattle - they had it valued at a ridiculous number. I think he put like $130 million into it - and that was when $130 million meant something - ha ha.

As you can imagine, it probably wouldn't fit a normal valuation algorithm. So, that got them off to a bad start, but they quickly recovered, and honestly, they do a pretty good job now. I'm pretty impressed.

For the most part, you can get a good valuation from their site. If your property has some really unique things - like views - lakes - whatever - well, yeah, that might not be counted. They give a range and so that should give you an idea.

There are other ways I'm sure, but Zillow is free and a good place to start.

After determining your value and mortgage balance

Ok, so somehow you've got an idea of your property value. So, let's look at the difference. So, if your property value is $300,000 and your loan balance is $285,000 or less (95% of the value) - you're good to go. If you have investment property and the value is $300,000 then your mortgage is $240,000 or less (80% of the value) then you too are good to go.

If your loan percentage is at or less than these thresholds then you are a great candidate for a refinance and should be looking at doing that.

Now, let's say your home property is valued at $300,000 and your loan is $295,000 ($10,000 over the limit of $285,000 or 95%). Let's further say your current rate is 6% and you can get 4%.

Well, wow - let me tell you - I'd be trying to find a way to come up with $10,000 to refinance. The 2% difference in the rate would save me about $475 a month in this example. Yes, $475 a month - ($285,000 * .02 / 12 months = $475).

And think about it - the $10,000 you'd pay to refinance - it's not like you're giving that money away as a fee - you are paying down your own loan. So, now instead of owing $295,000 - you owe $285,000 'and' and and - you are saving 2% in interest!! Are you kidding - it's a no brainer!

But - of course you have to have $10,000 in that example. So, you really have to look at your situation - the point is - if you have money in the bank and can do a pay down on your mortgage without cutting it too close - well, it may make a lot of sense. A 'lot' of sense. What creative things can you do to make that happen? Try and think outside the box.

The Actual Interest Rate

While you do need to shop around a bit for the best rate and fees - your credit score can play a huge difference in what you pay. Someone with a near perfect score may get say a 4% loan where someone with a weaker score 4.75% and the lowest and still qualify might be 5.5%.

On a $300,000 loan the weaker score pays $187.50 more a month and the one with the lowest credit score pays $375 a month. That's $2,250 and $4,500 a year respectively. I don't even want to multiply that over 30 years. Oh, my. I think I could find some other use for that money.

So, obviously, you want to have the best credit score possible. And as I've said before, if it's from the economy or health things - I'm sorry - otherwise - what the heck are you thinking. Get your act together - seriously. You're destined for a life of financial insecurity unless you get that under control.

 Honestly, most of the disasters I see in people's finances is self generated. Everyone has ups and downs and as I said, I'm sorry for those in that situation. But, refusing to be involved in your own finances - burying your head in the sand - totally relying on someone else - is - well, consider yourself smacked upside the head. If you don't understand something - ask questions until you do.

The Process

Ok, everything else checks out - enough of a difference in the interest rate, credit ok, appraisal ok - so should I do it? Well, why in the world would you not? Too hard? Seriously? Go back and reread this sentence until you think - yes!

Sure, it's a little work but to get the kind of savings you can get - once you do it you'll be saving money every month. Pretty much you'll just spend time filling out some forms and making copies of bank statements - things like that. Honestly, there isn't that much work for you to do - but do it you must and don't dilly dally either - just do it and get the process going. Your bank or mortgage broker will do most of the work.

Fees

 Common fees would be a Title Report - showing there are only disclosed loans on the property. This runs from about $300 - $1,000. You'll also have an Escrow fee - which is a charge for who handles the actual paperwork and filings. It's typically $250 - $750. Additionally, you'll also have a couple of hundred dollars in miscellaneous fees like credit reports and filing fees and appraisal costs.

The biggest fee is typically a 'loan fee' or 'origination fee' - it can come in many names but conceptually, it's a one time fee for borrowing the money. So, if your loan amount is $280,000 and your loan fee is 1% then your one time loan fee is going to be $2,800. Loan fees vary from no loan fee to perhaps 1.5% or so. Obviously, the lower this is the less time it will take you to recover the fees.

A loan may also offer the opportunity to 'buy down' the rate. So, they may offer you 4.5% or 4.0% with a buy down cost of .375% of the loan. So, if your loan is $300,000 then the buy down cost would be $1,125 ($300,000 * .00375). Basically the way to look at this is will you live there long enough to recover that extra fee. In my example that buy down of $1,125 would be made up in less than a year. $300,000 * .005 rate savings = $1,500 a year. Your cost was $1,125 - so in this example - probably obviously yes - makes sense.

So, there are your biggest fees - Origination or Loan fees, Title Report and Escrow fee. Compare those fees to your monthly interest rate savings to see how long of a recovery you have. Generally the rules stated earlier will apply. Do the buy down calculation separate.

Now, a lot of people want to count in Insurance and Tax reserves as part of the cost and that just isn't the case. They are only collecting an estimate of the costs - if your present loan is collecting for these - you'll get that money back. Don't confuse the issue.

Interest adjustment - same thing - that's not really a loan cost - if you look, you'll end up skipping a payment so this should wash out for you as a no cost - except your new payment will be less because your rate is lower.

Common statements I've heard

I'm not going to be saving that amount every month. Your minimum payment difference is a permanent decline in a fixed rate situation as described here. The amount of actual interest you save true - it won't stay the same, because the balance will be going down and so the amount you save will decline as the loan is paid down. So what? Your savings over the loan period is tremendous. What you want is to recover your fees and the rest is gravy. Plus you have a permanent - up to 30 year - reduction in your rate.

I'm starting over on the 30 years.

Well, that's true, and you'll actually have a change in your payments from two angles - one is your actual true interest rate savings that I've based all this on and two from the extending of your payment out to 30 years or your new loan term.

I like to have the 'minimum' I have to pay on something be as low as possible. So, by setting the payments so low - if I have some issues such as a drop in income - my minimum payments will be a lot less.

Depending on your age and situation - do you really care that it's now 30 years? In a lot of cases, I'm not sure it really matters - the client isn't going anywhere - they have steady but not climbing income - well, yes, they have extra cash flow - so that's going to be great for them.

If your desire is to have your home paid for - well, a worthy goal, but look at the overall. Is it to leave more to your child who won't return your phone calls unless they need something? Ha ha. Seriously, don't let emotion work your decisions. Make good logical choices for you.

The simplest solution though and the smartest would be to continue making the same payments you are used to making now and you'll have a pretty good excess coming off the principal each month. That loan balance will reduce at a phenomenal rate - except it's really not phenomenal because we can explain it.

But consider if you want to do that - look at your age - income future - present situation to decide.

But, the bottom line is that if you can do it you'll save money if you can refinance. Of course if it's not in the cards there's nothing you can do - but there are still a lot of people I've seen that could do it and could benefit a lot and just haven't. It might take being creative, but it's up to you - pay more money if you want - personally I'd rather have more to spend on the things I really want.

Take some charge of your finances. You'll feel better about it.

Joe Poff, CPA

 

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Comments

Posted by Ifeanyi from United States posted at Monday, March 26, 2012 21:13
Comment from Ifeanyi is -
It makes perfect sense. Here's why: Your credit score is only part of the equation. They also look at the amount of credit you have available vs. what you owe. In other words, if you have three credit cards, each with a $10,000 limit, it doesn't matter that you've never used them and they have a zero balance. Creditors look at that as you have a potential to have $30,000 in debt and that's less money you'll have to pay them back. But if you have three credit cards, one with a $1000 limit and zero balance, two each with $500 limit and damn near maxed out, that somehow works better for you because they see you only have $2000 in other obligations, and unless you're jobless, they'll get their money from you. The other part they look at is the age of the items on your credit report. Less than three years is like being brand new in many cases. They see it as they don't know you well enough type of thing. That's why, if you EVER have to cancel a credit card, try not to cancel the older ones, cancel the newest one. Longevity is good.
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Posted by Sabrina from United States posted at Monday, March 26, 2012 14:49
Comment from Sabrina is -
Hey! Your blog popped up on bing and I checked out some more of your stuff. I just added you to my Google Reader feed. Keep it up. Look forward to reading more from you in the future.
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Posted by Ram from United States posted at Monday, March 26, 2012 06:31
Comment from Ram is -
You may not want to hear this, but your perception of what a reasonable rate is and what your lender thinks is a reasonable rate are completely different. While you are looking at your rate for your 20% loan and comparing it to your first, your lender is pricing your second mortgage to adjust for the increased risk of lending out 100% of the value of your home. If you are looking to replace your current second mortgage, understand that there are no real deals out there for stand-alone second mortgages and there are not very many lenders (especially now) that offer stand-alones. Your best bet would be to look at a HELOC (Home Equity Line of Credit) to pay off your second mortgage which would be priced at the Prime Rate plus or minus up to one percent and would have minimal or no closing costs. If it makes you feel better though, you are still not in a bad loan structure considering the blended rate that you currently have of 6.05% (5.25*.8 + 9.25*.2) which is not currently available for 80% financing let alone 100%. Also you should be looking at a worst case blended rate of around 6.65% based off of what I am assuming is a 6% lifetime cap on your second mortgage adjustments.
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Posted by Shuuzou from United States posted at Sunday, March 25, 2012 02:48
Comment from Shuuzou is -
There are some factors to consider here. First, in today's world, who stays in one spot so long? On top of that, who wants to be paying a mortgage when you are retired? Many people today can't afford to live on their retirement and you want to add a mortgage payment to that? Second, with the way mortgages work, you the bulk of the interest up front. Lets take an example: Say you borrowed $ 300,000 for a home at 6% interest for 30 years. Your payment is around $ 1800.00 per month. You don't get 10% of the loan paid off until year 7. You get to 20% of the loan paid off in year 12. The total interest you pay the bank over the whole lifetime of the loan is $ 347,514.00.If you take the same thing and do a 40 year mortgage your payment per month is $ 1650.00. You get to 10% paid off in year 12. You get to 20% paid off in year 19. The total interest you pay the bank is $ 492,307.20. For a 50 year mortgage your payment per month is $ 1580.00. You get 10% of the loan paid off in year 18 and 20% of the loan paid off in year 27. The total interest paid to the bank is $ 647,526.00You can see that going longer is not the smarter thing to do. If you need to have a 40 or 50 year mortgage to afford your home then you need to look at a cheaper home.
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LinkedIn got screwed?
Posted by: Joseph E Poff, CPA CITP from Auburn Software, Inc. on Wednesday May 25, 2011 at 1:08 PM   (-07 GMT) | Comments (5)
Tags | Businesses, | Economy, | Stocks | Categories: | Financial Markets - Stocks, | Economy - United States
So, wow - don't know if you followed the LinkedIn IPO- what a story - and perhaps a message for us too.

It was set to go public at $38 or $40 - something like that and when it was issued it immediately hit about $85 before hitting $115. I think a day or so later it was around $85 again.

So, what does that tell us? Well, a couple of things.

One is that LinedIn got screwed. The company itself got the $40 a share - they didn't participate in the run up to $115 or even to $85. The company got whatever it contracted for - the Initial Public Offering price of $40.

So, whoever set the IPO price of $40 should be flogged if not worse. It didn't take a braniac to figure out this stock would take off.

In fairness though, let's look at what happened. When a private small business is sold it's typically sold at the price of 3 to 7 times earnings - plus the assets. So, if the business is making $150,000 a year (after an owner's salary) and has $10,000 in equipment and $50,000 in assets then a good starting point on a price might be between $510,000 and $1,110,000 or (3 or 7 times $150,000) plus ($10,000 + $50,000). So, again, 3 to 7 times earnings plus assets.

A public company will usually go for a higher multiplier - so you'll probably find them selling for 5 - 25 times earnings.

If you think of it like this it might help to understand it. If a company is selling for 5 times earnings, then in theory you'd make all your purchase price back in 5 years and would still have your investment. A great deal.

Now, if it is at 20 times earnings - well, in theory that's 20 years......

But, what are earnings? Well, they can be based on the prior few years or using the current year as the basis for your projections. Or, you can base it entirely on projected earnings. Which is correct?

Let's say the earnings in the last 3 years were - Loss - $65,000, Loss - $22,000, Loss - $5,000. Let's also say the current earnings are $70,000. How would you determine how to value it?

It's not hard to see that since the earnings are one of the multipliers then it's probably more important in the formula than the assets in a sale. So, how this is determined is critical.

Usually, a buyer is going to want to use the lowest, most pessimistic earnings projections while a seller will paint the most optimistic projections of the future. Probably, a good number is somewhere in between.

So, as I indicated, usually in private companies 3 - 7 times earnings and in public companies 5 - 25 times earnings with the lower number 'usually' meaning a better bargain - assuming the earnings you're basing it on are reasonable.

In the LinkedIn situation, my understanding is that it reached 500+ times earnings. Oh, wow. In my simple mind, that told me it will really need a turn around to greatly increase the earnings to make that price be anywhere near reasonable. A lot of pressure on this stock - that's for sure.

This reminds me of the tech crash. When companies where coming off the IPO's (and even regular trading) and the prices were 200 times earnings - or in a lot of cases had 'never' turned a profit - I just could not understand it. It really went against all my years of training - and defied logic. But, like a dope - I finally caved in and bought into the tech bubble because even taxi drivers were making more in the market than me - not long before it did crash. (No offense to taxi drivers - it's a subtle reference to the taxi driver stock 'guru' who is now in jail)

So, 500 times earnings is like - wow. Is this the start of a new movement for stocks?

When you look at what happened, it's hard to blame the underwriter for letting the stock come out of the gate at $40 - to set it higher would have been irresponsible, but if I was LinkeIn - the company - I'd be annoyed that extra money - or some of it - didn't find it's way into the company.

Who got it then? Well, the big industrial investors got the IPO's - so they pretty much had a lock - they knew they'd be buying at $40 and selling at probably $80 - at $115 - after one day - a banker's kind of wet dream.

Of course, the founder's do well too. But, they are limited on how much stock they can sell for a few years, so they are happy to see it go to $85 or whatever. Great for them. Hard to be critical here - but notice I didn't say that about the industrial investors. But, without them a lot of lesser know IPO's might not happen.

The whole idea of a public offering is to get money for the company to expand - to do things they couldn't do without a huge infusion of cash - the kind you don't have to repay - and that only comes from a stock offering. Too bad they missed out on hundred's of millions - but all is not lost - the big Wall Street guys made out ok! Unfortunate there isn't a better system for us all to be able to participate in an IPO - I mean - what does that second letter stand for? Public I think...

All in all - an interesting side note to today's economy and perhaps a sign of optimism - a sense that better times may be coming.

Joseph E Poff, CPA

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Comments

Posted by Elly from United States posted at Thursday, November 24, 2011 15:46
Comment from Elly is -
Many many quality points there.
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Posted by Regina from United States posted at Sunday, July 10, 2011 15:45
Comment from Regina is -
Please keep throwng these posts up they help tons.
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Posted by Kaylynn from United States posted at Sunday, July 10, 2011 04:41
Comment from Kaylynn is -
Great stuff, you helped me out so much!
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Posted by Benon from United States posted at Saturday, July 09, 2011 20:00
Comment from Benon is -
Wow! Great thinking
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Posted by Jas from United States posted at Tuesday, May 31, 2011 13:21
Comment from Jas is -
Great!
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Real Estate Investing
Posted by: Joseph E Poff, CPA CITP from Auburn Software, Inc. on Wednesday August 4, 2010 at 8:04 PM   (-07 GMT) | Comments (0)
Tags | Investing, | Mortgages, | Real Estate | Categories: | Debt, | Economy, | Real Estate

The Real Estate market has been and will continue to be a highly leveraged commodity. Sure, right now it's in the dumps - hardly anyone can get loans - those that can are too afraid. But there are signs it's already easing. For example, appraisals now must be made by those familiar in the area - there are issues about whether foreclosed properties should be in samples. Applications are becoming less restrictive too - ever so slightly but they seem to be easing. Credit score minimums have also been lowered.

The near or at 100% financing we had enabled a lot of people to buy property - residential and commercial alike who otherwise may not have been able to do so. Under some circumstances that 'can' and 'does' work - but you can't just blindly do it - you need to really look at the situation. Something that wasn't happening in the industry just prior to the collapse. But with or without the 100% financing 70-98% was common place and most of the time worked and still will work. It will be common place again.

In business you make money by leveraging yourself by your employees (or perhaps by machines). If you never had employees a business would have difficulty in growing or surviving.  It's the same in Real Estate - many clients of mine bought their own buildings to house their business in highly leveraged loans. It was rare when they didn't work out. Everyone won in those - my client was in better shape than renting - the bank did fine - things were great.

The concept of cheater intro interest loans, negative amortizations, the borrowers 'pretending' they didn't understand and the borrowers that really didn't understand - no wonder the Real Estate market had what the stock market calls a major correction. But we will go back to the heavily leveraged loans - it just has to happen. Along the way - Real Estate values will go up.

The market is still in a state of flux but smart - nerves of steel investors could make some money by buying some Real Estate. While prices might still drop - say another 10% if you buy now - the likelihood is that would be the extreme and we are probably at or near the bottom now. Signs of stabilization are showing up - not great - but stabilization. Also, pressure will be on our elected officials as the election season starts.

So, depending on your cash situation and investment strategy you might want to investigate the availability and pricing of some properties be that commercial, residential or land - all depending on your personal situation.

Be smart - don't over commit either physically, mentally as well as financially. Real estate transactions can be stressful but the more of them you do the easier it becomes. If you're planning on developing a property - well that's a lot of work - research it first - know what you are doing. If you want to be a landlord be prepared for it being vacant and the dead beats that leave your rental house in shambles. On the positive side - don't look for a quick return, but given time you will come out ok. Just think of the population increases - mathematically, they will have to increase in value.

As an alternative to investing directly into a project you could invest in a mutual fund or similar type investment that specializes in Real Estate projects.

Joseph E Poff, CPA

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Trademarks - who needs them?
Posted by: Joseph E Poff, CPA CITP from Auburn Software, Inc. on Tuesday July 20, 2010 at 11:22 PM   (-07 GMT) | Comments (0)
Tags | Businesses, | Intellectual Property | Categories: | Businesses - Operations, | Businesses - Product Development, | Intellectual Property - Trademarks
Trademarks - that really doesn't apply to me. Or does it?

Why is it that the things you know the least about are the things that will get you. For tests - I'd shy away from the parts that seemed like I didn't understand - but then I learned that I could get a bigger percentage increase in my score by studying those parts rather than perfecting my knowledge on something I already knew. I felt better when I studied the stuff I already knew - I could even do something else while I was doing it - but not a smart way to do it. Not having a concept about trademarks could be one of those gotcha's.

For a relatively small fee - considering the downside of not doing it - you can file with the US Patent and Trademark office your business or product name. Prior to doing so you'll want to make sure that your name isn't already taken. If it's a pretty straight forward name - then it's probably already taken. What are the consequences of using a name that's already registered? How about all the profits you made from the use of that name - yep - all of the profits. Oops.

So, let's say that you started a company and made hot dog carts in 2008 and called the carts Joe's Hot Dog Cart. You start selling them and man oh man - they are selling like crazy. In 2010 you surpass 3 million in sales and it looks like it will go higher.

Only one problem - someone else is making hot dog carts and while their sales are only 2 a year and yours are 2,000 - they filed and received a trademark from the USPTO in 2007 on the name - believe it or not -  Joe's Hot Dog Cart.

So, now the person that has the valid trademark finds out that you - oh, you lucky dog - you've got a very successful business now using his trademarked name. Boy, the attorneys smell money here. You're in some hot chili.

Another situation is where you're marketing the hot dog carts and this time you were smart enough to get a trademark on it. You have a website - JoesHotDogCart.com and things are great until you discover one day there is a website JoesHotDogCart.net or Joes-Hot-Dog-Cart.com or one of the many variations. Having your name trademarked gives you vast power in forcing whoever is hosting the offending site. I've had ones shut down in less than 24 hours.

On those kind of sites, it's not just that they may be trying to sell a competing product - they may be a look a like site where they are taking orders and money from the poor souls that go to the .net version of your site instead of the .com. If you've got a .net site - well, unless you have the .com site too - people will 'really' get confused there. Registering your trademark goes a long way toward protecting you and your customers. As a side note - it's probably a good idea to register .com's and .net's when you register a name.

The protection of your trademark will continue for years and will be an additional valuation item of your company.

To file an application, you need to choose a class for your trademark. For example the hot dog carts would probably fall under class 7 - machines and tools. So, someone else could file under another class such as class 2 - paints - and then they could use Joe's Hot Dog Cart for a type of paint. So, when you file, you need to make sure you have the right class and have looked at whether you need more than one class.

You describe your product or service - mostly from canned choices from the USPTO and then pay your fee. After it's reviewed (3 months to 1 1/2 years) you'll have your Trademark - assuming all goes well. You must be using the name to file or you can file an 'intent to use' and then use the name within a year. That's a helpful option if you wanted to make sure you'd get your name approved before you printed up $200,000 worth of advertising material and then find out the USPTO rejected your name or it was contested.

There are issues related to foreign registration that I've not covered in this article. And I need to say that it's in your best interest to seek professional help in preparing and analyzing your company issues. There is a wealth of information at the USPTO site - http://www.USPTO.gov be a patent on how the cart is Also, patents - which may often be confused with trademarks - are filed to protect a design or process. For example, on the hot dog carts there may 'also' be a patent on how the cart is actually built - its size - components - special features.

Copyrights are often confused with these two also. A copyright is usually associated with someone's writing - such as this article or any article on The Blogs of Economics 411. Copyrights are awarded the moment anything is published - in book form or such as being on a website or handed out at a public meeting. Copyrights can also apply to designs.  More about patents and copyrights in future articles.

Joseph E Poff, CPA
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Investment Strategy - what's that?
Posted by: Joseph E Poff, CPA CITP from Auburn Software, Inc. on Friday July 2, 2010 at 4:08 PM   (-07 GMT) | Comments (0)
Tags | 401k, | Investing, | IRA | Categories: | Accounting - 401ks, | Financial Markets - Mutual Funds, | Accounting - Retirement Valuations

Do you have an investment strategy? Do you even know what that is? Does it consist of a 401k voluntary deduction each pay period that goes into some fund but you can't really remember which one? Well, don't feel alone - that's the approach of a lot of people I've worked with through the years.

It's ok to have a hands free investment approach to some degree but you don't want it to be totally hands free. If you're driving a car, a boat or flying a plane - all will go pretty much on their own - but you do have to steer occasionally and sometimes stop for gas. Once in awhile you also need to have an inspection of your means of transportation and make repairs. The same is true with your investments.

First - which fund(s) get your money? Funds are often very specialized now with exotic titles such as "The Fund of the Penny" whose stated objective is 'To corner the market on the 1963 US penny and then drive the price up and sell taking a capital gain on the increase in value". Ok - ok - I'm kidding, but there are some very very specialized funds you can invest in. Would the one I listed make sense? No. Do you know that you haven't already invested in it and don't know it? Well it is a fictitious fund ( I think) - but you see the point - you don't know if you don't spend a few minutes looking at it.

I'm constantly amazed that I'll see individuals spend hours - days - months arguing with the phone company over an extra $3 charge but won't spend any time looking at their 'very very large' retirement portfolio. Why? Usually it's because they have trouble understanding it and feel better leaving it in the hands of someone else. This is the 'close my eyes and hope for the best' approach and lots of times that works out ok. It's dangerous to do this though.

I can understand individuals not understanding investing and shying away from it. Working on that phone bill is easier because it's easier to understand. However, investing isn't so complicated - it's just that a lot of people haven't been exposed to it. Learning a little bit about it seems 'very complicated' because the terms are unfamiliar and they come fast and furious especially if someone is selling you something. No one wants to feel like an idiot and show that they don't understand. But you know - that's 'wrong'.

It's just like anything new - boating, flying, bee keeping, rocket building - all are hard in the beginning, but once you pick up on the 'lingo' - which will come quickly - you'll start making a lot of progress. It is hard in the beginning - that's for sure - especially the rocket building - ha ha - but soon the terms make sense and everything starts to fall into place.

In investing terms such as mutual funds, money market funds, T Bills, contract buy downs, reverse mortgages - all of these are terms (and lots of others) most people have heard of but may not be really familiar with them.  And to invest wisely, you don't need to know how to put together your own mutual fund - but broad stroke concepts are good things to know. This was one of the reasons I designed and developed Economics 411 - to expose individuals to some of the different types of investments and to illustrate things such as the dollar impact over say 10 years of investing in a passbook savings account versus 10 years with a money market account or CD. I think that seeing that in black and white in the game will resonate with them. They'll go - wow - I never understood that but do now.

Staying with mutual funds - you need to know how to value them. This is easier in recent years, but there are two parts to a mutual fund. One is that the mutual fund passes out earnings. The other part is the per share value of the fund.

Let's say you have a fund - we'll call it "The Fund of the Penny" - and the value per share at the end of the year was $27.40. Earnings for the year were $.75 a share and the value of the fund at the beginning of the year was $28.65. You have 1,214 shares. How did you do for the year? Should you invest more?

Well, let's look at that.

Beginning of the year value $28.95 per share
Earnings $    .75
End of year value should be if the market value held steady $29.70
End of year value is $28.65
Loss $  1.05

So, you didn't do too good on this - it lost $1.05 a share or 3.6% of it's value.

Now suppose the fund had paid out $2.00 a share during the year - what then? Well, that would mean you actually made $.95 a share. So, as you can see you need to really look at your investments to track how they are doing and if you need to change to a different fund.
With your retirement funds - not just mutual funds - you don't necessarily just want to look at just one year or some isolated period. I remember one time at a client's company retirement plan meeting (Profit Sharing Plan) - there was my client, his investment person, myself and about 30 employees. The investment person had prepared statements for the overall performance of the fund. He showed me his handouts prior to the meeting and they showed that from August to December the retirement funds had increased something like 25% - in just those 4 months. Pretty impressive.

What he 'hadn't' shown was that from January to August the fund has lost 50% ( I can't remember the numbers exactly). In any event the year ended up being a 25% loss (if my math' s correct) for the year - something I told him I'd have to point out in the meeting when I gave my report. Sure enough - the crowd was all pumped up from him and his 25% increase since August. Following him reminded me of when I went to one of the local schools for career day and watched the fireman come in with his fire truck, hoses and gear; the veterinarian with his cages and the animals he brought in; and me - with my mechanical accounting pencil. The crowd was ready to go and I was about to give them a downer. At least then I was able to tell the kids that we had a rock band they'd know as a client.

So, I followed the gentleman and gave out my report which shortly generated questions regarding why my report showed a 25% loss for the year and the broker's show a 25% gain? I had to explain that while his was 'technically correct' - it was limited to that time period - August through December. My report covered the whole year which also encompassed the drop in the market that occurred in early August of that year (some of you will remember the time I'm talking about).

My dad often said - 'figures don't lie but liars figure' so there you go. You can often distort numbers to your needs so make sure of what you are comparing - be consistent. Ask questions of your advisors. Never be embarrassed that you don't know something. Fire your advisor if they can't or won't answer your questions - or seems disinterested. Only doctors are allowed to not pay attention to you!! (Ha ha - just kidding Dr's that are clients.) Don't take that from your advisors.

I'd often tell my older clients that it took them all their life to accumulate their wealth - and in all likelihood if they lost it now there won't be enough time left in their lifetime to rebuild it. So, one of the keys is principal preservation. As you get older, you generally want to start picking a little more safe investments rather than worrying about getting an extra bit of interest. Sometimes it's not worth the risk - but of course you have to review your overall portfolio. Which brings up a good point - diversification - that will be in an upcoming article.

Invest safe and wisely and have fun!wisely and have fun!

Joseph E Poff, CPA
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Welcome to the Blogs of Economics 411
Posted by: Joseph E Poff, CPA CITP from Auburn Software, Inc. on Tuesday June 1, 2010 at 5:55 PM   (-07 GMT) | Comments (0)
Tags | Author, | Blog | Categories: | General Information, | Write for us

In the years – decades really – that it took me to design and develop the financial game Economics 411 ( http://www.Economics411.com ) – I often thought of enhancements I wanted to add. One was a Blog that brought together many different authors - all interested in the Economy and in Investing. Each would write a little bit about their knowledge and experience on these topics.

For example, as a CPA, I’ll have topics that relate to my experiences and my clients in the accounting finance area as well as Information Technology. A Stock Broker, Real Estate Agent, Mortgage Broker or fellow CPA will be viewing things from a different angle and their topics will undoubtedly be different than mine.

One thing my 30 years in public practice taught me is that some of the keenest insight of investments and businesses came from clients that weren't in the financial - accounting industry. So, while we’ll have professionals as authors I'd also like to encourage others that want to share their insights with others to participate.

Let me know if you'd like to become a contributor on this site. We already have several people that will be coming on board shortly.You can leave comments and rate any story you read here and then check back to see what responses you generated.

If you have Questions – you can submit them too for our anonymous Q&A page. You can also contact any of the Authors directly for a personal answer, but keep in mind that they often only have their time to sell and so if you are taking up some of their time you should expect to pay them for their time. I’m sure any of them would be more than happy to consider taking you on as a client.

It took a long time to get Economics 411 up and running and I'm sure this will take some time too. I'm excited as The Blogs of Economics 411 has finally launched – roughly a year after Economics 411 launched.

I think there could be some great practical posts for people to read and hopefully help them with their own personal finances. Perhaps in 20 years, someone that has read some of the articles on The Blogs of Economics 411 and played Economics 411 - perhaps they'll have a little more money that they would have if they passed us by - who knows - I'm going to think so! 

Joseph E Poff, CPA

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