WORLD PROPERTY CHANNEL ®

I don't know about you, but when it comes to doing math, I often try to find something else to do.  Oh, don't get me wrong.  I can balance my checkbook and have never written a bad check in my life.

But when it comes to working percentages, returns on investment and amortization tables, I generally need help.

A generous helper usually has been my old friend, Moishe Pipuk, who has been mentioned in this corner previously and who says he  is also a retired certified public accountant.

Pipuk called me the other day.  "I want to talk to you about that story you posted on some lender offering to give homebuyers a chunk of cash for just letting him share in the future value of the home's sale," Pipuk says in that low monotone he always uses when he is getting ready to put something over on you.

(Please see,  "Chicago Entrepreneur Launches Fund to Help Home Buyers Finance Purchases, Sept. 8, 2009.")

Having had mind-boggling discussions with Pipuk before, I ask him if he doesn't mind me turning on my small Kmart recorder to make sure I get everything right.  Pipuk says he doesn't mind at all.

"That guy isn't planning to help home buyers as much as he is going to help himself - big time, I might add," Pipuk continues.

"First of all, the guy gives an example of a $240,000 home appreciating to $375,000 in six years when it is sold. That is a six-year appreciation of about 56 percent or 9.33 percent per year - unheard of, unrealistic and unsupportable in today's economic climate.

"Homes used to appreciate, on average, about 5 percent a year until the crash came in 2005.  If I had to guess, residential single-family homes in the next five years might appreciate at an average 1 percent a year, certainly not 5 percent and seldom at a 9 percent clip.

"But to continue. The guy says he will, like Santa Claus, give the buyer up to 15 percent cash, or in this example, 10 percent, or $24,000 - after the buyer closes on the home contract. 

"All the guy wants in return is a 30 percent bite of the increased price of  the home when it is finally sold. In this example, he cites six years but says the buyer doesn't have to sell the home at any specific period - and still not owe the lender a dime.

"OK. Good, so far. Now comes the very interesting part.

"In the lender's example, he assumes the $240,000 home is sold in six years for $375,000.  That's an increase in value of $135,000.  At this point, the lender gets back his initial $24,000 gift plus 30 percent of $135,000 or $40,500 for a total $64,500.

"Now you might say, what's the big deal - making $40,500 over six years on an investment return?  Yes, that is a big deal - a very big deal when you do the numbers.

"The lender has just made a 169 percent return on his $24,000 'investment.'  Broken down on a yearly basis, that's a return on investment of 28 percent.

"You check that by multiplying $24,000 by 169 percent and that gives you $40,560 - just about the lender's 30 percent portion of the home's $135,000 increase in value at sale time.

"Not too shabby.  Not too shabby at all.

"Now let's see if those numbers also check out for another example. Let's use a home purchased for $200,000. It is held for seven years, which is generally the average time American homeowners have kept their residences over the past 20 years.

"At the seven-year mark, the home is sold for $270,000. That price is based on the home appreciating an average 5 percent a year, which will not happen over the next five years at least.

"But let's go with 5 percent anyhow.  That $270,000 means the home has appreciated in value by $70,000 or 35 percent.  The lender has given the homeowner a gift of 15 percent of the home's initial purchase price, $200,000 x 15 percent, or $30,000.

"At closing, the lender gets back his $30,000 gift plus 30 percent of the $70,000 increase in value, or $21,000, for a total $51,000.

"Again, you might say, what's the big deal - a $21,000 profit over seven years?  It is a big deal because the $21,000 represents a 70 percent return on the lender's initial $30,000 gift.

"Take $30,000 times 70 percent and you get $21,000, or an annual return on investment of 10 percent.

"Not too bad, even seven years down the road.  Did you get all that, my friend?"

I told Pipuk I would take two or three no-doze tablets and try to work the numbers again when I am more rested.  Meanwhile, if readers find fault, any fault, with Pipuk's calculations, please, don't call me.  I'll be sleeping it off.

And that's the way I see it - for now.

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