California Real Estate
Why people might be wasting their money
by Sandra McClintock

You know the story. Over the past decade, there has been no better investment than real estate. In fact, most economists report that in the face of rising unemployment, the cost of a war in Iraq and the series of natural disasters that devastated the country, it's the increase in the value of real estate that has kept the American economy afloat in recent years.

So it might come as a surprise to know that, despite record levels of real estate appreciation, people might be actually wasting money when it comes to purchasing a home in Southern California. And as today's interest rates begin to creep up, that lost opportunity only magnifies itself. But there's one approach that can help leverage the value of real estate significantly.

The smart money -- investors, luxury home owners and successful businesspeople -- have been taking advantage of a time-tested financing method to maximize the money from their property portfolios to either lower their cash payment or free up their cash, allowing them to increase their holdings and investments or use the money for improvements that only add to the value of their homes. They're turning to negative amortization funding. Flexible, low-cost programs that can multiply the borrowing power and affordability compared to standard fixed-rate mortgages. Sean Reynolds of SMR Financial has been specializing in deferred interest, or negative amortization funding programs, for almost 20 years, and is the leading authority that those "in the know" turn to when it comes to managing the complex financial makeup of the luxury homebuyer. We caught up with Sean earlier this month to talk about the trends in real estate and how his approach to funding has helped maximize the return in real estate for some of the most successful business people in California.

South Coast Magazine:
Sean, how is what you are doing different from conventional mortgages?

Sean Reynolds:
Most people can tell you how much money they've made in their homes based on the appreciation. The problem is, they don't really see that money until they either sell their home or refinance the existing loan every four or five years. In the meantime, any gain they get through appreciation is just a paper gain because they don't really have access to the money. The money just sits there, idle. For example, if you have a mortgage in the area of $1.5 million, using conventional rates, you could be paying in the range of $7,500 or more each month. With the funding programs we're specializing in, that same mortgage is in the $3,500 range, giving you about $4,000 a month to work with, either in the form of lower monthly payments, or capital to invest in other appreciating assets, including improvements in your own home.

But here's where most of my clients see the opportunity. The $4,000 difference is applied to the balance of the loan. After one year, that additional balance has grown by only $48,000, while the value of their home, especially in the mid to upper segment of the market, has probably appreciated by a multiple of that amount.

South Coast Magazine:
So what does that mean to the borrower?

Sean Reynolds:
Well, it provides two great alternatives. On one hand, since their payments are lower, they have more cash on hand than their neighbor who is living in the same house but locked into the more conventional program and paying more. Cash that they can use for improvements, investments or lifestyle desires. On the other hand, we are seeing people who can now step up a level in the home they want, because the payments on a monthly basis are much more affordable. And as interest rates rise, as they are in today's market, home affordability becomes even more a pronounced issue for most people. In the example I just used, they've had the benefit of that $48,000 in available cash while their home has more than offset that amount through appreciation.

And unlike other deferred interest loans that fluctuate with the rate, this program locks in a very low introductory rate, so my clients can take advantage of very low rates without sudden increases if rates begin to rise-like they are at the present time.

South Coast Magazine:
Okay, so all this makes good sense when you look at the investment and available cash coming from your home. But aren't negative amortization loans risky?

Sean Reynolds:
That's the fallacy some people carry in absence of the real facts and issues. While it's true that you are deferring interest to the overall balance of the loan, the amount is typically a fraction of what the home is appreciating, so you actually come out ahead each month from an investment and cash flow standpoint. While there are risks in all aspects of life, you would have to see about a 30 percent correction in real estate for these types of programs to really impact the equity in most people's homes. And most economists will tell you that in the unlikely event that we see a 30 percent correction, there will be much more fundamental problems in the economy we'll be dealing with --assuming the bankers would ever let it get to that point before stepping in to begin with.

In reality, it's really no different than what people have been doing with conventional refinancing -- taking advantage of the appreciation in their homes over time to pull equity out of their homes today. But the difference is, instead of refinancing your home every four or five years to take advantage of the appreciation, this program allows you, in essence, to take advantage of the appreciation in your home each month. In fact, what I'm seeing with many of my self-employed clients is they can adjust their payments each month to allow for those times of the year, especially now during tax season, when their out-of-pocket expenses increase compared to the rest of the year. This element of flexibility is a key factor to the program.

South Coast Magazine:
What makes SMR Financial so different from the other lenders?

Sean Reynolds:
Well, I've been doing these programs for almost twenty years. At SMR, we understand the importance of working quickly to facilitate financing at the speed of "now," which is something you don't find at the big banks and institutional lenders. It's also why people keep coming to us, why our activity continues to increase and our loan volume continues to grow each month. We didn't just jump into this industry when rates hit historic lows. We've been doing this when the market was hot, but also when 30-year mortgages were close to 9%. I can usually give an answer to even the most complicated transaction right over the phone, and if I can't, I'm back to the customer in 30 minutes. This is critically important with our client base, which consists of quite sophisticated people who have widely different objectives, from maximizing their tax benefits, increasing liquidity or accessing accumulated equity. They simply don't want to go with standard lenders who might not be able to execute. And our team at SMR is solid. Kristin Brunt heads up our loan processing and has been with us for five years, and Natalie Brems is the one individual that connects the dots, providing the concierge level of service that we feel is unmatched in the industry.

South Coast Magazine:
Speaking of your clients, describe the typical individual you would be working with on these types of programs.

Sean Reynolds:
We find ourselves working with sophisticated individuals who tend to be in the luxury segment of the market and at loan levels of $1 million and above. Accomplished, smart businesspeople that have complex financial needs, whether it's the purchase of a new home, a second home, or the financing of investment property. They are selective individuals who demand smart solutions and service, and they don't want to get caught up in the paper chase of big, bureaucratic organizations. They just don't have time to waste. We've spent years perfecting this vehicle to address their unique situations, understand them as customers and go to great lengths with our concierge approach to service that meets their needs and eliminates distractions. This way they can focus on running their businesses and their lives without having to worry about the small details getting done, and done right. And as most of our business is referral-based, I'm quite proud to say that I think we're delivering on the two key areas of our mission: providing a more personalized solution to our clients' complex financial requirements that frees up their cash, and doing it with stellar customer service.

South Coast Magazine:
Finally, what trends do you see emerging in the next few years?

Sean Reynolds:
Well, real estate will remain one of the best investments anyone can make. And while it may not continue to grow at the rates we've seen in the recent past, we still see real estate as a growth asset, especially in the key markets -- Southern California, the Northeast, parts of the Southeast, Florida and Texas. But I believe as interest rates edge up, home affordability will become a central theme for most people. The $2 million home that's affordable at 4.5 percent turns into a $1.7 million home when rates go to 5 percent. And what's compounding that is while rates are going up, home appreciation is also rising, so you're actually getting less for your money if you're sitting on the sidelines. The key is to get in and not wait. That's where the financing plans we offer really make sense, and why they're so popular. We're allowing people to maintain home affordability, even in an appreciating market, while lowering their monthly payments to maximize their buying power. It's absolutely the right financing tool for today's market. Since rates have gone up and we're able to show people how it works, the response to this program is great. We are increasing our activity each month and our loan volume in this product is growing each month as well, so I guess we're moving in the right direction and doing things right.

SMR Financial
Sean M. Reynolds
27201 Puerta Real, Suite 170
Mission Viejo, CA 92691
949.600.6570/888.679.7755 fax
www.smrfinancial.com

(South Coast Magazine Spring 2006)