WE HAVE A DIFFERENT SHOW THIS WEEK, A DIFFERENT WAY TO LOOK AT WHAT WE DO IN THE HOME BUILDING INDUSTRY, A LOOK AT THE “HOUSE” AS A FINANCIAL STRATEGY FOR BUILDING WEALTH
➢ THEME: “If WHAT you thought to BE true about your house turned out not to be true, when you would want to know.
My guests today are Jim Kuhner with Benefit Light Financial and a Legal Segment by Kelly M. Davis, Attorney at Law on Mechanics Liens.

1. INTRODUCTION OF THE GUEST JIM KUHNER
Jim Kuhner is the owner of Benefit Light Financial and his new company Wealth Education Strategies, LLC, a company dedicated to providing financial education. Jim is a faculty member with the prestigious National Institute of Financial Education www.NIOFP.com. He teaches Borrow Smart workshops to consumers and continuing education courses for realtors, CPA’s, CFP’s and HR departments. Jim offers special training in the convergence of asset and liability management and provides a unique approach to building wealth. He is a leading provider of strategy, content, tools and education in eliminating unnecessary wealth transfers, He currently has two books he co-authored currently being published, the first, Sitting on Your Assets, and the second, Borrow Smart, Retire Rich.

2. Jim, can you tell us about the Borrow Smart workshops that you provide to the consumer?
Basically, we teach consumers how to Manage Liabilities into Assets™. The Program is a unique process designed to increase the wealth of a client through the management of their liabilities. We also identify wealth transfers by looking at both sides of the balance sheet, assets and liabilities as they relate to a person’s net worth.

3. When you talk about liabilities, as a Custom Builder and interacting with my clients in the past, I would assume a person’s house and mortgage would be a major part of a person’s liability management, am I right?
You are absolutely right? It is important that I clarify for your listeners the difference we make when talking about a person’s house and a person’s home. The home is your emotional experience you have in your house, such as hobbies, security, relaxation, a place to be with family. The house is the physical shelter; it deals more with logical reasoning as it relates to appreciation opportunities, tax benefits, leverage, credit mortgages and so forth.

4. That’s interesting, as a Builder I never really looked at that difference before. Of course, I can see that my focus is on the construction of the physical shelter, which would be the house. You just mentioned the house pertains the tax benefits, leverage, credit, mortgages, is that also your focus when you talk about managing liabilities into assets?
Yes it is. Let me share with your listeners Jim three key statistics, these were just updated in March of this year.
➢ 28% of America’s wealth is inside the house.
➢ 19% of America’s debt is not tax preferred.
➢ 65% of Americans have more wealth in their house than all other investments.

5. Tax preferred, you mean tax deductible, right?
That’s right; let me also put the statistics into actual dollar amounts, especially as it relates to net equity in the house in American and the non-deductible that Americans hold. These numbers were just updated In March of this year

➢ The total value of the house in America is 20.9 Trillion. By contrast, the total value of Equities or stock holdings is 20.0 Trillion. The total value is not the net equity in the house because we have to subtract the 10.4 Trillion in Mortgage debt, which brings us to 10.5 Trillion that Americans have in Net Equity, that’s the 28% of the wealth that is inside the house.
➢ I mentioned 19% of America’s debt is not tax deductible, this would be a credit card, personal car debt, and so forth, this is 2.5 Trillion.

6. I made a note when you talked about 65% of American’s have more wealth inside their house that all other investments, obviously if you are managing liabilities such as a mortgage, into assets, understanding the financial aspects of owning a house is very important, is it not?
Yes it is, understanding things such as tax deductions, down payments, appreciation, equity and so forth are very important.

7. Is there one thing that is more important than the others?
Maybe, they are all interrelated when looking at the process as a whole, I would say a key component is the relationship of the mortgage to other types of non-deductible debt, in other words equity or maybe the lack of equity to other non-deductible credit debt.

8. At the beginning of the show we mentioned we would be giving our listeners a chance to win a $50 gift certificate to Chili’s, we are going to give a House Quiz that has four questions with either a true or false answer. If you want a chance to win the gift certificate, round up something to write with and something to write on. You can send your answers to this email

1. A large down payment will save you more money on your mortgage over time than a small down payment? True / False
2. A 15-year mortgage will save more money over time than a 30-year mortgage. True/False
3. Making extra principal payments saves you money? True/False
4. The interest rate is the main factor in determining the cost of a mortgage? True/False

9. OK, let’s send in those emails with your answers, we will be announcing the winner at the end of the show. Oh, and by the way, this is just like school, you only get to take the test once.
When you talk about taking a test, I will never forget my Geology class in College, the class was at 8”00AM, it was in a big auditorium, and people kind of slept through the class because all the Professor did was read out of the book. Then when the final test was given, 60% of the test was on a rock display in the Hallway.

10. I bet there were a lot of people wanting to take that test over?
I would think so, but I did not trust the guy, I actually studied the display…. it sort of made him angry because at 8:00AM the spring quarter of my senior year…you can imagine how often I was in that class.

11. You brought up an interesting thing at the last break, which is what people earn as far as a rate of return on equity on their house?
That is a very interesting discussion; most people confuse appreciation with rate of return on the money that is inside the house.

12. What do you mean?
First, let’s define rate of return when we talk about the house, it is the rate of return on the equity inside the house. Now, what if I asked you to make an investment, I will guarantee you a 0% rate of return and that’s before inflation…how much do you want to invest?

13. If you mean no more than 0%, not much,
I do mean 0% and no more, you see Jim, House Equity always earns 0%! Equity in a house can only increase through.
➢ Principal Repayment
➢ Appreciation
It’s kind of difficult to show numeric numbers on the radio, so let’s just look at two broad explanations.
If you put $0 down on a 30-year mortgage, you have no principal repayment and let’s say there is not appreciation, what is the return on you equity?

14. I see what you mean?
Here’s another way to look at it. Let’s say you make extra payments on your mortgage. You are basically taking money from one pocket, your checking account, and moving it into your other pocket, your house account. There is no change to your balance sheet, and no change to your net worth.

15. I know as a Custom Home Builder, our clients often discuss how much money they are going to put down on their house. For many of our clients, the house we build is going to be their last one. What is your opinion on a large down payment?
Well, let me ask you two questions.
➢ Do you earn interest on your down payment?
➢ Is the down payment money accessible?
What would that large down payment be worth if it could have made interest?
Let’s say you and I each buy a house for $400,000 and you have more money than I do, so you make the largest down payment you can, 100%, or in other words, you pay cash for the house. So, now you have $400,000 of equity in your house, and as we discussed earlier, how much does the equity in your house earn….

16. 0%
That’s right, 0%.
Now, I take out a 0% interest loan, I have the $400,000 outside of my house and I put it someplace where it earns 8% for 30 years. Now I would have earned $3,974,292 over your original $400,000 down payment. And guess what, if both houses are in the same neighborhood, are in the same condition, they are probably going to sell for about the same price, are they not?

17. Yea, probably
So my question is, where is your $3,974,292 that I have and you don’?
This is a good example of OPPORTUNITY COSTS…in other words, by paying cash, or making a large down payment, you are losing the opportunity to earn a rate of return outside of the house. Again, equity in your house makes 0%.
And what about inflation, why would you want to take dollars that are more valuable today and put them into house equity and make 0% rate of return…. you are actually going backwards when you factor in inflation.

18. Can you give us an example?
Sure, Let’s say we have the same $400,000 house we each just bought, but this time you put down $200,000 because you listened to about half of what I told you….
Now let’s say inflation is 3.5%, in 30 years your current $200,000 of equity will be worth $61,664.
Now, let’s say your house grow in value at 4%, in 30 years it would be worth$1,122,717. Let me ask you a question, does it make any difference what your house is worth if you had $200,000 in equity in your house, or if started with $0.

19. I see what you mean
The real difference is in the opportunity costs, money that you lose by locking the money inside the house at Zero Rate of Return.
People need to remember the equity rule by Jim….”the House appreciates the same regardless of what you owe”

20. This is definitely not what our parents thought,, they always wanted to pay off their house as soon as possible.
Well, parents who believe that are thinking of the what happened during the depression, banks had demand notes then, they could just come to you and demand you pay the balance all at once, if you could not they could take your houses. Mortgages are different now, so they way people leverage their mortgages should be to their benefit and not the bank’s.

21. I guess what you are saying then, is the house will appreciate or depreciate based upon market conditions. Is that right?
Yes it is. I might add at this point there are two way a house can increase a person’s net worth, you just mentioned the first way, appreciation which we have little control.
The second is the approach you take to borrowing over which people do have a great deal of control.
Well, that is true. If we have time I can review that briefly.
However, there is another concept that I would like to share with your listeners, Jim.
Many of your listeners are thinking that if you have more equity in your house, you are saving interest on your mortgage…. and that’s true.
However, the real question is, is it better to have the money inside the house or outside the house?

22. Do you have some secret potion or magical wand on how to tell?
I do, but let me just say this, the initial decision to locate money inside or the outside the house has no immediate impact on net worth, but in the long term there can be a tremendous impact on future wealth.
Here is a simple way to evaluate and make decisions. We use a calculation, which is actually simple called Effective Percentage Rate.

23. What is that, I have never heard of that term relative to a mortgage?
It really has to do with the location of the money… what you are being charged, and whether or not there is a tax deduction involved. With the 32% tax bracket.
For example, if you are being charged 7% for a mortgage loan, and you are in a 32% tax bracket, then you multiply the tax bracket times the deductible mortgage loan interest, so 30% times the interest rate of 7% is 2.24%, then you subtract that to find the net after tax rate, or the Effective Percentage Rate which would be 4.76%.

24. OK, I guess the math is correct, but how can our listeners use this Effective Percentage Rate number?
This is all about leverage and arbitrage, in other words can you borrow money at one rate and earn a higher rate with the borrowed money, or should you pay down the debt. Here is an example; it’s just a hypothetical example.
Let’s say you have an extra $1,000 that you can invest each month over a 30-year period. We are going to use the same interest rate as far as what you can earn outside the house of the mortgage rate we just spoke about, 7%.
Now, the question is, should you invest outside the house at 7% after tax return which is the Effective Percentage Rate, or EPR, or inside the house by paying down your mortgage where you would save the EPR, of4.76%.
In 30 years, wealth inside the house “the interest you saved” would be $850,650 and wealth outside of the house would be $1,328,259. By locating wealth outside the house you would have increased your net worth by $477,606 in this example.

Mechanic’s Liens, presented by Kelly M. Davis

My name is Kelly Davis and I have been practicing law since 1999. Having been raised around the construction industry, construction issues have naturally interested me and have been my primary focus.
While Texas is not hurting as much economically as many other states, I have seen a huge swing in people not getting paid for the work they perform, what we refer to as “slow payers”, and builders going bankrupt.
Right now, for example, one of the major things that my law firm does is try and collect money for suppliers, vendors and subcontractors. One way to do this is through the Mechanic’s lien process.
On the flip side, we also help homeowner’s who find themselves in the situation of having mechanic’s liens filed on the home they are having built.
So, today, we are going to discuss these two situations.
What is a mechanic’s lien?
Lien against the title to real property (land and improvements) created by law to secure persons who have either labored, or who have provided labor, materials, machinery, fixtures, or tools to erect or repair (or remodel) improvements to land.
How does one properly file mechanic’s liens?
The most important thing is that you have to get it right.
In Texas, there are several different types of mechanic’s liens depending on whether you are a builder, subcontractor, or vendor. Each one has their own requirements which specify certain time frames, letters to be sent notifying the property owner of the potential lien, lien language requirements, and filing requirements.
The biggest thing to remember in Texas is that if you do one thing wrong with your filing then it invalidates the entire lien.
Some of the biggest mistakes I see:
1. No. 1 mistake: People wait too long to begin the mechanic’s lien process. For residential projects, a notice letter goes out no later than the second month after the work is performed on the house. This doesn’t give much time to wait for payment.
2. Mistake 2: The notice letters or Mechanic’s liens don’t have the correct language in them or are sent to the wrong parties.
3. Mistake 3: is that they fail to give the notice to the proper parties of the filing of the mechanic’s lien within the time required.
4. Mistake 4: is that many companies believe they can file them by themselves. While it is possible to do it right, this is a very complicated area of the law. It has taken my firm many years of drafting hundreds a year to automate the process and make sure there are no mistakes. Most of the time, companies will go years with many invalid liens before they get it right. A process we like to call trial and error.
The biggest misnomer is that the Mechanic’s lien process is expensive. Trust me, you can protect your investment into a house without spending a lot of money.
So, I’ve filed my Mechanic’s Lien, what’s next and when do I get paid?
Usually, if you get to it early enough in the process, you will wait for someone to negotiate the lien out in order to be able to close the property. Sometimes, a lien is filed too late in the process and then you must wait until the property owner decides to pay you, refinance or sell their property. Caveat: most mortgage companies consider this to be an act of default.

There’s a lien threatening to be filed on my property, what do I do?
Many homeowner’s are shocked that their personal property is what gets attached to, or liened, when it’s the builder who hasn’t paid.
Weekly we get calls from homeowner’s who are understandably upset about a notice that they have received in the mail. Most of the time, they claim to have already paid their builder.
One of the things I tell them is that their property will be liened if they cannot get their builder to pay what is owed.
How does this notice letter help the Homeowner?
There is some positive to this process. Believe it or not, the reason why mechanic’s liens are so hard to file (as I discussed previously) is because the State of Texas has a long standing history of protecting homestead and property rights.
The notice letter that you should receive as a homeowner informs you that there is a problem and someone hasn’t gotten paid. It also tells you to withhold payment from the builder (at least enough to pay the claim), immediately, until this issue is resolved.
In order to limit your liability for mechanic’s liens you must also withhold something called “retainage” which is 10% of your contract price, including change orders. Technically the retainage is there to pay potential lien claimants.
Lastly, if you follow the retainage law and immediately stop your payments to the builder, your liability can be severely limited. This is hugely important if all the sudden you get dozens of lien notices worth thousands of dollars.

Next time I’m on the air, I will be discussing a hot topic for the Fort Worth metroplex right now – oil and gas.
If you need to contact me, call 972-434-8009 otherwise visit us on the web at www.kmdalegal.com.
See you soon!