By BRETT ARENDS

In other news on the markets this week, Warren Buffett quietly made an acquisition.

A big one. Even by his standards.

The 80-year old investor put down $9.7 billion, or about a quarter of Berkshire Hathaway‘s entire cash pile, to buy Lubrizol Corporation, a specialty chemicals company based in Wickliffe, Ohio.

What does this mean for you? Warren Buffett’s investment moves are usually worth a closer look, even if you’re not one of his stockholders. After all, he’s one of the most successful stock pickers ever. And it’s never too late to practice your swing, even if your own stock portfolio is closer to $20,000 than, say, $20 billion.

A look through the company’s financials reveals nine reasons Warren Buffett loves Lubrizol.

1. It has a lucrative niche.

Lubrizol’s main business is making additives for fuel, which make engines run better and last longer. They are a small part of the cost of the fuel, but they are valuable to the end users and they are lucrative. Lubrizol’s gross margins last year were a thumping 33%, up from 25% five years ago. The company’s return on equity is 34%.

2. It has a wide moat.

Lubrizol has little trouble defending its business from competition. It has been around for 82 years – even longer than Mr. Buffett – and has built up a strong franchise. It is the market leader in the industry. And the fuel additives industry is technically advanced. Lubrizol owns a remarkable 1,600 patents and has 6,900 employees worldwide.

3. It’s in a dull industry.

Nobody goes into the fuel additives business for the glamour. Venture capitalists are not throwing money after new fuel additives start-ups. Companies in the sector do not typically give away their products for free to gain market share, “eyeballs,” “mind share” or the like. Indeed some of the existing players have been getting out – making life better for those who are left.

4. It has pricing power.

Mr. Buffett recently said “the single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.” At a time of rising raw material costs, that’s especially important. Lubrizol fits the bill. The company’s own raw materials jumped 10% last year, but it was able to pass those costs on to its customers.

5. It’s stable.

Sales fell 9% in 2009, but gross profits actually rose, from $1.1 billion to $1.5 billion. And the company says less than half of its revenues rely on boom-and-bust cyclical industries, such as construction and industrial production. Lubrizol had $2.7 billion in total liabilities at the end of last year – and $2.5 billion in cash and other current assets. Dividends have risen steadily, from $1.04 per share five years ago to $1.39 last year.

6. It benefits from overseas growth.

Two-thirds of last year’s revenues came from outside the U.S.A. The company has 40% of its plant and equipment overseas. And that’s rising. Last fall Lubrizol broke ground on a new factory in southern China, that will begin production in 2013. The company is a big beneficiary from economic growth in emerging markets. In countries like China, India and Brazil, hundreds of millions of people are moving into the middle class, buying cars, and driving them more. Every drive needs fuel, and every gallon of gas needs additives.

7. It has low unionization.

Just 4% of Lubrizol’s U.S. employees are members of a union (although some overseas workers are also members of collective bargaining agreements). That’s good for profits. Mr. Buffett may be a Democrat at nights and on weekends, but when he’s at the office he’s all business.

8. The stock was reasonably priced.

Even a great company can be a bad investment if you pay too much for it. In the case of Lubrizol, Mr. Buffett is paying $135 a share. That’s less than 13 times last year’s earnings, and 12 times forecasts for 2011. If you find a good company at a good price, who cares what “the market” is doing?

9. He likes the management.

Lubrizol chief executive James Hambrick has been with the company since 1973, when he started there as a co-operative education student. He’s been CEO for seven years. “Lubrizol is exactly the sort of company with which we love to partner – the global leader in several market applications run by a talented CEO, James Hambrick,” Mr. Buffett said when he announced the deal. “Our only instruction to James – just keep doing for us what you have done so successfully for your shareholders.”

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The truth behind second-home slowdown

New loan rules, spending habits reshape market

By Tom Kelly, Wednesday, March 16, 2011.

Inman News™

While sales activity in the second-home market has been dinged by the loss of home equity in primary residences, leaders involved in second-home finance say the real problem lies elsewhere.

Bob Waun, managing director of Americor Mortgage/Vacation Finance and a board member of the Condo Coalition, an advocacy group for homeowners associations, said financing — not demand — is the reason vacation property sales are in the doldrums.

"Absorption has been exasperated by the lack of financing for echo boomers and baby boomers who wish to (buy) but cannot without significant cash outlays," Waun said. "If we can fix the condo rules, we can fix the entire market. And it will cost taxpayers absolutely nothing. All we need is some air cover."

Lenders have increased their guidelines regarding second-home loans. Many now require a minimum down payment of 35 percent of the purchase price and are discounting the portion of rental income produced by potential renters. In addition, most lenders require that at least 70 percent of a condominium’s units be owner-occupied.

One of the biggest gripes voiced by salespersons at the National Association of Realtors’ annual convention was the additional restriction involving condo association dues. In order to get a Fedeal Housing Administration-insured loan in a specific building, no more than 15 percent of the owners in the complex can be behind on their dues.

"Stricter FHA and GSE underwriting rules eliminate many buyers with credit scores as high as 750, and lenders are imposing credit overlays of their own, restricting the availability of credit," said Vicki Cox Golder, NAR’s past president.

The GSEs, or government-sponsored entities, include Fannie Mae and Freddie Mac. Analysts believe the investors who buy Fannie and Freddie loans have increased their restrictions, or "overlays," to a point where they shoulder no risk in making a loan.

The result? Mortgage money that was once too easy to get is now far too difficult.

"There is a lot of money out there," said John Tuccillo, former NAR chief economist and now a national housing consultant. "The Fed has put $1 trillion into liquid reserves in banks. But for some reason, the money is not getting out. It is hard to get financing for real estate. The banks are uncertain about regulations and what is a good loan and a bad loan. There is a lot of disconnect in the liquidity of the system and interest rates, and the level of financing."

Stephen Roulac, chief executive of Roulac Global Places, a San Rafael, Calif.-based consulting firm that advises senior management and investors in real estate affairs, said there is still a small group of individuals who are not swayed by the availability of mortgage money.

"There’s really no direct correlation at all," Roulac said. "Most of the people who can afford a second home outside the United States are either going to be paying cash or have a variety of places they can get funding. The financing situation is not a factor for these people."

Most housing officials are quick to point out that the cash buyer is an insulated segment of all housing — especially second homes.

"There’s an enormous link between home equity in a person’s primary residence and the second-home market," said Adam McAbee, senior manager and a second-home specialist for Irvine, Calif.-based John Burns Real Estate Consulting. "If a person’s home was worth $300,000 and the market value is now $200,000, there’s no equity left to even consider a second home."

David Collins, chairman of Active Living International, a company specializing in the research and development of active-adult communities, is an expert in predicting where snowbirds prefer to land. He once said that an attractive development in the sun near the water, with great access to an airport and priced at $400,000 would sell easily.

"Airlift is critical," McAbee said. "But if the benchmark in 2007 was $400,000, it’s probably in the $200,000s now. I think it’s safe to say things have changed that much."

Tuccillo said that overseas economies and housing appreciation — especially in China — are bringing more foreign buyers to American markets, even though length of stay is an issue.

"Domestically, I think we are saving more," Tuccillo said. "Spending habits have changed from spending and consuming, to saving. That could mean a reduction in the demand for second homes. I am not saying it is fact. It is a theory. But there is evidence that it is happening."

Tom Kelly’s book "Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World’s Bargain Zone" was written with Mitch Creekmore,  senior vice president of Stewart International, and Jeff Hornberger, the National Association of Realtors’ international market development manager. The book is available in retail stores, on Amazon.com and on tomkelly.com.

 

       

      

    

   

   

      

   

  

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Copyright 2011 Tom Kelly

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Off-market sales come at a price

Sellers may sacrifice market value for privacy, convenience

By Dian Hymer, Monday, March 14, 2011.

Inman News™

Flickr image courtesy of lumaxart.

Wouldn’t it be nice to bypass all the marketing required to sell a home — especially people coming through at inconvenient times and public open houses — and sell directly to someone for a price you can live with, without the fanfare?

There are times when a sale off-market is appropriate.

For instance, an elderly man decided to sell his house for $1 million to a contractor he knew. He let his co-trustee know what he’d verbally agreed to and she got into the act. As a trustee, she owed a fiduciary duty to get the highest price possible for the trust. She knew that $1 million was too low.

After canvassing the local real estate community, it was determined that the house was probably worth about $1.4 million on the market. But, the co-trustee agreed that the property needed to be sold and that it probably would never be put on the open market due to health issues in the family.

The prospective buyer also agreed that the price was low. However, he couldn’t afford to pay more than $1.2 million. Both trustees thought this was an acceptable price since no commission was involved and the house had some issues. For instance, part of the house was built over the septic tank.

The buyer was a contractor who was aware of the property condition. He was also willing to let the seller rent back cost-free as long as was necessary until he found an acceptable retirement home. These concessions made the deal more valuable than the $1.2 million price, which was accepted by the seller.

HOUSE-HUNTING TIP: The biggest problem with selling directly is that the property doesn’t receive the benefit of marketing exposure. Professional marketing introduces a listing to a broad range of buyers. In so doing, a price is determined by what buyers are willing to pay. When a home sells without marketing, the sellers don’t know if they could have sold for more, and the buyers don’t know if they could have paid less.

In neighborhoods where homes are more alike than different, and were built at the same time, it may not be that difficult to establish fair market value, if there have been a lot of recent sales.

In neighborhoods with a diverse housing stock and few sales, it may be difficult to arrive at a price without professional assistance. One approach would be to hire a knowledgeable local appraiser to do an appraisal on the property. However, appraised value is not necessarily market value. The only way to determine the marketability of a home is to put it on the market.

Residential real estate transactions can be complicated, especially in well-established areas with an older housing stock, disclosure requirements and local compliance ordinances. In the above example, the co-trustee was a real estate broker who handled the transaction for free. So, an experienced professional was involved in the sale and made sure that all mandatory requirements were met.

Property condition has a big impact on price. A seller who is not aware of disclosure obligations (which vary from state to state) and who doesn’t have recent inspections of the property might not provide the buyers with the information they need to determine the price they should pay.

Even in situations where the sellers don’t want to expose their property to the market, professionals (real estate agents or attorneys and inspectors) should be involved to make sure that the transaction is completed successfully and that the buyers and sellers don’t end up suing each other after closing.

THE CLOSING: Neither the buyers nor sellers get a good deal on a transaction that closes badly.

Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of "House Hunting: The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer’s Guide."

Contact Dian Hymer:
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Copyright 2011 Dian Hymer

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