Tuesday, November 30, 2004

Denial Worst Enemy When Hard Times Hit

I have found in my short life that our "trending" chart can resemble a roller coaster rather than a blue chip company's profits chart and that can mean major challenges when it comes to homeownership.

There are times in our lives when we must come to grips with reality and make very difficult personal decisions to preserve our financial and mental well being. Job loss, sickness, death and divorce are all reasons for someone needing a home -- quick and for short term -- while they disperse with the property or find a more permanent housing situation.

The most common problem is when a homeowner loses a job (or in our double-income culture, just one of the two jobs is lost). For some folks, this is a liberating event that launches them into a different direction, professionally. If they have some savings, they may start a business. For many of my colleagues, that's exactly how they started up their real estate careers -- through a job loss. When the dot-coms melted down four years ago, the ranks of Realtor population locally in the national Capitol area swelled by nearly 20 percent per year. And now many of those former IT professionals are using their skills to make pretty good money in a growing industry.

Then I've seen the folks who live in denial. They think things will turn around -- sooner rather than later. And two to three missed mortgage payments later, they are facing late notices and threats of foreclosure.

Regardless of how you lost your job -- downsizing, health, whatever -- don't wait too long before making the tough decisions that need to be made about how to preserve your wealth in your home.

First of all -- cut all your expenses to the bone. You would think most people in this situation would do this, however, it's amazing how plastic gives people a false sense of security. Instead of paring down to the basics, they hang on to the extended cable, satellite, two cell phones, extra car payment, dinners out with friends and gift buying, because they just know their unemployed situation is not going to be a long-term problem. Hopefully, you're right -- but don't be foolish.

Obviously, you need a financial support team. Get over the embarrassment and call family, friends, clergy, etc., and let them know you've just lost your job or can't work because of your health and that you need help now or will in the near future. Then the real tough decision needs to be made … do you need to scale down in your living? This means either selling your house or renting it out and moving into something more affordable.

The average household spends more than 20 percent of its income on housing payments, according to the 2004 State of Housing report published by the Joint Center for Housing Studies at Harvard University. It is the first payment that should be made when you are faced with a drop of income. If you cannot make that payment -- reach out to your support team.

Other options include:


Moving out temporarily (leaving furniture in place) and rent your home out as furnished for a short-term rental. The good thing about furnished rentals is that you can charge a lot more than the going rate. Add on to the fact that it's a short term and you can charge a bit more. Check with a local real estate company that has a corporate or relocation division. They are regularly looking for temporary housing for corporate clients moving in to your area or who need a place to stay while on assignment.

Scale down into a smaller, less expensive home and rent out your house for a year. Go ahead and take the plunge, pack up and move into a smaller dwelling or in with family/friends while you're getting back on your feet. Check with your local housing services, churches, synagogues, mosques, etc., for community support.

Sell. If you're in a robust market, it may be time to sell and take your equity to purchase another home outright with cash. Or -- find the temporary housing as described above and use the equity to live on until you can get back on your feet.
There are plenty of resources available to those who have hit the downside in life. Remember -- most likely, this is a temporary situation. Don't let pride and denial stand in the way of making the hard, but wise decisions.

Thursday, November 11, 2004

International Property Option For Anti-Bush Buyers

If you’re still aching over the Bush presidential victory – all is not lost. There’s plenty of property north of the USA to look at in case you’re considering leaving the country for the next four years.

I was quite humored to hear that Canada’s Immigration web site received an extra 100,000 visitors right after the 2004 presidential election. To think that people would consider leaving a country (one with as many freedoms we have) because their candidate lost is beyond me – but here’s a little research in case they really want to emigrate. (It looks like our northern neighbors are losing quite a few citizens with the Montreal Expos relocation to Washington, D.C., so maybe we can have a citizen exchange to keep relations on a good footing, eh?)

First of all, as with all real estate purchases – you want a really good Realtor to get you started. Fortunately, the American-based National Association of Realtors has several Canadian branches, which means they have Canadian properties on their monstrous web site, Realtor.com, from which to search. Just select a state ON, BC, etc. and then fill in a city and you’ll be on your way.

In Toronto, it looks like their 1 and 2 bedroom condos range in the C$105,000 arena. Fortunately, their economy is such that US$100,000 will convert to about C$115,000. So you actually walk in with more money in your pocket because of the strength of the US dollar over its Canadian counterpart.

Keep in mind, that if you want to benefit from the robust real estate appreciation in this country by holding on to your American property while seeking out citizenship in the Maple Leaf country, you’re going to get hit with some taxes that U.S. citizens don’t pay.

CanadianLawSite.com (a, well, Canadian law site) reports this insightful information to its citizens who own vacation property:

“If, as a Canadian owner, you rent out your U.S. vacation home, the rental income you receive is subject to a flat 30 percent tax in the U.S. before any deductions for expenses incurred in earning this income. As the tenant must withhold and remit this tax to the IRS, the Canadian landlord does not have to file a U.S. personal income tax return for that year, provided the taxes are remitted.”

In addition, the rental expenses also come with ties to the American government even after you jump the border.:

“To benefit from the deductions for your rental property expenses, you must elect to be taxed within the U.S. on a net basis. Before making this election, you should be aware that you must rent the property for a minimum length of 15 days per year, or the deductions will not be allowed. Even if you meet the 15-day requirement, there are other rules that further limit the amount of expenses considered deductible.

“Having made this election, you will be required to file a U.S. return annually. This election remains in force for subsequent years and can only be revoked with the consent of the IRS. When you file, your rental income will be subject to the graduated tax rates applicable to a U.S. resident on the taxable income realized from a rental activity.”

So if you’re seeking to run from Bush during the next 4 years, it’s going to cost you (at least in the arena of real estate) unless you completely divest of all your holdings. Fortunately, real estate prices in Canada and their appreciation rates are moving up pretty well this year. Average prices and appreciation rates are as follows, according to the Wall Street Journal’s Real Estate Journal:

St. John, New Brunswick – C$114,000 (17 percent)
Manitoba – C$111,000 (15.6 percent)
Vancouver - C$363,000 (14.9 percent)
Montreal - C$184,000 (14.2 percent)
Toronto – C$307,000 (5.8 percent)

At these prices and with the political climate we’re facing the next four years, it looks like for American liberals, Canada homeownership might be the right place, at the right time, for the right price. Michael Moore – are you listening?

Your Home Is A Liability

I hate to share the news with you, but your house is a liability. This month, my house has cost me more than $2,000. On the other hand, it has grown in value, at about a rate of 1.5 percent this month – that would be roughly $2,000 as well – but it’s still a liability. Let me explain.

Real estate has created a lot of wealth in this country; however, during the last refinancing boom – Americans mortgaged a large portion of that wealth because they wanted access to the equity NOW. The mortgage companies have done a great marketing job on the American public, and assisted them in lowering payments and dropping the cost of debt. However, Americans are still in debt at record levels and we still haven’t learned to save. Many of us have been relying on the growth in the value of our homes to create wealth. If that’s your only savings plan, you’re in for a big, ugly surprise. More on that in a moment.

This “investment” that we live in, is actually a liability. I just paid my mortgage payment; repair bill for some drywall work; fixed the sink and leaking toilet; paid the water and trash pickup bills; and sitting in front me are the phone and electricity bills. By the end of the month, I’ll put out $2,523 – just so I can sleep here, clean up the yard, wash the windows, winterize the doors and windows and shout at my teenagers under a non-leaking, warm dwelling.

Does this expense mean I should move out and stop the madness? Not at all. To rent in this same house in my marketplace, would cost me about $400 more per month (which is the going rental rate for my house.) And therein lies the difference between my house being a liability versus an asset. While it has value, it’s not creating income for me. It’s creating wealth, but the only way I can gain access to it is to go deeper into debt or sell it (something none of my kids or wife would agree to right now…but give me one bad weekend and it may be RV land for all of us.)

There are two houses around the corner on the market for rent. The owners of those properties have income-producing assets, in addition to the wealth being created via appreciation at nearly 20 percent per year over the past two years. (The national average stands at 7.7 percent appreciation, according to the National Association of Realtors.)

On top of that, the mortgage expense of the property, hopefully, is being covered by the rental payments, and thus, the owner doesn’t even have the monthly mortgage payment to contend with. And since the renter will pay for garbage, lawn maintenance and all utilities, the owner needs to be concerned only with breakdowns of appliances, hot water heater, a/c and other functions of the house. A rental property is truly an investment and money-making asset.

Now, back to the savings. Your home, in a liberal sense, could be considered a forced savings account. In my marketplace, Washington, DC, it’s definitely making money for everyone. However, some markets are still headed downward and you must determine what role the value of your home plays in your overall financial plan.

It cannot be denied that if the house is growing in value, it can create some wealth for future use. However, the reality remains that we as a country are not saving enough.
A recent AARP study found that less than half of baby boomers save for retirement regularly. According to the 2002 Retirement Confidence Survey, 44 percent of retirees age 60 and older have saved $75,000 or less for their retirement and 11 percent have saved nothing.

Your home should not be used as the substitute retirement plan. Practice the GOOD principle (Get Out Of Debt) and then use your payments to your creditors as investments in your future.

Friday, November 05, 2004

Real Estate Investment Clubs Provide Good Training Ground

If you’re nervous about taking that real estate investment plunge on your own, you may want to consider finding a team of experienced investors you can learn from in your area. Real estate investment clubs are located all over the country. I’ve listed some web sites below where you can look up clubs in your area, but first let me provide you with a couple of safeguards about how you should approach a club.

1 – Make sure the people attending the investment club are actually investors. Sometimes you can attend a club where everyone attending, except for a few people, are all wannabes. I belonged to a writer’s club like this once. It was exciting for about two meetings. That’s about how long it took me to realize I was the most experience writer there. I needed a club of strictly published authors and writers to learn from. Instead, each meeting would end with people surrounding me asking how to sell articles, columns and books. You want a club full of bona fide investors who hold property and are always on the search for new investment opportunities.

2 – Investigate whether the club is there to inform on investing, or inform on books and tapes about investing. Some clubs are nothing more than a forum for the organizer to sell his or her programs for hundreds of dollars a pop. You only get a taste of investing tips, not the real deal.

3 – Watch out for sharks. It’s sad to admit, but there are some “investors” in our community who believe they should never have to use their own money to get into a transaction. Instead, they prey on those who are excited and na├»ve about the real estate investment process, but who may have some cash set aside to begin investing.

The line goes something like this: “I’ll find the deal, we’ll use your investment cash, then we’ll split the proceeds 50/50. Besides, you wouldn’t find the deal without me and I’m going to guide you through the process.” The challenge with this scenario is that you lose half the profit from the rental income, as well. It’s not a relationship I would always be against; however, there are plenty of experienced investors who would be willing to share their expertise with you without taking part of your first transaction.

There are just too many potential problems with this type of relationship. More can go wrong than right:

Your new investor friend could have credit problems and could be using your credit to buy properties
Being half owner and the “more experienced” investor, he or she could force you to sell property too soon or too late, causing you to lose potential profit
You lose control of the decision-making process.
By being party to the transaction, the investor is now tied to the profit of the investment and may not be as objective in the decision-making process.

4 - Before partnering with anyone, investigate them.
Are they licensed to practice real estate (though you don’t need a license, it’s good to know.)
If they’re licensed, have they had any complaints registered against them through the real estate commission.
Ask him or her for references from other investors. What you want to here is: “Ask anyone here about me.”

Just be careful in working with someone that you’ve never met before your first visit. Drop by the investment club several times before linking up with someone.

I had two Realtors in one of my training sessions - brand new to the business – who informed me they were going to be partners. When I inquired on how long they had known each other, they told me they had just met that week. I suggested they try working on their own to start and then determine if they wanted to partner up with someone who, quite frankly, they knew nothing about. A few weeks later, I saw one of them and asked how it was going…she informed me that she had no idea where her new partner was – it seemed he had dropped off the planet. Be careful. Be informed and have fun.

Here are a list of web sites with links to real estate club lists:

www.REIClub.com
www.CREonline.com
www.RealEstatePromo.com
www.TheCreativeInvestor.com
www.RealEstateLink.net (includes Canada)

As you’re researching, you may want to search at your favorite search engine for “real estate investment club” with your state attached. Not all clubs are listed in the lists above.

Friday, October 22, 2004

Lease To Own One of Several Bad Credit Options

For many buyers without cash or with credit problems, the solution to homeownership in the past has been a lease-to-own contract. The traditional wisdom behind this arrangement has been that the buyer is able to rent the property from an owner for a designated time period, usually paying a rent higher than market rate. The extra cash is then applied to an agreed upon down payment amount. In the end, once the down payment is acquired (and hopefully a better credit rating for the buyer with time), the transaction is consummated with a settlement and the property exchanges hands.

I’ve received numerous letters from readers asking how this arrangement works. It depends on the wants and needs of both the buyer and the seller.

If a buyer needs cash for the down payment, then the lease to own is a possibility. Here’s how it works. To build up a 5 percent down payment for a $200,000 purchase, the lease agreement would include rent, plus an additional premium on the rent that will be used to build up the down payment. The amount of the premium depends on how much the buyer/renter wants to save and how much s/he can afford to set aside. To attain $10,000 would require an additional $833 per month for a year; $555 per month for 18 months; or $416 per month for 24 months.

Thus if the going rent for this house is $1,200, the premium would be tacked on to the rent and set aside for the down payment so that with the one-year plan above, the monthly payment would be $2,033.

What this does for the buyer is to guarantee a purchase of a house for the buyer at today’s prices – assuming you want today’s prices. In a market that is dropping in value, a lease to own could set you up to buy a house at today’s prices only to find that when you finally settle on the property it’s actually worth less than it was on the day you agreed to buy it. The seller, on the other hand, may be cutting off future gain if a property is moving upwards.

In a dropping value scenario, the buyer may have a difficult time getting the desired financing in the future if the price of the house drops too rapidly – thus giving you a home not worth the amount you agreed to in the past. You could still buy it, but you may have to come up with even more cash to satisfy the eventual lender’s loan-to-value limits.

For instance, if you agree to $200,000 and in a year it drops 3 percent in value, the house would then be worth only $194,000. The eventual lender may require a 5 percent down payment -- from this new level of value – meaning the maximum loan amount is $184,300.

But since you’ve agreed to buy the house for $200,000, and was planning on a mortgage of $190,000, you’re now short $5,700 ($190,000 - $184,300 = $5,700). This is the difference between what you were planning on borrowing versus what the lender will now let you borrow. Since you’ve already agreed to pay $200,000 you must come up with the $5,700 or be in breech of contract.

The opposite is also true – and is a risk the seller takes in this scenario. What if the house increases in value the same amount – 3 percent? That means that in a year, the house would be worth $206,000 instead of the agreed upon sales price of $200,000. On this side of the transaction, it’s a much easier scenario -- the seller just lost six grand. He doesn’t actually have to write a check, it’s lost mainly on paper. Because of the contract, he can’t demand the extra money.

If the seller wants to take a gamble on increasing values, he could write up a lease with a purchase option agreement instead of the lease to purchase agreement. This means the house does not have to settle – it just gives the renter the option of buying the house at either the fair market value at the end of the lease or an agreed upon sales price higher than today’s going rate.

As far as the paperwork goes, a contract is written up with the agreed upon sales price, but the settlement date is set for a year later – with the contingency that the buyer will rent the property for that amount of time. Simultaneously, the renter/buyer and landlord/seller sign a lease contract establishing the monthly rent, due date, and what the two parties will be responsible for over the rental period. At the end of the lease, the house goes to settlement and the renters become the new owners of the property.

One final word of caution: don’t try this on your own. A lease-to-own arrangement can get a lot sticker than a traditional transaction because there’s now a legal arrangement for a prolonged period of time between the buyer and seller instead of the usual shorter-term. Plus, the seller is now agreeing to be a landlord, which comes with its own set of rules and regulations. Time breeds discontent, especially if the price starts to fluctuate. Seek out professional help to make sure everything is on the up and up.

Friday, October 15, 2004

Outer Space Land Not So Far Out

Homo Sapiens will buy anything. A few questionable products I can think about include the Chia pet, pet rocks and lunar plots of land. Of course, I had never heard about the lunar plots until a few days ago, when I came across an article from Agence France-Presse, republished on a web site called www.SpaceDaily.com.

It seems that an American entrepreneur has hit pay dirt with a scheme to sell lunar plots to Earthlings for about $25 a pop – and these aren’t cookie cutter pieces of property, either, measuring out to around 700,000 square metres each (150-plus acres). While, the sale is actually old news, Dennis Hope, the American who came up with the idea, claims he’s found a loophole in the United Nations Outer Space Treaty of 1967, which makes his parcels legitimate.

Purchasers of the plots (including about 1,200 lunar land owners in Germany) became concerned about their claims when President George Bush began talking about returning to the moon, building a space station and launching missions to Mars from the Moon. They’ve begun a letter-writing campaign to the White House, requesting that the U.S. respect their “land rights” and to at least not leave rusting space junk on their property.

Further research reveals that the quest for owning space bodies is beginning to heat up in the 21st Century. In fact, in 1993 three Yemeni brothers sued the United States government for trespassing against their property - Mars. They claimed to be the owners since they had inherited the Red planet 3,000 years ago from their ancestors. Did our government take it seriously? Well, we sent lawyers to Yemeni to deal with the issue.

It seems laughable, but where there’s potential development, of course, lawyers are soon to follow, which brought me to another piece in the Christian Science Monitor about outer space law makers. Now, these guys are serious – so serious that students can major in accredited studies in college – the University of Mississippi being one of the institutes of higher learning that offers a degree in space law.

It appears the lunar landowners could have saved their money if they had looked up the Outer Space Treaty and found out that it “provides the basis of all space law with its clear decree that no nation can claim ownership to any part of it, and all nations must agree to its peaceful use. The treaty was signed by all major space powers and remains the guiding light of space initiatives,” according to the Monitor.

The idea of space law is to prevent the free-for-all type colonization of heavenly bodies the way our Earthly history has been marked over the last several hundred years. At this point, the nations that could actually develop any type of intergalactic property have signed on to the treaty. But that was nearly 40 years ago when no one had even been to the moon yet.

The treaty is about to truly be tested as the International Space Station becomes operational and the idea of building improvements on the lunar rock near reality.

Think about it – who really owns the Moon and who can tell anyone else what to do if they decide to start development? Enter the laser-toting, brief-packed space attorney. When you consider that it’s going to take billions of dollars to traverse and develop a building lot more than 13 million miles away – I say to the victor go the spoils. Whoever can get there first and build something, go for it.

Realistically, though, while it all may seem like sci-fi today, if the Outer Space Treaty prevails, it means we all will own a piece of the rock and that’s probably how it should be.



Sunday, October 10, 2004

Will Moving Early Cause Capital Gains Taxes?

Q: I am a homeowner of 18 months getting ready to move from Portsmouth, VA to Pensacola, FL with no plans to return to this erea. I don't know whether to rent my place out or sell. I am an active duty navy doc, planning to be a flight surgeon. I bought my condo for 165K, my real estate agent thinks we can sell it easily for 200K. The value is expected to continue to increase. I am not sure if it is worth it to rent, I am very confused about capital gains and the rules as they apply to my situation.

Lt. McNiff

A: You should review, first, your lifestyle choices. Do you HAVE to sell? Can you hang on to it for a while? Can you buy another home without the funds from the sale of your VA home? Will rent cover your monthly expenses? If you put the money in another fund, will you have as much return?

Your biggest challenge is the fact that you haven’t been in the house for more than 2 years. You will be able to reduce your capital gains tax because you are moving for your job. There’s more information at
www.irs.gov regarding that. Where are you moving? What are the appreciation rates like there? You need to sit with an informed mortgage professional who can run through the numbers. In addition, you may want to call your tax professional to get a read on what your tax liability would be on the gains.

Visit
http://www.irs.gov/faqs/faq10.html to see some FAQs regarding Capital Gains and the sale of a home.

Friday, October 08, 2004

Feds Offer Housing Assistance to Renters

For those who find themselves using HUD Section 8 housing choice vouchers, homeownership is not as far away as you may think. The Homeownership Voucher Program enables first-time homebuyers in low income brackets to purchase a house using HUD Section 8 funding to help with the payment and some housing expenses.

The federal program is administered through local Public Housing Authorities (a list of which can be found at this link:
http://www.hud.gov/offices/pih/pha/contacts/index.cfm). Meanwhile, not all PHAs participate in the program, however, thousands of new homeowners across the country enjoy the benefits of homeownership because of this program.

Housing vouchers can only be obtained by current holders of HUD rental vouchers. So if you want to take advantage of this program, then you have to apply via HUD for rental voucher assistance first before then following the process of using that voucher to buy a home. The voucher can be used to subsidize the monthly payment and housing expenses – the amount it will subsidize is up to 70% of such payment, according to the HUD web site,
www.HUD.gov.

The tenant-buyer must find the house, which must undergo an initial housing quality standards inspection conducted by the PHA, as well as a home inspection. The good news for families that live in expensive areas, unlike the rental voucher, you don’t have to buy a house in the jurisdiction of the PHA.

Here are some other requirements of the program:

First-time homeowner or cooperative member.
No family member has owned or had ownership interest in their residence for at least three years.
Except for cooperative members, no member of the family has any ownership interest in any residential property.
There is an minimum income requirement calculated by the current minimum wage times 2000 hours – that’s currently $10,300 annually. For disabled families, the qualified annual income of the adult family members who will own the home must not be less than the monthly Federal Supplemental Security Income (SSI) benefit for an individual living alone multiplied by 12 (currently $6,768). These are general guidelines, the PHA may establish a higher minimum income requirement. Except in the case of an elderly or disabled family, welfare assistance is not counted in determining whether the family meets the minimum income requirement.
Employment requirement. Except in the case of elderly and disabled families, one or more adults in the family who will own the home has been and is currently employed on a full-time basis for at least one year before.
The PHA may have its own requirements as well that must be followed.
The family must attend and satisfactorily complete the PHA's pre-assistance homeownership and housing counseling program.

The homeownership voucher can also be used to help cover monthly homeownership expenses, which include the following:
1. Mortgage principal and interest, 2. Mortgage insurance premium, 3. Real estate taxes and homeowner insurance, 4. Part of the utilities,5. Some routine maintenance costs, 6. Allowable major repairs and replacements, 7. Principal and interest on debt to finance major repairs and replacements for the home, and8. Principal and interest on debt to finance costs to make the home accessible for a family member with disabilities if the PHA determines it is needed as a reasonable accommodation.

Like all good things, this won’t last forever. While the voucher program has no time limit for an elderly household or a disabled family, all other families, can only receive assistance for 15 years if the initial mortgage is 20 years or longer. For all other mortgages, the assistance runs up to 10 years. This limit is very generous when you consider most homeowners stay in a property an average of five to seven years.

Monday, September 13, 2004

Capital Gains Exceptions Finalized

The Internal Revenue Service issued final rules recently that could reduce capital gains taxes for some homeowners. Current rules allow taxpayers to exclude $250,000 in gains for single sellers and $500,000 for married sellers if they have met certain criteria.

Ann vom Eigen, Legislative and Regulatory Counsel for the American Land and Title Association, reports on her group's website, "The IRS has finalized rules for the treatment of taxpayers who do not qualify for the maximum exclusion of capital gains on home sales because they have not owned and used their property as their principal residence for two of the past five years, or have taken an exclusion within the preceding two years. The rules significantly expand the situations under which capital gains exclusions may be taken."

In essence, if a homeowner found it necessary to move before the two year period, then he or she would owe capital gains taxes on gain under the two floor amounts ($250,000/$500,000).

There have always been exemptions under the code to allow for at least some exemption from taxation if the homeowner had extenuating circumstances, such as a change in place of employment, health or unforeseen circumstances. Under the final rules, "safe harbors" are established for taxpayers to qualify for these exclusions of capital gains taxes.

Unforeseen circumstances have been the most confusing section of the rules, though they point out that the IRS is not heartless when it comes to taxes and hard times. What determined unforeseen circumstances seemed to be considered on a case-by-case basis in the past. Now, the IRS has named an unforeseen circumstance as "an event that the taxpayer could not reasonably have anticipated." In addition, the unforeseen circumstance could affect someone in the household other than the taxpayer, such as the taxpayer's spouse or other dependent who lives in the house.

Safe harbors under the unforeseen section include, but are not limited to:


A natural or man-made disaster or act of war or terrorism resulting in a casualty to the residence.

Death.

The cessation of employment as a result of which the individual is eligible for unemployment compensation.

A change in employment or self-employment status that results in the taxpayer's inability to pay housing costs and reasonable basic living expenses for the taxpayer's household.

Divorce or legal separation under a decree of divorce or separate maintenance; and

Multiple births resulting from the same pregnancy.
If you find yourself in an "unforeseen circumstance" situation, then you may be in luck, as it were, for your hardship. It means you may be able to pay less taxes or be exempt from taxes altogether. The tax would be calculated based on how long you had lived in the property, among other criteria. Check with your accountant to be sure and you can use the online capital gains calculators below to get started.

Members of the military also receive some final rules on the length of stay test. ATLA also reported that under the military exception, "A taxpayer serving, (or whose spouse is serving) on qualified official extended duty as a member of the uniformed services or Foreign Service may elect to suspend the running of the 5 year period for up to 10 years. The exception for members of the Foreign Service and the military is retroactive to May 7, 1997."

Monday, September 06, 2004

Good and Bad of Multiple Offers

A reader recently wrote, complaining that she felt there were no “rules” in the arena of entertaining multiple offers in a real estate transaction. What I have found in many instances, is that what is legal and acceptable practice isn’t what many buyers want to hear.

“You should have told me you had multiple offers…that’s not fair,” is usually the first complaint filed from the party who loses out on a contract. Then they go looking for someone to file a complaint against or to try to sue. (We are, unfortunately, the most litigious country on the globe.)

On the other hand, I’ve heard some buyers complain that they believe the listing agent is lying and only trying to push up their offer when they are told there are multiple offers – then they demand to see the other offer. They assume that the seller is simply trying to push up the price by claiming there are other offers when none actually exist.

Revealing the status of multiple offers is up to the seller. The cold hard facts are that the buyer has to sit and wait for a response from the seller (depending on whether or not he wrote in a deadline for responding). Nevertheless, the buyer has no “rights” to know if there are more offers.

The National Association of Realtors’ Code of Ethics has several Standards of Practice (SOP) in dealing with multiple offers. First of all – a Realtor “shall submit offers and counter-offers objectively and as quickly as possible.”

In fact, all offers must be submitted until the seller has made a final decision. “When acting as listing brokers, REALTORS shall continue to submit to the seller/landlord all offers and counter-offers until closing or execution of a lease unless the seller/landlord has waived this obligation in writing. REALTORS shall not be obligated to continue to market the property after an offer has been accepted by the seller/landlord...”

As far as telling buyers about multiple offers, this situation apparently became so prevalent, that about a year ago the NAR instituted the following instructions in its SOP: “REALTORS, in response to inquiries from buyers or cooperating brokers shall, with the sellers’ approval, divulge the existence of offers on the property.”

The key wording in this phrase is “in response to inquiries.” It’s a kind of “don’t ask, don’t tell” situation for the listing agent. She’s not going to tell the buyer about multiple offers if the buyer doesn’t ask – however, reading the SOP further, you can see that the Realtor is not obligated to divulge the presence of multiple offers, either, without the sellers’ approval.

In a sellers market, some agents will place a deadline on when all offers must be submitted. Once the offers are submitted, the agent then settles down with the seller for a marathon contract review. The real area of contention comes when offers float in one after the other over a few days. Thus, the usual practice of dealing with multiple offers would go something like this:

Each offer is presented to the seller for consideration.
The seller will hear all offers before making a decision.
A seller can accept or begin countering more than one offer at a time, however, s/he must set an order of precedence, i.e., primary offer, first backup contract, second backup contract, etc.
Be sure to get released from an offer before finalizing the selected offer, i.e., don’t sell the house twice.

Multiple offers can be a good thing. In a fast-paced market, they are considered the norm and the presence of such inflates pricing. The buyer who works with an agent who understands the aggressive techniques needed to escalate their offer, will win. However, you can also have buyers pull contracts during multiple offer situations because they want to deal in a less competitive environment.

It’s interesting to hear from buyers who are outbid in the selling process and start talking about “fairness” in a bidding war. There’s this idea that just like kids lining up for a drink at the lemonade stand, that if they get there first, they get to drink the freshly made beverage at the price posted without any interference from the kid in the back of the line.

In real estate, the seller doesn’t care when you got there – he or she is looking at basically one thing – what’s the net dollar amount to the seller.

Friday, August 27, 2004

Capital Gains Exceptions Finalized

The Internal Revenue Service issued final rules recently that could reduce capital gains taxes for some homeowners. Current rules allow taxpayers to exclude $250,000 in gains for single sellers and $500,000 for married sellers if they have met certain criteria.

Ann vom Eigen, Legislative and Regulatory Counsel for the American Land and Title Association (
www.alta.org), reports on her group’s web site, “The IRS has finalized rules for the treatment of taxpayers who do not qualify for the maximum exclusion of capital gains on home sales because they have not owned and used their property as their principal residence for two of the past five years, or have taken an exclusion within the preceding two years. The rules significantly expand the situations under which capital gains exclusions may be taken.”

In essence, if a homeowner found it necessary to move before the two year period, then he or she would owe capital gains taxes on gain under the two floor amounts ($250,000/$500,000).

There have always been exemptions under the code to allow for at least some exemption from taxation if the homeowner had extenuating circumstances, such as a change in place of employment, health or unforeseen circumstances. Under the final rules, “safe harbors” are established for taxpayers to qualify for these exclusions of capital gains taxes.

Unforeseen circumstances have been the most confusing section of the rules, though they point out that the IRS is not heartless when it comes to taxes and hard times. What determined unforeseen circumstances seemed to be considered on a case-by-case basis in the past. Now, the IRS has named an unforeseen circumstance as "an event that the taxpayer could not reasonably have anticipated." In addition, the unforeseen circumstance could affect someone in the household other than the taxpayer, such as the taxpayer’s spouse or other dependent who lives in the house.

Safe harbors under the unforeseen section include, but are not limited to:

A natural or man-made disaster or act of war or terrorism resulting in a casualty to the residence.
Death.
The cessation of employment as a result of which the individual is eligible for unemployment compensation.
A change in employment or self-employment status that results in the taxpayer’s inability to pay housing costs and reasonable basic living expenses for the taxpayer’s household.
Divorce or legal separation under a decree of divorce or separate maintenance; and
Multiple births resulting from the same pregnancy.

If you find yourself in an “unforeseen circumstance” situation, then you may be in luck, as it were, for your hardship. It means you may be able to pay less taxes or be exempt from taxes altogether. The tax would be calculated based on how long you had lived in the property, among other criteria. Check with your accountant to be sure and you can use the online capital gains calculators below to get started.

Members of the military also receive some final rules on the length of stay test. ATLA also reported that under the military exception, “A taxpayer serving, (or whose spouse is serving) on qualified official extended duty as a member of the uniformed services or Foreign Service may elect to suspend the running of the 5 year period for up to 10 years. The exception for members of the Foreign Service and the military is retroactive to May 7, 1997.”

Resources:

For the full text of the final revisions, visit the Federal Register online at
http://www.gpoaccess.gov/fr/, and search for “page 50302”.

Capital Gains Calculators:
Certified Residential Specialists (
http://www.crs.com/14_resources/7_calculators.html)
HomeGain.com (
http://www.homegain.com/tools/CapitalGains)
MoneyChimp.com (
http://www.moneychimp.com/features/capgain.htm)

Sunday, August 22, 2004

Selling Note Creates Instant Cash for Seller, Profit for Buyer

There are many reasons why you may find yourself as the owner of a real estate note. A note is a financial instrument by which the owner of real estate borrows money against the property. Most times, the note is referred to as a mortgage. A homeowner can have several mortgages on one property – totaling more than the value of the property with some programs. However, in most circumstances the note is only a portion of the value of the property. For instance, the property may be worth $200,000, but the mortgage is for $180,000.

The first mortgage is usually held by a large lender – such as a bank or investment firm. Second trusts can be held by large companies, but it’s not unusual for individuals to hold a second trust on a property. In some instances, the seller of a property will offer to hold a second trust to enable a purchaser to buy the property. Sellers often make such an offer for several reasons. Most times it’s because the buyer may only qualify for a smaller mortgage, so the owner/seller takes on a second to enable them to qualify to purchase the house.

For instance, the buyer may put down 5 percent in cash, take on a mortgage for 75 percent of the value of a house, and then the owner creates a note for the remaining 20 percent to make the deal work.

The owner can hold on to this note and receive payments over time or the note holder could sell it, get cash upfront, but at a discount. It’s like either taking $120 over the next year at $10 per month or taking $60 now. Many note holders would rather take the lower amount of cash than hold out for the larger amount over time. This impatience can work in the best interest of a bargain-hunting note buyer.

It works like this. Let’s say a home sells for $200,000. The buyer puts down 5 percent ($10,000) and the owner provides a 20 percent second trust at $40,000 and the bank loans the buyer the rest ($150,000).

If the second trust was to be paid back over 15 years at 9 percent, the monthly payment would be $405.71. The total amount paid to the note holder would actually be $73,027.80 – quite a bit of money. However, if the note holder got into financial distress in year 5, he has the option to selling the note for some quick cash. At this point the note is only worth $31,861 (after 60 payments) and to make it worth the note buyer’s while, the note owner would most likely sell it at a discount. By discounting the note, the actual return on the buyer’s money is more than the original 9 percent on the face of the note.

For instance, if the buyer purchases the note for $25,000 and continues to receive the payment of $405.71 over the remaining 10 years of the note, he’ll receive a return of 15.15 percent per year on the note. If the seller is really desperate and sells the note for $20,000, the return balloons up to 21.43 percent. But it hasn’t been so bad for the seller by letting the note go for just $20,000. Remember, he’s received 60 payments of $405.71 ($24,342.60) and then a final purchase price of $20,000, totaling $44,342.60. The drawback is that over 10 years, he’s only received a cumulative 10 percent return on the money.

Now – the new owner will receive a total of $48,685.20 in payments on his $20,000 investment over the next decade. Not a bad return. What’s more – it’s a guaranteed return on the money – not a hopeful return like most investors face with stocks. In addition, the investment is secured by real estate, not paper or the last quarter’s performance.

So how do you purchase or sell these notes? There are plenty of places online to find those who want to buy notes, but the best place to look is to your local mortgage industry, settlement companies or real estate investment club.

Your first contact would be with either a mortgage broker/banker who is looking for people with a bit of cash who are looking to buy seconds at the table when the property is being settled. Another contact would be with a Realtor who works with investors to help buyers get into properties who need creative financing.

There are plenty of ways to invest in real estate – buying paper can be one of the cleanest alternatives out there.


Friday, August 13, 2004

Promissory Note An Instrument of Investment

There are plenty of ways to invest in real estate and one of the cleanest ways is to loan money to homeowners/buyers who need cash to purchase a property. For most individual investors, this loan would be based on a promissory note – an instrument by which you loan someone money and they promise to pay it back in certain terms and at a certain interest rate.

It sounds easy – and the process actually is pretty simple. There are plenty of sample notes on the Web and even Microsoft has some templates for this type of document at its documents site – I’ve used it several times. The tough part comes in the risk factor. After all, you’re handing over thousands of dollars to someone and hoping, praying they’ll pay it back. If they do – great – you’re making more than market interest on your money. However, if they don’t, you may have to foreclose on the property, which can get pretty messy.

If the person signing the note (the borrower) is a trustworthy person – then there’s no fear. That’s why you want to complete a financial background check on anyone to whom you would consider issuing a promissory note. Assuming you’ve completed this process, then your next task is looking at the terms of the note.

This will include these basic points:
Start date and finish date
Loan amount
Length of loan
Interest rate
Payment plan
Recourse for non-payment
Location payments are to be sent
Name of who will receive payment
Name, address of borrower…just to name a few.

There are several ways to figure repayment. If this note is a family member and you’re just loaning them the money, but don’t really care when it’s paid back, then you can be a bit more flexible on the payback requirements. Let me mention something here – it you are receiving a loan from a family member, you definitely want to use a promissory note. It removes any question as to the intentions of both the borrower (son/daughter/nephew/niece/grandchild) and the lender (mom/dad/uncle/aunt/grandparent).

I’ve seen plenty of bad blood boil over because “My grandson never paid back that $15,000 I loaned them to buy a house.” If the borrower gets into further financial stress, it gets more uncomfortable and distressing at between the family members and can ruin what should be a nurturing relationship. However, a promissory note takes away the flexibility of “just pay it back when you can.”

The payback can occur several ways:

Amortized – This is how most loans are paid off. A payment that includes interest and principal over the term of the loan. For a $10,000 loan over 5 years at 7 percent, the amortized payment would be $198.01 per month and the payments would be spread over 60 months.

Balloon Payment - Let’s say you can only afford $100 per month, but you still want to pay off the mortgage in 5 years. Then you would be looking at a monthly payment of $100, but then a final large payment at month 60 of $7,016.96.

Interest Only – There’s a lot of talk about interest only loans these days. On a simple plan, the above loan would cost the borrower $58.33 per month for 59 months (7 percent per year divided by 12 monthly payments) and then a balloon payment of $10,058.33 on month 60.

Single Payment – This is how many promissory notes are structured – “Here, Johnny, take this $10,000 and pay me back with interest in five years.” Johnny, then would pay back the $10,000, plus accrued interest totaling $3,500 (7 percent per year). It could even be compounded interested, which is a great deal for the borrower – because Johnny is paying interest on interest and principal and the loan amount grows each year.

There’s a lot of information out there about promissory notes. Before you either issue one or take one, read up on the risks and benefits. Next week, I’ll talk about how to get cash for a note you may already be holding.


Friday, August 06, 2004

Home Sale Values: The Truth Is Out There

I heard of a news story the other day on a local radio station that blew me away. Apparently, a local real estate agent has a condo listing that has lingered on the market for a while and called a reporter from this station to complain about it. The reporter quoted him and determined that the real estate market in Montgomery County, MD was, indeed, slowing down.

What’s so ludicrous about this is that the president of the Greater Capital Area Association of Realtors, James Kneussl Jr., had also been interviewed for the story, he says, and he shared with the reporter how all numbers were heading upward – except for one – the days on market. It was taking a shorter period of time for houses to sell in his county – namely, 18 on average. When he heard the story air, he expected to hear his quotes coming out to balance the nay-saying agent – but it didn’t happen. The reporter quoted the agent’s negative observation, instead of sticking to the local statistics which were shared with her and which were readily available online and through other sources.

This is a prime example of not believing everything you hear in the media and read in the newspapers (except here, of course).

Well, there’s a way to get to the bottom of any real estate market very quickly by looking up your local or state Realtor association and clicking on the link that leads to market statistics. Not all local associations carry statistics and in those cases the states do. Furthermore, in some localities, the statistical data may be hosted by the local multiple listing service, which may be owned by a separate entity.

In the Washington, DC suburban area, that web site is
www.mris.com – the official web site for the Metropolitan Regional Information Systems, Inc. Here, you’ll find two monthly pull-down reports for MLS information for 56 counties and cities in the company’s coverage area from Pennsylvania to Virginia.

It’s a great tool to use to see where home price trends are headed. It’s not such a great tool to price your individual house, because it’s too broad to determine an individual home’s current value.

Nevertheless, if you want to know how your market is moving -- up or down -- finding the local jurisdiction’s web site is a very good start. To locate any local set of stats, simply click by
www.Realtor.com, scroll down the page and click State & Local Associations, under “About the National Association of Realtors.” Then, just drill down to your local Realtor association from the state level.

You may find your local association, then determine that they don’t carry their local stats – click back to the state list and click the state’s web site, which usually carries all the numbers for the state, county by county.

Your best source of finding out the value of your home’s value is still by using your neighborhood real estate specialist or appraiser. The numbers you’ll find reported on an association’s site is a look at your community on a county or city level. To find out your home value, you need an analysis of homes that have sold in your neighborhood like your house and the local sales force or appraisal group’s are best equipped to determine that value.

Regardless of the fact if your market is hot or cold, if your home is lingering on the market, it doesn’t mean the whole market is falling – it may mean you simply have priced it too high or the condition of your property does not reflect your asking price. If that’s the case, review your pricing with your listing agent and discuss a price drop. Keep in mind, the “market” doesn’t care how much you put into the remodeling or how much money YOU think you can get out of it. The market reflects what the buyer is willing to pay and what sellers are willing to accept, period.

Sunday, May 02, 2004

Rent to Avoid Taxes?

Q: My wife and have owned a primary property for 4 years and 9 months. Three months ago we bought another primary home and we are supposed to move to and then sell the other one. If we don't move into this new property and sell it, Does the gain become "ordinary income?". If so, would it be better to rent it out and sell it after two years? If so, would the tax consequences be better? We would greatly appreciate your advice. Thank you very much

GHF

A: I’m not sure how the income will be classified – you’ll need to check with your accountant or the IRS web site. However, it will definitely be taxed if you don’t live in it for two of the next five years (they don’t have to be sequential years). If you never move into and sell after two years – the gain will be taxed. The two rules that must be met are ownership and use. You may own it for two years, but if you don’t live in it, then the gain will be taxed.

Here’s one consideration: Rent out your current primary residence, live in the new primary residence, then move back into your old home and sell the rental – THEN, you can get the gain tax free as long as the gain doesn’t surpass the $500,000 limit for married filers. So far this loop hole has not been closed where you can introduce a property into rental use and then move back into it with not much of a tax liability – check with your accountant, however, before making a final decision!

MAC