Our Loss: Short Sales and Mortgage Interest...

It seems to me that the public is not appropriately upset about the looming Fiscal Cliff.  Even if Congress can come to some last-minute resolution-- you can be sure that there will be areas they will overlook, and programs they don’t extend by mistake or on purpose.  Witness the impending impact on short sales, even our local Board of Realtors sent out a message on this topic--so in a nutshell, here’s the conversation topic of the week: 

Starting Tuesday there is no longer a benefit to a short sale. No matter what the final outcome may be regarding the fiscal cliff, no deal has been struck that will extend the Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA).  This legislation provided tax forgiveness for short sales (that were the borrowers primary residence as well as additional requirements such as time they owned the property).

The whole reason for a short sale was that people who were “underwater” in their homes, with the approval of their bank, could sell the property for less than they owe, and the bank would forgive the debt AND because of the MFDRA the IRS would forgive the debt as well.  With the expiration of this Act, the amount a bank forgives would become taxable to the seller.  So be awarew starting Jan 1st, all short sales will have additional tax consequences until and unless Congress passes some kind of extension

The Administration is trying to find new streams of income—so they can keep spending at the new higher rate--and is reconsidering many of the things Americans have traditionally considered sacred.  Everything is on the table.

And so what about the mortgage interest tax credit?  We are all afraid of the loss of this credit, though not everyone seems to fully grasp what losing this credit might mean beyond what it might cost them personally.
The ability to deduct the mortgage interest paid to a lender for the use of their money has become a fundamental economic benefit to homeownership for tens of millions of Americans.  And just to be fair about it, the Banks have to classify these interest payments as income, and they pay tax on it too. Wouldn’t this be a double tax?

Will the loss of the mortgage interest tax deduction actually affect the health of the housing market? That really depends on how deeply the government decides to cut. If the tax credit is eliminated entirely, the impact on the real estate market could be devastating. Right now, the “move up” market is weak, and people who benefit from the tax credit comprise a good portion of that market.

Eliminating the financial benefits of the tax credit, combined with other tax hikes likely to be imposed on “wealthy” families could drive some potential homebuyers out of the market completely. To be sure, not all homeowners even take the credit, (to get it you have to itemize your return) but without the credit, home prices may well fall, or at least not increase, which will have an effect on pricing throughout the housing ecosystem, depressing prices just when our market is finally beginning to recover from a multi-year downward cycle.

At very least it seems likely the Administration will demand limits on what can be deducted, as well as more stringent regulations on what properties and loans a borrower can claim interest credit against. If these changes are significant, no doubt we’ll experience some softening in the market, likely reversing the growth in economy as a whole. After all, a weakened housing market will contribute to adverse conditions in related markets such as construction, building materials, home appliances and the like.

So even if Monday’s emergency convening of Congress is successful and we don’t go fall over the fiscal cliff, the devil is in the details.  Eliminating some of the benefits of home ownership burdens the middle class in a way that can only hurt the real estate market. Considering that it’s been the housing market that’s pulled the U.S. out of virtually every recession since World War II, it seems like we should be shifting our focus to stimulating it in any way we can rather than doing anything that might knock it down.

Dane Hahn is a real estate professional practicing in  the tri-county area. (Charlotte, Sarasota and Manatee.) . You can reach him at 941-681-0312, or at dane.hahn@gmail.com See him on the web at www.danesellsflorida.com

Note: Starting Tuesday, anyone considering a short sale should speak to an appropriate professional regarding all tax implications of a short sale.

Foreign Investors Have Cash


I was pleased to attend a breakfast this past week in which Michael Saunders was the invited speaker. This was a businessman’s meeting and Mrs. Saunders was speaking on the economy and real estate in general throughout the SW Florida area. She was not recruiting, she was not in her training mode, she was simply reporting what she sees as the immediate future issues and successes that we might experience right here.

First the good news, of which there seems to be quite a bit. Houses are selling again, prices are turning around (heading up), and the number of sales is increasing as well. She was mixing new homes with used inventory in her remarks, but because there are many more existing homes than brand new stock, the trend is good for new sales as well as resales. And the buyers have cash. About 80% of the sales we have seen over the last month were for cash.

The banks—who would normally have been lending for all these sales—are busy with refinancing existing homes for folks who have decided to stay put, but would like some of that 3.5% loan money.
It's pretty hard to ignore the opportunity to refi a home at 3.5%, especially when headlines about worldwide inflation are only a few months off, and when inflation is at 3.5% (which it no doubt will be by March or April) then your mortgage is free. Back in the day, when the inflation rate hit 6-7% and President Ford was wearing a WIN button (Wip Inflation Now) the mortgage rates were at 18%. So you can see that the Federal Reserve is holding down rates that would naturally be on the upswing.

But there was some bad news too. And I don't mean the so-called “shadow inventory”--which are the homes still owned by the banks that are vacant and will one day flood the market. That dirty little secret is still to be dealt with. No, the bad news is that foreigners are lurking out there ready to eat your lunch.

Economic and political uncertainty around the globe are benefiting real estate in the United States, especially in Miami and New York, the two “safe haven” American cities foreign investors usually look to first. Florida's real estate market is certainly no stranger to capital flight from Latin America. But the velocity at which some Argentines are investing in Miami real estate has shocked some brokers here. In the past few months, Argentines have quietly passed Brazilians to become the most active group from Latin America buying Miami real estate. Argentines are buying foreign properties not only to park their savings but also to make extra income through rentals. Argentines don’t want any more Argentine risk. So they are willing to risk their savings on Miami real estate instead. But Miami is Miami, what about us?

Mrs. Saunders related that she had a call last week from a working acquaintance of hers who owned one of the largest real estate offices in Paris, France. He left a phone message saying he was coming to Sarasota to look at property—which was good news for the Saunders Agency. But when he arrived, it turned out he wasn't looking at the million dollar properties up and down the Keys—as Saunders had suspected. He wanted to buy 150 homes under $150,000 for a syndicate of Parisians who wanted to invest in Florida real estate—and the had cash.

All this sounds fine, and is good news for sellers (albeit, most of the sellers for this batch will be banks of hold-over short sales), but in fact this is bad news for the “little guy” who wanted to pick up a piece of paradise for a few dollars under the old prices, so it's no wonder when I take my clients out to see homes throughout Sarasota and Charlotte Counties, there's not much left in their price range—the inventory has gotten thin.

And what is the Franco-American plan for the 150 homes? To rent them of course. The steps the syndicate is taking is to 1. Buy up the stock. 2. Fix them up so they can be rented. 3. Rent them for 5 years. 4. Resell them. Sounds like the late-night TV pitchmen who sell you a system on how to get rich in real estate.

Dane Hahn is a real estate professional serving clients in Sarasota and Charlotte County. You can reach him at 941-681-0312 or by email at: dane.hahn@gmail.com. See him on the web at www.danesellsflorida.com.





You Make Money When You Buy


Leverage in Real Estate investing is the use of borrowed money to increase your profits in an investment. Just a quick recap before I get into the caveats that you need to know to keep your investment sound. Remember I said that if you had $100,000 to invest and you purchased a small income property for $100,000. which had an appreciation at an average of 7% per year. At the end of the first year of operation, your property would be worth $107,000. That's a better return than a savings account, but if you had leveraged your investment by putting your $100,000 down on a $500,000 income property, at the end of the first year, it would be worth $535,000. So which is the better investment? The one that returns $7,000 or $35,000? Using leverage in your real estate investments can have a big effect on your financial statement.

Rule One--Put the minimum down on a good property, find one which has a strong likelihood of appreciating in value. Stay away from questionable properties in run down areas. If you use leverage to your advantage, it will make you wealthy.

Rule One A—Negotiate.  You make money in real estate when you buy not when you sell. I've written this before, but it's worth saying again. You can't sell a property for more than it's worth, but you can buy one for less than it's worth. Always always remember you make your money when you buy.

Rule Two—Positive cash flow is everything. Properties must produce positive cash flow each year and over time should grow in value. If you over-leverage (take out too large a loan) your properties, you risk losing them. Remember, properties are like race horses, they can make you a lot of money but they require care and feeding and come with expenses. Taking out too big of a loan on your property means your monthly expenses may be more than the property can support. We live in the “now” not in the future. The key is a positive cash flow now. The second key is the resale value—but that’s in the future.

Rule Three—Focus on your returns. Investment real estate is valued (when it comes time to borrow against it or to resell) by the income that a property generates after subtracting out expenses. So, if you can raise the income or lower the expenses, or both you will make more money now AND raise the future value of the property.

Depending on the property, this management technique can increase the value of your investment by double digit multiples. Small changes to the performance of the property over time can make you huge amounts of money.

Rule Four—More is better. Just as multiple properties are better than one property, multiple tenants are better than one tenant. Unless you own single use building like a gas station, multiple tenants allow you get past bad months so your vacancy rate can be kept low. Nobody wants to own a huge vacant building. So there is wisdom in owning an multi-units like an apartment complex, an office building, or retail center. Ideally you will always have some tenants, your expenses are likely to increase a bit over time but you can maximize your return by making small cost of living or inflationary adjustments across multiple tenants. A small increases in rent, when applied across multiple tenants, can add up to big results.

If you own a 10 unit apartment house and raise each rent $25 per month, you actually create $3,000 annually in extra income. By making small adjustments across multiple tenants it can increase your investment dramatically.

Rule Five—You can get rich slowly. But forget trying to get rich quick. Investing is not for the faint of heart nor for the impatient. Being a landlord comes with tenants—and they're not all nice. Investing comes with bills, and you will do yourself a favor to pay them on time. And speaking about time, investing and managing real estate takes time. You will find yourself investing weekends in fix-ups and repairs, and more. But in the end, it must be worth your efforts.

Rule Six—Save your emotions for your spouse. If a property is not producing, if you can't keep tenants, if you have bought a property you can't manage: sell it. Don't keep a property just because you got a great buy or one day it might start to generate a positive cash flow. If it's time to get out of the real estate investment business, come to grips with that before your investments are no longer being managed properly. When it's no fun anymore, get out.

Rule Seven-It's OK to let others do it for you. There are many ways to profit from real estate investments without the hands-on daily management issues. But just one is the FTSE NAREIT Mortgage REITs Index Fund (REM). This ETF follows an index that measures the performance of the residential and commercial real estate, mortgage finance, and savings associations sectors of the U.S. equity market, allowing investors to get exposure to both the front and back end of real estate. With a portfolio of 30 mostly medium sized firms, and with a YTD return of 26.06%, REM also boasts a handsome annual dividend yield of 11.88%

Dane Hahn is a real estate professional serving Sarasota and Charlotte Counties. Reach him at dane.hahn@gamil.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com


Investing 101, Using Leverage in Real Estate


Because the market is on the rebound as I write this, I wanted to say a few words about “leverage” in real estate. In a nutshell, leverage is using other people's money to buy property, and why using leverage in real estate can generate significant returns, with only a modicum of risk.

Maybe you recall what a lever is from grammar school math class. It's been a long time since I sat in Miss Alberta’s class in Ridgewood, NJ, but still, when I think of a lever I visualize a worker moving a huge rock using a long pole and wedging that pole against a fulcrum so he can make the big rock move. If you remember that scenario, the key is the length of the pole. I think it was Archimedes who said, “with a long enough pole, I could move the earth.” In real estate, the key is a low mortgage rate.

So how does elementary math and the concept of leverage translate to real estate? Well, let's say you have $100,000 in cash and you decide to invest in a house that costs $100,000. After 5 years passes, you sell the house for $125,000. In this very simple example (no fix-up, no taxes or carrying costs) you have made $5,000 per year, and invested $100,000. Congratulations, you made 5% on your money. It's a better return than a savings account, (but comes with more risk).

OK, now suppose you bought that same house for $100,000, but you only had half of the money it would cost to buy the home. You put down $50,000 and borrowed $50,000. Now at the end of those same five years, when you sell the house for $125,000, and pay the loan off, you will have your $50,000 back and the difference of $25,000 as earnings. That's still $5,000 a year, but you only needed $50,000 to make it happen, so your return on investment (ROI) is 10% a year. (A much better return than a savings account, but again, this example leaves out the expenses of operating the property and servicing the loan.)

Now in a more real world example. You buy the house for $100,000, and apply for a simple mortgage. The mortgage company's loan to value (LTV) is 80%, meaning you can get the money to buy the house with only 20% down. Now at the end of your five year ownership, when you sell the property for $125,000, you have “made” $25,000 on an investment of $20,000. That's $5,000 per year on $20,000 invested, or 25% per year on your money. (Can you do this? Yes, it happens everyday in every state in America).

What if the Federal Government wanted you to make a buck? Consider this, the HomePath program offeredby Fannie Mae offers foreclosed homes directly to qualified buyers. This special program allows you to qualify with only 3% down payment and can even give you up to $35,000 back to fix up your home. And better yet, it can be an investment property—as opposed to many federal programs which only are available if you live in the home. I won't kid you, you need a good credit score to get the 3% loan, but if you qualify, it's a great program.

Using the HomePath program, if you buy the home for $100,000, using your 3% and Fannie Mae's 97%, and you sell in 5 years for $125,000. You will realize the $25,000 gain having “risked or invested” only $3,000 of your own money. Now your ROI is 166% per year. In truth, it's not going to be that high because you'll have taxes, insurance, principle and interest to pay each year, but you can see what leverage can do.

And since you only used $3,000 of your $100,000 to make this investment, you have $97,000 still to invest. I would suggest you consider owning more than one house at a time.

Are there risks? Yes, but an investor, who manages his properties will not allow risks to get out of control. He will not allow the properties to deteriorate, and will buy and sell without emotion. Not every property will be a “home run”, but enough will be so that a simple portfolio of 4 or 5 houses, or multifamily homes will produce a good rental income year in and year out, and go a long way to augmenting a retirement plan. And in all my examples, the risk is the same, just the return changes—so the smart investor, (1) buys with as little of his own money as possible, and (2) spreads the risk over multiple properties.

Years ago, on late night TV, there were hucksters flacking “no money down real estate programs” where average folks became very rich, seemingly overnight. Nerds had huge boats, Rolex watches and beautiful girlfriends. That doesn't happen very often. If you're honest, don't plan to get rich quick. But you can get rich slowly. I see it everyday.

Dane Hahn is a real estate professional practicing in Florida and New Hampshire. You can reach him at 941-681-0312 or at dane.hahn@gmail.com. See him on the web at www.danesellsflorida.com.

Dodd-Frank stings the Real Estate Market


The fiscal cliff notwithstanding, there are a number of financial issues that have the potential to sink the housing market—just when we have begun to see light at the end of the tunnel. Most of us have heard of the Dodd-Frank Act designed to mandate Wall Street reform, but the media has not spent much ink on the pending rulings on mortgage origination requirements also mandated by the Dodd-Frank.

For one, ponder the eventual fates of Fannie Mae and Freddie Mac, now in their fourth year of conservatorship. And for another, consider the Federal Reserve’s recently proposed Basel III capital standards program, which have the potential to deliver a crushing blow to both REALTORS® and consumers in today’s still-fragile housing recovery.

Basel III is an international regulatory standard on bank capital adequacy, stress testing and market liquidity developed in Europe by the Basel Committee on Banking Supervision in 2010. Basel III was developed in response to the deficiencies in financial regulation revealed by the recent financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.

All this sounds good, but the European Organisation for Economic Co-operation and Development (OECD) estimates that the implementation of Basel III will decrease annual GDP growth by 0.05–0.15%. Another smack in the face that won't help our economy. Critics suggest that Basel III requirements will also increase the incentives of banks to game the regulatory framework, which could further negatively affect the stability of the financial system.

Taken together, the outcomes of Qualified Mortgage (QM), Qualified Residential Mortgage (QRM) and Basel III rulings now under consideration would likely shut down the mortgage finance market to a good number of home buyers, and would vastly change the home ownership landscape.

Ken Trepeta the National Association of REALTORS (NAR) Real Estate Services Director Ken says “If the ability-to-repay rules of QM are written too narrowly, it will tighten credit even more for all but the most credit-worthy buyers. As for QRM, if the rule requires a minimum down payment of 20 percent, much of the first-time buyer market outside of FHA would simply disappear.”

Among the most worrisome proposed Basel III standards are detailed risk-weighting requirements that would force banks to hold more capital for all but the most conservative loans, making almost all loans more costly for consumers as well as harder to get. “If regulators do the wrong thing on any one of these issues,” he said, “the result could be a ticking time bomb for the housing recovery we are just beginning to see. Even if regulators get it right,” Trepeta warned, “credit overall will likely be tighter. If they botch it, it could be disastrous.”

NAR has both vigorously opposed any changes that would limit or undermine the current Mortgage Interest Deduction, and has also been working closely with the House Financial Services Committee and the Senate Banking Committee for two years to ensure that Wall Street reform legislation does not adversely affect REALTORS® or consumers. But the Mortgage Interest Deduction may soon be a thing of the past.

In a July 2011 letter to Fed Chairman Ben Bernanke, then NAR President Ron Phipps wrote, ”regulation of the mortgage lending industry is becoming so complex that it threatens to weaken the system instead of curing abuses,“ and that the lending industry and regulators ”have over-corrected in response to abuses that occurred in the middle of the last decade.“

The letter calls on the credit and lending industries and Federal regulators to reassess the entire credit structure and look for ways to increase the availability of credit to qualified borrowers who are good credit risks.

In September, 2012, NAR President Moe Veissi sent a follow-up letter to Bernanke on behalf of the Realtors and the American people, once again warning of the potential effects of these unresolved issues. The hope is Berrnanke would be able to preserve this widely used deduction, and influence the rule-makers. Authority for the rule-making lies with the Consumer Financial Protection Bureau (CFPB), which has until Jan. 21, 2013 to issue the final ability-to-repay/QM regulations, to take effect 12 months later.

Dane Hahn is a real estate professional practicing in Charlotte and Sarasota Counties. You can reach him at 941-681-0312, or at dane.hahn@gmail.com. See him on the web at www.danesellsflorida.com.



Real Estate Stories that Show You How!

Let's begin easing you out of the pits. I mean, comfort zone! I'm going to slowly and methodically give you as many little sparks and insights to the relatively simple ways that ordinary people use real estate to achieve extraordinary results.
Stories are the best spark plugs. They let you casually observe from a safe, secure and understandable view point. I will write to answer most of the questions that I feel I myself would ask if I was reading what you are about to read.
I want you to know something from the very start of this report and that something is this: I care about you and I sincerely mean that. I really do want you to move to a new comfort zone, one that is pleasurable and free from fear. A place where you realize you have the power to achieve greater things than you currently can imagine.
It's possible for you to start being a more powerfully directed purpose-driven individual who is well organized and on track to higher achievement. You will change and grow, slowly and steadily with every page you read. With every thought and insight you gain, your desire and courage will grow as well.
Napoleon Hill wrote one of the greatest books of all time. It's called "Think and Grow Rich." The essence of that book, the secret it reveals time and again is this: you must develop a burning desire.
Don't put this book down thinking the previous statement is cliché and that you already knew that! I am simply leading you to my next point, the next point being is - your desire needs a starting point. So to start developing desire, my secret is you must have a purpose. Why do you want to pursue real estate? I know what you're thinking: to make money, to have security, to feel useful and appear successful. Good points. I agree you can have all of that and more if that is what you desire.
Now here is something that comes before any of those things you desire. What is the purpose of all those things? Purpose, purpose, purpose...you need to first define purpose before you get the things. My purpose, or so I thought early in my career, was to move up to a nicer house and have my first house become my first rental property. When I moved up to the next one, I quickly learned as soon as I rented it out, I was in some way responsible for creating happiness and security in the life of another person that was of no relation to me.
It soon was evident to me how the choices I made in choosing that first property either would help me or hurt me in my quest to succeed in the real estate investment business.
All of it is cumulative, everything you do and how you do it adds up. It compounds itself and it either makes your life easier or more difficult. I am going to give you experiences that you can learn from that will make your life easier; I am going to show you how. That is my purpose.
The book that gave me the unknowing courage to take my first steps in real estate was a book called "How I Turned $1000 into $3 Million in real estate in my spare time" by William Nickerson. He was a master storyteller and by osmosis, after reading his book, I found myself gravitating towards the real estate classified section of my Sunday paper.
Eventually I leapt and my life had changed. It was an FHA foreclosure, a two-bedroom, one-bath home with a built-in, screened-in pool, with a Jacuzzi and a built-in sprinkler system. I bought it for $46,000 and used the HUD 203K rehab program to fix it up. I spent $16,000 to update and make repairs. They then gave me one loan for a total of $62,000. It took me three months to complete it and I was in; I had done it!
My life changed, I learned, I took the leap. From then on I had confidence. I had already had my first home but now I had two. Well, I was in the Coast Guard and wouldn't you know, three months later we moved. Uncle Sam took me out of St. Petersburg, Florida and dropped me in Kodiak, Alaska, for my next tour of duty.
Well guess what? I was armed with ambition, courage, confidence and just enough knowledge to be considered dangerous, so I bought a duplex as soon as I came ashore on Kodiak Island. Now I had three dwellings and my relationships and responsibilities were growing with my new tenants counting on me to provide a clean, functional and pleasing environment for them to exist in.
It looked like this: My mother rented my first house and an elderly couple rented the second one and my duplex came with an existing tenant who was a hospital administrator, so I was lucky. I was able to ease myself into the role of landlord without getting burned early in my career. I now had two houses and a duplex in the span of about one year. My brothers and some other family members took notice and were pretty well dumbfounded.
They couldn't figure out how I had, all of a sudden, become a real estate wizard.
It felt good to make that change in so short a time.
I got that from reading a book! And that my friend is how you are going to do the majority of everything you do in real estate, by reading and taking steps towards duplicating the success of others in a repeatable pattern. The key is to understand that you can do it if you read the right books and apply the very basic formulas that are handed to you.
There lies in: Magic Bullets in Real Estate
This is a common man or woman's real estate manual. William Nickerson never gave me anything so easy as "Magic Bullets!" So I learned trial by fire and it has been very gratifying. I've since went on to collect 17 properties, 23 tenants, 2 real estate licenses in Florida and Alaska, an assistant appraiser's certificate and over a hundred books on real estate. I just kept learning and growing and gaining momentum for the last 13 years. I am still in the Coast Guard, too, and I work at Alaska One Realty in my spare time. In two more years, I will be retired at the ripe old age of 42. Sounds like a sort of fairytale, doesn't it? Don't let me fool you. It's hard work and I'm still not a millionaire, but I want you to have the truth, so I will be honest with you every step of the way.
I know why I am not a millionaire and here is why. I would periodically sell property that was going up in value and paying for itself through the rent checks. But being in the Coast Guard would dislocate me every four years, so I found myself selling out in order to avoid being what is called "an absentee landlord."
This is an important lesson for you. It has prevented me from becoming a millionaire up to this point. The lesson is: find an area on this planet that you could and will live in, and stay close to it. Don't move more than 10 miles from your farm area. The farm area is where all your properties are located. Long distance "land lording" is tough! It can be done but you lose the ability to control the situation compared to if you were there. I've served my country and saved people's lives, so for me it has not been in vain. I have no regrets but if you don't have to leave your area of expertise, don't!
The networks you build and the contacts you build, in the process of "doing" real estate, are so valuable that when they are no longer at your disposal, it puts you at a serious disadvantage.
Not to mention when you move you have to acclimate yourself to an entirely different market, build new trust-based relationships and start all over again. It's like a treadmill you'll be running and running, however it gets you nowhere.
I've used it to my advantage. I have been forced to accelerate my abilities to rapidly duplicate my success whenever I am moved, but it is still an uphill battle. My point: Don't move too far from your farm or your network of bankers, appraisers, carpenters, tradesman, real estate, friends, tenants and so on. Once you have the skill you can duplicate your success anywhere you go but if you don't have to go...enough said on that!
I like to say, "Don't sell the goose to get the eggs." What that means is if you need money to buy more property, use equity lines from other property to do it. You will get the same amount of money or more by using an equity line as if you sold it. However, you get to keep the asset and the money! I go into this in "Magic Bullets," so I won't drone on here. Just know you don't have to sell your property to get the cash out of them.
So here we are. You know a little bit about me and you may have picked up a nugget or two. Let's find a few more.
There once was a man who wanted to buy some investment property, so what he did was look at growth patterns. You should do this too, by going to your city's planning and zoning department. You can see growth patterns and you definitely want to buy property that stands in the way of growth.
This is how he used what he learned. He saw that city planners had decided that a new artery (highway) would benefit their city by creating linkage to another city about 100 miles away, so being a smart investor he only went as far as a ten mile limit to be able to be close to his investment.
Now on average, new growth will radiate out from existing prosperous cities in the direction it is planned at a rate of about one mile per year. So our smart investor had a 10 - 12 year plan to cash out in about 10 - 12 years.
What he did was buy, I believe, 10 acres of commercially zoned property very cheaply because there was no demand at the time. He bought it, fenced it in, put up some lights and a gate, and held onto that little bugger. Now that new highway was coming his way and the good folks, through their taxes, were paying to have it built.
It didn't take long for the heavy equipment to start cutting a swath towards his fenced-in storage facility and when they got close enough to him, he started renting out a secure area for everything, from road cones to generators to backhoes. You name it - it was stored there. This more than paid his land off.
Now the men and their equipment eventually moved on further down the trail but they left a finished highway behind them. And guess what? Low and behold, people started driving on it, and then started buying property to build houses on to get away from the city. Since the new highway was a straight shot into town, ten miles out was breeze.
Well, of course, here comes the herd and everyone is just populating the whole darned area. And within ten years, residential housing surrounds Mr. Investor, and can you guess what he's got? Yep, a prime piece of commercial property, 10 acres large.
So in accordance with his 10-12 year plan, he sells his storage facility to make room for the new office/business park complex for over $2,000,000. That, my friend, is vision, and the sooner you get a clear picture of what it is that you want to specialize in, the sooner you can retire to the islands.
How hard was that? Don't tell me you can't do it, you can! I'm here to help you. I'm going to give you secrets no one else dares. Do you ever wonder why people won't tell you the secrets? Of course you already know this but I'll tell you anyway. It is because they are operating on a scarcity mentality, as though there won't be any left for them. Or if learn something and act on it, you will get ahead and have a great life. Well, misery loves company and silent oppression is the rule.
Here's a little story that poor quality real estate agents won't appreciate either but I'm going to tell it to you anyway. The reason I can tell it is because there are some great real estate agents out there who absolutely don't fear what I am about to tell you and would let you know it if they were in my position.
Here's the deal: Some agents want to be like the Wizard of Oz. They want to create the appearance of marketing and transacting real estate as being technical and very legal, a deep dark mystery. Well, it's not! The truth be told, you can write a contract on a napkin and it would stand up in court. I will emphasize here that you write on that napkin along with the terms of your agreement, "The terms set forth on this here napkin are subject to my attorney's approval."
An attorney will cover you completely for around $750.00. Prices may vary, however that is an average home transaction. There is a lot I am leaving out here but my point is this: If you own property, you can sell it anyway you want. "Magic Bullets" will teach you. Let's move on.
Exposure is the key to finding buyers and sellers in real estate. If a property is priced fairly and everyone who is looking for that type of property knows that it is in the availability pool, it will be found and the transaction will proceed as advertised. Price it right, advertise it properly and let the lawyer take care of the details. No commission, just a flat fee. Period.
Now that I have that off my chest, I will tell you a story about Dan, a 21-year old friend of mine, and his wife and their new baby. He's a hardworking guy who does his work without complaint and all the other "workers" pick on him for working so hard. Can you believe it? The other guys are so insecure and lazy that they make fun of a guy who is doing the work of three men, mainly of the three who are ridiculing him. Well, believe me, this doesn't go unnoticed by me and I take him under my wing. Dan wants to buy a house, so I begin the process of saving him years of trial by fire and save him $25,000 at no charge. That is because he deserved my help.
Anyway, here is the story: I began with him by asking him what type of home he thought he would be comfortable with and a price range. He indicated a 3-bedroom for around $100,000.
Knowing what he wanted and knowing the area, I was able to take him shopping for the house he was looking for. Now I always go after the "For Sale by Owner" homes first because I know they won't be adding any commission figure into their price, because they won't be paying one. So at 6% of $100,000 he will get $6,000 more "house" for his precious dollar.
I also told him besides the "For Sale by Owner" homes, we would be looking at oddball discount companies that help distressed sellers further part with their money and property. The mentality of a seller who uses cheesy companies to help them sell their property is pennywise and pound-foolish. If you're going to use professionals, then get a professional.
So off we go. After a day or so, we have found our house. Sure enough, El Cheeso Inc. has a sign on it. The screen doors are flapping in the breeze, the weeds are dancing on the lawn, but this house is indeed a 3-bedroom, 2-bath, 1-car garage with a fenced yard and it's selling for $110,000. Well, due to the fact that there is a divorce in progress, and a new girlfriend who doesn't like the place, and El Cheeso Inc. giving no representation, I negotiate for Dan and he gets it for $99,000. What's so great about this deal is this exact same floor plan in another house was for sale down the street, on the same street, for $25,000 more.
The moral of the story is good things come to those who deserve it, and that is another key to real estate. You must work hard so others will take notice of you and help you succeed.
Here's a beauty for you. This is about being in real estate circles and keeping your eyes and ears open and often times your "yapper" closed. This is the story of Brian and Julie. Here we have two hardworking souls. They have been married for 20 years and they have weathered the storms of matrimony. Julie works at a real estate office as an office manager. No real estate license, but she works at an office that sells a lot of waterfront property. So we are talking about location and being in the right place at the right time, and here comes a seller in the door of the office stating she is going to sell her older waterfront home. She is willing to take $180,000.
Julie tells Brian, they look at it and sure enough, this pearl is right on the water. She's a gem waiting to be polished up, so Brian and Julie sell their condominium and move in. Well, they aren't making any more waterfront property, so Brian goes to work polishing this jewel up.
Now, they have bought this house under market value in an appreciating market. So about one and a half years later, this property is worth over $350,000 and still climbing. Well, Brian is no dummy, so he gets to know his neighborhood. He strolls, takes walks and notices, you guessed it, a vacant, neglected jewel on an inside double lot. He tracks down the elderly lady, who is living with her sister, through the county records office and buys the house, including the extra lot, for a total of $120,000. Now Brian can walk to his new "jewel" and he starts polishing it. The neighbors start noticing and are amazed at his deal. He has offers of $180,000, $200,000 and $60,000 for just the lot. You name it. Now that the exposure is there, everyone wants a piece of it.
Well, this is what Brian did. He rented his first house out, moved into the second one and used plans that I gave to him to build a third house on the vacant lot, using the equity he accumulated from the first house that went up so much. And here's how this thing shakes out: $180,000 for his first house and it's value goes up to $365,000; he picked up the next jewel for $120,000 and he paid cash using the equity from the first house. Now he takes out a new mortgage on his second house for $120,000 and builds a third. The value at last count was $815,000 and he owed a grand total $300,000. That's a half million-dollar profit in 5 years!
Now what does this story tell us? #1 - it says, "work hard"; #2 - keep your eyes open; #3 - use equity lines; #4 - don't sell; #5 - learn how to be a landlord; #6 - be in locations that appreciate; #7 - buy things that are limited in availability; #8 - know how to research owners and repair property; #9 - get your partner's help (spouse); #10 - use knowledgeable friends to help you see potential (I gave him the plans and advised him not to sell anything!).
Can you get any more lessons out of this story? I'm sure you can. Just read it again and think on it. Jot down your ideas and put them to work. Real estate is not that hard, folks! You can do it. With a few magic bullets, some spark plugs and a good mentor to show you how, you can do it too!
Let's you and me talk for just a minute here, OK! Have you ever been really good at something and been able to step back and see the whole thing for what it is was? You just know exactly how to do it and you can see the end result clearly in your mind before you start. It's predictable to you. It's almost second nature, so you are comfortable doing it. It's almost become boring to you; your comfort zone is such that you can do it in your sleep.
I've gotten that way with certain types of real estate and I see people everyday that are so afraid of taking the first step that they are literally paralyzed. They make excuses and put it off, and rationalize and live a quiet life of desperation. They don't trust themselves and as a result of the unknown they can't trust anyone else either. This is a vicious cycle because the longer they wait the more it reinforces their beliefs.
I just want to grab them by the collar, take them to the bank and make them tell the banker, "Pre-qualify me!" Then walk them out the door and show them how to do something that will change their life forever, and that is to buy the first property, and then a second. Then their fear is gone and they grow to be of service to everyone who is ready for their assistance.
Let me tell you this: After you finish reading the rest of this report and you read the "Magic Bullets" book, your fears will be subdued and you will do something and your life will change. If you cannot succeed with what I am intent on showing you, then something is not right. I believe your desire would be your major obstacle, so if that's the case, read "Think and Grow Rich" by Napoleon Hill and come back to me then.
Let's get back to real estate education, shall we? Do you know who the largest commercial real estate owner in the U.S. is? It's McDonalds Corporation. Yep, and on top of that, they also have the most valuable locations for their type of business. The research they do on demographics and traffic counts is unparalleled!
If you were ever going to open a fast food restaurant, just put it near a McDonalds. You would survive just on the volume of people who flock or pass by the location that McDonalds has already decided meets all the critical data to support their restaurant business. Your restaurant, if you had good food and service, would flourish. Just sell something a little different than McDonalds. That's leveraging someone else's expertise in evaluating a location for a certain type of real estate.
Now that is a principle and principles are like natural laws. A natural law always works in every situation in its own way. It's like gravity - it always works! Here on earth, anyway.
So in real estate it doesn't matter what type it is, whether it's commercial, residential, industrial or recreational. Look for signs that serious market studies have been undertaken by major operators and buy things that can flourish in the presence of those concerns.
For instance, let's use Home Depot as an example. If Home Depot decides to build on a site, every residential lot within a mile of that new center will be bought up as soon as the Home Depot commits to build! Why?
Because smart investors know that Home Depot has done the market study and the area will be a prosperous one.
On top of that, it will provide jobs, it will pay taxes, it will provide materials to actually build the neighborhoods with, and people will shop there once their houses are built. The same goes for Wal-Mart, Lowe's and other smart business concerns.
You may or may not have noticed this but take a look the next time you are driving around. Here is what you should see. As you drive into cities from the suburbs, you'll notice donut shops, gas stations with convenience coffee centers, bagel shops, and etcetera, on the side of the road that people travel to on their way into the city to go to work. These are morning activity business centers.
Now on your way home, out of the city, you will see restaurants that cater to the evening meal crowd: KFC, Taco Bell, Subway and Pizza Hut. That's because people don't go there for breakfast. They get it on their way home, outbound from the city at night. If you put your restaurant on the wrong side of the road, you could be making a huge strategical error. Think!
Location, location, location as they say, are the 3 most important things in real estate. That is a very true statement. With residential property, that boils down to safety, security and convenience. So buy homes in good neighborhoods, cul-de-sacs preferably. No noise or through traffic, no escape routes for thieves, and a private setting, where kids play in the street without getting run down.
Security = close to hospitals, police and fire protection for obvious reasons.
Convenience = stores, gas stations, restaurants, small businesses, parks and recreation and access to major highways to circulate or evacuate if necessary.
You might get a great deal on a piece of properly but if it takes you a half hour to get a loaf of bread. What kind of resale will that great deal offer? Another great deal may back up to or face a busy street. That's often a poor choice as well...noise, pollution, the loss of privacy and curb appeal are all factors here.
The two best types of property to buy are:
1. Property that no one else knows is for sale! Why? Because you have no
competition.
2. Property no one wants! You just have to figure out why people don't want it.
If you can turn that lemon into lemonade through some problem solving, that
jewel may just shine because you used the right magic polish.
In real estate, you get paid when you solve problems. That is a fact!
Here is a golden nugget for you. If you do this, it will catapult your real estate investment career. I guarantee you will gain more insight to real estate by doing this one thing than just about anything else you could possibly do. The golden nugget is this: Take a real estate appraisal course. It will fly by, a few weekends and it's over, but the perspective and the information you gain from the class is priceless. It gives you vision, ideas and understanding. You will have an edge over every other investor who has not done it.
I had an instructor, who by some stroke of luck, I was privileged to be taught by. His name is Steven V. and he is truly a genius. This guy could make millions if he applied himself to real estate investment but he chooses to teach and give back to others in that way. He is very comfortable in life and money is a by-product for Steven. When I finished the class, I had appraisers wanting to hire me to go to work. Now I don't want to work as an appraiser. I just want to think like one and that is why I took that four-weekend course. That class taught me more than both of my real estate licensing courses combined. The reason for that is real estate classes deal with state laws, contracts, regulations and ethics. Appraisal focuses on evaluating real estate and that is what you want to learn as an investor.
A real estate license can actually hold you back from being a savvy investor and here's why: #1 - You have to announce to every seller that you are an agent. It's an ethics rule and a disclosure law. Well, now the seller is on guard for all kinds of reasons and you waste precious time overcoming negative reactions. #2 - When you go to sell your real estate, the same things apply but add to that scenario the fact that if you make large profits on property that you sell, people can come after you, saying you took advantage of them because of your expertise. And they win!
So you don't need to go to college for 4 years and you don't need a real estate license. What you do need is a guy like me to convince you to go to appraisal school and read books like the one you have now.
Then go out and do it, using a lawyer to protect you every step of the way. Again, here is a good point to make. Simply weave into every agreement or offer you make the following statement: This entire agreement is subject to my attorney's approval. I can't stress that enough. That's one line of text. That covers it all. It gives you time to investigate deals. It protects your interests and keeps you from getting burned in this business.
Here are a couple more beauties that I use to protect myself and you should too.
These are used with initial purchase offers:
1. Willing to pay X amount of dollars or appraised value, whichever is less.
(That says, "I'm only going to pay so much but if the appraisal is lower than
what I offered, than I am going to get it for the lower price. I don't get
burned!)
2. Subject to my partner's approval. (My partner was always my wife, and if she
didn't like it, the deal was null and void, cancelled, over, kaput, finito.)
Now nothing says my partner wasn't my dog, so if there's no fire hydrant, well the deal could be off.
Those are examples of escape clauses that could be abused to the point of being called "weasel clauses." Don't be a weasel! They give you a short period of time to have the option to buy something first with the right to cancel the deal, contingent upon something or someone else's decision.
I use them to protect myself and to get a little time to do my research on the property. Don't use them to unfairly tie a seller's hands. Be fair and try to move quickly when you do employ them.
What you are doing is creating a short time, zero-cost option to buy real estate. Here is a little trick and I don't use it very often but it can be used in a fair manner so I will give you the nugget. When you write an offer to purchase property, on the top line of the contract is a line that indicates who the buyer is. On that line in certain cases, I will write my name plus the words or assigns, like this:
Buyers: Dan Auito or assigns
What that word "assigns" does is this: it allows me to sell by assigning my right to buy the property to someone else. Dirty dealers will take advantage of people with that word if they can get away with it.
Here's where I would use it. In real estate, a lot of bargain hunters look for distressed property. You know, the fixer-uppers, the abandoned, condemned, fire-damaged stuff. I go a step further and look for distressed sellers such as death, divorce, relocation, but a lot of times I don't specialize in that type of property.
That's OK because if it's a steal and I get it for 40 - 50% off, I will assign it to someone who does deal in that type of property and make a profit by assigning it.
I'll always ask the distressed seller if that is a problem and if it is, I will buy it outright, then flip it but it costs more to do that. So I'll explain this to the seller and get their permission to use it. I don't slip it in on them. You will have a miserable existence if you practice real estate by deceit. Natural law will crush you; play fair! Purpose, passion and desire cannot be achieved or acquired by deceit. That's a quotable quote. I hope you remember it.
Let's get on with another story. This illustrates another fine example for you. This story is about a family who had business interests outside of real estate investing and as a result of the successes of their other businesses they had fairly large sums of money to play real estate like a monopoly game. Power can be dangerous in the wrong hands!
So here we go. This flush with cash family sees an opportunity to take advantage of an overlooked or left alone market. That market is the old-fashioned trailer park, or shall we say Mobile Home Park.
Anyway, the way most mobile home parks came into existence was this: Usually a man of integrity and strong work ethic coupled with a love for his fellow man would buy a piece of land suitable to the placement of mobile homes. As people moved in, he and his wife would welcome them and the neighbors would greet them and the community would become established.
The private owner would dig his own sewer lines and cut his own roads and landscape the park. Maybe put in the clubhouse complete with a swimming pool, shuffleboard, pool table and meeting hall. As time marched on, the residents bonded with each other and a family-friendly community took root. Well this man of integrity had a problem. Since all of his tenants are his friends, he is pressured not to raise the lot rents with inflation.
So the rents over the years are kept very low in the park and now this man and his wife are getting old. Perfect timing for our investors to come knocking and offer our private aging park owner a 2 million dollar price for his 10 acres of mobile home lots. This is a once in a lifetime offer and many park owners cashed out.
What people didn't see was these investors were systematically and methodically doing this all over the place and once they cashed out as many mom and pops as they could, they lowered the boom.
Now they the investors had control of many parks in the same areas and they started raising the lot rents. You see, they didn't have any emotional ties to the residents and they didn't live there, so it was a straightforward business deal: either pay the new higher rent or move.
The residents said, "To hell with you new owner, we are moving." "Well, fine, go ahead," they said. Now the residents started calling around to find another park with low rents but guess who owned those? Yep, our investors did, and those lot rents were going up too. So the mom and pops who didn't sell were full and it would cost on average of about $7,000 to relocate to another park even if they could find a vacancy.
The old folks who had it so good for so long were faced with a new reality and that was that they had no choice but to pay up or move, and moving, in many cases, wasn't an option. These investors exploited a complete segment of the market and made millions and millions in profit and continue to do so today.
It wasn't long after this happened that you started seeing signs saying, "This is a resident owned community." People eventually got smart and started buying that little lot that their trailer was sitting on and they began paying association dues for the clubhouse and security and grounds, maintenance and road repair. The good ole days are nothing but a fond memory.
Life goes on but America did not change for the better as a result of these types of people. Their only purpose was to make money; I believe they will die alone and in misery as a result of their way of life.
So I ask you again, can you be passionate and put your heart into investing in real estate by investing the way our corporate investors did? I think not. Money is no good when you get it by deceitful ways. I encourage you to work at balancing your objectives. Lease optioning, flippers...you are walking a fine line.
Here's a flip side to communal living. This story is a happier scenario, so let's have a little joy here. I once lived in Key West and I lived off base. Well, I thought I lived next door to Noah, and it sounded as though he was building another ark. All summer long, hammers and saws seemed to be making some type of racket, so naturally being the neighbor I was, I got to know the man next door. He never went to work and I asked him one day, "Don't you have a job and he kind of grinned and put his hammer down and this is Mark's story.
Mark and his brother were from the Northeast and they had a 30-room boarding house for college kids there, at something like $300.00 a month. That was about $9,000 a month and they made the parents responsible for the rent payments. Mark would spend his time with his family in the Keys for the nine months that school was in session. His brother was a local up North and he took care of the toilets, faucets, doors and windows. Yes, they had their very own animal house going on there, but Mark factored in the abuse and would spend 2 - 3 months a year, putting the animal house back together while the animals went home for summer break.
Mark only worked three months a year and the house (ark) that he built next to us was a masterpiece; it was beautiful. He was a master craftsman and he loved his work and spent a lot of his time with his family in a wonderful climate. Makes you kind of jealous, doesn't it? Well, don't let it because you can do it, too, but you must get started. Mark was 45 when I met him. I believe he was 25 when he got started, so my advice to you is to get started now!

Investing in Obama's Inflationary Economy

Andrew Snyder of Inside Investing Daily wrote this week that even though he didn't vote for Obama, the President's financial plans are not all that bad. And by, “not all that bad”, he means if you read between the lines, there are some investments—including real estate—that will benefit from the Obama inflationary management style. Snyder points out that the day after Obama's re-election -- the same day the stock market tanked -- gun sales soared.  I say this comes down to—for every action there’s an equal and opposite reaction--you just have to understand how to react.

On Nov. 7, the day after Obama’s reelection, the government recorded the highest-ever level of firearms-related background checks. This is the check that precedes a civilian gun purchase. We won't know for sure until the full figures for the month are calculated. But we do know there were 1.6 million background checks in October -- more than 20% over the same time last year.  These are folks who share two concerns, one is that they may—at some point—need a gun, and secondly they think the President may promote new regulations which will curtail citizens access to the purchase of guns.

A new acronym, called SWAGGR, is a term for an investment “bundle” that should be relatively inflation-proof.  The SWAGGR market is comprised of the investments that will most likely flourish during the time period of high inflation.  Guns, ammo and all the self-defense industry is all part of what we call the SWAGGR market. The letters in the acronym stand for Silver, Wine, Art, Gold, Guns and Real estate... all the things I've talked about in these columns. These are the things -- maybe even the only things – that will generate real, lasting wealth in the inflationary economy.

Of course I've been a proponent of real estate as a method to avoid the rampant inflation which is sure to creep into our daily conversations as the federal printing presses crank out mountains of paper money—money with no real value.  Leaving cash in a bank account today is a sure way to lose about 10% to 20% of your BUYING POWER each year.  And Wall Street is LasVegas in New York. Why would any sane person want to occupy Wall Street?

I have discussed real estate, silver and gold as appropriate alternatives to sitting on a bank account but SWAGGR also adds wine, art and guns—these are other investments that will also provide some security as the dollar tanks. I would also add fine jewelry (generally silver, gold and gems) as well as stocks in companies that will profit from the SWAGGR categories together with long-lifespan personal property (like home additions) together with expensive items that you plan to purchase or replace over the next couple of years.

These are the assets that can't be manipulated by a government gone wild. These unconventional investments lie outside the nation's zombie economy.

You may say you don’t need or want to own a gun. But that doesn't mean you can't take advantage of the nation's fear of future fire-arm regulations. And you may not have the funds it takes to bid on a high-end piece of fine art, but investments in companies that will profit from the sale of art—like Christies.  You might not have the kind of investment portfolio it takes to buy an orange grove or a waterfront lot. Again, that's fine.

There are alternative investments.

Sturm, Ruger & Co (RGR:NYSE), the gunmaker, just declared a special dividend of $4.50 per share. That payout is equal to nearly 10% of their closing price. Or for about $10 you can buy shares of Smith and Wesson (SWHC:NASDAQ). You can get into a Real Estate Investment Trust like Plum Creek (PCL:NYSE) for under $45. These are players in the SWAGGR market... and both will probably increase in value as the herd seeks safety.

It doesn't matter which political party you voted for, you can still take advantage of the Obama effect on our stock market. One leading financial magazine refers to the pending inflationary event as "a time bomb." In short, if your money is connected in ANY way to the stock market, I urge you to be in touch with a financial planner to reallocate it into investments that will be inflation protected. And do it soon. The tipping point will likely occur whether we go over the “fiscal cliff” or not—so think January at the latest. Before that all comes to pass you should have moved the funds you hope to preserve into some solid investments.

And don't be shocked by the plans that our government has in store for us. Tax increases for everyone are almost a certainty.  I would expect to see the home mortgage deduction (earned for us all by the constant efforts of the National association of Realtors) slip away together with many other deductions we have enjoyed over the years.

In inflationary times, cash does not have the appeal that we have given it over the years, because if everything gets more expensive week by week, then it’s smarter to spend cash today before the prices go any higher.  So the SWAGGR message says stop saving money and start investing in the things that you can profit from in the future, things that people will want, which due to inflation, regulations and shortages will likely increase in value (and therefore get more expensive over time relative to the dollar).

Dane Hahn is a real estate professional serving Florida’s Charlotte and Sarasota Counties, you can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com.

Tax Valuation of Homes

Sometimes people wonder how the County values their property for tax purposes.  When you look at your tax bill it’s clear the County changes the valuation every year and I for one am pretty satisfied that the appraisal team from Sarasota and Charlotte Counties are doing a good solid and creditable job—but how do they do it?

Bill Furst at the Sarasota Appraisers Office is happy to speak at group meetings, and to share exactly how the valuation is established, and why his team makes changes every year.  I have some experience in this arena, I have often been asked to value homes, sometimes to estimate a probable sales price, sometimes for a bank or mortgage company which may be considering a foreclosure or extending a loan and wants to determine the value of this particular asset.

But the county gathers a huge amount of data. In fact, I was surprised at the amount of effort to achieve accuracy they go through. As you can imagine, they have tons of data on the homes they send tax bills to, obviously they know what the home was worth last year and if there was a recent sale, they have that information from the clerk of the court records, (this is the data that Realtors also use) but they have even more. They can access various databases, foreclosure records, and they actually send out questionnaires to all new property owners, looking for information and condition on the property.

Highest and best use information comes from the judicial opinions, land use regulations and the building codes and ordinances.  This data helps create actual value for vacant lots as well as rezoned homes.  A house that backs up to commercial property may not be very appealing to a buyer, unless it has recently been rezoned commercial—that would increase its value measurably.

Income information is collected from landlords, so rental income will provide one of the variables in a rate of return equation helping to determine the value of an apartment or condo building.

Florida statutes require that at lest every 5 years a representative from the Appraisers office must visit each and every home in the county.  Of course they can visit every year if they believe the characteristics of the property have changed.  Arial photography is one method of determining if an addition or a new swimming pool has been added to a home without the benefit of a permit.  Unusual sales prices also will bring out questions, like why did a house we thought was worth $200K sell for $350K? But when permits are pulled, the Appraiser has the obligation to come see what’s new.

As Furst makes clear, they do not come out to your house to change the records, but to verify that the records they have are accurate.  If the landowner will not allow the Appraiser into the house to verify his data, the Appraiser has the right and power to estimate what “might” be inside the home.  In my experience, these estimates come in much higher than what the homeowner would like, and the only way to get the data corrected is to request the appraiser come back.  This is time consuming and usually results in at least one big tax bill before the corrections are made, so dealing with the appraiser from the start makes the most sense.

Some of the assumptions that an appraiser (who was not allowed into a home) might make would include lots of tile, the kitchen is new granite, and fully updated, if there is a chimney, then there could be 2 or three fireplaces, and the home’s measurements might include additional square footage under A/C.  It’s better not to have to do all this twice.

Dane Hahn is a real estate professional practicing in Sarasota and Charlotte Counties.  You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com

Housing Deductions



Housing never came up in any of the presidential debates, even though both candidates discussed the income tax changes they had in mind.  But just so you know, housing-related tax deductions, including home mortgage interest and real estate taxes, account for 49% of total itemized deductions. In fact for middle-income tax itemizers, 56% of deductions are housing-related, which means any discussion of capping itemized deductions would reduce tax benefits for the middle class. Naturally during the campaign anything that affects the middle-class would be taboo, but not so much today.
In listing what he did over the last four years, Obama didn’t mention any housing accomplishments. And, in listing all the problems that Obama failed to fix, Romney didn’t mention housing either. Both candidates carefully avoided discussing the mortgage interest deduction when talking about taxes. Romney suggested capping aggregate deductions at $25,000 without explicitly limiting any particular deduction, and Obama criticized Romney for not specifically calling out which deductions he would limit. Because the election is (thankfully) behind us, we can look back and wonder: now what? What if the administration decides to cut the itemized deductions on housing?
First of all, whoactually itemizes their tax deductions?  Remember if you don’t itemize, you can’t take real estate deductions.   The IRS says only one-third of tax-filers itemize, but this ranges hugely by income. Only 15% of filers with less than $50,000 adjusted gross income (AGI) itemize their deductions, compared with 96% with $200,000 or more AGI. Higher-income filers include a much higher average total of itemized deductions, too. A cap of $17,000 – which is what Romney suggested– is roughly equal to the amount that the typical itemizer with less than $50,000 AGI deducts, so many lower-income itemizers wouldn’t be affected at all by that cap. But even a higher cap of $25,000 would hit many people in the $50,000-$200,000 range and probably most in the $200,000-plus range.
Among all filers, 49%  of their itemized deductions is housing-related, which includes home mortgage interest, real estate taxes and a few other small deductions like mortgage points and qualified mortgage insurance premiums. 56% of the middle-income filers deduct housing expenses, more than the share for lower-income or higher-income filers.
Housing-related deductions are a larger share of overall deductions for lower-income and middle-income filers than for higher-income filers. A limit on these deductions would be a regressive tax. Here’s why. Higher-income filers pay a lot more in state and local taxes, and because tax rates often rise with income, these deductions account for a larger share of itemized deductions.

Among itemizers with $200,000 or more AGI, 36% of itemized deductions are state and local taxes, compared with just 18% for the middle-income filers and 8% for the lower-income filers. In fact, higher-income filers deduct more for state and local taxes than for home mortgage interest – in part because the mortgage interest deduction is limited to interest on the first million of mortgage debt, which would affect higher-income filers most.

At the same time, the home mortgage interest is, by far, the largest deduction for middle- and lower-income itemizers. Lower-income people also rely more on itemizing deductions for expenses that higher-income filers are more likely to get covered by insurance or their employer, including medical/dental expenses and unreimbursed business expenses.
Many middle-income folks itemize and deduct more than $25,000, so a cap at that level would snag many in the middle-class. There’s no question, though, that if a cap on deductions is low enough to affect filers with less than $200,000 AGI, the home mortgage interest deduction would be most affected. Together, the mortgage interest deduction, real estate taxes and other small housing-related deductions account for the majority of deductions for filers under $200,000 AGI, even though these housing-related deductions are a smaller share of what higher-income filers itemize.
Removing the mortgage interest deduction might lower home prices, particularly at the high end, which would hurt home sellers. High-cost areas with high homeownership benefit most from the mortgage deduction. Younger, higher-income households in expensive homes benefit greatly from the mortgage interest deduction. Here’s why: being younger and therefore in the earlier years of a mortgage, a larger percentage of their mortgage payments are interest rather than principal and therefore provide a larger deductible.

Also, higher-income households are in higher tax brackets and therefore benefit more from mortgage deductibility, and people in more expensive homes have larger payments to deduct. However, even in the absence of the mortgage interest deduction, homeownership today is still more affordable than renting. It’s 45% cheaper to buy a home than to rent a similar home today, assuming itemized deductions and that the resident is the 25% tax bracket.

But even without any itemizing, it’s still cheaper to buy than to rent in every large metro area.  Thus, even without the tax deduction, low mortgage rates and years of post-bubble price declines have made buying much cheaper than renting.

Dane Hahn is a real estate professional practicing in the Englewood/Sarasota area.  You can reach him at 941-681-0312 or at dane.hahn@gmail.com see him on the web at www.danesellsflorida.com.


How Do I Get My Deposit Back?



This week I had a curious email with the following request for assistance:

Hi Dane

Being from UK I am not sure how things work there, I attempted to purchase a property back in April, put a deposit down, after which I had an inspection done which found some things had been damaged in the property since I viewed it. I decided not to proceed.

The Agents (mine and the seller’s) both refuse to respond. I have found from title escrow company I needed to sign a cancellation form so I have done this, but it looks like the seller is refusing to sign it, so my deposit is being held.

How do such cases get resolved? As you can see we are now in October and still I am getting no response from agents and stone wall from the title/escrow company.

Rgds
Martin

My Reply: Hi Martin, Thanks for your question. I will have to give you a fairly generic answer because I don't have all your particulars at hand. As I understand this, you placed a deposit on a property in April, and following the inspection decided not to go forward. If you were working with a Realtor who was representing you (as a buyer’s agent), this probably would not be an issue, but apparently you have an agent representing the seller--and the seller also has an agent representing him.

The situation here is pretty much two against one. (Two agents against you) So where do you go from here and what's the next step? My professional opinion is you need to find a young hungry lawyer. At this point you are in quicksand and need an ally.

I will assume that the property in question is a house, and that the inspection showed some damage or unseen wear that has cooled your desire to own this property. I will also assume that the seller was thrilled to get your offer, which may have been for more money than he was expecting to get--meaning that your withdrawal from the transaction leaves him with no buyer in that price range. (And no real willingness to relist the property and sell it to another party.)

Typically a case of this kind is settled with the seller coming to grips with the deficiency in his property and either offer to make the repair or returning your deposit and life goes on.

But because the seller is unwilling to return your deposit, probably he has given you a reason--I would suppose he is saying that there was a time period in which you could have withdrawn, but he didn't hear from you and that time frame has expired and so now YOU either have to perform (buy the house). OR he gets to keep your deposit as "liquidated damages". This would be a fairly common response from a seller faced with losing a sweet deal.

The seller himself is probably not holding your deposit (escrow) money, that's the job of the listing agent or the escrow company. I will tell you from personal experience that nobody wants this kind of deposit money in their accounts--especially if they suspect the house is never going to close. So here are two good things you probably didn't suspect, (1) whoever is holding the funds wants to rid themselves of your deposit. And (2). Interpleader is an informal real estate court, which if you ask to have the case sent there, will hear your case and rule on who gets to keep your funds. It's not free, so you need to think over that avenue of redress. At Interpleader, they may give you back all the deposit, they may split it between you and the seller, or they might give it all to him...it depends on their findings. You can invite your lawyer to come and help you.

If the deposit in question is less than $5,000, you can skip Interpleader and take the seller to small claims court. There you may have a real judge hear the case but more likely you will be asked to sit with a mediator who will hear both sides and suggest a fair way to settle, if you both agree the case will be closed, if you don't agree, get out your wallet because the next steps will be costly, and you will begin to learn the intricacies of the American Legal System.

Or you might change your mind, and decide to buy the house. You may offer a little less for the property than you first did due to the problems unearthed during the home inspection. I don't know the real facts or the personalities involved, but if that house was worthy of your offer 6 months ago, you might still want it for the "right" price.

Martin bear in mind that Florida does not allow Realtors to practice law, so my answers are only my answers, but I wish you success and hope you do consult a real lawyer.

Dane Hahn is a real estate professional practicing in New Hampshire and Charlotte and Sarasota Counties in Florida. You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312



ReMax Chairman Dave Liniger: A Letter to President Obama and Governor Romney

 The following letter was issued October 25, 2012, to the Candidates from Dave Liniger,
Co-Founder and Chairman of RE/MAX, LLC

We have just witnessed the last of three presidential debates in anticipation of elections now just 2 weeks away. Considering the depth of these debates and the months of political advertisements in this campaign, it is discouraging that there has not been a serious discussion about housing. As leaders, you ignore housing at our peril.

Although the economy is recognized as the single most important issue in this campaign,
and housing is commonly blamed for the recession and sluggish recovery, it is unimaginable that relevant solutions to housing issues have not been front and center. Over 3.5 million homes have been foreclosed on in the last four years, another 3 million are likely in the next four, one in 213 homes had a foreclosure filing in the third quarter, and over 10.8 million homes remain underwater with mortgages greater than their market value.

Housing has always led the country out of the dark days of recession, but that has not happened this time. Still, housing does have the ability to promote a stronger overall recovery if it is allowed to do so. But it will take real political leadership in the White House and Congress to acknowledge this fact and take the appropriate steps.

It has been a long and painful road for homeowners and real estate professionals alike, but market performance in recent months has everyone feeling a bit more optimistic. Prices are rising and many underwater homeowners have received a lifeline. But we’re not on solid ground just yet. Significant obstacles remain on the road to recovery.

Simple steps would quickly increase home sales by another 700,000, create over a quarter of a million jobs and deposit millions of dollars into the economy. So, what are the obstacles?

One aspect of the fiscal cliff you have not discussed is the Mortgage Forgiveness Debt Relief Act of 2007, which is set to expire on December 31. If not extended, this has the potential of immediately reducing home sales by as much as 20%. Troubled homeowners who meet the qualifications for a loan modification or short sale are not likely to pursue either of these options if the remaining mortgage balance is considered taxable income.

Many of us in real estate have long been promoting the short sale as a viable alternative to foreclosure. In 2012, short sales began to shed their reputation as a cumbersome and time-consuming process, and their numbers have been steadily increasing. This helped reduce foreclosures and kick-start a struggling housing market. Now, the transaction that serves as salvation for many families facing foreclosure will come to an abrupt halt.

The CBO says a two-year extension will save distressed families about $2 billion. The average debt forgiveness in a short sale is $65,000. How are these struggling families going to pay taxes on this amount? Without debt relief they will eventually be forced into bankruptcy or foreclosure. What will the associated costs to society be then?

In normal times, most of us would never consider forgiving unpaid tax bills, but these are not normal times. It is more important for our country to get housing on a solid footing, put people back to work and have an economy that everyone can be confident in again. Just like a debt relief policy that is more appropriate to another place and time, unrealistic lending standards are also slowing the recovery.

Even with improving home sales, nearly 15% of sales contracts are falling through. This is largely the result of strict lending requirements. Obviously, we’re obsessed with fighting the last war. Today’s lending requirements may have prevented the housing crisis five years ago, but the pendulum has swung too far in the opposite direction. Otherwise creditworthy individuals are being denied or too intimidated to apply for a home loan.

Financing appears to be getting more difficult, not less. In August, the average FICO score of a rejected mortgage application at Fannie and Freddie was 734, two points higher than one year ago. And the average down payment of a rejected applicant was 19%. Historically, these are numbers that would seem like a solid lending risk, but for some reason that’s not the case today.

Additionally, requirements in the Dodd-Frank Consumer Protection Act that would unreasonably define Qualified Mortgages will certainly have the unintended consequences of making mortgages more difficult to obtain and perhaps add to the cost of financing a home. Even the authors of this legislation have said this was not their intent.

One proposal being considered that really shocks most of us in real estate is the elimination or reduction of the Mortgage Interest Deduction. This is not simply a loophole for the wealthy. It has been a mainstay of the middle class for many years, and by promoting homeownership it promotes a strong economy. Over 75% of homeowners utilize the deduction over the time of their ownership. Even a gradual elimination gives pause to many potential homeowners. This is the wrong approach at the wrong time.

Our message to you is simple, “First, do no harm.” Do not disrupt the ability of a fragile housing market to positively impact a stalled economic recovery at this critical time. Housing is a powerful economic engine that can easily add a large number of jobs and cash to the overall economy if it is not prevented from doing so.
The Debt Relief Act must be extended, reasonable lending standards established, housing-specific provisions of Dodd-Frank re-examined, and the mortgage interest deduction untouched. These steps will build a solid foundation, restore confidence, and provide clarity to lenders and relief to troubled homeowners. Take these simple steps and watch housing lead the country to real recovery, as it has many times in the past.

President Obama and Governor Romney, you still have time to detail your vision. For many Americans, housing is still a crisis and they are anxiously waiting for solutions.

Respectfully,
Dave Liniger
Co-Founder and Chairman
RE/MAX, LLC
 
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