Making Assumptions In Real Estate

Making assumptions during a Real Estate transaction can be a costly mistake. Each year in North America hundreds of people assume that the property they are buying is all right. These same people proceed to purchase a home without taking the proper due diligence.

Problems such as wiring, plumbing, insulation and other mechanical features of the home begin failing and then the buyer doesn’t know were to turn.

Your first step in this instance is to seek legal advice from a professional. If your agent did their job then you should have a contract that protects you from many of these unforeseen issues.

However if you waived a home inspection, and failed to warranty the mechanical items in the home then you could have some very costly repairs on your hands. The furnace and air conditioning units are costly items to replace. An unseen leak in an oil tank can mean expensive environmental clean up.

In rural properties it is possible to find that your well has water that is not safe to drink, or that you need to truck water in because the well has inadequate flow.

If you failed to safe guard yourself in the agreement of purchase and sale you will be fighting an uphill battle if you choose to seek compensation. The courts will look more favourably on the vendor in these instances and you will be out of pocket for the repairs. This is unless you can prove that the vendor attempted to hide the issues from you, or failed to disclose problems with the home.

Before you make the decision to buy a home, make a checklist of areas to inspect. Specific areas such as, the roof, chimney, foundation, electrical, plumbing and insulation. Each of these areas of a home can unearth some of the homes history and will help uncover the overall state of repair for the home.

Real Estate Investment Planning: Mapping The Road To Wealth

Whether investors own one-family rental homes or multi-unit store, office, and apartment complexes, they are operating a business. Most business experts, including the Small Business Administration (SBA), emphasize that a business plan is an essential prerequisite to the launching of any type of business. For real estate investors, the investment plan functions as their business plan.

Write a Real Estate Investment Plan

Having financial goals in writing makes real estate investing more concrete and attainable and less pie-in-the-sky. This is because organizing the relevant facts and figures helps tame the fear and reckless risk-taking that defeat individuals who fail to prepare.

To create a real estate investment plan:

  1. Establish personal financial goals, such as desired net worth, the amount needed for a comfortable retirement, and the amount to bequeath to loved ones.
  2. Set a schedule for achieving those goals, such as five years, ten years, or retirement age.
  3. Calculate various ways to achieve those goals – including different down-payment amounts to offer and the corresponding amounts to finance through mortgages, and making research-based estimates of the operating expenses of the properties and the rents needed to cover the expenses; this results in target cash flow amounts.
  4. Understand the types and quantities of property to seek based on those calculations.
  5. Determine how and when to dispose of the properties.

Tax professionals can suggest strategies for reaching financial goals and minimizing taxes. Investors will get more out of those consultations if they know in advance their net worth goals and cash flow needs.

Cash Flow Projection

A good real estate investment plan hinges on the determination of whether an investor wants to take out cash regularly from a property. How much cash is used to buy a property and how the debt and operating expenses are managed after the purchase affect the cash flow. The larger the down payment on a property, the smaller the mortgage payments will be and, by extention, less of the monthly rent will be devoted to the mortgage paydown.

The cash flow calculation will differ if an investor will not need to draw money from a property and instead wants to see both a good return on the initial cash outlay — the down payment — and growth in equity. In such a case, the investor may want to make a small down payment and finance as much of the purchase price as possible. This often means a small cash flow amount, which can be applied to paying down the principle on the mortgage loan. At the same time, the equity in the property will be growing because of the debt paydown, inflation, and appreciation.

Develop an Exit Strategy for Maximum Wealth Protection

The SBA advises small business owners to plan their exits from their businesses. The SBA notes that an exit involves several steps and can take several years, depending on the size of the business and the reasons for leaving it.

Similarly, real estate investors must decide when and how to dispose of properties in their portfolios, all in keeping with their investment goals. Outright sales, taking back mortgages, and 1031 property exchanges under the U.S. tax laws are some of the disposal methods, and each method triggers its own tax consequences.

The form of ownership in which property is held also must be considered. State laws have specific requirements for the dissolution of partnerships and corporations, and the appropriate tax returns must be filed. These procedures usually require sound guidance from attorneys and tax professionals.

Obtaining A Real Estate License To Save Thousands

Real estate agents have a lock on the real estate market, but have you ever wondered what it takes to become one? The answer might surprise you.

Becoming a Real Agent is Fast and Easy

You can become a real estate agent in two months. By taking a few evening classes, buying a book, and then taking a test. you can become a licensed agent. Once you pass the test you only need to spend some time with a current real estate agent. This can be completed by simply speaking with your local real estate agent, who sold you your home, who is a friend of the family, etc. Once you obtain your license, expect to save 3.5% on your future real estate transactions.

The Benefits of Obtaining a Real Estate License

You get a much better understanding of the real estate process. This is a great crash course in real estate. Most importantly, you learn a ton about how the transaction is processed and executed. This understanding can help you be a better customer when you choose to use an agent in the future. It will also speed up your real estate deals tremendously.

You also obtain the ability to command 3.5% of every real estate transaction you are involved in. Instead of for sale by owner, you can list your property on the MLS (the Holy Grail of listing services) and you can act as your own agent. Typically only licensed agents have access to the MLS database. This is very powerful. Normal for sale by owner properties are not listed on the MLS and those owners do not get a commission split. Additionally, since most do not offer any broker commissions, most brokers choose not to show these houses. These are a few reasons why for sale by owner houses typically sale for less and spend more time on the market.

Finally, the biggest benefit occurs when you buy houses. Instead of paying full price, you get a 3.5% discount because that is your broker fee. Imagine buying four to five houses in your life time and saving 3.5% on every house. This could add up to tens of thousands of dollars in savings. Additionally, if you ever want to become an investor, having a license adds profit to your bottom line. You also get much greater sourcing of properties. Besides access to the MLS, you can simply walk into most banks and ask for their foreclosure list. This saves you the time of going down to a courthouse or going through another agent, whom you have to indirectly pay 3.5%.

Becoming a real estate agent is very cost effective. In addition to the great real estate knowledge you gain by going through the process, there are significant savings to be gained by acting as your own broker. Taking two months out of your life now could save you thousands of dollars in the future.

Avoid Capital Gains Tax on Real Estate Sales

Paying taxes can make it harder to grow investments, especially when they will be subject to taxation down the road. That is why it is important to know that for every investment there is a way to defer or avoid taxes.

Real estate investors do this through their losses on depreciation, which never actually come out of their pockets, but can show a loss where a profit was actually made.

For investors who want to sell a property that has gone up in value, the best way to defer taxes, perhaps infinitely, would be to take the profits from the sale and engage in what Robert Kiyosaki, best-selling author of Rich Dad, Poor Dad, calls a 1031 exchange.

What is a 1031 Exchange?

A 1031 exchange (also called as a like-kind exchange) is an event that takes place in real estate where a property owner sells a piece of land, a house, or a building, and uses all of the equity to purchase a larger piece of property of the same kind.

Since the gains that were made are being used to buy a bigger investment, all taxes are deferred until a sale is made that does not involve this transaction.

The term “1031 exchange” is used in common language because it is in section 1031 of the Internal Revenue Code that this idea is explained.

It is there that it states that gains taxes will be deferred on properties of the same kind if they are being used in a productive manner, such as a business or investment. This rule does not apply to stocks and bonds.

Important 1031 Rules

Investors have to understand that this kind of deal is not hard, but it does involve a few complications that cannot be avoided:

  • Two key deadlines
  • Placement of equity
  • Use of an intermediary

The deadlines that must be noted by someone attempting to make this kind of deal are 45 and 180 days after the sale of the property that brings in the proceeds for the new purchase.

The 45 calendar-day deadline is when buyers must identify the new property that they want to acquire. If this deadline is missed, the tax deferral is off. After 180 days, the identified property must be bought. These deadlines are concrete, and can fall on a holiday.

The last key to completing a 1031 exchange is using a Qualified Intermediary, also called a QI. The QI must be a person that is an unbiased third party, leaving relatives and business partners out of the loop. The QI will be the one actually securing the purchasing and selling of properties, making sure that it all goes to plan. Rates for such services can be as high as $2,000.

Investors must make sure that their QI is bonded and insured just as they ensure their electrician and plumber are licensed and insured.

Once all of the pieces are in place, real estate investors can turn small rental homes into larger pieces of property without having to pay the taxes on the gains that were made in the sale by growing their portfolios as they expand from duplexes to quadplexes to apartment buildings, or moving from owning a small cabin to a motel to a hotel.

When the original owner passes on, the property can still operate and earn money for the new owner who will never have to pay taxes on the gains until it is sold, if it ever is.

An Inherited House Can Be A Windfall

Those who inherit a house do not always view this as a lucky break (aside from the emotional aspect of losing a loved one). The inheritor may already own a home and have no use for another. The inherited house may be saddled with one or more mortgages, and it may also need costly repairs and upgrades. To the inheritor, what could have been a windfall seems like an albatross around the neck.

On the other hand, an astute real estate investor views even a problematic inheritance as a golden opportunity.

Benefits of Inheriting a House

Under federal tax laws, an inheritance is tax-free if the beneficiary is the husband or wife of the deceased or if the property is left to someone other than a spouse and is worth less than an amount specified by law  . Many states follow the federal lead, but it is crucial to know the particular provisions of the state in which the inherited property is located.

Fundamentally, the inheritance of a home is a windfall.

“Whether it’s for the purpose of selling the house and getting the equity or renting it and making income and gaining the tax benefits of ownership, such as depreciation, an inherited house can be a very nice benefit,” said Richard Seltzer, an attorney and long-time real estate investor based in Jersey City, New Jersey, in an interview with this reporter.

Challenges of Inheriting a House

At times, an inherited home comes with “baggage.” Seltzer’s story about a new client illustrates this point. The client had recently inherited a house in which his late brother had lived; the house had originally belonged to their parents.

“The house has been totally neglected, and there are all kinds of debts that the client is finding,” Seltzer explained. Nonetheless, Seltzer estimated that, after paying for the repairs to the house, the real estate commission when he sells it, and the debts on the property, the client will walk away with a sizable sum. “Yes, he will have some headaches and some hassles, but at the end of the road, he will make about $100,000, the inheritance is tax-free, and he’ll be happy when it’s done,” Seltzer noted.

To a real estate investor, a neglected property is merely a “fixer-upper.” If the investor chooses to sell an inherited house after fixing it, the sale proceeds can help finance the purchase of another investment property. Alternatively, the investor can rent out the house if the cash flow will be enough to cover the mortgage and operating expenses of the property.

How to Decide Whether to Keep an Inherited Property

Of course, anyone who inherits or is about to inherit real estate can consult an attorney, a tax professional, or a certified financial planner for guidance on what to do with the property and what tax consequences to expect.

In Seltzer’s view, there is one simple guideline for deciding what to do about an inherited home that comes with a mortgage. “It’s just a matter of affordability. If you can afford the payments, then you should keep it,” he stated, adding, “If it’s something that will fit into your lifestyle, you should keep it because in my opinion, real estate is an asset. Most pieces of real estate, if bought properly, are positive assets.”

Cost of Renting In A Property Slump

Thousands of landlords that purchased buy-to-let rental properties are now experiencing falling monthly rent. Whilst this means lower housing costs for tenants, rental yields for landlords are falling at the very time that income streams from alternative savings and investments are also plummeting. What can this fall in monthly rent be attributed to?

Increase in Rental Properties Hasn’t Offset Falls in the Cost of Renting a House

Falling house prices and general uncertainty have deterred many potential first-time buyers from investing in property. This has increased the demand for rental properties, but an influx of new landlords, particularly in the Manchester area, is causing monthly rental yields to fall.

Whilst has experienced a 22% increase in new business, this isn’t sufficient to offset the increase in rental properties available. This has meant that the average amount of time it takes to rent a house has increased by 27% to 70 days during the last 12 months.

Where Has the Cost of Renting a House Fallen Most?

The average cost of renting a house across the entire UK has fallen from £840 in January 2013 to £830 in February 2014. This means that average rental yields are down 1.2% over the last month and 4.8% in the last 12 months.

Rental properties in the North West experienced the biggest decline in rental yields. Annual rental prices in the North West fell by 14.3% to £592 pcm from £645 pcm. This can largely be attributed to an increase in rental properties of 45.9% in the Manchester area. A staggering 57.8% of rental properties in the North West region are now in Manchester. Most of these are new build rental properties.

There was also evidence to suggest that more expensive areas, such as Kensington and Chelsea are experiencing falls of up to 11.7%. This is due to a number of reasons, but is heavily connected to falling City bonuses and a desire to reduce housing costs. This is backed up by the fact that the more affordable London Boroughs have experienced a 6.7% increase in monthly rental yields.

Whilst many landlords are experiencing falling rental yields, those that aren’t tied in to fixed-interest mortgages are benefiting from reductions in Bank of England base rates. Always remember the property is a long term investment and the property slump won’t last indefinitely.

Preparing to Sell Your Home: Improvements Sell Houses

Are you having trouble selling your home? A lack of offers to purchase may be caused by a number of seemingly innocent factors. Some of the most frequent comments overheard by residential real estate sales professionals reveal problems that are relatively quick and inexpensive to fix.

“It’s dark in this room.”

The best way to improve the look and feel of a room is with a fresh coat of paint. Spend an afternoon brightening up a dull or drab room by applying a bright, new color on the walls.

When preparing to show the home to potential buyers, be sure to open up the curtains or blinds, allowing the maximum amount of natural light to enter the space. Heavy, light-blocking draperies should be removed and replaced with something more airy and neutral.

“The house has a strange smell.”

As a resident of your home on a daily basis, you may not notice an uninviting smell when you enter the house. This can especially be true if smokers are living in the home. Relying on the honest opinion of friends, family and other visitors to your home is a good way to determine whether an unappealing smell is turning off buyers. There are inexpensive and time-effective ways to bring a fresh scent to an otherwise musty or unpleasant-smelling space. These include steam-cleaning the carpets and window treatments, thoroughly dusting all of the furniture (especially those often neglected and hard-to-reach places), and airing out the house by allowing windows to stand open.

“This room is small.”

De-cluttering is the very best way to enhance the amount of space in the house. Eliminate all clutter from the rooms by packing away seldom-used or bulky items. Allow the most possible floor space to be exposed by picking up baskets, bins and boxes from the floor. Store them neatly in a garage, basement, or rented storage unit.

It may also be necessary to remove extra pieces of furniture. A master bedroom, for example, should never contain more than a bed, dresser and bedside table(s). Additional pieces of furniture clutter the room and make the space look small.

“The house needs a lot of work.”

Today’s buyer is more educated and pays more attention to detail than ever before. Adequate attention should be paid to minor fix-up jobs around the house before showing it to potential buyers. Fill any holes in the walls and touch up the paint. Be certain that the trim is in good condition, and is freshly painted, if possible.

Out front, ensure the maximum amount of curb appeal by trimming overgrown shrubs and trees, mowing the lawn, and pulling any unsightly weeds. Add a punch of color by planting pretty annual flowers.

“I can’t imagine us living here.”

While most vendors need to remain living in the house while trying to sell it, removing personal items such as family portraits, toys, school awards and personal artwork allows potential buyers to imagine living in the space. The seller needs to create a neutral atmosphere that sells the lifestyle that will be enjoyed by purchasing and moving into the house.

If you are experiencing difficulty selling your home, take some time to evaluate whether a buyer will find these flaws in your house. Attending to them as quickly as possible will ensure you receive the most return in the purchase price for a quick sale.

Selling Homes Online: Creating Listings That Stand Out

The majority of home buyers start their search on the Internet, usually on real estate portals such as the Multiple Listing System (MLS). So how do you make sure your property gets noticed among the hundreds of other listings you’re competing against?

Let’s take a look at the three most effective methods for attracting maximum online interest…

Selling Your Home Online: Price

Obviously there are many factors that go into pricing your home to sell. But once you’ve established your price, pay attention to the searchers narrowing their criteria by specific price ranges.

People looking on the low end of the price scale tend to search in increments of $10,000 ($25,000 to $100,000 in the luxury markets).

So if you’ve priced your home at $350,000, for example, you’ll effectively edge out everyone searching up in the range below you. By reducing your price by just $100 to $349,900 you can open your viewing up to a whole fresh batch of viewers… and hopefully a faster sale!

Selling Your Home Online: Eye-catching Photographs

Listings with photos generally get more viewings. However, bad photographs can be just as much as a turnoff as no photos!

Here are some tips for taking photographs that sparkle:

  1. a) Exterior shot:
  • Use an angle shot of your home’s exterior to show depth.
  • Avoid shooting the street, sidewalk, vehicles, or power lines. If it can’t be helped, crop them out with a photo editor such as Photoshop.
  • Include a shot of the exterior with your listing.
  1. b) Interior shots:
  • Turn on lights when photographing to showcase it as light and bright.
  • Take photos only of key rooms such as the kitchen, large bathrooms or bedrooms. Don’t bother with hallways, ceilings, or tiny nooks.
  • Use a wide-angle room to capture an entire room.
  • Find the focal point of each room, then photograph it from different angles until you find the most eye-catching vantage point.

Selling Your Home Online: Listing Description

Your real estate agent will write your description for you. But it’s always helpful to know what makes a powerful description. Your goal as the seller is to drum up enough interest for a home viewing, but not give so much information that your buyer may eliminate your home before seeing it in person.

A good listing also covers these four key characteristics:

  1. Location (school district, township, or area)
  2. Asking price
  3. Type of home (e.g., townhouse, craftsman, condo)
  4. Number of bedrooms and bathrooms

Besides these broad characteristics, think of what drew you to your home in the first place. Was it a great view? Privacy? A bright and airy space? These are the selling points your listing should highlight. Help out your realtor by providing a short list of the key features that drew you to your current home.

Remember, the vast majority of home buyers start looking online for their perfect home. So when you’re selling your home, make sure you put these tips into play–and get top billing in the real estate portals.

Is the Real Estate Rebound Here?

Over the past six months, real estate foreclosures have continued along at a blistering pace. In addition, the number of bank owned homes is also swelling. Until recently, banks appeared to be unwilling to accept losses in to their real estate portfolio. Short sales proved to be very tough to execute and very few foreclosed properties were actively in the market. The tide appears to be shifting.

Bank Real Estate Owned (REO) Properties

While the average home sales price continuing to decline, sellers can take solace in the fact that volume seems to be turning. After the government tax break ended, there was a stiff drop off in the number of home sales. However, over the past month or two, volume appears to have stabilized, albeit at lower price points.

Buyers have banks to thank for the increased volume. Banks are beginning to show a willingness to deal their trouble properties to the highest bidders. Banks faced a major concern of selling too early at lower prices than they may have gotten by waiting. It would appear that the waiting game is over and many institutions believe the markets have bottomed out.

All real estate is local of course, so it might take a bit longer for the smaller markets in Florida and Las Vegas to experience a rise in the volume of sales, but rest assured its coming. If the economy can avoid a second recession and begin to add jobs, expect residential real estate sales to come back in a big way.

Real Estate Sales Volume vs. Price

While a volume resurgence might be a few months off, a price rebound is at least a year away. The same force driving volume back up is pushing prices down. Every sale of property is recorded the same way, rather it be a foreclosed sale or a sale by an individual. Appraisers and buyers have no way of knowing what sales were foreclosures and what were not. As such, the average sales price will always be deflated in markets with a large amount of foreclosed properties.

On average foreclosures sell for 30 – 40% less than non-foreclosed homes. If half the sales are foreclosures, the market price will decline by 20% more than if all of those homes had been sells by individual owners. The same dynamic that contributes to the volume increase will likely accelerate the price deflation. Assuming buyers can maintain their cool, expect prices in the hardest hit areas to remain below their historical averages for at least one more year.

Success As A Landlord Comes From People Skills

Although current market conditions in many parts of the United States are making rental properties more affordable to more people interested in real estate investing, individuals must determine whether they are up to the challenges of being a landlord.

Being successful as a landlord requires familiarity with the laws, ordinances, and regulations that apply where a rental property is located. Yet, what makes many individuals with no experience as landlords hesitant about entering the residential rental market is the fear of dealing with tenants and their problems. While this is a legitimate concern, it is also necessary to recognize that there will be dealings with government authorities and craftspeople who will be working at the properties.

Landlords Need Basic People Skills

Some people have the innate ability to get along with others while still getting what they want; other people are clueless about the subtleties involved. Fortunately, most individuals can develop their people skills to the level needed to be effective landlords.

Tenants: As the ones who supply the funds used to pay the mortgage, maintain the property, and generate a profit, tenants are the clients of their landlords. What landlords need to understand about tenants is that most of them merely want a decent place to call home, to pay their rent, and to go about their lives; most tenants prefer to have minimal contact with their landlords. Of course, there are “high-maintenance” tenants who either constantly complain about perceived problems or who are a nuisance to the landlord and other tenants due to their lifestyles and behavior – by being filthy, engaging in illegal activity, or throwing loud parties, for example. By choosing tenants in a deliberate and cautious manner, landlords can avoid most of these types of headaches.

Nevertheless, problems will occur even with good tenants. The appropriate approach by investors in rental properties is to view tenant problems as resolvable and temporary, even if it sometimes takes a while to abate certain conditions, such as vermin infestation. To make the landlord/tenant relationship work, a landlord needs to be even-tempered, courteous, and fair with the tenants without becoming a “pushover.”

Government officials: By definition, these people are charged with the safety and well-being of members of their constituent communities. Government officials carry out their duty by administering the statutes, ordinances, and regulations that prescribe the minimum standards of sanitation, habitability, and security that landlords must meet with regard to their rental properties.

These standards and the way they are administered and interpreted may seem burdensome at times. Nonetheless, landlords who strive to meet the prescribed standards will avoid unnecessary fines, government intervention, and court appearances. However, if the enforcement of a standard seems arbitrary or unreasonable, a landlord should not hesitate to speak up. For instance, if a code enforcement officer issues a citation for failure to recycle at a two- or three-family property, when in fact the recycling bins go on the curb only when they are full, the landlord who can document this may be able to defeat the citation in municipal court.

Craftspeople: Contractors and handymen offer services in return for payment. In other words, dealing with them means engaging in a business transaction. Landlords who want to avoid feeling cheated and dissatisfied with the services rendered must chose their craftspeople carefully, preferably on the basis of recommendations from other property owners. Moreover, the services to be performed and the costs involved should be spelled out clearly in a contract.

Landlords are Business People

Most important, landlords must remember that they are engaged in a business. Therefore, to succeed, landlords must act in an unemotional, business-like manner at all times, regardless of the status of the persons with whom they are dealing.