Are There Deals in Real Estate

House bargains

“Deals” And “Bargains” In Real Estate

The myth: It is widely believed by the public (and even by many real estate practitioners!) that there are “deals” or “bargains” to be had in real estate. The thought is that, in good markets or in bad, somehow a property can be purchased “below market price”.

The reality: There are three factors in real estate that combine to forestall the possibility of a below-market-price-deal:

1.) supply and demand that is reflected in

2.) price movement that is

3.) constantly tracked in real time in both the quasi- and wholly-public record.

The result is a ready reference of so-called “comparable” properties against which all other properties of like kind, condition and location are measured.

An example: No one would argue that in the market at the end of the last decade a property purchased for $325,000 that sold for $600,000 three years earlier is a “deal”; but once that property has sold for $325,000, all the comparable properties in the neighborhood take on the value of that sale. The identical model sitting next door or across the street can no longer be said to be “worth $375,000”, whether the $325,000 sale price was the result of a distressed sale (short payoff, bank owned, etc.) or not.

Another factor: A further element to be considered in a declining market is the effect of competitive pricing. In a balanced or rising marked, the most recent sold comparable (several, actually) will establish value for surrounding property. When prices are in a downward spiral, the asking price, when lower than those of surrounding properties, will to a great degree, serve as the “comparable” rather than recent neighborhood selling prices (would you pay $25,000 for a new car if the same model was available across town for $22,000 and you could be made aware of that fact with a few strokes on a keyboard?).

Bottom line: If there truly were “deals” in real estate, professionals would be grabbing them up; there is little evidence, even anecdotally, that such has occurred.

“LOWEST PRICE” VS. LOW INTEREST RATES

The dilemma: The thoughtful buyer must make a judgment about the direction of both pricing and interest rates, then strive to optimize the “tradeoff” between the two.

Tradeoff example: buyer can pay only $1,500.00 monthly principal and interest:

Home Price: $312,500 –  Down Payment: 20% – Interest Rate: 6% – Monthly Payment: $1,499.88

But move the interest rate up just one percent, and . . .

Home Price: $281,250 –  Down Payment: 20% – Interest Rate: 7% – Monthly Payment: $1,499.88

Consequence: In any given market, the buyer can acquire a property that has about 10% greater current value (read “more house for the same payment”) if interest rates are 6% than if they are 7%! It may not be wise to wait for the “bottom” of the market when interest rates are rising!

Seller Financing, What is it?

Giving-house-keys

Seller Financing (So-Called “Seller Cadrries”)

 

So-called “Seller Carries” are getting to be more common as landlords or empty nesters age and want out. The advantages, generally, are these:

– The Seller may get a slightly higher price.

– Although the interest on the note is taxable, it is additional income for the life of the note.

– It may enable a sale that would otherwise be difficult because of the Buyer’s position with a conventional lender.

 

Some rules of thumb if the Seller is to carry the entire loan:

– To protect the Seller, there should be a fairly good down payment, 20% minimum, 30% preferred.

– The Seller carried note must be secured by an immediately-recorded deed of trust.

– The Seller must be a named insured on both the fire/liability and the title insurance policies.

– The Buyer must provide full credit and employment history as well as references.

A bit easier if the Seller is carrying a note for partial value (say 10%), Buyer 10% down, bank 80%:

Same rules regarding a note and an immediately recorded deed of trust.

– Same rules about insurance: Seller must be completely covered

– Seller may not need so stringent a credit check since the lender is giving 80% L.T.V.

– The structure of the note/deed must be done using the CAR Form SFA (Seller Financing Addendum).

The Seller Financing Addendum

– The “originator” of the loan is supposed to prepare the SFA and, by definition, that is the Selling Broker/Agent.

– Few brokers, let alone agents, know of or how to complete an SFA; be certain the creator of the document knows what he/she is doing.

– If the Buyer has used a first deed loan as partial payment and the Seller’s note is a second, it must run for the life of the first (Dodd-Frank January 2014)

– The Selling Agent has an obligation to provide credit/income history, etc., Listing Agent is obligated to see that this is done!

The downside for the seller:

– The Buyer may not make the monthly payments

– The Buyer may default on the first loan to the bank

– The Buyer may fail to pay taxes or insurance premiums.

 

The upside for the seller:

– The payout over a term of years may favorably effect the Seller’s capital gain

– The majority of buyer/borrowers refinance within about seven years, so the note may not run to 30 years.

– The property has already been bought and 90% paid for; if compelled to foreclose, the Seller stands to make still further appreciation

1031 Tax Exchange Quick Tips

1031 Exchange

TAX DEFERRED (1031) EXCHANGES

A GENERAL SUMMARY FOR INFORMATION PURPOSES ONLY

The so-called “ten-thirty-one exchange” (1031 refers to the controlling section of the IRS Code) was designed and is administered for the purpose of delaying the payment of any taxes on capital gains as long as the principal(s) involved observe certain rules and time-lines.

No principal should engage in a 1031 exchange without seeking and receiving tax and other advice from a licensed professional tax expert. The following data are a broad outline of the mechanics of a 1031 exchange.

The properties to be exchanged must have been held for investment (the seller) and be held in future for investment (the buyer). A principal residence does not qualify for such an exchange.

When an owner (seller) wishes to “move up” and sells one income property with the intent to buy other income property, the following rules apply to the buying side of the move up:

– Within 45 calendar days of the close of escrow on the sold property, the seller-turned- buyer must identify in writing ( normally with an escrow holder) the property to be purchased; three may be identified and the second or third substituted should the first choice fail.

– The now-buyer must close the purchase escrow within 180 calendar days of the closing date of the sold property.

– The property bought must be acquired for a purchase price greater than the property that was sold by the seller-turned-buyer and must also have an encumbrance (mortgage) greater than that which was discharged at the sale of the now-buyer’s former property.

– None of the proceeds from the sale may pass to the seller-turned-buyer but must be placed with a third party “accommodator” for the duration of the escrow for the newly purchased property. As the time for close of the purchase escrow approaches, the accommodator will transfer the funds to the then-escrow holder.

There are a variety of other rules, of course, and it is for this reason that professional tax advice must be sought by the principal.

The exchange must be for a “like kind” investment: a single family dwelling that has been held for investment may be exchanged for multiple units, commercial/retail property, even raw land.

The buyer of the property sold by the seller-turned-buyer does not need to be bought by another party engaged in a 1031 exchange; equally, the property purchased need not be sold by an individual wishing to make such an exchange.
The term “tax deferred” means just that. Either at death (as part of an estate) or when the principal sells the “last” investment property owned, there must be a reconciliation and payment of taxes on the capital gain, starting with the principal’s first unit and finishing with the last.

Always talk to your CPA about any tax questions or liabilities.

Investors Now Cashing Out of Real Estate Investments

In the last year I’m never been so popular with investors. I’ve gotten calls, emails, invitations to fancy dinners, drinks on the house. Yeah it’s been a fun year a wining and dining but unfortunately to investors I couldn’t put out much. See investors got so desperate for new fresh meat (houses not me) they did everything in their power to attract properties to them. Unfortunately, not many homeowners were selling.

Let’s talk a ride back in time. Investors came roaring into the real estate market soon after the massive real estate collapse in 2007 and 2008. Cash was king and investors gobbled up every opportunity big and small throughout Southern California and really the whole country.


In the last 5 years investors pushed and propped up the housing market. The strategy was simple, Buy and Hold. Investors bought up hundreds of properties at a time and smaller investor took what they could. At these bargain prices no ugly property went unnoticed. Once purchased, the property would be held for a number of years until home prices rose and then sold for a profit. In the meantime tenants would be placed in the property.

Personally I saw the buying boom start out where the housing collapse hurt the most, in the Inland Empire. As homes came up for sale investors picked up houses when the regular buyer was not interested or couldn’t get financed. On the flipside, sellers scrambled to sell as quickly as possible to get out of the mounting debt.

Years passed and the inventory of homes for sale fell but Investors still had a huge appetite so they moved west into nicer higher priced areas such as Orange County and Los Angeles County and bought everything in sight. In the last year, something happened that caught some by surprise, a Seller’s Market was born. Investors had eaten so much inventory that the regular buyer, (families, 1st time buyers, move up/down buyers) had no chance to purchase and the run up of bids to buy a home, any home, started. But the investor continued.

Fast forward to today. The regular home buyer has either quit or has been priced out of a home and investors have something of a hangover. Prices have risen so fast that even the mighty investor cannot make sense of buying homes at today’s prices.

Now we face a scarcity of homes for sale and prices are above the reach of  families. Investing in real estate does not make sense for investors. Now, interest rates have started to creep up with the announcement by the Fed that it will start curbing back stimulus to the economy. For the first time since the bull run in real estate, home sales and those under contract have dropped. We also know that applications for new mortgages and refinances have slowed. These are strong indicators that the run on housing is nearing an end.

There have been investors that have started to cash in on their winnings and dump the homes they have purchased. I would recommend if you are an investor to look at your portfolio and consider an exit strategy. The indicators are strong and you can still take advantage of higher home prices.

Call me to discuss your real estate investments. We can see where you want to go and strategize a plan to get there. Diego Loya 714.989.6040