FEATURED ARTICLE - DECEMBER
1031 Tax Exchange Information
A 1031 Tax exchange can offer significant benefits to real estate investors and buyers. The Internal Revenue Code (IRC) Section 1031 states that a real property owner can sell certain property and then re‑invest those revenues into a like-kind property to defer the capital gains tax. To qualify for a 1031 Exchange, property exchanges must be completed in accordance with the rules set forth in the tax code and the treasury regulations. This site contains a wealth of information about 1031 exchanges, and additional Real Estate Investment Opportunities.
Frequently Asked Questions (FAQ) about 1031 Exchanges
What is a 1031 exchange?
Under Internal Revenue Code (IRC) Section 1031, a real property owner can sell certain property and then reallocate the proceeds in ownership of like-kind property and defer the capital gains taxes. To qualify as a like-kind exchange, property exchanges must be done in accordance with the rules set forth in the tax code and in the treasury regulations. The 1031 exchange can offer significant tax advantages to real estate buyers.
Who should consider a 1031 exchange?
If you have real property that will net you a gain upon sale (generally property that has been substantially depreciated for tax purposes and/or has appreciated in fair market value), then you are exactly the person who should consider a 1031 exchange.
There are 5 tax classes of property:
1. Property used in taxpayer’s trade or business
2. Property held primarily for sale to customers
3. Property that is used as your principal residence
4. Property held for investment
5. Property used as a vacation home
Section 1031 applies to the first and fourth categories, and sometimes the fifth category. Business use is defined as, "To hold property for productive use in trade or business." Property retired from previous productive use in business can be qualifying property. Investment purpose is defined as real estate, even if unproductive, held by a non-dealer for future use; or the increment in value is held for investment and not primarily for sale. Investment is the passive holding of property, for more than a temporary period, with the expectation that it will appreciate. Property held for sale in the immediate future is not held for investment.
Why should you consider a 1031 exchange?
· Defer paying capital gains taxes. A properly structured exchange can provide real estate buyers with the opportunity to defer all or most of their capital gains taxes.
· Leverage.
· Upgrade or consolidate property.
· Diversify. Own multiple properties rather than just one.
· Relocation to a new area.
· Differences in regional growth or income potential.
· Change property types among commercial, retail, etc.
What are the general 1031 exchange rules?
The real property you sell and the real property you buy must both be held for productive use in a trade or business or for investment purposes, and must be like-kind.
The proceeds from the sale must go through the hands of a qualified intermediary and not through your hands or the hands of one of your agents, or else all the proceeds will become taxable.
All the cash proceeds from the original sale must be reallocated to the replacement property—any cash proceeds that you retain will be taxable.
The replacement property must be subject to an equal level or greater level of debt than the relinquished property or the buyer will either have to pay taxes on the amount of the decrease or have to put in additional cash funds to offset the lower level of debt in the replacement property.
Disclaimer – There are substantial risks associated with the federal income tax consequences of purchasing and owning real property, especially if the purchase is part of a tax-deferred exchange under section 1031 of the code. In addition, the income tax consequences of purchasing and owning real property are complex. Because the tax consequences are complex and certain of the tax consequences may differ depending on individual tax circumstances, each prospective purchaser must consult with and rely on his own independent tax advisor concerning the tax consequences of such a purchase and his individual situation.
Identification Period
Within 45 days of selling the relinquished property you must identify suitable replacement properties. This 45 day rule is very strict and is not extended should the 45th day fall on a Saturday, Sunday, or legal holiday.
Exchange Period
The replacement property must be received by the taxpayer within the "exchange period," which ends within the earlier of 180 days after the date on which the taxpayer transfers the property relinquished, or the due date for the taxpayer tax return for the taxable year in which the transfer of the relinquished property occurs. This 180-day rule is very strict and is not extended if the 180th day should happen to fall on a Saturday, Sunday or legal holiday.
Replacement Property Identification
3-property rule
You may identify any three properties as possible replacements for your relinquished property. More than 95% of exchanges use the 3-property rule.
200% rule
You may identify any number of properties as possible replacements for your relinquished property as long as the aggregate value of those properties does not exceed 200% of the value of your relinquished property.
95% exemption
You may identify any number of properties as possible replacements for your relinquished property as long as you end up purchasing at least 95% of the aggregate value of all properties identified.
In a 1031 like-kind exchange you can exchange any real property for any other real property within the United States or its possessions if said properties are held for productive use in trade or business or for investment purposes. Examples of 1031 like-kind exchange property include apartments, commercial, condos, duplexes, raw land and rental homes*. As used in IRC 1031(a), the words "like-kind" mean similar in nature or character, notwithstanding differences in grade or quality. One kind of class of property may not, under that section, be exchanged for property of a different kind or class. Examples of qualified 1031 like-kind properties and like-kind exchanges:
· apartment building for farm/ranch
· office building for hotel
· raw land for retail space
· unimproved property for commercial property
· airplane for airplane
Examples of non like-kind properties include primary residences, stocks and bonds, notes, partnership interests, developed lots held primarily for sale and property to be resold immediately after initial purchase or completion of improvements.
* Qualification for Section 1031 exchanges depends upon the extent of personal use.
- Simultaneous
- Two-party swap
- Alderson exchange
- Delayed exchange (most common)
- Safe harbor
- Multiple sales/acquisitions
- Reverse exchange
- Improvement exchange
- 1918 - First income tax law
- 1921 - Section 202 of Internal Revenue Code states that gain or loss not recognized on exchanges of like-kind property
- 1924 - Non like-kind exchanges excluded from Section 202
- 1928 - Code section changed to Section 112(b)(1)
- 1954 - Section 1031 enacted
- 1975 - Starker exchange; tax court approves delayed exchange
- 1977 - Tax court reverses prior ruling, invalidating delayed exchanges
- 1979 - 9th Circuit reverses, reinstating initial ruling and creating delayed exchange
- 1984 - Congress amends Section 1031; 45-day identification period and 180 day exchange period and partnerships excluded
- 1991 - Regulations 1.1031 passed
- 2002 - Revenue Procedure 2002-22 issued by IRS
The Role of the Qualified Intermediary (QI)
The QI is a 1031 exchange intermediary or entity that can legally hold funds to facilitate a 1031 exchange. To be qualified, the 1031 exchange intermediary must not be a relative or an agent of the exchanging party. As an exception, a real estate agent may serve as a 1031 exchange intermediary if the current transaction is the only instance in which the agent has represented the exchanging party over the past two years.
The use of a QI is essential to completing a successful 1031 exchange process. The QI performs several important functions in the 1031 exchange process including creating the exchange of properties, holding the 1031 exchange proceeds, and preparing the legal documents.
GLOSSARY - Investment Real Estate Glossary
Accommodator
A qualified intermediary who agrees to assist the exchanger to affect a tax-deferred exchange. Also described as a facilitator or an intermediary, a qualified intermediary cannot be the taxpayer, a related party, or an agent of the taxpayer.
The Role of the Qualified Intermediary (QI)
The QI is a 1031 exchange intermediary or entity that can legally hold funds to facilitate a 1031 exchange. To be qualified, the 1031 exchange intermediary must not be a relative or an agent of the exchanging party. As an exception, a real estate agent may serve as a 1031 exchange intermediary if the current transaction is the only instance in which the agent has represented the exchanging party over the past two years.
The use of a QI is essential to completing a successful 1031 exchange process. The QI performs several important functions in the 1031 exchange process including creating the exchange of properties, holding the 1031 exchange proceeds, and preparing the legal documents.
Adjusted basis
The basis of the property adjusted for any capital improvements or depreciation. To calculate the adjusted basis, take the basis (the cost of the property) and add the cost of any capital improvements made to the property during the taxpayer's ownership, and then subtract any depreciation taken on the property during the same time period. Once the adjusted basis is known, gain or loss can be computed on a transaction.
Amortization
A gradual paying off of a debt by periodic installments. Example: A $100,000 loan is arranged at a 12% interest rate. The borrower pays $13,500 in the first year. Of the payment, $12,000 is for interest, $1,500 for principal. After the payment, the loan balance is amortized to $98,500.
Amortization schedule
A timetable for payment of a mortgage loan. An amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining balance after each payment is made.
Amoritization term
The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months.
Annual percentage rate
The cost of debt (such as a mortgage) that consumers pay, expressed as a single annual percentage.
Assumable mortgage
A mortgage that can be taken over ("assumed") by the buyer when a home is sold.
Basis in the replacement property
In a 1031 exchange, the deferral of the tax on the gain is accomplished by requiring the taxpayer to carryover (substitute) the basis of the relinquished property to the replacement property with suitable adjustments in the event additional consideration is paid.
Bear market
An extended period of falling value of the overall market, accompanied by anticipation of negative economic activity.
Boot
"Unlike" property included in a like-kind exchange. Example: In an exchange of property under Section 1031 of the Internal Revenue Code, Collins exchanges her warehouse worth $100,000 and receives Baker's land worth $125,000. Collins pays $15,000 cash and a car worth $10,000 in order to equalize the values of the properties exchanged. The car and cash are boot.
Broker
A person who, for a commission or a fee, brings parties together and assists in negotiating the sale of an asset between them.
Bull market
An extended period of rising value of the overall market.
Capital gain
Gain on the sale of a capital asset. There are limits on the deduction of capital losses against ordinary income. Example: Collins purchases land for investment purposes for $10,000. Thirteen months later she sells it for $14,000. She reports the $4,000 profit as a long-term capital gain on her income tax return.
Capitalization rate
A rate of return used to derive the capital value of an income stream. The formula is value equals annual income divided by the capitalization rate.
Class A property
Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high-quality standard finishes, state of the art systems, exceptional accessibility, and a definite market presence.
Concurrent exchange
Also referred to as a simultaneous exchange when the exchanger transfers out of the relinquished property and receives the replacement property at the same time.
Deferred gain
In a tax-deferred exchange, the amount of realized gain that is not recognized. Example: Donald arranged a tax-deferred exchange in which $1 million of gain was realized but not recognized (that is, it was not currently taxed). The deferred gain of $1 million carries over to the newly acquired property in the form of a reduced tax basis, to be taxed if and when the newly acquired property is sold in a taxable transaction.
Delayed exchange
A transaction in which a property is traded for the promise to provide a replacement like-kind property in the near future. The Tax Reform Act of 1984 allows investment real estate or real property used in a trade or business to be sold with the tax on the gain deferred, provided replacement property is identified within 45 days and closed within 180 days. Other strict requirements must also be observed.
Depreciation (tax)
An annual tax deduction for wear and tear and loss of utility of property. Example: Tax depreciation allows a tax deduction without a cash payment, thus providing an important benefit to real estate owners. A tax depreciation deduction may be claimed even when the property's market value increases. The annual tax depreciation deduction allowed for improvements (land is not depreciable) is 3.64% of the original cost of the building for rental housing and 2.56% for commercial and industrial property.
Depreciation
Decline in value of an asset. Property depreciation occurs due to general wear and tear.
Due diligence
This term can be applied in the following ways:
1. making a reasonable effort to perform under contract. Example: A prospective homebuyer signed a sales contract contingent on the sale of her present residence. She is expected to use due diligence in marketing her present house.
2. making a reasonable effort to provide accurate, complete information. A study that often precedes the purchase of property, which considers the physical, financial, legal, and social characteristics of the property and the expected financial performance; the underwriting of a loan or purchase. Example: The pension fund sent various experts to perform a due diligence study of a property it was considering for purchase. Matters to be considered included the mechanical and electrical systems of the building, local market conditions and competition for the property, and environmental hazards.
3. examination of property to detect the presence of contamination. Example: Before lending on a shopping center, the lender insisted on an environmental audit as part of its due diligence.
Equity
A buyer's financial interest in a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage.
Escrow
an agreement between two or more parties providing that certain instruments or property be placed with a third party for safekeeping, pending the fulfillment or performance of a specified act or condition. Example: The deed to the property and the earnest money were both placed in escrow pending fulfillment of other conditions to the contract.
Exchange period
In a 1031 exchange, the replacement property should be received by the taxpayer within the "exchange period," which ends on the earlier of 180 days after the date which the taxpayer transferred the property relinquished, or the due date for the taxpayer's tax return for the taxable year when the transfer of the relinquished property occurs (such as April 15th). The exchange period is 180 days, due to the Taxpayer's ability to extend the date of payment.
Exchanger
In a 1031 exchange, the party wishing to defer tax on gain on the exchange of investment property.
Fair market value
The highest price that a buyer, willing but not compelled to buy, would pay and the lowest a seller, willing but not compelled to sell, would accept.
Fee simple
The greatest possible interest a person can have in real estate.
Finder's fee
A fee or commission paid to a mortgage broker for finding a mortgage loan for a prospective borrower.
Fiscal year
A continuous 12-month time interval used for financial reporting; the period starts on any date after January 1 and ends one year later.
Fractional interest
Ownership of some but not all of the rights in real estate.
Full disclosure
A requirement to reveal all information pertinent to a transaction.
Gain
The amount obtained for a property minus the property's adjusted basis, and transaction costs. No matter what the adjusted basis of a property is, there's no gain until the property is transferred. There are two types of gain: "realized gain" and "recognized gain." Realized gain is the difference between the total consideration (cash and anything else of value) received for a piece of property and the adjusted basis. Realized gain is not taxable until it is recognized. Gain is usually, but not always, recognized in the year that it is realized. If gain is not recognized in the year it is realized, it is said to be deferred. In an exchange under Section §1031, realized gain is recognized in part or in full to the extent that boot is received. (See Boot.) Where only like-kind property is received, no gain is recognized at the time of the exchange.
Ground lease
A lease which keeps the ownership of the land separate from that of the improvements. The landlord leases the land to the tenant, but the tenant owns the improvements.
Growth factor
Interest earned for the duration of the exchange that is payable at the end.
Guarantee mortgage
A mortgage that is guaranteed by a third party.
High-rise
Generally a building that exceeds 6 stories in height and is equipped with elevators.
Home equity line of credit
A mortgage loan, which is usually in a subordinate position, that allows the borrower to obtain multiple advances of the loan proceeds at his or her own discretion, up to an amount that represents a specified percentage of the borrower's equity in a property.
Homogeneous
Uniform, of like characteristics or quality. Opposite of heterogeneous. The values of an area tend to be maximized when properties are homogeneous because low-valued or unusual properties are likely to reduce the value of other nearby properties of higher cost.
Holding period
The time span of ownership, often for investment real estate.
Identification period
In a 1031 exchange, the replacement property must be identified within 45 days of the close of escrow/closing the relinquished property. If the 45th day happens to fall on a weekend or legal holiday, it is not to be extended.
Income property
Real estate that generates cash flow
Interest
The fee charged for borrowing money
Interest rate
The rate of interest charged for the use of money, usually expressed at an annual rate.
Intermediary
The party who facilitates a 1031 tax deferred exchange by acquiring and selling property in an exchange. The intermediary plays a role in almost all exchanges these days. He or she neither begins nor ends the transaction with any property. He or she buys and then resells the properties in return for a fee.
Internal Revenue Code Section 1031
Section 1031 of the Internal Revenue Code allows an investor to defer his capital gain and depreciation recapture income tax liabilities when he exchanges relinquished property for like-kind or like-class replacement property.
Investment property
A property that is not occupied by the owner.
Joint tenancy
Ownership of realty by two or more persons, each of whom has an undivided interest with the right of survivorship.
Judgment
A decree of a court stating that one individual is indebted to another and fixing the amount of indebtedness.
Jurisdiction
Geographic or topical area of authority for a specific government entity.
Kiosk
A kiosk is a freestanding structure (open sides, usually multi sided) located in a shopping center or mall from which merchandise is sold. A multi-sided structure found in a shopping mall or center.
Lease
A written agreement between the property owner and a tenant that stipulates the conditions under which the tenant may possess the real estate for a specified period of time and for a specified rent.
Leverage
The degree to which an investor or business is using borrowed money.
Loan
A sum of borrowed money (principal) that is generally repaid with interest.
Loan-to-value (LTV) percentage
The relationship between the principal balance of the mortgage (i.e. the loan) and the appraised value (or sales price if it is lower) of the property. For example, a home with a value of $100,000 and an $80,000 mortgage has a LTV percentage of 80 percent.
Like-kind property
In a 1031 like-kind exchange you can exchange any real property for any other real property within the United States or its possessions if said properties are held for productive use in trade or business or for investment purposes. Examples of 1031 like-kind exchange property include apartments, commercial, condos, duplexes, raw land and rental homes.* As used in IRC 1031(a), the words "like-kind" mean similar in nature or character, notwithstanding differences in grade or quality. One kind of class of property may not, under that section, be exchanged for property of a different kind or class. Examples of qualified 1031 like-kind properties and like-kind exchanges:
·apartment building for farm/ranch
·office building for hotel
·raw land for retail space
·unimproved property for commercial property
·airplane for airplane
Examples of non like-kind properties include primary residences, stocks and bonds, notes, partnership interests, developed lots held primarily for sale, and property to be resold immediately after initial purchase or completion of improvements.
Market Value
The highest price a property would command in a competitive and open market under all conditions requisite to a fair sale with the buyer and seller each acting prudently and knowledgeably in the ordinary course of trade.
Master lease
The master lease is a triple-net lease in which the lessee completely leases the replacement property under an escalating rental payment plan. Under triple net plus lease properties, the lessee takes on the responsibility to sublet the property. In addition to rent, taxes, insurance and maintenance, the lessee also pays the debt-carrying expenses.
Mid-rise
A building with between four and eight stories above ground level although in a Central Business District, this might extend to buildings up to twenty-five stories
Mixed-use
Space within a building or project providing for more than one use (i.e., a loft or apartment project with retail, an apartment building with office space, an office building with retail space).
Mortgage
A written instrument creating an interest in real estate and that provides security for the performance of a duty or the payment of a debt. The borrower (i.e., mortgagor) retains possession and use of the property.
Net lease
A property lease in which the tenant pays all expenses normally associated with ownership, such as utilities, maintenance, repairs, insurance, and taxes.
Net Lease PLUS
Offering set monthly rental payments (typically a 6% to 7% annual average) with complete owner property control, Net Lease PLUS leads the way with tomorrow’s whole property market solution—today
What is the Net Lease PLUS™
Net Lease PLUS Highlights
• Whole property opportunities for single buyers only
• Multi-tenant, income-producing
Following are the "DOMAINS we use for the internet:
.
1031
A tax deferred exchange allows us to sell a piece of investment
(i.e. rental), trade or business property, buy a new property with
the gain or profit from the sale, and not owe taxes on the sale immediately.
If you eventually sell the new piece of property, you would owe taxes
at that time. Generally, all gains and losses on sales of real estate
are taxable, but an exception lies where the property sold is traded
or exchanged for "like-kind" property. The new property
is seen as a continuation of the original investment, so taxes are
not due at the time of the sale.
Many people view tax deferred exchanges as being for huge corporations,
or only for professional investors. I believe that everyone should
take advantage of these where they can. Strategy -- purchase a rental
home below market value, rent it for a year, sell it, and buy two
rental properties with your gain. Note that if you do this too many
times, the IRS may take the view that you are not a long term investor,
and disallow such exchanges. When you get ready to do a tax-deferred
exchange, you will need the services of a qualified CPA or Attorney.
This is a basic introduction only, and you should always get professional
advice from someone who has all the details on your deal, since so
much liability is at stake. In my course I list the company that
I use for these real estate exchanges. They are a national company
and can help you out wherever you are in the country. I have used
them for several deferred exchanges, and they have been an excellent
resource and extremely competent.
Let's look at how one of these deals would work. Assume that you
own a rental property that has gone up in value. You'd like to sell
this property and then reinvest the proceeds into some other rental
real estate. You can avoid the tax bill if you can find suitable
property to exchange for. The difficulty of the tax deferred exchange
is that the property you are going to purchase must be identified
within a certain amount of time, and it must be closed within a certain
amount of time after it is identified. Unfortunately, no extensions
are possible.
Identifying Property
You must identify property in a written document signed by you,
and delivered to the party assisting you with the exchange (cannot
be related to you!) on or before 45 days from the date you sold the
original rental property. There is a growing body of support for
identification of properties, and closing of new properties before
the original property is sold. This is somewhat controversial and
outside the scope of this discussion.
Technical Note: You can identify more than one property as the replacement
property. However, the maximum number of replacement properties that
you may identify without regard to fair market value is three properties.
You may identify any number of properties provided that the total
value of these properties is not more than 200% of the value of the
original property you are selling. Note that you don't have to close
on all the properties you identify. You can name several if you're
not sure what will close, or not close, but you have to observe the
rules in this technical note in terms of the value of properties
you identify. If at the end of the identification period you have
identified more properties than you are allowed, you are generally
treated as if no property was identified. This means that you pay
taxes!
Time Limits For Completing the Exchange
If you have correctly complied with the identification phase of
the exchange, you have up to 180 days to complete an exchange, but
the period may be shorter. Specifically, property will not be treated
as like kind property if it is received more than 180 days after
the date you transferred the property you are relinquishing, or after
the due date of your return (including extensions) for the year in
which you made the transfer.
For multiple property transfers, the 45 day identification period
and the 180 day exchange period are determined by the earliest date
a property is transferred.
Avoid Boot!
Boot is defined as any money or any type of property of unlike kind
(example, a car received as part of down-payment). You will be taxed
on this boot regardless of whether or not you carry out the exchange
correctly. You will want your exchange company, or attorney to examine
your transaction closely to make sure you don't receive anything
that could count as boot. Special rules apply for exchanging property
with assumed mortgages.
Summary
The tax-deferred exchange is a great way to maximize your wealth.
By keeping your investments growing without immediately paying taxes,
you can do wonders for your net-worth. You will need to search out
a good intermediary. I am happy to provide the name of mine for our
members. This may seem like a dry subject, but it is important to
understand when you begin to accumulate some rental properties.
Remember that this article is to provide basic information only.
If you are planning on doing a tax deferred exchange, you really
need to speak with a professional that handles these transactions
on a regular basis. Information here is subject to change by IRS
regulations or statute, so be sure to use current information provided
by your accountant or other professional when planning a strategy
involving tax deferred exchanges.
Buying Fixer uppers
Ask many a home buyer about the type of house they are looking for
and many will reply "We are looking for something we can fix
up and live in (or resell). We like the idea of gaining some quick
sweat equity." The classic "fixer-upper" home. Unfortunately,
there is a bit of fantasy in the notion, though. First of all, there
are many more fixer-upper buyers than there are fixer-upper properties.
Second, the current thinking in many minds is that anyone can make
a killing in the Real Estate market, which is not always the case.
Third,
many buyers totally mis-estimate both the cost and the time involved
in fixer-uppers, severely impacting (and in some cases destroying)
the profit potential. Unless you are fully prepared to deal with
the realities of fixer-uppers rather than the fantasies, it probably
is a good idea to look elsewhere for a home.
This does not mean that there isn't equity to be gained (or profit
to be made) by purchasing the RIGHT property at the RIGHT price.
The important notion is to understand that there are several factors
that will make the difference between winning and losing in such
a transaction.
The Mindset
The first factor that must be understood is that it isn't going
to be easy. The only people who think that finding, buying, fixing
and selling a home is an easy task are those who have never done
it. Those with any experience (even if only once) will tell you that
it rarely is as simple as it appears. In general, it is best to assume
that repairs will cost twice what you estimated, take double the
amount of time and,when finished, the house will be worth less than
expected. If you keep that in the forefront of your thinking, the
chances of being burned are much less.
Foreclosure sales are often good sources for fixer-upper properties.
A couple of resources that specialize in listings of those types
of homes are and . All three of the resources above offer free trial
periods to evaluate their services and search for foreclosure listings
in the area in which you are interested.
Start Out Small
Some of the worst examples of mistakes made by buyers of fixer-uppers
are first-time buyers who bite off way more than they can chew. Examples
of this are houses that have structural problems or will take an
exceptionally long time to repair, or are located somewhere other
than a desirable neighborhood. These can be a horrible drain on finances,
time and peace of mind.
A much better strategy for the inexperienced is to purchase a home
in a desirable neighborhood that is in need of cosmetic attention--new
paint, carpeting, appliances, landscaping and the like. These repairs
can either be handled by the homeowner or are easily contracted out,
saving time, effort and money. Yes, money can be made on homes needing
major renovations, even if they
are in less popular neighborhoods, but these are jobs for professionals,
not homeowners (and definitely not for first-time homeowners!)
Avoid Surprises
The most expensive situations are often those that are the least
expected--those nasty little (and often big) surprises that jump
out at you. You can avoid many of these surprises, though, with a
couple of easy steps taken BEFORE final commitment to a property.
1) Have the property thoroughly inspected. Have the inspector detail
all obvious (as well as potential) defects in the property. NOTE:
The seller may say "we are selling the house as-is, so NO inspections." Avoid
this property like the plague.
2) Run the numbers. You must know the market values for houses in
the neighborhood in which you are interested that need no repairs.
Running the numbers means working them backwards to see how much
equity or profit may be available (or even IF there will be any)
in the deal. You will need to begin by computing the realistic value
of the home when all repairs are made. From that point, you will
need to subtract any selling expenses you will incur (commissions
and the like) as well as the full cost of repairs and, most importantly,
the amount of desired profit or equity.
Example:
$600,000: Expected Sale Price, Repaired
-40,000: Selling Expenses
-25,500: Repair Expenses
-50,000: Desired Profit/Equity
$485,000: Maximum Property Purchase Price
Don't be deluded into thinking that you'll be able to sell for more
than the market value or do the repairs for less than the estimates.
If the numbers don't fit--with a good amount of "wiggle room" for
more expense or handling costs or if the property does not sell quickly--don't
waste your time or your money!
Summing Up
When considering a fixer-upper, whether for resale or to live in
with increased equity, go into the process fully prepared so you
will avoid many surprises. For your first project, only consider
structurally sound homes in good neighborhoods requiring cosmetic
repairs only. Have any property you are considering fully inspected
and then get firm estimates for all needed repairs. Most importantly, "run
the numbers" to be certain that the potential for gain is truly
there. If you are satisfied on all counts, you may very well be able
to be successful with your fixer-upper project “Remember not
making a decision is still a decision!
Using a home as a rental
Renting your home out as a seasonal(vacation rental)or long term.
Long term renters are easy to find as there is a shortage of homes
for rent. So, if you want to buy something for retirement or a
vacation home and rent it out to help your payments-this is typically
the easiest way. (Long term rentals are considered to be anything
over 6 months, as the tenants don't pay the 11.5% Florida tax)
• Generally long term rentals should be unfurnished.
• Initially we do a credit check before submitting a lease to
you, then with your approval of the lease, we collect the first and
last months rent plus a security deposit which is typically a months
rental amount. We are very proactive in this area and I assure you
the home is handled professionally.
• As to utilities- The tenants take the lease to the water,
electric, phone and cable people and have the utilities put in their
name and of course they pay their own deposits. Garbage is included
in your tax bill-so there is no garbage bill.
•What makes a good Vacation Rental
• A clean, well-maintained home on a canal or open water.
• Typically one of the bedrooms should have a set of twin beds
if the renters are bringing children.
• Good linens and towels and a backup set. This is especially
important for monthly renters.
• The washer, dryer and refrigerator should be newer if possible.
• A good Television hooked up to cable (about $35.00 per month)
and a CD or tape stereo system.
• The kitchen must be completely outfitted. A microwave is also
very important for renters.
• Patio and/or Lawn-Deck furniture. If there is an upper deck,
a table and chairs plus loungers.
• On the water side, below a set of loungers and chairs.We get
a lot of repeat renters÷if the renters have a good experience,
they will come back. We see this especially with people that book
two to three months a year.
Short sales
The Basics of “Short Sales”
by William Bronchick
You will likely come across dozens of properties in foreclosure
with little or no equity, that is, the seller owes at close to or
more than the property is worth. In these situations, lenders are
sometimes willing to accept less than the full amount due, commonly
referred to a "short pay" or "short sale."
Negotiating a short sale with the lender is a difficult process,
generally because it is a daunting task finding a bank officer who
has the authority to accept a discount. You will have to call around
to locate the lender’s “Loss Mitigation Department.” More
than likely, each lender you deal with will have a separate name
for this department, so be patient when calling. Much like getting
your phone bill corrected, you can expect the process to involve
a lot of waiting on hold and being bounced around an intricate maze
of automated voice mail systems. Once you get in touch with the right
person, then the negotiating begins.
From the lender’s perspective, a short sale saves many of
the costs associated with the foreclosure process - attorney fee's,
the eviction process, delays from borrower bankruptcy, damage to
the property, costs associated with resale, etc. In a short sale
scenario, the lender gets the property back faster, so it is able
to cut its losses. Your job as the investor is to convince the lender
that it will fare better by accepting less money now.
The lender will want some information about the property, the borrower
and the deal he has made with you. Specifically, the lender wants
to know what the property is worth. The lender will generally hire
a local real estate broker or appraiser to evaluate the property
(called a broker’s price opinion or “BPO”). You
can also submit your own appraisal or comparable sales information.
In addition you will want to offer as much specific negative information
about the property as possible. Also, include some relevant information
about the neighborhood and the local economy if things are bad (copies
of newspaper articles with “bad news” may help). A contract’s
bid for repair estimates should also be submitted, which, of course,
should be the highest bid you can obtain!
The lender will also ask for financial information about the borrower.
Sort of a backwards loan application, the borrower must prove that
he is broke and unable to afford the payments. The borrower must
show that he has no other source of income or assets to repay the
loan. This process may involve as much, if not more paperwork than
an original mortgage application! The borrower should submit a “hardship
letter”, which is basically a sob story about how much financial
trouble the borrower is in. This may require a little literary creativity,
and some help on your part. Don’t lie, just paint a picture
that doesn’t look good.
Finally, the lender generally wants to see a written contract between
you and the seller. The lender wants to make sure the seller isn’t
walking away with any cash from the deal. Generally, the contract
must be written so that the buyer pays all costs associated with
the transaction, so that the “net cash” to the seller
is the exact amount of the short pay to the lender. A preliminary
HUD-1 settlement statement is often requested, which can be difficult,
since many title and escrow companies simple won’t prepare
one in advance of closing. You can prepare your own HUD-1, and simply
write “preliminary” on the top.
Don’t be surprised if your short sale bid is rejected. Lenders
aren’t emotionally attached to their properties, so they aren’t
as likely to give you “steal.” Many short sales fall
through if the BPO comes in too high, which is often the case. You
can’t pull the wool over a lender’s eyes - if the property
isn’t is need of serious repair, it is unlikely you can convince
the lender the property is worth a whole lot less than the appraised
value.
If you are interested in these properties please contact me and
I can furnish you a list of properties
