Dan Christiansen shares his thoughts on the RE market.

Success Story

We are constantly working all the avenues we can as investors to make money from real estate. Many people get turned off by the concerns about the hassle of managing the repairs of rehab work. Others don’t like the idea of having to deal with renters who might call them in the middle of the night with a plumbing problem. We understand that there will always be some kind of problem that we are solving to help others and to help us earn an income.

Let’s consider an area of real estate that doesn’t require rehab or late night repairs.

Note Brokering:

How to find notes:

There are many sources online that we can pay to get a list of personal note holders.

If we want to find them without paying a fee we need to go to the county records to look at the public records on real estate. There we can look up properties based on the counties search tools. Many times, counties will have this information on a county website. We can do a search for address after address and focus on who the lien holders or mortgage holders are on that particular property. Most will list bank after bank that holds the mortgage on each property. Look at the rare ones that list an individuals name or family trust. These are the properties that were sold by seller financing. We can either send a letter to the address listed or do further research to find a phone number for the note holder.

What to ask the note holder:

Tell them who you are, and that you found that they are the note holder of a certain property from the public county records. Ask them if they have interest in selling off their note for a discounted one lump some of money. This is all about finding a motivated note holder. If they have interest, get all information about the property and the details of the payments and interest rate that they receive. Let them know you will get back to them when you can find a buyer for their note.

Where to list this note:

Do a search online for “note selling, note buying, and note brokering”. You will find many websites where notes can be posted to sell. One could also list the note in the classified section of the newspaper.
We only want to list generalities and never the address of the property. If we get an interested party we can give them more details about what is owed on the note and interest rate etc. We need to factor in the cost of the note changing hands through the services of a title company or real estate attorney. We should also factor our brokering fee.

Finalize the deal:

Talk to the note owner about what their final lump sum of funds would be after the discounted asking prices, the transfer fees, and your brokering fee. The deal can be finalized and all benefit. The seller of the note, the buyer of the note, and we receive a brokers fee. This is a process that can take time to get a system down but it can result in funds that we can make without the typical hassles of real estate.

What is a 1031?

“In general—No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.”

-Involves selling investment real estate THAT HAS BEEN HELD FOR INVESTMENT and replacing it with other qualified real estate that will be held for investment. Take note that NO time frame is given by the IRS how long the property needs to be held.

What qualifies?
-Commercial properties
-Farmland
-Developed lots for investor – held for appreciation
-Warehouses
-Apartment buildings
-Rental houses
-Vacation homes, under certain circumstances
-Bare land
-Some personal property, baseball cards, airplanes

What doesn’t qualify?
-A principal residence
-Spec house
-Developed lots – inventory for bld
-Flipped properties

Why do a 1031?
-AVOID TAXATION – short term gains as high as 35% federal and around 7% state. Long term gains 15% but still must pay state taxes around 7%
- Increase net worth
-Increase cash flow – vacant land for cash flowing property
-Consolidate holdings (10 houses for 1 building)
-Diversify risk. Sell property and buy 10 houses in different locations.

Process of 1031

Identification –
-New property must be identified in writing within 45 days of sale of relinquished property
-Can identify up to three properties of any value
-Can identify more than three properties but total value of all three properties can not exceed 200% of relinquished property value
-Can identify any number of properties BUT you must buy 95% of FMV of all properties identified

Closing on new properties
– 180 days from sale of relinquished property TOTAL, not in addition to 45 days

This is NO extension provision. You must identify and close in the appointed time frames or you will pay the tax. If you back out on day 46 or day 181 you will blow the exchange.

Reverse 1031
-Buy new property BEFORE selling relinquished property
-45 and 180 day limits apply
-Need money to buy new property
-Could refinance relinquishing property to get cash to make new purchase
-Could find cash or financing elsewhere
-Need to use special purpose entity to “park” the relinquished property before selling

Selecting Intermediary to do the Exchange
-Tax professionals
-Value added services – not just hold your money
-Are they sufficiently bonded?
-E&O Coverage

How Intermediaries get paid
Flat fee
Interest on deposited funds

A recent survey of participants at the Southeast chapter of the Real Estate Investment Advisory Council included a survey of the 165 participants to obtain their views on when the current recession would end. These participants whose primary focus is commercial real estate agreed that the primary leading indicator would be the housing market – that is “investors will know an economic recovery is under way when the housing market finds price stability and foreclosures moderate”. These and other opinions from the survey are contained in the article below which was recently published in the National Real Estate Investor.

Investor Survey: Housing Market Bottom Will Signal Recovery

Mar 25, 2009 1:09 PM, By Sibley Fleming, National Real Estate Investor

ATLANTA — Investors will know an economic recovery is under way when the housing market finds price stability and foreclosures moderate. That’s the majority view of a regional real estate investment group.

“During the housing boom, consumer spending grew faster than income because their wealth was fueled by home equity,” said Sam Chandan, president and chief economist of New York-based Real Estate Economics LLC. “Households lost $5 trillion of wealth in the fourth quarter and about $2 trillion in the third. It’s unprecedented.”

Chandan’s remarks came during a meeting this week of the Southeast chapter of the Real Estate Investment Advisory Council (REIAC), where roughly 165 members voted electronically on current economic topics, offering an instant snapshot of the developers’ and investors’ concerns. Kieran Quinn, vice chairman of Bethesda, Md.-based Walker & Dunlop and outgoing chairman of the Mortgage Bankers Association, served as moderator.

When the audience was asked which event would signal that an economic recovery had begun, 39% said the bottoming out of the housing market would be the leading indicator. New job formation followed close behind with 36% of the vote.

“If you look at the 2001 recession, according to the National Bureau of Economic Research, it ran until November of 2001,” said Chandan. “We continued to experience job losses in the recovery for another two years after that. The magnitude of the numbers can’t stay at 500,000 or 600,000 but the job market is going to be a lagging indicator of stability in the economy.”

Others on the panel, including Egbert Perry, chairman and CEO of Atlanta-based Integral Group LLC, a director of Fannie Mae and former director of the Atlanta Fed, agreed.

The relationship between the housing market and commercial real estate is worth noting. “There’s that old axiom that commercial lags residential by six quarters,” said panelist Chris Marinac, managing principal and research analyst for FIG Partners LLC, based in Atlanta. “We’re going to top at about 4.5%, which means we’re just at the edge of commercial delinquencies.”

The audience and panelists were also asked to look into their crystal balls and predict when the recovery would begin in earnest. The second half of 2010 drew the most responses at 39%, followed by sometime in 2011 at 25% and year-end 2009 or the first half of 2010, 21%.

An overwhelming number of respondents — 64% — expected unemployment to peak at 10% to 12%. “The unemployment rate, in our view, will creep to 10% to 12%,” said Chandan. “Part of what is being reflected here is a lower labor participation rate. There are fewer people looking for work, a larger number of discouraged workers so the number is a little bit misleading.”

The U.S. Region with the brightest future over the next five years was the Southeast with 57% of the vote. Atlanta was ranked the U.S. city with the brightest future, at 45%. Population trends indicate that 40% of the U.S. population will be living in the Southeast by 2050, according to Perry.

Overall U.S. commercial real estate supply/demand fundamentals over the next two years are expected to weaken significantly with widespread problems of greater severity and duration and many tenant and ownership defaults, according to 53% of the survey respondents. Another 31% expected that supply/demand fundamentals are going to weaken only moderately with serious weakening isolated in specific geographic areas and commercial real estate sectors.

“One area that we should have concerns about of further deterioration that haven’t really been anticipated by the market is industrial warehouse distribution,” said Chandan. “The risk is we could adopt more protectionist policies in the United States. That will limit the flow of goods in and out of the country. Once you separate services and look at the aggregate flow of goods in and out of the United States, it’s down about 35% from a year ago.”

Not surprisingly, participants predicted that retail (52%) will be the weakest sector over the next five years and multifamily (77%) will be the strongest.

In terms of the least problematic solution to the U.S. banking crisis, 45% of respondents said an aggregator bank to remove “toxic assets” and recapitalize banks was the best option.

“I think the greatest transfer of wealth is happening right now as we wipe out everybody’s values,” noted Perry. “But I think the biggest problem we have in an effort to accelerate or purge the problem out of the system, we’re dumping so much product onto the market that the banks themselves by trying to respond to regulation are in fact aggravating the problem.”

Short sales can be frustrating and I’m hearing from more and more investors that the headaches and the timeframes to get a deal done are not worth the effort. While I don’t necessarily agree with that sentiment, the note below should give us all some hope. At a minimum, it let’s us know that banks recognize there is a problem and they need to streamline the short sale process. This is beneficial for the lender as they avoid foreclosing and it’s beneficial for the investor because we get good deals done more quickly.

So don’t give up on short sale opportunities.

Fannie Tries Short Sales Over Foreclosures

Fannie Mae has launched pilot projects in Phoenix and Orlando intended to reduce foreclosures by pre-approving short sales, agreeing on a price and the loss it will take prior to a deal even being made. It is hoped the program will improve the popularity of short sales among real estate agents.

Property professionals initially had welcomed short sales but soon found the process to be a frustrating one–due to squabbling about the sale price and slow approval times by the mortgage companies–that often ended with no sale at all.

“Short sales have received such a bad reputation among real-estate agents that, as a portion of the overall mortgage market, they have gone down,” says Tom Popik of the research firm Campbell Communications, whose November survey of realty practitioners found that agents had to wait as long as 8.1 weeks to receive a response from the lender on a short sale. That was nearly double the 4.5 weeks the process took earlier in the year.

Fannie Mae’s pilot will focus on homes that are listed at less than the mortgage balance and carry a Fannie Mae-backed loan serviced by Countrywide Financial Corp. If it proves successful, the concept could be expanded to other geographical areas and additional lenders. There are concerns, in the meantime, about the program’s success, with real estate agents noting that property prices could decline before the pre-approval is issued.

Source: The Wall Street Journal, Nick Timiraos (01/09/09)

I get frustrated when I hear investors say that sellers are not willing to discount their properties or sell at a loss. The best I can do to convince them they are wrong is to share experiences of other investors that are having great success finding such deals. That is until now because I have some research proof done by zillow.com proving that many houses sell at a loss by homeowners that are under water.

According to Zillow.com, over the past year a staggering 30% of homes sold were sold at a loss. That is good news for investors that are looking for deals. This is not to say homeowners are offering their homes at a loss or want to sell their homes at a loss but do if the right offer is presented.

(This is a subtle hint that you need to be in the market looking for these deals and most importantly need to be placing offers).

Report: One-Third of Homes Sold Under Water

Nearly one-third of homes that sold in the last year went for less than what was owed on them, according to a report released Wednesday by Zillow.com.

The real estate website calculated that homes values fell 9.7 percent compared to a year ago in 163 metropolitan areas. Compared to the market peak in 2006, home values have fallen 12.8 percent. Home prices have declined for seven straight quarters, according to the report.

Over the past year, 30.2 percent of homes sold were sold for a loss. In 17 markets – 14 of them in California – more than half of homes sold in the past year were sold for a loss, the report said.

Source: Zillow.com (11/12/08)

Posted by Carter Brown

Real estate prices by-and-large are driven by simple economics – supply and demand; the greater the demand for real estate the higher the price. Population growth in any area will almost always have a positive impact on real estate values. Growing areas with a growing population will almost always be accompanied with job growth and these are all strong positive indicators of a healthy real estate market. As the country’s population grows so does the demand for housing and as the Census Bureau reports the U.S. population is expected to increase dramatically in the coming years.

Population Boom Will Drive Real Estate Industries

When the Census Bureau released population projections last month, more attention was paid to the country’s changing racial composition than to the massive scope of the increase. What’s clear is that the latest numbers will inevitably give the real estate business a boost.

The Census Bureau is projecting an increase of 135 million people in the U.S, a 44 percent rise, by 2050. That’s equivalent to the entire populations of Mexico and Canada moving to the United States.

The bureau estimates that this population boom, largely fueled by immigration, will require 52 million new housing units, along with more places for people to shop and work.

Source: The Washington Post, Steven A Camarota (08/31/2008)

Posted by Carter Brown