With prices falling in many markets around the country, some investors are left wondering if it’s still possible for them to turn properties for quick profits.  We want you to know that you absolutely can, but it’s critical that you do your pre-purchase analysis of the property very carefully.  Make sure that when you look for comparables to determine how much you’ll be able to eventually resell the property for that you realize that yesterday’s sale prices may be higher than tomorrow’s.  In other words, you need to anticipate that your resale price will be a moving target and plan accordingly.

In a soft market (a buyer’s market), it’s especially critical that you also don’t price your property too high when you list it, either.  Speed in reselling is critical.  You need your property to represent a better value for the money than anything else on the market, thereby attracting a serious buyer quickly.  When determining the price at which you’ll resell the property once any needed renovation is complete, you should ask yourself, “What price would it take to sell resell this property within 2 days of hitting the market?�  It’s far better to take a smaller profit quickly and easily than to wait and worry and labor to get an aggressive asking price (if you can get it at all) once all the costs are tallied and lost time is taken into account.

The reason that so much emphasis is placed on your resale cost is that it is by far the MOST important part of your analysis.  That isn’t to say that other parts aren’t important or can be overlooked, but if you don’t have a good resale price (based on the information above) you’ll end up way off course, possibly holding onto a property that you’d rather be done with and never see again.

Once you know the resale price that you’d like to use, you’ll simply start to subtract or back out your various anticipated costs of acquiring, fixing, holding, and reselling the property, along with an amount that you’d find acceptable as a profit, to determine what your maximum offer price should be to the seller.  Most uninformed and inexperienced investors go about things in the opposite order by first making an offer on the property and then trying to justify a high resale price for the property and manipulate their rehab expenses so they’ll hopefully be left with some profit in the end.  Let me assure you … that is a recipe for absolute disaster in today’s markets.

If you begin with the end in mind and are wise in your approach to dealing with soft markets, you’ll find that you can navigate them successfully and very profitably.

Here is an article from www.rebusinessonline.com describing some of the issues involved in a 1031 exchange.

Tips for the 1031 Consumer

What real estate owners should look for before doing a 1031 exchange

                                                 Howard J. Kopel, Esq.

First published in the May 2006 issue of Shopping Center Business

Published online 08-21-2006

For several years now, tax-deferred exchanges have been a major force in the real estate market. While the concept of like-kind exchanges has been a part of the tax code since 1918, it first became a practical tool within the reach of all investors when, in 1990, the U.S. Treasury Department issued the Omnibus Budget Act of 1990. In the act, the Treasury clarified the 45-day identification period and 180-day exchange period rules and clarified the actual and constructive receipt issues by allowing the use of a Qualified Intermediary (QI) as a safe harbor.

The Federation of Exchange Accommodators (FEA), the national trade organization representing the parties directly involved in Section 1031 exchange transactions, markets the concept and teaches investors about the benefits and techniques of Section 1031 exchanges. This marketing effort was first successful on the West Coast, the FEA’s home. The shorter transaction period typical in that part of the country, and possibly a higher risk tolerance, also contributed to the Section 1031 exchange’s early popularity on the West Coast.
 
While Section 1031 exchanges did not catch on as quickly on the East Coast, the good news did eventually travel. The late 1990s saw the beginning of a real estate boom that we are still experiencing today. The appreciations in real property are enormous and continue to grow. Investors, their tax and legal counsel, lenders, and realtors throughout the country have become educated in the nuances of tax-deferred exchanges as a matter of necessity. Section 1031 of the tax code provides one of the only commercially accessible safe harbors available to small- and mid-level investors for earnings attributable to the ownership of investment real estate. Section 1031 exchanges are therefore a staple of real estate investment and real property transactional practice.
 
For those of us in the real estate transaction business, the increased recognition has ignited a profitable trend. Demand for tax benefits has spurred demand for replacement properties. And the increase in transactions consequently enticed many new entrants into the Qualified Intermediary (QI) business.

Investors, or 1031 consumers, have a wealth of options when it comes to choosing the best provider to facilitate their tax-deferred exchanges. The following are some ideas regarding what you might expect or request of your qualified intermediary:
 
Fidelity Bonds and Errors & Omissions Coverage

The QI has a fiduciary responsibility to receive, hold and safeguard Section 1031 exchange funds during a transaction. Since there are no regulatory or financial restrictions placed on a QI, a 1031 consumer will be interested in the QI’s financial stability, as well as the bonds and E&O policies that the QI has in place.

Membership in the FEA

The FEA encourages innovation in the industry, establishes ethical standards of conduct and works toward the development of uniformity of practice and terminology within the exchange profession. Membership in the FEA indicates a QI’s participation in the exchange of ideas and knowledge regarding tax-deferred exchanges.

Access to Title Insurance Underwriting

Timing is the key to a Section 1031 exchange transaction. The investor is faced with tight deadlines within which to sell property, identify replacement property and close on replacement property.
The ideal QI does more than dot the i’s and cross the t’s on the agreement and assignment documents involved in the transaction. In order to smooth the way and help investors meet deadlines, a QI will:
• Have access to title companies nationwide. Replacement properties can be located anywhere, and a QI with ties to title companies with a national focus can help clear title and arrange the closing in a quick and efficient manner. On the other hand, too-close ties to just one nationwide company can have the perverse effect of limiting underwriting flexibility.
• Be experienced at closing complex transactions. Most exchange transactions are not simple forward exchanges. A QI with ties to sophisticated title companies can help you work through the knotty title issues arising in complex transactions and ensure that title company delays do not arise and jeopardize the tax-deferred status of the transaction.

Interest Income on Exchange Funds

The QI market is not uniform in its treatment of interest income on exchange funds. An investor is not only entitled to negotiate with a QI to retain the interest income, but he or she should enlist the QI to negotiate with financial institutions to obtain the best rate on his or her behalf.

Experience

There is no question that experience is the best teacher. Familiarity with a particular type of transaction will help a QI conduct its role in the transaction in the most professional manner.

In the last 10 years, Section 1031 of the Internal Revenue Code has successfully made the journey from obscurity to common practice. There are many professionals who stand ready to give advice and help facilitate the exchange transactions. The right professionals are the ones who can and routinely do deliver the successful transactions.

— Howard Kopel, Esq., is chief executive officer of Sutton Alliance, a provider of real estate transaction services for more than 20 years.

This is an incredibly exciting time to be a real estate investor.  While much of the country is fixated on all the negative news (as they view it) of over-built neighborhoods, rising interest rates, and sagging prices, hopefully you’re able to see the silver lining and recognize the opportunity.

The yield on the 10-year treasury note is on the rise, which directly influences the movement of interest rates (also on the rise lately).  As rates increase, fewer and fewer people can afford to buy, and those that do are having to settle for smaller homes than they might otherwise like to live in.

In recent years, loan money has flowed freely even to those who normally wouldn’t qualify to borrow.  Sub-prime loans have catered to those who don’t qualify for loans under normal underwriting guidelines.  With more buyers in the market with the funding to purchase, demand was high, higher than the supply. This caused prices to rise quickly.  As people saw prices rising so quickly, they rushed in to buy additional speculative property, which added to the demand in the market.  Many of the loan programs available required little to no money down and many offered very enticing “teaser rates�, coupled with ARM (adjustable rate mortgage) loans. ARM loans start with fixed interest rates and payments for a short period of time before going adjustable, thereafter having payments that adjust freely up or down each month with market rates, leaving the borrower susceptible to higher payments down the road.  Many borrowers could barely afford to get into their home even during the period of the fixed teaser rate, however, they reassured themselves that they’d be able to sell the property and pocket a great deal of appreciation before the adjustable portion of the loan ever kicked in.

Once markets started to slow and soften a bit many of the speculators and other investors holding property at the time tried to dump what they had and get out, but they found that selling was difficult once supply was high and demand was quite low in relation.

All of the issues listed above have lead to a point that is depressing to many but extremely exciting to those who look for the opportunity and are ready to act on it.  In recent years, many investors in “hot markets� have complained about how difficult it is to find motivated sellers.  Today, motivated sellers abound.  For evidence of this, try going to a site like www.craigslist.com and looking at the homes for sale in some of the hottest markets of recent years like Las Vegas, Phoenix, and San Diego.  You’ll likely find sellers willing to rent, lease option, and maybe even carry back financing.  You’ll find offers to pay closing costs, give cash back at closing, etc.

We’ve all heard the most common investing advice to buy low and sell high.  In recent years, speculators have tried going by a new adage of buy high and sell higher (which is largely a game of chance).  Many investors made some money with that strategy but many also got clobbered when the market turned.  The coming months and years could hold some of the best opportunities you ever have to find truly motivated sellers.  We can genuinely help these sellers while creating sizable future profits for ourselves in the process.  In these exciting times we hope that you’ll buy low so that you can sell high and better your financial future.

The article below discusses the possible impacts on office building construction of the tighter lending standards resulting from the problems of sub-prime mortgages in the residential real estate markets.  It supports the premise that the commercial markets in the United States remain relatively immune from the problems facing the residential markets in some areas of the country.
Tighter Lending May Stifle Office Construction

By John Egan

May 8, 2007 12:46 PM

SAN ANTONIO – Office construction should enjoy continued growth in 2007, but tighter lending standards may dampen the office market and other commercial construction sectors in the latter half of this year and into 2008, according to the latest McGraw-Hill Construction Outlook forecast released at the American Institute of Architects’ annual convention this month.

Buoyed by rising office employment and declining vacancy rates in some U.S. markets, office construction starts are projected to total 208 million sq. ft. this year, up 5% from 198 million sq. ft. in 2006, says Robert Murray, vice president of economic affairs and chief economist at McGraw-Hill Construction, a data and research company for the construction and design industries. Last year, office construction starts climbed 19% from 166 million sq. ft. in 2005.

However, sparked by a less favorable environment for commercial real estate lending, construction of office buildings and other commercial structures should experience a slowdown in the latter half of 2007, Murray predicts, with that trend continuing into 2008.

A January survey by the Federal Reserve Board found one-third of senior loan officers at U.S. banks had tightened credit standards on commercial real estate loans over the previous three months, while 46% of the officers said the quality of those loans would deteriorate this year. In particular, smaller business banks with hefty commercial real estate loan portfolios will face more pressure to justify that type of lending.

On a positive note, the large amount of investment capital pouring into commercial real estate may mean that the industry will withstand stiffer lending standards in 2007 and 2008. Whatever the financial situation, Murray doesn’t think commercial real estate construction will be a victim of the type of “boom-and-bust cycle� witnessed as recently as the early part of this decade.

According to the AIA’s most recent Consensus Construction Forecast, a semiannual survey of the country’s leading construction forecasters, U.S. construction activity is expected to increase 9% in the office sector this year compared with 2006, 13.1% in the hotel sector, 5.4% in the industrial sector and 3.5% in the retail sector. Murray is among the forecasters who contribute to the consensus outlook. The latest forecast was released in January.

Elsewhere in commercial real estate Murray predicts:

• Retail construction starts will dip 3% this year to 287 million sq. ft. Thanks to expansions by Target, J.C. Penney and other retailers, store construction won’t see a sharp decline over the next couple of years.
• With the casino boom tapering off, hotel construction starts will slip 8% this year to 75 million sq. ft. That follows a 68% jump in 2006.
• Weighed down by the softening condominium market, multifamily construction starts will drop 10% this year to 455,000 units. That comes on the heels of a 3% decrease in 2006. One bright spot: Excluding condos, the multifamily market remains a relatively safe investment.

THIS ARTICLE APPEARED RECENTLY IN NATIONAL REAL ESTATE INVESTOR