Breaking News: President Signs Tax Credit Extension & Expansion

Breaking News: President Signs Tax Credit Extension & Expansion
 
President Obama signed into law legislation that extends and expands the first-time homebuyer tax credit this morning. This enacts the legislation into law making the extension and expansion effective immediately after today. To learn more about the jobless benefit extension and the extension of the homebuyer tax credit visit: Obama signs jobless benefit extension.
 
Who Qualifies for the Extended Credit? 

First-time homebuyers who purchase after today and before April 30, 2010, are eligible for the extended tax credit.

(November 6, 2009)

Short Sales explained by Oregon Association of Realtors

Short Sale Single Offer Clause

Q.  Can a buyer have a provision in their offer on a short sale that says the seller cannot submit other offers to the lender until the lender has decided on the buyer’s offer?  What happens if the seller gets three such offers, each with the same clause?

A.  Sure the buyer can have such a clause.  The question is what will happen if they do?  Short sales are seriously misunderstood and difficult transactions.  There is tremendous ambiguity and uncertainty for both the seller and the buyer in a short sale.  The seller wants to avoid foreclosure and may not care much about price.  The buyer wants a deal.  Neither needs the uncertainty associated with an ongoing bidding war conducted by serial offers being presented to some distant, unresponsive, disinterested, overworked employee of a troubled lending institution.  The clause you reference is just the kind of thing you’d expect a buyer seeking to reduce uncertainty would come up with in such a dysfunctional market.

Whether a seller can or should accept an offer with such a clause depends on the situation.  In a short sale, offers are going to be contingent on the seller getting the lender’s consent sufficient to clear title.  That means two agreements.  One is the real estate deal between buyer and seller.  The other is the agreement between the lender and the seller regarding the seller’s debt to the lender.  Making the real estate deal contingent on the seller/lender agreement doesn’t make the lender a party to the real estate deal itself.  The seller therefore retains the right to accept or reject any offer on any terms.  Retaining a right doesn’t, however, mean the seller can do whatever they please.

Whether a particular seller should (normative question) accept an offer with such a clause depends first on the seller’s position.  If there is a chance the lender will demand a personal note for the deficiency, or the seller’s taxes will vary with the deficiency, the seller may have no reason to accept such an offer.  On the other hand, if time is short and the size of the deficiency doesn’t matter that much to the seller, they may like the idea of one offer.  It is, in the first instance, their call. The concern, of course, is that accepting such an offer may somehow defraud the lender or involve the agents in misrepresentation.  Everyone is, and ought to be, a little paranoid about lender fraud after it brought down the whole real estate market.

Fraud and misrepresentation by silence require hiding material information.  A seller negotiating with a lender regarding the seller’s debt to the lender owes the lender the duties of good faith and fair dealing. They cannot hide information from the lender that would be material to the lender’s decision regarding the debt.  Here, that means they could not deliberately hide subsequent better offers without the lender’s knowledge.  In this case, however, that is not a problem.  If the seller accepts the offer, the single offer submission term will be contained in the offer forwarded for the lender’s approval.  If the lender doesn’t like that approach all they have to do is say no.   Of course, that may take a month or two and by that time the seller may be foreclosed, but that just takes us back to the normative question of “should” the seller accept such an offer.

The “two agreement” nature of short sales means the seller must consider both their own needs and their duty of good faith and fair dealing to the lender.  Their own “needs” means answering a context-specific normative “should” question.  Once the seller has that answer, the issue becomes their obligation to deal honestly and fairly with the lender.  That can be done just by submitting the offer with the “one offer clause.”  It could be done by working with the lender ahead of time to determine how to handle such things.  That can be done by phone and confirmed by email.  Remember, on the seller/lender side we are talking about disclosure of material facts relevant to the seller’s debt to the lender.  All that means is not hiding important things from the lender.  The single offer presentation clause is actually an easy one because the disclosure issue is taken care of by the provision being presented to the lender in the offer.  It is secret procedures like unilaterally deciding to take backup offers and submit them serially to the lender without the lender’s knowledge that may cause real problems.

Alright, so what about the multiple offers all with the same single offer presentation clause?  It’s the same thing.  First the seller deals with the offers as offers.  A seller with multiple simultaneous offers will normally reject all offers and ask each buyer to make their last best offer.  It doesn’t matter if the buyers come back with last best offers that all contain the single offer presentation clause.  At that point, the seller will (assuming it is in their interest to accept any offer with such a clause) simply accept the best offer and forward it; just like they would had they received only one offer.  It is just an application of how to deal with multiple offers coupled with how to deal with short sale negotiations.  For more information, you should read the new “Dealing with Multiple Offers in Short Sale” section of the Oregon REALTORS® Risk Management Toolkit.  Contact me at kathryn@kjkproperties.com if you’d like a copy.

Homeowners and investors can consider lease options as tool

As the owner of real estate assets that have been used and abused by the current market, I have had the opportunity to evaluate my long term goals.  I have always used the business mindset with the belief that my rentals can pave the path to retirement down the road.
 
Have you evaluated your own real estate holdings?  Are you the owner of a house you would rather see “sold?” Are you a landlord by default?  Here is a thought – try renting the assets with a concurrent lease option.  Who is it best for? This fits an existing investor looking for income, and anyone with a “due on sale” clause that has considered selling on contract.
 
There are many benefits to concurrent lease options, but they are not for the faint hearted.  If you have a business mindset about owning a rental, this option could be for you.  Contact me for a full article on this topic.

For more information and a private consultation on how to use your own real estate assets to your benefit, please contact me.  We can discuss value, reasonable rents, concessions, capital improvements, and the prospect of increased cash flow with a lease option.  The best business person does their due diligence and makes wise decisions based on facts.  Now is the time to evaluate your real estate holdings with a long view.

September Market News

September Market News

Having the long view in real estate investing

Having the long view.

My name is Kathryn King and I am an investor as well as a Realtor and company owner.  I work with owners of homes and small investment properties, mainly built of houses and duplexes and other small buildings.

Thinking over what sort of message I have, I started thinking about a financial book I have been reading.  It was written near the year 2000.  In the final chapter the author talks about taking a long view with regard to investments in the stock market.  Reading this at the end of this financial book was a breath of fresh air.  I need the long view in real estate for career, clients, and my own investments.

I don’t know about your experience of the past 18 or so months, but my experience as a person employed in the field of real estate and as that of an investor has been trial and tribulation.  I have experienced many things that I could view as failures and I think the opportunity lies in the ability to see them as hiccups on the ride.  To remain detached and keep stride I like the concept of taking the long view.

I did not have a short view or a “flip” mentality wit h regards to my real estate holdings.  However I did not anticipate the increased turnover, the decrease in rents, the sharp increase in concessions, and the literal demise of commercial real estate in the midst of an attempted reverse exchange.  With these experiences and the news repeatedly reminding me of the state of our nation, I somehow became a short view investor, losing sight of the end goal!  I can say the same is true for home owners and investors I know. 

Change has hit my segment of the market on a huge personal scale.

1. Clients and friends are being foreclosed on.  For many this is their financial vehicle going away.

2. Buyers have lost their jobs in the midst of home shopping this year.

3. Sellers are not understanding CAP rates—they never had to think about that in this decade.

4. Increased vacancy rate has had a very personal impact.

5. Default rental owners struggle with the concept of supply and demand, and rent as a pricing function.

6. The climate has required an ability to understand change as it is directly under foot.

7. My clients do not readily understand that economic factors are relatable to their investments in a very real and large sense. 

The end result of my experience is to plan for today’s economic climate as the future, and not to plan for increase revenue or rents in my planning.

There has been a powerful lesson in this period in time.  For one I had to remember that I purchased real estate investments as part of a long term retirement plan.  I had ideas about retiring early and the change of economy has helped me to take seriously the exit planning if I intend to take the plunge some day.  Another thing that I learned is to value that which we cannot place a dollar figure on.  In this time I have found opportunity to appreciate health, family, my new husband, my dogs, great weather, and the companionship of friends.

Overcoming objections at a showing

How do you know when a potential resident has an objection?  Why would it be important to know this?  By understanding the potential resident and responding you can increase your likelihood of getting an application.  What is the best way to work for the application when there are objections?  Some ideas: asking open ended questions, listening for their comments, and by watching the resident’s body language.  Let’s roll play.

I am a renter coming to see your home for rent. When I am inside the property I want to be able to look around without you crowding me.  How will you know this?  I will turn my attention to the property and will not be engaging with you.  I may walk away from you when I am inside the unit to “take charge” of my own direction without being led.

What should you do as the owner?  Observe my body language and let me look around on my own.  Perhaps comment that you are going to do a few things and will be available for questions.  This is a great time to change bulbs, sweep the floors, shake the entryway rug, etc.

When I have come back through and am ready to head out, ask a few open questions about the property such as:

Are there features you find appealing?

Can I tell you more about the parking, storage, amenities?

The home has electric heat, public water and public sewer.  The garbage is paid the owner’s

responsibility.

Perhaps I have some objections to the electric heat and I say: I don’t like electric heat; I have heard it is expensive.

How would you respond?  A reply could be “the heat is zonal electric and very consumer friendly.  You don’t have to heat the entire house like with gas or oil heat.  This can be a great cost savings, as you are in charge of how much or little you use.  Gas and oil prices have increased over the years and it is not uncommon for electric to be comparable.  Would you like me to check the total electric bill for the prior year and see if the past resident will share any usage patterns?” 

This invitation could engage me.

What if I have other complaints about amenities?  Perhaps I mention that there are not washers and dryers in the home. 

Try this response:  “we decided that because many renters have their own washers and dryers it would be better to keep the rent a bit lower and not provide them.  We could look into the cost of providing them at a higher rent, would you like us to do that and get back to you?

When the visit is almost over, is that when you begin to ask for the application?  It is probably a better idea to always assume they will be applying and phrase your comments accordingly.

“Let me give you my card.  I will be available this afternoon and all day tomorrow to collect applications.  Our screening company screens seven days a week.”

Give it about 24 hours and then do a follow up call to see where the resident stands.  Ask questions and see if there are more concerns you can help to resolve.  Don’t be afraid to ask for the application!

These simple tips are great for home buyers as well.  I would employ these strategies at one of my open houses any day.

For more tips like this, great landlord education, or to search for homes and rentals, visit my blog or monthly meetings at:  www.landlordstudyhallblog.com.  My group Landlord Study Hall meets the 2^nd Wednesday of most months at All Saints Episcopal Church at 4033 SE Woodstock Boulevard.  We have been meeting over six years and have a well informed group of rotating speakers.  If you or someone you know needs to buy or sell a home they can reach me several ways:

e: Kathryn@kjkproperties.com

Twitter: catincluded

Facebook: Kathryn@kjkproperties.com

P: 503-997-9035

Kathryn King, KJK Properties, 1603 NE 16^th Avenue, Suite A, Portland, OR 97232.

I look forward to hearing from you soon.

Should I Sell active real estate in trade for passive real estate?

Reasons for considering a trade of one or more assets for another asset of the same class:

• Selling in a depreciating area to purchase in an appreciating area. Consider selling in a glutted market in order to leverage the equity into an apartment complex at a discount in a market affected by lack of available financing to increase cash flow and hedge against further loss of value
• Estate planning. Exchanging several homes into larger apartment complexes so that the apartments later can be sold by the estate and the value split equitably amongst the heirs, or so that the asset may later be transferred into a trust for estate planning purposes.
• Increased cash flow. Single family residential can be more expensive on a price per square foot basis, exchanging for apartments or NNN commercial can reduce maintenance expenses and increase cash on cash return.
• Termination of active management duties.  Apartments and NNN commercial complexes are easily outsourced to management companies so that the owner may travel, etc.
• Moving equity into a property that can be refinanced.  Many owners of bare land have not considered the income stream that can be created by exchanging into an income producing apartment which would provide income in retirement.
• Moving equity into property or properties that are considered more liquid – an example would be exchanging two apartment buildings for single family residences in urban neighborhoods close to the city center.
• A hedge against inflation – In uncertain economic time’s one thing that is certain is that rents tend to rise.  You can safely plan for moderate to aggressive rent increases that improve your financial performance.
• Leveraging relationships – Contracting with a professional management team will give you direct access to the immediate attention of their vendor relationships saving you costly time and repair dollars during ownership.

Case study: Mr. Jackson is considering converting several single family residences into one large apartment.  He has been an active landlord for thirty years and feels safest in real estate because it is a commodity he understands.  He has had several health issues and maintaining several rentals has become a strain.  He has reasonable income from the homes but no longer wants active real estate responsibilities.  Mr. Jackson takes the homes and sells them totaling one amount of relinquished debt and one grand total of sales price.  Within the timeline of his exchange, he identifies an apartment complex in an area of town close to the tech sector with healthy wages.  His cash on cash return increases because of increased rent per square foot and a lower cost per unit acquired in the apartment.   This value is net of the cost of active management.  Mr. Jackson elected to employ a new management firm and deliver to them management standards so he could travel without worry.  The new management is active in the field and aggressively markets, providing Mr. Jackson with a lower vacancy rate than he himself could obtain.  His asset is protected by their effective maintenance relationships and practices.  Monthly reports and income checks are now the extent of his participation.

Sales – the art of responding to objections as a rental owner

Are there aspects of being a rental owner that were not explained as “part of the job” when you purchased your first rental?  Things like finance 101 and true costs associated come to mind.  Many don’t understand the 360 degree job of being a landlord.  Are you a landlord by default?  Find yourself as a rental owner because your home didn’t sell?  In this market perhaps the most important aspect of owning a rental is understanding how the interaction with a potential resident is a sales opportunity – yes, your job description now includes sales!

The vacancy rate has increased during this “perfect storm” of economic woe.  It is time to get very proactive when showing your homes for rent.  You may notice many more showings and less applications – natural consequence of the market.  This is your que to ask questions about the likes and dislikes of the visitor, phrasing them in open ended sentences such as:

If you were to rent this home are there things that you anticipate needing?  Are there features you find attractive?  How would your furniture fit inside the home?

When you get a response such as “the bathroom doesn’t have any cabinetry.” you will want to act proactively in the moment responding with something such as “we can purchase an organizer to hang above the toilet, would that take care of this for you?”

Often you may need to overcome objections to an upper level unit.  If this is preventing the rental of the unit what can you do?  Think creatively!  Hire movers to bring the large items from the prior residence and move them into the new residence as a part of your sales incentives at the property.

What if the concern is crime or safety?  This is a concern that a rental owner needs to be careful responding to.  No person can suggest a property is safe, so rather than respond to a subjective question offer sources of information.  In Portland, Oregon we can recommend a resident go to www.portlandmaps.com for crime statistics and comparison.

Knowing your property and area can be the best asset to overcoming objections you have.  Obtain information on schools, amenities nearby such as shopping and parks, and have it available for the residents. 

Being proactive, asking questions, and responding with solutions will have you leading the pack to fill your vacancies.

What about the investor that wants to sell into a passive investment?

Case study:  Mrs. Choo has 7 rental properties, 5 of them houses she bought over time and two of them duplexes that she built.  She knows she wants to retire in 15 years at age 50. 

Margaret could choose to pay additional to the principal of the loans to pay them off at a 15 year amortization during the time she is earning a steady income.  At the time of her retirement, Mrs. Choo places the properties for sale with a broker specializing in land sales contracts or mortgage and trust carried by an owner. 

Seven buyers are found with attractive terms to Margaret.  The down payments total $220,000, which she is able to invest with her financial advisor in the stock and mutual fund market, and the payments from the land sales contracts have in turn created a stream of income to her of a total amount of $10,000 per month. 

Mrs. Choo graduates her sales clauses in each contract so that she is paid off in graduated steps, according to the wishes of her tax advisor; likely in step with the reduction of her other taxable income or to offset anticipated future losses.  The money from each satisfied contract is invested with her financial advisor.  The additional money is invested to create an additional stream of interest income and increased principal investment in the account.

What makes a smart real estate investment nowadays?

It all depends on if you want cash flow, write off, appreciation.  What is your objective and what is your financial condition?  The best of all investments will give you good cash on cash return (the function of your down payment as related to the annual income after expenses), good value retention and appreciation, low maintenance, and tax benefit.  But how do you get there?

Many of us don’t have a pile of cash laying around to get us started.  I personally am not a believer in the get rich quick antics that I hear about on TV.  I believe in simple hard work and smart investing, so here is how I got to where I am.

I started by making my first home a rental after I had owned it about a year.  I moved because I didn’t like the area, but for some reason liked the concept of real estate as a wealth building vehicle.  When I turned this house in to a rental I had to buy another one to live in.  Owner occupied financing is more affordable so this was a great option.

About 1.5 years later I bought another house.  This one was an impulse purchase!  It had good potential (a fixer, indeed), and the house I was living in had grown small.  This third house was in Woodstock, a still sleepy urban neighborhood that had promise.  I fixed it up, fell in love with living in that great walkable neighborhood, and decided I had enough of moving.  I settled in and stayed over 10 years, while I did more investing.

About a year later I tried my first tax deferred exchange (a 1031 exchange), and sold that first house to get a better house in a better neighborhood.  With each of these houses I tried to get the rent to pay the payment.  Within reason, as long as I was not tapping the equity, these houses came close to paying for themselves when comparing cash flow only.  When tax write off and appreciation were taken in to effect, they were all adding up to growth in value and potential for wealth.  With all of these houses I put relatively little down, which helped with the cash on cash return.

What should you take in to consideration when deciding to invest?

1.  Amount of down payment

2.  Loan terms

3.  Area

4.  Design of home or investment

5.  Realistic rent

6.  Expected vacancy rate

7.  Minimum return on investment desired

8.  Length of time you intend to hold the home or investment

9.  Capital improvements required

10.  Reserves for replacements

This list is just a start.  There are infinite considerations when purchasing real estate.  Feel free to meet up with me at my monthly forum, Landlord Study Hall.  We have been meeting monthly for over 6.5 years and welcome your attendance.  Read more at www.landlordstudyhall.com.  This month we will delve into notices, terminations, and evictions.

More on this story next blog post!

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