As I progressed in any career as a Realtor I became very interested in Real Estate Exchanges – Exchanging one property or properties for another. If you are not familiar with this technique I will give you a brief explanation how it works. Section 1031 of the Internal Revenue code states that if you exchange a property that you hold for business or investment for another property that you intend to hold as a business or investment - then you do not have to pay taxes on your gain; your taxes are not forgiven, they are deferred. However, if in the exchange a party receives an “unlike property”, such as cash, mortgage relief, etc., then that “unlike property” is taxable. Cash received in an exchange, is like Kryptonite is to Superman.
Now, I am not a CPA or Tax Attorney so please don’t take any statements that I may make as gospel. I am not in any way, shape, or form giving tax or legal advice. What I want to do is relate to you an example of how exchanging can work as an investment tool. I am going to do this with the following story from my experiences.
At the time of this story I had a listing on a 40 acre, 200+ space Mobile Home Park in Southern Arizona for, as best I can recall, about 2 million dollars. You can tell this was a while back. The price today would probably be around 5 or 6 million. Taking my property information with me, I attended a Society of Exchange Counselors market session. These sessions happened 5 or 6 times a year and lasted usually 3 to 5 days. The average headcount at my session was probably around 50 exchangers. This group, which is still going strong, was made up of around 100 Realtors from all over the country. I was a member of this group for 15 years and during that time I met and learned from some of the brightest minds I have ever encountered in the Real Estate industry. The group has a website: http://www.societyofexchangecounselors.com/.
One humorous thing I remember about this group was a comment made by our secretary who, among many other things, was responsible to find a meeting place for the Marketing Sessions which were held at various cities around the country; from Hawaii to New York. Her comment was, “It’s difficult to find a room large enough to hold all these egos.”
Anyway, back to my story. At the same meeting was a very professional lady, Margaret, from Pasadena, California. Although these transactions actually formulated over several weeks, or maybe even a month or two, I will outline it to make it easier to follow:
1. Margaret had a doctor client in Pasadena who had invested in an Apartment Complex (I think 8 Units) some years earlier. He now had a cash offer to sell the Units at a huge profit. However, if he accepted the offer he would have to pay a large portion of his profits in Capital Gains tax. He really didn’t need or want the cash anyway. He really wanted a larger investment property. Margaret negotiated an agreement between the cash buyer and the doctor to sell the Units to the cash buyer only if she could find another investment for the doctor; wherein the doctor could receive a Tax deferred exchange under the provisions of IRS Code 1031.
2. Margaret then located a 40 Unit Apartment Complex in Riverside, California which the doctor liked and would accept with the proceeds from his 8 Units. The owner of the 40 nits would like to move is equity into a larger investment; however, he also did not want to take the cash for the same reasons as the doctor.
3. So now – along comes Jack, who has a client that doesn’t mind taking the cash at all. In fact, he preferred it, as he was trying to liquidate assets of a Family Trust to the beneficiaries of the Trust.
The end results were as follows:
1. The cash buyer got the 8 Units in Pasadena.
2. The doctor got the 40 Units in Riverside.
3. The Riverside investor got the 40 acre Mobile Home Park in Southern Arizona.
4. The Mobile Home Park owner got the cash plus a first Trust Deed carry-back on the park.
5. Margaret and Jack each received a nice commission – Well-Earned, I might add.
As a tag on the commission bit, it turned out when we were almost ready to close ALL these transactions, the Riverside investor needed $50,000 to close his end of the deal.
After a lot of haggling, I reluctantly agreed to use $50,000 of my commission in exchange for a 10% interest of the equity in the Mobile Home Park. In less than a year I sold my 10% interest for $90,000 to the investor’s brother. As you can tell, I like successful and unusual stories from professionals in Real Estate or Investors.
I would like to hear your story. Maybe we could publish it on my Blog, giving you credit as a guest writer. If interested, email me at jr1@RealEstateJack.net.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Showing posts with label Equity. Show all posts
Showing posts with label Equity. Show all posts
Wednesday, February 9, 2011
Friday, August 13, 2010
How To Find Good Mortgages To Invest In - Part II
What makes a GOOD Mortgage Investment? One that returns ALL of your principal and all of your interest as agreed. The best way to insure this happens is to make sure there is plenty of equity to protect your position.
Why do you have to have plenty of equity? Because if you continually invest in mortgages, sooner or later you are going to buy a mortgage in which the person making the payments stops paying. This can be a payer that you thoroughly checked out before you bought the mortgage and he checked out great. Excellent pay history, excellent credit, good job, etc. However, things happen. People die, get sick, lose their job, etc. If you buy many mortgages it can and probably will happen.
When you look at a mortgage to buy, you have to assume that you may end up owning the property that secures the mortgage. A question you must be able to answer BEFORE you buy the mortgage is: “If I have to foreclose on this mortgage, is there enough equity in the property that I can be reasonably sure that I can get my investment back?”
To analyze this potential investment you need to consider:
“How much is the maximum investment in this given mortgage you can make in relationship to the value of the property?
Some “general” rules used by different investors have been:
“Do not invest more than 70% to 75% of the value of the property. This is a GENERAL rule. You have to develop your own criteria based on your Real Estate marketplace.”
You have to take into consideration how much it will cost you, above your investment, to sell the foreclosed property. Such as: “What are comparable properties selling for in the area where the subject is located?”
This is one of the reasons why it is very important to have a professional appraisal done BEFORE you buy the mortgage. If you do have to take the property there may be repairs needed before you can sell the property again. When you do sell the property there may be sales cost to pay, back taxes, etc.
What I have found some mortgage investors do if they have to foreclose is to get the house ready for sale, then agree to finance it for a new buyer. This makes sense since the investor is already investing in mortgages. This allows the investor to get a TOP DOLLAR price (because many people who can’t qualify for a conventional loan are looking for a home to buy). It also allows the investor to more thoroughly check out and qualify the new buyer.
I have not intended in this article to scare anyone away from investing in mortgages; however, one needs to know some of the pitfalls and bad things that can happen. If one knows bad things can happen, they can prepare for it.
As stated in a previous article, I restate that mortgage investing can be one of the most lucrative investments one can make, and safe if the investor does proper due diligence.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Why do you have to have plenty of equity? Because if you continually invest in mortgages, sooner or later you are going to buy a mortgage in which the person making the payments stops paying. This can be a payer that you thoroughly checked out before you bought the mortgage and he checked out great. Excellent pay history, excellent credit, good job, etc. However, things happen. People die, get sick, lose their job, etc. If you buy many mortgages it can and probably will happen.
When you look at a mortgage to buy, you have to assume that you may end up owning the property that secures the mortgage. A question you must be able to answer BEFORE you buy the mortgage is: “If I have to foreclose on this mortgage, is there enough equity in the property that I can be reasonably sure that I can get my investment back?”
To analyze this potential investment you need to consider:
“How much is the maximum investment in this given mortgage you can make in relationship to the value of the property?
Some “general” rules used by different investors have been:
“Do not invest more than 70% to 75% of the value of the property. This is a GENERAL rule. You have to develop your own criteria based on your Real Estate marketplace.”
You have to take into consideration how much it will cost you, above your investment, to sell the foreclosed property. Such as: “What are comparable properties selling for in the area where the subject is located?”
This is one of the reasons why it is very important to have a professional appraisal done BEFORE you buy the mortgage. If you do have to take the property there may be repairs needed before you can sell the property again. When you do sell the property there may be sales cost to pay, back taxes, etc.
What I have found some mortgage investors do if they have to foreclose is to get the house ready for sale, then agree to finance it for a new buyer. This makes sense since the investor is already investing in mortgages. This allows the investor to get a TOP DOLLAR price (because many people who can’t qualify for a conventional loan are looking for a home to buy). It also allows the investor to more thoroughly check out and qualify the new buyer.
I have not intended in this article to scare anyone away from investing in mortgages; however, one needs to know some of the pitfalls and bad things that can happen. If one knows bad things can happen, they can prepare for it.
As stated in a previous article, I restate that mortgage investing can be one of the most lucrative investments one can make, and safe if the investor does proper due diligence.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, July 9, 2010
Investing In Real Estate Is A Two-Way Street
Every Real Estate Investor must recognize that investing is a Two-Way street. Contrary to what we used to believe, Real Estate values can go DOWN as well as up. The last 30 years have given us vivid examples of this roller-coaster ride.Nonetheless, Real Estate is and always will be the best investment vehicle; “Under All Is The Land”. However, the investor who fails to recognize that ANYinvestment can turn into a Two-Way street, can be in for major problems. Checked out General Motors or British Petroleum stock prices lately? Or maybe Real Estate prices in Las Vegas?
By the way, speaking of Las Vegas, I watched a movie last night about “Bugsey” Siegel who built the first hotel/casino in Las Vegas; The Flamingo. Bugsey was killed by his fellow Mafia (The Mob) compatriots because the cost of the hotel/casino ended up being several million more than Bugsey had told them it would be. Also, they did not think that this venture in the middle of the desert would be profitable. To date (or as of the date of the movie) Bugsey’s 6 million dollar venture has turned into 100 billion. How’s that for appreciation?
Anyway – Some ways to protect against the Two-Way street is as follows:
1. Try to invest in areas with varied businesses and economies.
2. Be aware that even though high-leveraged investments have more potential, they also have more risks.
3. Diversify your assets – so that you don’t have to start over from scratch. (I say this with considerable
experience). Try to have some properties Free & Clear, or at least with high equity percentages.
4. Use non-recourse financing whenever possible. I highly recommend getting Seller Financing whenever
you can. As icing on the cake, ask for the right to substitute collateral for the loan in the future.
5. If losses occur, don’t sweat it too much. If you did it once, you can do it again. You still have your
creative and experienced mind. I remember a statement I heard many years ago, don’t know who said it first;
“If you took all the money/assets of the people of the U.S. and split it up evenly among all of the people (with or without money/assets), those same people who have assets now and who gave theirs up, will have it back within a few years.”
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
By the way, speaking of Las Vegas, I watched a movie last night about “Bugsey” Siegel who built the first hotel/casino in Las Vegas; The Flamingo. Bugsey was killed by his fellow Mafia (The Mob) compatriots because the cost of the hotel/casino ended up being several million more than Bugsey had told them it would be. Also, they did not think that this venture in the middle of the desert would be profitable. To date (or as of the date of the movie) Bugsey’s 6 million dollar venture has turned into 100 billion. How’s that for appreciation?
Anyway – Some ways to protect against the Two-Way street is as follows:
1. Try to invest in areas with varied businesses and economies.
2. Be aware that even though high-leveraged investments have more potential, they also have more risks.
3. Diversify your assets – so that you don’t have to start over from scratch. (I say this with considerable
experience). Try to have some properties Free & Clear, or at least with high equity percentages.
4. Use non-recourse financing whenever possible. I highly recommend getting Seller Financing whenever
you can. As icing on the cake, ask for the right to substitute collateral for the loan in the future.
5. If losses occur, don’t sweat it too much. If you did it once, you can do it again. You still have your
creative and experienced mind. I remember a statement I heard many years ago, don’t know who said it first;
“If you took all the money/assets of the people of the U.S. and split it up evenly among all of the people (with or without money/assets), those same people who have assets now and who gave theirs up, will have it back within a few years.”
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Thursday, July 8, 2010
The REO Formula - Real Estate Owned
For clarification let’s describe what Real Estate Owned or “REO” is. Real Estate that is foreclosed on by an Institutional Lender (primarily banks, mortgage companies, insurance companies, etc.) and is now owned by that Lender is REO property. Most lenders have within their company an REO department usually managed by an REO officer, employee of the bank, or other lender. Lenders definitely do not want to own property they have had to foreclose on. They are under pressure from Federal and/or other banking regulators to dispose of these properties. This also lessens their ability to make new loans.
Today, the Short Sale is a very popular method of buying these foreclosed (or about to be foreclosed on) properties from the banks. There is another method or technique that has been used by Real Estate Investors for many years that has become known as the “REO Formula”.
Let’s look at an example for the use of the REO Formula.
Let’s say you are a Real Estate Agent with a very active & wealthy investor client who owns several properties and is always looking for a way to acquire more properties and/or raise cash. It seems like many investors are always in need of cash to make another “deal”.
Let’s say that your client owns several parcels of good development land. He would like to acquire more income producing properties. You find out from one of your REO officer contacts about a small apartment complex that the bank would take $250,000 for. You know that the fair market value of the units should be around $350,000.
After conferring with your client, you come up with the following proposal to the bank:
1) Your client will exchange development land valued at $250,000 to the bank for the apartments provided the bank will loan your client $175,000 (70% LTV) cash back on the apartments.
2) Your client then will buy back the land from the bank with $87,500 cash down and the bank loaning the balance of $162,500 (65% LTV).
Let’s look at the benefits to both parties:
A. YOUR CLIENT
1. Has completed a tax deferred exchange of his development land for the apartments.
2. Has $87,500 cash which is also tax deferred.
3. Has exchanged dormant land for income producing property.
B. THE BANK
1. Has exchanged an unwanted REO property (a bad loan) for two good loans from a capable borrower.
Another way this could be structured could be to have the bank make the loan on your client’s land. Then your client could buy the apartments with cash down and a loan from the bank. However, using this method would not have the same tax benefits.
Please be aware that I am not giving tax advice here. Before structuring any transaction that might have tax ramifications, you or any person should consult a CPA or tax professional.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Today, the Short Sale is a very popular method of buying these foreclosed (or about to be foreclosed on) properties from the banks. There is another method or technique that has been used by Real Estate Investors for many years that has become known as the “REO Formula”.
Let’s look at an example for the use of the REO Formula.
Let’s say you are a Real Estate Agent with a very active & wealthy investor client who owns several properties and is always looking for a way to acquire more properties and/or raise cash. It seems like many investors are always in need of cash to make another “deal”.
Let’s say that your client owns several parcels of good development land. He would like to acquire more income producing properties. You find out from one of your REO officer contacts about a small apartment complex that the bank would take $250,000 for. You know that the fair market value of the units should be around $350,000.
After conferring with your client, you come up with the following proposal to the bank:
1) Your client will exchange development land valued at $250,000 to the bank for the apartments provided the bank will loan your client $175,000 (70% LTV) cash back on the apartments.
2) Your client then will buy back the land from the bank with $87,500 cash down and the bank loaning the balance of $162,500 (65% LTV).
Let’s look at the benefits to both parties:
A. YOUR CLIENT
1. Has completed a tax deferred exchange of his development land for the apartments.
2. Has $87,500 cash which is also tax deferred.
3. Has exchanged dormant land for income producing property.
B. THE BANK
1. Has exchanged an unwanted REO property (a bad loan) for two good loans from a capable borrower.
Another way this could be structured could be to have the bank make the loan on your client’s land. Then your client could buy the apartments with cash down and a loan from the bank. However, using this method would not have the same tax benefits.
Please be aware that I am not giving tax advice here. Before structuring any transaction that might have tax ramifications, you or any person should consult a CPA or tax professional.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Subscribe to:
Posts (Atom)