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A Basic Guide To Real Estate, Mortgages & Taxes

Peter G. Miller — Wed, 11 Nov 2009 04:33:00 +0000

Let’s be honest: April 15th is a day of reckoning, the moment when we find out what we really owe for taxes. In households nationwide wallets are drained and many who were rich on the 14th are greatly impoverished by the 16th.

But for those with real estate the load is made lighter by tax rules which encourage the ownership of homes and investment property. Such rules are not only good for homeowners, they’re also good for the country: About 20 percent of all economic activity nationwide is related to real estate, so policies which encourage real estate activity help everyone.

It seems that almost every year changes to the tax code require the production of new forms and a re-education process. That said, the real estate basics remain in place and they’re good news for buyers, sellers, borrowers and owners.

Mortgage interest is generally deductible.

The IRS says there are three categories of deductible home mortgage interest:

Mortgages you took out on or before October 13, 1987 (called grandfathered debt).
Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2005 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).
Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2005 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).

Substantial profits can be sheltered when a prime residence is sold.

When a prime residence is sold, up to $500,000 in profits can be sheltered from federal taxes if married, $250,000 if single, providing the home has been used as a prime residence for two of the past five years. Generally this deduction cannot be used more than once every two years, according to the IRS.

There are also provisions which may be helpful to individuals who must sell a prime residence in less than two years. Under the 2004

safe harbor rules, individuals may be able to get some capital gains relief under certain circumstances, such as being forced to move because a job has been relocated at least 50 miles or a home that must be sold because of multiple births resulting from the same pregnancy.

Also, individuals in the Armed Forces and the Foreign Service may be entitled to special consideration under the Military Family Tax Relief Act of 2003 (MFTRA). For instance, you may have longer to take a capital gains deduction or to amend a tax return. There are other provisions under MFTRA that also may be helpful, so check with a tax professional for specifics.

Lastly, please see the information below regarding the new tax credit of up to $6,500 which is available to certain owners who obtain a contract to buy their current residence before April 30, 2010 and close before June 30, 2010.

Points may be deducible by both buyers and sellers.

Picture a situation where a home is sold for $500,000 and the owner — to help close the sale — offers to pay 1 point for the buyer. If the property was financed with a $350,000 mortgage, a point would be worth $3,500. According to the IRS, “the seller cannot deduct these fees as interest. But they are a selling expense that reduces the amount realized by the seller.”

Interestingly, in this situation the buyer can also deduct the points when the home is sold.

“The buyer,” says the IRS, “reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them.”

In effect, the seller gets to write-off the $3,500 cost by reducing any profit from the sale. The buyer essentially lowers the purchase price of the property when the home is sold at some point in the future — thus increasing the size of any profit. However, since up to $500,000 in sale profits may be untaxed, most buyers will effectively never pay a tax on the seller’s contribution for points.

If a prime residence is refinanced then the deal with points is different: The expense of a point must deducted over the life of the loan. If the home is sold before the loan term ends, then any cost not deducted for points can be used to reduce owner’s profit from the sale.

Home offices may be deductible.

If a portion of your home is used regularly and exclusively as your principal place of business or for the convenience of your employer it may be possible to write off a portion of such costs as mortgage interest, property taxes and utilities. There are a number of tests which must be met to take this deduction, see IRS Publication 587, Business Use of Your Home for details.

In some cases there may be tax advantages associated with not deducting your home office in the year or two before you move. Speak with a tax professional for specifics.

Mortgage insurance premiums may be deductible.

Mortgage insurance premiums should be deductible. The catch? Not all premiums are deductible by all borrowers. In general, the rules look like this:

The deduction applies to loans made after January 1st, 2007.
The deduction applies to both private mortgage insurance (MI) as well as mortgage insurance through the Federal Housing Administration (FHA), the Veterans Department (VA) and the Rural Housing Administration.
The deduction applies to acquisition indebtedness, meaning debt used to acquire a home.
If you refinance remaining “acquisition indebtedness” then you can write off mortgage insurance on the new debt.
You can take the deduction if you’re married, file jointly and have a gross adjusted income of $100,000 or less. If you’re single or married and filing separately the income limit is $50,000.
The deduction phases out once income limits are passed. For married couples, the deduction is reduced by 10 percent for each $1,000 in income over $100,000. This means there is no deduction for incomes above $110,000. For singles and those married and filing separately, the deduction is reduced by 10 percent for each $500 in additional income — this means there is no deduction above $55,000.
The mortgage premium write-off begins January 1, 2007 and is scheduled to end December 31st, 2010. However, the program is likely to be extended.
Speak with a tax professional for specifics.

Natural Disasters

The Katrina Emergency Tax Relief Act of 2005 provides extensive tax benefits and assistance to those who were victims of hurricanes Katrina, Rita and Wilma. For details, go to the IRS Katrina relief page or call 1-866-562-5227.

If you have been in a natural disaster — a flood, hurricane, tornado, etc., contact your local congressional office to see if special tax help is available. Links to congressional offices can be found by pressing here.

Mortgage Forgiveness Act

Traditionally if you do not pay a mortgage in full any money not paid is regarded as “imputed” income — income which is taxable. However, with the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a bill sponsored by Rep. Charles Rangel (D-NY), if you can negotiate a partial pay-off with a lender, the amount forgiven will not be taxed by the federal government.

This legislation makes sense because people who have lost their homes, been foreclosed or gone bankrupt have no money to pay. However, the maximum write-off is limited to forgiveness worth no more than $2 million (not a problem for most folks) and — more importantly — the rule applies only to a principal residence.

Some questions to ask: When does this law end? Are home equity loans covered? What about state rules?

$8,000 Tax Credit For First Time Buyers Extended Until April 30, 2010

Under the FHA reform package passed by the Congress during the summer of 2008, first-time home buyers could be entitled to a tax credit equal to 10 percent of the purchase price of the residence. This credit is limited to $7,500 for married couples and single taxpayers but can be no more than $3,750 for married individuals filing separately.

Since most homes are valued at more than $75,000 the credit will likely be used up with the purchase of a home or condo. The property must be occupied after April 9, 2008 but before July 1, 2009 to qualify. Also, a “first-time” buyer is defined as someone who has not held title to real estate for at least three years. The credit phases out for married couples earning above $150,000 a year and for singles earning more than $75,000.

The catch.

The $7,500 is a credit against taxes due to Uncle Sam. If you owe $10,000 to the IRS you can deduct up to $7,500. But, when you sell the property the $7,500 must be repaid over 15 years — that’s just $500 a year at some point in the future.

Okay, it’s really a $7,500 loan — without interest and when you really need it.

2009 First-Time Homebuyer Credit (Part 1)

In 2009 the deal changed. Under the American Recovery and Reinvestment Act of 2009 the credit amount was raised to $8,000 and NO repayment is required if a first-time homebuyer purchases a residence before December 1, 2009. There is still an income phase out and buyers must own their homes for at least three years.

2009 First-Time Homebuyer Credit (Part 2)

In November 2009 the deadline for the first-time homebuyer credit was extended under the Worker, Homeownership, and Business Assistance Act of 2009 from December 1, 2009 to include contracts made before April 30, 2010 and closed before June 30th.

Also, the income cap to get the full credit was raised from $75,000 if single or $150,000 if married to $125,000 for singles and $225,000 for joint filers. Above the $125,000/$225,000 levels the credit phases out to nothing at $145,000 for singles and $245,000 for couples.

New Credit for Existing Home Sellers

The November 2009 legislation also created a new tax credit for existing home sellers. In basic terms, if you have owned your home for five consecutive years out of the last eight you can get a tax credit for as much as $6,500. The contract to sell your replacement residence must be signed before April 30, 2010 and the deal must be closed before June 30, 2010.

For specifics regarding the November 2009 changes, speak with a tax professional and get a copy of IRS Form 5405. Also, see the IRS first-time homebuyer site for details regarding the new legislation.

Investment real estate can generate substantial write-offs.

If you own rental property you must seek a fair market rental for your property. You may generally deduct mortgage interest, property taxes, repair costs, management by an outside party, depreciation, advertising, insurance, utilities, legal services and other expenses.

It’s possible with rental properties to have both a positive cashflow and a loss for tax purposes. However, the ability to use real estate losses to reduce overall taxes may be phased out as income rises above $100,000.

If a rental involves relatives special rules and restrictions may apply. Check with a tax pro for details.

A 1031 exchange may allow investors to defer all capital gains taxes.

With a 1031 transaction, investment property is exchanged for “like” real estate. The basic requirements are that within 45 days after the “relinquished” property has been sold, a “replacement” property must be identified. The identified replacement property must then be acquired within 180 days after the sale of the relinquished property.

What’s important about a 1031 exchange is that the capital gains tax on the relinquished property is deferred — but it does not disappear. What really happens is that the basis for the new property (the “replacement property”) is reduced by the adjusted value of the “relinquished property” (the old property).

A 1031 exchange is complex and requires the services of a “qualified intermediary.” Among other tasks, a qualified intermediary holds the money from the sale of the relinquished property and applies it to the purchase of the replacement real estate. This must be done because under the rules for 1031 exchanges, the seller of a relinquished property cannot touch money from the sale — it must be held by the qualified intermediary.

Accounting for a 1031 exchange is also complex. Essentially there is a need to figure out the sale value of the relinquished property, add back depreciation and account for financing. Ed Horan, a well-known exchange authority and the author of How To Do a Like Kind Exchange of Real Estate, has posted a free 13-page exchanging guide with an accounting worksheet that’s well worth reviewing before meeting with a tax pro.

Death of a Spouse

The capital gains write-off for the sale of a home is $500,000 if married and $250,000 if single. But what happens if a spouse dies?

For years the rule has been that if the couple’s home was not sold by December 31, 2007 then the surviving spouse would be treated as a single home seller. In other words, the maximum write-off would go from $500,000 to $250,000.

There is a certain logic to this approach — and also a certain cruelty. If a spouse dies on November 30th the surviving spouse would have about four weeks to sell the home. This hardly seems right but now the rule has been changed.

Under new legislation passed by Congress, after December 31, 2007 surviving spouses will now have two years from the date of passing to sell the property and still qualify for the $500,000 write-off.

Gifts

For 2009 you can give someone as much as $13,000 per year, tax free. This is up from $12,000 in 2008. For gift information from the IRS, press here.

Sources and Publications

You can be certain that the information presented here is not a substitute for professional advice. As always with taxes, nothing is ever simple or easy. Speak with a qualified tax professional for specific advice — an enrolled agent, a CPA or an attorney who specializes in tax issues.

Also, the IRS itself has excellent information at its website, www.irs.gov, by phone at 1-800-829-1040 and with specialized publications such as those below:

A Basic Guide To Real Estate, Mortgages & Taxes is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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2009 Real Estate, Mortgages & Taxes

Peter G. Miller — Wed, 11 Mar 2009 06:18:25 +0000

Mortgage interest is generally deductible.

The IRS says there are three categories of deductible home mortgage interest:

Mortgages you took out on or before October 13, 1987 (called grandfathered debt).
Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2005 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).
Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2005 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).

Substantial profits can be sheltered when a prime residence is sold.

There are also provisions which may be helpful to individuals who must sell a prime residence in less than two years. Under the 2004
safe harbor rules, individuals may be able to get some capital gains relief under certain circumstances, such as being forced to move because a job has been relocated at least 50 miles or a home that must be sold because of multiple births resulting from the same pregnancy.

Points may be deducible by both buyers and sellers.

Interestingly, in this situation the buyer can also deduct the points when the home is sold.

“The buyer,” says the IRS, “reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them.”

Home offices may be deductible.

In some cases there may be tax advantages associated with not deducting your home office in the year or two before you move. Speak with a tax professional for specifics.

Mortgage insurance premiums may be deductible.

Mortgage insurance premiums should be deductible. The catch? Not all premiums are deductible by all borrowers. In general, the rules look like this:

The deduction applies to loans made after January 1st, 2007.
The deduction applies to both private mortgage insurance (MI) as well as mortgage insurance through the Federal Housing Administration (FHA), the Veterans Department (VA) and the Rural Housing Administration.
The deduction applies to acquisition indebtedness, meaning debt used to acquire a home.
If you refinance remaining “acquisition indebtedness” then you can write off mortgage insurance on the new debt.
You can take the deduction if you’re married, file jointly and have a gross adjusted income of $100,000 or less. If you’re single or married and filing separately the income limit is $50,000.
The deduction phases out once income limits are passed. For married couples, the deduction is reduced by 10 percent for each $1,000 in income over $100,000. This means there is no deduction for incomes above $110,000. For singles and those married and filing separately, the deduction is reduced by 10 percent for each $500 in additional income — this means there is no deduction above $55,000.
The mortgage premium write-off begins January 1, 2007 and is scheduled to end December 31st, 2010. However, the program is likely to be extended.
Speak with a tax professional for specifics.

Natural Disasters

Mortgage Forgiveness Act

Some questions to ask: When does this law end? Are home equity loans covered? What about state rules?

$8,000 Tax Credit For First Time Buyers

Under the FHA reform package passed by the Congress during the summer of 2008, first-time home buyers may be entitled to a tax credit equal to 10 percent of the purchase price of the residence. This credit is limited to $7,500 for married couples and single taxpayers but can be no more than $3,750 for married individuals filing separately.

The catch.

Okay, it’s really a $7,500 loan — without interest and when you really need it.

For specifics, speak with a tax professional before you go house hunting.

Investment real estate can generate substantial write-offs.

If a rental involves relatives special rules and restrictions may apply. Check with a tax pro for details.

A 1031 exchange may allow investors to defer all capital gains taxes.

Death of a Spouse

The capital gains write-off for the sale of a home is $500,000 if married and $250,000 if single. But what happens if a spouse dies?

Under new legislation passed by Congress, after December 31, 2007 surviving spouses will now have two years from the date of passing to sell the property and still qualify for the $500,000 write-off.

Gifts

For 2009 you can give someone as much as $13,000 per year, tax free. This is up from $12,000 in 2008. For gift information from the IRS, press here.

Sources and Publications

Also, the IRS itself has excellent information at its website, www.irs.gov, by phone at 1-800-829-1040 and with specialized publications such as those below:

2009 Real Estate, Mortgages & Taxes is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: 2008, 2009, Buyers, capital gains, credit, interest, investors, limits, points, sale, sell, Sellers, shelter, tax, taxes

Can A Landlord Enter Without Notice When Selling?

Peter G. Miller — Wed, 19 Nov 2008 15:15:15 +0000

Question: I\’m a renter who has no contract with the landlord. I pay rent month-to-month. The owners’ recently put the home up for sale, and the real state broker put a lockbox on my door. Do they have the right to come in while we are gone or do they have to wait until we are at home? Is there some notice that they will have to give?

Answer: When you rent property a landlord has a right to enter to make repairs and in certain other limited circumstances. If possible,
notice should be given but that’s not always practical or reasonable.

You are now renting on a month-to-month basis. That means the landlord — or you — can end the tenancy, usually with a month’s notice. Leases typically contain a clause which says that during the last month or two of the rental period the landlord may show the property to prospective buyers or replacement tenants. Many leases also have a clause which allows the use of a lockbox.

Specific rules vary by jurisdiction. As you do not have a written lease you may want to ask a local housing agency what’s permitted in your community.

That said, the owner would benefit from a home which is neat and well-prepared for showing, thus it would be in everyone’s interest to provide notice when possible. Given buyer schedules, however, notice may not always be practical — such as when someone is just driving by the property with a broker and suddenly has an urge to see the home.

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Syndicated originally by Content That Works and posted with permission.

Can A Landlord Enter Without Notice When Selling? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Will You Become A Foreclosure Statistic?

Peter G. Miller — Mon, 22 Sep 2008 23:24:45 +0000

You have to figure that most owners who lose their homes in a foreclosure never thought it would happen to them. It always happens to someone else — you know, the people who get sick, laid off, have an accident, that sort of thing.

So you might think: Foreclosure. That will never happen to me. No way. But lurking in millions of mailboxes each month is a financial time bomb, a threat to homeownership never before seen in this country.

For the past few years the nation has been flooded with forms of financing which allow buyers to purchase homes that were once unaffordable. The essential deal is this: You buy now, pay less than you should each month and then within five years sell at a big profit or refinance.

Truth is, it’s been a great ride. Many people have followed the formula and made a ton of money. But like musical chairs, you just know that a bunch of people will be caught in the wrong place at the wrong time.

In a growing number of metropolitan areas, the wrong time is now. Just look at what’s happened to home prices during the past few years.

Okay, so why are falling metro prices a problem? If you’re not selling and you’re not refinancing, who cares?

Falling prices are not an instant problem for those with fixed-rate loans. But for millions of borrowers with the latest forms of low-ball financing, falling prices can be financially lethal.

Imagine that you bought a property a few years ago. Since values were going up it made sense to buy the biggest home you could afford and to buy that big house you got a $400,000 interest-only loan at 5.6 percent, a mortgage amount that covered 100% of the purchase price.

For the first years the loan was wonderful: Monthly payments were $1,867 plus taxes and insurance. But after five years the loan automatically converted to a one-year ARM. The 1-year rate that was originally at 3.60 percent rose to 5.45 percent. Combine the index with a 2.0 percent “margin” and your new rate for the loan would be 7.45 percent.

After five years not only does the rate go up, the mortgage bill now includes the expense of monthly principal payments to reduce the loan balance. The monthly cost for principal and interest? It’s now $2,943. Taxes and insurance are again extra. < !- http://www.fanniemae.com/tools/libor/2006.jhtml __ http://www.fanniemae.com/tools/libor/2001.jhtml-->

“Those low-payment loans that looked so good a few years ago are going into their second phase,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com. “Each day more and more borrowers are finding that the low ‘start’ payment is gone and that steeper, fully-amortizing payments have now kicked in. At the same time, homes that were once easy to sell are now tough to market. It’s a brutal combination and what we’re seeing is likely to get worse.”

The instant solution to high monthly costs is to sell the property. During the past five years many areas have seen huge price increases. The odds are good in most markets that a seller with several years of ownership at this can readily sell, often with a significant profit.

But as the market evolves the odds may become less attractive. Not all markets have seen double-digit growth. In such areas price stagnation or actual declines can lead to huge inventory increases. To sell in down markets homes owners will be forced to offer not only price discounts but other incentives such as “seller contributions” to help buyers at closing, new carpets, new kitchens, moving allowances, etc.

But selling also may not be an option. Not only can a sale in a down market produce a bankrupting loss, but losses on the sale of a personal residence are not tax deductible.

What can you do to avoid being a foreclosure statistic, to not get caught in the impossible position of loan costs that are too high and market values that are too low?

“Act now,” says RealtyTrac’s Saccacio. “Don’t wait for the hammer to fall. If you see a mortgage problem looming in the next year or so, refinance to a long-term, fixed-rate loan before your credit report shows any late or missed payments. Take a careful look at traditional loans with liberal qualification standards such as FHA or VA financing. Speak with your lender about a loan modification and see if your adjustable-rate mortgage has a conversion feature, a right to switch to a fixed-rate within the first few years of the loan term. Because a conversion is a loan modification and not new financing, conversion can be quick and cheap.”

If you find a situation where the property cannot be reasonably refinanced, if unaffordable monthly costs are certain, then it makes sense to sell now and move to a less-expensive home with reduced debt, lower monthly costs and fixed-rate financing. Moving is a way to avoid foreclosure and dodge bankruptcy — two events no property owner should experience.

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Published originally by RealtyTrac.com during September 2006 and posted with permission.

Will You Become A Foreclosure Statistic? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Can I Sell “As Is” A House I Inherited?

Peter G. Miller — Sun, 21 Sep 2008 22:41:51 +0000

Question: I’ve been offered a reasonable price on a house I inherited. I want to sell it in “as is” condition. What things should I look out for to protect myself during escrow and after closing?

Answer: The matter of “as is” sales has evolved during the past decade or so. The best advice used to be “caveat emptor” –- buyer beware, but now it is both buyer and seller use care.

The issue here is that you can plainly sell a home on an “as is” basis. At the same, many would argue that “as is” does not mean a seller has a license to simply sell a damaged property to an unwary buyer. In general, owners must disclose what they know about a property even in an “as is” sale situation.

Given the current trend, sellers wishing to sell on an “as is” basis should take several steps.

First, require the buyer to obtain an independent home inspection with an inspector selected, hired and paid for by the purchaser. In exchange for the right of the inspector to enter the property, require the buyer to give you a copy of the completed inspection for your records. Keep this document with your closing papers.

Second, “as is” requirements vary by state. Depending on the state, either a real estate broker working with language from an attorney or an attorney directly should write a proper “as is” clause. This clause should be written to “survive” closing (have standing after the sale is completed and the matter goes to court).

Third, properly and fully complete any required seller disclosure form to the best of your ability. Review with a broker or attorney – this document should be seen as relating to the “as is” agreement.

Fourth, if you are not living in the property, see if it can be sold as “commercial” real estate. An attorney can explain if this is possible and the advantages which might be available in a given jurisdiction.

————————
Syndicated originally by Content That Works and posted with permission.

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How To Buy 200 Foreclosures A Year

Peter G. Miller — Sat, 20 Sep 2008 14:14:21 +0000

For many people it’s not the best time to be in real estate. Markets have slowed or declined in most local areas and financing is tougher to get than a year ago. Chicago’s Joseph Varan is also cutting back — this year he expects to buy no more than 200 homes.

Varan is the president of GoIn Realty, a brokerage based in Woodridge, IL, just outside Chicago which deals in bulk sales and foreclosed properties.

Varan is a bulk real estate purchaser and what’s known as a “third party buyer.” As a wholesale real estate purchaser he buys homes by the bunch from lenders who want to get rid of REOs — real estate owned by lenders, insurers and investors which did not sell at foreclosure auctions. Varan is also believed to be the largest “third party buyer” in Chicago, meaning that Varan bids at foreclosure auctions, looking for discounts and bargains.

Varan started in real estate as an agent in 1982 and within a year made his first REO purchase — a HUD foreclosure property. By 1986 he had his first successful auction bid.

Varan explains that before 2002 he rarely was in the market to buy, however since then he has purchased more than 1,500 properties, typically 250 to 300 units per year.

Varan is the king of foreclosures in the Chicago area, and at first it might seem as though he fits the mold of no-money-down buyers hawked in get-rich-quick seminars. But Varan has been in the real estate business for a quarter of a century, has more than 50 employees, evaluates thousands of properties every month and requires substantial amounts of investor capital to underwrite his purchases. Why does Varan need large amounts of financing? One reason is to buy properties for cash, but Varan also has other costs such as property protection, insurance, property taxes and losses — that’s right, not every property is a winner and most produce only marginal profits. If you’re a real estate investor with insufficient capital then a single weak purchase can doom your entire enterprise.

This year Varan expects to make fewer bids.

“Although I’m always buying, this year I am holding back on purchasing marginal deals to see what happens to the market,” says Varan. “We are still buying, but on track for about 175-200 units for the year. I always need to adjust my pricing based on what the market is doing. I purchase on a scavenger basis and 90 percent of my inventory is sold to investors on an as-is basis who then repair the property and market it on a retail basis.”

As RealtyTrac.com has reported, foreclosures for the second quarter of 2008 were up 121 percent over the same period a year ago . These numbers are central to understanding turmoil in the mortgage marketplace — and change in the new world of loan servicing.

Varan was one of more than 2,000 attendees at the 2007 Five Star Default Servicing Conference, an event attracting a growing number of people and with good reason: Loan servicers have a key role to play in the foreclosure marketplace.

Loan servicers typically collect mortgage payments and pay out property tax and insurance payments. In effect, they manage the practical side of mortgage debt for investors who own such paper.

However, loan servicing becomes enormously important when borrowers have financial problems. Should the servicer work out a loan modification with the borrower or foreclose? If the property is foreclosed and does not sell at auction, then what? Should the servicer sell the property “as is” or fix-it-up to get a better price? Meantime, who protects the property, takes care of utilities, orders title work, etc?

The Five Star conference attracts loan servicers as well as an array of people who work various part of the business — big property owners, specializing brokers, lenders, lawyers, title experts, foreclosure services and wholesale buyers such as Varan. Given the growth of the foreclosure marketplace during the past few years, the Five Star is the epicenter of the loan servicing world.

Sale prices in the Chicago area as of the second quarter were actually up, says the National Association of Realtors. Its figures show that the typical home in Chicago/Naperville/Joliet was priced at $283,200, 1.7 percent above a year earlier.

More recently, however, real estate activity in the Chicago area has begun to turn.

“The market has dramatically slowed down,” says Varan. “In fact, the total number of sales for the last six months is down about 20 percent. The numbers for the most recent month have been dropping down to as low as 23 percent. Additionally, the inventory supply is now at 10 months.”

People usually lose their homes because of illness, accidents, divorce or the death of a spouse. But for Varan, there are now new factors in the marketplace: Fraud and get-rich-quick investors. “Most homes that I purchase are already vacant, and I often do not know the reason for foreclosure,” he says. “It appears, however, that many of these properties were involved in some type of fraud. The reason for this conclusion is that the previous sales prices of the properties are substantially above the area’s market price. Furthermore, the loan(s) have usually been taken out in the last year or so. The other type of property that I frequently buy at foreclosure is one that has tenants; namely, homes that were bought for investment purposes and end up having negative cash flow. While some foreclosures are caused by illness, accidents or death, in my experience, those loans do not have a great impact on the foreclosure rate of the homes that I purchase.”

Varan’s marketplace strategy is dictated by investor requirements, investors who allow him to purchase properties for cash. Most want to re-sell a property within six months.

As to Varan’s buyers, they could be people who just want a residence, but typically they’re investors who buy homes in “as is” condition, fix ‘em up and then rent or re-sell them. A look at properties for sale by Varan as of this writing shows prices that range from those requiring an initial bid of $10,000 to a commercial property priced at $3.5 million.

Looking toward the future, Varan says “buyers will continue to exercise the ‘wait and see’ approach. Consequently, values and sales will continue to decline. It will take some time for the economy to absorb the consequences of the mortgage industry overly extending itself. With the Fed’s assistance, however, including lowering rates, the mortgage market will have more liquidity, and therefore, money available to loan out.”

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Published originally by Realty Times on September 18, 2007 and posted with permission.

How To Buy 200 Foreclosures A Year is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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10 Questions To Ask Before Buying a B&B

Peter G. Miller — Tue, 16 Sep 2008 17:56:14 +0000

Pick up just about any newspaper or magazine and you can find ads for idyllic stays in the country, bed-and-breakfasts (B&Bs) not far from metro cores where owners live in beautiful surroundings, get paid for sharing and never worry about commuting.

Not a bad way to live, and in some cases entirely delightful. But is a B&B a good business or retirement option?

At first buying a B&B might seem like a real estate transaction, but it’s more. You’re not only buying ground and “improvements” (that quaint house), you’re also buying a business which needs customers. To get customers you must market. To keep customers you must maintain facilities and provide something better than can be found at home. You’ll likely need to hire a few folks, say groundskeepers, housekeepers and cooks. And since your “in” the inn business, you’ll need to worry about changing sheets, canceled reservations and all the other joys of hotel ownership.

Imagine that you have a household income of $120,000, $20,000 stashed away in cash, and $50,000 in real estate equity once your current residence is sold. Can you buy a B&B? Here are 10 basic issues to consider:

1. Is it a B&B?

Some properties work as a bed and breakfast and some don’t. You need bedrooms and bathing facilities, a place — at least — for breakfast. But you also need more — privacy, quiet, good furnishings, etc. Does the property have such facilities or can they be built? How much cash is required to bring the physical plant up to your standards?

2. Is it a business?

There’s a difference between a hobby and a business. For one thing, a business means there are deductible expenses. It also means that profits and their pursuit are a measure of whether or not an activity is a “business” by the standards of the IRS. For background information, take a look at Publication 535 and speak with a tax professional.

If you were buying a local bakery or hardware store the first thing you would want to see are tax returns for the past two or three years — same with a B&B. If it’s a business, if it has cashflow, the tax forms will show it.

But what if some income is off-the-books? In such situations you have to wonder what, if anything, can be believed. There is no practical way to trace unreported income, no assurance that it exists, no way to use it to secure financing and no guarantee that it will continue.

3. How will you market?

If you buy an existing business one of the most important assets to acquire is the list of past visitors. This list can be the basis of an extensive marketing campaign (meet the new owners, 20 percent off on the second night, etc.). Alternatively, you need dollars for websites, ads and brochures.

4. Should you acquire or create?

There are arguments on both sides of this question. If you purchase an established B&B you are paying for a going business with all the assets and advantages of an enterprise which has been in place for some time — past clients, experience, supplier lists, etc.

If you start from scratch you may have a lower initial cash cost — but mistakes and a lack of experience can be expensive.

5. What about cashflow?

Go back to our wage earners and look at their $120,000 a year — can any of that income be continued from a B&B? With cell phones and home offices that’s not an unreasonable idea in many cases. But what if some or all of today’s income is lost by moving — can the B&B support the business and the new owners? How long will it take before the dollars roll in?

6. How will the transaction be financed?

You may need one or more loans to acquire a B&B. As a place to start, consider the SBA 504 program.

7. What are the terms?

If you need financing be sure to ask tough questions. How long is the loan? Shorter terms, say 10 or 20 years, mean higher monthly payments than with a 30-year mortgage. What is the interest rate? Can it change? How much down? Also, beware of fees. You could be looking at 3 percent or more.

Create a spreadsheet and compare financing costs with existing or projected revenue. Be conservative. You will have vacancies. Towels will be swiped. Furniture will be broken. Checks will bounce.

8. What are the rules?

We live in a regulated society — sometimes with good reason. For a B&B, you have to ask what zoning, fire, health, building, and lodging rules apply. What about licenses? For a good discussion, see Home-Based Business and Government Regulation by Henry B. R. Beale.

9. Can you practice?

If possible, pick a B&B you like and ask the owners if you can “shadow” them for a few days — see the hours they put, the practical problems they have, etc. If you’re negotiating for a specific property, make the transaction contingent on a study period of given length, on-the-job training to better understand daily needs.

10. Who can help?

You need an experienced real estate broker — and an accountant, structural inspector, lawyer, etc. — to help with the transaction, whether you’re buying an existing facility or hope to convert a property for use as a B&B.

Can it be done? There are thousands of B&Bs throughout the country, so the answer is “yes.” But like any business, a B&B is work. If it’s the kind of work you would find interesting, then now’s the time to start looking at properties.

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Published originally by Realty Times in April 2004 and posted with permission.

10 Questions To Ask Before Buying a B&B is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: B&B, buy, IRS, mortgage, price, real estate, sell

How To Get The Best Home Price In A Slowing Market

Peter G. Miller — Mon, 08 Sep 2008 01:32:35 +0000

Reports across the country suggest that real estate in most areas of the country is in decline. None of this is terrible or awful unless you bought last year and must now sell. Those who have owned for a few years are well ahead in most communities.

Consider that in 2000, according to the National Association of Realtors, the typical existing home sold for $111,800 versus $212,400 in July 2008.

So, what’s the best approach to selling in today’s market? Consider these five core points.

1. Buyers are scarce relative to home supply.

While sellers have called the shots for the past few years, that’s no longer the case in most markets. No problem — adjust. Make your home the most attractive, best priced property in the neighborhood.

While pre-market prep could have been ignored in the recent past, today you have to paint, clean-up and repair before offering a home for sale. An MLS photo that shows a home with a lousy roof is evidence of a property that likely will not sell quickly or at full price.

2. Remember cash is still an issue.

While home prices may have slipped a touch, real estate continues to be hugely expensive for most buyers, especially first-timers who lack equity from a prior sale. Rather than reducing prices, offer to pay for buyer closing costs, thus lowering out-of-pocket purchaser cash requirements.

3. Choose the right broker.

When comparing local brokers, look for such markers as recent success in your neighborhood, a high level of local activity and professional education.

In a slow market picking the right listing broker becomes especially important. Why? Because a broker with a strong local history is known and respected: If he or she offers a property at a given price that value is likely to be accepted as at least within the realm of reason.

As an example, last year we sold a property that was unlike virtually all nearby properties in terms of size (smaller house), lot (much bigger) and age (older than most). In other words, not an easy house to sell because there were no practical comparables. The broker — who had sold properties worth some $200 million in neighborhood real estate over the years — suggested a sale price which turned out to be exactly on target.

Alternatively, let’s say we used a less experienced broker, someone who was not an authority figure. The property might have sold for less because another broker might have been less credible. In effect, one of the values of using an experienced listing broker is to readily establish believable prices and terms, an important matter in a buyer’s market.

4. Numbers Count.

Real estate sales are a by-product of exposure. If the odds of selling a home are 100 to one, if it takes 100 inquiries and visits to sell a property, then the quicker you get those inquires the better. No less important, if you can get more than 100 inquiries the odds of getting a top price and terms improve.

This means that when considering a listing broker you need to review the marketing plan with care. What, exactly is the broker going to do in terms of advertising, open houses, MLS placements, online marketing, broker relations, etc?

Remember that the marketing plan which works for one property may not work for another. Plans need to be specific to local markets, to particular homes and for current market conditions. The thinking that seemed so good last year may be inappropriate this year.

5. It’s a business deal.

With some frequency I see homes priced for reasons that won’t work:

The property must sell for this price because I need $400,000 for the next home. The truth: Prices are established by the marketplace, not seller needs.
Similar homes in a different neighborhood command a particular price, therefore my house should sell at the same price. The truth: What happens elsewhere is irrelevant. What happens in the immediate neighborhood is what counts.
The Flombacks got $800,00 for their home so I should be getting at least that much. The truth: This is not about the Flombacks and should not be about seller ego. The real issue is about bricks and mortar. The Flombacks may have an objectively better house.
The buyer’s offer requires that we leave the washer and dryer — it’s an insult. The truth: Homes reflect our psychological identity, who we are, our social status, etc. But the marketplace reflects supply and demand. Leaving a washer and dryer may be a lot cheaper than not getting a sale for months on end.
This home would have sold for $500,000 last August and we will not accept a lower price. The truth: It’s not last August. It’s now and the marketplace reflects current supply and demand.

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Published originally by Realty Times on October 10, 2006 and posted with permission.

How To Get The Best Home Price In A Slowing Market is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: buy, home, market, mortgage, real estate, sell

Can we sell our late mother-in-law’s house?

Peter G. Miller — Wed, 03 Sep 2008 23:22:46 +0000

Question: We’re having several brokers make presentations to sell my late mother-in-law’s home. How should we compare them? Is there a form we could use?

Answer: Is this your property or is title still held by the estate? In the latter case, see what rights you have to sell and whether court approval is required before you can list or accept a purchase offer.

As to finding a broker, start with the thought that all real estate is local. Thus you want someone who successfully markets homes in the community where the property is located. Ask candidates such questions as: How many properties have you sold in the past year? On average, how long was each property on the market? What trends do you see in the local market? What was the difference between the original listing price and the final sale price? In this community, what concessions – if any – are sellers making? What repairs are needed to maximize the value of this property? How would you market the home if we list with you? Can you give us three recent references?

Can we sell our late mother-in-law’s house? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: court, death, estate, sale, sell

Can Unmarried People Buy Real Estate Together?

Peter G. Miller — Sun, 31 Aug 2008 10:23:47 +0000

Sure.

Our society, and laws, provide certain benefits for wedded couples. Thus, if two people who are not married wish to buy real estate together, that’s fine. But a few caveats are in order.

First, there should be a written agreement among the parties showing who owns what, the rights and obligations of each party, what happens if someone wants to sell (and someone else doesn’t), how profits and losses are to be handled, survivorship, how disputes are to be resolved, etc.

Second, all parties to the purchase should have wills and living wills. These are important documents that can protect the assets of each buyer in case of death or incapacity.

Please see an attorney for details, including the best way in which to hold title.

Can Unmarried People Buy Real Estate Together? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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