We have been working for a few weeks now trying to determine what type of property to purchase…single family, duplex, home with a guest house…for an investment property.   Trying to sort out what is most advantageous for a new investor is not always easy since there are so many things to consider. 

   What area?

   What type of property?  A property= high end;  B property=middle of the road; or C property= lower end.

    What price range?

    Who is the audience to whom the rental is targeted?

    Laying the appropriate groundwork is paramount to success; understanding the accounting when one owns rental property; understanding the advantages of a 1031 tax deferred exchange;  deciding whether to form an LLC,  all are important considerations.   This means talking with professionals; the accountant, the facilitator for information, and possibly an attorney.  Formulating some type of long term plan with short term goals so we are all on the same page regarding the map to success comes next.

   But in the meantime, we have been looking at various types of property to familiarize my client with the maket.  There seemed to be plenty of potential candidates for purchase on the market a month or so ago, but suddenly, she said, everything she liked has a contract on it.

   The real estate market is definitely stirring.  Properties priced correctly and which show well are not languishing on the market as they were a few months ago.   Second homes and retirement homes are showing signs of life.  Adding steam to the market is Tucson’s AARP designation as the number one place to live which is both an affordable and desirable retirement area.

    Real estate prices are still low, interest rates remain below 6%, and although requirements for loans have tightened somewhat, money is available.  People are putting their homes on the market, there still is an abundance of short sales and foreclosure properties, and savy investors are purchasing properties on the steps of the courthouse.

   A good cross section of housing is available and Tucson remains a buyer’s market.   It is time to scoop up there bargains because this market will not last.   It always boils down to supply and demand.  

   If you are thinking Tucson, now is the time to act.  Use a local lender who knows and understands our market here, and a good Realtor who listens to your needs and wants.  Take a look at my web site to garner information which will help you as well as provide the opportunity to input your own criteria and see what is out there, and if you don’t have a Realtor now, contact me.  I am always willing to help! 

   Take the comments of my client seriously…”all the good properties suddenly have contracts on them!”

Lenders:

Lance Dickson –  Nova Home Loans –  http://www.lancedickson.com

Tom Heath – The Heath Team   – http://www.theheathteam.com

Jerry Sundt – VIP Mortgage http://www.sundtmortgage.com

Realtor:    Terry Bishop  http://www.terrybishop.com

The path taken by people trying to get out from under negative equity or mounting bills is littered once again with potential legal problems for Realtors, buyers, and sellers.  The passage of the Arizona Senate Bill 1271 emphasizes the need for people to seek legal counsel when contemplating a foreclosure or short sale.

The Arizona Association of Realtors  (AAR) requested that Governor Jan Brewer amend the call for a Special Session of the Legislature to review the issues resulting from the passage of Senate Bill 1271, otherwise known as the Anti Deficiency legislation.

This bill states that within 90 days of the sale of property under a trust deed, “an action may be maintained to recover a deficiency judgment against any person directly, indirectly, or contingently liable on the contract for which the trust deed was given as security…”

This does not apply to any property 2 ½ acres or less used as a one family or single two family dwelling by the trustor  for at least six months and for which has a certificate of occupancy was issued

The legislation continues that the deficiency judgment will be for an amount equal to the amount owned to the beneficiary as of the date of the sale, as determined by a court.  This can be for the difference in the fair market value, less the amount of liens owed, and includes any interest which may be incurred. 

The party seeking remediation must act within the 90 day period, and if no action is pursued, the proceeds of the sale are considered full payment of debt.

In the letter to Governor Brewer, Tom Farley, CEO and Cheif Lobbyist for the AAR,  points out this bill applies people with second homes, rental property, and family owned property.  Developers, Farley said, are not protected . The statute points to the “subtle difference” in the property “being utilized as a one or two family dwelling”  which is how the existing statute reads, rather than the amended version which specifies “the focus is on the trustor themselves utililizing the property instead of the property being utilized”.

Farley’s letter came as a result of researching case law and the consequences of this bill.  He substantiates the letter with case law from various jurisdictions.  Lenders receiving Troubled Asset Relief Funds (TARP) are authorized to seek deficiency judgments against property owners after foreclosure.  Deficiency judgments allow for the judgment creditor to garnish the wages of the judgment debtor, employ collection agencies, garnish non earnings such as bank deposits, take non-exempt property and sell it at a public auction to satisfy the debt, and place a judgment lien on real property owned or later acquired by the judgment debtor.

The legislation came as a result of lobbying from the Arizona Bankers Association.  Arizona is one of the highest foreclosure/short sale states and Arizona bankers would like to recover some portion of the millions of dollars lost.  The bill, as of this writing, is scheduled to go into effect September 30, 2009.  Unless rewritten in the special session, the courts may be filled with lenders seeking deficiency judgments against former homeowners, which will create another series of problems including a rush to file for Bankruptcy on the part of judgment debtor.

Resources:

Text of SB 1271:

http://www.azleg.gov/legtext/49leg/1r/bills/sb1271s.pdf

Arizona Association Realtors:

http://aarnews.com/

http://aarnews.com/?s=SB+1271&x=26&y=9 

Other Blogs about SB 1271:

http://en.wordpress.com/tag/sb-1271/

   Any number of life events can cause a homeowner to become delinquent on his or her mortgage payment:  loss of job, divorce,  death, incarceration, medical bills, caring for children’s children, caring for parents, adjustments in mortgage terms, accident.  These are life’s events.  Mortgage delinquency is not planned.

   The State of Arizona, through Attorney General, Terry Goddard, and the Arizona Foreclosure Task Force, has issued a booklet about foreclosure which can be download from your computer.  The workbook, which provides timely and accurate information, is at:

                http://www.arizonaforeclosuretaskforce.com

Although this information was written for the citizens of the Grand Canyon State, the worksheets and general information pertain to anyone.  The specifics of foreclosure in Arizona may differ in your state; check with your local HUD office or your own Attorney General’s office, or seek the counsel of a qualified attorney and Realtor who understand the foreclosure process. 

The booklet warns against “scams” where people promise to keep you in your home or suggest you can get a better interest rate.  The old adage applies:  “If it’s too good to be true, it probably is”.

Although it is often frustrating, people who believe they may be in financial trouble, should contact their lender immediately and determine if any “work-out” can be done.  Keeping a journal of information detailing the time and date, plus the general conversation and to whom you spoke is important.  Chances are you will not speak to the same person when you make calls and having this ready reference will be be invaluable. 

You should be prepared to detail the “hardship” you face and a “hardship letter” will be required if you eventually go to a “short sale”. The worksheets in the booklet help the consumer detail how and when the hardship took place. 

For the state of Arizona, a list of housing counselors is provided.  If you are located outside of Arizona, call your local HUD office (Department of Housing and Urban Development listed under the Federal Government).  Housing counselors are trained to work with the lenders and may have more success than you as an individual homeowner may have.  They will need your information from the worksheets.

Budget forms are provided since the lender will want to know about your personal assets and liabilities.  Easy to use forms help determine what type of loan (s) you may have on your property.  Once you complete this information, you should have a good understanding of your financial situation and whether a short sale or foreclosure is the only option, or whether you can keep your home. 

Options are detailed if you elect not to keep your home which also includes bankruptcy and the types of bankruptcy.   Finally  there is a segment on scams and how to recognize a scam.

Remember, this is public information and as soon as Notice of Sale if filed with the Recorder’s Office, people will come out of the woodwork offering to “help” you.   If you know of someone who may be facing financial difficulties, share this information with him or her. 

Be proactive and knowledgeable, for in knowledge there is power.

Resources:

http://www.arizonaforeclosuretaskforce.com/wp-content/uploads/2009/05/2009-arizona-consumer-foreclosure-info-wrkbk.pdf

www.hud.gov

    Our real estate market here in Tucson is beginning to show signs of life, although it is predicted there is a great deal of “shadow inventory”.   This is inventory held by the banks from foreclosures, and has not yet been put on the market.  Short sales and foreclosures continue to be prevalent.  People who do not have to sell their homes are staying put for another year or so.

   Tucson is considered a distressed area and appraisals are often coming in low.  Money is available for people with good credit scores – both FHA financing with 3.5% down, and conventional loans.  For veterans, VA loans are available and anyone PCSing to Davis Monthan Air Force Base for a tour should definitely consider a VA loan to purchase a home. 

    The areas which seem to be hit the most are the master planned communities. These are the areas which grew rapidly and the areas where new home subdividers/builders had relationships with lenders such as Countrywide and offered zero down loans, option arms, 80/20 loans with the 20% being adjustable. These are the areas where “creative financing” reigned supreme.

    People flocked when builders held lotteries for lots, potential homeowners camped out to get a lot.   It was a feeding frenzy.   The media lapped it up.  These too were the areas where prices jumped thousands of dollars in a week during the heyday of the boom.   Prices changed from morning to evening.  I had a client with a price point of $140,000 and we went to a new home subdivision, and when we walked out, I said “let’s look at a resale”.  And now these are the areas where homeowners are experiencing negative equity, where foreclosures are rampant, and where people are walking away.   My client is just about even in his resale home.

    Homeowners are not the only ones hurt in this market.   Subdividers and home builders are also feeling the pain.  People considering a new home should check with the Arizona Department of Real Estate to make sure the builder is not in financial distress.

    If possible, any earnest money deposit should be put in a neutral escrow.  If the house for some reason is not finished or does not close escrow, the home buyer can petition the escrow company through his or her real estate agent, to have the earnest money returned.  Generally the earnest money in a new home subdivision, goes to the builder and is used as working capital.  If the builder goes under, the buyer loses the earnest money.  It is prudent to remember that with new home construction, real estate agents have difficulty altering the builder contracts which are written by a bevy of contract attorneys.  Err on the side of caution…and if the builder balks, walk away!  Don’t forget, builders are hungry these days and if they feel the financial position is sound, a neutral escrow should be fine.

   These are not times to try and save on a real estate commission, especially if you do not know how to navigate the desert.  Sign a buyer’s broker agreement and agree to pay your agent whatever percentage if it is not being paid by the seller.   Find yourself a good real estate agent who knows what is transpiring and who is not afraid to holler in your behalf.  You need representation, especially in this market.  Remember a California dollar and a New York dollar are not the same as a Tucson dollar.  They may be worth the same amount, but they don’t buy the same goods and services!

Call me at 520-884-7201, leave a message if there is no answer.  If you need a good agent in any other part of the country, I can help you with that too.  You can also e mail me at terry@terrybishop.com

    There are all kinds of bargains out there…I sold a two bedroom, two bath townhouse for $37,000!  This is rare, but possible.  I sold a townhouse in the Catalina Foothills for $275,000 which would have sold for $450,000 a few years ago…but patience was the price…it took nearly five months to close escrow.  This is a buyer’s market, but only if you know the pitfalls, the time frames, and the costs.  Rely upon your Realtor.

 Resources:

Arizona Department of Real Estate:

 http://www.re.state.az.us/INFO_FOR/CONSUMERS.html

 http://159.87.254.2/publicdatabase/SearchDevelopments.aspx

Tomorrow:  Numbers

  Rather than trying to give each month since January 2009 a blog page, I am going to attempt to try and combine all six months so that you, the reader, can discern some type of trend.  This may take a few blogging days.

  Another aspect to consider when investing in property is whether you, the investor, are skilled and can do repair work in a home.   Today there are thousands of REO properties for sale, real estate owned properties – another term for bank owned properties.  Many of these properties need work. 

    I have often thought a consortium of tradespeople would be an ideal investment group;  a person who knows drywall, a plumber, an electrician, a tile person, and maybe a roofer.   Between these people and someone to put up the initial amount of money, the group  purchases property, fixes it up, and then puts it on the resale market.  (This would have to be an LLC, limited liabiity corporation, with exit strategies defined for group members and legally enforceable.  Consultation with an attorney is advisable.)

    The key is to purchase the property at the correct price, and with today’s pricing, making offers would be the name of the game.  Doing the repairs in a timely manner is critical. The sooner repairs are done, the sooner the property can be put back on the market.  If you buy correctly, the property can be priced in the mid range for the area so the property does not languish on the market.  The sooner the profit can be made the quicker the group can move to the next property.

    A 1031 Tax Deferred Exchange may not work in this instance because the property has not been held for any appreciable period of time.  Short term capital gains tax would have to be calculated prior to determining profit.  Again, here is where a good accountant who also understands the workings of 1031 tax deferred exchanges is necessary.

   Think about a team and who you need on your team to make investing in property profitable and fun! Check professional people with good credentials, too many properties have been fixed up by rank amateurs.  Your goal is to have your property stand out and sell immediately!

    As a potential investor, you have thought about the type of property you want to purchase, “A”, “B” or “C” property.   You know the area in which you would like to concentrate your investment(s).  Find a good Realtor who is familiar with 1031 tax deferred exchanges, who can suggest a good lender to provide financing for investment properties.  Your aim is to create a relationship which will last for years.  

    Ask your Realtor to sit down with you in a meeting with a 1031 Tax Deferred Exchange Facilitator.  There are companies which specialize in faciliating 1031’s, and often Title Companies have departments that are knowledgable about 1031’s.

    Talk with your accountant about 1031 Tax Deferred Exchanges.   The impetus for these exchanges comes from Section 1031 of the Tax Code.  A reliable team is extremely important because any mis-step in timing can trigger big tax liabilities.

    How does a 1031 work?

    Let’s say you purchase a multi family unit for $200,000.  You put the requisite 20-25% down.   That is $40,000 to $50,000.  In a nutshell, you hold that property for five years, and each year it appreciates 5%. In five years, the property is now worth $256,671.  You have a gain of more than $11,000 a year.   Additionally, you have had the rent on the units as well as the tax deduction of interest and depreciation, plus the costs to maintain the property. 

     With a tax deferred exchange, you must  take your proceeds and reinvest them in another property within the required period of time.  You now  have the initial $40,000 or $50,000 plus the gain of $56,671.  Adding the initial down payment to the capital gain, you would have between $96,671 and $106,671 to reinvest depending upon your initial investment.

    Using a 20% formula for down payment on the next property, you can now purchase a property between $386,684 and $483,355, or $426,684 to $533,355 for the 25% figure. 

    If you were not to defer the taxes, you would pay long term capital gains tax on the proceeds of $56,671.  That is now 20%.  Uncle Sam would take $11,334 right off the top.  That $11,000 plus can purchase $44,000 to $55,000 more property!   Ideally you want to defer taxes until you are dead and allow your heirs pay the tax,  or at least defer the taxes until you are not working.

   Create a long term plan.  Within a hypothetical 20 years, you would do this four times.   Each time, you will have more cash to purchase a property.  At the end of 20 years, you will have property valued at million dollar levels. 

   Adhering to the timing is imperative.  Putting  a competent and professional team together and having all work synchronistically is paramount.  Deferring the taxes on the sale of these properties is what maximizes the leverage so you can purchase more property.  You must eventually pay the taxes, and if you want to pull some cash out, you can also do that, but be aware, taxes will be due!

Resources:  Internal Revenue Service

    http://www.irs.gov/newsroom/article/0,,id=179801,00.html

National Association Realtors:

     http://www.realtor.org/library/library/fg408

 1031 Faciliatator:

       Brigitte Echave
Leverage Exchange Group LLC
7840 E Broadway Blvd Ste 209
Tucson AZ 85710
 866-988-1031 
 520-722-2578 
520-465-8690 520-979-8256

 brigitte@leverageExchange.com

http://www.LeverageExchange.com

 ” What’s old is new and what’s new is old.”  That adage stands today.   As we all know, no more NINJA loans, no income, no jobs, no assets.  And sometimes the old fashioned way is the best. 

      Putting 3.5% down on an FHA loan after January 1 is prudent.  And conventional loans with 5% or more down, is also prudent.  Where else could you purchase something costing $350,000 with no money down?  It makes no sense.

     But in 1999 Congress repealed Glass Steagall through the passage of the Gramm-Leach-Bliley Act.  This permitted commercial banks and investment banks to compete. 

   Congress deserves to take it’s lumps.  The repeal of the Glass Steagall Act at the end of the Clinton administration combined with the loosening of terms and government encouragement to banks to make  unworthy loans through the Community Revnvestment Act, lead us to this debacle. 

    Money was loose and abundant.  And builders took advantage of this free for all, as did lenders, Realtors, investors in housing stocks, investors in property… anyone who thought they might make a buck. If you could fog a mirror, you could buy a house!

    But now, returning to saner times, people are lamenting the lack of easy money.  But in the 1990’s, people needed a down payment, and they needed closing costs to purchase a house.  In some areas of the country, there are 40 and 50 year mortgages…years ago, a 20 year mortgage was considered long. 

    If people have a vested interest in their home, chances are they will work hard to keep it and they will make their purchasing priorities accordingly.  But if I have no vested interest in my home, why should I deprive myself of something I want in order to make a mortgage payment? 

    That simplifies the problem, I know.  We have 80-20 loans out there with adjustable rates…there are rates resetting at much higher rates…and I know the forclosure rates are at their peaks.  There is plenty of blame everyplace…some of which should be laid at the doorstep of Congress. 

     Let’s hope this financial mess ushers in a period of stability where people begin to count their pennies again before making huge purchases.  And maybe some reflection for all those people who tried to make a fast buck…and some consideration of business ethics and the fact we are dealing with people’s lives and the lives of their families…and maybe…just maybe…some reflection about self responsiblity. 

    It’s a blame game alright, but ultimately, the person responsible is oneself.  

    Resources:

http://my.opera.com/richardinbellingham/blog/show.dml/1796860

http://thestrangedeathofliberalamerica.com/bill-clinton-glass-steagall-and-the-current-financial-and-mortgage-crisis-part-two-of-an-indepth-investigative-report.html

http://www.dealwatchblog.com/post/2008/09/17/Lawyers-say-repeal-of-Glass-Steagall-isnt-to-blame-for-Wall-Street-woes.aspx

http://en.wikipedia.org/wiki/Glass-Steagall_Act

http://mises.org/story/2963

http://www.federalreserve.gov/dcca/cra/

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

http://www.ffiec.gov/cra/

http://mises.org/story/2963

      We all are familiar with the person who needs to buy “whatever” at a discounted price, but doesn’t act. When when the price goes up, he/she begins the “I coulda….I woulda…I shoulda…” refrain.   Things are miserable because he/she missed the “golden opportunity” to buy at rock bottom prices.

   But how many of us are intelligent enough or savy enough to get what we want at rock bottom prices? Too many factors impact pricing and especially the price of real estate.  You may follow interest rates, but do you follow the bond market, and the stock market?  And what impact does the bond market and the stock market have on the price of real estate?

     In my experience, I have had potential investors tell me they wanted to buy “a good property”…and I ask, “what is a good property?”…The standard answer is …”I need a property with a positive cash flow”…and then I ask, “is that on paper or is it actual?”  

      There is a big difference here.   The potential buyer wants the money in hand, month after month.  The greater gain may be on paper through capital appreciation by inflation, plus the tax advantages.

    I ask the buyer if he/she has an investment philosophy….and I have rarely received a satisfactory answer. I begin to explain philosophies of investmen;  A properties, B properties, C properties; university properties, active adult communties, snowbird rental properties; Section 8 properties…areas of town, concentrating properties all in one area, or throughout town …and the big question, who will manage the properties…?

     What is the point of all of this?  For the investor willing to dig a little deeper, willing to do some elbow grease, willing to have a bit of patience on short sales, or purchase bank owned properties, this is the Tucson time now which will be “woulda, coulda, shoulda” in another few years.

    With a well thought out investment philosophy utilizing 1031 Tax Deferred Exchanges,  doing the homework necessary, and understanding the potential of leveraging, combined with today’s lower interest rates and low prices,  the time is now.  The key to the puzzle is an excellent Realtor and a desire to suceed.

    Couldas, Wouldas, Shouldas, are a dime a dozen and in three years a lot of people will be crooning that tune.

Resources:

http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031

http://www.realtor.org/library/library/fg408

     In all the media doom and gloom, (which of course sells papers and viewership for news programs) one can look closely and see there is positive impact out there – interest rates as low as 4.675% – for someone willing to pay a one per cent loan origination fee.

    “Rates have not been that low in at least six years” said Lance Dickson, Senior Vice-President of Nova Home Loans in Tucson.  People not desiring to pay a loan origination fee for a 30 year fixed mortgage can obtain a mortgage for about 5%. 

     Jerry Sundt of President of Sundt Mortgage in Tucson is offering the same low rates for people with good credit scores.  Twenty per cent down is required for an 80-20 Loan to Value.  For every $100,000 in purchase price, the borrower needs to put down $20,000 for a 20% equity stake. 

     This  is an ideal time to refinance a higher rate mortgage if you have at least 20% equity in your home.  Many people are now in 6 1/2 % or 6.75%  mortgages.  We’re looking at good credit scores of about 740.  But rates are much lower for people with lower credit scores too!

     To understand how interest impacts payment, $100,000

               at 6.75% for 30 years, the cost is $648.60; 

              at 6 .25%, for 30 years, the cost is $632.07;

              at 5%, the cost is $536.82; and

              at 4.675% the cost is:  $517.14. 

    If you are thinking about selling your home within a year or two, refinancing may not pay.  You, your lender, and/or your Realtor, should do a break even analysis to determine if a lower rate will save you money. Calculate the closing costs including the loan origination fee to determine whether this works for you. 

    The media does not emphasize that people who have been in their homes prior to 2004 and have not refinanced to the hilt, should have some solid equity in their homes. 

   A previous blog dated July 28, 2008 and titled “Bring on the Numbers” traces the increase in home pricing in Tucson from 1993 through 2007.  With a 45% increase in three years between 2005 to 2007, the lamented decrease in home value of about 25% still leaves the homeowner who bought in  2004 or before, with at least a 20% increase in equity.  The only article I’ve seen about this phenomena was written by Kenneth Harney who is “right on” in his analysis.

    With more than 600 homes in Tucson on the market for $120,000 or less, now is the time to “sieze the day!”    A gander at the blog yesterday which shows all the active listings and the breakdown by both zip code and price range combined with the lowest interest rates in years will get savy people moving. 

    It is a well known fact that by the time the media says we are pulling out of the doledrums, prices have already moved up — and when that happens, interest rates will move up too!  The media uses lagging indicators!

    So to the savy out there, Carpe Diem!

 Resources:

Ken Harney Articles:  http://realtytimes.com/rtpages/kennethharney.htm

Lance Dickson -Senior Vice President – Nova Home Loans:  http://www.lancedickson.com/

Jerry Sundt – President – Sundt Mortgage http://www.sundtmortgage.com/

Tucson Realtor:  Terry Bishop   http://www.terrybishop.com

      Although August 2008 brought only $215,369,442 in sales as compared with July which showed $240,837,426 in sales, more than a 35 million decline, the numbers this month indicate that the Tucson market is reacting to the numbers of foreclosures and short sales, but is continuing to stabilize.

    The average sales price declined another 6.42% month over month, and is now $238,504.   The average sales price in July was $254,854.   At the peak in March 2006, the average sales price was $281,819.

     Likewise the median salesprice also declined 7.45% from $199,900 in July to $185,000 in August.  For  people thinking about entering the market as a buyer, this may be an excellent time.   The high median sales price of $226,465 occurred in November 2005.

      The number of active listings in multiple listing declined 1.43% from 7,876  units in July to 7,763 units in August.  This is a level seen last in March 2006 when 7,577 properties were on the market.  At the high point of inventory there were more than 10,300 properties on the market.

     Pending contracts declined 8.54% from 960 in July to 878 in August.  This goes back to levels of January 2001 and may reflect heistancy on the part of buyers who may have been waiting for intervention of the federal government and the interpretation of the Housing Bill.  Interest rates have once again declined with the government take over of Fannie Mae and Freddie Mac.

      There was a rise in new listings from 1679 in July to 1,952 in Agust, an increase of 16.26%.  Still this number reaches back to January 2005 levels when 1947 new listings came on the market.  With the exception of December when new listings dramatically fall, from that point in 2005, the numbers of new listings continued to soar to nearly 3500 at the peak in January 2007. 

        The number of properties sold declined 4.44% month over month with 903 sold in August and 945 sold in July.   Sellers appear to be pricing their properties to the market since only 545 properties expired; the listing  period endeed and the property did not sell.  This is down from 813 in January. 

       Properties are staying on the market an average of 77 days, down one day from July at 78.  Days on the market in July-August 2005 were a low of 25 days.  Properties at the higher price end though are staying on the market longer periods of time.

       The following chart shows the numbers of active properties for sale in each zip code within the Tucson Multiple Listing Service, the number of properties sold within each zip code during August, and the percentage of properties sold during the month.

    Readers can further parse and analyze the MLS numbers by clicking on the resource link.

Resources:

http://www.tucsonrealtors.org/tar-v2/stats_august.pdf