2009 has been a very interesting and eventful year. Our son Andrew got his real estate license in October and has joined the firm as our junior associate broker. It’s great to have him aboard and part of our business family. He has brought a new perspective to the table and has been helping us develop our web presence. As a result of his input we are posting the weekly blog called “On the House.” So far the reaction has been very positive. We have some other projects in the works that are quite unique and should be up and running in the next two months. We’ll keep you posted.
The market itself is showing some signs of recovery. Despite our high unemployment we are seeing a rebound in the lower to middle price ranges (three hundred fifty thousand and below). There is a lot of first time buyer activity. We’re looking for a continued upswing in 2010.
The thing that all of this, the economy/real estate market, has brought out for us is just how interdependent we are. There is such a clear connection between the success of one business and the success of many others. What affects one affects everyone. Perhaps that’s the positive out of the seemingly negative environment we are in. We had a friend tell me that this was a wonderful opportunity for growth and change. It’s also an opportunity for us to work together, to support each other, to elevate each other as we elevate ourselves. We have been making every effort to support local businesses, especially those owned and operated by friends and acquaintances. Let’s all focus on that common goal so that we can move from this environment of survival and lack to a place of progress and abundance. Let’s make that journey together.
Lastly, we wanted to thank everyone for their support over the years. It has been the key to our success and longevity in this business. It has also been the key to a life filled with good friends and a strong extended family. Thanks so much for a great life.
We wanted to extend the best of Holiday Wishes to everyone from our family to you and yours. Take care of yourselves and we’ll see you next time where the information is always … On the House.
Monday, December 21, 2009
Monday, December 14, 2009
The 1031 Tax Deferred Exchange
I thought I’d take the time to talk about one of the most powerful tools out there. This discussion deals with the tax deferral of gain realized on investment property. I’m sure that you’re already aware of the fact that home owners are protected on a very large portion of their gain when they sell their primary residences. If you’ve owned and lived in your home for two of the last five years you are exempt for paying taxes on your capital gain. There are limits on the amount of gain that is exempted. It is up to $250,000 for a single person and $500,000 for a married couple. That’s a lot of tax free gain.
When it comes to investment property we are looking at something else entirely. You cannot simply buy, hold and sell an investment property without facing a tax on the gain. One way to protect yourself is to participate in an IRC 1031 Tax Deferred Exchange.
Let’s look at the structure of the exchange. You’re an investor that purchased a property years ago for the remarkably low price of $100,000.00. Many years later you’ve decided that you no longer want to hold this property and you put it on the market. You and your real estate professional have priced the property well and it sells for $300,000.00. Prior to this, of course, you spoke with your CPA who told you what would happen to the profit or gain you’re realizing from the sale. Essentially, you are looking paying federal tax, up to 15%, state tax in Oregon of 9% and a percentage of the depreciated value of the property, approximately 25% of that value. Your gain is based on the difference between the basis and the net sales price. Calculating the basis is somewhat complicated but for this example we’ll figure the purchase price plus any capital improvements and the cost of sale (commissions, repairs, etc). Bear in mind that this is a simplified version for determining the gain but it is still adequate for our purpose. Your CPA should be your only consultant when it comes to generating these figures. For argument’s sake we’ve determined that your actual gain is $150,000.00. You’re looking at a potential tax liability of $36,000.00 not counting the additional obligation for the depreciated value. Your profit has just been reduced to $114,000.00. That’s a big adjustment.
However, if you’d participated in the 1031 Exchange all of the tax on that gain could have been deferred. The process to enter into the exchange should start when the property is listed for sale. Your realtor will list the property indicating that the seller, you, intends to participate in an IRC 1031 Tax Deferred Exchange. There is specific language in the sale agreement, (Section 29), that informs the purchaser that the seller may elect to complete said exchange. There is no impact on the purchaser, financial or otherwise, unless the entire sale is written subject to that exchange. Section 29, followed up with an addendum indicating that this will be part of an exchange, serves as further notice of intent.
With all parties in agreement we proceed to the next step. The seller employs the services of an exchange company. The exchange company acts as a facilitator for the sale. It holds funds and processes paperwork that establishes the legitimacy of the exchange. In the old days the property title was transferred from the seller to the exchange company for a fraction of a second then transferred to the purchaser. Now there is a direct deed of the property from the seller to the purchaser. From the IRS perspective, however, the facilitator is considered to be the seller.
As with any construct there are many rules to follow. There are timelines to meet and documents to be executed. The minute the transaction is complete, that is, the day of recording, the process is set in motion. The $150,000.00 is held in an account. The seller is now in the position of fulfilling the requirements of the exchange. He or she has to purchase another like-kind property. The seller has 45 days to identify the property or properties and 180 days to close or finalize the sale(s). There is no latitude here. The periods are definite and unalterable. In addition, the sales have to be structured so that the seller is still carrying the same amount of debt that was attached to the previously sold property. There is another important stipulation. Any money that is not used in the deferral is considered boot and subject to tax. If you keep a dollar you pay the 24% and the portion of the depreciated value as well. You can’t touch any of it. I received a newsletter from First American Exchange the other day that indicated that there might be some flexibility regarding boot but, upon speaking with a representative from the company, said flexibility is very case specific and not a guarantee. Let’s stick with the assumption that boot is boot and is, therefore, subject to taxation.
While the timelines are very rigid the definition of like-kind is very broad. You can sell a single family rental and move that gain into a 40 unit apartment. It can go the other way as well. Again, before engaging in the transfer/exchange of any property, get a handle on the rules. Find out if your property is eligible for an exchange. For example, there is a holding period requirement for the relinquished property. If held for less than two years the IRs may decide that the property was held for sale rather than investment. Properties held for sale do not qualify.
The last piece that I find interesting is that the gain, here the $150,000.00, is held in an interest bearing account. I was involved in an exchange that was completed just shy of the 180 days and my profit was sitting in an account earning 5% interest. In our example here the interest earned in 180 days is right around $3750.00. So, in addition to deferring the tax on your gain you are accruing interest as well. It’s a beautiful thing!!
Lastly, don’t forget that any financial move has to be structured correctly. Advice and guidance for the proper professionals are a must. Also, bear in mind that the tax here is deferred, not forgiven. The same issues are present when you sell the new property as well.
As always, these postings are meant to pique your interest. For more detailed information on 1031 Exchanges you can contact my exchange company at www.firstexchange.com. They’re a great resource and always available for you. You can reach me as well at gary@vppihomes.com or through the website at www.vppihomes.com.
Thanks again for reading the blog. Your comments and feedback are always welcome. Until next time, the information has been… On the House.
When it comes to investment property we are looking at something else entirely. You cannot simply buy, hold and sell an investment property without facing a tax on the gain. One way to protect yourself is to participate in an IRC 1031 Tax Deferred Exchange.
Let’s look at the structure of the exchange. You’re an investor that purchased a property years ago for the remarkably low price of $100,000.00. Many years later you’ve decided that you no longer want to hold this property and you put it on the market. You and your real estate professional have priced the property well and it sells for $300,000.00. Prior to this, of course, you spoke with your CPA who told you what would happen to the profit or gain you’re realizing from the sale. Essentially, you are looking paying federal tax, up to 15%, state tax in Oregon of 9% and a percentage of the depreciated value of the property, approximately 25% of that value. Your gain is based on the difference between the basis and the net sales price. Calculating the basis is somewhat complicated but for this example we’ll figure the purchase price plus any capital improvements and the cost of sale (commissions, repairs, etc). Bear in mind that this is a simplified version for determining the gain but it is still adequate for our purpose. Your CPA should be your only consultant when it comes to generating these figures. For argument’s sake we’ve determined that your actual gain is $150,000.00. You’re looking at a potential tax liability of $36,000.00 not counting the additional obligation for the depreciated value. Your profit has just been reduced to $114,000.00. That’s a big adjustment.
However, if you’d participated in the 1031 Exchange all of the tax on that gain could have been deferred. The process to enter into the exchange should start when the property is listed for sale. Your realtor will list the property indicating that the seller, you, intends to participate in an IRC 1031 Tax Deferred Exchange. There is specific language in the sale agreement, (Section 29), that informs the purchaser that the seller may elect to complete said exchange. There is no impact on the purchaser, financial or otherwise, unless the entire sale is written subject to that exchange. Section 29, followed up with an addendum indicating that this will be part of an exchange, serves as further notice of intent.
With all parties in agreement we proceed to the next step. The seller employs the services of an exchange company. The exchange company acts as a facilitator for the sale. It holds funds and processes paperwork that establishes the legitimacy of the exchange. In the old days the property title was transferred from the seller to the exchange company for a fraction of a second then transferred to the purchaser. Now there is a direct deed of the property from the seller to the purchaser. From the IRS perspective, however, the facilitator is considered to be the seller.
As with any construct there are many rules to follow. There are timelines to meet and documents to be executed. The minute the transaction is complete, that is, the day of recording, the process is set in motion. The $150,000.00 is held in an account. The seller is now in the position of fulfilling the requirements of the exchange. He or she has to purchase another like-kind property. The seller has 45 days to identify the property or properties and 180 days to close or finalize the sale(s). There is no latitude here. The periods are definite and unalterable. In addition, the sales have to be structured so that the seller is still carrying the same amount of debt that was attached to the previously sold property. There is another important stipulation. Any money that is not used in the deferral is considered boot and subject to tax. If you keep a dollar you pay the 24% and the portion of the depreciated value as well. You can’t touch any of it. I received a newsletter from First American Exchange the other day that indicated that there might be some flexibility regarding boot but, upon speaking with a representative from the company, said flexibility is very case specific and not a guarantee. Let’s stick with the assumption that boot is boot and is, therefore, subject to taxation.
While the timelines are very rigid the definition of like-kind is very broad. You can sell a single family rental and move that gain into a 40 unit apartment. It can go the other way as well. Again, before engaging in the transfer/exchange of any property, get a handle on the rules. Find out if your property is eligible for an exchange. For example, there is a holding period requirement for the relinquished property. If held for less than two years the IRs may decide that the property was held for sale rather than investment. Properties held for sale do not qualify.
The last piece that I find interesting is that the gain, here the $150,000.00, is held in an interest bearing account. I was involved in an exchange that was completed just shy of the 180 days and my profit was sitting in an account earning 5% interest. In our example here the interest earned in 180 days is right around $3750.00. So, in addition to deferring the tax on your gain you are accruing interest as well. It’s a beautiful thing!!
Lastly, don’t forget that any financial move has to be structured correctly. Advice and guidance for the proper professionals are a must. Also, bear in mind that the tax here is deferred, not forgiven. The same issues are present when you sell the new property as well.
As always, these postings are meant to pique your interest. For more detailed information on 1031 Exchanges you can contact my exchange company at www.firstexchange.com. They’re a great resource and always available for you. You can reach me as well at gary@vppihomes.com or through the website at www.vppihomes.com.
Thanks again for reading the blog. Your comments and feedback are always welcome. Until next time, the information has been… On the House.
Monday, December 7, 2009
Hire a Professional
This post is a follow up on the last installment entitled “Do What You Know.” In fact this piece should be called “Know What You’re Doing.”
I was at a gathering last weekend. I had anticipated that there would be an awkward moment or two. A friend of ours had just listed and sold his/her home through another broker. There’s always the laundry list of reasons for the redirected business, the sense of betrayal and the complete lack of loyalty. And, being a professional, you’re obligated to be polite and understanding. It’s all part of the occupation. I’m not saying that it ever gets any easier. All I’m saying is that it’s part of the landscape.
Now the misery doesn’t end there. Invariably, part two of the nightmare unfolds. The friend begins to tell you about the trouble he/she’s having with the transaction. That train is never late. Not only were you not hired as the representative you are now being asked for advice. And, even if you do have a solution to the problem you cannot render it. And, even if you could render it, it may be too late already to affect the outcome of the transaction. Things are already in motion that cannot be stopped or altered. It is a very frustrating experience because you know that this would not have happened if you were the listing broker. The seller, our friend, is looking at paying out thousands of dollars more than necessary. He/she was left unprotected and vulnerable.
Whenever you’re buying or selling property and you hire a realtor hire a professional! I know that the preliminary interviews help establish compatibility and rapport but be sure to take it further. It’s the most significant financial event of your life. Take the time to ask qualifying questions. Does the broker know how to handle negotiations around a home inspection or a leaking oil tank? Does the broker have experience selling condominiums? Does the broker have access to services and contractors that might be necessary to remedy defective wiring or plumbing? Will the broker provide several options or just one? How will the broker protect you from the other cooperating broker whose fiduciary obligation mandates that he/she does everything to advance the agenda of his/her client? Will your best interest be the primary focus here? Is this broker the best fit and the most qualified? This is serious stuff. Will you walk down the road with confidence knowing that you’re in capable hands or will you be sitting at a cocktail party knowing that you’ve been compromised and underrepresented?
Please make the right choice. Ask those questions. Align yourself with someone who understands the process and knows how to protect you.
Once again, thanks for reading this post. Your comments and suggestions are always welcome. I can be reached at gary@vppihomes.com or www.vppihomes.com.
As always, this information has been... On the House.
I was at a gathering last weekend. I had anticipated that there would be an awkward moment or two. A friend of ours had just listed and sold his/her home through another broker. There’s always the laundry list of reasons for the redirected business, the sense of betrayal and the complete lack of loyalty. And, being a professional, you’re obligated to be polite and understanding. It’s all part of the occupation. I’m not saying that it ever gets any easier. All I’m saying is that it’s part of the landscape.
Now the misery doesn’t end there. Invariably, part two of the nightmare unfolds. The friend begins to tell you about the trouble he/she’s having with the transaction. That train is never late. Not only were you not hired as the representative you are now being asked for advice. And, even if you do have a solution to the problem you cannot render it. And, even if you could render it, it may be too late already to affect the outcome of the transaction. Things are already in motion that cannot be stopped or altered. It is a very frustrating experience because you know that this would not have happened if you were the listing broker. The seller, our friend, is looking at paying out thousands of dollars more than necessary. He/she was left unprotected and vulnerable.
Whenever you’re buying or selling property and you hire a realtor hire a professional! I know that the preliminary interviews help establish compatibility and rapport but be sure to take it further. It’s the most significant financial event of your life. Take the time to ask qualifying questions. Does the broker know how to handle negotiations around a home inspection or a leaking oil tank? Does the broker have experience selling condominiums? Does the broker have access to services and contractors that might be necessary to remedy defective wiring or plumbing? Will the broker provide several options or just one? How will the broker protect you from the other cooperating broker whose fiduciary obligation mandates that he/she does everything to advance the agenda of his/her client? Will your best interest be the primary focus here? Is this broker the best fit and the most qualified? This is serious stuff. Will you walk down the road with confidence knowing that you’re in capable hands or will you be sitting at a cocktail party knowing that you’ve been compromised and underrepresented?
Please make the right choice. Ask those questions. Align yourself with someone who understands the process and knows how to protect you.
Once again, thanks for reading this post. Your comments and suggestions are always welcome. I can be reached at gary@vppihomes.com or www.vppihomes.com.
As always, this information has been... On the House.
Monday, November 30, 2009
Do What You Know
Welcome back to On the House. We took a brief hiatus for the Thanksgiving holiday but are now back in business. We hope that everyone had a great extended weekend and that you were able to spend time with family and friends.
I had originally planned to chat about structured sales until I attended a seminar on bankruptcy. By the way, the structured sale is a fascinating vehicle and something about which everyone should have some understanding. However, there was something about the bankruptcy seminar that was very unsettling and, consequently, the inspiration for the topic today. What follows is directed toward my fellow realtors but is applicable for anyone that is in a position of trust.
First of all, the subject matter itself was daunting. We’ve all heard of the different types of filings that exist but do we really understand them? Do we know the difference between Chapter 7, 11, 12 (yes, there’s a Chapter 12) and 13 bankruptcies? Which one is a liquidation versus a reorganization? Which one is a business or an individual reorganization? Now, the answers are discernible but are they a part of our daily vocabulary? They are not.
It is at this point in the seminar that I became uneasy. The room was full of real estate professionals asking how to best advise their clients about the structure and disposition of a bankruptcy. Even more disquieting were the responses from the speaker; a lawyer who had been practicing law for nearly 30 years. There was seldom a yes or no answer. Most answers were conditional. Most answers had to be qualified. I was left with the impression that every filing was unique enough to rule out any definitive answers.
The only correct posture here for the real estate professional is to give no advice at all. In our challenged market we’re approached daily with the advice that we have to bring more value to the table if we’re going to be viable. We’re told that our survival depends on it. At the same time, our risk management experts tell us to avoid such behavior. We exist in a litigious environment walking a fine line between service and exposure.
The risk management people are right. When asked for advice about anything relating to legal or tax questions the only correct and honest position to take is to tell your client to seek that advice from a licensed professional in that field. I get approached all the time by friends and clients for advice on everything from how to manage an estate to where to make prudent and profitable investments. That last one always makes me smile. I mean, you’re talking to the guy who invested in Gardenburger ™ when it was at 18 ¾.
The final word here is to do what you know. Provide that market analysis. Direct your client to an attorney or CPA. Be available to assist in the marketing of the home if mandated by the other professionals. Don’t give legal advice. Don’t step out of your area of expertise. It’s entirely possible that you are putting yourself in danger and damaging your client as well. There is no upside here.
Once again, thanks for reading this post. I welcome your input on this or any other subject. I can be reached at gary@vppihomes.com or http://www.vppihomes.com
As always, this information has been… On the House.
I had originally planned to chat about structured sales until I attended a seminar on bankruptcy. By the way, the structured sale is a fascinating vehicle and something about which everyone should have some understanding. However, there was something about the bankruptcy seminar that was very unsettling and, consequently, the inspiration for the topic today. What follows is directed toward my fellow realtors but is applicable for anyone that is in a position of trust.
First of all, the subject matter itself was daunting. We’ve all heard of the different types of filings that exist but do we really understand them? Do we know the difference between Chapter 7, 11, 12 (yes, there’s a Chapter 12) and 13 bankruptcies? Which one is a liquidation versus a reorganization? Which one is a business or an individual reorganization? Now, the answers are discernible but are they a part of our daily vocabulary? They are not.
It is at this point in the seminar that I became uneasy. The room was full of real estate professionals asking how to best advise their clients about the structure and disposition of a bankruptcy. Even more disquieting were the responses from the speaker; a lawyer who had been practicing law for nearly 30 years. There was seldom a yes or no answer. Most answers were conditional. Most answers had to be qualified. I was left with the impression that every filing was unique enough to rule out any definitive answers.
The only correct posture here for the real estate professional is to give no advice at all. In our challenged market we’re approached daily with the advice that we have to bring more value to the table if we’re going to be viable. We’re told that our survival depends on it. At the same time, our risk management experts tell us to avoid such behavior. We exist in a litigious environment walking a fine line between service and exposure.
The risk management people are right. When asked for advice about anything relating to legal or tax questions the only correct and honest position to take is to tell your client to seek that advice from a licensed professional in that field. I get approached all the time by friends and clients for advice on everything from how to manage an estate to where to make prudent and profitable investments. That last one always makes me smile. I mean, you’re talking to the guy who invested in Gardenburger ™ when it was at 18 ¾.
The final word here is to do what you know. Provide that market analysis. Direct your client to an attorney or CPA. Be available to assist in the marketing of the home if mandated by the other professionals. Don’t give legal advice. Don’t step out of your area of expertise. It’s entirely possible that you are putting yourself in danger and damaging your client as well. There is no upside here.
Once again, thanks for reading this post. I welcome your input on this or any other subject. I can be reached at gary@vppihomes.com or http://www.vppihomes.com
As always, this information has been… On the House.
Monday, November 16, 2009
Anatomy of a Short Sale
I was watching an interview today and there was a gentleman talking about his new book, “Architects of Ruin.” It’s a study of our current economic crisis. His thesis, simply put, is that we’re in the trouble we’re in because of the liberalization of lending guidelines. Although he made some valid points I was struck with the sense that, as interesting as it was, it was a misplaced focus. Does it matter if the cause of the crisis is irresponsible lending, or irresponsible borrowing or an eroding manufacturing base and outsourced jobs or any number of blame based theories? My focus is what is happening right now and how we move forward. There is an Italian proverb that states, “When a ship has sunk everyone knows how she might have been saved.” Will understanding the journey to the train wreck make the wreck disappear? I don’t think so.
This brings us to the wonderful real estate climate we have today. And, as strange as it is, we are fortunate to have a climate at all in Portland. A good part of the state and the country is seeing almost not activity at all. We have very good movement in the three hundred thousand and below range and a surge in purchases by first time buyers.
The challenge that we face in our market is the flood of foreclosures and short sale properties. I’ve had only three sales all year that were not bank-owned homes or short sales. The bank-owned sales are fairly simple and straightforward. The borrower has defaulted on the loan and the bank is now the outright owner of the home. Offers are submitted and realize a fairly prompt response accompanied by countless addenda. They close within a reasonable period of time. And then, there is the short sale.
To understand the short sale we need to understand what this unique animal is. In a short sale the home owner remains in possession of the property and places it on the market for sale. The issue is that this person owes more on the loan than the house is worth. The home owner hasn’t enough equity in the home to pay off the loan. Sadly, while the home is on the market the mortgage, if not being paid, increases and late fess and penalties accrue. It’s a mess. Remember, this process is happening at the same time that the home may be heading for foreclosure. It’s a race to the finish line.
Now, the process is fairly standard with the exception of the seller trying to dodge the foreclosure bullet. The confusion arises when an offer is made on the property. The seller invariably accepts the offer. The offer is then presented to the lender(s) for the lender or lenders’ approval. Quite often there is a first and a second mortgage in place. You need approval by both the first and the second mortgage holders before the property can be conveyed to a new party. The first is in the best position and has first rights to what equity there is. Often the second position is looking at nothing or next to nothing from the proceeds of the sale. It is usually the second that holds things up and makes the close of the transaction difficult or impossible. They have nothing to gain by approving the offer.
For simplicity’s sake let’s assume that there is only one lender. The process can be long and frustrating. I have a sale that I’m involved in right now that was accepted by the seller, (my client), on the 23rd of July. The sale had to be faxed to the lender. It remained in the fax receiving department for two to three weeks before it was sent to the short sale department. It was not assigned to anyone when it got there. Every time I call for a status update I speak with a different person. Eventually a Broker’s Price Opinion (BPO) is ordered and a local realtor does an analysis of the property and the market and comes up with an opinion of what the sales prices should be. The price opinion is not disclosed to the listing or selling agents at this time. Since my seller has a Fannie Mae loan a second BPO must be ordered. That will not happen until a negotiator is assigned to the file. It is now November 15th and we are still waiting for the negotiator. The buyer and seller are still committed to the transaction but no one is happy. The buyer may withdraw at any time with no penalty. My representation to both sides that we are moving at a standard pace does little to make the situation more palatable. Not only does the seller know that the buyer can evaporate but the buyer knows that my seller has the right to entertain and accept another offer at anytime that can supercede his offer. The lender is always hoping for another, better, offer to come along. Once the negotiator is assigned and the second BPO is done things start to move more quickly. Bear in mind that the negotiator may counter the original offer on any part of the offer. There can be a counter on price, closing costs or possession. It’s entirely possible that the deal can fall apart at this stage.
What makes all of this interesting is that every transaction has it’s own structure or process. The listing agent on one short sale this year had a prioritizing system. The first offer presented was in the primary position and all others numbered accordingly. Second was second, third was third, etc. Our offer was accepted by the seller but wasn’t even presented to the lender until the primary position withdrew and we were moved up the ladder. That sale, from start to finish, took only six weeks. In addition, I was allowed to speak with the lender directly and was able to negotiate a credit for repairs; both very uncommon opportunities. In another transaction there was open competition and any offer could replace the first. We waited for a response for three months only to be told that one of the other offers was approved. There was no ordering. An agent in my company worked on a short sale for six months only to have the lender withhold approval and foreclose on the property. She had to wait for a couple of weeks for it to be listed with another agent at a higher price and write a new offer with the same buyer.
The usual reaction from everyone involved is frustration at the very least. They point to the lender’s incompetence and indifference as the reasons for the protracted close. The sentiment is that the lenders don’t care about a situation that they helped to create. Don’t forget our blame-based theories. I was sympathetic to that point-of-view myself until last week. I was making my weekly call to track our progress and had a frank discussion with one of the processors. I asked him if there was anything that I should be doing that I wasn’t doing to help my client. He explained that the system is overloaded. Every processor is carrying an average of 600 files! They are instructed to prioritize the files according to proximity to foreclosure. Those files are processed first and the others not in imminent danger are pushed back.
The final thought? Patience is the key. The processor I spoke with the other day made it quite clear that a demanding and impolite agent gets nothing accomplished. Also, be sure that you understand that it may take longer that what seems necessary or reasonable. Be prepared for a long involved process. The short sale is not for the squeamish.
Thanks for coming to our site and reading our blog. As always, we welcome your input and/or questions. Next week we’ll be talking about the structured sale.
Until then the information has been … On the House
This brings us to the wonderful real estate climate we have today. And, as strange as it is, we are fortunate to have a climate at all in Portland. A good part of the state and the country is seeing almost not activity at all. We have very good movement in the three hundred thousand and below range and a surge in purchases by first time buyers.
The challenge that we face in our market is the flood of foreclosures and short sale properties. I’ve had only three sales all year that were not bank-owned homes or short sales. The bank-owned sales are fairly simple and straightforward. The borrower has defaulted on the loan and the bank is now the outright owner of the home. Offers are submitted and realize a fairly prompt response accompanied by countless addenda. They close within a reasonable period of time. And then, there is the short sale.
To understand the short sale we need to understand what this unique animal is. In a short sale the home owner remains in possession of the property and places it on the market for sale. The issue is that this person owes more on the loan than the house is worth. The home owner hasn’t enough equity in the home to pay off the loan. Sadly, while the home is on the market the mortgage, if not being paid, increases and late fess and penalties accrue. It’s a mess. Remember, this process is happening at the same time that the home may be heading for foreclosure. It’s a race to the finish line.
Now, the process is fairly standard with the exception of the seller trying to dodge the foreclosure bullet. The confusion arises when an offer is made on the property. The seller invariably accepts the offer. The offer is then presented to the lender(s) for the lender or lenders’ approval. Quite often there is a first and a second mortgage in place. You need approval by both the first and the second mortgage holders before the property can be conveyed to a new party. The first is in the best position and has first rights to what equity there is. Often the second position is looking at nothing or next to nothing from the proceeds of the sale. It is usually the second that holds things up and makes the close of the transaction difficult or impossible. They have nothing to gain by approving the offer.
For simplicity’s sake let’s assume that there is only one lender. The process can be long and frustrating. I have a sale that I’m involved in right now that was accepted by the seller, (my client), on the 23rd of July. The sale had to be faxed to the lender. It remained in the fax receiving department for two to three weeks before it was sent to the short sale department. It was not assigned to anyone when it got there. Every time I call for a status update I speak with a different person. Eventually a Broker’s Price Opinion (BPO) is ordered and a local realtor does an analysis of the property and the market and comes up with an opinion of what the sales prices should be. The price opinion is not disclosed to the listing or selling agents at this time. Since my seller has a Fannie Mae loan a second BPO must be ordered. That will not happen until a negotiator is assigned to the file. It is now November 15th and we are still waiting for the negotiator. The buyer and seller are still committed to the transaction but no one is happy. The buyer may withdraw at any time with no penalty. My representation to both sides that we are moving at a standard pace does little to make the situation more palatable. Not only does the seller know that the buyer can evaporate but the buyer knows that my seller has the right to entertain and accept another offer at anytime that can supercede his offer. The lender is always hoping for another, better, offer to come along. Once the negotiator is assigned and the second BPO is done things start to move more quickly. Bear in mind that the negotiator may counter the original offer on any part of the offer. There can be a counter on price, closing costs or possession. It’s entirely possible that the deal can fall apart at this stage.
What makes all of this interesting is that every transaction has it’s own structure or process. The listing agent on one short sale this year had a prioritizing system. The first offer presented was in the primary position and all others numbered accordingly. Second was second, third was third, etc. Our offer was accepted by the seller but wasn’t even presented to the lender until the primary position withdrew and we were moved up the ladder. That sale, from start to finish, took only six weeks. In addition, I was allowed to speak with the lender directly and was able to negotiate a credit for repairs; both very uncommon opportunities. In another transaction there was open competition and any offer could replace the first. We waited for a response for three months only to be told that one of the other offers was approved. There was no ordering. An agent in my company worked on a short sale for six months only to have the lender withhold approval and foreclose on the property. She had to wait for a couple of weeks for it to be listed with another agent at a higher price and write a new offer with the same buyer.
The usual reaction from everyone involved is frustration at the very least. They point to the lender’s incompetence and indifference as the reasons for the protracted close. The sentiment is that the lenders don’t care about a situation that they helped to create. Don’t forget our blame-based theories. I was sympathetic to that point-of-view myself until last week. I was making my weekly call to track our progress and had a frank discussion with one of the processors. I asked him if there was anything that I should be doing that I wasn’t doing to help my client. He explained that the system is overloaded. Every processor is carrying an average of 600 files! They are instructed to prioritize the files according to proximity to foreclosure. Those files are processed first and the others not in imminent danger are pushed back.
The final thought? Patience is the key. The processor I spoke with the other day made it quite clear that a demanding and impolite agent gets nothing accomplished. Also, be sure that you understand that it may take longer that what seems necessary or reasonable. Be prepared for a long involved process. The short sale is not for the squeamish.
Thanks for coming to our site and reading our blog. As always, we welcome your input and/or questions. Next week we’ll be talking about the structured sale.
Until then the information has been … On the House
Friday, November 6, 2009
Taxes, Taxes, Taxes!!
Welcome to On the House and our first post.
Well, it’s tax time and consequently, the subject of the day. As you know our tax year is based on a fiscal year that begins on July 1st and ends on June 30th of the following year. We are now looking at tax statements that cover 2009/2010. Statements are delivered in October and the payment is due on November 15th.
Now, I’ve been paying property taxes for over 25 years and I still pause when I read my statement. There are two values represented there. One is the real market value (RMV) and the other is assessed value. The terms are not unfamiliar but what has always puzzled me is just how the assessed value was derived from the RMV. I’ve always wondered just what formula was used to establish assessed value. A quick call to the good folks at the Multnomah County Assessor’s office was very enlightening. It turns out that, with the exception of new construction, the assessed value is not derived directly from the current RMV.
Let’s journey back to 1997. Measure 50 was passed and everything was set in motion. At that time the assessors turned the clock back to 1995 and took the RMV of record and used that figure to establish the base value of the home. They applied another 10% discount to that value and the new assessed value was determined. That process applied to all existing residential property in Multnomah County. From that point on there was a provision that the assessed value could be increased each fiscal year by a factor of 1-3%. Typically you’re seeing the increases right at the upper end of that range. There is also a provision for what is called “exception value”. This allows an additional tax increase for major remodeling or upgrading to the home.
There is a different formula for new construction. The assessors apply the “changed property ratio” to determine assessed value. They take the sales price of the home and multiply that figure by .5515 and the new base value is established. The ratio is adjusted every year so that figure applies to 2009/2010 only. From that point on the rules regarding the permitted increase limits apply.
One other piece that causes confusion is the actual dollar increase itself. I looked at my statement and my assessed value only went up $6490.00 but my taxes went up $271.91!! To understand what is happening here we need to look at the millage rate. The millage rate is the percentage that is charged for every thousand dollars of assessed value. Right now we’re being charged $21.7866 for every thousand. A home assessed at $100,000.00 would owe $2178.66 in annual taxes. Bear in mind that this millage rate is adjustable as well as the assessed value. Last year, for example, it was $21.1840 per thousand. This increase in millage rate is the one to watch. The assessed value can remain the same year to year and the taxes can still increase with an increase in the millage rate.
The final question that comes up concerns challenging the tax. There is an avenue to do this. You can apply to the Board of Property Tax Appeals (BOPTA) before the 31st of December of this year. You can get petition forms at http://www.oregon.gov/DOR/PTD/BOPTA.shtml or go in person to the county office and get them from the county clerk. It’s an interesting process in itself and beyond the scope of this blog. If you’re interested in pursuing that process there is information that you will need to mount an effective challenge. Contact me at gary@vppihomes.com and I’ll help you through it.
That’s my overview for today. I welcome input in any form. I envision this blog turning into a Q an A forum and look forward to your responses.
Until next time, the information is… On the House.
Well, it’s tax time and consequently, the subject of the day. As you know our tax year is based on a fiscal year that begins on July 1st and ends on June 30th of the following year. We are now looking at tax statements that cover 2009/2010. Statements are delivered in October and the payment is due on November 15th.
Now, I’ve been paying property taxes for over 25 years and I still pause when I read my statement. There are two values represented there. One is the real market value (RMV) and the other is assessed value. The terms are not unfamiliar but what has always puzzled me is just how the assessed value was derived from the RMV. I’ve always wondered just what formula was used to establish assessed value. A quick call to the good folks at the Multnomah County Assessor’s office was very enlightening. It turns out that, with the exception of new construction, the assessed value is not derived directly from the current RMV.
Let’s journey back to 1997. Measure 50 was passed and everything was set in motion. At that time the assessors turned the clock back to 1995 and took the RMV of record and used that figure to establish the base value of the home. They applied another 10% discount to that value and the new assessed value was determined. That process applied to all existing residential property in Multnomah County. From that point on there was a provision that the assessed value could be increased each fiscal year by a factor of 1-3%. Typically you’re seeing the increases right at the upper end of that range. There is also a provision for what is called “exception value”. This allows an additional tax increase for major remodeling or upgrading to the home.
There is a different formula for new construction. The assessors apply the “changed property ratio” to determine assessed value. They take the sales price of the home and multiply that figure by .5515 and the new base value is established. The ratio is adjusted every year so that figure applies to 2009/2010 only. From that point on the rules regarding the permitted increase limits apply.
One other piece that causes confusion is the actual dollar increase itself. I looked at my statement and my assessed value only went up $6490.00 but my taxes went up $271.91!! To understand what is happening here we need to look at the millage rate. The millage rate is the percentage that is charged for every thousand dollars of assessed value. Right now we’re being charged $21.7866 for every thousand. A home assessed at $100,000.00 would owe $2178.66 in annual taxes. Bear in mind that this millage rate is adjustable as well as the assessed value. Last year, for example, it was $21.1840 per thousand. This increase in millage rate is the one to watch. The assessed value can remain the same year to year and the taxes can still increase with an increase in the millage rate.
The final question that comes up concerns challenging the tax. There is an avenue to do this. You can apply to the Board of Property Tax Appeals (BOPTA) before the 31st of December of this year. You can get petition forms at http://www.oregon.gov/DOR/PTD/BOPTA.shtml or go in person to the county office and get them from the county clerk. It’s an interesting process in itself and beyond the scope of this blog. If you’re interested in pursuing that process there is information that you will need to mount an effective challenge. Contact me at gary@vppihomes.com and I’ll help you through it.
That’s my overview for today. I welcome input in any form. I envision this blog turning into a Q an A forum and look forward to your responses.
Until next time, the information is… On the House.
Subscribe to:
Posts (Atom)
