Best Place Real Estate

Many savvy investors buy and sell real estate by doing 1031 exchanges. With the decline in real estate prices over the last few years, some investors may think they are selling a property at a loss and therefore do not need to do another 1031 exchange. But before you do anything, be sure and consult a tax professional because you may have a taxable event. If you acquired the property through a 1031 exchange and are now selling the property for a lower price than you paid for it, you may actually have a gain instead of a loss. The key to remember is that with a 1031 exchange you carry the adjusted cost basis from one property to the next.

Consider this scenario. Let’s say that several years ago you sold a rental property for $350,000. The adjusted cost basis of that property was $100,000 so you had a gain of $250,000. Rather than pay the taxes on the $250,000 gain, you deferred the taxes and bought another property through a 1031 exchange. You paid $350,000 for the new property.

Now in 2009, the property you purchased for $350,000 is only worth $250,000. Even though this is $100,000 less than you paid for it, you still have a gain of $150,000. Remember that you transferred the $250,000 gain from the first property to this property. After you deduct the $100,000 loss, you are left with a taxable gain of $150,000.

This is a very over simplified example, but the point is that if you have bought or sold, or plan to buy or sell through a 1031 exchange, consult a good tax professional first.

A loan modification or short sale is not always the answer for a homeowner facing foreclosure. However, at least in some cases, a “deed-in-lieu” option may help. The new Foreclosure Alternative Program (FAP) has a deed-in-lieu program that may help some homeowners. Under this program, sometimes referred to as “cash for keys”, the bank takes back the home from the borrower and agrees to write off the debt. This program does not work for everyone and a lender will only agree to do it under certain conditions. To read more about the program, see this week’s Beyond the Headlines by the California Association of REALTORS.

It is already bad enough to have suffer through the heartache and stress of the foreclosure process and the possibility of losing your home. But to be the victim of a scam that takes advantage of you makes it even worse.

The increase in the number of foreclosures has also increased the number of predators preying on vulnerable homeowners.  These unscrupulous people try to convince desperate homeowners that they can rescue them from foreclosure.

The California Association of REALTORS has provided member REALTORS with a document for us to share with consumers regarding foreclosure rescue scams.  It provides some of the warning signs and red flags of a foreclosure scam as well as some resources for homeowners who are already victims of such scams.  Click on Foreclosure Rescue Scams below.

Foreclosure Rescue Scams

I must add that there are a number of very ethical professionals who are seriously trying to help homeowners facing foreclosures.  But, just like everything else, beware of the scam artist.

Buyers who are looking solely at distressed properties may not be getting the “good deal” they are looking for.  So many people are constantly viewing sites that post homes in foreclosure or that are bank owned thinking that this is where they will find good deals.  Just because a property is a short sale, in foreclosure, or is bank owned does not mean it is a good investment.  Many short sales have their short-comings.  (Sorry, I couldn’t resist!)

There is so much in the media everyday about foreclosures and short sales.  Banking on this and the human desire to get rich quick, “specialists” are offering subscriptions to websites and classes on “buying short sales and foreclosures”, “how to buy bank owned properties”, “how to find distressed properties”, and so on and so on.  I often wonder if anyone other than those putting on the classes is making much money.  It is kind of like appealing to the American desire to be thin instantly.  I’m sure you’ve seen the ads.  “You don’t have to diet or exercise.  Eat whatever you want.  Just drink this drink or take this pill and you will lose 30 pounds.”  And, I love the before and after pictures.  “Before” shows a guy with a huge beer belly and “after” shows a guy with abs of steel.  And, of course, all this occurred within 2 weeks!

But the truth of the matter is that if you want to be thin, you need to eat a healthy diet and exercise.  And, the truth of the matter in real estate is that you need to look at all factors, not just price.   I am not saying don’t buy a bank owned property or foreclosure.  I’m saying look at the whole picture.

One very important thing to consider when buying a distressed property is how many in the neighborhood are also distressed sales.  When there are many distressed sales in a neighborhood, those distressed sales now become the comps.  So, if you are looking at a bank owned property that previously sold for $500,000 and you buy it for $400,000, you are now the comp.  It is unlikely you will be able to turn around and sell it tomorrow for $500,000.  What may appear to be a hot deal on the surface may not really be so great when you do the homework.

Again, I’m not saying stay away from distressed sales; just know what you are doing.  In many neighborhoods, especially lower priced entry level homes, just about all the listings are either short sales or bank owned.  If you want to live in a specific neighborhood and plan to stay there for a while, you are buying at a great time.  If your goal is to build wealth and your real estate portfolio, what a great time to do it.  There is no question the market will turn around and when it does you will be happy you bought now.

The approach I suggest to my buyer clients is to first determine how much you can and want to invest in your purchase.  Then look at properties that meet your criteria in that price range.  Keep in mind how long you intend to keep that property and what you plan to do with it (primary residence, rental property, vacation home, retirement home).  Look at location, condition, neighborhood, commute to work, etc. as well as price.  The house you decide on may or may not be a distressed sale, but you can feel confident that it is the right property for your needs.