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.

I have had this conversation with several clients recently regarding bank owned listings. When you make an offer, it must be your “highest and best”. While it is understandable that buyers do not want to pay more than they have to for a property, the old days of making a low offer and expecting a seller to counter do not apply in today’s foreclosure market. A good percentage of foreclosures are in the lower price tier and first time buyers and investors are all over them. Most listings receive multiple offers shortly after they hit the market and sell for at least full list price if not over.

There is so much in the news about the terrible housing market, all the foreclosures, and declining prices. So it is very understandable that many buyers think they can come in way lower than the asking price. But the truth of the matter is that usually the asking price is the low price. Some of the comments I get from many buyers are:”Is the listing agent lying about having all those offers just to apply pressure and make you offer more?” or “What if the lender would have taken less than my offer and I end up paying more than I needed to?”

REALTORS are required to abide by a Code of Ethics and lying about multiple offers, or anything for that matter, is unacceptable. And, I can tell you from experience, multiple offers on bank owned properties is common place in today’s market. As far as the purchase price the lender will accept, the bank’s goal is to get the highest price with the best terms. That does not mean that the highest offer always gets it. In addition to price the bank considers the terms of the offer as well as the financial soundness of the buyer.

My advise is to offer a price you feel the property is worth to you, but it should be the highest price you feel you are comfortable with for that property. Offering a lower price and expecting the bank to come back with a counter is usually a waste of time. It really wouldn’t make good business sense on the part of the bank to spend time countering one buyer when they already have a better offer from another buyer. Your offer should be contingent on an appraisal, so if the appraisal comes in much lower you can renegotiate.

In a recent Orange County Register article, “O.C.’s Expert Observers Tell What’s Scary“, REALTOR, Steve Thomas comments on “herd mentality”.  This is similar to what Donald Trump refers to as “group think” in his audio book, Why We Want You To Be Rich, co-authored with Robert Kiyosaki.  Herd mentality or group think is when people do things because everyone else is doing it. Trump encourages people to “think for themselves” rather than just following the herd.

A few years ago when the market was rapidly appreciating, it seemed like some people were buying just because everyone else was.  Many didn’t do their homework and just assumed the market would continue to appreciate indefinitely.  They just figured it was the right thing to do because the rest of the herd was doing it.

But, the real estate market is cyclical. It has its ups and downs, just like most everything else.  Now that we are in a down market, I think that much of the herd of buyers think that prices are going to continue to go down indefinitely. After all, that is all you hear about in the media. Now it seems that a lot of buyers are actually waiting for the prices to start going up before they are comfortable buying. In my article, “Should I Buy Now Or Wait for Prices to Go Down More?“, I discuss trying to time the exact bottom of the market.

However, some people, particularly investors, are taking advantage of our current market.  Those who have strayed from the herd and who can “think for themselves” understand real estate cycles. They know that this down market will not last forever and that we are now somewhere near the bottom.

When the market turns around and starts to appreciate again, people who buy early will eventually make money.  But the buyers who strayed from the herd and bought when others were afraid to buy will be the ones who profit the most.

The steep decline in housing prices has brought investors to the market in full force. Many are buying in the bottom price range of the market. In Orange County that consists of primarily of low to mid-priced condominiums. These homes were hit really hard by the demise of the real estate market. Now we are seeing tons of short sale and bank-owned condominium listings and investors are scooping them up as fast as they can. While many buyers and real estate agents do not want to bother with short sales, bank-owned listings are receiving multiple offers and many of the offers are cash offers. Remember, this is Orange County and despite what you read in the papers about all the job losses and foreclosures, there are still a lot of people here with a lot of money.

The opportunity we have now is that the decline in prices combined with very low interest rates has made single family detached homes possible for many investors who otherwise could only purchase condos. When I make an investment decision, I like to look at the long term and I think that in the long run, a single family home is a better investment than a condo.  Therefore, I believe that the current market is not only an opportunity for investors, it is also an opportunity to make a really good long term investment. Consider these points:

• In many areas, like Lake Forest, Mission Viejo, and Laguna Hills, you can now buy a single family house for about the same price as some of the condos a few years ago. These are generally small entry level homes, but ones that would make excellent rentals.
• While single family detached homes lost value in the market down-turn, they weren’t hit quite as hard as a lot of condos and therefore I think they will recover more quickly.
• When real estate is in an upward cycle, detached houses typically appreciate at a little higher rate than condos. So this is something to look forward to.
• Interest rates. What an opportunity, low prices and low interest rates! You must be able to qualify for the loan and provide documentation supporting your income and assets, but it should have been that way all along.
• Again, looking into the long term, when the market does turn around, we will probably reach a point where first time buyers will again be priced out of the market. (History has a way of repeating itself.) This will keep the rental market strong and I think single family houses will be more appealing to families than condos.
• As I mentioned above, investors are all over the bank-owned condos, particularly in the lower priced complexes. This could be a potential problem down the line. Lenders do not like to make loans in complexes that have a high percentage of absentee owners. Therefore, units in these complexes may be harder to sell in a few years because it may be difficult for buyers to get financing.

Please note that I am not suggesting that condos are a bad investment. They can actually be very lucrative. What I am suggesting is that the current market has given us other opportunities to consider.  As with any investment, you need to do the research and do the math, and I suggest doing it for both the short term and the long term.

Although a lot of people are taking advantage of this buyers’ market, others are unsure about buying a house as they are concerned that prices may still be declining.  It almost seems as if some people are waiting for prices to go up before they will feel good about buying.  However, when prices do go up, some people who are qualified to buy now will be priced out of the market.

If we all had a crystal ball we would know exactly when to buy and when to sell.  But we don’t and it is nearly impossible to perfectly time the market, whether it is the stock market, the real estate market, or really, anything.

Rather, you are probably better off buying when we are some where near the bottom.  Imagine real estate prices as being represented by a “V” or a “U”.  It would be really nice to buy at exactly at the bottom of the “V”.  The only thing is that we usually don’t know exactly when we are there.  There is no bell ringer who rings a bell announcing we have hit the very bottom.  But, buying when we are near the bottom of the “U” puts you in a much better position.  Yes, prices may go down a little, but they will more than likely start going up again soon.

Also take the interest rates into consideration.  Prices may go down a little more, but if interest rates go up, it may be more difficult to qualify for a loan.  Even though the price of the home may be less, the monthly payment for the loan could be higher because of a higher interest rate.  So again, some people who are qualified to buy now, may be priced out of the market by higher interest rates.

Real estate is a long term investment.  Most people stay in a home for at least 5 to 7 years.  Rather than concentrating only on prices and trying to buy at the bottom of the “V”, I believe it is better to consider all parts of the formula for a successful investment.  That formula not only includes price, but also includes loan rates and terms, tax advantages, length of the investment, and resale value.  For rental property, the formula also includes rental income and the increase in the income over the years.

Price is important.  But, please, look at the whole picture!  Look at all the factors involved in a real estate purchase.

Yes, the price is really important, but so are the mortgage rates.  It is possible for prices to go down further and for rates to go up.  In this case, the house payment on a piece of property could be the same or even higher than when the price was higher.  In his article, The Fed and Mortgge Rates, Bill McCord gives a clear and well written explanation of rates.  Real estate mortgage rates are a big part of the real estate buying picture.

Another thing that is so important to remember is that, for most part, real estate is a long term investment.  Consider the location of the property, floor-plan, amenities, etc.  If you are buying income property, will you be able find tenants easily and how much can you expect to receive in rents?

Even though there are many distressed sales currently on the market, there are some properties that have a lower price for a reason.  Is it simply that the seller needs to unload the property now, or is there something less desirable about this property that is making it harder to sell?  When you attempt to sell it in the future, will it also be harder for you to sell for the same reason?  For example, a home on the view side of the street will usually sell for more than the same home across the street without the view.  Even if the non-view house is asking a really low price, you could very well be better off paying more to be on the view side of the street.  When prices start appreciating again (and they will), your view property will be even more valuable.

Like any other investment, when purchasing real estate you need to look the whole picture.