The best real estate investment strategy is…

1031_Exchange_2For my money it’s the 1031 tax-deferred exchange.  The 1031 allows owners of investment property to exchange certain types of property and may defer the recognition of capital gains or losses due upon sale, and hence defer any capital gains taxes otherwise due.  In essence you can sell (exchange) your rental condo in Arizona and buy a duplex in San Diego.  The catch is the properties must be “like-kind” which means the properties must be investment property.  It does not matter if one is a single family home and the other is a 4 unit building.  Like-kind simply means property held for investment.

Now, there are many rules to follow, which I will cover in my next post, but I want to show you the real benefits of a 1031 exchange.  Here are the 5 main reasons to exchange, courtesy of Asset Preservation.

  1. PRESERVATION OF EQUITY
    A properly structured exchange provides real estate investors with the opportunity
    to defer 100% of both Federal and State capital gain taxes. This essentially equals an interest-free, no-term loan on taxes due until the property is sold for cash! Often the capital gain taxes are deferred indefinitely because many investors continue to exchange from one property to the next, dramatically increasing the value of their real estate investments with each exchange!
  2. LEVERAGE
    Many investors exchange from a property where they have a high equity position, or one that is “free and clear”, into a much more valuable property. A larger property produces more cash flow and provides greater depreciation benefits,
    which therefore increase the investors’ return on their investment.
  3. DIVERSIFICATION
    Exchangers have a number of opportunities for diversification through exchanges. One option is to diversify into another geographic region, such as exchanging out of one apartment building in Denver, Colorado, for two additional
    apartments – one in Los Angeles, California, and the other in Dallas, Texas. Another diversification alternative is acquiring a different property type, such as exchanging from several residential units to a small retail strip center.
  4. MANAGEMENT RELIEF
    Some investors accumulate several single family rentals over the years. The ongoing maintenance and management of what can be a far-reaching group of properties can be lessened by exchanging these properties for one property better
    suited to on-site maintenance and management. Exchanging into a single apartment complex with a resident manager is a good example of this strategy.
  5. ESTATE PLANNING
    Sometimes a number of family members inherit one large property and disagree about what they want to do with it. Some want to continue holding the investment and some desire to sell it immediately for cash. By exchanging from one
    large property into several smaller properties, an investor can designate that, after their death, each heir will receive a different property, which they can either hold or sell.

Stay tuned for the next post relating to the 1031 exchange where I will cover the anatomy of the exchange and also share a case study.

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Is cash really king? A case study…

Cash-Bonus-293x300So maybe you didn’t hear it here first.  And perhaps there is some trepidation as you read about how the market is picking up.  I get it.  Real estate has been hit hard the past several years.  But like a punch-drunk boxer taking a standing 8 count, the market is digging deep and finding its equilibrium. So here’s the thing…It’s back!  Like every cycle before, the housing market is cutting through and leading the economic recovery.

And if you think cash is king…think again.  In some markets nearly half of all transactions involve cash buyers, but that doesn’t really tell the whole story.  With the right agent in place you can find a great property and beat out those cash buyers.

The Right Agent

I read a blog recently that questioned the value of relationships between agents.  I’m here to tell you firsthand that it matters…A LOT!  Working with an agent who is not only well-connected, but also well-respected, can make the offer, negotiation, acceptance, and closing details go much smoother.  It’s like anything else really.  Why do we shop at certain stores?  Why do we take our cars to a certain mechanic?  In many cases it’s because of the relationships we have with the people there. You also must work with an agent who knows what you want…and knows the local market you are interested in better than anyone else.  In addition to knowing what’s available, and that’s not much these days, they need to know what’s under contract and if there are circumstances that may cause it to fall out.  Again, relationships and connections.

Case Study Part 1:  On St. Patrick’s Day we met with a client who expressed an interest in buying a property.  After a short discussion about their needs, I ran an MLS search and found only 4 homes that were active on the market and met their criteria.  Now, because we constantly monitor the market and talk with other agents, I knew there were 2 other homes under contract that also fit their needs.  I called the agents and guess what?  One of them just cancelled escrow and was going back on the market that evening.  I called the buyers, met them an hour later, and wrote the offer.

timing-is-everythingTiming is Everything

We’ve all heard this expression.  But you must understand that timing can be the key to beating out the cash offer.  Here’s the reality of cash offers.  They usually come from investors and what do investors want?  The best deal (lowest price) possible.  So all things being equal when it comes to price, the terms you offer, along with the timing, can make all the difference.  And it’s not just about taking the home in “as-is” condition.  A great strategy should include the best terms and timing important to the seller.

Case Study Part 2:  Back to our St. Patrick’s Day buyers.  Since I had a good relationship with the listing agent I was able to ask some questions about why the home fell out of escrow, and what were the important issues facing the seller.  I was informed the seller had just moved to an assisted living facility and was concerned about her children having time to come in from out-of-town and being able to get her belongings out.  Simple fix.  We offered to give them extra time after closing to handle this…at no cost to them.  Piece of mind goes a long way!  I also discovered the seller wanted to close ASAP.  Again, an easy fix as we offered to close on their time frame.  As you can see it’s really just about communication and a meeting of the minds.  Thing is buyers have to come to grips with the fact that this is a seller’s market and sometimes that takes losing out on a few places to get it.  The right agent and strategy around timing and terms makes a world of difference.

The Right Terms

Every buyer has their own set of circumstances.  So I want to remind you that you should do what you feel is best when it comes to your situation.  But you need to think about what you can, and cannot, live with and how can you make your offer the most appealing to the seller.  Here are some common terms buyers offer up:

  • Closing time frame
  • Inspection time frame
  • Appraisal and loan contingency removal
  • Who pays for title, escrow, repairs, warranty, etc
  • Deposit amount

Agents tend to draft offers based on local custom.  What happens is they often use a “Contract Template” with the same default settings.  Real estate is not cookie cutter and you should discuss with your agent what you can do differently to make your offer stand out.  If that also matches up with terms and timing the seller has mentioned, you could be the winning bidder.  You may want to offer to close faster, or pay for things like warranties and termite reports vs. having the seller pay for them.  Make it as easy as possible for the seller to accept your offer.

Case Study Part 3:  After talking with the agent we knew why the property had fallen out of contract, when the seller wanted to close, how much time they needed after closing to remove personal belongings, what they did not want to pay for, and who the agent liked to use for services such as title and escrow.  We also knew there were competing offers and one was cash.  After considering all this and reviewing the sellers counter offer, and speaking with their lender, the buyer decided to make it easy for the seller to accept their offer.  They came in a little higher than their initial offer, increased their deposit, agreed to take the home in “As-Is” condition, and offered the seller even more time after closing to clean the place out.  The end result?  Cash is not always king!

   

The Hidden Real Estate Market…Plus 3 Things You Need to Know…

San-Diego-21288

So just what is going on in the San Diego real estate market? Well, it is interesting to say the least! The 3 things I see happening are as follows:

  1. Prices are trending up. There is fierce competition out there, especially in the entry level price points. Do your homework, have your loan in place, and hire an ultra-aggressive REALTOR to represent you!
  2. Inventory is still down. But homes are selling! Don’t get caught up in the drama, just keep your eye on the ball and you will find the right home.
  3. Interest rates are still low…but trending up. If you are getting a mortgage, it may be a good idea to lock your interest rate. Your loan officer can help you with that. Don’t get priced out of the market and miss out on the great rates out there.

OK, I have a couple more observations to share based on market data. A recent report courtesy of Altos Research, shows exactly what is going on in certain segments of the market. This report looks at the market in quartiles, which represents the 25% most expensive, upper middle, lower middle, and least expensive homes in the marketplace. In looking at the lower two segments, you’ll see what you get for the money.  In the lower middle segment you will get a home with 3 bedrooms, 2 baths, 1500 square feet , about 50 years old for around $455,000. In the least expensive segment, what do you think you get?  Pretty much the same thing with one exception…it will cost you about $175,000 less!

Guys, these are the sort of things you can capitalize on to get the best deal. Even if you qualify for a $450,000 home, that doesn’t mean you can’t find something just as good for $325,000, right? Same thing happens with the upper middle segment compared to the lower middle. A very similar home in the lower middle costs $200,000 less! No matter how you slice it, that’s a great deal! Take time to learn the market. If you’d like to have access to this type of information on a weekly basis, delivered right to your inbox, then just visit our web site and click on the “How’s the Market Today” link. You can select cities and zip codes all across the country. Then, when ready to start looking, give one of our great agents a call to get inside!

Dude! Where’s my house?

shadow14513.  7277.  6248.  These numbers represent the following for the San Diego county real estate market, according to the SANDICOR Multiple Listing Service:  Homes sold since Nov. 30 2012.  Homes currently for sale.  Homes currently under contract.  Can you guess which is which?  More on this later.

Over the past few years our market has been fueled by investors, cash transactions, short sales and foreclosures.  Interest rates are still WAY LOW, prices are on the upswing, and first time buyers are actively engaged in the process of finding and buying a home.  What’s missing?  NEW INVENTORY!  Where have all the sellers gone?

Shadow inventory has been hanging over our heads for a couple of years now.  At some point we will see some of that hit the market in some form or fashion.  But what I’m wondering why, when past cycles showed different patterns, are more homeowners not looking to take advantage of current market conditions to move up, out, or pick up an investment property?  After all we are talking about homeowners who seemed to have done things the right way.  Take  a look at this San Diego market report:  Atlantic & Pacific Real Estate Exec Summary [SF]_CA_SAN DIEGO

Check out the gray box at the top right of the report.  This is the Market Action Index and it indicates who the market favors, buyers or sellers.  You’ll notice it currently favors sellers.    Now, suppose you are thinking about moving up into a larger home.  Based on the data, you have a very favorable opportunity to win at both sides of the deal.  You bring inventory to the market which is desperately needed, especially at the entry to mid level price points, and that creates a frenzy whereby buyers will compete hard for your property and there is a great chance a bidding war ensues.  On the buy side, since you might be moving up and into a price point where there is more inventory and less competition, you will have some fantastic choices to consider and know you will get a great deal.  If you are downsizing, maybe you are in a position to pay cash or have a larger down payment that makes your offer more attractive if competing with other buyers.

shadow2

With all the competition out there looking to buy, how do you set yourself up to be a winning bidder?  One way is to work with an agent that has access to all the inventory…like Atlantic & Pacific Real Estate agents do.  Hey Jason, “What do you mean all the inventory?”  Well like all agents we have the multiple listing service or MLS.  But because we represent several banks and loan servicers (like our parent company Carrington) our agents also have access to pre-listed homes that are not yet on the active market.  Options are always good, right?  If you’d like more information on this just contact me and I will put you in touch with a Realtor that can help you.

Now to answer the question.  There are 4513 homes currently for sale.  7277 homes currently under contract.  6248 homes sold since Nov. 30, 2012.  And most importantly, don’t limit your options to what most agents think is the only option!  Dig deeper and see the big picture.

New Year…New Opportunity…

hand_houseWelcome to 2013!  I always wonder why people say the year the way they do.  Do you say 20-13 or two thousand and thirteen?  I look at it like this, we didn’t say one thousand nine hundred and ninety-nine, right?  It was 19-99 and it should be 20-13!  OK off the soap box.

So this year we are expecting big things in the real estate and housing market.  We saw some marked improvements in sales and price increases, and a flurry of home-buying activity, especially in the 4th quarter.  The government made some strides in avoiding the so-called “fiscal cliff”…kind of…I guess, and with the low interest rates, cost of money, and lack of inventory 2013 is shaping up to be an interesting year for real estate.

2012 was also a big year for me personally.  After launching SmartRealty Solutions and spending the past few years specializing in listing and selling foreclosures and working with investors buying at auctions, I made the decision in August to join Atlantic & Pacific Real Estate (APRE), as the San Diego Regional Broker.  APRE is an awesome brokerage that is on the cutting edge of real estate.  In fact we were created to work with the most sophisticated and serious real estate clients…institutional sellers and investors.  I think consumers are ready for a serious real estate firm and APRE fills the bill.  We are also proud to be part of the Carrington family of companies who are all dedicated to serving anyone interested in the residential market.  If interested you can learn more about Atlantic & Pacific Real Estate here.  The leadership and vision at APRE is world-class and in my 20 years of practicing real estate I have never been part of a more dedicated, professional, and consumer driven company.  I am so excited for 2013 and the opportunities we have in front us in this great business.  I look forward to connecting with you and feel free to reach out with any real estate questions you have.  Here’s to a great year!

APRE_Classic_4C_MD

Home Sellers…It’s time…

Today is the last day of summer 2012 and what a summer it’s been!  Crazy hot and humid weather descended on San Diego like never before, and along with it came a big shift in the local real estate market.  Home sellers, it is YOUR TIME!  According to SANDICOR, the San Diego Regional Multiple Listing Service, or MLS, there are currently 5904 single family homes for sale.  That’s not much.

In real estate we look at the absorption rate, or length of time it would take to sell the existing inventory.  It doesn’t take into account any new homes coming on the market in the future, but just asks “If I were to sell every home on the market today, how long would it take me?”  It is used to determine if it is a buyer’s market, seller’s market, or balanced market.  Absorption rate is calculated in months and can generally be interpreted as follows:

  • Less than 3 months: Seller’s Market
  • 3-6 months: Balanced Market
  • Greater than 6 months: Buyer’s Market

The absorption rate for San Diego today stands at 1.6 months.  Home sellers…it’s time!  The average sales price currently sits at $439,201 and the average days on market time is 70.  Compare that to last year when the average sales price was $404,504 and days on market was 75 days.  Overall it’s not a huge leap, however because the inventory is much lower the X factor is that we are seeing multiple offers, over list price, and prices are starting to move up faster.  Now, that also means there will be more competition and investors are still a big piece of the buyer pool.  To put that into perspective we just had a buyer offer $45,000 over list price…and they did not get the property!  Home sellers…it’s time!

Typically as we move into Fall and the 4th quarter the real estate market takes a breather.  As agents we plan vacations and family gatherings, and as consumers we ease off the home search, decide against listing the house, and think we will wait “Until the New Year” to do anything.  Well that strategy may cost you this time round.  If you have a need…not just a desire…but a need to get your home sold, this could be the best opportunity in a long time to get it done.  The buyers looking this time of year also have a stronger desire, and with the lack of inventory it could be the perfect storm for you.  And it’s been a long, long time since that has been the train of thought.  Home sellers…It’s time!

Don’t want to get into a bidding war? Then don’t…

It’s no secret that real estate is making a comeback.  I have written recently about inventory levels dropping and the market heating up.  While we have not yet seen that same level of price increases, there is no doubt that activity is picking up and one of the best ways to gauge that is by paying attention to how quickly homes sell, and how many offers they get.

Over the past few months every single transaction I have been involved with was a multiple offer situation.  Look, I understand it’s frustrating, especially if you have been looking at homes and making offers.  Everyone wants the best deal possible but that means different things to different people.  Recently a client told me, “I don’t want to get into a bidding war.”  Then they proceeded to make an offer $20,000 under list price, knowing there was already another offer on the table.  Result?  Bidding war!

So what’s a buyer to do?  Here’s my advice.  If you want the house then make the best offer you can.  Simple.  If you are looking for a deal and that is the only thing that matters, then make whatever offer you want, but don’t be surprised when you lose out…after a biding war.  Consider that interest rates are at record lows…under 4% for a 30 year fixed rate mortgage!  The difference in monthly payment if you pay $300,000 or $320,000 is about $50/month.  Is it worth losing out on the home you really want over that?

My point here is not to have you overpay.  It’s to help you understand the realities of the market and help you get what you want…a nice home at a fair price.  Every real estate transaction involves some give and take.  I learned a long time ago that a successful negotiation is one where everyone walks away feeling like they won.  If you are a buyer that “Win” should be you becoming the successful bidder.  And the best way to insure that happens, and to avoid a bidding war, simply make your first offer your best offer.  At least if you lose out you know you went down swinging!

I will have a follow-up to this post in a few days outlining some strategies for what exactly is the best offer to make.  Hint:  It’s not always about the price.  Stay tuned.