Archive for July, 2011

Condominium investing as a buy and hold strategy can be very worthwhile. There is a building, and a unit in that building which you rent to a good tenant, and providing you purchase at the right price, life is good.  The tenant‘s rent pays the mortgage, taxes, insurance and homeowner‘s association dues and some increment over that is left over for positive cash flow. This is what we all would like to see.

But sometimes there are hidden financial perils awaiting the condominium investor. Think again of the building.  You as an investor only own up to the inner surfaces of the unit you have bought. Everything else is what is called ?common area “or ?limited common area,” which means you do not have a direct role in maintaining that structure.  Especially in the case of mature buildings this can become a source of financial pain for the unwary buyer.

[stextbox id="grey"]“…sometimes there are hidden financial perils awaiting the condominium investor.”[/stextbox]

The homeowners‘ association may be required by the condominium declaration to maintain and replace the structure as parts wear out, and if so it is entitled to assess the owners of the units regular charges to pay for the cost of that maintenance and replacement. But owners generally do not like high monthly assessments, and that dislike can produce problems of deferred maintenance and a deficiency when it comes time to replace major portions of the building. And there is no statutory requirement that the homeowners‘ association actually maintain the building or replace worn out components.  Any such requirement is in the declaration, which is part of the documents the prospective buyer receives before closing the sale.

Some parts of a building can be expected to last a fixed number of years before they need replacement. Examples are: an asphalt roof, wooden siding and vinyl windows.  When the anticipated time of replacement of such items comes up, there should be a reserve account and there should be money in the reserve account to pay for that replacement. Otherwise the homeowners‘ association has nowhere to look for the money except to the current owners. And this can be the source of (in some cases) very large special assessments to replace deteriorated building parts. Such special assessments, if they are not paid currently, become a lien on the owner‘s unit.

In some cases the size of the assessment is enough, if it is financed, to cause an otherwise positively performing rental to become a negative cash flow producer, or – “an alligator.”

Two years ago the Legislature adopted a law that generally requires homeowners‘ associations to conduct reserve studies annually of the physical condition of the condominium building. These studies are to be done after a physical inspection and are to be performed by a professional in the field of reserve studies. However, the homeowners‘ associations are not required by statute to make assessments on condominium owners to fund the reserves that the studies indicate will be required to replace life limited parts of the building when they need replacement. The declaration of an individual condominium may require such studies and proper funding of reserve accounts to cover expected maintenance and replacement costs.

It is a good idea therefore, as part of your pre-purchase inspection, to obtain a copy of the most recent reserve study for the building in which you are considering buying, and also to obtain the declaration and the most recent financial records of the homeowners‘ association.  Check to see first that there is a reserve for building replacement required in the declaration; and second that the reserve is ?on track? for what it should be at the building‘s current stage of its useful life. Also check to see that the owners are paying reasonable assessments that are calculated to keep the reserve in the proper balance to building replacement cost over time. If you buy a unit in a building in which previous owners have not paid enough to build a proper reserve for  replacement of worn out building elements, then it is you who will have to make up the difference at the time the replacement occurs. There is no way to recover those deficiencies from the previous owners, or from the homeowners‘ association board members or officers.  It is better to pass on purchasing a unit in such a building because once the special assessment occurs, your options as an investor are limited and bleak. Sometimes the best investments are those you do not make.

About the author…
Doug Owens is a member of the REAPS legislation committee. Doug practices real estate law and general business law from his office in Seattle. He offers a 10% discount for REAPS members and he can be reached at (206)985-6679 or [email protected]

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You may have seen residential neighborhoods with sidewalks that have some portions that look as if they were lifted by tree roots. Sometimes these lifted sections can be tripping hazards. But that is the city’s problem, right? Not necessarily, according to a recent case.

If you invest in residential property in areas in Washington that have sidewalks, then you may want to know about a recent court case that held the property owner liable for injuries suffered by a pedestrian in a tripping accident on the sidewalk.

The facts are that during the fifties, the owners purchased a residence in West Seattle and lived in the home for fifty years. Some time before 1990, they planted three birch trees on the property next to the sidewalk.

[stextbox id="grey"]“In 2003, a pedestrian tripped on the lifted sidewalk section and broke her wrist. She sued the city and the property owners.”[/stextbox]

Over the years, the roots of these trees grew beneath the sidewalk and, according to an expert at the trial, lifted a section of the sidewalk about an inch, although the tripping hazard was “not conspicuous.”

In 2003, a pedestrian tripped on the lifted sidewalk section and broke her wrist. She sued the city and the property owners. The property owners asked the court to dismiss the case against them on the basis that they did not have any duty to the pedestrian.

The court discussed the responsibility of the landowner in terms of whether the tree roots were a natural or an artificial condition. The court concluded that when the owner plants a tree on the property, that tree is an “artificial condition,” and the owner has a duty to “restrain” the tree from injuring a pedestrian. The city still has the responsibility to maintain the sidewalk but that is not enough to shield the property owner from damages in such a case. The court refused to dismiss the case against the property owners.

For the investor in residential property, what does this mean?

First, it means you should have a good first hand

A New Item For The Investor’s Pre-Buy Checklist — Tree Roots Under The Sidewalk
inspection of the property you intend to buy if it is in an area where there are sidewalks. You should look around to see if there are trees on the property. Trees can be counted on to send their roots out, and they may be under the sidewalk.

Second, if the inspection discloses that there are trees on the property whose roots may be under the sidewalk, it will be important to know whether the trees were there before the sidewalk. If the trees were planted by the existing homeowner or a predecessor rather than having been in place when the house was built, then there is the likelihood that the property owner will be responsible for “restraining” the roots from lifting the sidewalk and creating a tripping hazard. If the trees were planted by the homeowner or a successor, it will then be necessary to find out before purchasing what the cost of “restraining” the roots is likely to be. If you can establish with certainty that the trees were in place before the house was built, then likely you do not need to be concerned about potential liability from tree roots lifting the sidewalk because such trees are classified as a “natural condition.”

The court made it clear that where an artificial condition is involved, the property owner has the duty to restrain the tree roots, and a reasonable assumption is that this duty would extend to subsequent purchasers of the property, even if they were not the ones who created the artificial condition.

This is another case of “let the buyer beware.”

About the author:
Doug Owens practices real estate law and general business law from his office in Seattle. He offers a 10% discount for REAPS members and he can be reached at (206)985-6679 or [email protected]

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Jul
16

You Think You Don’t do Auctions?

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When most investors think of auctions, they think of the courthouse steps. But, in truth, all real estate transactions, in one form or another, are auctions. It’s important to recognize each type of auction and know when to play and when the deck is stacked against you. Here’s a breakdown of two main types of auctions and versions of them:

The Open-Outcry
This is what we typically think of when we imagine an auction. This is most commonly seen at the courthouse steps in a foreclosure auction. Many investors either love or avoid this type of auction for two major reasons- all players are privy to all bids and the price is ascending. In other words, the auction ends when one investor bids higher than any other is willing to bid and walks away with the house.

Rarely in real estate do we see an entirely descending price auction, where a bid decreases until an investor decides to pay the stated amount for the property. There are circumstances, when if the auctioneer’s minimum starting bid is unacceptable, he will choose to drop that bid until an investor chimes in. This, in and of itself, is a descending auction, but more than likely, an excited investor who once held out is now willing to play and bids begin to climb again.

The Sealed-Bid
Another common type of real estate auction is a sealed-bid, where all investors’ bids are kept private and the auction demands each investors’ highest and best bid. Most sealed bids are first price auctions- highest bid wins (think listed REO property).

However, another version of the sealed-bid auction is the second price auction. In this version, the winning investor doesn’t actually pay his exact bid, but some figure in between his bid and the next highest bid. This is exactly the scenario played out in a multiple-offer situation where such offers include escalation clauses (think listed fixer properties with offer deadlines).

If you are a buyer, consider this: in some sealed-bid auctions, the seller may explicitly state that he/she has a right to reject all bids and not sell the property. Of course, although this would deter some investors from bidding, it does protect the seller from selling the property for less than what they think it is worth. Which leads us to the following…
Single-bidder Common-Value
This overarching type of auction occurs when a single investor makes an offer to a single seller. In this type, both the investor and the seller only have an estimate of what the house is worth. If they both calculated house’s worth equally, there wouldn’t be a deal at all. The seller will only sell if the investor offers more than the seller thinks it’s worth, and the investor will not offer more than he/she thinks it’s worth. So, the only way an investor wins in this type of private auction is when the investor values the property more than the seller. Sounds overly simple, but remember, a starting bid hasn’t been set. Each party has an estimate, nothing more.

This is why many investors choose to offer additional services or incentives to increase the value of their offer. If the investors’ bid is significantly lower than the seller’s estimated worth of the property, these additional services can help bridge the gap. How so?

Popular value-added incentives include fast cash, quick closings, complementary move-out or trash-out services, waiving inspections, etc. Here’s why this works: The value of these incentives is very difficult to quantify. Waiving an inspection is often viewed as a great incentive, but no one can actually put a dollar value on this.

By adding these services, it’s much more likely a seller will value them higher than the investor, and suddenly the investor’s starting bid starts to look very enticing!  Auctions in real estate are not only exciting, but more common than you think. Any time you make an offer on a property or sell a property, you are engaging in at least one type of auction. Each has it’s own strategy and potential pitfalls. Bid away!

About the author:
Elise Huxtable is a Partner with Pacific Investment Partners in Seattle. PIP purchases fixer houses, assignments and other debt instruments in King and Snohomish Counties. She is also a Realtor with Keller Williams, exclusively representing investors in strategic buying and aggres-sively selling their rehab projects. To learn more, visit www.seattlereahbinvestments.com.

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Jul
15

Is Hard Money Really That Scary?

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People often get nervous when they hear the term or phrase “hard money lender.” Many people have misconceptions about what an actual hard money lender is. Hard money is not a scary thing; it is an opportunity cost for investors. It allows investors to leverage their money and increase the underlying ROI (return on investment).

What Is A Hard Money Loan?
A hard money loan is a non-conventional loan where the borrower is given funds in exchange for collateral on a parcel of real estate. A hard money loan is typically secured by a promissory note and a deed of trust secured by the subject property. In addition, it is not uncommon for a hard money lender to have the borrower personally guarantee the note. Typical note amounts are short term – from 6 months to a few years. These loans are not made for long-term purpose.

When To Use Hard Money And When Not To
Hard Money is designed for investors that need quick cash in order to secure an opportunity that has time constraints on closing. For example, if a investor wants to purchase a foreclosure property at the court house steps, they MUST have cash in hand to purchase it. Hard money is designed for investments purposes, not for homeowners that need to be bailed out of a bad scenario. It is not a band aid for a problem, but rather a bridge loan for you to capitalize on an investment.

[stextbox id="grey"]“Some hard money lenders, such as Intrust Funding LLC, can fund your transactions in as little as 24 hours with no appraisal, inspection and lighter underwriting requirements.”[/stextbox]

Isn’t The Cost Of Hard Money Outrageously Expensive?
Yes, hard money is more expensive than conventional lending. However, it is an opportunity cost that allows you to purchase properties at a greater discount that other conventional lenders won’t finance. It adds strength to your purchasing power and can help you get a better deal.  For example: If you can purchase a property for $200,000 at a 30% discount because you have cash in hand to purchase it you would save $60,000 immediately on a purchase. If the average cost of hard money is 3 to 4 points, you will essentially be paying $5,600 ($140,000.00 x .04) in cost to save $60,000.

Advantages Of Hard Money And Why You SHOULD Use It
Leveraging your cash and utilizing hard money loan for a real estate purchase can be very profitable to any investor. One of the biggest strength of hard money is that it can help you close your purchase quicker than traditional loans. Some hard money lenders, such as Intrust Funding LLC, can fund your transactions in as little as 24 hours with no appraisal, inspection and lighter underwriting requirements. Conventional lenders will require a full credit report, income documentation and asset verification. A hard money lender is more concerned with the property it is lending on rather than credit score.

INCREASE YOUR Cash On Cash Return And Profit.
One of the reasons investors use hard money is to leverage cash and increase their overall cash on cash return. Cash on cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. Meaning, how much cash you put in and how much cash you get out.  For example, lets say a you have $100,000 to invest in real estate. If you purchased a property for $80,000 and put $20,000 into fixing it up you would be into the property for $100,000. If you sold that property for $150,000 in 3 months and had selling cost of $15,000, you would have a profit of $35,000 – a 35% cash on cash return.  If you borrowed at a scenario of 4 points with 12% interest and had to put 20% down, the points of $3,200 ($80,000 x .04) will be rolled into the loan. Cash down: $20,000. Fix up: $20,000. Three Months of Interest: $3,000. Total Cash in: $43,000. At a sales price of $150,000 – $15,000 – $106,200 = $28,800 in profit and a 67% Cash on cash return!

In addition to increasing your cash on cash return, it will increase your total profitability as an investor. Instead of having all your money tied up in one deal, you can diversify your investment capital and do more properties at the same time.

If you take the previous example, you would at would be able to invest that money 2.29 times over in 3 months rather in just one deal. Thus, you could make $65,952 in 3 months, rather than the $35,000 by leveraging your cash and using hard money.

Exit Strategies
When using hard money, one of the most important things to think about is how you’re going to pay off the loan. You always will need to have multiple exit strategies when selling a house. Things to do before you borrow:

  • Prequalify with a mortgage broker to refinance into a permanent loan.
  • Get a schedule of construction and average days on market so you know a rough estimate of how long you will carry the note for.
  • Verify how long your hard money note is for, and do they do extensions?

The better the game plan you have, the quicker you can get in and out of the property and the hard money loans.

In Closing
The more tools you have the more successful investor you will become. Associate yourself with a good reliable hard money source today and increase profitability. Hard money is nothing to be scared of, it is something all investors should embrace. It will give you more purchasing power and give strengthen any offer that you put on a property. Visit www.intrustfunding.com to get prequalified today.

About the author:
James Dainard is one of the founding partners of Invest Now LLC, the largest wholesale property company in Washington. He has been buying and selling real estate in King, Snohomish and Peirce county for the past five years. He graduated from University of Washington Business School with a focus in Finance and Marketing. Over the past 2 years James has been actively working directly with investors purchasing real estate, providing them with multiple exit strategies and supplying them with various different lending sources.

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Internal Revenue Service sends millions of letters and notices to taxpayers every year. Here are eight things taxpayers should know about IRS notices  - just in case one shows up in your mailbox.

  1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
  2. The IRS might send you a notice for a number of reasons. They may request payment of taxes, notify you of changes to your account, or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
  3. Each letter and notice offers specific instructions on how to satisfy the inquiry.
  4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
  5. If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.
  6. If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper-left-hand corner of the notice.  Allow at least 30 days for a response.
  7. Most correspondence can be handled without calling or visiting an IRS office. However, if youhave questions, call the telephone number in the upper-right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call.
  8. It’s important that you keep copies of any correspondence with your records. If you get an IRS notice, don’t panic! And, as always, if you’d like some guidance, just give us a call. We’ll help you with the next steps.

About the author…

Marc Wallace, CPA, Masters in Taxation, is with the firm of Stegman Wallace, P.S. Certified Public Accountants. The firm’s mission is to help their clients achieve success by providing personalized attention and a commitment to service that addresses not only today’s needs but tomorrow’s plans. Their dedication to helping you achieve your financial goals means placing a premium on timeliness, thoroughness and accuracy.

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