Wednesday, April 14, 2010

Question from Chapter 9-Preparing for Uncle Sam

Q: I’d like to minimize my tax burden though a tax deferred exchange but I’ve heard that the IRS has so many guidelines that I’d need to meet to make this happen. Can you walk me through some of these guidelines so I can take advantage of these tax savings?

A: A 1031 Tax-deferred exchange is a powerful way to build wealth through real estate.
You can sell investment property and transfer all the gain to another, larger investment property or several other properties and defer the capital gain taxes due on a straight sale.
If the property is held as investment property and is exchanged into property that is like that which was sold, this is called “like-kind”. Prior to the closing of the sale of the old relinquished property, the seller must enter into an exchange agreement with a qualified intermediary or accomodator.
The accomodator structures the exchange transaction to meet IRS code requirements.
Make sure the accomodator is an unrelated party, is not anyone close to you and is properly insured and bonded.
The three basic IRS exchange guidelines are:
1. The purchase price of the replacement property must be equal or greater than the sold property.
2. The debt on the replacement property cannot be less than the debt on the sold property
3. You must use the entire net sale proceeds from the sold property to acquire the replacement property.
There are strict time-frame requirements. You must identify the replacement property within 45 days of close of escrow of the relinquished property and you must close escrow no later than 180 days from the closing date of the relinquished property.
There are many other rules and details to consider in a tax- deferred exchange in addition to these basic rules.
Read the entire Chapter 9 of the book “Get the Best Deal When Selling Your Home” to find out how to qualify for a tax-deferred exchange.

Chapter 8-You Have Received Offers-Now What?

Q: I’m a home seller and we finally received a purchase offer for our property. What should I be looking for in a purchase contract before I accept an offer and take my home off the market until escrow closes?

A: If there is financing involved, I recommend that the buyer deliver an acceptable loan pre-approval letter to the seller at the time the offer is presented or within seven days of acceptance.

Make sure you have the right to cancel the sale and contract without liability in the event the buyer fails to qualify for the loan within a reasonable period of time- usually two or three weeks from acceptance.

Be cautious about offers that are contingent upon the sale and/or close of escrow of another property. If the buyer’s property is already in escrow, demand to receive a copy of the purchase contract and escrow information prior to accepting their offer.
If the sale is not “seasoned” with contingencies satisfied, you are assuming a high risk position.

Even more risky are offers contingent upon your buyer finding a buyer for their property. You have no control or access to critical information for the sale of this property.

There are key contract clauses that can be incorporated into your contract to give you more control and the ability to cut loose your buyer if they can’t sell their home in a reasonable period of time.

Real Estate Book: Question for Chapter 7-Screen Buyers

Q: I just received a pre-qualification letter from my lender. My Realtor told me that the letter needs to state that I’m pre-approved – not pre-qualified. Seems like semantics and more hoops for me to jump through. Is there really a big difference between being pre-approved and pre-qualified for a loan?

A: There is a huge difference in a loan pre-qualification letter and a complete loan pre-approval.
Loan pre-qualification is nothing more than taking a loan application, checking a buyer’s credit report and debt-to-income ratios to match loan program qualifying criteria.
A loan pre-approval is achieved when the buyer’s complete loan package with all required supporting documentation is submitted to a bank underwriter for conditional approval. The conditional approval may only require a satisfactory property appraisal and acceptable title report and insurance to complete the loan processing.

“Pre-approval” is a misused term and often overstated by Realtors and mortgage brokers. A true loan pre-approval will have an expiration date and a list of any remaining funding conditions yet to be satisfied.

Real Estate Book: Question for Chapter 6-Pre-Sale Preparation

Q: My Realtor suggested that I have a pre-sale inspection before I even put my home on the market. I already know what needs to be repaired in my home and this seems like a waste of time. Doesn’t the buyer pay for their own inspection anyway?

A: The adage “knowledge is power” certainly applies to buying or selling real estate.

I always recommend a pro-active approach in selling real estate by obtaining as much information about the condition of the property prior to offering the property for sale.

This information will empower the seller and their agent to form a marketing and pricing strategy based on the condition of the property.
Sometimes it’s better for both the seller and buyer to agree upon an “as-is” sale with a price or credit concession from the seller in lieu of repairs to the property.
The pre-sale inspection reports provide both parties with the information needed to draft a purchase contract that meets the mutual needs of each party and can greatly reduce the need to renegotiate the contract for unexpected repairs that are discovered during the escrow period.

Real Estate Book: Question for Chapter 5-Selling Your Home in an Up or Down Market

Q: My husband accepted a new position and we need to relocate and sell our home ASAP. I’ve interviewed 3 agents and want to use the agent who recommended the highest listing price.
Is listing our home at the highest price possible going to benefit us?
After all, we need to get every penny out of our home to help us purchase our new one.

A: Beware of some agents who will “buy” your listing by recommending a list price that is significantly higher than other agents competing for the listing.
Realtors use the same source for real estate sales data to determine the range of fair market value for a property. If you interview three or more seasoned agents who are familiar with local real estate values and market conditions, there should not be a wide variation of recommended list prices between them.

Real Estate Book: Another Question for Chapter 4-How Much is Your Home Really Worth?

Q: I will soon be placing my home for sale on the market. My Realtor prepared a CMA for me to help determine my home’s value. How do I know if this price is what I should use as my list price?

A: A Competitive Market Analysis or CMA is an accurate depiction of available like kind competing homes for sale.

A CMA, active competing properties, recent pending sales and recent sold properties-these three categories will usually provide a sufficient cross-section of relevant date to determine a range of fair market value and list price for your home.

Real Estate Book: Question for Chapter 4-How Much Is Your Home Really Worth?

Q: I have been reading a lot about property values and now I am confused. What is the difference between market value and appraised value?

A: Market value and appraised value can often be the same, as well as just as often be different.
Appraised value usually puts the most weight on past history of real estate sales.
Market value can differ as real estate market dynamics can quickly change course making past sold values irrelevant.
In a rising market, I will put a lot of weight on recent pending sales (properties in escrow waiting to close) in addition to the supply and demand ratio of available homes for sale compared to the volume of recent pending sales activity.
In a declining market, yesterday’s sold property values are usually higher than what a property is worth today.
I usually put a lot of weight on the value of competing homes for sale in addition to the supply and demand ratio and lengthening marketing time to sell a property.