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Exchange REO to another property to defer taxes

Question:

Is it possible to exhange an REO into another property in order to defer taxes and if so what would be the minimum time frame?

Answer:

You’re speaking of 1031 Exchange Rules. This is really a question for your tax person as we do not give any tax or legal advice.

However, that being said, it doesn’t matter the source of the property, whether it’s an REO or Short Sale, or owner-seller. Whether or not a property qualifies for 1031 Exchange depends on whether it complies with 1031 Exchange Regulations and your INTENT!

I suggest you do the research by checking with your tax person or the internet (such as the IRS website) for these regulations.

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ARV or Cash flow for REOs

Question:

Tony, what is the highest percentage of ARV that you will offer for an REO? Or, do you strictly look at your cash flow?

-Student

Answer:

I look at my cash flow. Each case is different. I’ve paid probably as high as 70%, but it depends on what I’m going to do with the house. If I know it’s a house that I don’t want to keep as a rental, but I’m not going to have to fix anything, I can just turn around and flip it and make $10,000 after all is said and done, why would I say no to that? People sometimes think “oh I don’t want to waste my time with that.” GET OUT OF HERE! Listen, if I can do $10,000 on a house and do $50,000 a month, I’ll take 3 of those a month. The rest of you guys can keep the rest of them. So, yeah, I’ve done as high as 70%. But again, everything is in line, if you look at the way I calculate numbers on my stuff, I’ll pay a little more if there’s less repair. I’ll pay less if there’s more repair. If there’s no carrying cost, if I have no hard money loan on it, I adjust the numbers so that it makes sense, because that’s what makes the difference between someone who will walk around complaining that he can’t find a deal or someone like myself or Mike Cantu or any of the successful people that you’ve had an opportunity to meet that understand that it’s not about finding a deal. Once in a while, we find deals and they land right in front of us and we trip over them like a rock. But most of the time you’re making deals, ok? It’s creating deals. You’re looking at something and asking yourself, “How can I tweak the numbers or something on the property?” It’s about being creative in the way that you see real estate. If I only had a dime for every time I heard someone who would walk a house with me and go, “my god why would you even touch that? Why would you buy that thing? Are you crazy?!” I was so happy to hear that because I knew this is why I’m making the money I’m making because most people cannot see that and they get stressed out.

-TA

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What if an REO property needs more than your estimate?

Question:

Hi Tony, Please help me reconcile these two statements: 1. You once said that you never cancel escrow on an REO agent. 2. You also said that you run “an offer mill” making 15 offers per day or so.

How can both be true? What if your offer on an REO property is accepted and then you inspect the property and discover that it’s going to require a lot more work and money than you thought? Do you lower the offer? Isn’t that what you called a “terrorist offer?” Or do you cancel altogether? And if so isn’t that the same as cancelling out of an escrow? You just disappointed an REO agent.

Or do you inspect every single REO property before you make an offer so that scenario never occurs. That means you and Sabrina are inspecting at least 15 properties per day.

 

Answer:

Dear David,

Nice of you to write. Let’s take your questions apart piece by piece.

1 – I don’t run “offer mills.” My goal is to send out 15 offers a day. However, we personally only write a minimum of five and those are LOIs on an 8 1/2 X 11, pre-designed template where we basically just enter the property and agent information. However, we only make offers for two reasons:

One, on properties that I’m interested in buying. These are made through the listing, or a buyer’s agent within the listing agent’s office or through a buyer’s agent outside the listing agent’s office.

Two, on properties where I am interested in meeting the listing agent such as a pending listing where I use an LOI (Letter of Intent/Interest) type offer. This is what I call a “calling card offer.” It’s just my way of introducing myself using a point of interest for the listing agent.

2 – I have never canceled a deal once I have a seller accepted offer and have opened escrow.

3 – Presently, in our market, properties that we pro-actively select to submit offers on fall into one of two categories: REOs or Short Sales. The REOs are typically inspected by Sabrina and/or myself and the agent representing us, prior to submitting our offer.

The short sale offers are submitted with one contingency – “Subject to Interior Inspection.” We seldom inspect short sales unless we are concerned about the present condition or the upgrades. This is typical and accepted when dealing with short sales where the final price has not yet been approved by the lender. Keep in mind, short sales for us are the equivalent of gambling, that’s why we call them “Slot Machine Offers.”

-On a short sale where the selling price has already been pre-approved by a lender and we are interested in purchasing at the approved price, we would be inspecting the property prior to opening escrow.

4 – In the past, when I have been out of town, and before the existence of the Flip video camera, I would have to rely on Sabrina or an agent to inspect a severely damaged property, something that has always made me somewhat uncomfortable. There have been times where they have underestimated the repair costs. One that comes to mind, is actually a recent purchase of a property where they missed that a part of the foundation was made of brick. This is a very costly repair.

However, it would be more costly if I cancelled that escrow as the level of damage it might cause my business may be unrepairable. In all honesty, many times it’s not so much the damage it will cause my reputation as a professional buyer, but the fact that having that level of commitment assures me of the loyalty of top brokers, indefinitely.

In any event, this is the way I’ve chosen to do business and I believe it’s largely responsible for the success that I’ve experienced. Keep in mind that I suggest that as new buyers, you keep your contingencies for inspecting, financing and everything else in place to protect yourselves from your own errors or poor judgement. Take your time, inspect properties carefully, really understand what you’re doing and the cost of those repairs as well as the added value that they will bring to the property. A declining market is not a forgiving atmosphere.

The bottom line is this, we don’t make offers on properties without prior visual inspections! Nor would I recommend that anyone entertain that idea, it just isn’t prudent since the condition of the property is such a crucial part of your equation. If the picture that I conveyed of our system of making offers was a disorganized or disorderly conglomeration of disjointed actions – nothing could be further from the truth!

I don’t make frivolous offers. I don’t waste an agent’s time by making uneducated guesses. Every action we take in our office is well thought out and pre-calculated with a specific reason in mind.

Unfortunately, my ability to communicate may not be as good as the systems in my office. Please forgive me for any confusion that I may have caused.

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Today’s Real Estate News 10.30.2013

Summary:

In today’s news, CNN Money reports private sector hiring lowest in 6 months. Reuters shares Janet Yellen, president of the Federal Reserve Bank of San Francisco, was concerned over the housing bust but chose not to go public. Senate Majority Leader, Harry Reid, stated Yellen’s confirmation for head of the Federal Reserve should go smooth. Freddie Mac claims to have securitized $1 Billion of HAMP Performing Mortgage Loans. DS News reports serious delinquencies hit a five-year milestone. The MBAA reports an increase of mortgage applications this week. Since 2010, “foreclosure rescue schemes” have more than doubled according to the Housing Wire. Housing Wire also reported more uncertainty among mortgage servicers, the Office of the Comptroller of the Currency called for banks to practice effective risk management whether the banks chose to do it themselves or seek outside assistance and banks & business trade groups called for more “checks and balances” for the Consumer Financial Protection Bureau. Wells Fargo plans to donate $6 Million to 67 different nonprofits for the “2013 Leading the Way Home Program Priority Markets Initiative” which will help to revive heavily distressed neighborhoods. Multi-family loan provider, Greystone, introduces an affordable multi-family loan program. San Diego’s local newspaper shares La Jolla resident sentenced to five years in prison and fined $1.4 million in restitution for deceiving homeowners around the nation he could help modify their home loans. MSN shares a story of an oddly small & narrow house built on a lot out of spite, you have to see the pictures to appreciate this story!

Private sector hiring slowest in 6 months

“Private sector employers added just 130,000 jobs in October — their lowest level of job growth since April, according to a report by payroll processor ADP. The pace of hiring has been slowing since June, but the government shutdown earlier this month appears to be a main reason for the sluggish hiring in October.”

INSIGHT-Yellen feared housing bust but did not raise public alarm

“Oct 30 (Reuters) – When Janet Yellen became president of the Federal Reserve Bank of San Francisco in June 2004, a massive real estate bubble was building in the vast nine-state area that it oversees.”

Reid expects Yellen to be ‘easily’ confirmed as Fed chair

“Oct 29 (Reuters) – U.S. President Barack Obama’s nomination of Janet Yellen to head the Federal Reserve appears headed toward a smooth confirmation by the Democratic-led Senate, Senate Majority Leader Harry Reid said on Tuesday.”

Freddie Mac Securitizes $1 Billion of HAMP Performing Mortgage Loans

“MCLEAN, VA–(Marketwired – Oct 30, 2013) – Freddie Mac (OTCQB: FMCC) announced today that it has begun securitizing performing Home Affordable Modification Program (“HAMP”) modified mortgage loans held in the company’s mortgage-related investments portfolio. These loans were modified to assist borrowers who were at risk of foreclosure, thereby assisting them with keeping their homes. Since the US Treasury launched the program in March 2009, 229,000 borrowers have received permanent HAMP modifications on Freddie Mac-owned loans.”

Serious Delinquencies Hit Five-Year Milestone

“Mortgage delinquencies are on the decline, according to a report from Equifax. Home finance write-offs so far this year total $96.3 billion, down 22 percent compared to the same time period last year, the company says.”

Mortgage Applications Increase in Latest MBA Weekly Survey

“WASHINGTON, D.C. (October 30, 2013) — Mortgage applications increased 6.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 25, 2013.”

Foreclosure rescue scheme complaints more than doubled

“Foreclosure rescue schemes have more than doubled since 2010, according to data collected by federal regulatory agencies.”

Uncertainty about the future plagues servicers

“Mortgage servicers flourished during the financial crisis and have exponentially grown their businesses, largely through acquisitions of credit-impaired residential mortgage servicing portfolios. But all of this is about to change, according to a recent report from Moody’s Investors Corp. (MCO).”

OCC sounds alarm on risk management of third parties

“Banks need to practice effective risk management regardless of whether the bank performs the activity internally or through a third party, the Office of the Comptroller of the Currency said Wednesday.”

Banks, business trade groups push for CFPB reform

“The Consumer Financial Protection Bureau lacks the check and balances, the financial accountability and the transparency that is generally found at other financial regulators operating out of Washington D.C., experts told the House Financial Services Committee on Tuesday.”

Wells Fargo donates $6 million to revitalize communities

“Wells Fargo (WFC) will donate $6 million across 67 nonprofits through the 2013 Leading the Way Home Program Priority Markets Initiative to help revitalize and stabilize neighborhoods.”

Greystone premieres affordable loan program

“Greystone, a provider of multifamily loans, premiered its Greystone Affordable Loan Program, which provides long-term, fixed, forward rate-lock financing for affordable multifamily housing.”

La Jolla man popped for sham loan mods

“A La Jolla man has been sentenced to five years in prison and ordered to pay $1.4 million in restitution for defrauding homeowners around the country who had turned to his sham company for help modifying their loans.”

This weird, tiny house in Seattle was built out of spite, locals say

“A house this small and strange-looking would be interesting on its own, but local legend says the reason it exists is pure spite. Known as the Montlake Spite House, this pie-shaped Seattle house is only 830 square feet and was recently for sale for $397,500. Why would anybody build a house like this? The widely accepted story is that a neighbor offered to buy the small corner lot from the property owner. The lowball offer he made was so insulting that the owner built this house on the lot just to annoy his cheap neighbor. Is that what actually happened? There’s some debate there, but why let that get in the way of a good story?”

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Today’s Real Estate News 10.29.2013

Summary:

Today, DS News reports about how much real estate us investors have purchased since 2011. Realtytrac shares the opinions on leading brokers regarding the QRM proposal and how the foreclosure rate has been increasing in New York City and Long Island since Hurricane Sandy. According to CNN  Money, home prices are still increasing. Realtor.org shows their approval in delaying flood insurance increases. The MBAA’s president & CEO stresses a housing policy balance.  According to the Housing Wire, Hensarling is pointing the finger at Dodd-Frank for the mortgage market’s “volatility,” the Special Inspector General for TARP outlines the failures of the “Hardest Hit Fund,” the underdogs of mortgage servicing are forecasted to rule the mortgage market according to mortgage servicing experts, mortgage originations are most likely to decrease and the FHFA states that mortgage rates are to continue to climb. Bloomberg reports that consumer confidence has decreased the most since August 2011 and BofA could be forced to pay somewhere between $5-8 BILLION to settle federal claims while it’s Countrywide unit and investors in mortgage-backed securities are expected to ask a federal judge to overrule FDIC’s objections and settle for $500 Million.

Investors’ Home Purchases Total $1 Trillion Since 2011
“Since 2011, investors have purchased more than 950,000 homes; and with 370,000 purchases so far this year, they have already surpassed the number of purchases they made in either of the past two years, according to a new report from RealtyTrac.”

Leading Brokers Weigh in on Impact of New QRM Proposal, Reveling Concerns Over Mortgage Rules Taking Effect in 2014
“RealtyTrac® (www.realtytrac.com), the leading online marketplace for comprehensive housing and real estate data, today released opinions from five leading real estate brokers across the country on the impact to the real estate market and mortgage industry posed by the newly proposed Qualified Residential Mortgage (QRM) rules set to take effect in January as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in 2010.”

New York City and Long Island Foreclosures Continue to Increase a Year After Hurricane Sandy Hit
“One year after Hurricane Sandy made landfall on the U.S. eastern seaboard, RealtyTrac® (www.realtytrac.com), the nation’s leading source for comprehensive housing data, today reported that foreclosure activity in the first nine months of 2013 is up 33 percent compared to the first nine months of 2012 in the 7-county region including the five boroughs of New York and Long Island.”

Home prices continue to climb
“Home prices posted the largest annual gain since housing bubble days in August, although the month-over-month gain slowed for the fourth straight month.”

Realtors® Applaud Bipartisan Legislation to Delay Flood Insurance Rate Increases
“The following is a statement by National Association of Realtors® President Gary Thomas:

“The bipartisan ‘Homeowner Flood Insurance Affordability Act’ introduced today in the Senate by Sens. Robert Mendendez, D-N.J.; Johnny Isakson, R-Ga.; and Mary Landrieu, D-La., and in the House by Reps. Michael Grimm, R-N.Y., and Maxine Waters, D-Calif., will help millions of homeowners who are facing sudden and extreme increases in flood insurance premiums, which are an unintended consequence of legislation to reform the National Flood Insurance Program.”

Stevens Calls for a Constructive Balance in Housing Policy
“Washington, DC (October 28, 2013) — David H. Stevens, President & CEO of the Mortgage Bankers Association (MBA) today delivered the following remarks at the association’s 100th Annual Convention and Expo in Washington, DC.”

Hensarling blames Dodd-Frank for mortgage market volatility
“Rep. Jeb Hensarling, R-TX, received thousands of cheers from attendees during the Mortgage Banker’s Association 100th Annual Convention and Expo Tuesday as he painted the Dodd-Frank Act as the real threat to mortgage finance reform.”

SIGTARP details Hardest Hit Fund failures
“The Hardest Hit Fund, which was launched by the Treasury to help families in areas stricken by the housing bust, fell short of its stated goals, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) warns.”

Smaller competitors may dominate servicing in the near future
“Mortgage servicing experts foresee a future market dominated by specialists such as Ocwen Financial (OCN) and Nationstar Mortgage Holdings (NSM), while big, traditional banks head for the hills when it comes to servicing to escape litigation and costs.”

Mortgage originations expected to fall 32% in 2014
“Mortgage originations are estimated to reach a total value of $1.2 trillion in 2014, a 32% drop from 2013 levels, the Mortgage Bankers Association said Tuesday.”

FHFA: Mortgage rates continue to climb
“Mortgage interest rates continued their upward climb, with contract mortgage interest rates increasing 0.11% from August to September, according to the Federal Housing Finance Agency’s index of new mortgage contracts.”

Consumer Confidence in U.S. Slumps by Most Since August 2011
“Confidence among U.S. consumers declined in October by the most since August 2011 as the budget impasse and debt-ceiling negotiations in Washington took a toll on outlooks.”

BofA Accord With FHFA Could Cost $8 Billion, Fitch Says
“Bank of America Corp., the second-biggest U.S. lender, may have to pay $5 billion to $8 billion to settle federal claims tied to faulty mortgages after a rival lender’s deal set “a relatively high bar,” Fitch Ratings said.”

Countrywide, Investors Seek Approval of $500 Million Pact
“Bank of America Corp.’s Countrywide unit and investors in its devalued residential mortgage-backed securities will ask a federal judge to overrule objections from the Federal Deposit Insurance Corp. and approve a $500 million class-action settlement.”

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Today’s Real Estate News 10.24.2013

Summary:
In today’s news, CNN Money shares about “impact investing,” and how 50% of the country’s foreclosed homes are still being occupied. Reuters reports that jobless claims remain high yet manufacturing is slowing. According to Market Watch, BofA is slashing 3,000 mortgage jobs. CNBC states that 9 banks are being probed on mortgage-backed securities and Fed easing’s effect on mortgage rates. Mortgage apps fall less than a whole percentage according to the UPI. Housing Wire reports that the fed “proposes minimum liquidity requirements” for the big banks. Bloomberg is full of news today sharing that Bank of America’s Countrywide is being held liable for selling thousands of defective loans to Fannie Mae & Freddie Mac, the city of Vallejo is set to sell water-bonds for the 1st time since before it’s 2008 bankruptcy filing, all-cash buyers make up nearly 50% of all home sales and Warren Buffett says that while the housing market has made some headway, it still has a way to go. Dr. Housing Bubble shares the story of how it’s possible that a 932 square foot home can be priced at $895,000.  

Can you make money and feel good about it?
“Want to make money while helping the people around you? Impact investing may have the answer.”

Half of nation’s foreclosed homes still occupied
“Foreclosure sounds like the end of the line, but actual eviction can take months or years — even after the bank has repossessed a home.”

U.S. jobless claims stay elevated, manufacturing slows
“(Reuters) – The number of Americans filing new claims for unemployment benefits fell less than expected last week, but a lingering backlog of applications in California makes it difficult to get a good read of labor market conditions.”

Bank of America to cut 3,000 jobs in mortgage unit
“NEW YORK (MarketWatch) — Bank of America Corp. Inc. BAC -0.25% will cut approximately 3,000 mortgage jobs in the fourth-quarter as it looks to make cutbacks in its expenses, said a person familiar with the matter.”

Jury Finds Bank of America Liable in Mortgage Case
“Updated, 9:20 p.m. | Bank of America, one of the nation’s largest banks, was found liable on Wednesday of having sold defective mortgages, a jury decision that will be seen as a victory for the government in its aggressive effort to hold banks accountable for their role in the housing crisis.”

US task force probes nine banks on mortgage-backed securities
“At least nine banks face investigations by the U.S. Department of Justice into their sales of mortgage-backed securities as part of an effort by the task force that reached the $13 billion pact with JPMorgan Chase, people familiar with the matter say.”

What more Fed easing really means for mortgage rates
“Now that the Fed is expected to keep its foot on the easy money pedal for months to come, don’t expect to see interest rates go much lower.”

U.S. mortgage applications fall less than 1 percent
“WASHINGTON, Oct. 23 (UPI) — U.S. mortgage activity dropped less than 1 percent last week, the Mortgage Bankers Association said Wednesday.”

Fed proposes minimum liquidity requirements for big banks
“For the first time in its regulatory history, the Federal Reserve Board is proposing a rule that would create a standardized, minimum liquidity requirement for banks deemed systemically important.”

BofA’s Countrywide Found Liable for Defrauding Fannie Mae
“Bank of America Corp.’s Countrywide unit was found liable by a jury for selling Fannie Mae and Freddie Mac thousands of defective loans in the first mortgage-fraud case brought by the U.S. government to go to trial.”

Vallejo Water-Bond Deal to Be City’s First Since 2008 Bankruptcy
“Vallejo, the Northern California city that sought Chapter 9 bankruptcy protection in 2008, is set to sell about $19 million in water-revenue bonds next week in its first municipal-debt sale since the filing.”

Families Blocked by Investors From Buying U.S. Homes
“Home purchases by institutional buyers reached a record high in September and all-cash buyers accounted for almost half of sales as investors responded to rising demand from renters.”

Buffett Says Gains in Housing Fall Short of Equilibrium
“Warren Buffett, the billionaire chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A), said the U.S. housing market has made progress and still has a way to go in recovering.”

The Grand Republic of Santa Monica: 932 square feet for $895,000. How housing built before the Great Depression can fetch wild prices.
“The mania in certain California neighborhoods is so dramatic that my e-mail box is now filled on a daily basis with Real Homes of Genius.  It isn’t as high as it was in 2007 at the apex of the last bubble but I’m seeing some pretty outrageous properties being listed for pipedream prices.  Targeted markets are definitely benefitting from the investor fever.  First, many of the homes being sold are actually being sold for the land.  Given the headline cost plus construction costs this is a very tiny market segment here.  Yet the froth is very obvious in these regions.  Santa Monica is prime Westside housing.  It is hard for anyone outside of the region to understand the crazy prices in Santa Monica.  Even those in the region have a hard time understanding.  Today we’ll focus on this area and pull up a property that only an investor could love.  Welcome to the wonderful Republic of Santa Monica.”

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Today’s Real Estate News 10.14.2013

Week 3: Small businesses reel from shutdown
“As the government shutdown moves into its third week, small businesses across the country are trying to figure out how — or if — they’ll be able make up the lost business.”

For sale by owner: Homeowners ditching brokers
“Bolstered by the housing recovery, a growing number of homeowners are going it alone when selling their homes hoping to save thousands of dollars in commissions.”

Homebuyers: To get the house, get there first
“Housing inventory is stiflingly tight in many locations, making it a challenge to find, much less land, your dream home.”

Shiller, two others win economics Nobel for ‘bubble’ warnings
“Robert Shiller, who became famous for calling the housing and Internet stock bubbles, was one of three Americans to win the Nobel in economics Monday.”

Saying goodbye to the California middle class. California least affordable state in the entire country as renting class expands.
“California for a generation has been a high cost of living state.  This is no surprising revelation.  Yet the tech boom in the 1990s set the state into a unique stratosphere of real estate.  Hundreds of thousands of jobs now depend on big tech companies including Facebook, Google, Apple, and other common names.  Changes like this have added to drive up in real estate values.  New data highlights that California’s metro areas are the least affordable for those looking to buy based on the families living in those areas.  Of course, investors are bringing outside money so that is one way to move around this new reality.  Unlike an Ohio or Nebraska, California real estate is global in nature.  The only problem today is the massive gap is pushing many middle class families out of reach from buying a piece of real estate.  It is becoming more challenging for families to purchase real estate in California and the data backs this up.”

14 American Housing Markets Drowning In Foreclosures
“One in every 998 U.S. homes received a foreclosure filing in the third quarter, according to the latest foreclosure data from RealtyTrac.”

US Default Seen Pushing Housing to the Brink
“Housing largely dodged a bullet on the government shut down that went into effect October 1, the pending default, however, is an entirely different matter. As the October 17 default deadline nears, knuckle in the housing industry are turning white.”

The 2 Families of Mortgage REITs
“Mortgage REITs are a very interesting sector, and although they only represent a small percentage of REITs, they’ve developed a very loyal following. Their increased use of leverage leads to very high yields that appeal to income seekers with a sizable appetite for risk. However, before jumping in to the sector, investors should realize that not all mortgage REITs are created equal. There are a wide variety of mortgage REITs, and the two major categories are separated by the types of mortgages the REITs invest in.”

J.P. Morgan Hiring for Compliance “SWAT Team”
“Facing a slew of costly regulatory issues, J.P. Morgan Chase & Co. is bringing in a SWAT team.”

Mortgage applications gain; buyers look past US shutdown
“Applications for U.S. home loans rose in the latest week as demand for refinancing outpaced purchases, data from an industry group showed on Wednesday.”