Grayson Hodge

It Is All In The Numbers

by Cliff Hockley

"The biggest mistake many investors make is to ignore the numbers generated by their properties."

Financial statements. Let's start with financial statements, or lack of them. Many real estate investors only track the results of their real estate investments at tax time. Instead investors should be reviewing their results by reading their financials on a monthly basis, or at a minimum on a quarterly basis. I have been working with a client who always files an extension. He really never pays attention to his financial information, because it is always six months late. He just assumes he is making money and the people that are working for him are doing the right thing. He owns over 150 units at three locations. He has no way to make a quick decision. He has no idea if he is losing money or making money. Do you want to be in his shoes?

What are Financial Statements?

Typically, we assume financial statements will include:

1. A balance sheet (a summary of a person's or organization's balances. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year). This document is usually prepared by a CPA or management accountant.

2. An income statement (a summary of income and expenses) usually prepared by the investor, a bookkeeper, an investor, or a property manager.

3. An income register that includes a rent roll (summary of all collected rents and miscellaneous income).

4. Check register (list of all bills paid by check or via wire or electronic transfer)

5. A summary of security deposits (a summary of all tenant security deposits)

6. Aged payables reports (if you have aged payables, bills that have been incurred but not paid.) Typically financial statements are prepared on either an accrual basis or cash basis. In my mind (not being an accountant) I prefer cash basis. It is easier to see how a property is operating from month to month, without the numbers being clouded by budget accruals (O.K., O.K. I know I am not an accountant).

Other helpful thoughts Many people use excel spreadsheets, or QuickBooks to track property income and expenses, or if they own only a rental house, maybe just a checkbook. I recommend that you do not mix your personal expenses with your investment expenses, and that you have a separate check book for every property you own.

What do you look for? I believe you are looking for breaks in the patterns. Accounting is just a way of organizing numbers into helpful patterns.

Look to make sure all the rents have been paid.

Make sure all bills have been paid on time.

Compare the bills and rents to the trailing 12 months.

Are some of the bills out of line? In other words are the water bills higher than you expected?

Is the insurance bill 3 times what you thought it was going to be, especially when compared to your other investments?

Look carefully at your maintenance numbers, are they in line with industry standards?

Cash on cash return

Compare your income and expenses to budget and use the variances to find inconsistencies.

How much you owe to the bank and when you have to refinance or pay off your loan?

• Current CAP rate (Sales price divided by Net operating income)
• Percent of expenses to income (this ranges from 20 - 60% depends on the property)
• What is your vacancy rate?
• How many move out notices do you have?
• What are the rent levels for units (are they within the range for the market place?) If others are preparing the reports for you, you should review monthly account reconciliations to make sure all the numbers balance.

Randomly check the check register and income register to see if someone is not siphoning money out of your property accounts. It is very easy for onsite mangers to collect rents and not send them to the central office. (This is why we have a policy that most of our rents are mailed or directly delivered to our office).

Conclusion

Many real estate investments stumble from time to time. Tracking the monthly operations is just like a Doctor checking your pulse, blood pressure and taking your temperature. You can tell a lot from the basics. You can tell early when you are running into a problem and what you need to do to restructure and improve your operational results. Reviewing and understanding your numbers will help you decide whether to keep, sell, refinance, or improve your property.

There are many standard rules of thumb. Call a local property manager and ask how they gauge the successes of your property type.

Finally, ignoring your numbers will not help you. Preparing an annual budget and reviewing your financial reports on a monthly basis are the first and second steps to insuring the operational success of your investment. Do both today. Your real estate investment success is all in the numbers.

Published: October 22, 2009

Home buyers should pay attention to IRS Form 4506-T

Not just a harmless part of the paper blizzard, it potentially exposes otherwise confidential personal financial information to unknown and uncontrollable numbers of people.

By Kenneth R. Harney

October 11, 2009

Reporting from Washington - You might assume it's just another boring-looking piece of the paper blitz you're hit with when you apply for a home loan. But given IRS Form 4506-T's new prominence in the fraud-shocked mortgage market, it's much more than just another document to sign.

The form authorizes a loan officer or mortgage investor to get electronic transcripts from the Internal Revenue Service covering multiple years of your federal income tax filings. The IRS has supplied private tax return information to lenders for years, but the data typically were requested only at the close of escrow, and mainly for self-employed applicants or those with unusual income patterns.

But Fannie Mae recently directed lenders to obtain two sets of electronic transcripts for all borrowers, regardless of income sources -- a 4506-T upfront at application and another at closing. Fannie told lenders the move was part of its efforts to spot fraudulent income claims and limit loan losses.

During the height of the housing boom, many lenders went soft on borrowers, allowing millions of them to "state" their incomes rather than supply copies of tax returns filed with the IRS. These so-called no-documentation loans often later turned out to be "liar loans," with puffed-up incomes enabling borrowers to obtain larger mortgages than they could justify -- or afford -- based on their actual incomes.

When lenders didn't verify stated income claims, liar loans frequently turned into foreclosure bombs. Their remains are visible in neighborhoods across the country, where foreclosures have soared to record levels.

Now, not only Fannie Mae but also most major lenders are tightening standards and double checking everything. When it comes to what you say is your annual income, they want to verify it twice -- even if you submitted stacks of IRS returns.

The IRS is helping out as well by lowering the cost of those multiple verifications. As a result of higher-than-expected revenues generated by skyrocketing demands for 4506-Ts, the IRS -- which is not permitted to make a profit on services such as income verification checks -- has cut the price of transcripts from $4.50 to $2.25, according to industry sources.

"The timing of the cost reduction couldn't be better for lenders looking to return to more prudent underwriting," said Curtis Knuth, vice president of New Jersey-based NCS Inc., one of the largest vendors of Form 4506-Ts to the mortgage industry. Most lenders, he said, do not charge loan applicants separately for income verifications but roll the costs into their origination or processing fees.

The much more intensive use of Form 4506-T also is focusing new light on what consumers should -- and shouldn't -- do when confronted with a lender's or settlement agent's request that they fill one out.

Here's a quick overview:

* Take Form 4506-T seriously. It's a powerful tool, and potentially exposes otherwise confidential personal financial information to unknown and uncontrollable numbers of people. It is not just another part of the paper blizzard.

* Pay careful attention to the IRS' instructions on the form, particularly as related to the tax return transcript years being requested, and to the dating of the form next to your signature. The date you write in is important because the IRS won't provide transcripts unless it receives the request within 60 days of the signing date by the taxpayers making the loan application. Make sure you date the form when you sign it.

Filling in the tax return years is crucial as well because it allows you to limit what the lender, settlement official or secondary market purchaser of the mortgage can obtain. The form includes boxes allowing up to four years of tax data to be accessed, but loan applicants can specify that fewer years be available.

Earlier this decade, controversy erupted in the mortgage industry because some large secondary market loan investors and banks were requiring brokers or closing agents to instruct applicants to sign Form 4506-Ts but not date them or fill in the transcript years being requested. Some lenders even distributed their own printed instructions along with the Form 4506-T, requiring the home buyer's or refinancer's signature, but no dates. This not only countermanded the IRS' instructions but gave investors the ability to check incomes whenever they chose -- long after the closing.

Bottom line here: Be aware of the new importance of Form 4506-T, and get used to seeing it twice during the mortgage cycle. Make sure you know how it's supposed to be used -- and how it can be abused. Check it out in advance by going to the forms area at the IRS website www.irs.gov and downloading a copy.





kenharney@earthlink.net

Distributed by the Washington Post Writers Group.

9 Ways to Stay Safe Online and Protect Your Privacy

By Nerissa Sardi

RISMEDIA, September 17, 2009-Nearly everyone is using the Internet these days to find information or connect with others. But surfing the Web can still sometimes feel like the Wild West. Despite technological advances to help reduce the risk of identity theft, becoming the victim of an Internet scam or having your privacy invaded is a persistent threat. And, as a number of recent incidents involving social networking websites have shown us, it can even be fatal.

Keeping your guard up is essential to avoid trouble on the Internet. Here are nine tips to help you stay safe online:

1. Be careful who you give your information to. Avoid giving out personal information such as your name, address or telephone number on websites until you have read and understand their privacy policy. For example, be on guard for online promotions or contests in which you may be asked to provide details about yourself. This information could be used to market to you in the future. Never give out your Social Security number or passwords online, unless you are certain the site is secure.

2. Don't reply to spam. Ever get one of those strange, unexpected e-mails for real estate, weight loss, work-at-home or investment opportunities? Your best bet is to delete those e-mails without opening them. Never reply to these e-mails, even to request they remove your name from their lists. Replying will alert the sender that your e-mail is a "live" e-mail attached to an actual person.

3. Use secured websites. Before you purchase a product or service online with a credit card, make sure the connection is secure or encrypted. Look for a small lock icon on the website, or look at the URL address line; a secure connection will begin with https:// ("s" for secured) instead of http://

4. Beware of public wireless access. Don't send personal or confidential information when using public wireless connections in cafes and other public places. Fellow wireless users could potentially monitor what you are doing from only a few feet away.

5. Think before you post. Avoid revealing personal information or photos on websites such as Facebook, MySpace or SecondLife. Personal or embarrassing information and images can haunt you in years to come when you are applying for college or a new job. If it's on the Internet, it's available for a potential employer, your school, a future or current spouse, your mother or grandmother to find.

6. Beware of classified listing meet-ups. When using websites such as Craigslist or Freelist to buy or exchange goods locally, always bring someone you trust with you to meet the seller/buyer. Be cautious about letting strangers into your home or meeting in unsafe places

7. Watch your cookies. Cookies are tidbits of information that websites store on your computer. Some cookies are useful, such as those that store information about you so you don't have to retype info every time you go to that site. Other cookies are used to track your motions through a website. Some companies keep this data for their own usage- however, some sell your information to other marketers. Be sure to monitor and edit the cookies on your computer.

8. Use anti-spyware. Spyware is sneaky software that rides its way onto computers during the download of screensavers, games, music and other applications. Spyware sends information about what you're doing on the Internet to a third-party, usually to target you with pop-up ads. Anti-spyware will help block this threat.

9. Monitor your kids' Internet use. Move computers out of the bedroom and into family space where parents and others can check on your child's Internet use by simply walking by. Set specific times that your child may surf the Web, and set rules about social media websites, such as Facebook, My Space and Twitter.

For more information, visit www.findlaw.com.

Read more: http://rismedia.com/2009-09-16/9-ways-to-stay-safe-online-and-protect-your-privacy/#ixzz0RMJkKpIn

RISMEDIA, September 15, 2009-RE/MAX International, Inc. recently announced a partnership with California-based iQual Corporation whose flagship product, the ApprovalGUARD^TM Service, is designed to help consumers understand and manage their credit profile. The terms of the partnership will allow RE/MAX to provide consumer credit information and articles written by professional credit experts on real estate website remax.com.

"Consumers have always found it difficult to understand their own credit, but in today's market many are also finding it harder to qualify for credit, and are looking for resources to help them proactively manage their personal credit profile," said Marnie Blanco, Vice President of eBusiness at RE/MAX International. "Remax.com is a one-stop hub of consumer resources and information on everything from preventing foreclosure and choosing a contractor, to finding an experienced agent in your neighborhood. Now, our partnership with iQual will allow us to provide consumers with a host of easy-to-read articles to help consumers become experts on their own credit health."

For more information, visit www.approvalguard.com or www.remax.com.

Read more: http://rismedia.com/2009-09-14/remax-international-partners-with-iqual/#ixzz0RAuel9Lq

NEW YORK (CNNMoney.com) -- Hundreds of thousands of first-time homebuyers across the country have begun to claim their tax credits, according to new government data released on Friday. So far, nearly 315,000 people have claimed the tax credit after filing an amended 2008 tax return, according to a Treasury Department report on the status of the Recovery Act. California led all states with 42,304 claimed credits. Eligible first-time homebuyers can claim the credit of up to $8,000 -- or 10% of the home's value, whichever is less -- on either an amended 2008 return or on their 2009 return. Treasury's figures more than likely sharply underestimate the real number of people who have taken advantage of the credit because many homebuyers have not yet claimed it on their tax return. According to a recent National Association of Realtors survey, about 1.1 million first-time homebuyers have used the credit. NAR expects that number to grow to about 1.8 million by the time the credit expires on Nov. 30. The discrepancy between Treasury and NAR probably stems from the fact that a majority of eligible first-time homebuyers have opted to wait to file for the credit on their 2009 returns, which they can file in early 2010. State-by-state data. The Treasury figures show how some of the hardest-hit states during the housing downturn are now among the states with the largest numbers of claimed tax credits. California, Georgia, Florida, Arizona and Michigan are all in the top 10, when it comes to claiming the credits. Though part of that is likely skewed by population figures, other large states like New York and Virginia have been left in the dust. "We're seeing some big increases in many of the areas with the biggest price corrections," said NAR spokesman Walter Maloney. "That's no coincidence." A National Delinquency Report from the Mortgage Bankers Association showed that California, Florida, Arizona and Nevada combined accounted for 44% of all foreclosure starts during the quarter. Last quarter, the Cape Coral metro area in Florida recorded the largest decline in home prices: 52.8% to $84,000, according to a NAR report. After California, Texas and Florida were the next states with the largest number of claims, with over 29,000 each. Arizona had nearly 9,300 claims and Nevada rounded out the top 20, with 5,259. Most of the smaller states made up the bottom of the list, with Vermont's first-time buyers bringing up the rear, claiming just 351 credits. Applying for the credit is as easy as filing income taxes. First-time homebuyers just have to claim it on their return -- no other forms or papers have to be filed. National Association of Realtors estimated an extra 350,000 sales will occur this year, solely because of the credit. The National Association of Homebuilders, more conservatively predicted 165,000 extra home sales.