Terry Bishop

Our real estate market here in Tucson is beginning to show signs of life, although it is predicted there is a great deal of "shadow inventory". This is inventory held by the banks from foreclosures, and has not yet been put on the market. Short sales and foreclosures continue to be prevalent. People who do not have to sell their homes are staying put for another year or so.

Tucson is considered a distressed area and appraisals are often coming in low. Money is available for people with good credit scores - both FHA financing with 3.5% down, and conventional loans. For veterans, VA loans are available and anyone PCSing to Davis Monthan Air Force Base for a tour should definitely consider a VA loan to purchase a home.

The areas which seem to be hit the most are the master planned communities. These are the areas which grew rapidly and the areas where new home subdividers/builders had relationships with lenders such as Countrywide and offered zero down loans, option arms, 80/20 loans with the 20% being adjustable. These are the areas where "creative financing" reigned supreme.

People flocked when builders held lotteries for lots, potential homeowners camped out to get a lot. It was a feeding frenzy. The media lapped it up. These too were the areas where prices jumped thousands of dollars in a week during the heyday of the boom. Prices changed from morning to evening. I had a client with a price point of $140,000 and we went to a new home subdivision, and when we walked out, I said "let's look at a resale". And now these are the areas where homeowners are experiencing negative equity, where foreclosures are rampant, and where people are walking away. My client is just about even in his resale home.

Homeowners are not the only ones hurt in this market. Subdividers and home builders are also feeling the pain. People considering a new home should check with the Arizona Department of Real Estate to make sure the builder is not in financial distress.

If possible, any earnest money deposit should be put in a neutral escrow. If the house for some reason is not finished or does not close escrow, the home buyer can petition the escrow company through his or her real estate agent, to have the earnest money returned. Generally the earnest money in a new home subdivision, goes to the builder and is used as working capital. If the builder goes under, the buyer loses the earnest money. It is prudent to remember that with new home construction, real estate agents have difficulty altering the builder contracts which are written by a bevy of contract attorneys. Err on the side of caution...and if the builder balks, walk away! Don't forget, builders are hungry these days and if they feel the financial position is sound, a neutral escrow should be fine.

These are not times to try and save on a real estate commission, especially if you do not know how to navigate the desert. Sign a buyer's broker agreement and agree to pay your agent whatever percentage if it is not being paid by the seller. Find yourself a good real estate agent who knows what is transpiring and who is not afraid to holler in your behalf. You need representation, especially in this market. Remember a California dollar and a New York dollar are not the same as a Tucson dollar. They may be worth the same amount, but they don't buy the same goods and services!

Call me at 520-884-7201, leave a message if there is no answer. If you need a good agent in any other part of the country, I can help you with that too. You can also e mail me at terry@terrybishop.com

There are all kinds of bargains out there...I sold a two bedroom, two bath townhouse for $37,000! This is rare, but possible. I sold a townhouse in the Catalina Foothills for $275,000 which would have sold for $450,000 a few years ago...but patience was the price...it took nearly five months to close escrow. This is a buyer's market, but only if you know the pitfalls, the time frames, and the costs. Rely upon your Realtor.

Resources:

Arizona Department of Real Estate:

http://www.re.state.az.us/INFO_FOR/CONSUMERS.html

http://159.87.254.2/publicdatabase/SearchDevelopments.aspx

Tomorrow: Numbers

Rather than trying to give each month since January 2009 a blog page, I am going to attempt to try and combine all six months so that you, the reader, can discern some type of trend. This may take a few blogging days.

I posted this to my website blog: http://www.terrybishop.com/blog July 13, 2009.

I've had a bit of a hiatus from blogging, and if truth be told, I miss it. But I stopped blogging in January/February. I became paralyzed and found myself unable to do much of anything ... oh I took real estate classes, and was not literally paralyzed, but I was in a real blue funk, as if something had sucked the joie de vivre from my innards.

Needing to get out of this melancholy, I finally realized the root and the extent of my problem. Congress was trying to get the stimlus bill passed ... that bill which was suppose to be a panacea to the problems of the economy...but seems to be ladened with pork...GM and Chrysler were in the throes of financial crisis. Much had been made of the bonuses to AIG, and then the powers that be gave Fannie Mae and Freddie Mac bonuses far in excess of those to AIG...and everyplace there was news, there was a comparision to the Great Depression. Barney Frank and Chis Dodd paraded pompously in front of the cameras with their "just so" hair, seemingly oblivious to the true impact of what they had orchestrated years earlier. Connect the dots and cause and effect are not a part of their thought processes.

The sound bites were inane...the people writing about the Great Depression did not have much of a background in economics, they seemed to parrot what the members of the House and Senate desired. The kicker was the more than 1200 page stimulus bill which no members of Congress read...but upon which they voted. I didn't think that this was democracy as I believed...I didn't think it was responsible government.

It was pandering to the whims of lobbyism and I understand that lobbyism will go on ad infinitum...as soon as people get elected to the House or the Senate, they begin filling their war chest for the next run...and so we don't necessarily have thoughtful government...we have goverment based upon what interest group can pony up the most cash...or so it seems to me.

And so I did the only sane thing I could...I stopped reading the newspaper and I turned off the news. Alas, it saddens me but at every instance, I will tell people, look beyond the sound bites...the press releases, and think for yourself. Don't believe everything you read or hear...not that I did. But I suddenly realized what an impact the news has upon people...and how important little gestures are in getting to the truth...and so I am blogging again...about Tucson, about real estate...and maybe once and a while, a tangent like this!

I posted this on my website blog: http://www.terrybishop.com/blog July 12, 2009.

Another aspect to consider when investing in property is whether you, the investor, are skilled and can do repair work in a home. Today there are thousands of REO properties for sale, real estate owned properties - another term for bank owned properties. Many of these properties need work.

I have often thought a consortium of tradespeople would be an ideal investment group; a person who knows drywall, a plumber, an electrician, a tile person, and maybe a roofer. Between these people and someone to put up the initial amount of money, the group purchases property, fixes it up, and then puts it on the resale market. (This would have to be an LLC, limited liabiity corporation, with exit strategies defined for group members and legally enforceable. Consultation with an attorney is advisable.)

The key is to purchase the property at the correct price, and with today's pricing, making offers would be the name of the game. Doing the repairs in a timely manner is critical. The sooner repairs are done, the sooner the property can be put back on the market. If you buy correctly, the property can be priced in the mid range for the area so the property does not languish on the market. The sooner the profit can be made the quicker the group can move to the next property.

A 1031 Tax Deferred Exchange may not work in this instance because the property has not been held for any appreciable period of time. Short term capital gains tax would have to be calculated prior to determining profit. Again, here is where a good accountant who also understands the workings of 1031 tax deferred exchanges is necessary.

Think about a team and who you need on your team to make investing in property profitable and fun! Check professional people with good credentials, too many properties have been fixed up by rank amateurs. Your goal is to have your property stand out and sell immediately!

This was posted to my blog this morning at http://www.terrybishop.com/blog

As a potential investor, you have thought about the type of property you want to purchase, "A", "B" or "C" property. You know the area in which you would like to concentrate your investment(s). Find a good Realtor who is familiar with 1031 tax deferred exchanges, who can suggest a good lender to provide financing for investment properties. Your aim is to create a relationship which will last for years.

Ask your Realtor to sit down with you in a meeting with a 1031 Tax Deferred Exchange Facilitator. There are companies which specialize in faciliating 1031's, and often Title Companies have departments that are knowledgable about 1031's.

Talk with your accountant about 1031 Tax Deferred Exchanges. The impetus for these exchanges comes from Section 1031 of the Tax Code. A reliable team is extremely important because any mis-step in timing can trigger big tax liabilities.

How does a 1031 work?

Let's say you purchase a multi family unit for $200,000. You put the requisite 20-25% down. That is $40,000 to $50,000. In a nutshell, you hold that property for five years, and each year it appreciates 5%. In five years, the property is now worth $256,671. You have a gain of more than $11,000 a year. Additionally, you have had the rent on the units as well as the tax deduction of interest and depreciation, plus the costs to maintain the property.

With a tax deferred exchange, you must take your proceeds and reinvest them in another property within the required period of time. You now have the initial $40,000 or $50,000 plus the gain of $56,671. Adding the initial down payment to the capital gain, you would have between $96,671 and $106,671 to reinvest depending upon your initial investment.

Using a 20% formula for down payment on the next property, you can now purchase a property between $386,684 and $483,355, or $426,684 to $533,355 for the 25% figure.

If you were not to defer the taxes, you would pay long term capital gains tax on the proceeds of $56,671. That is now 20%. Uncle Sam would take $11,334 right off the top. That $11,000 plus can purchase $44,000 to $55,000 more property! Ideally you want to defer taxes until you are dead and allow your heirs pay the tax, or at least defer the taxes until you are not working.

Create a long term plan. Within a hypothetical 20 years, you would do this four times. Each time, you will have more cash to purchase a property. At the end of 20 years, you will have property valued at million dollar levels.

Adhering to the timing is imperative. Putting a competent and professional team together and having all work synchronistically is paramount. Deferring the taxes on the sale of these properties is what maximizes the leverage so you can purchase more property. You must eventually pay the taxes, and if you want to pull some cash out, you can also do that, but be aware, taxes will be due!

Resources: Internal Revenue Service

http://www.irs.gov/newsroom/article/0,,id=179801,00.html

National Association Realtors:

http://www.realtor.org/library/library/fg408

1031 Faciliatator:

Brigitte Echave
Leverage Exchange Group LLC
7840 E Broadway Blvd Ste 209
Tucson AZ 85710
866-988-1031
520-722-2578
520-465-8690 520-979-8256

brigitte@leverageExchange.com

http://www.LeverageExchange.com

I posted this to my blog this morning at: http://www.terrybishop.com/blog

I often look at people who are slim and trim ... people who can speak another language...or people who seem to know so much about a particular subject. Then I realize, it is all slow but steady. Most of these people developed some kind of plan: eating and working out in a healthy manner; learning new vocabulary and verb conjugations; or studying a particular subject.

The same is true for that person who owns a 120 unit apartment complex. It's a plan. Generally it does not happen overnight. It requires homework. But advanced planning may make it a bit easier.

In a previous post, I talked about the power of a 1031 Tax Deferred Exchange combined with a good plan of action purchasing investment properties. Real estate can generate cash flow for your retirement. And with today's low interest rates and the numbers of properties on the market, the time is ripe to make a long term plan and begin to implement it for your future.

People often say they want an investment property which generates good cash flow. That's all they know. They have no philosophy of investing. As a potential investor, your first decision should be: What types of properties do you want to purchase? This may be determined by your price point.

"A" properties are those properties which are usually the most expensive; townhouses, condos, single or multi family homes in the most expensive areas of town. They generally command the highest rental prices.

"B" properties are mid priced properties; townhouses, condos, single and multi family homes in middle class neighborhoods.

"C" properties are properties in lower income neighborhoods, but managed properly, can be a solid investment.

There will always be people who are eager to rent in each type of property. In a down market, people may move from an "A" property into a "B" property, and people in a "B" property, may move to a "C" property to save money. Think about the area in which you live and where "A" properties, "B" properties, and "C" properties are located. Check the areas and the price points of these properties.

Condos, townhouses, and single family homes all present different investment strategies. Often these properties have association fees. What the fees cover and the management company is important. Some management companies do a far better job than others and surveying the area for deferred maintenance is important.

As an investor, do you want to maintain the grounds? How much are the association fees? Can you buy a different type of property without association fees and maintain the property yourself or hire a groundskeeper for less than the association fee? How much time do you want to devote to managing property? These are important questions for the potential investor to answer honestly.

I am a firm believer in purchasing properties in the same general area. When you drive by one property, you can drive by all. Problems arise when landlords do not know what is transpiring with their property. Seeing aluminum foil on the windows may tell you something other than the tenant is a day sleeper. Mileage and drive times are costs of owning property and it is important to check your asset on a regular basis.

Tomorrow: The power of a 1031 Tax Deferred Exchange

Resource: Qualified 1031 Tax Deferred Exchange Facilitator

http://www.leverageexchange.com/pdf_files/1031%20exchange%20info.pdf

Business Brokerage, Commercial Agent:

http://www.sonoitaproperties.com/

I posted this article this monring on my blog, http://www.terrybishop.com/blog