Threshold Investment Properties » Financial Issues

$8,000 first-time homebuyer credit

Matt Kastner — Tue, 31 Mar 2009 22:31:40 +0000

Ever since the “American Recovery and Reinvestment Act of 2009 (aka The Stimulus Bill) was passed in February, many homebuyers have been trying to figure out what this means for them. Sure an $8,000 tax credit is great, but how do you get and how do you qualify?Here is a brief rundown of the main points of interest:

Repayment – This tax credit does not have to be repaid. However, if the qualifying home is sold within three years of purchase, the entire amount of the credit must be repaid.
Credit Amount – Credit will be for 10% of the purchase price of the property up to $8,000.
Property Eligibility – All primary residences including single-family homes, condos, townhomes, mobile homes and even houseboats (not that that matters much in Missouri). Duplexes do qualify, but generally, only 50% of the property is considered your primary residence so you can only consider half the purchase price when determining the amount of credit.
Personal Eligibility - For first-time homebuyers only. In this case, a first-time homebuyer is considered someone who has no owned a primary residence in at least 3 years.
Income Limits – Credit begins phasing out when the purchaser’s income exceed $75,000 for a single person or $150,000 for a married couple.
Timetable – Available for purchases between January 1, 2009 and December 1, 2009.
Claiming the Credit – Fill out IRS From 5404 to determine your amount of eligibility and apply this amount to your 1040 tax return on Line 69.

One of the biggest concerns with this tax credit is that you don’t actually see the money until after you purchase the property. You might receive the funds within just a month or so of the purchase, but that doesn’t do a lot if you need it up front. Thankfully, in the State of Missouri, there is way around this issue.

In response to the passage of the Stimulus Bill, the Missouri Housing Development Corporation unveiled a load program that will you as much as $6,750 prior to closing, using your pending tax credit as collateral. As long as this amount is repaid by June 2010, no interest will be due on the amount. This program is available only for Missouri and more info can be found here.

While you can’t use this credit on an outright investment property, the fact that it is available for duplexes and foreclosures makes it an appealing option if you are looking to take advantage of this great buyers market and also find a place to live. If you are looking to do a bit of rehabbing, you can even use the $8,000 to help fund the project.

On the other side of the situation, this program should also be a help to rehabbers trying to sell their finished projects. A free check for $8,000 might be too much for formerly skiddish buyers to pass up, which may help the residential sales market in the coming year. It’s really a win-win for everyone involved in the real estate transaction.

$8,000 homebuyer tax credit in stimulus

Matt Kastner — Fri, 13 Feb 2009 19:28:50 +0000

There is a bill, a stimulus bill, up on Capital Hill, that might be of interest to you if you or someone you know is looking for their first home.It could mean $8,000 in your pocket.

Earlier this week, the real estaet industry was abuzz about these credit. Orginally, the provision was set to provide a $15,000 tax credit, which did not need to be repaid, put that was wiped out of the bill while it was being batted around congress. The credit would have been available to anyone who bought a home within the next year, regardless of income. This was to be an escalation of the current tax credit of $7,500, which is for first-time homebuyers only, has income restrictions, and must be repaid.

The bill is still being worked on at this point, but it seems that an $8,000 tax credit will replace the original in the final bill. At this point it sounds like this version will have the same restrictions as the existing credit, but will not have to be repaid. The credit would be available to any first-time homebuyer who purchasers before August 31, 2009. Its possible the language of the bill will be altered to require repayment (which happens over 15 years), but we won’t know for sure until next week.

If you or someone you know is a potential first-time homebuyer, considering the great interest rates and great foreclosure buys on the market, this might be something to pay attention to. Whether you like the stimulus bill or not, its hard to turn down a $8,000 check. I’ll have more on this once the bill is final.

UPDATE - The bill has just passed in congress and will be voted on by the senate tonight. The exact details of the current provision are still unclear. The bill is 8 inches thich (seriously) so I guess they might not even know what they are agreeing to. Additioally, the State of Missouri is trying to do something similar with a $1,000 tax credit. More on these next week.

Great lending news!

Matt Kastner — Tue, 10 Feb 2009 22:52:18 +0000

It appears that Fannie Mae has decided that it is going to cut real estate investors a break. Word is hitting the street that the current cap on Fannie Mae backed loans will be removed for credit worthy real estate investors beginning March 1, 2009. The new cap will jump all the way up to 10 properties.

This is great news for you investors that have been waiting for something to break. The restrictions on this platform will probably be pretty strict, but when compared to the environment of the past year, this is a major step forward. This might bode well for the markets this summer. Might be time to get back in touch with your lenders and see what this means specifically for you. Hopefully you can reap the benefits.

More as it develops.

Investing your savings

Matt Kastner — Mon, 09 Feb 2009 22:10:05 +0000

Since your house isn’t your biggest investment and you are using this mentality as a springboard to get out of the endless cycle of dumping your money into the bank’s coffers, there is one big question looming in your mind: “What do you do with this new found money you have saved?” The short answer… invest it.

There are probably a thousand schools of thought on how to get the best and safest returns on your money. However, with the recent collapse of the financial markets, along with stock prices and savings account interest, it should be obvious that there is no such thing as a totally safe bet. Since I am obviously an advocate of investing in real estate, and since I know quite a bit about it, I am going to stay out of those more uncertain waters and talk about what I know: investing in real estate.

The beauty of investing in real estate is that, more than any stock or mutual fund, you control your destiny. Sure there are lots of things out of your control such as the ebb and flow of consumer demand and fluctuating interest rates, but you have a greater measure of control through this investment method than almost any other. You buy the supplies, you hire the labor or you do the labor yourself… you have control.

I have gone beyond budget on projects and was faced with that ever important question: What is more important to me, my time or my money? I have often decided that my budget was the most important thing so I did some construction work myself, which I was planning to sub out. Sure I had to work hard for it, but when I got in a pinch the decision was mine; not some CEO who I have never heard of. That’s what I love about real estate. It’s not for everyone, but if you have that entrepreneurial mindset, there is nothing better.

If you decide that want to make a move into the investment real estate market the question then becomes what kind investing do you do? Fix and flip, fix and rent, buy fixed up and rent… there are a many choices. In reality, there is no one answer as different people have different strengths and financial resources. If you don’t know much about construction and don’t have the time or desire to learn, you might want to stay away from rehabbing. On the other hand, if you know your way around a tool box and have the time (or decide weekends and evenings are for chumps) you might consider getting into properties that need work. The margins tend to be bigger on those.

The key is to remain flexible. Two or three years ago, the best bang for your buck was to find decent 4-families that needed a little work and rent them out. Sometimes you could resell within a year for a profit. Those days were great. Now, the biggest return for the smallest investment of time and money is often small houses, usually 2 bedrooms, which are popping up daily on the foreclosure market. The key is to remain flexible. Never get stuck in a pattern of investment that you refuse to break. Some of the best returns come from recognizing new trends.

As I said, not everyone is cut out for the real estate investment world. The money can be great, but there is hard work and time involved even for the most distant investor. The trade off is that it is a relatively safe place to put your money if you make wise purchases and are patient. People always need housing and even if demand lessens for a couple of years (such as right now), things always bounce back. If you follow the deals and trends in the market, whether they be houses, multifamilies, there is always money to be made by those with the drive to make it.

If you haven’t already, make sure your check out the first two parts of this series: Part 1:Your home is not your biggest investment and Part 2: Responsiblity managing your home

Responsibly managing your home

Matt Kastner — Thu, 29 Jan 2009 22:54:29 +0000

So if your house isn’t your “biggest investment,” what is a person to? You have to live somewhere. That’s an important question, but there is no easy answer. If the solution had to be narrowed down to one thing it would be “responsible money management.”The biggest problem with the real estate and financial markets in modern America is that we have all gotten into the habit of spending money without considering the consequences. Oftentimes, the money is borrowed in the form of a mortgage loan or credit card. We have all become so entrenched in the rat race that we live our lives in a perpetual cycle that always keeps us from becoming truly financially free.

Thankfully, it is easy to escape this pattern with forethought and discipline. A good first step is to change your view of the role of the house. Once you stopping seeing it as an unlimited piggy bank, you are on your way. Here are a few things you should consider in the future, when faced with a decision regarding your home:

Downsizing – Or at least, quit buying bigger and more elaborate homes simply because you can. If you are buying your first home, don’t go overboard. just because your real estate agent or parents suggest you plan ahead and buy big doesn’t mean you should. With our collective track records over the past twenty years such advice now seems questionable. By buying smaller you don’t have to be house-poor. You don’t have to resort to constant refinancing or high credit card debt to enjoy life. You might even be able to consider a shorter loan term than 30 years, which will help to pay down your mortgage more rapidly, thereby putting more money into your balance sheet more quickly.
Avoid moving too often – If you’re the type of person who buys a new house every few years, you also need to realize that you are paying a lot of fees to mortgage brokers and real estate agents each time you move. Between points on a loan and agent commissions, paying an 8% premium for a property is not uncommon. Maybe even more. This is money that you will never see again and it adds up pretty quickly if you move 4 times in 10 years. We’re talking tens of thousands of dollars here.
Avoid refinancing - While there are times when this is unavoidable, way to many people refinance their homes every few years. As discussed in website:
Your standard deduction is increased by any state and local real estate taxes you paid in 2008, up to $500 ($1,000 if married filing jointly). The taxes must be state or local real estate taxes that would be deductible on Form 1040 (Schedule A) if you were itemizing your deductions. Taxes deductible in arriving at adjusted gross income, such as taxes on business real estate, and taxes on foreign real estate cannot be used to increase your standard deduction.

Home is not your “biggest investment”

Matt Kastner — Wed, 21 Jan 2009 19:55:57 +0000

In the world of real estate you often here people touting that a person’s home is their single biggest investment. If you subscribe to this idea, perhaps it’s time a dose of reality.

This mentality has been pounded into our heads by insurance companies, rehabbers and realtors trying to sell the “big package” when it comes to our homes. We all start to believe it. Then we get the calls from mortgage brokers telling us how much money they can us each month on mortgage payments if we refinance. They’ll also dangle the carrot of pulling cash out of the building during the refinancing too. “Why not enjoy the fruits of your labor while you are still young enough to truly enjoy it?” That sounds good too.

The 90’s and 2000’s were, and continue to be, ripe with this overbuying and refi-to-vacation craze. This kind of thinking has become part of American society. It can even be cited as the main reason for the current recession and why we are seeing so many foreclosures. Everyone has swallowed this type of thinking, hook line and sinker. It’s time to wake up to reality. Consider the costs involved of owning a house:

Maintenance and Improvements - No matter how nice the property, maintenance is always a must. Whether its something as simple as landscaping and paint or as expensive as a new roof or deck, these costs add up over time. And the bigger and nicer the house, the worse it gets. Smaller, cheaper houses might need more repairs more often, but when they occur they generally cost less. The overly large and fancy houses favored in recent years are major expenses waiting to happen.
Insurance and Property Taxes – Owning a home also requires you to have insurance on the property as well as keep up with property taxes. Like maintenance, these expenses will continue indefinitely and will rise over time. Some areas in St. Louis have seen massive increases in property taxes over the past few years.
Interest – Assuming you get a loan for your property, you’ll be paying a hefty amount of interest on that loan for a long time. In fact, if you follow the typical trend of securing a traditionally amortized 30-year loan, a majority of your mortgage payment will be applied to paying of interest for the first 15 years or so of repayment. It isn’t until the second half of the loan repayment period that you really start to make good progress on paying down your loan balance. Since you will likely move or refinance your loan before you reach this period of more rapid pay-down, you will likely lock yourself into a cycle high interest, low principal mortgage payments.

But there is always appreciation to offset that right? Wrong. In the St. Louis area, appreciation rates are modest when compared to many other parts of the country. These rates range somewhere between 4.5% and 5%. Not a horrible return in a vacuum, but consider the costs above. Inflation can’t be ignored either. Averaging somewhere around 3.5% annually in the United States, money is worth that much less with each pass year. Using admittedly rough math, that only allows for 1% to 1.5% in actual housing appreciation each year. Start deducting the costs of all those interest payments, taxes, insurance and maintenance and things look less rosie. You’ll always have some principal pay-down to help out, but for most people that isn’t much. Other areas of the country have seen more appreciation, but as the current recession and rapid housing depreciation demonstrates, they have their own problems.

Start tallying the operating costs above and the “your home is your biggest investment” mentality starts to fall apart. Factor in the realities of appreciation and inflation and it blows up entirely. Rather than looking at a home as an investment, it is probably better to look at it as a sort of savings account. A wealth repository rather a than wealth generator. Its possible to get lucky and make a killing just by owning a home during the perfect time, but in reality it’s just a big piggy bank. Like any piggy bank, its only as full as you make it. Or leave it.

This article series is continued in Part 2: Responsiblity managing your home and Part 3: Investing your savings

‘Tis the season to be taxed

Matt Kastner — Tue, 13 Jan 2009 21:18:02 +0000

Now that the giving season of the holidays is over it’s time for another kind of giving season: giving to the IRS. With 2009 here it’s time to start thinking about taxes. Your 2008 tax returns aren’t due until April 15, 2009, but it never hurts to get an early start. Most of the deductions available for real estate investments are pretty self explanatory, but if you do your taxes yourself make sure you do your research. I have used software such as H & R Block’s Taxcut and TurboTax in the past and they are good options. Just make sure you used common sense when using such software as you might be missing out on some of the key deductions. For quick overview of the basic deductions check out this article: Top Ten Deductions for Landlords.

If you go the route of hiring a professional make sure you use someone who is familiar with figuring taxes or your kind of real estate investments. Not all CPA’s a created equal and I have heard a few horror stories. It’s sometimes worth paying a little more to make sure you are working with someone who will help you take advantage of all your deductions without opening you up for an audit.

If you have any ax tips you would like to share or CPA recommendations, feel free to share in the coment section below.

Bailout goes local with Pulaski

Matt Kastner — Tue, 23 Dec 2008 18:59:18 +0000

It seems like Pulaski Bank couldn’t resist the call of all that bailout money. The Post Dispatch is reporting that they will receive an infusion of $32.5 million fromt he government in exchange of like amount of stock. Reports say that the bank is well capitalized, but they want the money to be able to lend more in the current market. One part of me wants to beleive that, but the cynic in me says this will have no affect on the amount of loans they are giving out. Sure would be nice though.

Housing prices continue to fall

Matt Kastner — Tue, 25 Nov 2008 16:32:53 +0000

You’d think that the sky was falling. Here’s the bad news of the day on housing:

Meanwhile, the Standard & Poor’s/Case-Shiller national home price index released Tuesday tumbled a record 16.6 percent during the quarter from the same period a year ago. Prices are at levels not seen since the first quarter of 2004.

This doesn’t make me happy, but I still don’t understand why people overreact so much about things like this. People have become so spoiled due to years of steady appreciation that this blip has everyone running for the hills. We need to all get back into focus. If inflation is 4% annually, any appreciation of home values exceeding that amount should be looked at as a bonus. After years of 8% annual appreciation we are finally resetting back to a level of sanity. We need to get used to it. This is probably going to be the way of things for the foreseeable future.

Click here for the full article.

A rosier financial picture

Matt Kastner — Sat, 04 Oct 2008 17:47:26 +0000

I just read this article on Forbes, which I think paints a very different picture of the current situation. They make the claim that lending is actually easier to get now than a year ago. It’s worth a read: Bank Loans Have Not ‘Dried Up’

Financing difficulties

Matt Kastner — Fri, 03 Oct 2008 20:10:00 +0000

With all of the uncertainty in the financial sector, it seems like everyone is running scared. I have heard from multiple clients this week about this situation. It seems that many of these institutions are putting a freeze on some types of loans. This is in now way across the board at this point, but it is a cause for concern.

If you follow the real estate market at all, you know that there are tons of great deals flooding onto the market. That’s great, but if lending totally drys up we’re all in for a world of hurt. The positive side of this is that we still have FHA to fall back on for financing. Granted, the program is only available to owner occupants, but at least all these multi-families and rehab houses won’t just sit there. There is also the hope that things will start to loosen up quickly following the $700 billion influx in government money from the bailout. UNfortuneatly, nobody knows what the real affects of that money will be at this point.

With this in mind, the question I pose to any of you readers with financial connections is who is still lending? If you work at a bank or have a brother who works at a bank, or whatever; I would like to hear from the source. I generally don’t let people solicit in the comments section, but if you’d like to share some info (REALISTIC INFO!) I’m sure everyone would love to hear from you.

Wachovia and A.G. Edwards

Matt Kastner — Mon, 29 Sep 2008 17:00:11 +0000

What a difference a year can make. Thats about how long it has been since Wachovia bought St. Louis-based A.G. Edwards. According to this article, it looks like Wachovia just sold off its banking operations to Citigroup. Apparently the brokerage is not part of the deal, but one has to wonder what kind of affect this could have on St. Louis and the 4,800 jobs currently employed through joint Wachovia/A.G. Edwards operations.

One thing I don’t get is how all these huge companies seem tobe so blindsided by the current status of the economy. If they had their eyes open, knowing what they knoe, they had to expect this. Perhaps that is why Wachovia bought A.G. Edwards in the first place. Maybe they saw the way the wind was blowing and decided to shift gears. What we have is either a brilliant strategy or stupidity. Care to take a pick?

A changing economy

Matt Kastner — Mon, 22 Sep 2008 14:42:31 +0000

With all the sweeping changes hitting our country’s economy right now, I don’t know if many people truely grasp how sweeping these changes could be. Looks like we just got some more fuel to feed the fire. With Bear Stearns gone and Lehman Brothers gone as we know it, the fate of the last two big investment banks seems to be sealed: they really aren’t going to be investment banks anymore. Both Morgan Stanley and Goldman Sachs will become traditional commercial banks. The times they are a changing. Check this out for more.

Another look at the federal bailout issue

Matt Kastner — Fri, 12 Sep 2008 21:12:39 +0000

Check out this surprising spot-on article about the Fannie Mae/Freddie Mac bailout from David Nicklaus of the St. Louis Post Dispatch. I’m still afraid the cure could be worse than the disease here. Hopefully that’s just the cynical, pessimist in me.

Local banks will survive government buyout

Matt Kastner — Thu, 11 Sep 2008 20:40:04 +0000

It sounds like the Fannie Mae/Freddie Mac shakeup won’t be too big an issue for local banks in Missouri and Illinois after all. So this article in the Post Distpatch claims anyway.

Pulaski Bank takes one on the nose

Matt Kastner — Wed, 10 Sep 2008 15:46:23 +0000

The Post Dispatch is reporting that local Pulaski Bank just sold it’s shares in Fannie Mae in the wake of the government bailout for an after-tax loss of $5.2 million. Not the kind of news you want to hear when you are hoping to see some of the local boys loosen up the lending reins. Check out the story for more.

Mortgage industry shakeup

Matt Kastner — Mon, 08 Sep 2008 16:42:33 +0000

The boat has been sinking, but a bailout is coming. If you haven’t already heard the news, it appears that the United States government will be bailing out federally backed lenders Freddie Mac and Fannie Mae to the the tune of $100 billion each. You can see more details on that here. There seems to be a universal sigh of relief at the moment. Stocks are shooting up and optimism is in fashion.

I have been talking about financing troubles a lot lately and hopefully this will help bring about some of the changes investors have been clamoring for in the market. They aren’t going to happen overnight, but an infusion of such a large amount of cash into the lending market probably won’t hurt things.

The one point that has been glossed over in just about all the articles I have read this morning is the part about the government taking control of 80% of both of the mortgage companies. Clearly something has to be done to prevent Fannie and Freddie from falling into the abyss, but if this arrangement becomes anything more than temporary the fallout could be worse then what we are seeing.

Whether partially or fully government controlled, it has become clear that these institutions are in need of a major overall or need to be altogether dissolved. Washington is in for a shakeup with the upcoming elections, and I hope this issue gets put front and center as a major campaign issue. These changes have to be implemented ASAP, not 5 years down the road. We can’t allow this to happen to us again.

Investment property financing

Matt Kastner — Mon, 11 Aug 2008 23:01:20 +0000

Other than which building to buy, the most important question to ask yourself when investing in real estate is “How am I going to pay for this?” If you’re loaded with cash and have a ton of equity built up in your house and other investments, this is a pretty easy question to answer. But for most of us, things aren’t quite so simple.

The reality of today’s market is that you have to have cash to make anything happen. If you’re looking for little or no-money down loans then you’re simply out of luck. For the past year I have had luck sending clients to local banks like Pulaski and Champion for their loans. Deals typically had to be done with 20% down (You better get used to that I’m afraid), but you could oftentimes get some money to help pay for improvements on properties. Some of the foreclosures coming on the market are amazing deals, but almost all of them need work. For the better part of this year, the loan programs were accommodating in these situations. That was then.

As for now, 25% down seems to have become the standard. That might be alright if construction financing were still available, but it isn’t. That means that in order to buy through a local bank, you will have to put down 25% plus all construction costs. In a strict refi environment that can be tough. Still, these terms are pushing out a lot of the competition when making purchases and the quality of deals has gone up accordingly. Properties with potential cap rates for over 15% in good neighborhoods are not unheard of. I have run a few spreadsheets that show a cash-on-cash return of over 40%. With numbers like that, you can justify putting down that kind of money.

The problem is that most people don’t have $50,000 in cash lying around to put into a building. Discussions with my bank contacts don’t sound encouraging, in terms of this improving in the future either. Still, I wouldn’t lose hope altogether. A couple of years back everyone was working through mortgage brokers to finance their deals. They were virtually abandoned in 2007 and 2008, but things might be trending back to them and away from the banks. I have heard a few encouraging things backing up this theory in the past few weeks, but I will hold off on getting my hopes up until I know more.

On the bright side, at least FHA loans are getting easier to get. If you’re looking to live in a two-family or four-family these loans can be great options. If only non owner occupant loans were still as easy to get. So how about it? Anyone have any leads on how to get ahold of some good financing in the St. Louis market. If you do, I’m all ears.

Fannie and Freddie dissolved?

Matt Kastner — Sat, 02 Aug 2008 04:46:31 +0000

I was doing a little more research on the new federal housing legislation after posting about it this afternoon and I ran across an interesting concept on the Cato Institute’s website: Get rid of Fannie May and Freddie Mac. Not something that had really crossed my mind, but the author makes some pretty good points. You can take a look for yourself here. I doubt it would happen, but it could work.

Federal housing bailout

Matt Kastner — Fri, 01 Aug 2008 17:37:27 +0000

If you’ve been living in a cave for the last year, you might be surprised to know that foreclosures are happening at a record pace in St. Louis and around the country. Obviously, this can make for some pretty great buys in the real estate market, but a lot of people and companies are hurting because of this trend. All levels of government have been talking about doing something to stop the bleeding for months, but nothing has been done. Until this past Wednesday that is.

On Wednesday, President Bush signed a housing rescue bill into law. I won’t go into too much detail on the specifics, but you can find write ups on the situation on CNN and Yahoo. Here’s a brief outline from CNN of what the new law will do:

A larger role for the Federal Housing Administration
A stronger regulator for the GSEs
A permanent increase in “conforming loan” limits
A new home-buyer credit
A ban on down-payment assistance from sellers
A new affordable housing trust fund
Grants to states to buy foreclosed properties

This is not a polictical blog, but I feel that I have to share my thoughts on this situation. The bill was about 700 pages long, so I’m guessing it was a bit bloated. I have read up on this new law quite a bit and I’m sure it will be of at least some help to market. But that’s not really the thing that concerns me. What concerns me is that this is being billed as a “housing rescue” when it is clearly a “housing bailout.”

We’re a capitalist country. When companies and people make bad investments they pay the price. Fannie May and Freddie Mac might be backed by the government, but they are publicly traded companies. They’re both Fortune 500 companies for god’s sake. So why should the general public have to pay for a bailout because they backed loans they shouldn’t have. They made a bad business choice and their shareholders should be the ones taking a beating, not us.

As for the normal everyday citizens that are going to be helped by this bill, I feel much the same. I don’t want to see anyone on the street, but why are we subsidizing stupidity? We’re basically going to give these people tens of thousands of dollars because they bought a house that was more that they could afford. In what way do these people deserve this money? If they get foreclosed on and their banks take a big loss, that is the banks fault. The owner can always rent. That might sound harsh, but the alternative is even more so.

White House spokesman Tony Fratto’s line about this bill particularly urks me: “The Federal Housing Administration will begin to implement new policies intended to keep more deserving American families in their homes.” So who is going to be deciding who is “more deserving?” This is a grey area where government just doesn’t belong.

If any readers see my comments as cynical and uncompassionate, think of the world we live in. When was the last time the government got something right? Hurricane Katrina, Iraq, Afganistan, scandals… I could go on and on. We live in a word of cause and effect, and if those who made poor business choices don’t feel the effects of their actions, I fear for the precedent that will set. In the end, all this is going to do is make us more dependant on government generosity. This isn’t a matter of Democrat or Republican ideas. Liberal or conservative. Its right and wrong. And this is just wrong.

Lenders catching up on loan fraud backlog?

Matt Kastner — Fri, 14 Mar 2008 19:57:00 +0000

In the heyday of the 100% financing investment real estate market, fraud was really running rampant. One of the more common tricks was getting owner-occupant financing on a building, which the buyer had no intention of ever occupying. Nobody was getting called out on it, so more and more people started doing it.

Today is a different story. With all the checks and balances in the system, you’d be hard pressed to get away with that now. Some of these cash-strapped lenders are even getting so picky that they are looking back at old loans to figure out if any fraud was taking place.

I actually got a heads up on this issue from one of the tenants in a building I have ownership-interest in. The owner of the neighboring property did a rehab a couple of years ago and somehow got away with a non-historical porch and windows in the front of the project. We’ve been none too happy with his work and even less happy with the tenants he put in the building. I must confess that I wasn’t all that upset when I heard from our tenant that this guy was in trouble.

Apparently he financed his substandard rehab project with an owner-occupied loan despite the fact that this was a pure investment. I’m sketchy on the exact implications of this, but he now has this property for sale on the MLS. It’s way overpriced, so I’ll be curious to track what happens when he can’t sell this thing. Will they go so far as to foreclose on him or will they just renegotiate his loan?

The main question this situation raises is whether this is an isolated incident or if this is a sign of things to come? I suppose only time will tell. If you’re among those who financed this way, I would suggest you don’t wait to find out which way the wind is blowing.

Refinancing rates and terms are starting to open up again so it might be a good time to start thinking about making your loan legit. Under situations such as these, a lender has a right to call in a loan in full at any time. If that happens, the lendee (hopefully not you) might find themselves among the ranks of the recently foreclosed. Be careful out there.

How credit scores work

Matt Kastner — Wed, 14 Nov 2007 20:44:00 +0000

*NOTE – This article was originally written in September of 2006 for the newsletter.

All investors realize sooner or later that their credit score can have a major impact on what type of financing can be acquired when purchasing new properties. It happens all too frequently: the perfect property has been identified, an offer has been made, but the financing terms aren’t agreeable because the credit score hasn’t allowed for a lower rate or flexibility in terms. An investor’s credit score can greatly affect the type of financing options available.

Just what makes up a credit score? There are basically five categories that determine what one’s score will be: Payment history, Amounts Owed, Length of Credit History, New Credit, and Types of Credit Used. These five categories are weighted to compile an average credit score for a consumer, ranging from a low of 300 to a high of 850 (depending on the source, the average credit score is 678). The most heavily weighted categories are payment history and amounts owed, making up 35% and 30% respectively. Following payment history and amounts owed are length of credit history (15%), new credit (10%) and types of credit used (10%).

Since a credit score is a snapshot of one’s credit risk at a particular point in time, it figures that if there have been any recent late payments or there are many credit cards that are maxed out, one’s credit score will be affected negatively. It can be a slow process to improve negative credit, even though the scores themselves are quick to worsen when a late payment or bankruptcy is reported. In other words, it’s easy to lower a credit score, but not so easy to improve it.

Before putting a bid on a contract, it is best to have an idea as to what one’s credit score and overall financial profile will yield in terms of financing options. Contrary to common belief, credit scores are not affected by requests made by a lender in order to provide a prequalification. In fact, a borrower can have a number of lenders run their credit within a 14-day period, but it only counts against the credit score as one inquiry.

*Thanks to Alysa McLaughlin of Doering Mortgage on putting together this article. Give her a call at (636) 734-8396 or visit her on the web at loanmomma.net.

Raising your credit score

Matt Kastner — Wed, 14 Nov 2007 20:36:00 +0000

*NOTE – This article was originally written in August of 2006 for the newsletter.

According to myfico.com, “in a given three-month time period, only about one in four people has a 20-point change in their credit score.” Most credit experts agree that there is no such thing as a quick fix for bad credit. The best strategy is to manage credit responsibly over time. Here are some tips for raising credit scores:

Pay your bills on time – Late payments, collections, etc., can have a major impact on a credit score.
Get current and stay current on your payments – A higher score will be reflected when bills are paid on time over a longer period of time.
Keep credit card and other revolving lines of credit low – Keeping the balances on credit cards and revolving lines under 50% of the balance can give a score a big boost.
Pay off debt, don’t move it around – If debt can’t be paid off or paid down, don’t consolidate it onto one account where the balance is close to or at the limit. This can have a negative impact on your credit score. Keep a balance of 50% or less of the limit to keep credit scores higher.
Closing an account doesn’t make it go away – Even though an account is closed, the payment history of that account will still report for years. The more time between the last late payment and when a credit report is run, the less it affects the score.

*Thanks to Alysa McLaughlin of Doering Mortgage on putting together this article. Give her a call at (636) 734-8396 or visit her on the web at loanmomma.net.

1031 Exchange: The when, the why and the how

Matt Kastner — Wed, 14 Nov 2007 17:08:00 +0000

*NOTE – This article was originally written in July of 2006 for the newsletter. This article was actually provided by Greg Schowe of Asset Preservation, Inc. (www.apiexchange.com)

The burden of capital gains taxes can take a bite out of your profits, when it comes time to sell your investment property. When an investment property is sold, any unsheltered capital gains will be subject to significant taxation. One method you can employ to avoid this problem, is to utilize a §1031 tax deferred exchange. If used properly, this method is capable of indefinitely deferring the payment of capital gains taxes.

WHAT IS IRC SECTION 1031?
Section 1031 of the Internal Revenue Code allows an owner of investment property to exchange property and defer paying federal and state capital gain taxes (up to
15% Federal, 25% depreciation recapture and applicable state taxes) if they purchase a “like-kind” property following the rules and regulations of the Internal Revenue Code. This allows investors to use all of the sale proceeds to leverage into more valuable real estate, increase cash flow, diversify into other properties, reduce management or consolidate holdings.

WHAT IS “LIKE-KIND” PROPERTY?
There is some confusion regarding what type of property qualifies for a §1031 tax deferred exchange. The Internal Revenue Code Section 1031 states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.” “Like-kind” property can include, but is not limited to, any of the following, provided it is held for investment:

Single Family Rental
Duplex
Apartment
Commercial Property
Raw Land

For example, raw land can be exchanged for a single family rental, or apartments or a commercial building. Properties can be exchanged anywhere within the United States.

DOES AN EXCHANGE NEED TO BE SIMULTANEOUS?
No, contrary to what some property owners envision, a §1031 tax deferred exchange is rarely a two-party swap. Most exchanges are delayed exchanges, whereby the Exchanger has 180 days between the sale of the relinquished property and the closing of the replacement property. They must identify the potential replacement property (or properties) within 45 calendar days from closing on the relinquished property.

WHEN IS A §1031 EXCHANGE APPLICABLE?
It is applicable whenever a property owner intends to sell any property that is not their primary residence (and falls under the definition of “like-kind”) and plans to buy another “like-kind” property within 180 calendar days following the closing of the relinquished property.

Paramount to any exchange is a competent and experienced Qualified Intermediary. Greg Schowe of Asset Preservation can provide this experienced guidance to ensure your transaction runs smoothly from beginning to end. Contact Greg at 314.369.8766 or greg@apiexchange.com for more on how you can make the §1031 exchange work for you.

Asset Preservation, Inc. does not give tax or legal advice. The information on this page should not be relied upon as a substitute for tax or legal advice obtained from a competent tax and/or legal advisor.

Federal & State Historic Tax Credits in St. Louis

Matt Kastner — Wed, 14 Nov 2007 16:13:00 +0000

Don’t forget to consider utilizing Historic Tax Credits when remodeling your home or investment property. Federal and State credits could allow you to have a much as 45% of your construction costs reimbursed after project completion.

When applying for Historic Tax Credits a lot of paperwork and record keeping is involved. However, if you do not wish to do this yourself, this work can be outsourced. There are a growing number of Tax Credit Consultants in the St. Louis area that will handle this work for you. Their fees generally begin at around $1,700 depending on the size and length of the projects.

These credits are available in a growing number of South City neighborhoods including parts of Benton Park, Benton Park West, Soulard, Gravois Park, Dutchtown, McKinley Heights, Lafayette Square, Forest Park Southeast among many others. If your property is not in a National Historic District you may also petition to for your property be listed as individually historic.

For more information on tax credits check out the links below or contact the St. Louis Cultural Resources office at (314) 622-3400.

Federal Tax Credit Website
Missouri Tax Credit Website
Rehabber’s Club Tax Credit Website