Tierra Grande - January 2013

JANUARY 2013 ™

JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY

NON-PROFIT ORG. U.S. POSTAGE PAID DALLAS, TEXAS PERMIT No. 70 COLLEGE STATION, TEXAS 77843-2115

In This Issue Shadow Inventory Broker Price Opinions Home Loans for Vets Commercial Market Thawing Texas Licensee Statistics Dying Without a Will IRS Audits

JANUARY 2013 ™

JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY

WE HAVE ONE QUESTION.

WHAT’S YOUR PROBLEM? REAL ESTATE doesn’t come with an instruction booklet.

SOONER OR LATER

every real estate owner, renter, buyer, seller, Realtor, builder, consultant, financier, appraiser or (who did we leave out?) runs into a problem they can’t handle.

SEND US your primary real estate problems.

Our staff will categorize your input and see what solutions we come up with.

DON’T MISUNDERSTAND We’re not talking quick fixes here.

Your problems will give direction to our research. The idea is to find answers, solutions or both, that help Texans make better real estate decisions.

To tell us about your problem www.recenter.tamu.edu/WhatsYourProblem iii

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Visit us online at

recenter.tamu.edu

Director, GARY W. MALER Chief Economist, MARK G. DOTZOUR Senior Editor, DAVID S. JONES Managing Editor, NANCY MCQUISTION Associate Editor, BRYAN POPE

JANUARY 2013

VOLUME 20, NUMBER 1

TIERRA GRANDE™ JOURNAL OF THE REAL ESTATE CENTER AT TEXAS A&M UNIVERSITY

14 Rising From the Ashes

Texas’ commercial markets are finally making headway. Absorption is up in all four metros, office projects are under construction, and rental rates for Class-A buildings are climbing.

BY MARK G. DOTZOUR, DANIEL PARULIAN AND MICHAEL STEWART

Assistant Editor, KAMMY BAUMANN Art Director, ROBERT P. BEALS II Graphic Specialist/Photographer, JP BEATO III Circulation Manager, MARK BAUMANN Lithography, MOTHERAL PRINTING, FORT WORTH ADVISORY COMMITTEE: Joe Bob McCartt, Amarillo, chairman; Mario A. Arriaga, Spring, vice chairman; James Michael Boyd, Houston; Russell Cain, Port Lavaca; Jacquelyn K. Hawkins, Austin; Kathleen McKenzie Owen, Pipe Creek; Kimberly Shambley, Dallas; Ronald C. Wakefield, San Antonio; and Avis Wukasch, Georgetown, ex-officio repre­ senting the Texas Real Estate Commission.

TIERRA GRANDE™ (ISSN 1070-0234) is published quarterly by the Real Estate Center at Texas A&M University, College Station, Texas 77843-2115.

Telephone: 979-845-2031.

SUBSCRIPTIONS free to Texas real estate licen­ sees. Other subscribers, $20 per year. Subscribe online at http://recenter.tamu.edu/store VIEWS EXPRESSED are those of the authors and do not imply endorsement by the Real Estate Center, Mays Business School or Texas A&M University. The Texas A&M University System serves people of all ages, regardless of socioeconomic level, race, color, sex, religion, disability or national origin.

PHOTOGRAPHY/ILLUSTRATIONS: JP Beato III, pp. 1, 14–15, 16, 29; Real Estate Center files, pp.

2–3, 5, 12, 18, 28; Robert Beals II, pp. 7, 8, 10–11, 23–27. © 2013, Real Estate Center. All rights reserved.

2 Shining Light on the Shadow

Market

Some say the housing market will not fully recover until the “shadow” inventory — homes with delinquent loans, in foreclosure or foreclosed but not yet sold by the lender — is cleared. Luckily, Texas has fewer homes in this category than California and Florida. Here, the recovery is well underway.

BY MARK G. DOTZOUR

6 For What It’s Worth

Broker price opinions (BPOs) have come into vogue since the housing market crashed in 2008. The Dodd-Frank legislation approved using BPOs, which are less time consuming than appraisals, in some situations.

BY CHARLES E. GILLILAND AND MICHAEL OBERRENDER

ON THE COVER Éilan multiuse development, San Antonio

PHOTOGRAPHER JP Beato III

10 Homes for the Brave

In these days of tight credit, eligible Texas veterans have a loan option not available to the public: the Veterans Land Board Housing Assistance Program, which finances loans for as much as $417,000.

18 License to Sell

Factoid: There are way fewer active real estate licensees in Texas today than there were during the 1980s real estate boom. And as more and more people move into the state, the industry is likely to expand to service the influx.

BY JAMES P. GAINES

23 Where There’s No Will . . .

If you care who inherits your stuff when you bid farewell to this earth, embrace reality and make a will. Otherwise, here’s who gets what.

BY JUDON FAMBROUGH

28 The Tax Auditor Cometh

Internal Revenue Service statistics show that 1.3 to 4.3 percent of small businesses and sole proprietorships were audited in 2011, compared with less than 1 percent of individuals.

That puts most real estate professionals squarely in the IRS’ sights.

BY JERROLD J. STERN

BY HAROLD D. HUNT JANUARY 2013

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Housing Markets

By Mark G. Dotzour

The housing market continues to recover. Home sales are up, prices have stabilized, and inventories are low in most Texas markets.

Previous Real Estate Center studies have shown that home sales volume is largely correlated with three things: job growth, lower interest rates and positive home price appreciation.

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ome sales in 2008, 2009 and 2010 were sluggish all over America despite low interest rates because of job losses and falling home prices in many parts of the country. Job growth started to increase in 2011, but homebuyers were still skeptical because of the possibility of falling prices. As we passed through 2012, job growth continued, mortgage rates were low and the fear of falling prices began to fade into the mist of history.

Inventory levels of homes for sale (as reported by the local Multiple Listing Services [MLS]) are extremely low in some Texas markets and at manageable levels elsewhere across the state. When inventory levels are high, prices can fall. When inventory levels are low, prices start to take off again. Each month the Real Estate Center reports the number of homes sold and the number of months of inventory in the market.

Some real estate market analysts have said that the recovery in the housing market won’t be complete until the “shadow inventory� of houses is put on the market and sold. The shadow inventory could be defined as the number of homes in a local market that have seriously delinquent loans on them, are in the process of foreclosure, or have been foreclosed TIERRA GRANDE

Figure 1. Foreclosure Sales per Month 35

Thousands

30 California

25 20 15

Florida

10 5 0 2005 2006 2007 2008 2009 2010 2011 Source: Lender Processing Services

Texas

2012 2012 Aug

40 million active loans in America. The Real Estate Center worked with LPS to provide a snapshot of the shadow inventory in Texas metropolitan areas. This report provides the first public glimpse into the murky waters of shadow inventory at the local level.

Table 1 shows how Texas compares with California and Florida in mortgage loan distress. In Florida, nearly 21 percent of all loans reported by LPS haven’t received a payment in more than 90 days. A sizable portion of these loans will be foreclosed upon in coming months, adding to the current inventory of homes for sale in the marketplace.

In California, 7.8 percent of the loans are seriously delinquent. Just 5.3 percent of the loans in Texas are seriously delinquent. Clearly the pipeline of troubled properties likely to come into the market in the next year is much smaller in Texas.

From Table 1, we can infer there were more than 100,000 Texas houses in foreclosure or presently owned by the lender.

These properties will eventually make their way back into the marketplace.

but not yet sold. These houses create a pipeline of additional inventory that will eventually be put up for sale and compete for buyers.

The term shadow inventory is a Table 1: State Comparisons of Troubled Loan Performance as of July 31, 2012 perfect description of these houses with troubled loans because the Active Active information about these houses is Loans Loans 90+ Loans in Active Delinquent Loans in Real Estate Delinquent Foreclosure not frequently or widely pubLoans 90+ Days Foreclosure Owned (Percent) (Percent) lished. It’s nearly impossible to California 6,863,026 536,948 194,768 103,311 7.8 2.8 get a precise measure. It’s easy to Florida 3,804,866 786,119 537,253 78,244 20.7 14.1 know how many homes are cur3,720,110 195,491 61,027 39,476 5.3 1.6 rently listed in the MLS. But com- Texas panies that service mortgage loans Source: Lender Processing Services have no reason to publish their results or to enumerate publicly how many troubled loans they For comparison purposes, Figure 1 shows the number of are caretaking in each metropolitan area. foreclosure sales in Texas, Florida and California on loans ender Processing Services (LPS) provides periodic reports monitored by LPS over the past eight years. In California, to the national media with statistics about the number foreclosure sales exploded to more than 30,000 per month of delinquent loans, the number of homes in foreclosure by 2008 and have been trending downward for the past three and the number of homes that have been foreclosed and are years. However, there are still close to 20,000 homes per still owned by the lender. LPS has loan-level data for nearly month sold in foreclosure.

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25

Figure 2. Percent of Loans 90 or More Days Delinquent

Percent

20

Florida

15 California

10 5

Texas

0 2005 2006 2007 2008 2009 2010 2011 Source: Lender Processing Services

F

2012 2012 Aug

it is apparent the foreclosure drama is far from over in Florida, while California’s situation is improving and Texas delinquencies are miniscule by comparison.

The Texas mortgage loan market is healthy compared with other more distressed areas of the country. This is a key reason that home prices have been essentially stable for the past three years, while other markets have seen substantial price declines.

Table 2 shows mortgage performance information for all Texas metropolitan areas at the end of July 2012. The number of loans reported by LPS and included in the data is labeled “active loans.”

For example, LPS reported 18,023 active loans on homes located in Abilene on July 31, 2012. Of those loans, 670 had not made a payment in more than 90 days. There were 207 loans in foreclosure, and the banks owned 142 homes. Only 3.7 percent of the loans were 90+ days delinquent, and only 1.1 percent of the properties were owned by the bank lenders.

Finally, Table 3 shows the number of foreclosure sales of properties with loans monitored by LPS. The number of foreclosure

lorida sales peaked in 2010 at more than 20,000 homes per month and still remain at elevated levels. The Texas situation has clearly been more moderate. The number of homes sold per month Table 2. Troubled Loan Performance for Texas Metro Areas at foreclosure has been July 31, 2012 steady at about 5,000 per month since 2006.

Loans Loans Loans in Active Delinquent Loans in Real Estate Delinquent Foreclosure Figure 2 offers another Loans 90+ Days Foreclosure Owned (Percent) (Percent) interesting comparison between Texas, Florida Abilene 18,023 670 207 142 3.7 1.1 and California. It shows Amarillo 26,891 1,232 361 206 4.6 1.3 the percentage of all Austin-Round Rock 348,455 12,685 4,395 2,673 3.6 1.3 loans that are at least 90 Beaumont-Port Arthur 33,646 2,092 642 388 6.2 1.9 days delinquent. This Brownsville-Harlingen 35,395 2,124 617 423 6.0 1.7 could be viewed as the College Station-Bryan 26,613 577 193 110 2.2 0.7 pipeline of new forecloCorpus Christi 54,555 2,876 890 557 5.3 1.6 Dallas-Plano-Irving 786,138 44,666 13,511 8,732 5.7 1.7 sure and short sales in El Paso 92,474 4,902 1,462 700 5.3 1.6 coming months.

Fort Worth-Arlington 376,966 22,334 6,487 4,285 5.9 1.7 Currently, more than Houston-Sugar Land-Baytown 998,959 55,692 17,732 12,115 5.6 1.8 20 percent of all active Killeen-Temple-Fort Hood 70,957 3,488 981 547 4.9 1.4 loans in Florida are more Laredo 23,800 1,657 480 303 7.0 2.0 than 90 days delinquent.

Longview 17,577 942 307 228 5.4 1.7 The rate has remained at Lubbock 39,955 1,438 478 253 3.6 1.2 this elevated level since McAllen-Edinburg-Mission 53,768 3,691 1,353 766 6.9 2.5 early 2010. California 43 1.8 0.7 Midland 17,111 309 125 peaked in 2010 at about Odessa 12,119 318 116 43 2.6 1.0 13 percent and is reportSan Angelo 12,944 370 130 50 2.9 1.0 ing a continual reduction San Antonio 350,444 17,759 5,205 3,140 5.1 1.5 in delinquency.

Sherman-Denison 16,157 1,005 307 242 6.2 1.9 The Texas market’s Texarkana, Tex.-Texarkana, Ark. 7,965 443 153 97 5.6 1.9 delinquency peaked at Tyler 23,178 1,074 372 248 4.6 1.6 more than 5 percent Victoria 10,829 461 147 103 4.3 1.4 in early 2010, and the Waco 26,289 1,236 371 234 4.7 1.4 trend has stabilized at Wichita Falls 15,150 865 251 147 5.7 1.7 this relatively low level.

Source: Lender Processing Services From this figure alone,

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Table 3. Average Foreclosure Sales per Month

Metro Area Texas Abilene Amarillo Austin Beaumont Brownsville College Station Corpus Christi Dallas El Paso Fort Worth Houston Killeen Laredo Longview Lubbock McAllen Midland Odessa San Angelo San Antonio Sherman Texarkana Tyler Victoria Waco Wichita Falls

All of 2006

First Seven Months of 2012

Percent Chance

3,593 14 29 278 17 35 9 41 1,031 38 488 915 58 21 13 27 50 6 9 9 215 22 7 18 11 23 13

4,896 20 32 363 47 50 17 67 1,140 89 558 1,386 88 39 26 41 77 8 7 11 390 32 12 30 11 33 20

36.2 42.8 10.3 30.5 176.4 42.8 88.9 63.4 10.5 134.2 14.3 51.4 51.7 85.7 100.0 51.8 54.0 33.3 –22.3 22.2 81.4 45.4 71.4 16.7 0.0 43.5 53.8

Source: Lender Processing Services JANUARY 2013

sales in any given metro area can vary substantially from one month to the next, so the reported numbers are the average number of foreclosure sales per month for the first seven months of 2012 and for all 12 months in 2006. he year 2006 was used for comparison because it represents the last year before the housing mortgage crisis began in earnest. The table shows that in Texas LPS reported there were 3,593 homes to be sold each month in 2006. By 2012, this number had increased more than 36 percent to 4,896 foreclosure sales per month. The foreclosure sales experience varies widely across Texas metropolitan areas.

The housing market took a heavy body blow in 2007 and has been under duress ever since. However, that situation is gradually changing. The data indicate the housing market is improving. Delinquency rates are still elevated but no longer increasing. Foreclosure sales are still happening at elevated levels, but the local markets in Texas are digesting the extra inventory that comes from broken mortgage loans. The Texas housing market is not fully recovered, but it is getting there.

There is light at the end of the tunnel. It’s not a train.

T

Dr. Dotzour (dotzour@tamu.edu) is chief economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY The shadow inventory of houses will ultimately be foreclosed and sold because of the strength of the Texas economy and prudent lending. Shadow inventory in Texas is elevated but manageable and should represent little threat to the housing recovery here.

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Appraisal

For What It’s Worth

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By Charles E. Gilliland and Michael Oberrender

Traditionally, lenders and other real estate market participants have relied on appraisals when making decisions involving value. In Texas, individuals licensed by the Texas Appraiser Licensing and Certification Board (TALCB) perform residential appraisals. In addition to successfully passing an examination, these licensed or certified appraisers have educational preparation and experience that qualifies them to render professional and informed estimates of market value.

Each appraisal reported by these individuals must conform to the Uniform Standards of Professional Appraisal Practice (USPAP) established by the Appraisal Foundation. The TALCB polices the profession to ensure that work done in Texas conforms to these national standards. To maintain their credentials, appraisers must guarantee their work meets these requirements, often making the process a time- and laborintensive exercise.

Because an appraisal requires time-consuming investigation and analysis, fees can add up, leading some decision makers to seek a less expensive way to get an estimate of value.

Increasingly, a broker price opinion (BPO) is substituted for an appraisal. The most prevalent use of BPOs occurs in cases of foreclosed properties, REO properties and for refinancing purposes.

BPOs began to gain more favor after the housing market crashed. In fact, the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, explicitly approved

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using a BPO for a variety of situations in which an appraisal was previously required.

Dodd-Frank defines a BPO as: an estimate prepared by a real estate broker, agent, or salesperson that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model.

Dodd-Frank also sets forth general prohibitions to the use of a BPO. Section 1126 states: . . . In conjunction with the purchase of a consumer’s principal dwelling, broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by such piece of property.

BPOs appear to be similar to appraisals. However, a licensed real estate salesperson or broker prepares the BPO, not a state licensed or certified appraiser. The National Association of Realtors (NAR) defines a BPO as “an estimate of the probable selling price of a property.” A BPO is a less formal estimate of the price of a property rather than the market value estimate produced in an appraisal. Consequently, Rule 535.17 of the JANUARY 2013

Texas Real Estate Commission specifies that every BPO in Texas must contain the following disclaimer verbatim: THIS IS A BROKER PRICE OPINION OR COMPARATIVE MARKET ANALYSIS AND SHOULD NOT BE CONSIDERED AN APPRAISAL. In making any decision that relies upon my work, you should know that I have not followed the guidelines for development of an appraisal or analysis contained in the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation.

Otherwise, the preparing salesperson or broker will be held to the formal USPAP standards.

Finally, the rule requires that all BPOs be issued in the broker’s name even when a salesperson performs the BPO. ortgage lenders historically have been the primary users of BPOs for various purposes. Because most assignments called for an “exterior only” analysis in the past, BPOs frequently were not as thorough as certified market analyses (CMA). Salespersons and brokers routinely provide CMAs focused on sales in an immediate neighborhood to buyers and sellers of homes to facilitate a sale. Following the housing market crash in 2008, use of BPOs escalated. Although Dodd-Frank explicitly prohibits using a BPO in the origination of a residential purchase money mortgage, lenders have identified numerous situations in which they may use BPOs.

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BROKER PRICE OPINIONS are not just for mortgage lenders anymore. The NAR student manual on BPOs suggests several situations in which they may be appropriate, including legal proceedings such as divorce and estate planning.

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he NAR student manual entitled “BPOs: The Agent’s Role in the Valuation Process” is used for a program NAR designed specifically for agents who plan to expand their services to produce BPOs. The course consists of a thorough explanation of the process a prudent agent would use to produce credible estimates, including practical classroom exercises.

Successful students earn a BPO certification that confers benefits, including a referral service. Although salespersons and brokers are not required to undergo specific education to issue BPOs, they may find a formal course beneficial.

The manual lists the following situations where BPO usage may be appropriate: • updating values in investment portfolios, • loans in default, • legal proceedings such as divorce and estate planning, • release from private mortgage insurance (PMI) obligations and • establishing or evaluating home equity lines of credit.

The housing market collapse prompted lenders to seek quick price estimates of homes with defaulted mortgages. BPOs also have become an important tool in government programs designed to relieve housing market problems.

In the 2008 FDIC seizure of the Independent National Mortgage Corporation (IndyMac), the FDIC proposed a loan modification plan to make mortgages more affordable. Under the plan, first lien mortgage payments would have dropped to as low as 31 percent of a borrower’s monthly income. The plan specifically encouraged use of BPOs to establish new

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loan-to-value ratios. The FDIC never adopted the plan, but it became a model for subsequent government loan modification efforts that frequently specified BPOs as acceptable home value indicators. These developments created a growing demand for salespersons and brokers who were capable and willing to provide BPOs. Form 1004 (Uniform Residential Appraisal Report) establishes expected data and analyses for a Fannie Mae appraisal.

The appraisal form consists of six pages designed to produce a complete formal appraisal report. In addition, appraisers must complete a Market Conditions Addendum to the Appraisal Report (Fannie Mae Form 1004MC) detailing economic trends in the subject market. These forms call for detailed information on: • the subject property, • the contract, • the neighborhood, • site, • improvements, • sales comparison approach, • reconciliation, • cost approach, • income approach, • public utility district information, • market research and analysis and • condo/co-op information.

This report should provide a comprehensive analysis of the subject property and its market environment.

Fannie Mae also has devised the three-page Residential Broker Price Opinion form. Main sections of the BPO form are: TIERRA GRANDE

• general market conditions, • subject marketability, • competitive closed sales, • marketing strategy, • repairs, • competitive listings, • the market value, • comments and • included pictures.

The form specifies a host of requirements for brokers or agents offering BPOs. Although BPO requirements focus on many details in the subject residence’s environment, they necessarily must omit much of the information included in the appraisal report. NAR’s description of an appraisal is as follows: “A certified appraisal is formal, impartial estimate or opinion of value . . . for which the appraiser accepts responsibility. Only a state-certified appraiser can provide a certified appraisal.”

Appraisers must answer to the TALCB when questions arise concerning compliance with USPAP; salespersons and brokers do not. However, this does not excuse brokers from the obligation to perform as responsible real estate professionals.

Member codes of ethics promulgated by associations to which they belong still apply. Standards of conduct imposed by licensing requirements at the Texas Real Estate Commission (TREC) still apply. In addition, any broker providing a BPO that strayed over the line into fraud would be subject to legal liability in civil litigation.

Thus, although the strict standards imposed by USPAP do not apply to a BPO provider, other legal and ethical considerations still govern salespersons’ or brokers’ actions as they provide BPOs. Dr. Gilliland (c-gilliland@tamu.edu) is a research economist and Oberrender a research assistant with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Broker price opinions (BPOs) and certified market analyses (CMAs) have been more commonplace in the wake of the 2008 housing market crash. Both are less detailed than certified appraisals but usually can be generated faster.

BPOs Outlawed?

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By Charles E. Gilliland and Judon Fambrough

As lenders increasingly rely on real estate brokers for broker price opinion (BPOs), a function traditionally reserved for real estate appraisers, word on the street has it that the 82nd Texas Legislature abolished BPOs. But rumors of the demise have been greatly exaggerated (to paraphrase Mark Twain).

For decades, the Texas Real Estate Licensing Act (Licensing Act, found in Chapter 1101 of the Texas Occupations Code), allowed licensed real estate brokers to perform appraisals for compensation. In fact, before the passage of the Texas Appraisers Licensing and Certification Act (Appraiser’s Act, found in Chapter 1103 of the Texas Occupations Code), appraisers were required to have a real estate broker’s license.

Following the enactment of the Appraiser’s Act in 1991, those performing appraisals with “federally related transactions” were required to obtain a license under the new act.

These individuals were then designated as “state-certified real estate appraisers” or “state-licensed real estate appraisers.” But appraisers performing non-federal related transactions were still allowed to provide

JANUARY 2013

appraisals after obtaining a real estate broker’s license under Chapter 1101.

That changed effective Sept. 1, 2011, when the 82nd Texas Legislature removed the language from the Licensing Act allowing real estate brokers to perform appraisals for compensation.

This led many appraisers to believe that brokers could no longer render an opinion on the estimated value of real estate without obtaining an appraiser’s license.

However, the devil lies in the details.

While the legislators removed “appraisals” from the list of permitted activities in Chapter 1101, it added another permitted activity in its place. Brokers may still render written analyses, opinions or conclusions related to the estimated price of real property as long as the analyses or opinions: • are not referred to as appraisals; • are given in the ordinary course of the broker’s or salesperson’s business; and • are related to the actual or potential acquisition, disposition, encumbrance, or management of an interest in real property.

The Appraisers Act reinforces this fact. The statute was amended to permit BPOs as long as they are done in

compliance with the three conditions just enumerated (Section 1103.004, Texas Occupations Code).

TREC also addressed BPOs under its rulemaking authority by amending the Texas Administrative Code.

In addition to Rule 535.17 mentioned earlier, requiring the written disclaimer, the same rule now allows a salesperson to prepare, sign and present a BPO or comparative market analysis on behalf of the salesperson’s sponsoring broker, but the salesperson must submit it in the broker’s name and the broker is responsible for its content.

Finally, TREC changed Rule 535.16(c), which now obligates a real estate licensee to provide a BPO or comparative market analysis when negotiating a listing or offering to purchase property for his or her own account as a result of a contact made while acting as a real estate agent. So, in some instance, BPOs are not only permitted, but required.

Dr. Gilliland (c-gilliland@tamu.edu) is a research economist and Fambrough (judon@ tamu.edu) is a member of the State Bar of Texas and a lawyer with the Real Estate Center at Texas A&M University.

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Homebuying

homes for the brave

By Harold D. Hunt

Texas veterans looking to finance a home purchase may be eligible for a state housing assistance program designed just for them. In 1983, the Texas Legislature created the Veterans Land Board (VLB) Housing Assistance Program, through which Texas veterans may now borrow as much as $417,000 toward a home purchase. The VLB is administered by the Texas General Land Office.

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WHO MAY APPLY To be eligible to participate in the Texas Veterans Loan Programs, an applicant must: have served no fewer than 90 cumulative days on active duty in the Army, Navy, Air Force, Marines, Coast Guard or U.S. Public Health Service, OR have enlisted or received an appointment in the National Guard or a reserve component of one of the listed branches of service after completing all initial active duty training requirements as a condition of enlistment or appointment, OR served in the Armed Forces of the Republic of Vietnam between Feb. 28, 1961, and May 7, 1975; have served after Sept. 16, 1940; have not been dishonorably discharged; have successfully paid off any previous VLB loan; and JANUARY 2013

be a bona fide resident of Texas at the time the application is made. A bona fide resident lives in Texas with the intent to remain in Texas. Texas residents currently serving on active military duty outside of Texas may be eligible, but presence in Texas solely because of military service may not establish bona fide residency. Eligibility determinations are made by the VLB on a case-by-case basis.

Two married, eligible veterans may have only one active loan of each type (home, home improvement and land) at one time.

The unmarried surviving spouse of a Texas veteran who is missing in action (MIA) or who died in the line of duty or from a service-related cause may be eligible to participate in the programs. The surviving spouse must meet all other eligibility requirements for the home loan programs.

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HOW TO APPLY Veterans should: submit proof of military service to the VLB, complete and submit a Request for Certification (Form 41) and Declaration of Eligibility (Form 42) to the VLB, and complete and submit an Affidavit of Texas Residency (Form 43), if Texas is not shown as the home of record on discharge documents.

Forms 41 through 43 are available in a downloadable PDF titled “Certification of Eligibility Application,” located at www.glo.texas.gov/vlb/_documents/loans/certificationapplication.pdf.

The VLB maintains a database of real estate agents and brokers who have completed special training on VLB housing loan programs (see Required Licensee Training). A list of professionals can be found at www.glo.texas.gov/vlb/

veterans-benefits/veteran-loans/find-a-realtor/index.html.

Veterans can also locate a lender participating in the Veterans Housing Assistance Program and request a Texas Veterans Home Loan application. The completed application must then be returned to a lender. Locate a lender at www. glo.texas.gov/cf/vlb-lenders/VLBVetLenderSearch.cfm.

WHAT HOMES QUALIFY A VLB home loan may be used to purchase a residence that meets the following requirements: Must be the veteran’s primary residence.

Must be located in Texas.

Must be a single-family attached or detached home, townhome, condominium or planned unit development.

Duplexes or other multifamily units must have been constructed at least five years prior to the closing date of the loan.

Manufactured/modular homes may be eligible. Contact the VLB to confirm.

New homes must either meet the Environmental Protection Agency’s guidelines for ENERGY STAR qualification and must be ENERGY STAR labeled and certified or have a Home Energy Rating System (HERS) rating of 75 or less. This includes completion of the Thermal Bypass Checklist by a certified HERS rater prior to wallboard being installed.

A copy of either the ENERGY STAR or HERS rating certificate must be included in the closed loan file.

Veterans must occupy the home within 60 days after the closing of the loan, and the home must be the veteran’s primary residence for at least three years.

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While the VLB cannot provide interim construction financing for new construction, Texas veterans work with participating lenders to provide a permanent take-out loan when the home is complete.

A take-out loan may be used to finance a home that qualifies as new construction under the following conditions: The VLB home loan must only be used to pay off the construction loan.

The term of the interim loan cannot exceed 24 months.

The original indebtedness must have taken place within 24 months of the closing date of the VLB home loan.

A veteran may occupy the newly constructed residence during the term of the interim loan and still qualify for a take-out loan. Two-to-four family units are not eligible for take-out loans.

For further information regarding take-out loans, go to www.glo.texas.gov/vlb/veterans-benefits/veteran-loans/ home-loans/take-out-loans.html.

SPECIAL CIRCUMSTANCES A disabled veteran may qualify for a lower interest rate in the home loan programs if eligible for the Veterans with Disabilities Program. Under the program: Veterans must have a compensable service-connected disability of 30 percent or greater as verified by an award letter from the Veteran’s Administration.

The award letter must be submitted to the lender.

The rate reduction is a full 50 basis points, or one-half of 1 percent on the available VLB loan interest rate.

The amount of disability discount is subject to change at any time.

The unmarried surviving spouse of any service member who was killed in the line of duty (service member must have been a legal resident of Texas at the time of death) may be eligible for a lower interest rate. Find out more about unmarried surviving spouse and disabled veterans interest rate discounts at www.glo.texas.gov/vlb/veterans-benefits/ veteran-loans/loan-discounts.html.

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A VLB home loan may not be used: for refinancing or as a down payment.

The VLB does not provide reverse mortgages.

Texas reservists and National Guard troops with a VLB home loan can defer their interest payments when they are called up for active duty thanks to the Servicemembers Civil Relief Act. Participants pay only the principal portion of their loans and any required escrows for taxes and insurance as long as they are on active duty, plus a three-month grace period following deactivation.

For nine months following the grace period, the interest rate will be no more than 6 percent. After that time, the interest rate and standard payment will return to normal.

Eligible reservists and National Guard members who want to reduce loan payments should send a copy of their orders showing activation date to the lending institution to which they make their payments.

INSURANCE The VLB requires title insurance policies on all homes purchased through the home loan program. Hazard, fire and casualty insurance is also required.

If the home is in a flood zone, the veteran must purchase flood insurance.

LOAN TERMS

REQUIRED LICENSEE TRAINING Several options are available to real estate licensees who would like to become VLB Home Loan Preferred Real Estate Professionals.

First, Steve Hudson, marketing specialist with the Texas Veterans Land Board, uses one of four options to provide the mandatory one-hour training program to interested parties.

For larger groups, local boards of Realtors can contact Hudson about providing the training in person, which counts for one hour of TREC-approved MCE credit through the Texas Association of Realtors (TAR).

For individuals or small groups, Hudson can mail the program materials and then conduct the training over the phone.

Hudson can also provide the training in person to larger groups in other local settings such as a title company office where no MCE credit is given.

Finally, the VLB has applied to TREC for provider status to offer the one-hour training as a webcast. One hour of MCE credit will be available for this option when approval is received.

Hudson may be reached at 512-936-2553 or steve. hudson@glo.texas.gov to discuss these training options.

Another alternative is available through Tamara Tapman, vice president and VA liaison with SWBC Mortgage. Tapman offers onsite one-hour VLB loan training along with an additional two hours of VA loan training. TREC has approved this course for three hours of MCE credit through TAR. For details, contact Tapman at 210-218-8722 or ttapman@swbc.com.

Certification of eligibility to participate in the home loan program does not guarantee an interest rate on any loan.

For information on locking in an interest rate on a home loan, contact a VLB participating lender. VLB interest rates are subject to change at any time.

Down payment amount is determined by the lender.

All loans are subject to credit approval.

A VLB home loan is not the same as a Veteran’s Administration (VA) loan. The VA is a federal program, whereas the VLB is a state program. The VLB allows participating lenders to qualify a veteran client under VA, FHA or conventional guidelines, then receive funds for the loan from the VLB acting as a third-party lender.

Dr. Hunt (hhunt@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

JANUARY 2013

13

Commercial Markets

14

TIERRA GRANDE

T

he office market is rising like a phoenix from the ashes of the 2008 price collapse. The collapse was the biggest since 1986, when prices fell nearly 40 percent because Congress changed the tax laws for real estate owners. Lack of financing for commercial real estate, higher vacancies and declining rents due to recession, and a lack of confidence in the future of America caused transaction volume to plummet in 2009 and 2010.

But time marches on. Five years have passed since the commercial real estate lending market froze and started the downturn in July 2007. The recovery has been painfully slow, but it is clearly underway.

America’s office buildings fill when employment increases.

Most professionals focus specifically on job growth in two key JANUARY 2013

industry sectors: professional and business services (PBS) and financial activities. PBS employment peaked in January 2008 at roughly 18 million workers. By September 2009, this number had dropped to 16.4 million. Since that trough, PBS employment has risen virtually unabated to 17.9 million, recovering nearly all the recession losses.

Employment in the financial activities industry has not fared as well. This sector reached peak employment of 8.3 million in December 2006. The cataclysm in the industry caused employment to fall to a cyclical low of 7.6 million at the trough in July 2010. Since then, employment has resumed a gradual uptrend to 7.7 million workers by September 2012. Today there are over a half million fewer workers employed in financial activities than there were at the end of 2006.

15

OFFICE REITS did well in 2012, with prices for the largest ones rising 26.6 percent. Cap rates for the Houston and Austin markets trended downward.

A

Dollars

ccording to CoStarNet, absorption for the Dallas– Fort Worth market was up nearly 610,000 square feet in second quarter 2012, following a 320,000-square-foot gain in the first quarter. Austin filled 314,000 square feet in the second quarter after absorbing over 631,000 square feet in the first quarter.

San Antonio followed the positive trend as well. Net absorption was nearly 250,000 square feet in the second quarter, following 468,000 square feet of positive absorption in the first quarter. The Houston office market is on fire, filling more than 1.5 million square feet in the second quarter after filling more than 1.3 million square feet in the first three months of 2012.

Nationally, rental rates for office buildings have been stabilizing, and Class-A office space rents are inching upward (see figure). Texas is no exception. Amazingly, asking rents for downtown (central business district; CBD) space in Houston, Austin and San Antonio are now higher than during the halcyon days of 2007. Asking rents in Texas cities compared with the “gateway cities” that are drawing strong investor interest are shown in Table 1.

After the financial collapse in 2007, construction for all commercial real estate came to a grinding halt. Lending for new real estate projects vaporized. For nearly two years, little new supply of office space was added in America. But times are changing. As someone once said, the state bird of Texas is the construction crane.

A review of F.W. Dodge data revealed there are 64 office projects currently under construction in Houston alone. Dallas has 16 projects underway and Fort Worth and Austin have 25 and 15, respectively. San Antonio has 26.

16

Class-A Office Gross Rental Rates (Gross Asking Rates for Overall Market)

32 30

AUSTIN

28

HOUSTON

26

SAN ANTONIO

24 22

DALLAS-FORT WORTH

20 18 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sources: CoStar Group and NAI REOC

T

he Great Recession did substantially delay many construction projects in the Texas office market. As of Sept.

27, 2012, F.W. Dodge data indicate 45 office construction projects have been put on hold in Houston, 46 in Dallas, 26 in Fort Worth, 40 in Austin and 17 in San Antonio.

The stock market has been signaling an office market reawakening. Real estate investment trusts (REITs) that own office buildings put in a strong performance in 2012. Prices for the largest REITs are up 26.6 percent in 2012 (Table 2). Notice how the average price for the apartment REITs is up just .3 percent for the same time period. Apartment REITs were the darling of the market in recent years, but a new sheriff moved into town in 2012.

TIERRA GRANDE

According to CoStar, the average office cap rate for sales on office buildings 15,000 square feet or larger declined from a high of 8 percent in first quarter 2009 to 7 percent at the end of Large Texas Markets PSF Gateway Cities PSF March 2012. Clearly prices have begun to pick up steam. Real Houston $30.73 New York $56.53 Capital Analytics (RCA) reports cap rates in CBDs dropped Austin $29.94 San Francisco $41.53 from 8 percent to around 6.5 percent by August 2012.

Dallas–Fort Worth $22.56 Washington, D.C. $38.48 Data from RCA shows cap rates for the CBD areas rangSource: CoStar Group ing from 5.5 percent in Washington, D.C., to 7.2 percent for New York City boroughs. CoStar shows Houston and Austin ome office REIT managers still view the overall market following similar trajectories with average cap rates at around as weak and are preparing for the possibility of future 9 percent in second quarter 2009, then trending downwards challenges by holding large cash reserves and acquiring to the high 6 percent range for Houston and the low 6 percent only top quality buildings range for Austin at the end in the strongest markets. of March 2012. These rates Table 2. REIT Price Changes, 2011–12 However, they are seeing are lower than the national Price as of Price as of Percent occupancy continuing to average, and this displays 10/12/2012 12/31/2011 Change recover in quality markets leakage from the overand are starting to increase Office Real Estate Investment Trusts crowded gateway cities that rental rates.

Brandywine 12.37 9.5 30.2 are driving cap rates down The uncertainty of AmerBoston 108.94 99.6 9.4 and prices up in these two Mack-Cali 27.86 26.69 4.4 ica’s economic and politiTexas markets.

Parkway 13.88 9.86 40.8 cal future has been a major ith Class-A marCommonWealth 14.72 16.64 –11.5 concern. Mortimer Zuckerkets bid up so high, Kilroy 46.37 38.07 21.8 man, CEO and co-founder of there is a potential Brookfield 15.89 7.81 103.5 Boston properties, expressed opportunity for investors in SL Green 78.17 66.64 17.3 his concern during a second the B and C office buildings Douglas Emmett 23.72 18.24 30.0 quarter 2012 conference call: based on relative value. The Corporate Office 25.55 21.26 20.2 “We’ve had the biggest or Class-A space will reach a Average price change for office REITS 26.6 the most stimulative fiscal point that is too expensive S&P 500 1428.59 1257.6 13.6 and monetary policy in our to justify the cost, making Apartment Real Estate Investment Trusts history, and here we are, the Bs and Cs (especially AIMCO 25.45 22.91 11.1 three or four years later, the high-quality ones that Associated Estates 14.58 15.95 –8.6 and we’ve run up deficits of can also benefit from a little AvalonBay 132.29 130.6 1.3 close to $5 trillion, and it rehab) a much more attractive BRE Properties 46.46 50.48 –8.0 has not taken the economy alternative. There is always Camden 62.7 62.24 0.7 out of the very weak status.” value in leaving “something Colonial 20.7 20.86 –0.8 Class-A buildings in major for the other guy.”

Equity Res 56.02 57.03 –1.8 cities are seeing rents and Opportunity will be conEssex Property 145.5 140.51 3.6 occupancy pick up thanks centrated in strong economic Home Prop 58.81 57.57 2.2 to a “flight up the quality areas with good job growth, UDR 24.01 25.1 –4.3 curve” according to Gerry and if Texas remains one of Post Properties 47.37 43.72 8.3 Sweeny, CEO of Brandywine the lone areas with this qualAverage price change for apartment REITS 0.3 Realty Trust. In a weak marity it will become even more Source: CoStar Group ket, tenants can move into flooded with people wantthe best buildings at affordable rent levels. Hence, the nicest ing a piece of the action. It would be prudent to get into these buildings fill up with tenants that move out of lesser-quality markets before this occurs so when things do heat up investors buildings in the same city. can sell into strength and not buy at the peak.

A surge of buying interest from REITs, pension funds and With all the focus on apartments for the past two years, the other investors is pushing prices up, especially in large maroffice market hasn’t gathered as much media attention. But kets. Real Capital Analytics reported that their Commercial clearly the market is coming back, and the investor public is Property Price Index was up 10.3 percent in the 12 months end- moving back into the sector. ing June 2012. CoStar noted that office buildings in New York, Dr. Dotzour (dotzour@tamu.edu) is chief economist and Parulian and Boston and San Francisco have recently sold with cap rates less Stewart research assistants with the Real Estate Center at Texas A&M than 5 percent. A Boston office building, 100 Federal Street, University. sold for $471 per square foot and a cap rate of 4.4 percent.

As cap rates are further compressed in the gateway citTHE TAKEAWAY ies, REITS have started to look more and more to alternative markets with strong economic growth. Office market growth Job growth is returning to sectors of the economy that use requires strong job growth, and there is no better place for job office space. As a result, rents are starting to increase and growth than Texas. There will likely be increased institutional investor interest is heating up. After several years of dorinterest in Texas office buildings that are filled with quality mancy, new buildings are under construction. tenants, which could drive prices higher.

Table 1. Class-A Office Asking Rents

S

W

JANUARY 2013

17

Brokerage

Since 1983, Texas’ population increased 66 percent. Annual home sales nearly tripled, while total sales dollars ballooned nearly sevenfold. During this time, the size and structure of the home sales industry (licensed real estate agents and brokers) moved in the opposite direction.

18

TIERRA GRANDE

Figure 1. Total Active Texas Licensees* and Home Sales

300

154,811

140

250 124,185

120

200 111,193

100

150

80

100

83,089

60 1983

Home Sales (thousands)

Number of Licensees (thousands)

160

50

1987

1991

1995

1999

2003 2007 2011

2012

*As of August of each year except June 2012 Sources: TREC and Real Estate Center at Texas A&M University

TEXAS BROKERS AND GENTS

A

The number of active Texas real estate licensees theoretically reacts to changes in the overall housing market and population growth. During the boom years of the 1970s and early 1980s, the number of people licensed as real estate brokers and sales agents accelerated rapidly. The real estate market’s notorious collapse between 1985 and 1989 plus subsequent license law changes that expanded the educational prerequisites and costs to obtain and retain a license caused the number of licensees to plummet. Active licensees fell from a peak of 154,811 in 1986 to a low of 83,089 in 1998 (Figure 1).

As the home sales market improved both in unit sales and total dollar volume during the 1990s and especially the housing boom of the mid-2000s, the number of active licensees reversed its downward trend and reached another peak of 124,185 in 2007. Home sales, however, declined nearly 27 percent after peaking in 2006, dragging the active licensee total down to 111,193 JANUARY 2013

by summer 2012.

Figure 2. Number of Active Texas Real Estate Stronger home sales in 2012 and 2013 Brokers and Sales Agents* may reverse the 170 downward trend, 154,811 but because of the 150 lag in reporting new licenses and renew130 als, it may take a couple of years to 110 Total Licensees 111,193 become evident.

The Texas Real 90 Estate Commission 83,089 (TREC) licenses 70 different types of Sales Agents brokers. Histori50 cally, the majority Brokers of broker licenses 30 were issued to 2012e 1983 1987 1991 1995 1999 2003 2007 2011 individuals who *As of August of each year except June 2012 ran or owned their Sources: TREC and Real Estate Center at Texas A&M University own companies. In recent years, more and changes in the state license laws and of these companies are incorporated regulations, the number of licensed broor operate as limited liability corporakers hovered between 65,000 and 70,000, tions (LLC) and are licensed accordingly. and sales agents numbered about 15 to Individual brokers as a percent of total 20 percent more. By 1991, though, the brokers fell from 93 percent in 1983 to number of brokers actually exceeded the approximately 81 percent by 2012. The number of sales agents and stayed that decline in individual brokers was offset by the increased number of corporate and way until 1994. Since then, the number of agents has steadily increased while LLC-licensed brokers, which rose from 5 broker numbers have held fairly stable percent to 17.5 percent by 2012.

(Figure 2).

The number of licensed brokers relaSales agents per broker peaked at tive to licensed sales agents also shifted 2.04 in 2007, meaning there were more during the past 30 years. Prior to 1991 Number of Licensees (thousands)

Today there are fewer real estate licensees serving a substantially larger market in terms of sales and people. Advances in technology, business practices and processes coupled with more stringent licensing requirements have resulted in greater sales productivity per licensee.

19

Figure 3. Texas Real Estate Agents Per Broker 2.2 2.04

Agents Per Broker

2.0 1.8

1.65

1.6 1.4

than twice as many agents as brokers.

Today, there are about 1.65 sales agents for every broker. On average, there have been 1.3 agents per broker over the 30-year period (Figure 3).

Average = 1.34

1.2 1.0 0.8 1983

0.94 1987

1991

1995

1999

2003 2007 2011

2012e

Sources: TREC and Real Estate Center at Texas A&M University

Figure 4. Total Active Licensees, Home Sales and Home Sales Volume Indexed to 1983 (1983=100)

800

683.4

700 600

Dollar Sales Volume

500 400 279.9

300 200

Number of Home Sales

80.1

100 0 1983

Total Licensees

1987

1991

1995

1999

2003 2007 2011

2012e

Sources: TREC and Real Estate Center at Texas A&M University

2.5

2.0

Figure 5. Annual Texas Home Sales per Licensee 2.4

If the number of residential licensees is 75% of the total licensees, then the rate would be 2.9 homes sold per licensee per year.

2.2 1.8

1.5

1.0 0.6

0.5

0 1983

1987

1991

1995

1999

Source: Real Estate Center at Texas A&M University

20

2012e

2003 2007 2011

GEOGRAPHICAL ISTRIBUTION

D

As expected, the geographical distribution of licensees across the state follows the primary population centers. The top 20 counties by number and percent of licensees as of August 2012 based on licensee mailing addresses registered with TREC are shown in Table 1.

Harris County had the greatest number of licensees with 27,359, or 23 percent of all the licensees in the state.

Dallas County had 15,526 or 13 percent of all licensees. The top 20 counties collectively account for approximately 69 percent of the state’s population and 95 percent of all the licensees in the state. These counties were relatively well served based on real estate licensees per 1,000 population. Only El Paso, Lubbock, Bell and Hidalgo Counties had fewer than the statewide 2012 average of 4.25 licensees per 1,000. Anderson, Comal and Travis Counties had double-digit numbers of licensees per 1,000 people.

Of course, many licensees actively do business in more than one county.

Approximately one in three licensees in Texas conduct business in the Houston MSA. The five largest counties of the Houston MSA (Harris, Fort Bend, Montgomery, Galveston and Brazoria) represent 34 percent of all the licensees in the state. Four principal counties in the Dallas-Fort Worth MSA (Dallas, Tarrant, Collin and Denton) take in 31 percent of all licensees. Three counties in the Austin MSA (Travis, Williamson and Hays) and two in the San Antonio MSA (Bexar and Comal) contain 14 percent and 9 percent of all licensees, respectively.

Almost nine out of ten Texas licensees (88 percent) do business in the four principal metropolitan areas of the state.

TIERRA GRANDE

Table 1. Top 20 Counties by Number of Licensees, August 2012

County 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

LICENSEES, HOME SALES, SALES OLUME

V

Despite the tremendous growth in the Texas residential marketplace during the past three decades, the number of licensees actually declined by 20 percent.

Homes sold through Texas Multiple Listing Services (MLS) totaled 86,287 in 1983 but grew to an estimated 241,500 by 2012, a 180 percent increase. The annual number of home sales peaked at 281,839 in 2006. The estimated 241,500 sales in 2012 represented a 20 percent increase over the 2002 level and only 14 percent less than the peak.

As individual home prices increased and more expensive homes entered the market, the total dollar volume of residential sales multiplied even faster.

Residential sales volume in 1983 totaled slightly less than $7.3 billion. By 2012, residential sales totaled an estimated $49.8 billion, a 583 percent increase.

Total sales volume increased 59 percent from 2002 to 2012, and the 2012 volume is only 7 percent less than the 2006 $53.8 billion peak. The relative change in the number of licensees, home sales and home sales volume indexed to 1983 is shown in Figure 4.

With the growth in unit sales and total dollar sales volume and fewer active licensees, sales production per licensee increased dramatically. Based on total sales and total licensees, the number of sales per licensee rose from 0.6 in 1983 to 2.2 sales per licensee in 2012, a nearly 250 percent increase. The 2012 level of sales per licensee was consistent with the levels achieved between 1998 and 2003, suggesting a return to sustainable conditions (Figure 5).

Although the majority of licensees are involved in marketing housing, many licensees are active exclusively in commercial, land and other nonhousing real estate. The precise number of exclusively residential licensees is unknown.

If the number of licensees devoted to residential sales is, say, 75 percent, 80 JANUARY 2013

Harris Dallas Travis Bexar Tarrant Collin Denton Fort Bend Montgomery Williamson El Paso Galveston Brazoria Nueces Comal Hays Lubbock Bell Anderson Hidalgo

Number of Licensees

Percent of Total Licensees

Cumulative Percent

2011 Population

Number of Licensees per 1,000 Population

27,359 15,526 10,994 9,568 8,862 7,110 5,399 4,628 3,791 3,657 2,595 2,203 1,675 1,498 1,342 1,251 1,148 1,121 1,105 1,047

23.3 13.2 9.4 8.2 7.6 6.1 4.6 3.9 3.2 3.1 2.2 1.9 1.4 1.3 1.1 1.1 1.0 1.0 0.9 0.9

23.3 36.6 46.0 54.1 61.7 67.7 72.3 76.3 79.5 82.6 84.9 86.7 88.2 89.4 90.6 91.7 92.6 93.6 94.5 95.4

4,180,894 2,416,014 1,063,130 1,756,153 1,849,815 812,226 686,406 606,953 471,734 442,782 820,790 295,747 319,973 343,281 111,963 164,050 283,910 315,196 58,308 797,810

6.5 6.4 10.3 5.4 4.8 8.8 7.9 7.6 8.0 8.3 3.2 7.4 5.2 4.4 12.0 7.6 4.0 3.6 19.0 1.3

Sources: TREC and U.S. Census Bureau

Table 2. Sales per Licensee in Selected States and Years California Florida Georgia Illinois Michigan New York North Carolina Ohio Pennsylvania Texas

2000

2005

2008

2009

2010

1.59 1.44 1.97 3.09 2.73 2.27 1.56 4.80 0.80 2.21

1.30 1.58 2.78 3.86 2.81 2.21 2.31 5.72 4.42 2.43

0.87 0.87 n/a 2.51 2.35 n/a 1.67 3.70 0.62 1.84

1.10 1.23 n/a 2.40 2.70 n/a 1.51 4.22 0.69 1.76

1.05 1.19 1.79 n/a n/a n/a 1.55 n/a 0.55 1.83

Sources: Association of Real Estate License Law Officials, NAR, individual state Realtor associations and Real Estate Center at Texas A&M University

Table 3. Licensees per 1,000 Population Selected States, Selected Years California Florida Georgia Illinois Michigan New York North Carolina Ohio Pennsylvania Texas Average

1985

1990

1996

2000

2005

2010

2011

10.9 27.4 8.3 8.7 8.9 4.8 9.4 4.7 8.8 9.4 10.1

11.5 20.9 8.2 5.2 7.5 8.8 12.2 12.7 11.8 7.7 10.6

9.7 13.9 6.7 22.2 5.0 6.3 10.7 14.4 3.6 4.4 9.7

10.6 17.0 8.9 6.4 6.8 6.4 10.7 4.0 20.0 4.1 9.5

12.9 19.5 9.6 6.4 7.4 7.5 10.8 4.5 4.7 5.1 8.8

12.5 15.4 n/a 6.0 6.3 n/a 9.4 5.1 20.1 4.6 9.9

11.9 17.4 9.3 n/a n/a n/a 10.0 n/a 22.8 4.4 12.6

Sources: Association of Real Estate License Law Officials, U.S. Census Bureau and Real Estate Center at Texas A&M University

21

Dollars (thousands)

500

400

Figure 6. Dollar Volume of Home Sales Per Licensee Sales per licensee is up from $52k to $448k per residential licensee per year.

453.3

448.2 338

If the number of residential

300 licensees is 75% of the total

200

licensees , then the rate would be $598k per residential licensee per year.

The increase in dollar volume sales per licensee has been 52 even more impres0 sive. In 1983, each 2012e 1983 1987 1991 1995 1999 2003 2007 2011 licensee generated Sources: TREC and Real Estate Center at Texas A&M University about $52,540 in residential sales Figure 7. Total Number of Texas Licensees volume. By 2012 each licensee was Per 1,000 Population 10 estimated to have 9.4 produced approximately $448,234, a 8 753 percent increase (Figure 6).

The estimated 6 rate of sales per 5.2 licensee for 2012 4.2 was only slightly 4.1 4 more than 1 percent less than the peak level of $453,330 in 2 2006. If the number of licensees devoted to residential sales 0 2012e was, say, 75 percent, 1983 1987 1991 1995 1999 2003 2007 2011 80 percent or 85 Sources: TREC and Real Estate Center at Texas A&M University percent of the total number of licensees, percent or 85 percent of the total number then the dollar sales volume per licensee of licensees, then the number of 2012 would have been around $597,645, sales per licensee was around 2.9, 2.7 $560,292, or $527,334 per residential or 2.6 homes per residential licensee, licensee, respectively. respectively.

Surprisingly, total home sales data GROWING POPULATION, for individual states are sketchy and FEWER ICENSEES inconsistent. However, since 2000, sales The high number of licensees during the per licensee in Texas compare favorably early 1980s was a legacy of the extraorwith the other top ten most populous dinary boom years during the 1970s. states. Sales per Texas licensee exceeded Since 1986, the peak year for number of levels reported in California, Florida and licensees, Texas’ population increased Georgia almost every year during the by more than 9.6 million people, with past decade, especially in the lean years more than 5.3 million added just since of 2008–10. Only the Midwestern states 2000. Total licensees declined by nearly (Illinois, Michigan and Ohio) had higher 44,000 since 1986. Consequently, a sales per licensee. Comparative data on significantly larger population is being sales per licensee for the top ten most serviced by considerably fewer total populous states since 2000 are shown in agents.

Table 2.

100

L

22

In the early 1980s, before the energyrecession bust, active Texas real estate licensees reached a high of 9.4 licensees per 1,000 people. In fact, licensees per 1,000 population equaled or exceeded 9.0 for each of the four years from 1984 to 1987. Since then, however, licensees per 1,000 has dropped more than 50 percent to an estimated 4.25 licensees per 1,000 in 2012 (Figure 7).

Among the top ten most populous states, the real estate population service level is distinctly greater in the fastergrowing major states (California, Florida, Georgia) and noticeably less intense in the nongrowing states (Ohio, Michigan).

Texas has consistently maintained a relatively lower population service level than the other top ten states. Although the number of licensees relative to population varies significantly among the states, the average number of licensees per 1,000 people increased from 10.1 to 12.6 from 1985 to 2011 (Table 3).

Although Texas is the second most populous state, it trailed California, Florida, Pennsylvania and New York in number of licensees in 2011. And compared with most of the other most populous states, Texas consistently has fewer licensees per 1,000 population. As the market and the population of the state continue to expand, expect the number of licensees to expand as well.

Dr. Gaines (jpgaines@tamu.edu) is a research economist with the Real Estate Center at Texas A&M University.

THE TAKEAWAY The number of active real estate licensees per 1,000 Texans stood at 9.4 in the 1980s, but dropped to 4.25 by 2012. The national average is 12.6.

As Texas’ population continues to grow and the housing market expands to keep pace, the number of licensees will likely increase to meet demand.

TIERRA GRANDE

Legal Issues

Everyone should have a will.

But many people delay or avoid making the decision because of two misperceptions.

First, you cannot draft a will by yourself; you need an attorney.

Second, you do not need a will if you own no property.

JANUARY 2013

I

n truth, an attorney is not required. Texas recognizes two types of written wills: a holographic will (one entirely in the deceased’s handwriting) and an attested will (one not entirely in the deceased’s handwriting), such as a typewritten will. A holographic requires no witnesses while an attested will requires at least two. So, in essence, you can draft your own will, especially if it is holographic.

While an attorney is not required, his or her expertise is recommended to: • comply with the legal requirements to validate the will, • meet the special needs of certain beneficiaries, • make sure all of your assets are properly distributed without ambiguity and • avoid death taxes, to the extent possible, such as federal gift and estate taxes associated with large estates.

If you have no assets, do you still need a will? The answer is probably yes for two reasons. First, if you have minor children, the will is the primary vehicle by which you appoint a guardian. Second, if you subsequently receive assets before or after you die, your will determines the distribution.

On the other hand, you can own a large estate and still not need a will. Some assets transfer at death without need of a will. These are known as nonprobate assets and include such things as jointly owned property held as joint tenants with the right of survivorship. The same goes for accounts payable on

23

death. Likewise, a life tenant’s interest in a life estate passes to the designated recipients known as remaindermen when the life tenant dies. (For more information on probate-avoidance techniques, see publication 1106, “Five Ways to Avoid Probate.”)

If you die without a will (intestate) and have assets subject to probate or if you die testate but do not dispose of all your assets in the will, how is this property divided?

In Texas, distribution depends on: • whether the property is real or personal, separate or community and • whether you are survived by a spouse, children (or their descendants), or any next of kin.

With this in mind, the rules of descent and distribution found in Sections 38 and 45 of the Texas Probate Code (TPC) govern the division. These rules are sometimes referred to as the rules of intestate succession.

Before describing the rules, an overview of what constitutes real and personal property, and the difference between separate and community property, is necessary.

Real property includes land (real estate) and everything firmly attached to it. Trees, houses and barns are good examples. Personal property is any tangible or intangible property not affixed to the ground. This includes vehicles, cattle, farm machinery and bank accounts.

Real Property

A

Division of Separate Property (Real and Personal)

ssume you own community property (including a home, car and truck) with your spouse. Also, you have a farm, cattle and machinery that you inherited as your separate property from your parents. You have no children by this marriage, a prior marriage or out of wedlock.

If you die intestate (without a will), how is your separate property divided?

Distribution of separate property is described in Section 38 of the TPC. It comprises two categories, real and personal. In this case, the farm is real property and the cattle and machinery are personal. Three variables determine the distribution.

• Is there a surviving spouse?

• Are there surviving children (or their descendants)?

• Are there surviving relatives such as parents, brothers and sisters, aunts, uncles or grandparents?

Personal Property

Spouse Only and No Children (or their Descendants) If you die intestate survived by a spouse and no children (or their descendants), your spouse gets all your separate property, both real and personal property.

Community property includes any property (real or personal) acquired during a marriage except property acquired by one spouse by way of gift, devise or inheritance. Each spouse owns an undivided one-half interest in this property. However, if a parent or relative gifts (gives) or devises (wills) property solely to one spouse (excluding the other), this property, even though acquired during the marriage, is that spouse’s separate property. Any property acquired prior to the marriage remains the separate property of that spouse unless the other spouse’s name is added to the title.

Community Property

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Separate Property

& Spouse and Children (or their Descendants) Only If you are survived by a spouse and children (or their descendants), your spouse receives one-third of the separate personal property (the cattle and the machinery), and the children (or their descendants) get the remaining two-thirds.

As to the separate real property (the farm), your spouse receives a life estate in one-third of the land. Your children (or their descendants) get two-thirds of the real property immediately and the remaining one-third when the spouse dies.

The issue of what happens to the primary residence located on the premises is discussed later.

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&

or

Spouse and Parents (or their Descendants) Only, No Children If you are survived by a spouse and your parents or their descendants (meaning your brothers and sisters), your spouse gets all your personal property and half of the separate real property. The parents or their descendants share in the other half of the real property according to the degree of kinship described later.

If you have no surviving spouse, then there is no differentiation between how real property and personal property is divided. It goes together.

or Children (or their Descendants) Only If you are survived solely by children and no spouse, all your separate property, real and personal, goes to your children (or their descendants).

or Parents (or their Descendants) Only If you are survived by your father and mother, no spouse and no children (or their descendants), your separate property, both real and personal, will be divided equally between your father and mother. If only one parent is alive and you have no surviving brothers or sisters (or their descendants), then all your separate property goes to the surviving parent. However, if you have surviving brother(s) or sister(s) (or their descendants), then the surviving parent gets half the separate property, and your brother(s) and sister(s) (or their descendants) share in the other half.

Brothers and Sisters Only If you have no surviving spouse, no surviving children (or their descendants), and no surviving father or mother, then all your separate property, whether real or personal, goes to your surviving brothers and sisters or their descendants.

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& Maternal and Paternal Grandparents (with Possible Descendants) If there is no surviving spouse, no surviving children (or their descendants), no surviving parents and no surviving brothers or sisters (or their descendants), your separate property is divided equally between your maternal and paternal grandparents.

If the only survivors are your four maternal and paternal grandparents, half of the property goes to each side of the family. Each grandparent receives one-fourth of your separate property or one-half of the half going to that side of the family.

If one grandparent is dead and he or she had no surviving descendants, the surviving grandparent on that side of the family gets one-half of the separate property. But, if a deceased grandparent had surviving descendants, such as your aunts and uncles or cousins and nephews, then the surviving grandparent gets one-fourth, and the descendants of the deceased grandparent share in a fourth.

No Maternal or Paternal Grandparents If both the maternal and paternal grandparents are dead (and both had descendants), the descendants on each side of the family share in the half of the separate property going to that side of the family. If one set of grandparents is deceased and had no descendants, the descendants on the other side of the family share in all the separate property.

According to the statute, the distribution of the separate property never extends to the great-grandparents or their descendants. If no descendants of your maternal or paternal grandparents can be found, (and you have no other survivors mentioned earlier) the separate property transfers (escheats) to the state of Texas.

Distribution of Community Property (Marital) The rules of descent and distribution associated with community property are simple compared with separate property. The reason is twofold. First, the law makes no distinction between real and personal community property. Both are treated the same. Second, the distribution is limited to the surviving spouse and/or the deceased’s surviving children (or their descendants). While there may be no surviving children, there will always be a surviving spouse: otherwise, no community property can exist.

Rules for distributing community property when the first spouse dies intestate are found in Section 45 of the TPC. In the opening example, the community property consists of the home and the vehicles.

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Special Rules In specific situations, special rules apply. Here are four.

(1) Per Capita or Per Stirpes? (Section 43, TPC) Surviving Spouse Only If you die intestate survived by a spouse and no children (or their descendants), your spouse gets your half of the community property, regardless of whether it is real or personal. The surviving spouse becomes vested with all the property that was formerly community property. It now becomes the surviving spouse’s separate property.

or Surviving Spouse and Children (or their Descendants) Only The presence of surviving children (or their descendants) changes the distribution.

If all your surviving children (or their descendants) are from this marriage and none from prior marriages or out of wedlock with someone other than your surviving spouse, your spouse still gets your half of the community property as before. However, if any of the surviving children (or their descendants) are from another marriage or out of wedlock with someone other than your surviving spouse, then all your children (or their descendants), regardless of origin, receive your half of the community property. The surviving spouse keeps his or her half.

The statute states it this way. Your spouse gets your half of the community property if “all surviving children and descendants of the deceased spouse are also children or descendants of the surviving spouse.” The statute adds, “In every case, the community estate passes charged with the debts against it.” In other words, whoever gets the property gets the responsibility for paying debt (or lien) against it.

Because the debt (or lien) follows the community property, the recipient(s) may wish to disclaim or renounce the inheritance when the debt approximates or exceeds the value of the property. The procedure is outlined later.

Children (or their Descendants) Only The statute does not address this situation because if there is no surviving spouse, then there can be no community property to divide. If there is no surviving spouse, all the deceased’s property is his or her separate property and will be distributed according to Section 38 discussed earlier.

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When a group such as all your brothers or sisters (or their descendants) is entitled to receive property, how is the property apportioned among them? For example, assume you have three children (A, B and C) from two marriages. A has no children, B has one child and the C has four children. You die intestate. How is your half of the community property divided among them?

If all three of your children survive you, each receives onethird of your half of the community property. Each stands in the first or same degree of inheritance (Section 43). The distribution is on a per-person or per-capita basis. But what happens if the B and C predecease you, and only A is living?

Here, A stands alone in the first degree of inheritance. So, A still gets one third of your half of the community property. The surviving children of B and C share in the portion that otherwise would have gone to the parent had he or she survived. B’s surviving child gets one-third of one-half of the community property that would have gone to B. C’s four surviving children each get one-fourth of the one-third of the one-half of the community property that would have gone to C. This is known as a per stirpes distribution.

What happens if all three of your children predecease you?

Now who stands in the first or same degree of inheritance?

This would be your grandchildren. Remember, those standing in the first or same degree receive property on a per capita basis. Thus, each of the surviving five grandchildren receives one-fifth of your one-half of the community property on a per capita basis.

What if one or more of the grandchildren predecease you?

How does this affect the distribution?

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It depends on whether the predeceased grandchildren had any survivors (your great-grandchildren). Assume two of the five grandchildren predeceased you and neither had any descendants. In this event, the remaining three grandchildren each receive one-third of your half of the community property per capita. If one of the two predeceased grandchildren had a surviving child, then the property is split four ways. Each of the three surviving grandchildren gets one-fourth of the one-half per capita, and the great-grandchild gets the other one-fourth per stirpes (the part that would have otherwise gone to your grandchild had he or she survived).

(2) Adoptees Another special rule deals with adoptees (Section 40, TPC). Are they treated differently from natural biological children when an adoptive parent dies intestate? The answer is no.

Adoptees are treated as natural descendants of the parents who adopted them. And, should the case arise, the parents can receive property through the adopted child. It goes both ways.

What about the biological parents?

Can the adoptees still receive property by descent and distribution from their biological parents? The answer is yes, but the biological parents cannot receive property from or through the adopted child. It only goes one way.

There is one exception. The previous rules apply to adopted minor children. According to statute, a couple can adopt another adult with his or her consent. Likewise, one adult can adopt another adult, and one spouse in a marriage can adopt an adult without the other spouse’s consent or joining in the adoption (Sections 162.501 through 162.507, Texas Family Code).

That being said, here is the exception. The adopted adult is viewed as the son or daughter of the adoptive parent (or parents). But the adopted adult can no longer inherit from his or her biological parents. Only adopted minor children can do this.

The disclaimer must be in writing and acknowledged before a notary or anyone authorized to take acknowledgments. The disclaimer must be irrevocable and filed in the probate court where the deceased’s will is being or has been probated. If there is no probate, the statute specifies where the disclaimers must be filed.

Unless the deceased’s will specifies otherwise (when dealing with devised property), the disclaimed property passes as if the person filing the disclaimer predeceased the maker of the will.

A disclaimer could affect whether property is distributed per capita or per stirpes described earlier.

(4) Homestead Property One special rule or exception applies when real property serves as the primary residence for the married couple. Texas homestead laws afford special protection to the surviving spouse and the deceased’s minor children.

The Texas Constitution and Texas statutes protect the surviving spouse and minor children from eviction when, upon the death of the first spouse, title to the homestead passes, in whole or in part, to a third party by will or by inheritance.

In either case, Texas homestead laws give the surviving spouse the right to live in the home (the primary residence) for the rest of his or her life (a life estate) without eviction. The law gives the same benefit to the deceased’s minor children until they become adults.

Consequently, possession of the homestead when devised or inherited by anyone other than the surviving spouse is suspended until the surviving spouse dies or abandons the home and/or the minor children reach adulthood. The law does not allow the partitioning of the homestead between the surviving spouse and the minor children.

Texas homestead laws give the surviving spouse the right to live in the home (the primary residence) for the rest of his or her life (a life estate) without eviction.

(3) Disclaimers and Renunciations There is another special rule regarding disclaimers and renunciations (Section 37A, TPC). Any person entitled to receive property by devise (by will) or by inheritance (by descent and distribution) may disclaim or reject the receipt of the property in whole or in part. The right of rejection extends not only to the recipient but to his or her legal guardian, personal representative, independent executor or a person acting under a durable power of attorney that authorizes disclaimers.

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Fambrough (judon@tamu.edu) is a member of the State Bar of Texas and a lawyer with the Real Estate Center at Texas A&M University.

THE TAKEAWAY Texas’ Probate Code spells out precisely who inherits real and personal property when someone dies without a will.

By drafting a will, you can decide for yourself who gets what.

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Income Taxes

The Tax Auditor Cometh

By Jerrold J. Stern

E

assessed amounts through the IRS administrative appeals system and, ultimately, the courts.

All taxpayers are allowed to deduct legitimate expenses. If audited, however, taxpayers must provide proper documentation. For real estate professionals, documentation is necessary for business meals, auto expenses, travel, entertainment, home offices, and, in some cases, the number of hours devoted to property management.

The main audit selection procedures include “programs� targeting specific groups; tax returns with atypical relationships between income and deductions; or a combination of both.

The combination approach probably explains the higher audit rates for the self-employed. Specifics of actual audit selection processes are not made public.

Audits associated with atypical income-deduction relationships are, in part, determined by the IRS statistical discriminant inventory function (DIF) system. This method scores each tax return with a DIF score. Returns with the highest DIF scores are reviewed by IRS staff to determine if an audit seems

arly last year, the IRS released its 2011 Data Book, which provides data on its audit activities, tax collections and related projects. Overall, the IRS audited slightly more than 1 percent of approximately 143 million individual 2010 tax returns.

While the overall audit rate was slightly more than 1 perTable 2. Average Itemized Deduction Amounts, 2009 cent, the rate varied by adjusted gross income (AGI; gross Adjusted Gross income less losses and certain business deductions). Audit Income Range Medical* Taxes* Interest* Charitable* rates for AGI levels between $1 and $200,000 were just under $15,000 to $30,000 $7,783* $3,184 $8,434 $2,048 1 percent. In sharp contrast, the rate for AGIs from $200,000 $30,000 to $50,000 $7,028 $3,943 $8,699 $2,274 to $5 million ranged from 3 to 12 percent. The rates for AGIs $50,000 to $100,000 $7,269 $6,247 $10,133 $2,775 over $5 million averaged 21 to 30 percent. $100,000 to $200,000 $9,269 $11,069 $13,456 $3,888 While audit rates seem low for the majority of taxpayers, $200,000 to $250,000 $21,599 $18,524 $17,572 $5,947 keep in mind that the rates are averages. The probability of $250,000 or more $38,149 $48,317 $25,527 $18,488 audit can be much higher depending on the size and type *Amounts in these columns are averages for those who deducted expenses in this of income and deductions as well as how the tax return category. For example, $7,783 is the average medical deduction taken by taxpayers compares with all others in that category. who claimed a medical deduction and had AGI between $15,000 and $30,000.

For example, IRS 2011 audit rates on small businesses/ Source: Commerce Clearing House (CCH), 2012. www.cch.com/wbot2012/ 025AverageItemizedDeductions.asp sole proprietorships ranged from 1.3 to 4.3 percent depending on income level. These relatively higher rates directly affect real estate professionals, who are generally considered necessary. The discriminant function equations are a closely self-employed (and, Table 1. 2011 Audit Rates guarded IRS secret. therefore, sole for Sole Proprietors While DIF system details are not publicized, the IRS does proprietors) for tax release average itemized deduction amounts for various AGI Adjusted Gross Audit Rate purposes (Table 1). levels. Table 2 indicates averages based on 2009 tax returns Income Range (Percent) During 2011, the (the most recent year for which data are available). Taxpayers Less than $25,000 1.3 IRS audited 278,000 can compare their own itemized deductions to the averages. $25,000 to $100,000 2.9 sole proprietorship As noted, taxpayers should deduct all legitimate expenses for $100,000 to $200,000 4.3 returns. This total which they have documentation. Assistance from a competent More than $200,000 3.8 was 18 percent of all tax accountant or tax attorney is advised.

Source: Table 9a, IRS 2011 Data Book, www.irs.gov/ pub/irs-soi/11databk.pdf audited returns filed Dr. Stern (stern@indiana.edu) is a research fellow with the Real Estate by individuals.

Center at Texas A&M University and a professor of accounting in the Kelley Audit statistics for sole proprietorships strongly imply that School of Business at Indiana University. the IRS believes small-business owners underreport income, overreport deductions or both. Approximately 75 percent of THE TAKEAWAY audits in the $25,000 to $100,000 category resulted in assessed tax increases averaging $8,000. For the $100,000 to $200,000 Depending on income level, 2011 IRS audit rates on small income category, an average $18,000 additional tax was businesses, which include most real estate professionals, assessed on 69 percent of audited returns. ranged from 1.3 to 4.3 percent. Audits increased tax liabiliIn addition to assessed tax increases, interest and (someties between $8,000 and $18,000 in most cases. times) penalties are levied. Taxpayers have the option to appeal

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