Journal
Connecting People - Educating Investors In This Edition: Tax Deferred 1031 Exchanges for Real Estate Investors
Anthony F. Earle, Attorney...............3
Successful Real Estate Investing is a Team Sport! Howard Bloom, REO Broker...........4
Positive Cash-flow in California
Craig Sailing, Private Investor.............6
STEPS-TO-SUCCESS: It begins with your home...
Michael Ryan, Mortgage Broker.....9
Online Auctions
Jesse Loomis, Bid4Assets.com.....10
Power Through Your Year-End Tax Planning Richard Smith, Enrolled Agent.......15
Vol. II
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(408) 264-3198
‘Don’t Pop that Champaign Cork Just Yet...’ The California Association of Realtors (CAR) recently released their forecast for the coming year, and the results look good. While they expect sales to fall slightly, they also state that home prices have hit bottom and will add a healthy 3.5% in 2010. It all looks so… normal. Then, they note at the end of the report, that there are a couple of wildcards worth keeping an eye on – specifically the labor market situation and foreclosures.
CHRISTOPHER THORNBERG Founding Principal Beacon Economics
This reminds me of a Florida weatherman predicting warm temperatures and sunny skies, while acknowledging that the category 4 hurricane bearing down on the state might be something to worry about. Foreclosures are not a wildcard—they will continue to be the primary driver of the housing market for the foreseeable future. (Continued on Page 7)
Christopher Thornberg PhD is an economist and a founding principal of Beacon Economics, an independent economic research and consulting firm with offices in Northern and Southern California..
What’s Going On in the San Jose Housing Market? SCOTT BAMBUCCI, VP, AltosResearch A picture is worth 1000 words: It’s pretty clear that there are two emerging trends this year after three years of challenges - inventory is tightening and list prices are rising. Both of these trends are a definite change in direction for a market that, along with markets like Phoenix and Las Vegas, became the poster child of the housing bubble and bust. (Continued on Page 11)
Today
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Notes from Geraldine’s Desk
ccording to the Harvard Review the number one form of trusted advertising is word of mouth, not paid advertising as you might expect. This is confirmed at the SJREI Association, our success has been built primarily on word of mouth - these personal recommendations to family and friends are what really helped us to grow and thrive as an organization.
GERALDINE BARRY President SJREI Association The SJREI Association provides the education and networking necessary to enable individuals to make wise, profitable investment decisions. Whether you have yet to purchase your first investment property, or are working on your hundredth deal, you’ve found the bay area’s most dynamic investors association. Three Chapter Meetings monthly to choose from: • East Bay • South Bay • Mid-Peninsula Check out our website for details www.SJREI.net
To advertise with us please call (408) 264-3198 2 SJREI Journal Vol.II
SJREI is growing despite the economy, and this past month we opened a new East Bay Chapter in Pleasanton, and had 125 people attend the Bruce Norris presentation. Our plan is to bring the same guest speakers that we have in the South Bay to the East Bay each month, so pass the word along to your friends and family in that area. We hope you can join us as we grow, and explore the possibilities there as always with the goal of sharing relevant, timely information with you so you can make good solid investment decisions. Our mission along with providing education and networking opportunities for all is to encourage one another through difficult times, and applaud our member successes. Originally, people made the decision to attend a meeting based on who the featured speaker/topic was going to be. However, the interesting thing now is that people come, not just because of great guest speakers, but because we have created a community where people can connect regarding real estate, and exchange all kinds of interesting facts and tips to assist one another. Our meetings attract attendees due to the variety of interesting segments such as the market updates, investor spotlights and more. We, at SJREI, are working on building our community of investors and our membership program, so you can become a part of this vibrant group to collaborate easily and effortlessly with other investors. Check out page 5 for a summary of great new member benefits to determine if membership is right for you. Non-members are welcome to attend also. Real Estate Management Lessons Learned from a Bad Economy Regarding property management during this current market cycle, both commercial and residential – our motto now has to be tenant preservation. I interviewed someone recently who sent two clients packing when they could not continue to pay the rents he wanted in his commercial building. The current eco-
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nomic climate was impacting these businesses, and sales were way down. Instead of working with them, and maintaining some cash flow the owner told them he could not reduce the rent. Both tenants moved out, and the landlord now has vacancies that he has little or no hope of filling anytime soon. Since that occurred, he shared with me that his large anchor tenant just recently asked for a $2000 reduction in his rent as business was challenging, and he was having a difficult time meeting his financial obligations. This landlord had learned his lesson, and worked with this tenant, preventing another vacancy. We have to be creative in this economic climate in order to survive this downturn. The same landlord’s mortgage payment is $20,000 per month – that is a large nut to crack, and sadly he could have sold the building for twice what he paid for it a couple of years ago, and he would not have to deal with this situation. Hindsight is certainly 20/20, but the lesson here is to stay close to your market - liquidate if you see a storm on the horizon (at the SJREI we are constantly talking about market conditions and what to expect), and work on maintaining the tenants you have to assist you with making your monthly payments. We have heard stories of landlords going deeper into debt to maintain a building that they inevitably lose. Strategy is the key here for all of these situations, and early intervention with the assistance of key professionals is crucial so that you don’t make a bad situation worse. The same is true for the residential landlord – if a tenant needs short term grace it may be most appropriate to work with them and develop a plan. It is rewarding to assist with creating a solution where your tenant can work through a temporary problem, and you don’t have a vacancy to contend with. Preventing long term vacancies is the goal, get creative and work with your tenants, this creates a win/win all round. We hope you enjoy our 2nd volume of the SJREI Journal – it is full of information on the CA market in general, as well as our local Nth CA market and includes lots of tips for investors. Enjoy!
Geraldine Barry
SJREI President Connecting People, Educating Investors
1031 EXCHANGE by Attorney Anthony F. Earle
Tax Deferred 1031 ExchangeAnother Tool for Investors
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eal estate investors have various “tools” in their investment “toolboxes” which can be used to increase both the net value and diversity of a real estate portfolio. One powerful “tool” is the Like-Kind Exchange, also known as Section 1031 of the Internal Revenue Code or the “1031 Exchange”.
ANTHONY F. EARLE Attorney Anthony F. Earle is an attorney licensed to practice law in all California state trial and appellate courts, the United States Supreme Court, the United States Court of Appeals for the Fourth and Ninth Circuits, federal trail courts in the Northern District of California and the United States Tax Court. He has served as judge pro tempore for the Santa Clara Superior Court and is also a licensed Real Estate Broker. 408.786.1060 800.515.7560 www.earlelaw.com
Tax obligations are a major obstacle to the creation and retention of wealth, as most real estate transactions have tax consequences. The Internal Revenue Code (IRC) requires a taxpayer to pay tax on a real estate transaction where the fair market value (FMV) of property received (e.g., cash) is greater than the adjusted basis of a property given up (i.e., investment real property). In other words, if a real estate investor sells an investment property for an amount greater than its adjusted basis, the difference between the sale price of the property and the property’s adjusted basis will be subject to capital gains tax. (The “basis” of an asset is generally its cost. However, basis may be adjusted over the course of time due to various events. The basis of property must be increased by capital expenditures and decreased by capital returns. Increases in basis have the effect of reducing the amount of gain realized or increasing the amount of realized loss. Decreases in basis have the effect of increasing the amount of realized gain or decreasing the amount of loss.) Although the general rule is that a real estate investor must recognize a capital gain on the sale of investment real property where the FMV of the property sold is greater than the property’s adjusted basis, IRC section 1031 provides taxpayers with a
mechanism to defer recognition of the gain to the extent that the investment property which is given up is exchanged for a property of “like-kind”. Like-kind property is alike in nature or character, but not necessarily in grade or quality. Real property is of like-kind to all other real property, except for foreign real property. Examples include single family residence for apartment building, or commercial building for parking lot. A lease of real property for 30 or more years is treated as real property. “Boot” is all property which does not qualify for Section 1031 treatment. Boot includes cash received, net liability (e.g., mortgage) relief, and the FMV of other non-qualified property received. The basis in property acquired in a likekind exchange is equal to: adjusted basis of property given + gain recognized + boot given (cash, liability incurred, other property) - boot received (cash, liability relief, other property). An exchange of like-kind properties must be completed within the earlier of 180 days after the transfer of the exchanged property or the due date (including extensions) of the transferor’s tax return for the taxable year in which the exchange occurred. Also, the replacement property must be identified as such not later than 45 days after the date on which the transferor transfers the property. The identification of multiple replacement properties is permitted. Special rules apply to exchanges between “related” parties.
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TEAM BUILDING by Howard Bloom
Successful Real Estate Investing is A Team Sport!
I HOWARD BLOOM Realtor Intero Real Estate Services Howard specializes in the purchase and sale of bank-owned properties. Believing in what he sells, Bloom has purchased more than 50 bankowned properties for himself.
(650) 947-4780 hbloom@interorealestate.com www.HowardBloom.com 4 SJREI Journal Vol.II
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n the world of real estate investing it often is not what you know, but who you know and who and what they know. A small, knowledgeable group of professionals can open doors to their own inner circle of resources that has taken years to develop. Surround yourself with the most qualified, competent professionals who want to see you succeed. These people share your goals, values and dreams. Many have learned from their experiences and mistakes. These are mistakes that you don’t need to repeat. Top professionals recognize the value of long term relationships that span years. The pros are willing to share their knowledge and tell you the hard truths. Professionals who will provide valuable advice even if it means they don’t make the sale or create more work and income for themselves. A professional recognizes that you, the client are the important person, not them. How do you find these key people? Perhaps the most important is word of mouth and recommendations of others who have been where you are going. Find key members of your inner circle and they each will be able to refer those in their own inner circle. A great source of meeting others pursuing common goals are trade groups such as the SJREI. Look for those who are leaders in their market and those respected by others in their field. Only a few have the inside track and knowledge of things before they are public. Choose professionals who recognize the value of long term relationships and what it means to both you and them. How does this translate to the new or experienced investor? It means seeking out that special agent who controls a piece of the action. Recognize that the agents who have the list-
ings control the market. These special agents know what’s coming on the market months in advance. They have the most knowledge of a property, its benefits, problems and issues. They know what the seller is looking for in the way of price, terms and conditions. The bottom line is they have the ability to influence the seller in many situations. The best part is that these special agents are networked with many of the other players which is why 20% of the agents sell 80% of the homes. So how do you find the right agent for you? In my experience I find that top agents like everyone else only have a limited amount of time. Using their time efficiently and effectively is paramount. Top agents always make time for good clients whom they size up as real buyers. They don’t have the time for clients who consume vast quantities of time and who want to “maybe” buy something in the next year. You need to make a commitment to the agent and get one from them. Top agents are in demand and will be selective of who they choose to work with. They will quickly sort out the real buyers from the unrealistic time wasters. Top agent or not, you, the investor/client have a duty to yourself to make sure that you ask the right questions and validate that you and your realtor are the right fit. If you feel that the agent is just moving product as his primary concern, and is not truly concerned with your success, it’s time to find a new agent. Remember it costs no more to have the best representation, why settle for less, you deserve the best. Whether you are a first timer or seasoned investor who wants to purchase investment property and learn along the way, call or email me today to schedule our initial meeting.
W
hether you have yet to purchase your first investment property, or are working on your hundredth deal, you’ve found the bay area’s source for sound, principled advice and networking. As investors ourselves, we understand the challenges that investors face, and customize our programs to address real-life situations and scenarios. Hear the best speakers, get the best advice Our educational meetings are delivered by recognized experts in their field. They keep you up to date on issues such as market timing, new legislation, and techniques that may
affect or enhance your real estate investing. Network with investors, buyers, sellers, and the people who support them All successful people rely on a network. Bringing like-minded people together to share information, assistance, and resources is a core goal of our chapter meetings Stay motivated, avoid pitfalls Who but another investor understands the doubts, challenges, and successes of real estate investing? SJREI Association fosters a positive climate of mutual support and sound advice. Your questions are respected, your participation is valued.
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Member Benefits
SJREI Association supports three chapters: Mid-Peninsula, South Bay, and East Bay. Membership entitles you to free admission to your local chapter’s monthly educational and networking programs and much, much more.
Make a commitment to your future by becoming a member of the bay area’s most dynamic real estate investment association—join SJREI Association today!
Commit to Your Future— Become a Member Today (408) 264-3198 www.SJREI.net
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SJREI Association is a proud member of the National Real Estate Investors Association. Our affiliation with National REIA entitles our members to thousands of dollars in savings in goods and services.
Insider Luncheons Name badge and
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Annual Membership Dues Additional Member* Guest passes (use at any chapter meeting) Free registration & attendance at local chapter meeting Network with other investors at each event Free registration & attendance at all chapter meetings: Mid-Peninsula, San Jose, East Bay Invitation to annual Leadership roundtable VIP seating at registered events Personalized name badge with expedited event check-in On-line community: member profile, read and post messages on message boards Hundreds in discounts for goods and services through National REIA affiliation Discounts on workshops and special events Invitation to Quarterly Insider Luncheon Audio library of past events New member orientation
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• 2% cash back from The Home Depot through the National Rebate Incentive Program • 20% off on your Quick Books purchases • Up to 26% discount off Fed-Ex shipments • Discounts on insurance through National Real Estate Health Insurance • Deep discounts through Sherwin Williams on paint, accessories and supplies • Discounts up to 65% from Office Max office supplies, copier paper, computer/technology products, furniture and print services • Discounts on car rentals through Avis/ Budget and Enterprise • Discounts on Cell Phone service from Saba Wireless Details on how to claim these valuable benefits are provided in the new member package. Availability of discounts is subject to change without notice.
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SPOT LIGHT Investor Profile Craig Salling is a full-time real estate investor and a licensed real estate professional. He and his wife are actively buying foreclosures to build financial independence, and are currently focused on the Sacramento market. They have also developed a niche market where they provide investors the opportunity to acquire finished and rented houses, below-market fixers, and participate in trust deed investments. Craig has a Ph.D. in Physics, and has worked for 30 years analyzing data, developing systems, managing projects, and finding robust solutions to complex problems. This experience has given him an excellent foundation for understanding real estate markets, optimizing cash-flow investments, and implementing efficient operations.
Positive Cash-flow in California
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wo goals of real estate investing are achieving financial independence and building wealth. A sure way to become financially independent is to accumulate a portfolio of real estate properties that have positive cash-flow. To accomplish this, you need to find the best rental neighborhoods, property managers, and rehab teams for a given market. Investors who already work in that market can save you a lot of time and effort in that regard. A sure way to build wealth is to own California real estate over the long term. So, an ideal investment would be rental homes in California that efficiently provide positive cashflow. It has been decades since these kinds of investments were available because housing prices outpaced rents. In 2008, this changed. Prices in Sacramento and other markets neighboring the Bay Area were low enough that houses made sense as cash-flow investments. My wife and I got involved immediately, because we knew that the best bargains would only last while most people were still afraid of further price declines. We have been successful. Our most recent rental home was purchased for $65K and yields $3000/yr net income. The total acquisition cost, including rehab and closing costs, is 100% financed. We plan to acquire 30 similar properties over the next year. 6 SJREI Journal Vol.II
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We have focused on single-unit rentals in Sacramento for several reasons. Prices are so low that the risk due to further declines is minimal. The replacement cost for a lot of these houses is twice what we paid for them! If prices fall much farther, they will reach zero! Houses in Sacramento typically double in value from the bottom of the market cycle to the top, similar to the Bay Area. But, because of the lower prices, you can buy more houses in Sacramento for a given investment and yield far greater total cash-flow. The strong positive cash-flow is a margin of error against any potential rent declines. We like the fact that Sacramento is a major metropolis with a diverse economy. Sacramento is the 12th fastest growing city in the country. Renters don’t like to commute, and Sacramento is one the few cash-flow markets near the Bay Area that is not dominated by commuters. We have found an outstanding property manager whose expertise enables us to fill all of our rentals with well-screened Section 8 tenants who receive their rent allowance directly from the government. So, our vacancy rates (now zero) are not affected by unemployment trends. There are currently an increasing number
of rentals on the market, and tenants have a choice. To further insure against vacancies, our team cost-effectively rehabs our rentals to create attractive, desirable homes. We spent a lot of time understanding our Sacramento target areas, and mapped them out in detail. We know certain pockets should be avoided because they are slow to rent. Often, the reasons are not obvious unless you are on the ground working that market daily. Our primary focus is to buy and hold properties. However, we also are a source of cashflow properties for other investors. We have started holding properties using investors who want to be private lenders. Many people are interested in buying fixer houses from us, typically starting around $75,000 or finished homes around $110,000. All of our homes come with our rehab team and property management in place, and the finished homes are sold with renters, and cash flow from day one of ownership. We consider owning cash-flow rentals in California to be an optimal strategy to reach the goals of becoming financially independent and building long-term wealth. solutions2buildwealth@comcast.net (408) 245-3278
ECONOMIC FORECAST by Christoper Thornberg (Continued from front cover) This summer’s surge in sales and stabilization in prices are not indicators that problems in the housing market are behind us. Rather, the recent surge in demand has been driven by low interest rates from the GSE’s and the FHA, temporary tax incentive programs for first time buyers, and the fact that prices have declined to levels that look positively affordable relative to their 2006 peaks. Most importantly, the recent surge in sales and price stabilization are due to the fact that buyers who went out looking for deals, didn’t find many out there. As a result those who came off the fence found themselves competing with other buyers in a way that hasn’t been seen for the past couple of years. But the FHA is beginning to see losses on its portfolio climb to levels that make it patently obvious they can no longer do business as usual. Moreover, they will likely have to curtail their lending substantially when Congress has to step in and bail out their programs. Fannie and Freddie are also on short leashes. The affordable rates they are
offering are largely due to the Federal Reserve’s aggressive program of buying their mortgagebacked bonds—a program that is limited due to the inflationary pressures that go along with it. Even more worrisome is the massive supply of homes that will be coming onto the market in the coming two years. Take a look at the second quarter Mortgage Banker Association numbers for California and you’ll understand my unease. The shortage of homes this summer was an illusion created by banks’ unwillingness to clear their portfolios of bad loans. Almost 6% of mortgages in the state are currently REO—terminology for owned by the bank. Another 9% are seriously delinquent (60 days or more behind on their payments). And it isn’t just subprime mortgages. Almost 8% of prime mortgages are in serious trouble. Add to this the coming waves of resets in Alt-A mortgages and you have a very grim picture of the market—or a very good one if you plan to enter the market to buy a home.
And don’t expect a rapid economic recovery to pull us through this glut. While the recession is finished for now (expect positive growth in Q3) most economists are expecting a tepid recovery at best. The issues in our economy—over leveraged consumers, banks sitting on mounds of bad debt, and an enormous trade imbalance—are all still there. The stability we see today is due to government programs designed to steady the economy. But stabilizing is different than fixing. The underlying problems will take at least a year to work themselves out, and in the mean time growth will continue to be weak, as will labor markets. There is a light at the end of the tunnel— it’s just not nearly as close as CAR would like us to think.
310-571-3399 310-739-3286 chris@beaconecon.com www.Beaconecon.com
Stonecrest Financial Commercial/Residential/Private Financing The current economic climate has led to a harsh and chaotic lending environment – especially in commercial real estate. When borrowers do manage to secure financing, they often experience lengthy delays and last minute glitches. Though Stonecrest is not immune to this market’s difficulties, we have access to more resources than most direct lenders, and have our own fund of private money financing. We are the decision makers.
Excellent Rates! Fixed or Adjustable Programs! All 50 States OK
• Loans to $4 Million. $2 Million and under Preferred • SBA 504 and Investor Loan Programs Available • Up to 90% Financing Available for Owner-User and Small Business Owners. • Up to 50% Loan-to-Value Available for Investor Transactions All Terms 20 Year Amortizations (25 year with exception) SJREI Journal Vol.II
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The Credit Restoration Expert, Hannah Fliegel The current economy has left investors reeling – Hannah had the 700 expertise to assist with increasing 650 your credit score. HammeredCredit.com Hannah@foreclosureOptionsNetwork.com
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Discount for SJREI members $399.00 for credit repair program. Protect your credit profile with LifeLock for $99 per year. Call for details 415: 999.9348
MILES/BARRY CONTRACT FURNITURE MILES/BARRY CONTRACT FURNITURE is
a full service independent furniture dealership providing quality, cost-effective interiors for businesses of all sizes. We offer creative, flexible solutions tailored to individual space requirements, budget and aesthetic concerns. MILES/BARRY CONTRACT FURNITURE’s ex-
Contact: Barbara Miles 650-359-5611 bnmiles@milesbarryfurniture.com www.MilesBarryFurniture.com
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perience in the industry brings you prompt, professional service for every aspect of your project. You will enjoy the care, accuracy and efficiency of working with just one contact.
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PRODUCT SALES Ergonomic Products Workstations-New and Refurbished Casegoods-Veneer & Laminate Filing Systems Conference Rooms Lunch Rooms Training Table PROJECT SERVICES Consultation on Project Phases Design CAD Drawings Installation Reconfiguration Affordable Pricing Panel Cleaning Leasing Extensive Product lines
Financing Insights by Michael Ryan
Steps-To-Success It begins with your home...
F
or most of us, our home is our first major investment and is an excellent training exercise in terms of buying real estate. Therefore this first step is the key to your future. The first steps-tosuccess begin with (1) A willingness to learn, and (2) Planning before buying. Facts Before Emotions: Credit Report: Understanding the good and the bad and working on improving those Savings and Budgeting: Learning how to budget and why it’s important Lending Options: Where we are, what we qualify for, and what more can we do.
Michael Ryan Mortgage Broker Michael Ryan & Associates Michael Ryan - GRI, CCRM, CAM and founder of Michael Ryan & Associates. Our corporate motto is to put YOU, our clients, first and exceed your mortgage expectations. With 19 years of industry experience, we have proven our business model to be successful. Call me if I can be of assistance.
(408) 986-1798 mike@michael-ryan.com www.Michael-Ryan.com
CREDIT: The recent debacle in real estate foreclosures makes knowing your credit score more important than ever. Scores below 740 can result in higher loan costs or higher rates. So a regular check-up with a loan professional keeps you aware of your score, shows you the tools to improve your score, and keeps a good score. SAVINGS AND BUDGETING: Saving more than you spend is a good indicator that you have the discipline needed to own and keep a home. This usually means saying no to the impulse buy, yes to what matters, and saving the rest. It even means Starbucks twice a week, not twice a day! Saving also means you can weather the unexpected – 3 months without work, 4 months between tenants, or major repairs.
information builds confidence and affirms the decision to be budget oriented and reinforces the need to save, and provide the financial power to buy the right home or investment property. LENDING OPTIONS: Lending options provides first-time buyers with more options at more affordable terms, i.e. lower down payments, less than perfect credit, and lower interest rates. Regarding loan programs, the possibilities are vast. Some are limited to first time homebuyers (someone who has not owned a home in the past 3 years), while others have built-in flexibility, if you know what to ask. The right professional can help you get the best loan, with any government incentives available to help with down payments, etc. CONCLUSION: So even though the headlines are challenging, none of this is because home ownership is bad, it is an over-reaction to being burned by a boom market in desperate need of correcting. At the same time, the rules of lending still favor the first-time home buyer with good credit and the discipline of savings. . If this is you, you simply have to decide if owning property today, with lower prices and interest rates, is good or bad for your plan. And if today is your day, call me, because the sooner we start planning, the better we will be prepared when it comes time to buy.
Monthly Income: This is a second aspect of Savings and Budgeting. Income can be seen as being what you earn or take home/net pay. Professionals can show us how real estate can positively increase our net pay, increase savings, and give us more buying power. This SJREI Journal Vol.II
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ONLINE AUCTIONS by Bid4Assets.com
Incorporating Online Auctions Into Your Disposition Strategy
I
t’s no secret that people are buying more and more commodities through online auctions, and real estate is no exception. Even Tax Collectors from counties like Alameda, Santa Cruz, and Merced, which used to hold tax sales on the courthouse steps, now utilize online auctions for faster, easier, and more scalable disposition. For sellers looking to run a fully integrated marketing campaign that reaches a large number of buyers and maximizes the sale price, online auctions may be an ideal platform.
Why Online Auctions Make Sense
JESSE LOOMIS Bid4Assets.com Jesse Loomis is the Vice President of Business Development at real estate online auction company Bid4Assets.com. In his tenure at Bid4Assets, he has been instrumental in the sales and marketing of over $250,000,000 in real estate sales. Bid4Assets.com is a leading online real estate auction company and has sold over 60,000 properties for banks, government agencies, and the private sector.
Bid4Assets.com jloomis@bid4assets.com (301) 562-3421 10 SJREI Journal Vol.II
In fall 2008, USA Today cited that “80% of all real estate searches now begin on the internet.” This is understandable, since the internet reaches tens of millions of homes, offices, and mobile devices and savvy buyers are constantly searching the internet for buying opportunities around the country. Whereas on-the-ground auctions traditionally limit the buyer pool to local buyers, expanding the outreach creates more competitive bidding. This spring Kern County had a tax-defaulted manufactured home that they hoped to receive $14,300 for. By conducting the sale via online auction, bids were submitted from Kern, Orange, Riverside, and Los Angeles Counties and the property sold for $47,200. Economists view auctions as efficient price setting mechanisms. A well-marketed online auction allows all potential buyers to bid against each other until only one remains. This price should accurately reflect market price, as it will be sold to the buyer with the highest willingness to pay. In many auctions the seller will enjoy a producer surplus, which is the difference between what the buyer pays for the property and the minimum price that the seller would have actually accepted. For larger volume sellers, online real estate auctions are also highly scalable. Some years San Bernardino County has auctioned over 2,000 properties concurrently via the internet. Imagine the logistics of trying to carry this out in-person!
How to Use Online Auctions
Preparing to sell your home or investment property via online auction begins much like selling it through traditional means. Clean your property as thoroughly www.SJREI.net
as possible, both inside and out, being sure to remove all debris and clutter. Take clear photographs; they are crucial for selling property online. Remember that outof-town buyers may be bidding on your property, so pictures will “tell the story” better than any text and can make or break a sale. Finally, disclose all terms of the sale, including settlement terms, any applicable fees, and whether the property is “free and clear”. Register on the online auction website and upload your pictures and property information. Once your auction is live on the website, interested parties will email or call you with questions. Try to answer promptly and earnestly to establish open communication and trust. If your auction is successful, the website will provide you the buyer’s contact information so that you can arrange settlement.
Auction Pricing Strategy
There are essentially three different ways to set up the terms for your auction. Finding the right strategy is crucial to maximizing bidding activity and, therefore, maximizing sale price. The first strategy is to use an “absolute auction”. In an absolute auction, the minimum bid is set low and there is no reserve price (a reserve price is the minimum amount a seller will accept for an auction and is generally hidden). This method is highly effective, as it guarantees a sale and greatly encourages bidding wars. The risk in this strategy is that the property owner may wind up receiving a lower price than he or she had hoped for. This strategy is effective for sellers who need to sell a property quickly or have properties in a neighborhood with an oversupply of inventory. A second strategy is to set the minimum bid low and use a reserve price. The low minimum bid attracts many potential bidders. This method is also risk-free for the seller, because a sale does not occur unless the reserve price is met. While this strategy may be attractive to many bidders, the reserve price may deter some potential buyers from participating. This strategy is one of the most common approaches to online auctions and works for a variety of properties. (Continued on page 13 )
(Continued from front cover ) By breaking the market into price “quartiles” (dividing the active inventory into four equal groups based on price), a couple of interesting points to note: • During the peak years of 2005-2006, the most expensive homes for sale were nearly double (40%) higher than the prices of the next closet price segment. • By January 2008, the price spread between the top 25% of homes for sale narrowed significantly from the peak years, but is starting to widen again in 2009.
SCOTT SAMBUCCI VP, Altos Research
• With the median price of the top quartile rise, this is could mean that more higher end homes are coming into the market, so it’s important to determine if these are distressed or non-distressed situations. If non-distressed, this would indicate an improvement in the market’s fundamentals. However, if properties entering the market are in distressed situations, it would indicate further troubles ahead.
Scott is a sales professional, an entrepreneur, and data geek. After several years in the publishing and educational software industry with Pearson plc, Scott moved to Silicon Valley with Aplia. Following his work with Aplia, he founded and operated consulting firm Economic Information Services bridging investment capital and business opportunities in Central Asia. Scott is part-time faculty member at California State University-East Bay and Saint Leo University in the areas of Entrepreneurship, Strategic Management, and Economics, and has previously taught undergraduate and graduate courses in Finance at the University of San Francisco. (415) 931 7942 scott@altosresearch.com
(Continued on page 14 )
Real Estate Expo
CA Real Estate Forecast for 2010
Bruce Norris, Market Timing Expert Panel of Local Experts
Get upadated on what is happening in our local real estate market Learn how you can take advantage of this once in a lifetime opportunity with key experts from the bay area
Workshops, Booth, One Stop Information Center
• Real Estate Investment in Today’s Market, Explore the Opportunities • 1031 Exchange, Tax Preparation for Real Estate Investments • Buying Short sales, Foreclosures and REO properties • Mortgage Service, Refinance and Lock in Historic Low Interest Rates • Avoid Foreclosures and Protect Your Credit • First Time Buyer Low Down Payment • New Trends in Home Improvement, Solar, Insurance, Remodeling....etc.
RSVP or Exhibitor Registration Info: 408-656-6155 or email: sf@ntdtv.com
December 5, 2009 Saturday (9AM-1:30PM)
Biltmore Hotel
2151 Laurelwood Rd, Santa Clara, CA 95054 SJREI Journal Vol.II
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Social Networking Tips
Why Would Anyone Want to Network?
W
hy would anyone want to NetWORK? Oh come on Kathleen, be serious!
No wonder so many people don’t like to network. My passion is to help reframe words to transform a negative charge into a positive response. The next time you network, try out these new word-twists to support a great and positive experience:
Alright, consider how your nervous system reacts when you see, or read, or say the word NetWORK. If 99% of the words in the English language trigger a response from our nervous systems, might not NetWORK evoke a negative neuro-emotional response?
Net-Curious ~*~ Net-Fun ~*~ Net-Support ~*~ Net-Share ~*~ Net-Serve … If you approach NetWorking from this new vantage point, I’m certain you will thrive at Net-Play ! Be Playful. Be Curious. Be Fun. Be supportive, be sharing, and be of service. Remember, you network computers but you connect with people. Focus on these values and you’ll create a win-win every time.
I’ve asked my audiences for words that come to mind when I say “WORK,” and common responses included “long,” “hard,” “boring,” “stressful,” “rather not go.” Now and then I hear a few positive responses, but mostly, thoughts of NetWORKing send subconscious nervous systems into panic.
Kathleen Ronald President, Speaktacular.com 310-633-0411 Twitter: connectingqueen
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ONLINE AUCTIONS by Bid4Assets.com
(Continued from page 10 ) A third possible strategy is to set the minimum bid at the asking price and remove the reserve price. This method can be appealing to buyers, because they know exactly what the property’s asking price is. It also appeals to sellers, because they can set the price wherever they desire and only need one bid to ensure a successful sale. A limitation of this strategy is that the high minimum bid may cause some buyer hesitation (fear of being the “first bidder”). This strategy can be a good approach in a stable market with predictable sales prices. Auction Glossary
Absolute Auction: An auction in which a property will be sold to the highest bidder, regardless of the winning bid amount. Bid (a.k.a Proxy Bid): A potential buyer’s maximum offer on an online auction. While individual websites may vary, most online auction sites use proxy bids. Proxy bids hide the bid amount confidentially in their system, using only as much of the maximum bid as is necessary to maintain the bidder’s high bid position or to meet the reserve. Bid Increment: The minimum necessary bid amount over the current bid. If an auction has bids, the next bid placed must be at least the current bid plus the bid increment. Buyer’s Premium: A fee that covers the costs associated with an auction. It is added to the winning bid amount and is included in the total purchase price paid by the buyer to the seller. Feedback (a.k.a Seller Feedback): While this varies by site, many online auction websites have some type of feedback system that buyers use to evaluate their experience with a particular seller. This can help potential buyers form an impression of a seller’s professionalism and trustworthiness before they place a bid. Minimum Bid: The floor at which bidding begins. Online auctions cannot accept a bid lower than the minimum bid amount. Reserve (a.k.a Reserve Price): The minimum dollar amount a seller will accept for an auction. This amount is not disclosed publicly, but bidders can usually see on an online auction when the reserve price has been met.
We are a full-service Real Estate and Property Management Company working the DFW market. We Caters to out of town investors providing the highest level of professionalism and competence. We have created a model which will assist each investor with all
their needs during every stage of their investment, Beginning with property selection, insurance needs, transaction closing, management, investment tracking and up-to date market information. We understand that property management is an important part of the equation and we place high emphasis on Market Knowledge and Performance. PROFESSIONAL SALES
Pam Blanco, Owner/Realtor ® 2000 E. Lamar Blvd.,
Suite 600 Arlington, TX 76006 817-907-7347 Cell 817-549-0013 Fax pam@pamtexas.com
PROFESSIONAL MANAGEMENT
• Advertising and Marketing
• Licensed Leasing Agents
• Area Knowledge
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• Property Selection
• Competitive Management Fees
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• Negotiations
• Individual Property Accounting
• Closing Coordination
• Maintenance/ Make Ready
• Updated communication
• Delinquent /Eviction Procedures
• Due diligence • Smooth transition to Mgmt.
• Regular communication SJREI Journal Vol.II
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(Continued from page 11 )
Beyond active housing supply and aggregate prices, there are other indicators that highlight the “turn” in the San Jose market. Sellers individually work with their local agents to price their homes based on local market activity.
Agents will provide recent comparables and base pricing decisions utilizing these comps. The prices of new listings hitting the market every week provides visibility on whether sellers hold an optimistic or pessimistic viewpoint on the market.
When examining any market across the country, it’s also revealing to watch how current sellers respond to buyer activity (or inactivity). Sellers began taking a more optimistic look at the market starting in early 2009: • The number of homes with price reductions began to fall from their 51% peak (over half of the homes for sale had a price reduction) to their current levels of under 30% (less than one in three). • Additionally, new listings – new sellers entering the market – also showed a turn toward optimism starting in early 2009. Throughout 2008, sellers joined a “race to the bottom” – new listings entered the market at lower and lower prices every week. But starting in early 2009, new sellers saw the market pick up and began moving their ask prices higher than sellers entering the market in previous weeks.
While looking at the time of market of active listings, it’s also evident that the upward trend may be leveling off over the last few months. It’s vital to see how the time on market responds to the seasonal impact moving into the slower time of the year this Fall.
Finally, looking at days-on-market by price quartile does show that the lowest price quartile is starting to Fall in recent months while top end is rising during this same period.
Overall, the San Jose is definitely signs of recovery in 2009. Whether it’s “the” recovery, remains to be seen. Many of these market measures are subject to seasonal fluctuations. However, if prices hold steady into the early Spring, that’s would provide additional support to the recovery argument. 14 SJREI Journal Vol.II
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TAX PLANNING by Richard Smith
Power Through Your Year-End Tax Planning
Y
RICHARD SMITH Enrolled Agent Richard Smith & Associates Richard Smith, who is an Enrolled Agent and licensed by the IRS, and his team have prepared taxes for indiviculas and coporations for more than 30 years. Richard is an active real estate investor who has more than 100 hourses in his porfolio plus a large multi-family building.
10050 N. Wolfe Rd. SW2-140 Cuptertino, CA 95014 (408) 446-5551 rsmithtax@aol.com www.richardsmithtax.com
ear-end tax planning opportunities have increased this year because of all of the new tax laws that have been signed by the President. I recommend a basic strategy that says defer income to next year, and accelerate deductions that will benefit you this year. Another recommendation is that you review the following tax strategies to determine if any would help reduce your 2009 tax liability. Spending time planning prior to the end of the year is key preparation for a trouble free tax season, and the deductions listed below can help minimize tax obligations for the current year. 1. Prepay California income tax to increase federal itemized deductions 2. Prepay January house payments for residence and rental properties 3. Prepay income tax preparation fees 4. Purchase new business auto: Expense up to $10,960 for depreciation 5. Use your automobile for charitable organizations (14 cents/mile) 6. Sell stock for losses this year (Maximum deductible loss is $3,000) 7. Charitable donations-cash and non-cash 8. Prepay for travel expenses for business purposes 9. Prepay property taxes due next April for both residence and rentals 10. Invest in T-Bills or CD’s: interest in is taxed next year 11. Open and fund your personal retirement plans: IRA, 401K, SEP-IRA 12. Start your part-time business this year to deduct start-up costs 13. Prepay childcare expenses (Maximum $3,000/child) 14. Establish proof of bad debts to claim bad debt deduction 15. Accelerate payment of miscellaneous deductions if more than 2% AGI 16. Increase medical expenses if you can exceed the 7.5% AGI 17. Deduct job-hunting expenses, even if you don’t change jobs 18. Prepay expenses such as professional orga-
nization dues & trade publications 19. Defer income until next year from bonuses, commissions and salary 20. Consider tax impact of delaying or speeding up marriage or divorce 21. Tuition deduction is $4,000 max or $2,500 max tax credit 22. Deduct sales tax on new auto up to $49,500 23. Gifts of $13,000, shift interest income to children 24. Tax-free exchange to defer gains on sale of rentals 25. Energy credit for home improvements is $1,500 max 26. On stock sales, long-term capital gains incur tax rate of 10-15% 27. Adoption credit is $12,150 max 28. Purchase business equipment & deduct up to $250,000 29. Plan to file early & use refund to fund SEP & IRA 30. Prepay estimated taxes to avoid underpayment penalties 31. Increase withholdings to avoid under payment penalty 32. Pay for rental property expenditures & repairs 33. Pay for year-end entertainment & gifts for business clients 34. Purchase business & office supplies, stamps, & envelopes 35. Purchase a passive income investment to offset passive losses 36. Prepay January office rent 37. Pay for business auto expenses (repairs, tires, battery, insurance, & motor club dues) 38. Defer December rental income until January 39. Enroll in employer provided tax-deferred programs 40. Invest in tax-exempt bonds or tax-free mutual funds For additional strategies please visit richardsmithtax.com SJREI Journal Vol.II
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I
nvesting in real estate is an exciting and rewarding business that can even be fun. Yet there are several keys to making your investing activities a success. Understanding these basics are the key to building a solid foundation for your investing career. It is the goal of the SJREI Association to help you succeed. The knowledge you will gain by attending this program will set the stage for a successful investing career. You will learn how to make wise choices, and discover where to get the help and information that you may need along the way, minimizing your exposure to unnecessary pitfalls and costly mistakes. By attending this workshop you will be provided with the important tools you will need to start investing your way to achieve financial freedom.
Become a Competent Investor with our JumpStart Program The SJREI Association has put together a great team of instructors to educate you. The information available at this workshop can literally save you tens of thousands of dollars by keeping you away from the wrong properties, and helping you evaluate and invest wisely. This is your opportunity to learn from some very experienced investors who have wide ranging specific skill sets. Come spend the day with us, and get ready to take flight.
SJREI Education Center Instructors Class offered quarterly, Instructors subject to change Call (408) 264-3198 or Visit www. SJREI.net to Register
“Rehab and Property Management for Investors” Nancy Chillag, Attorney/Investor Chillag & Associates is an innovative law firm specializing in real estate & construction. As a buy, fix and hold investor Nancy has great information and experience to share with investors.
“Financial Planning – Know Your Net Worth & Where You Want To Be” David Beck, Financial Planner Understanding your own balance sheet is the foundational piece in taking control of your finances. David will set the stage for this.
“Due Diligence & Market Analysis for Investors” Jeffrey Hare, Attorney/Broker/Investor Jeffrey specializes in real estate law & real estate property transactions. He picks up the pieces when investors don’t do their due diligence, and will share his expertise with this very important component of investing.
“Understanding Cash Flow and Property Analysis” Richard Smith, Accountant/Investor Accountant for 30 plus years, serious investor will share tips and worksheets to complete a cashflow analysis… the numbers tell the story.
“Locating Deals” Stuart Baeriswyl, Broker/Investor Stuart buys for his own portfolio and assists with finding properties that will perform over the long-term. A seasoned pro, Stuart will share his insights with investors on how to do to find deals that make sense. “Financing for Investors” Michael Ryan, Mortgage Broker Michael Ryan & Associates is an 19 year veteran of the lending industry. As an investor himself Michael understands investor needs and his knowledge and expertise will easily guide you through the extensive maze of loan options for home or business financing. 16 SJREI Journal Vol.II
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“Secrets of an Experienced Investor” Tom Wilson, Investor A 30 year experienced investor who has most of his personal portfolio in DFW and makes his team of professionals available to his peer investors and clients.
“Orientation, Goal Setting and Business Planning” Geraldine Barry, President of SJREI Association, Investor, Entrepreneur Strategy is the name of the game; come join us to customize one to fit your need & goals.