real estate: 2007

Thursday, December 20, 2007

PRESS DIGEST - New York Times business news - Dec 21

Dec 21 (Reuters) - The New York Times reported the following stories on its business pages on Friday. Reuters has not verified these stories and does not vouch for their accuracy.

* Despite a year that is among the worst in their firms' long histories, the chiefs of both Bear Stearns Cos Inc (BSC.N: Quote, Profile, Research) and Morgan Stanley (MS.N: Quote, Profile, Research) are holding tight to their perches of power.

* New evidence shows that drug makers Merck & Co (MRK.N: Quote, Profile, Research) and Schering-Plough Corp (SGP.N: Quote, Profile, Research) have conducted several studies of their popular cholesterol medicine Zetia that raise questions about its risks to the liver, but the companies have never published those results.

* SLM Corp (SLM.N: Quote, Profile, Research), which for years profited from placing large bets on its own stock going up, now faces a possible loss of more than $1 billion.

* New calculations by the World Bank suggest China may not be so rich after all, and could deflate arguments for a need to revalue the yuan.

* Campbell Soup Co (CPB.N: Quote, Profile, Research) agreed on Thursday to sell its Godiva Chocolatier unit to Yildiz Holding of Turkey for $850 million.

* Apple Inc (AAPL.O: Quote, Profile, Research) on Thursday put to rest the last of a series of lawsuits it brought in a losing and costly effort to put a stop to Web leaks about its product plans.

* Carmakers expect 2008 to be challenging, but hundreds of automotive parts suppliers are anticipating the year ahead to be one of the ugliest ever.

* The Internal Revenue Service has criticized proposed legislation that would scale back audits of wealthy taxpayers in the United States Virgin Islands, saying that the bill would "significantly affect" the agency's efforts to combat offshore tax fraud.

* On Thursday, shares of the nation's biggest insurer of financial risk, MBIA Inc (MBI.N: Quote, Profile, Research), fell 26 percent after it disclosed that it was guaranteeing billions of dollars of the kind of complex debt that unnerved the credit market this summer.

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source: reuters.com

Calpers raises real estate target to 10 percent

NEW YORK, Dec 20 (Reuters) - Calpers, the largest U.S. pension fund, has raised its target for real estate investment to a 24-year high of 10 percent of its assets, as the credit crisis presents bargains to the cash-rich institutional investor.

"As a big pension plan, we're not as dependent upon borrowing as a lot of investors," Clark McKinley Calpers spokesman said on Thursday. "We feel like we're really in a good position. We have some great opportunities out there to make good deals."

The California Public Employees' Retirement System, with a a fund value of about $250 billion, has raised its target allocation for real estate investment from 8 percent to a level unseen since 1984. The target can range 3 percent either way, to a low of 7 percent and a high of 13 percent, Calpers said.

Calpers' board sets the allocation targets every three years and can tweak them yearly as conditions change.

Although defaults in commercial real estate remain negligible, fear and confusion in the overall credit market abruptly has restricted the generous lending which drove the commercial real estate boom during the past five years, according to Real Capital Analytics.

The credit crunch, which can be traced back to subprime mortgage problems of home buyers, has caused all types of investors to demand more for the risk involved in investing. As a result, borrowers have found mortgages and other types of loans more difficult and expensive to get.

For U.S. office properties, average prices have declined while sales fell 55 percent in November to $7 billion, according to Real Capital.

The average cap rate -- the yield that buyers get in exchange for their investment -- rose to 5.8 for a downtown office building, from about 5.5 percent in October, according to Real Capital Analytics.

source: reuters.com

Frequently Asked Questions About Buying Debt Financed Real Estate in an IRA

Good news! You can buy real estate in your traditional, Roth, SEP, or SIMPLE IRA, your 401(k), your Coverdell Education Savings Account for the kids, and even in your Health Savings Account.

Even better, your IRA can borrow the money for the purchase or even take over a property subject to existing financing. What could be better than building your retirement wealth using OPM (Other People's Money)? However, there are some restrictions which you must be aware of when using your IRA to purchase debt financed real estate. Below I answer a series of frequently asked questions regarding the purchase of debt financed real estate in an IRA.

Question: Is it really legal to buy real estate in an IRA?

Answer: Yes. Even the IRS agrees that real estate is a permitted investment. In its answer to the question, "Are there any restrictions on the things I can invest my IRA in?" the Internal Revenue Service states, "IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option."

Question: Can my IRA buy real estate with a loan or take over a property subject to an existing loan?

Answer: Yes. An IRA may borrow money to acquire real estate or take over a property subject to an existing loan, provided that the loan is non-recourse to the IRA and to any "disqualified person." This means that typically the lender may only foreclose on the property in the event of a default. Even if there is a deficiency, the lender cannot come after the rest of the IRA's assets, nor can the lender come after the IRA owner or any other disqualified person. Neither the IRA holder nor any other disqualified person is permitted to sign a personal guarantee of the debt.

Question: Where can I get a non-recourse loan for my IRA?

Answer: There are at least four sources for financing which do not violate the non-recourse requirements for IRAs. First, there is seller financing. Most sellers understand that if the loan goes into default they get the property back anyway, so asking for the loan to be non-recourse should not be too difficult to negotiate. Second, there is private financing from financial friends.

If you cultivate a reputation as a professional real estate investor, there should be no reason that your financial friends would not loan your IRA money on a non-recourse basis, either from their own funds or from their own IRAs.

I have seen IRAs borrow the money for both the purchase and the rehab on a non-recourse loan!

Third, there are banks and hard money lenders. Non-recourse loans are not the norm, so many banks will turn you down. However, there is at least one bank that lends in all 50 states, and in Houston I have had at least 3 local banks and 2 hard money lenders make non-recourse loans to IRAs. Finally, as mentioned above, you could take over a property subject to an existing loan, provided the originator of the loan is not you or another disqualified person.

Question: Is there any tax effect of having an IRA own debt financed real estate?

Answer: Yes. Income and gains from investments in an IRA, including real estate, are normally not taxed until the income is distributed (unless the distribution is a qualifying distribution from a Roth IRA, a Coverdell Education Savings Account, or a Health Savings Account, in which case the distribution is tax free). However, if the IRA owns property subject to debt, either directly or indirectly through an LLC or a partnership, it may owe tax on the net income from the property or partnership.

Question: If the profits from an investment are taxable to an IRA, does that mean it is prohibited?

Answer: Absolutely not! There is nothing prohibited at all about making investments in your IRA which will cause the IRA to owe taxes.

Question: But if an investment is taxable, why do it in the IRA?

Answer: That is a good question. To figure out if this makes sense, ask yourself the following key questions.

First, what would you pay in taxes if you made the same investment outside of the IRA?

The "penalty" for making the investment inside your IRA, if any, is only the amount of tax your IRA would pay which exceeds what you would pay personally outside of your IRA.

Unlike personal investments, the IRA owes tax only on the portion of the net income related to the debt, so depending on how heavily leveraged the property is the IRA may actually owe less tax than you would personally on the same investment.

Second, does the return you expect from this investment even after paying the tax exceed the return you could achieve in other non-taxable investments within the IRA? For example, one client was able to grow her Roth IRA from $3,000 to over $33,000 using debt financed real estate in under 4 months even after the IRA paid taxes on the gain!

Third, do you have plans for re-investing the profits from the investment? If you re-invest your profits from an investment made outside of your IRA you pay taxes again on the profits from the next investment, and the one after that, etc. At least within the IRA you have the choice of making future investments which will be tax free or tax deferred, depending on the type of account you have.

Question: If the IRA pays a tax, and then it is distributed to me and taxed again, isn't that double taxation?

Answer: Yes, unless it is a qualified tax free distribution from a Roth IRA, a Health Savings Account (HSA) or a Coverdell Education Savings Account (ESA). The fact is that you still want your IRA to grow, and sometimes the best way to accomplish that goal is to make investments which will cause the IRA to pay taxes. Keep in mind that companies which are publicly traded already have paid taxes before dividends are distributed, and the value of the stock takes into consideration the profits after the payment of income taxes. In that sense, even stock and mutual funds are subject to "double taxation."

Question: If the IRA makes an investment subject to tax, who pays the tax?

Answer: The IRA must pay the tax.

Question: What form does the IRA file if it owes taxes?

Answer: IRS Form 990-T, Exempt Organization Business Income Tax Return.

Question: What is the tax rate that IRAs must pay?

Answer: The IRA is taxed at the rate for trusts. Refer to the instructions for IRS Form 990-T for current rates. For 2005, the marginal tax rate for ordinary income above $9,750 was 35%. Capital gain income is taxed according to the usual rules for short term and long term capital gains.

Question: Is there any way to get around paying this tax?

Answer: Yes. In some ways it may be considered a "voluntary" tax, since investments can often be structured in such a way as to avoid taxation.

Some ways to structure your IRA investment to avoid taxation include loaning money instead of acquiring the real estate directly or purchasing an option on the real estate, then assigning or canceling the option for a fee. These techniques have a disadvantage in that they may not result in as much profit to the IRA, but will generally be free of tax. There is also an exemption from this tax for 401(k)'s and other qualified plans in certain circumstances.

Question: Where can I find out more information?

Answer: Visit the website TheEntrustGroup.com for more information. Also, Unrelated Business Taxable Income and Unrelated Debt Financed Income are covered in IRS Publication 598, which is freely available on the IRS website at www.irs.gov. The actual statutes may be found in Internal Revenue Code §511-514.

There is one general truth that applies both inside and outside of an IRA -- you can do more with debt than you can without it. Despite the increased risk from debt and the taxes due on income from debt financed property, a careful analysis may lead to the conclusion that having your IRA pay taxes now may be the way to financial freedom in your retirement. Be sure to have your IRA pay the tax if it owes it, though. As I always say, "Don't mess with the IRS, because they have what it takes to take what you have!"

source: realtytimes.com

5 Year-End Benchmarks Key to New Year Marketing Success

"If you don't know where you've been, you'll never get where you want to go," my Grandpa Gooder always said. It's especially true with real estate marketing in today's market. Using the hindsight of year-end benchmarks is the best way to guarantee success in the coming year.

Whether you are an experienced real estate pro -- or relative rookie -- your first step toward thriving in tomorrow's "opportunity market" is to look into yesterday's rear-view window for what worked -- and what didn't.

By focusing on five key benchmarks, you can create a road map for your 2008 marketing strategy that can avoid the potholes ahead. Here are five year-end benchmarks that are critical for your new-year marketing success.

1. Start with your numbers

What was your gross commission income and percent of profit? How many total transaction sides did you have, and of those, how many were dual transactions? Single transactions? From your sold listing transactions, how many were your buyers? How many were co-op buyers? What was your average transaction sales price? What was your average commission? What was your share of all transactions in your area? What were the sources of your transactions: marketing, referrals, repeat clients?

Run your numbers and the areas needing attention will be obvious. Concentrate on your weaknesses. Your strengths will take care of themselves. Keep these figures year-over-year and the trends will become your roadmap to being smarter and richer. When recorded year after year, your activity history is invaluable, especially if you plan to sell your practice in the future.

2. Nail down your marketing expenses

How much did you invest in marketing last year? What percentage of your income was spent on marketing? What was your marketing cost per transaction?

Be sure only to include your direct marketing expenses. An up-front capital investment is not a marketing expense; only the using of that capital investment is a marketing expense. For example, your yard signs and brochure boxes are "tools of your trade" and a capital expense, however, the property flyers that go into the brochure boxes are a marketing expense.

If cost-cutting is called for, remember to "cut back, don't drop out." Stop marketing and only one thing happens: Nothing. Focus on moving your marketing investment from what didn't work to what did work, and trying new ways of marketing that are focused on opportunities in your market. For example, if local listings are expiring, ramp up your expireds marketing, or, if middle-market homes aren't selling, focus on luxury properties, or, if buyers are hesitating, launch a "Buy or Rent" service. Be creative.

3. Establish lead generation, prospect follow-up and long-term contact expenses

Lead Generation: What are you spending on advertising to "market strangers?" This includes production of marketing tools, advertising placement, postage, mailing services and Internet fees.

Follow Up: Figure out how much you are spending on lead management of "active prospects." This includes preparing free reports, pre-listing kits, videos, relocation kits, personal brochures, printing, postage, telephone expenses and gifts.

Past Clients: How much are you spending on marketing to your long-term contacts? This may include specialty items such as calendars or magnets; subscriptions, movie tickets, cookies, gift certificates (referral thank-yous and closing gifts); newcomer parties, client events; meals and entertainment.

4. Track your prospecting activities

Marketing and sales are a numbers game. To be able to predict and duplicate your performance, you need to know your ratios and numbers. To do this, you need to create a record-keeping system that tracks the number of attempts, contacts, leads, appointments and closings you make.

When you chart these numbers from attempts to closings, you will see relationships, or ratios. These ratios will give you invaluable benchmarks for improvement. For example:

* How many attempts does it take to make a contact?

* How many contacts to generate a lead?

* How many leads to land an appointment?

* How many appointments to close a contract?

* How many contracts to settle a paid transaction?

For example, how many registrations of website visitors, who sign-in to search properties through your IDX home search, does it take to convert to one paid transaction? Conventional wisdom suggests the average is 2 percent if only new listings by e-mail are sent as follow up, while the conversion rate can reach as high as 15 percent when telephone follow up is added to the mix.

5. Complete a benchmark worksheet for your prospecting activities

By keeping detailed records of your lead generation activities and the results, you can track the most important ratios for your practice. There is no "right way," only your way that fits your practice and your market opportunities.

Tracking will allow you to pinpoint your marketing strategy's weaknesses and strengths. You may discover that your marketing activity is almost completely directed toward lead generation, with very little focused on prospect follow-up or long-term customer contact. If so, fix it. You'll need to rebalance your efforts to give more attention to the neglected steps.

A balanced attack always will make your marketing work smarter, not harder, which will be reflected in a better bottom line. Now the exciting part: The 2008 market offers huge opportunities to the nimble and flexible -- if you know where you're coming from.

source: realtytimes.com

Ask the HOA Expert

Question: Our board president likes to conduct business by email. The board hasn't met face to face for almost a year.

Answer: Board business should be done at board meetings unless there is an emergency. The reasons are several:

* Open discussion of the issues (pro and con).

* Members can monitor how the board does business.

* Proposals are enacted by motion, second and majority vote.

* Actions are recorded in the minutes so all members know how and when it took place.

The exception to these rules is when items have already been approved in the annual budget and the board president or manager are merely executing the approved deeds.

Remind your board president of how HOA business needs to be transacted and that owners are entitled to an orderly process, open meetings, etc. If he is bent on doing business secretly (email, phone, door to door), run for the board and encourage other like minded owners to do the same with the objective of making a change.

Question: We have a problem with residents letting their pets wander or not cleaning up after them.

Answer: Monitoring pet activity is extremely difficult. While some residents allow their dogs to roam, cat owners are usually the most frequent offenders. And roaming animals can come from other properties as well. Frequent reminders via newsletters is important. If there are quite a few resident pets and large grounds, you might consider installing pet waste stations that provide bags and disposal containers. Some cities have companies that will actually restock and pick up the waste on a regular schedule. Or the landscape contractor could include it in his list of duties.

Question: Our HOA requires Board approval for structural modifications and alterations. The term "structural" is not defined within the CC&Rs. A homeowner has applied to the Board for approval to remove a rear closet wall (non-weight bearing), thereby utilizing the former hallway closet space to enlarge his kitchen area. We believe that the definition of "structural" is critical to understanding whether or not the Board's authorization is actually required in this situation.

Answer: "Structural" means weight bearing modifications or anything that modifies exterior appearance. But for safety's sake, the Board should review all plans for wall removal and not assume that an owner knows which ones are structural or not.

source: realtytimes.com
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