Vacation

Blog posts will resume after June 1st when I return from my Hawaiian vacation. To see a post of my awesome backpacking trip on the Na Pali coast of Kauai go to:

http://picasaweb.google.com/1wendywonder/HikingTheNaPaliCoast#

And for a post of my daughter's wedding in Poipu, go to:

http://www.kodakgallery.com/gallery/creativeapps/slideShow/Main.jsp?albumId=535904472905&ownerId=79031672405

#1 Reason to Offer Seller Financing

1 - to sell your property more quickly, by appealing to a larger pool of prospective buyers.

If you have to sell in today's market, for whatever reason, then you can command a higher purchase price, attract more buyers, defer taxes indefinitely, and create a passive income stream without having to put up with tenants - simply by offering seller financing on your property.

Which sellers can offer seller financing?
- Sellers who own property free and clear
- Sellers with equity in their homes
- Sellers with assumable mortgages
- Sellers with no equity, who are willing to sell their properties "subject to" the existing mortgage
- Sellers who are planning to lease, with the option to purchase at some point in the future when their buyer can qualify for a mortgage.

Let's look at each of these situations separately, in this and subsequent blogs, as we explore the advantages (and disadvantages) of selling on an owner's contract.

First, let us look at the seller who bought their property for cash, or who has lived in it long enough to have paid off the mortgage. A seller who owns their property free and clear has a great deal of flexibility in how to sell their property. By offering creative financing, they will earn more money over time, sell for a higher purchase price, and create a dependable income stream, secured by real estate.

If a seller can, in effect, become the bank for their buyer, they can determine what criteria the buyer must meet in order to receive financing. A buyer that does not have to rely on qualifying for bank financing is more likely to offer a higher price for the property. The seller can set the interest rate at a percentage or monthly payment amount that meets their needs for living expenses.

In the case of an elderly seller, there are several advantages to receiving payments rather than a lump sum of cash for their property. If the sale would normally be subject to capital gains tax, an owner can defer paying those taxes by deferring the amount of principal paid by the buyer. If the buyer makes a low down payment (principal? or pre-paid interest? this can be negotiated by buyer and seller, depending on their needs for various tax reasons) and makes interest-only payments, then capital gains tax can be deferred until principal is paid. If the payments are amortized and include principal, then the seller pays capital gains tax only on the principal as it is received.

An elderly seller with medical issues may not want to have a large amount of liquid cash in their accounts, as Medicare/Medicaid eligibility is usually not available until those funds are exhausted. If those funds are not available, other than in the form of monthly income, then the seller may still be eligible for medical assistance through these government programs.

An elderly person may want the principal balance to go to their heirs at the time of his/her death, in which case the property may be taxed at a stepped-up basis. All of this estate planning should be discussed with a financial advisor or estate planner to determine the best course of action for a seller facing these issues. For many senior citizens who have lived in their homes long enough to own them free and clear, these are very common scenarios that make the sale of their house on an owner-financed contract more attractive.

The income that a senior seller receives will be taxed as ordinary income. Ideally, this income is enough to cover monthly living expenses, which may include medical costs and/or the cost of an assisted living facility. In effect, a senior seller may be earning interest on money that is technically not theirs, i.e. funds that would normally be paid to Uncle Sam in the form of capital gains tax.

For example, my father recently sold his vacation house that he owned free and clear. I could not convince him to accept seller financing (although I tried!). The next April, when taxes came due, he moaned about how he should have listened to me, as Uncle Sam collected 15% right off the top of his profits. If he had offered seller financing on an interest-only basis, then he would have continued to earn interest on that extra 15% (money that would eventually be due in federal taxes) up until he received any payments of principal. As capital gains tax goes up, this bite becomes even more significant. After 2010, the capital gains tax rate goes up to 20%.

Let's look at a hypothetical example on the sale of a $100,000 house owned free and clear. House A is sold on a conventional cash-out financing; House B on an owner contract, 6% annual interest only, with a balloon payment in 20 years:

House A / House B
Purchase Price $100,000 / $100,000
Down Payment $ 20,000 / $ 20,000
Capital Gains Taxes Pd $ 15,000 / $ 3,000
6% interest only - / $ 4,800
20 yrs of pymts - / $ 96,000
Balloon pymt - / $ 80,000
Cap gains (25%) on balloon pymt / $ 20,000
Total received: $ 85,000/
$173,000

In this example, the seller of House B has received over twice the income from the sale of his $100,000 house as the seller of House A, simply because he has provided seller financing on the deal!

In a future blog, we'll look at a case where the seller has SOME equity, but still has an underlying mortgage.

Where to Find Investment Property

Brian Buffini claims that the #1 reason why real estate entrepreneurs fail is due to lack of leads. Where do you find the properties to buy as an investor?

While there are thousands of properties for sale at any given time in our region, they must be properties that an investor can buy and make a profit. That means they must be bought at a good price, or they must have opportunities for adding value. The search for the right types of property begins with a well-defined list of criteria, which is driven by the business model that you have selected for your business.

The vast majority of properties for sale in the Puget Sound area are listed properties on the NW Multiple Listing Service. Every multiple listing service is a cooperative effort among real estate brokers to share listings of available properties. These listings are marketed to real estate agents, other brokers, and posted on the internet, where buyers can access much of the listing information directly. Consequently, there is the most competition for these listing. Most of them have already been fixed up for sale, and are offered at full retail value. But occasionally investors will find fixer properties, undervalued properties (you HAVE to know values!), and properties that can be expanded by adding rooms or taking advantage of zoning opportunities.

The NWMLS has recently recognized the boom in REO and foreclosure properties, and is now requiring that listing information identify these properties as such. Some investors focus on expired listings, properties on the NWMLS that did not sell in the time period denoted by the seller, and there may be good opportunities here. Savvy investors can use the NWMLS to identify properties both with and without equity. There is a lot of information that a trained investor-friendly agent can find for an investor who does not have a real estate license. Ask!

FSBOs (For Sale by Owners) are another good source of properties. Owners are not always aware of market value, and may be frustrated by the responsibilities of trying to market properties on their own. Read the local newspapers to find FSBO ads. There are websites devoted to FSBOs, and one of the best ways to find them is just to drive around. Call on any For Sale by Owner signs you see in your target neighborhood.

Craigslist is another good source of properties for sale. Search both the For Sale and the For Rent listings, as often an unsuccessful seller turns into a reluctant landlord. Call on properties, and see whether the owner is willing to sell. Do a keyword search for listings that include such language as “must sell, fixers, forced sale, medical illness, divorce, estate, moving, relocation, TLC, etc.” Post an ad to find motivated sellers, and get them to call you.

Walk or drive the neighborhoods in which you are most interested. Write down addresses of any property that looks neglected, abandoned, or in disrepair; then look up the name of the owner in County records and contact them. Knock on doors and ask about properties that may be coming available in the neighborhood. Talk to people out on the street, like the proverbial post man, and ask for referrals. Word-of-mouth can be extremely powerful.

Get a list of target properties that meet your investing criteria from the title company, and send direct mail to owners.

Join a foreclosure group, and bid on properties at different foreclosure auctions. REDC (Real Estate Disposition Corporation) holds regular auctions in our area of lender foreclosed properties, in addition to county auctions on foreclosed properties. Check out the annual King County foreclosure auction on properties that are delinquent in paying property taxes.

Look at specialized websites for foreclosed and distressed homes available from government agencies like HUD or the VA. Talk to probate, divorce and bankruptcy attorneys. Make friends with people in senior centers and assisted living facilities.

And don’t forget about networking with fellow investors through your Real Estate Investment association! Wholesalers are looking for rehabbers, and vice versa. Most investors buy and sell property, and they should be thinking about you when they put together a list of sellers or buyers.

Happy investing!

Seattle Cash Buyers Part 2

Seattle cash buyers included three quit claim deeded properties (see previous blog post), bought at 26% of tax-assessed value; and 15 properties bought with Bargain and Sale deeds, most likely purchased at the King County foreclosure auction. These auction properties were purchased at 69% of tax-assessed value. Seven of these auction properties were non-owner occupied, and presumably purchased as an investment.

Of those single family homes purchased for $400,000 or less with a regular warranty deed, cash buyers paid 76% of tax-assessed value. 19 of these 45 properties (42%), were bought by investors as non-owner-occupied rentals.

Thirteen (11%) of the cash purchases in Seattle in the last three months were for properties over $1 million in price. Three of these were not identified as owner-occupied properties - perhaps they are vacation homes for affluent buyers?

Seattle Cash Buyers

There were 120 cash purchases of Seattle homes in the last three months. The top zip codes in which cash buyers bought properties in Seattle in the last three months were:

98115
98112
98108
98118
98144
98105

While the average tax-assessed value of these cash transactions was $536,333, 44% of them were tax-assessed at $400,000 or less. Most were purchased at an average of 89% of tax-assessed value. The most typical home purchased was a three bedroom, two bath house built (on average) in 1941, on a lot of approximately 4200 sf. 66% of the buyers purchased the property as a primary residence.

Favorite Seattle Zip Codes

The zip codes I like best in Seattle are the high-demand locations in the City of Seattle, typically close in to city center, and close to highway and freeway access. Many of these neighborhoods also have active commercial districts, with restaurants, groceries, galleries and retail shops. They are urban locations, with good access to bus lines, Light Rail, or other public transportation. Even in down markets, these neighborhoods continue to be active in terms of transactions, and see less of a decline in housing prices during downturns.

Below are some of the zip codes for some of my favorite Seattle neighborhoods. In the last 24 months, the following zip codes had these number of sales transactions:

98102 - 23 out of 260 homes (4.5% annual turnover)/Avg TAV: $850,404
98105 - 92 out of 1150 (4%)/$663,403
98117 - 106 out of 1714 (3%)/$450,202
98144 - 69 out of 1155 (3%)/$451,850
98122 - 56 out of 867 (3%)/$490,375
98136 - 51 out of 882 (3%)/$527,316
98119 - 37 out of 551 (3%)/$701,486
98115 - 127 out of 2345 (2.5%)/$469,275
98103 - 82 out of 1759 (2.5%)/$394,761
98116 - 59 out of 1116 (2.5%)/$501,679
98109 - 24 out of 961 (1%)/$731,074

The $300-$400K range seemed to be the most active (the "sweet spot") for most of these sales, so as an investor, I would be looking for neighborhoods that have more inventory in these price ranges. This would discount neighborhoods in the 98102, 98105, and 98109 zip codes.

My top Seattle zip codes for investing might include 98117, 98144, 98122 and 98136 for now. My next analysis will be to determine where cash buyers are buying real estate in Seattle. Stay tuned.

Cash Buyers

The Seattle Times today reported the emergence of all-cash buyers as a force in today's housing market. There did not appear to be anything new in the article - cash has always been king in the real estate market.

But the reality of today's housing market is that many deserving homebuyers - perhaps as many as 50% according to note-buying guru Eddie Speed - cannot qualify for a mortgage. The glut of inventory on the housing market is as much a reflection of the lending difficulties as it is of the housing situation.

If more sellers could offer seller financing, there would be a larger pool of buyers for their properties. Funny how many sellers with the ability to offer seller financing choose not to - despite the fact that their houses sit on the market.

The Times article went on to state that sellers are willing to accept a lower purchase price when a buyer comes in with cash, and does not require a financing contingency. Sometimes these buyers refinance right away into a mortgage, so they have access to liquid cash again. Many of these buyers are investors who have discovered that cash makes them more competitive in having their offers accepted. Unfortunately, the NW Multiple List Service has no easy way to track cash buyers.

One way to track cash buyers is to use a service like List Source to find buyers who purchased in the last three months or so, and have 99% equity in the property they purchased (for some reason List Source will not allow screening for 100%). Convoluted, but it works.

Cash buyers find funds by pulling lines of credit, like Home Equity, or perhaps cashing in stocks or using self-directed IRAs. Some of them use hard money or private money until they can sell or refinance the property just purchased.

Money talks. Always has, always will. It is a powerful tool for both sellers and buyers to use in speeding up transactions.

Life After Tax Credits: Part 2

Well, the Northwest Multiple Listing Service figures are in, and here are the results. Northwest MLS members reported 9,438 pending sales during April 2010, an increase of more than 36 percent from April 2009. Of these mutually accepted offers, 7,368 of them were in the four county Puget Sound region – the highest volume in this area since August 2006.

NWMLS brokers credit the increase to the effectiveness of the homebuyer tax credits and are optimistic about prospects for the future of the local housing market.

As of April 30, there were 39,999 active listings in the MLS database, about the same number as last April when inventory totaled 40,147 listings. There is now a 3.5 month supply of inventory in the four-county Puget Sound region, a rate that flips the market back to a sellers' rather than a buyers' market. Look to see well-priced homes sell in less than 30 days, and over-priced homes continue to sit on the market a long time....

The repeat homebuyers tax credit helped ratchet up home sales in the mid-price ranges, while there was a significantly higher increase in the number of high-end home sales. Last month, NWMLS members reported 93 closed sales of homes priced at $1 million or more, improving on last year's total of 52 such sales. Through the first four months of 2010, the number of closed sales at $1 million or more increased 65 percent from a year ago! Wealthy people know good deals when they see them!

The median price on last month’s closed sales of single family homes in King County was $375,000, only $5,000 (1.32 percent) less than a year ago.

Life After Tax Credits

Real estate investors and other professionals are all wondering, what will happen to the real estate market, now that first-time homebuyer tax credits have expired (for all but military and certain federal personnel- see my previous blog)?

Financial experts disagree on the potential impact. Economists are of the unanimous opinion that homebuyer tax credits helped boost demand and sell more houses, although how many of those sales would have occurred anyway is unknown. The National Association of Realtors thinks that only 18% of the estimated two million home sales in the last two years would not have occurred without the tax credits. Yet persistently high unemployment and the large number of foreclosures present formidable obstacles to a full economic recovery.

The good news is that housing sales are up, mortgage rates are still at historical lows, and housing prices continue to stabilize in much of the country. Spring time is traditionally a strong season for home buying in the Pacific Northwest. I'll be keeping my eye on sales in the region, and keep it posted here on the "Seattle Real Estate Investor" blog....