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| Article 1 (1031 EXCHANGES AND REFINANCING)
Article 2 (House With An Addition – For Sale) Article 3 (In this Market: Buyer Beware - Of Other Buyers!) Article 4 (Reducing Lead Hazards in Historic Homes) Article 5 (Q&A with Michael Merrill) Article 6 (Pricing 2-Family Houses in the Year 2000) Article 7 (REDUCE YOUR MONTHLY MORTGAGE PAYMENT!) |
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1031 EXCHANGES AND REFINANCING: "HAVE YOUR CAKE AND EAT IT TOO!" By Robert HB Buckner Many real estate investors never consider a tax deferred exchange because they mistakenly believe their equity must always remain tied up in real estate. This is simply not true. In addition to preserving all their equity when exchanging into more desirable property investors can also refinance the replacement property to obtain cash. The cash received from the refinance of the replacement property can then be used for whatever the investor chooses, whether that is buying more real estate, investing in the stock market or just taking a long vacation in Europe. EXCHANGING CAN RESULT IN MORE CASH THAN SELLING AND PAYING TAXES Many investors are surprised to discover that after paying all taxes associated with their capital gain tax liability (federal taxes, depreciation recapture and state taxes), they may end up with very little cash remaining for other objectives. Especially investors who have refinanced their property in the past may find that the amount of the net sales proceeds does not even equal the taxes owed. Prior to closing on the sale of any investment property, it is vitally important to assess the actual capital gain taxes that will be owed and then analyze the benefits of a tax deferred exchange. Frequently, proceeding with a 1031 exchange is the only way to preserve all of the accumulated investment equity! It is important to consult with legal/tax advisors and an experienced "Qualified Intermediary" on the timing of the refinance. A real estate investor should not refinance the relinquished (sale) property prior to performing a tax deferred exchange. The IRS could characterize this as a "step transaction" (where they determine the steps leading up to the exchange shows that the original intent was to obtain the cash to avoid the reinvestment rules of IRC §1031). In most circumstances, attorneys and CPA’s recommend that their clients refinance the replacement after the exchange is completed, rather than the relinquished property. Reflected below are a number of examples of the benefits of first exchanging and then refinancing to meet other objectives: Through a refinance of the replacement property, an investor can obtain the money needed to pay bills or meet immediate cash flow requirements such as providing assistance to parents in need of long-term health care. Although one cannot build on property already owned, the option of refinancing an investment property can provide new alternatives to New England investors. This strategy may be particularly useful to property owners who own several parcels of land and want to build on one of them. Since unproductive land is difficult to borrow against, it makes sense for the owner to exchange into income generating property like an apartment building or strip mall. The investor can then borrow against the equity in the new property and use the funds for construction. Many real estate investors would either like to diversify their investments and/or take advantage of excellent returns currently available in many stocks. By performing an exchange, they can meet two critical criteria: (1) Preserve all of their equity through the deferral of capital gain taxes (2) after refinancing, diversify their investment into the stock market or other attractive opportunities. |
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House With An Addition – For Sale By Steve Petitpas Sometimes, buying a house with an addition can lead to headaches, especially if that addition was built by a weekend handyman or an unscrupulous local contractor who’s been preying on unsuspecting homeowners. How would you know if it was built correctly or conforms to building codes? That is why every prospective home buyer should have their prospective purchase inspected by a knowledgeable home inspector who is experienced in current building codes and practices. I was recently called to a house in Newton. The homeowner had roof repairs done a little over a year ago. The work consisted of having a new roof installed and all the second floor bedroom ceilings repaired. What I discovered was that the roof had only been patched and the flashing had not been replaced. The bedroom ceilings had merely been spackled and painted with no primer sealant or stain kill. The plaster was pulling away from the ceilings and was in danger of falling on people. The only thing I could say to the homeowners was that they had been taken. Even newly constructed homes and additions may have problems too. I once inspected a new townhouse in a large complex in Walpole, only to find that the false chimney flue on the roof was open to the weather and was directly over the master bedroom closet. I pointed out to the builder, who happened to be on the building site that day to collect his final payment, that hundreds of dollars of clothing might be damaged by rain water entering the false flue above. He promptly ordered his men to quickly seal all 100 plus false chimney flues in the complex. Everyone has heard stories of people who purchased a house only to find out that they bought someone else’s headaches. Don’t you be the subject of the next money pit story. Building codes have changed over the years. Existing buildings do not have to comply with current building codes unless altered, and even then only the new work has to conform to the building codes at the time of construction. Certain building practices have been abolished. Your home inspector should be able to tell you if your prospective new house and addition contain such outdated or substandard practices. That information alone is worth the price of the inspection and could possibly save a life, especially when dealing with electrical or heating systems. Remember, for the next 30 years you may be paying a mortgage based on that inspector’s opinion of the house. How valuable is the opinion of an inspector who does not have a license, registration, or professional standing to protect? Starting in May of 2001, all home inspectors will have to be licensed. Currently, the only requirement in Massachusetts for home inspectors is that they can spell "home inspection." Even though someone may have been able to join national associations and organizations for home inspectors, this does not necessarily mean that they are qualified to perform building inspections. There is no substitute for an opinion by someone who is actively involved in the building industry such as a licensed builder, registered architect, or professional engineer, all of whom are regulated and licensed by the state to protect public safety and welfare. The ordinary home inspector is not regulated in this manner. A hallmark of a good inspector is the type of report produced. The final report should be typed and contain written descriptions of problems found and recommended solutions. A good report will also contain additional information besides the report itself, such as different materials used in construction of houses or tips on how to maintain items. The more information you have the better the decision you can make on whether or not you should invest your money in that property. After all, information is the name of the game. For most people their home is the largest investment they will ever make. Just because it looks good does not mean it is a good investment. Additions or enlargements to a house can really make that house attractive to prospective buyers. Don’t get too emotionally invested in a house only to find out it’s not a sound financial investment. Look for a knowledgeable inspector who’s versed in construction and building codes. When you’ve found someone, ask lots of questions. If the inspector has some kind of additional license or registration regulated by the state, that’s a definite plus. |
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In this Market: Buyer Beware - Of Other Buyers! By Jay McHugh You've found your dream house, so you'll make an acceptable offer and live happily ever after...unless another buyer beats you to the punch! This is happening day in and day out. In a competitive marketplace, this can not only happen, but can potentially have a far greater impact than any negotiating gambit that the seller would hurl your way. Yet, more buyers erroneously fear the seller more than they do other competing buyers! That's why it's important to make sure your offer strategy includes a strong stance against other potential buyers and their offers. You need to be more creative and flexible than ever before that I can remember! There are several factors that make buyer competition a threat in today's real estate market. First, in a competitive market with relatively few quality properties available, "dream home" category homes will become hot properties---often as soon as the For-Sale sign is planted in the yard. Most buyers want to purchase a home that requires very little fix-up. They comment, "I want to bring in my toothbrush and immediately set up housekeeping." And to obtain these turnkey benefits, buyers are willing to pay a premium. That can translate into not only a full-price offer, but one that exceeds the seller's listed price! Second, in an active market, timing is everything. In the good old days, you might have the luxury of viewing a home several times---even dragging your relatives to see it... before you actually made an offer. "He/she who hesitates is lost" aptly explains buyers who dally to make a buying decision today. And don't forget that being pre-approved for a loan has leveled the playing field for a majority of buyers. If they're all equally qualified financially, the best offer (as interpreted by the seller) gets the property. So what can you do to arm yourself to the teeth with added value to capture a seller and counteract offers from other buyers? First, make sure you are financially pre-approved by a lender for the loan you'll need and be prepared to document this fact to a seller if requested. In fact, many lenders provide pre-approval certificates or letters to buyers, a copy of which could be presented to the seller. Be honest with the seller about your interest in purchasing the property. This doesn't necessarily mean that you won't negotiate a fair purchase; but it also doesn't mean that you'll act nonchalant and noncommittal either. Sellers often choose one Buyer's offer over another based on the level of personal interest and commitment the buyer appears to have to the seller's home. Lastly, make sure you fully communicate the desired outcome to the real estate agent you're working with at that time. If he/she is a Buyer's agent, negotiating on your behalf, outline to the agent just how much you want this house and what you're willing to do to get it. The agent will then evaluate the best track to take in terms of price, purchase terms and negotiating tactics to help you realize that goal. The next time you're inclined to wonder what evil trick the seller might be up to, better look behind you first... to see if other buyers are trying to pull the rug out from under your dream home! In this market it is most important to listen to your broker and to act fast or you will be searching your local paper once again for new listings and frowning on the homes you have missed out on previously! |
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Reducing Lead Hazards in Historic Homes By John MacIsaac New England is known for its historic charm. Whether it's a small town in the Berkshires or a cobblestone street on Beacon Hill, there's a lot to admire in our homes and buildings that date back to the Revolutionary War and beyond. Perhaps you're lucky enough to own a Colonial-era home or a Victorian townhouse. The architectural details, both inside and out, are a big part of what gives an antique structure its beauty, and most people want to preserve them. But these architectural details may also be covered with potentially hazardous lead paint. In 1978, the federal government banned the use of lead-based paint in residential buildings. So if your home was built before then, there's a good chance lead paint is present. Deteriorating lead paint and lead dust are a known health hazard to children under the age of six. Adults can also be put at risk when renovations or paint stripping increases the amount of lead dust on surfaces and in the air. So what should you do if you're thinking of performing renovations on your antique home? Inspect before renovating To begin with, you don't have to destroy the architectural details of an older home to remove a lead paint hazard. But you do have to take certain precautions to protect yourself, workers performing renovations and members of your family from lead poisoning. If your home was built before 1978, never undertake to remove paint or make renovations without first having your home inspected by a certified lead inspector. Renovations can disturb lead paint, generating lead dust and leading to numerous health problems in adults, including high blood pressure, nervous disorders, and problems with pregnancy. Lead paint may often be present below newer layers of paint. Using advanced technology, like x-ray fluorescence, a lead inspector can tell you which surfaces have lead paint in your home. Surfaces commonly found to have lead paint include: wooden exteriors, interior trim work, window sashes and frames, baseboards, wainscoting, doors, frames, painted metals, and high gloss walls in kitchens and bathrooms. Keep the look, eliminate the lead hazard If lead paint is detected, home owners often mistakenly assume that the only way to eliminate the hazard is to strip the lead paint or scrape it away. But removing lead paint is extremely hazardous and should only be performed by a qualified deleading firm. Better, less intrusive choices are often available that also preserve the architectural integrity of your home. In some cases, surfaces with lead paint can be covered with specially formulated paints called "encapsulants" guaranteed to seal-in older paint for 20 years. Applying the encapsulant in several thin coats allows you to still see the details of woodwork and other architecturally significant features while controlling the lead hazard. Another option is to remove key architectural elements like trim and doors for professional stripping off-site, and then reinstall them. A lead hazard on stairs can sometimes be controlled by covering steps with carpeting. Comply with the law If your home was built before 1978 and occupants include a child or children under the age of six, you're required to comply with the state's Lead Law. The law requires that a lead inspection be performed and any lead hazards be brought into compliance to protect children. State health regulations require that home owners follow certain guidelines before performing "low risk" lead abatement activities, and enroll in a day-long course before performing "moderate" risk lead abatement. If you have questions about the state's Lead Law and health regulations, phone the Massachusetts Childhood Lead Poisoning Prevention Program at 1-800-532-9571. |
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Q&A with Michael Merrill of Merrill & McGeary, a real estate attorney.
Q: I want to purchase a condominium unit in a large, two family Victorian house. The space is great because it is so large. Notwithstanding that, there are a few interior and exterior changes I would like to make, such as adding a deck, installing a separate heating system, and moving some walls. How can I find out if these renovations and additions are possible? Should I read the condominium documents? Can the other owner veto my plans, or can I do what I want in my own unit? |
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Pricing 2-Family Houses in the Year 2000 Sara Rosenfeld, Sr. VP, Co-manager, Coldwell Banker Hunneman Brookline Office (617) 731-2447 Since the beginning of this new century, the pricing of 2-family houses has been a challenge for the brokers, let alone the buyers looking to purchase them. An amazing increase has happened in almost every community in Metro Boston since the beginning of the year. Thanks to Selma Newburgh, a sales associate with my office and the instructor for the Brookline Adult Education Course on Buying a Multi-Family house, we have the following information about the percentage increase of the average sales price of 2-family houses in certain communities. The percentages listed below are a comparison of the average sales price for all of 1999 compared to the average sales price for 2-family houses from January 1 to March 21, 2000: Arlington- an increase of 20.10% Somerville-an increase of 23.4% Brighton- an increase of 19.6% Waltham- an increase of 24.3% Brookline- an increase of 14.4% Watertown- an increase of 7.6% Cambridge-an increase of 25.9% West Roxbury- an increase of 5.9% Newton- an increase of 7.4% This information was derived from the Banker & Tradesman/Commercial Record On-Line Service and the MLS-PIN On-Line Service. As you can see, some of these increases are 5 to 6 times the typical annual appreciation, let alone for just over a 3-month period. What is causing such a rapid increase? In all of the communities listed above, except for Somerville, it is relatively easy to convert the 2-family house into 2 condominiums. The value of the property as 2 condominiums usually exceeds the house's value as a 2-family by a substantial amount. Though there are costs involved for a homeowner to complete the conversion process, the total value gained by converting the house is increasing some of these prices. The prices of condominiums in most of these communities have increased substantially over the same time period, too. Also driving the prices up for the 2-family houses is the increase in the average rents. The actual supply of available rental units has decreased due to the very high demand in Metro Boston causing the increase in the average rent to go up substantially. Additionally, the prices for the single-family houses in Metro Boston have reached an all time high in many communities. 2-family houses are more affordable for many new homeowners because of the additional monthly income from the rent. There is also a lack of available single family and two family homes for sale throughout the area due to the high demand. High demand and low inventory result in increasing prices. When you are trying to determine the price of a home, you use recent sales of comparable properties. Homes that sold during the past 6 months reflect historical prices under different market conditions. All of the factors listed above have created an unusual surge upward in prices and in many instances there is no data to support the new sales price. In many instances, the prices being obtained in today's market are record-breaking sales prices. Obviously, this is great news for home sellers and not great news for homebuyers! In any real estate market, the best way to determine the price you want to spend for a home is to take the time to speak with the right professionals. You need a knowledgeable mortgage originator who can explain the cost of financing a two family house. You need a good real estate sales professional to show you the current inventory and explain the recent sales information. And, you need to speak with your accountant to best understand all of the tax advantages of home ownership, especially 2-family houses. |
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REDUCE YOUR MONTHLY MORTGAGE PAYMENT!
Shari Marquis, |
