Top 10 Objections Sellers have to “Subject To”

The Top 10 Objections Sellers have to “Subject To”

– How to Overcome them and get the Deal!

©2009 by Wendy Patton

 

Before I start with the list of Subject To objections and how to overcome them, let me say that I understand most people get nervous about dealing with objections from the sellers. They worry that if they don’t have the right answer they will lose the deal. Here’s the thing with seller objections, if a seller is raising objections and asking questions it means they are seriously thinking about giving you their home Subject To.

Over time you will learn to LOVE to hear objections from the sellers because it means you are close to making the deal happen! You just need to give them a little more reassurance to get the deal done.

If a seller makes too many objections they aren’t really motivated and they probably won’t give you their home Subject To. On the flip side, if a seller doesn’t raise any objections, it means they aren’t really interested and you aren’t going to get the deal either.

The other great thing about handling Subject To objections is that after you have handled one successfully it becomes that much easier to handle it the next time. Each time a new objection comes up, it’s a learning curve. As you get more and more experienced your learning curve comes down so you’ll be able to get more deals done. So what if you blow it once? You WILL do better the next time around, and trust me, there are PLENTY of DEALS out there. If you don’t get this one, you’ll get another. Real estate investing is not a sprint race to the finish line to just get one deal, it’s more like a marathon where you will continuously do deals over time.

With that said, let’s take a look at the most frequent Subject To objections you’ll likely encounter.

 

 

#10 Can my attorney review the contracts?

“Absolutely! I recommend it.”

Most of the time they won’t do this anyway. But by giving them that reassurance it shows you have nothing to hide.

 

 

#9 What happens if you die?

“The contract has provisions that if either, I or you the seller die, it is still binding and our heirs would continue our contract.”

 

 

#8 How long will it take for you to get a new mortgage?

“What I can tell you is that I will work as quickly as possible to do this. As soon as you sign this contract I will go to work on finding a qualified tenant buyer for your home. Tenant buyers usually need about 1 year to get their credit back in shape to qualify for a mortgage. However, sometimes tenant buyers don’t exercise their option to buy so we would need to get another one, which could mean it would take longer.”

Sometimes the seller will want a “Not More Than” date, where no matter what happens you agree to refinance their Subject To property no later than that time. For example, you may find an option buyer who closes on the property before this date but if it doesn’t work out after a certain length of time, say 5 years, then you agree to refinance the mortgage to get the mortgage out of the seller’s name.

 

#7 Is this legal?

“Yes, there is no law against this at all.”

If you need to explain anything further on the “Due on Sale Clause”:

“On your mortgage there is probably a Due on Sale clause, which gives the bank the right to call the loan due if you transfer ownership. As long as the payments are being made the bank almost NEVER cares that the title has changed hands.”

This is especially true during a time when foreclosure rates are very high in the country, as they are now. Banks are less likely to want to exercise the “Due on Sale” clause because it increases the chance of them having to foreclose.

 

#6 I’m thinking about just listing it with a Realtor

“That is certainly your option. Let’s take a look at why I’m here today though. You want to SELL your house, not just put it on the market. Based on the comparable sales that I’ve brought you it takes X number of months to sell a home in this area. That means you’ll have to pay an additional Y in total mortgage payments in that time. Plus you’ll have to pay a 6 to 7% Realtor™ commission, transfer fees, and closing costs when it sells. This is not to mention any repairs that need to be done to bring the house up to the same standards as the homes that are selling here. Those will cost you time and money as well. If you add all of that up, plus all of the inconvenience of the months of showing your home, having to constantly keep it clean and presentable and having strangers going through your house, is it really going to be a better deal for you to list the house? It wouldn’t be to me.”

This objection is a stalling tactic. Sometimes they want to talk more before they make a decision to give you their home Subject To. Sometimes they are testing you to see how eager you are. If you are over-eager to get the deed, they will sense it and suspect you aren’t being completely honest with them. If they do decide to list it with an agent make sure they put your name down as an exclusion on the listing. This means that if they end up accepting your Subject To offer down the road, no commission would be paid to the listing agent.

 

#5 I have to get my asking price or I’m not selling

“I understand that you feel your home is worth $X, but let me show you what is happening right here in your neighborhood. This house at 123 Main Street is 1,480 square feet with a pool and it sold for $X. All the homes on this list are within a few blocks of your house. Remember, these prices are what houses have sold for, not what someone is trying to get for their home. I know you may have seen houses for sale in your area with certain asking prices, but we need to look at the actual sale prices. Based on these comparables we can see that your house is worth $X. I could be generous and pay you the price you want, but in order for it to make sense for me, I must get the following terms.”

Sellers commonly fix the price of their home in mind based on the asking price of neighbors homes, which in a hot market, can be to your advantage if homes are selling for more than asking price and appreciating rapidly. However, in soft markets it’s quite common for homes to sell well below the asking price. You need to help them adjust their thinking and realize that their home isn’t worth asking prices, it’s worth sale prices.

Remind the seller of the risk you are taking in assuming responsibility for their house when you take it Subject To, making payments and waiting to make your profit at some future time. Make sure that even with the terms the deal would still work for you. Just because someone is willing to sign the deed to their house Subject To doesn’t mean you should accept it! If you can’t find a way to make a fair profit on that house walk away.

To find out more on evaluating and determining the profitability of a home, read Chapter 5 of my book “Investing in Real Estate with Lease Options and Subject Tos”

 

#4 I don’t want tenants in my home

“I understand completely. Lots of tenants are not very respectful of the homes they rent. But the people that will be staying in your home aren’t tenants. They are home buyers. They don’t have the tenant mentality. They will look at the house as their own and want to take care of it and keep it nice.”

 

#3 What if you don’t make my mortgage payments?

“I understand your concern. What would make you more reassured and yet protect us both?”

Or

“I understand your concern. I could make your payments to the mortgage company and then mail the receipt to you. This way I am protected and so are you. Would this work for you?”

Work out a solution with them. This is a valid concern but accommodations can easily be reached. I don’t recommend you sending the payment to them for them to make to the bank. This leaves you very vulnerable. Make sure a bank authorization is signed as part of the Subject To paperwork, allowing you to verify that payments are being made. Also include a signed agreement that says if they don’t pay on time you have the right to switch your payments from the seller directly to the bank.

 

#2 This isn’t enough money!

A great way to handle this is to first get a full understanding of the question. Ask them what they mean or repeat, “this isn’t enough money?” and don’t say anything else until they answer. Next, sit down with them and do a cost analysis together. Get out a sheet of paper and give them the calculator. Hand them the comps and ask what the average sales price of the house is. They will calculate it and give you the figure. Then ask them what commission a Realtor™ gets in their area. Deduct the commission.  Next, ask them what repairs need to be done to the house to bring the property up to current market standards and deduct those costs. Ask them to calculate the average time to sell a house based on the comparable sales and total the mortgage payments for that time. Deduct all of the closing costs. Encourage them to put down anything else that will reduce the value and help them be more realistic also – for instance, what is their time worth? As they do this themselves on the calculator it becomes hard for them to argue about the value of their home and the price you are offering them. You are now working together as partners, not adversaries.

 

#1 Why should I give you the deed when the mortgage stays in my name?

“That’s a good question. What I can tell you is that different people do it for different reasons. The bank will not let me assume the mortgage on your house. In order for me to make a fair return on this deal I can offer you $X right now. I’ll be glad to buy the house immediately for that price, but how would you cover the difference between what I can pay and what you owe? You are actually being very savvy and getting top dollar for your house by letting me take over your payments. This saves you on the costs that would occur if you sold the house normally, like commissions, closing costs, repairs and so on. The minute you okay this paperwork I will be doing everything possible to sell this house as quickly as I can, using my expertise. I’ve spent thousands of dollars on training to do this business, legally and morally. It would be futile for me to let your home go back to the bank just because I didn’t make the payments.”

This objection is both legitimate and important. Put yourself in their shoes, wouldn’t you be asking it too if someone asked you to give them your home Subject To? It comes in as #1 because it is going to be the most frequently asked and sometimes the hardest to overcome. Does that mean you should fear it? Not at all. Different people will sign the deed over to their house Subject To for different reasons. As you build rapport with the seller their reason will become more apparent and you can tailor your answer to best fit them. Remember if they are motivated sellers and you have built a relationship with them, they will trust you and be willing to sign over their house Subject To to get out of it. You are doing them a service and this happens regularly. If they understand that their options are limited and that you are genuinely trying to help them the idea of signing over their home Subject To won’t seem so outlandish. What you’ll find is that through building rapport and gaining their trust this objection will be much less strenuous. If they are not truly motivated sellers, and are just tire-kickers, this will likely be a very strenuous objection and they aren’t even considering signing over their home. Don’t even worry about those sellers, they might become more motivated over time, but right now a Subject To isn’t right for them.

To find out more about Subject Tos, read my book, “Investing in Real Estate with Lease Options and Subject Tos”.   This book gives you all the details of which contracts you need in order to complete a Subject To deal.

To find more articles like this visit my website www.WendyPatton.com.

Selling in a Down Market. What Can I Do?

Selling in a Down Market.

What Can I Do?

©2009 by Wendy Patton

 

It’s in the news day after day about how bad the real estate market is across the country. Available supplies are rising, builders are cutting back, the sub-prime mess, prices are dropping, etc, etc. We both know that while many areas in our country are experiencing challenged real estate markets not every market does. Real estate is local, so there are some markets going down and some going up, no matter how much the news media tries to convince us otherwise.

That being said, however, there are a large number of markets right now in downward trends. If you happen to live in or own a home in a down market and you need to sell this is a time to get creative. Down markets are buyer’s markets, meaning you, as the seller, are competing for the smaller pool of buyers who have a large inventory of housing to choose from.

Mostly we hear about making sure your home is priced competitively and it is well staged (perhaps even using a professional home staging company). These things certainly can help. However, often they aren’t enough. The reason for this is that you are still competing for the same small pool of buyers as everyone else. If you really want to get your home sold you need to expand the pool of buyers. What I mean by that is that the existing pool of conventional buyers is comprised of people who want to buy now and can qualify for a mortgage now. We all know that the extreme tightening of the lending industry has made it much harder for prospective home buyers to qualify for mortgages. If you really want to sell your home you need to expand your pool of buyers to include those people who want to buy a home but can’t qualify for a standard mortgage at this time. This pool is actually much, much larger than the pool of buyers who can get a mortgage right now.

Let’s take a look at some of the more creative selling methods you can use to help your home stand out among the rest, reaching a larger pool of buyers and get sold in a down market.

Seller Carryback – aka Seller Holdback or Second Mortgage

Seller Carrybacks bridge the gap between conventional financing and more creative seller financing. In this case your home buyer can qualify for a mortgage but not for the full amount. They may be able to qualify for anywhere from 70% to 90% of the purchase price. To cover that differential the seller must give the buyer a second mortgage covering the remainder. The seller is essentially acting as a bank offering an additional mortgage. The terms of the second mortgage are entirely negotiable.

In the case of the seller carryback the sale of the property and transfer of the deed is completed. This allows the buyer to get their principal mortgage at the time you are providing the second mortgage. There are several advantages to this. By completing the sale the buyer is the new owner of the property, freeing you from the responsibility of taking care of that home. Additionally, if you have equity (beyond the amount of the second mortgage you are offering) you will get paid that equity. The disadvantages to this are that: 1. should the buyer default on their loan for some reason you would have to foreclose and 2. you must actually have equity in your home so that when the buyer purchases your home their first mortgage is enough to pay off your existing mortgage.

As I mentioned the terms of the second mortgage are entirely negotiable. That means the interest rate, the frequency of payments, the rate at which the interest compounds (yearly, monthly, daily, etc.), whether the payments are principal and interest or interest only, whether there is a balloon payment, and the duration of the loan are all factors you can set with the buyer. These terms should not be taken lightly either, as you can substantially increase your profit by negotiating favorable terms. While all of these terms may sound a bit intimidating, fear not, you don’t have to resolve them on your own. I recommend using an attorney to help you with the loan documents and terms. The small cost of using an attorney will pay for itself as the attorney will help you set favorable terms and protect you with proper documentation. I DO NOT recommend allowing the buyer’s loan officer to set up the second loan for you! Remember, they work for the buyer. They will be doing their best to make sure the terms favor the buyer and not you.

To help you understand how important it is to get favorable terms, let’s take a look at a variation in just a single term, the interest rate. All other terms being equal, let’s assume you take a seller carryback for $25,000, amortized over 30 years but with an 8 year balloon – this means the interest is based on a 30 year time table like a conventional mortgage, but the buyer will have to pay the balance after 8 years, usually by refinancing. If you set the interest rate at 8%, over the 8 year period the buyer would pay you a total of $15,364.77 in interest on the loan. If you set the interest rate at 8.5% the buyer would pay $16,381.76 in interest. That’s just over $1,000 in additional interest for just a ½% increase in interest rate.

There are a couple of important things to keep in mind when doing a seller carryback. The first is that the primary mortgage lender must be fully aware that you the seller are providing a secondary mortgage. Failing to disclose this constitutes fraud. The reason for this is that banks lend based on what they feel the borrower can handle based on the value of the property. If they are willing to loan 80% of the value of the home and permit a second mortgage for 15%, requiring the borrower to put 5% down, that is the most the bank feels this borrower can afford. If they are only willing to loan 80% of the value with NO second mortgage, it’s because they feel the borrower cannot handle the additional mortgage. If you provide that mortgage anyway, you are violating the terms of the first mortgage.

The second thing you need to keep in mind with a seller carryback is another type of fraud. It’s the forgiven loan scheme. It works like this: The buyer is approved for, let’s say, a 90% mortgage. The buyer, their loan officer, or their real estate agent, might ask you to take a 10% second mortgage, but they adjust the purchase price up to cover all or part of that 10%. They disclose to the bank that the seller will provide a 10% second mortgage, but as soon as the sale is complete you forgive that 10% second. In other words, you accepted the 10% second but had no intention of ever making the buyer pay it. What this effectively does is make the buyer’s 90% first mortgage a 100% first mortgage instead. Make no mistake, even though you are disclosing that second mortgage to the primary lender, you are still committing fraud.

Both of these types of fraud are very rare, and most likely as a seller willing to carry a second mortgage you won’t encounter someone who asks you to do it. However, I want to make sure you are aware of them because no matter how badly you need to sell your home, it’s not worth committing fraud over.

Land Contract aka Contract for Deed

Land contracts are essentially 100% seller financing. In this case your buyer will not be getting any other mortgage except the financing you are providing. Land contracts can be structured 2 different ways. You can either close on the property with the buyer and convey the deed to them and the land contract exists as financing on the property or you can set the land contract in place and the deed isn’t conveyed until the buyer pays the land contract off, either by refinancing down the road or by paying the balance in full. It is to your advantage to do the second, where you retain the deed until the buyer pays off the land contract.

You may have heard that in order to sell your home on land contract you must own it free and clear. This is not 100% true. In some cases, your existing mortgage may have a ‘Due on Sale’ clause. By conveying your home on a land contract when you do have a mortgage the bank has the right to invoke the ‘Due on Sale’ clause. However, it is VERY, VERY rare that a bank will invoke this clause as long as payments are being made. This is especially true in down markets where foreclosure rates are high.

Like a seller carryback the terms of the land contract are completely negotiable. All of the terms I mentioned in seller carrybacks apply here. I also strongly encourage you to make use of an attorney when it comes to setting the terms of the land contract and completing the paperwork. In some states title companies can assist with these documents.

As we know, traditional closings can be very costly in terms of closing costs, especially for the buyer who has to pay loan origination fees. An advantage to selling with a land contract is that most of these fees don’t apply, saving thousands of dollars in closing costs. This means that the buyer can either put this money towards a down payment, which goes directly to you, or for the buyer whose funds are more limited, they are still able to get into the house when they might not otherwise be able to do so.

A land contract results in the conveyance of the property. Because of this your buyer is actually a buyer and not a tenant. This gives you the advantage of putting someone in your home who has a buyer’s mentality not a tenant’s. They are much more likely to take care of the house and be responsible than the average tenant. The disadvantage to this is that if your buyer should stop making payments for some reason, in most states, you cannot simply evict them. You will either need to follow forfeiture procedures or foreclosure procedures, both of which cost more in time and money than a standard eviction.

On a Land Contract you can also “wrap” your mortgage. For example, if you are paying 5.5% interest, you might be able to charge 8% or more. Even without much of a higher price on your home, you have the spread between 5.5% and 8.0%. On $100,000 of a loan balance, it would mean $2500 per year in your pocket! This is 2.5% difference in interest on $100,000.

Land contracts hold a big advantage over seller carrybacks in that you are able to market your home to a much larger pool of buyers. With the seller carryback the buyer is still qualifying for a mortgage for most of the cost of the property, but with the land contract you can sell to someone who is currently unable to get a mortgage, which greatly increases your reach. Who are some of these people? Buyers who have moved from another area that are still trying to sell their old home and can’t qualify for two mortgages, someone who is going thru a divorce and their existing home is tied up, a buyer who’s credit is bruised, a buyer who’s credit isn’t established enough yet to qualify for a mortgage, just to name a few.

Lease Option/Lease Purchase

Lease options and lease purchases are probably the most creative forms of seller financing and are particularly effective for selling your home in a down market. In both, you are leasing the property to your buyer for a period of time and at the end of the lease period they can buy your home for a pre-set price. In the case of a lease option, the buyer has the right to purchase the home, although if they don’t they would forfeit their option fee. In the case of a lease purchase the buyer is obligated to buy the home at the end of the lease period. Obviously from the home seller’s perspective the lease purchase is more desirable. You must however, make sure that if you sign a lease purchase they can actually get a mortgage down the road, otherwise you will be suing them in court to buy your home (not a good experience).

Unlike the seller carryback and land contract, you are not charging interest on a loan, the tenant buyer is, instead, paying rent. One of the negotiable terms of the lease option/lease purchase contracts is whether any of the rent will apply as a credit towards the purchase price, otherwise there is no principal pay down.

With lease options and lease purchases you have a landlord-tenant relationship with your buyers until they actually purchase the house. This bears some advantages and some disadvantages. While your buyers are tenants, they do not have the typical tenant mentality. Their intention is to buy the house. As part of the lease option or lease purchase contracts they pay an option fee, which applies against the purchase price when they buy, but, it is non-refundable if they don’t. This money helps keep them motivated to become home buyers. However, because they are tenants, during the lease period you will be responsible for repairs on the house, except of course for damage done by the tenants.

One of the main advantages to having the landlord-tenant relationship during the lease period is that if the tenant stops paying rent you can evict them. The reason for this is that in lease options and lease purchases you retain ownership of the house until the buyer actually exercises the purchase agreement. While evictions are rare, they are definitely advantageous because they are much less costly and much quicker than foreclosure or forfeiture. Additionally, if you are forced to evict you still get to keep the option fee.

The terms of lease options and lease purchases are different than mortgage based seller financing. Instead of negotiating interest, amortization and the like, you are negotiating the length of the lease, the amount of the rent, the amount – if any – of the rent applied against the principal, and whether extensions will be permitted and how much the purchase price, option fee and rent will increase for an extension period.

Like land contracts you are truly offering your home to the largest possible pool of potential buyers. Offering this kind of flexibility is the most effective way to sell your home in a down market.

 

Mortgage Assumption

Mortgage assumptions are much more limited, but can be a useful option for selling your home in a down market. Instead of obtaining a new mortgage the buyer assumes (takes over) your existing mortgage. Depending on how much equity you have in the property it may be necessary for the buyer to either make a down payment or for you to offer a second mortgage.

The reason that mortgage assumptions are more limited is because of the qualifying criteria that must be met. First, your existing lender must be willing to let a new buyer assume your mortgage. Most mortgages are non-assumable, however, given the challenged market conditions many areas are experiencing this may be negotiable with the lender. In order for the buyer to assume the mortgage, however, they must be able to qualify. The lender will not let just anyone assume it. If the buyer can qualify for the existing mortgage they can likely qualify for a new mortgage as well.

There are a couple of reasons a buyer might want to do a mortgage assumption versus just getting a new mortgage. First, the terms of your existing mortgage may be much better than the buyer can get on a new mortgage. Interest rates have gone up and the difference in rate between your existing mortgage and a buyer’s new mortgage may be as much as 2% higher. If you remember from our above example, just a ½% rate differential for a much smaller loan can make a difference. The other reason a buyer would want to assume a mortgage is because it can save them thousands of dollars in closing costs. The advantage of this to you, the seller, is that is means they can put more money down when buying your house, or it allows them to buy your house when they might not otherwise have been able to.

When selling your home in a down real estate market it is critical to reach as many buyers as possible. The typical pool of buyers is limited to those who can currently qualify for a mortgage. By offering creative financing solutions you are able to reach far more buyers than the conventional seller, especially using lease options, lease purchases and land contracts.

Selling in a down market can be tough. This type of creative financing differentiates you from the pack of other homes on the market. Additionally by offering seller financing you can actually receive more money on the sale of your home, either in the form of interest payments or purchase price.

To see other articles like this visit: www.WendyPatton.com

Daddy’s Little Tax Deduction

By John Hyre, Tax Attorney, Accountant, Investor

Keeping your tax bill low is a war of details. There is no magical silver bullet that holds the IRS at bay. Rather, the tax code lets us cut a little here and a little there. It’s all in the details. Such “details” include your children. There are lots of ways to use the little darlings (I use the term loosely and obviously am not referring to teenagers!) to cut your tax bill. This article will focus on how to hire minor children in your business.

Specifically: If you have children between the ages of 7 and 17 and have not hired them in your business, the government is getting far too much of your money. And you are cheating your children of a remarkable character-building opportunity. On the other hand, hiring the kids saves you money and provides them with some hands on education. Here’s how it works:

Let’s say you are in a 30% tax bracket. Your business makes $75,000 in net income. You want to spend $4,750 on one of the kids. If you take that amount out of the business and spend it, you will pay $1,425 in taxes, leaving $3,325 to spend.

Instead, you hire your child. Each child has a $4,750 standard deduction – meaning that they do not pay federal income taxes on the first $4,750 in income. So you pay the child $4,750. Your business deducts that amount. The child uses the standard deduction to shelter the income. Result: You save $1,425 in taxes. Common questions:

Do we pay social security taxes on that wage?

No, if your child is under 18 years old AND you pay them out of a sole proprietorship, partnership or most LLC’s. If you pay them out of a corporation or an LLC treated as a corporation, then they owe social security taxes.

Is there lots of paperwork?:

You have to file a Form 941 four times per year. That’s the form that the IRS uses to get employers to withhold income and social insecurity taxes. For a child, it’s easy – there will be no withholding, so enter lots of zeroes on the form.

You need to issue a W-2 after year end. Easy enough.

You need to track the child’s hours and activities to prove that they did the work and that the type of work was within their capacity. A consistently kept Excel spreadsheet or “dead tree” notebook will do nicely. Bear in mind that the Tax Court has permitted parents to employ children as young as 7 years old as long as the work and pay were reasonable. 7-year olds can certainly pick up debris, lick envelopes, place stamps and the like. Obviously, the older the child, the more they can do. The pay should be a bit less than you’d pay a third party.

Do the children get to do whatever they want with the money?

Heck no! The money goes into a bank account and gets spent on what you say, when you say. Clothes, tuition and toys are all valid options. Using it to fund Roth IRA’s or (better yet) Roth Educational Accounts (also known as “Coverdales”) is a very tax savvy way to go.

Any tax traps involved?

Yes. Make sure that the children do not account for more than 49% of their upkeep. If they pay for 50% or more of their total expenses, you lose them as an itemized deduction on your personal return (Meaning you’d lose @ $3,000 in deductions AND the $1,000 child tax credit – ouch!). Using a program like Quicken or Microsoft Money can help you track kids’ total expenses (including housing and food) to make sure that you do not cross the 50% line.

Also, this particular tax tactic involves paying the kids for services. Providing passive income (like rents and interest) to children under 14 normally results in negative tax consequences. Now there are ways to give kids over 13 passive types of income while cutting taxes in a serious way – but that’s a story for another article.

Choice of Entity 101

By John Hyre, Esq.
One of the most common questions that real estate investors ask is: Which entity should I use? The correct answer usually depends on a large number of details…the exact nature and size of the business, the investor’s source and type of income, the number of family members, etc. This article will set out some general rules for picking a structure. Your mileage may vary based on your own personal facts and circumstances.

Rule One: Limited Liability Company’s (a.k.a. – LLC’s) are generally the way to hold rentals and most lease-optioned properties.

The asset protection aspect of entities usually matters little when selecting an entity. That’s because in most states, LLC’s are cheap, provide the best asset protection and are tax chameleons, meaning that they can select how to be treated for federal income tax purposes. So when I say that a corporation works best for you, what I really mean is that an LLC that elects to be treated as a corporation is the best choice in most states.

What really distinguishes entity types is the tax treatment accorded each one. As such, choice of entity usually turns on the applicable tax rules. In fact, tax rules will determine the best entity for rentals, because they are the little darlings of the tax code. Specifically, rentals:

– sell at favorable capital gains tax rates;
– generate depreciation deductions;
– generate tax upon sale that can sometimes be paid in installments, instead of all at once;
– can be exchanged for other real property tax-free; and may generate low-income housing credits

We want to select an entity that preserves these tax perks. Limited Partnerships (“LPs”) and Limited Liability Companies (“LLCs”) both achieve this goal better than any other entity. In most states, an LLC is cheaper and simpler to set up and run, so it is normally preferable to an LP. In addition to preserving rental property tax perks, LLC’s are the most flexible entity. Corporations have various restrictions on who can be an investor, what kind of income can be earned, etc. LLC’s are thankfully free of such pesky (and time consuming) issues.

Rule Two: S-Corporations are usually the best way to flip properties.

First, let’s distinguish S and C corporations. A C-Corporation is taxed on its income at special corporate rates. Any income that is paid to shareholders as a dividend is taxed again. This is the famous “double taxation” that applies to C-corporations.

For example:

Trumpco Incorporated earns $10,000 in taxable income. It pays a 15% tax on that income, or $1,500, leaving with $8,500 in after-tax income. It pays an $8,500 dividend to Trump, its owner. If Trump is in the 35% tax bracket, he will pay $2,975 in taxes on the dividend, leaving Trump with $5,525 of the original $10,000.
This double tax can quickly cost corporate shareholders more than 50% of their corporation’s profits. Fortunately, the income of a C-Corporation can often be finessed to reduce the double tax. Oftentimes, creative means of getting money to shareholders (e.g. – renting equipment to the corporation, taking salaries, etc.) can also eliminate one layer of taxation.
To offset the double tax (or the administrative cost of getting around it), C-corporations have a few unique perks enjoyed by no other entity. Employees (including shareholder-employees) can get certain benefits (e.g. – medical, favorable retirement plans, tuition payments) tax-free.
S-Corporations do not get the above perks, but they also do not have double-taxation issues. As such, they are “pass-through” entities. Following the Trumpco example from above, the $10,000 dividend to shareholders would only be taxed once, at the shareholders 35% rate. S-corporations are much simpler than C-corps, and therefore cheaper to operate. They are less flexible than LLC’s, but have one important advantage: S-corporation dividends are exempt from social security taxation if the S-corporation owners are paid a reasonable salary. This feature is quite important, because income from flips (as opposed to rentals) would otherwise be subject to a 15% social security tax.
For example:
The incredible Flipboy makes $80,000 in net income from wholesale flips done through an LLC. He would pay approximately $12,000 (15% of $80,000) in social security taxes. If he used an S-Corporation and paid himself a “reasonable” salary of $35,000, he would only pay social security tax on the salary, or $5,250. The remaining $45,000 in profits would be distributed without paying additional social security taxes, saving Flipboy $6,750 in social security taxes.
Limited partnerships are also exempt from social security taxes. Arguably, LP’s are not required to pay a reasonable salary, meaning that all of the LP’s profits can be sheltered from social security taxes. The catch: LP’s are significantly more complicated than S-corporations and therefore more expensive to run. The extra benefit of an LP over an S-corporation for flips must be weighed against the cost.
Rule Three: C-Corporations often make sense for high-income individuals with self-provided benefits.
As we stated above, C-corporation can provide certain perks and benefits tax-free. If you do not have a day job (or a spouse with a day job) that provides such benefits, getting them through a C-corporation can be very efficient from a tax standpoint. Also, I mentioned that C-Corporations pay taxes based on their own brackets. For example, the first $50,000 of C-Corporation income is taxed at 15%. For people in the 35%+ tax brackets, running $50,000 or so in income through the C-corporation at a 15% tax rate can be quite favorable. I say “can be” because C-Corporations are fairly expensive to administer. Remember, the benefits must outweigh the costs (e.g. – extra tax returns, bank accounts, etc.).
I rarely place a major business in a C-Corporation. Instead, I like to see secondary businesses put into a C-Corporation. For example, a C-Corporation that manages your rentals is paid what you choose to pay it (within reason!). You can pay it enough to fund your benefits, but not so much that double-taxation becomes an issue. If you put a major business into a C-Corporation, it may make “too much” income. At worst, the double tax kicks in, costing you big dollars. At best, your tax advisor finds a way to bail the income out of the company….and charges handsome fees for the favor! In my view, it is much easier to put the C-Corporation on an “income diet” than it is to “lose” the income later on (Sound familiar?).
Rule Four: Incorporate in Your Home State
I have yet to see a Nevada entity used to hold or flip properties that justified its cost. All of the benefits promised by Nevada entity hucksters (e.g. – privacy, no state tax) DISAPPEAR because you are doing business in YOUR state. Nevada entities CAN be used to reduce income taxes in SOME states by charging your in-state company interest – talk to someone familiar with YOUR state’s rules to see if such an arrangement is legally possible AND worth the cost and hassle. Do NOT accept the word of a guy who sells Nevada entities for a living. Shockingly, he will assert that a Nevada company will save taxes, promote privacy, make you better looking and cure cancer…all without having the first clue about the laws in YOUR state. To a guy with a hammer, everything looks like a nail!
Rule Five: Your Mileage May Vary
These are general rules. Your business, personal situation or state’s laws will often make for exceptions to the general rules. Get qualified advice!

How to Keep Positive in a Negative Market

“Whether you think you can or you think you can’t, you are right” – Henry Ford

 

I am sure you’ve heard the expression, “Attitude is everything.”  This is very true. Right now, it’s simply your attitude and mentality that will give you the edge over others who are trying to invest in this highly violatile market.   You’ve undoubtedly heard the importance of thinking positive and having the right attitude.  Most people are intelligent enough to know that this statement is true.  Some people reading this will argue that a positive attitude doesn’t always work.  Well, maybe not, but I know one thing for sure – negative thinking and a negative attitude NEVER works!  So your only choice and your only chance for success in this market are to pick the positive things in life and maintain a positive attitude at all times.

 

I once read a fortune cookie that said, “An optimist is someone who tells you to cheer up when things are going his way”.  I know that if you are reading this article, times may be difficult and you need serious answers to your burning questions such as, “How I profit in a slow market”?  There are many answers to this question, but first I need to impart to you some relative perspective.

 

A History Lesson on Real Estate Cycles

 

About every ten to twelve years, as an average, real estate values tend to double in most major metropolitan areas.  For example, in the 1920’s, the original colonial homes sold for just under $2,500 in Long Island, New York.  Since then, real estate prices have doubled almost eight times over the last 80 years.  That averages out to a 100% increase approximately every ten years.  An interesting note to this is that about every ten to twelve years, real estate values must correct before they enter their next “doubling cycle”.

 

 

It’s Not a Matter of If, It’s a Matter of When

 

The evolutionary process is three steps forward and one step backwards.  For example, imagine a 100% increase occurring in three steps of one-third parts each.  The last market cycle of the 1980’s was one in which real estate values doubled, followed by a correction of the early 1990’s, which equated to a 20-30% decrease over a three to five year period.  This cycle was then followed by the post-millennium cycle boom of 100% from the last high point of the previous cycle.  We are now in the naturally-occurring phase of a correction in the cycle.  This essential and beneficial adjustment gives the market pause to reflect and re-gather momentum and strength for the next doubling cycle.  This has occurred time and time again because the long-term demand for housing is growing an exponential rate based on population growth to almost double in the United States by 2050.  This will continue to drive prices higher as it has for the last 100 years.

 

Since we now know based on history that nearly all real estate prices will double again, it’s not a matter of if, it’s a matter of when your existing houses will sell.  Sharing these facts with your prospective buyers will put them in the right frame of mind to buy now versus next year if they plan on staying in the home more than five years.  If a buyer is apprehensive about being the right time to invest, ask him if he’d like to buy his parent’s home for the price they paid for it – the answer will be obviously “yes”.

 

Maintain a Positive Attitude Assuming a Negative Result

 

In “Winning Through Intimidation” author Robert Ringer talks of the importance of maintaining a positive attitude through the assumption of a negative result.  In other words, Ringer suggests that you be prepared for the worst case scenario while at the same time putting your best foot forward to get the best possible result.  This will take the mental pressure off of you and allow you to focus on getting the job done.  This approach, I believe, allows you to be positive and realistic in your mental assessment buying and selling houses.

 

If it Bleeds, it Leads

 

There’s an old expression in the media business, “If it bleeds, it leads.”  In other words, the media loves to cover negative news more than positive because it sells better.  When the real estate market is in turmoil, the media loves to run these negative headlines to keep reminding people how bad things are.  When buyers hear the bad news, it affects demand because the negative news drives fear, which makes buyers worry about whether the time is right to buy a home.

 

Is the media simply reporting the news or does the media actually affect the news in this regard?  The answer is obviously both.  The media reporting negative news alone can’t shape a real estate market.  However, since perception is often reality, when buyers are spooked, they may shy away from buying.  This affects lenders, builders, real estate agents and other professionals who rely on the real estate business for their income.  It becomes almost a self-fulfilling prophecy because things get worse and the media again reminds us how bad things are.

 

But, are things really as bad as the media reports?  At the time of this article (October 2008) the numbers certainly do reflect falling home prices and rising foreclosures.  When you hear that foreclosures have doubled or even tripled in a particular area, this may sound catastrophic at first until you realize that the vast majority of homes (97-99%, depending on the local market) are NOT in foreclosure.  Despite the doom and gloom, there’s always a buyer for a well-kept home offered at the right price and terms.  In short, don’t read the paper if you want to keep a positive attitude and sell your homes fast!

 

Ready Fire, Aim, Fire

 

Well done is better than well said – you have to take a whole lot of action to get your houses sold in s slow market.  In a good real estate market, people can sell a house fast, so when things slow down, they figure, “Oh well, there’s nothing I can do.”  Nothing could be further from the truth.  Not only is there something you can do, but there’s a lot you MUST do to get your house sold.  However, it’s not just about working hard, it’s about working SMART.  You need to do things in the right order and in the right way to get the proper results.

 

However, don’t focus too much on perfection before you take action.  You’re probably familiar with the phenomenon of the “C” student who outperforms the “A” student in real life.  This is because the “C” student is often satisfied with doing a mediocre job at something, but just getting it done.  The “A” student mentality often leads to paralysis of analysis and inaction.  In other words, the bottom line is getting your house exposed to as many buyers as possible, not necessarily getting it done perfectly.  For example, many sellers want to show their house only when it’s convenient for them and the house is in perfect shape to be shown, instead of when a buyer is ready.  While showing a house in its best condition is a priority, it doesn’t make sense to put off a ready, willing and able buyer for too long.

 

Fear

 

Many people reading this are prone to inaction because of fear of doing it incorrectly.  Remember, it’s not a matter of doing it perfectly, but putting forth your best effort.  As I discussed earlier, a lot of effort at a “C” level beats doing less things at an “A” level.

 

Lack of knowledge certainly makes it difficult to sell a house fast in a slow market, and in fact is probably the single biggest drawback for the average person.  Most people only have the opportunity to sell a few houses in their lifetime and often rely on professionals to do the work.  Thus, the average home seller does not have enough practice to get really good at the job.  In fact, most real estate agents who sell houses for a living are hardly good at it.  The top 5% of agents in any market do the vast majority of the business.

 

Taking the time to learn what to do is a very important part of the success in selling a house.  In the classic book “Think & Grow Rich”, Napoleon Hill writes about the importance of learning the right things.  He distinguishes between general knowledge and specialized knowledge.  Certainly, there’s a lot of general real estate knowledge in bookstores and floating around the Internet, but this book is unique because it offers the very specialized knowledge of how to sell a house . . . QUICKLY!  Our experience in selling thousands of homes will reveal the very specialized knowledge you’ll need to get your house sold fast and at the highest price you can get for your market.

Owner Financing Mechanics

by William Bronchick, Esq.

 

To sell a house quickly, it must be attractive and so should the terms. By fixing your home to present it in the best light and offering flexible terms as well, you have in fact given your buyer an “offer they can’t refuse.” When offering your house for an all-cash purchase only, you limit your market. If you’re flexible on the financing terms of the property, you increase your pool of buyers and thus the demand for your house

Let’s discuss the mechanics of the owner financing, which is different if the seller has existing financing on the property.

1.       Property Owned Free and Clear

Let’s begin the discussion with a simple explanation of owner financing with a property that is owned free and clear of any mortgage liens; that is, there is no debt owed on the property. Let’s say Sally Seller owns her home “free and clear” — that is, she owes nothing to the bank and there are no mortgage liens on the property. Sally agrees to sell her property to Barney Buyer for $100,000, with the terms of 5% down and owner-financing for $95,000 (95% of the purchase price). At closing, Barney tenders $5,000 in cash and signs an I.O.U. (known as a “promissory note”) for $95,000. Sally executes and delivers a deed (ownership of the property) to Barney. The promissory note is secured by a mortgage that is recorded against the property as a lien in favor of Sally. In this case, Sally is essentially acting as a lender to fund part of the purchase price of the house.

Sally can set a balloon date in the promissory note by which the loan has to be paid in full, at which time Barney must either sell the property or get a new loan from a traditional source such as a bank or mortgage lender. When the new loan is obtained, the loan to Sally is paid off and the mortgage lien is removed from the property. In some states a different form of mortgage called a “deed of trust” is used. A state-by-state list can be found in the resource directory in the appendix of this book.

2.       Seller Has a Mortgage, But Some Equity

The preceding example is for illustrative purposes only, because if you’re reading this manual you probably owe money to a lender secured by a mortgage lien on your property. Let’s consider a more common example — a house that has some equity because it has appreciated since it was purchased, or was purchased with a sizeable down payment.

Let’s say Sammy Seller owns a property worth $100,000 that’s encumbered by a mortgage of $80,000. Sammy agrees to sell the property to Betty Buyer for $100,000. Because there’s $20,000 in equity ($100,000 value minus the $80,000 loan), Betty offers to pay $10,000 down and borrow the balance of the $90,000 from Manny Mortgage Lender.   At the last minute before closing, Manny decides that Betty Buyer’s eyes are the wrong color and refuses to fund her loan. Instead, Manny offers to lend $80,000, which is $10,000 short of the amount Betty needs to close. One choice is for Sammy to drop the price of $90,000. Another choice is for Sammy and Betty to part ways and for Sammy to put the property back on the market to find another buyer.

A third choice is for Sammy to accept a promissory note for $10,000 as part of the purchase price. At closing, Betty will pay Sammy $10,000 down, borrow $80,000 from Manny and give Sammy a promissory note for $10,000. Sammy signs over to Betty a deed to the property, and Betty signs a mortgage lien for $80,000 to Manny, who will possess a first lien on the property. Betty also signs another mortgage lien to Sammy, who will have a second mortgage on the property. In a year or so, Betty gets a new loan for $90,000, paying off both the first (Manny’s) and second (Sammy’s) mortgage liens. In the meantime, Betty can make Sammy payments of interest on the $10,000 promissory note, which is a nice income stream for Sammy.

3.       Seller Has a Mortgage, and Little or No Equity

If the seller has little or no equity but a reasonably low payment on his note (whether a fixed-rate loan or fixed for a few more years), he can sell the property by using a wraparound transaction. A “wraparound” or “wrap,” is an arrangement wherein you sell a property encumbered with existing financing by accepting payments in monthly installments, leaving the existing loan in place. The seller uses the payments he collects from the buyer to continue making payments on the underlying mortgage note.

For example, Susie Seller owns a house worth $100,000 and she owes $90,000 to First Federal Financial on a favorable 6%, 30-year, fixed-rate loan. Her principal and interest payments on the loan are roughly $600 per month. She can sell the property for $100,000 for cash, but this might take a few months and $6,000 or more in broker fees and concessions, leaving breadcrumbs on the table after Susie pays off her loan. Susie advertises the property as for sale by owner (FSBO) with owner financing and sells the property to Barry Buyer for $100,000, taking $5,000 down and carrying the balance of $95,000 at 8% for 30 years. Susie doesn’t pay off her underlying loan, but rather collects payments from Barry (roughly $700 per month) and continues to make payments on the underlying loan (roughly $600 per month). Susie collects $100 per month cash flow on the “spread” until Barney refinances.

Mechanics of a Wraparound Transaction

A wraparound is commonly done with an installment land contract. The installment land contract is an agreement by which the buyer makes payments to the seller under an agreement of sale. The transaction is also known by the expressions, “contract for deed” or “agreement for deed.” The seller holds title as collateral until the balance is paid. In many ways, the installment land contract is similar to a mortgage, in that the buyer takes possession of the property, maintains it and pays taxes and insurance. However, the deed remains in the seller’s name until the balance of the debt is paid by the buyer.

An installment land contract usually contains a forfeiture provision, under which a defaulting buyer may be evicted like a defaulting tenant. Under the contract, legal title remains in the seller’s name until the purchase price is satisfied. When the buyer satisfies the indebtedness, legal title passes to the buyer.

Setting Your Financial Goals

by William Bronchick, Esq.

I bet you wrote down your goals in January 1st this year.  Is that all?  Did you re-think them this month and write it down again?  If you don’t know what your goals are, how are you going to measure whether you’ve reached them.  And, I would bet that if you didn’t write them down at all, you are in the same financial position as you were on January 1st.  Ouch!

Is it time for a change of strategy?  Maybe so, read on…

Take the most accurate archer, the best in the world. I guarantee that I can do a better job of shooting than he can…IF…you first blindfold him and turn him around a few times. You might think, why that is ridiculous. How is he supposed to hit a target he cannot see? Here’s a better question: How are YOU supposed to hit a target you don’t even HAVE?

When investing in real estate, in order to succeed, you need to set financial goals. Here’s how to go about it.

Make sure your goal is something you really want, not something that just sounds good. People say they would like a yacht. But do you really? Many yacht owners joke that a yacht is a hole down which you pour tons of money.

Be specific. Wrong: I want lots of money. Right: I want to be earning $5,000/month by one year from now.

Be detailed. When the subconscious mind has detailed instructions, miracles happen.

Shoot for the moon, but, at the same time, be realistic. “I want to make $500,000 the first year will most likely take a miracle. Five figures (on the high end)is much more realistic

Make your goal measurable. What gets measured gets done.

Write your goal down. This sets an unconscious process in motion to get your goal accomplished.

Write your goal in positive, not negative, terms. Write down what you want, not what you don’t want.Wrong: I want to leave my present job. Right: I want to replace my current income so I can work from home.

Include a deadline for achieving your goals. This prevents procrastination.  It also separates your goals from your dreams.

Having pictures of the things you will have and do with the money you make helps. Use a scrap book with color pictures of cars, homes, vacations, etc. you want.

Your goals should be action-oriented. What steps do you need to take to reach your goals?

Break down your goal into manageable steps. With each activity, ask yourself: Does this activity take me closer to my goal?

Keep your goals to yourself. You avoid any negative people around you who might sabotage your efforts. Some people cannot stand to see you succeed. And some spouses hate the idea of making a change, believe it or not.

Motivational tapes, played in your car on the way to work, can help dramatically. The ones by Nightingale-Conant are especially good.

Be prepared to review and restate your goals, as you reach a certain level, or your situation changes, and you realize that you have not reached high enough.

Zero in on Motivated Sellers

by William Bronchick, Esq.

When investing in real estate, you want to focus your efforts on motivated sellers. This is true especially if you are just starting out. and dealing with motivated sellers makes the process go even faster, which means cash in your pocket sooner rather than later.

Motivated sellers are people who MUST sell their homes. So…what motivates a seller to have to sell his home? Financial distress for one. Maybe he is behind on payments. Maybe he is facing foreclosure. Maybe even bankruptcy. Maybe he is facing a huge medical bill. Or a divorce settlement is looming on the horizon.

Positive reasons can force the need for a quick sale. A job relocation and not wanting to deal with a vacant house, let alone rent it out and have the value plunge. Getting married and having no need for two houses.

You may think you are taking advantage of these homeowners. Actually, you are doing them a favor. Think what happens if the homeowner does not make the sale. He could be foreclosed upon, or worse, forced into bankruptcy. Or an empty house could be destroyed by vandals. Renters could wreak havoc on the value of the house.

It’s easy to see, then, that these sellers need you. You are, in fact, a savior of sorts.

O.K., now how do you find these motivated sellers? Some tips:

1. Build a website, or have one built for you, announcing that you buy houses. Not a techie? Then have someone from www.elance.com build one for you.

2. Run classified ads in your local newspaper. Place your classifieds in dailies, weeklies, even free newspapers. Hint: advertorials(looks like editorial copy; reads like an ad; purports to educate but is really an ad)

3. Set up bandit signs, those little signs on stakes and phone poles, announcing that you buy houses for cash, fast. Warning: Don’t get carried away creating these until you find out they are legal in your area. If they are not, you can always place them after 5P.M. Friday evening through Sunday evening, because the sign police are not out and about then.

4. Put signs on your car. You are now a rolling billboard. You’d be surprised how many people will approach you when you are parked somewhere.

5. A bit more expensive, but take out a Yellow Pages ad. Hint: Use the advertorial approach to stand out from competitors.

6. On line, go to classified ad sites, especially free ones, like www.Craigslist.org

7. Once you get going, and can afford it, going the direct mail route can be quite profitable.  Mail to people within a zip code (shotgun marketing) or get a list of particular people, such as those in foreclosure (targeted marketing).

The bottom line is you can’t sit around waiting for deals to come to you, you must go out and find them and/or do things to get people to call you.  90% of sellers are not motivated, so be patient and be willing to weed through a lot of unmotivated sellers before you get that one that is dying to sell his home for cheap.

Learn what to say when the motivated seller contacts you at the upcomingFORECLOSURE INVESTING BOOT CAMP.

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