How Does A Reverse 1031 Exchange Work?

I had a client in the office yesterday with whom I have assisted in the disposition of rental properties, and the acquisition of a 30+ unit apartment complex. The question he and his wife had was on "reverse" 1031 exchanges.

The concept is relatively simple. It is, essentially, the opposite of a traditional 1031 tax-deferred exchange. The difference is that the investor is purchasing the replacement property "prior" to sale of the disposition property. But all the other rules remain. Here is how it works: The investor purchase the 1031 replacement property. A notation is made in the sales contract that the property is part of a 1031 tax-deferred exchange. The investor then has 45 days to identify the properties that are to be sold as part of the exchange, and 180 days (from the day the replacement property was purchased) to finalize the transaction(s).

As I stated at the top of the post, it is the opposite of a traditional 1031 exchange, but with the same rules.

Google Adds 6 New 'Streetview' Cities

From Inman News: Google Maps' controversial Street View feature (for more, see Google Maps Hits the Streets) expands to six more cities today with the addition of Chicago, Pittsburgh, Philadelphia, Phoenix, Portland and Tucson to its database. As a bonus, the images in Phoenix, Tucson and parts of Chicago are all in high resolution and the service has added the ability to pan up in any of the views, which is especially useful when looking at tall buildings.
Here's a quick marketing tip. Google Maps allows you to email a link to any location, so if you have clients currently looking at properties (especially if they are relocating from another city) email them the link to the Street View so they can take a virtual walk through the neighborhood.

BoA, JPMorgan Chase May Announce Record Losses

WOOF! The Financial Times is reporting that Bank of America and JPMorgan Chase are thought to be on the verge of announcing combined losses of $3 billion from mortgage-backed securities and leveraged loans when they report third-quarter earnings this month. The announcements would bring total losses at the world's leading banks from subprime-related assets to $20 billion, said the newspaper.

JPMorgan Chase's losses will come on leveraged loans of $1.4 billion, Sanford Bernstein analyst Howard Mason said in the report. He also anticipates it will suffer an additional $700 million in writedowns on mortgages and mortgage-backed securities, said Financial Times. Bank of America is expected to see around $700 million in leveraged loan losses and mortgage writedowns of $300 million. The newspaper added that the two entities lend significantly to private equity firms, so most of their writedowns will come from leveraged loan commitments they'd have to take a loss on if they sold now.

Yikes. More of the "things getting worse before they get better" phase we are now in. Hold on, it's going to continue to be a bumpy ride!

New PricewaterhouseCoopers Investor Survey Shows Credit Crunch Not Affecting Interest In Commercial Properties

New stats out from a PricewaterhouseCoopers Korpacz Real Estate Investor Survey show that investors remain strongly interested in commercial property despite credit market volatility and concerns about an economic slowdown. The survey adds that the major limitation to investment activity is a lack of properties coming to market. The interest is strongest in office, retail and industrial properties, but there are growing concerns about oversupply in the multifamily and hotel sectors.

In Ohio, particularly Central Ohio, there are definitely more investors than there are properties coming to market. We do not, though, have an oversupply of multifamily and hotels in the region. In fact, pressure on multifamily is driving up rents and values -- good for current investors but making for a more expensive proposition for investors looking for product.

Flippers Fueled Foreclosure Crisis

If you've read many of my posts, you know I hold a certain disdain for flipping. Not flippers per se . . . Its just that the flipping phenomenon is rife with risk for marginal gain. Holding real estate for investment and the plethora of tax advantages is far smarter, and far more lucrative. So some news that came out a couple weeks ago had my blood boiling again . . .

The Mortgage Bankers Association's chief economist, Doug Duncan, said in a speech that flippers and other speculators in single-family homes helped drive up price in many hot housing markets during the boom. As a result, they contributed heavily to mortgage delinquencies in several of those markets. CNNMoney.com reported on this speech recently.

Said Duncan, "Defaults are on the rise in most parts of the country, but . . . it is not always the case of a homeowner losing his or her home." Often it is "the case of an investor gambling on a continued increase in home values and losing that gamble." For example, the MBA reported that as of June 30, in Nevada, 32 percent of all prime mortgages in default and 24 percent of subprime defaults were on non-owner occupied properties.

"Calfornia, Nevada, Arizona and Florida were among the states with the fastest home price appreciation over the last five years. This . . . attracted both speculators and home builders, a volatile combination that led to an over-supply of homes that was beyond the capacity of the local populations to support. When this oversupply became apparent and prices began to fall, many of these investors simply walked away from their mortgages."

Incredible, isn't it?

One thing that we are noticing, as I predicted many months ago, is that the multi-family market is strengthening throughout Central Ohio. Largely because of the credit crunch tied to residential real estate, people who were planning to move into a home from an apartment cannot. And those who have been in their homes and have lost them, or are about to lose them, are moving to apartments. The next time you drive down the road, take a look at what has disappeared -- signs advertising free 1st month rent, free appliances, free 3 months of heat, etc. Owners no longer need the incentives to get people into their apartments.

Understanding Cap Rates

Every now and then I receive an email from a subscriber asking me to explain "cap rates."

When you are considering real estate for an investment, you take the emotion out of the equation and look at your acquisition from a business perspective. The return on the investment is more important than how the property looks or its location. An important point to consider is the Capitalization Rate, often referred to as the cap rate.

The cap is calculated by dividing the property's annual net operating income (NOI) by its fair-market value. The NOI is determined by taking the effective gross income, and subtracting operating expenses. For example, you purchase a property for $250,000 that rents for a total of $2,000 a month with $20 additional monthly income and $667 in monthly expenses (that's $8,004 annually). Your cap rate is 6.0 percent (which actually would be a marginal return here in the Midwest, but this is just an example).

All things being equal, the higher the capitalization rate, the better the investment!

I Shouldn't Discuss Industry News When I'm on Holiday!

Am in New England on some business and some personal downtime this week, and heard the most horrid "subprime mortgage" story. A friend in southern Maine tells me that an acquaintance of his, with mediocre credit, was denied an $80,000 mortgage for a home on 2 acres in the woods "because a single woman with two kids shouldn't be living alone in the woods." Now, that is not grounds to deny a mortgage. But what makes it worse is that she supposedly was approved for a $130,000 mortgage for a house in town that she was concerned was more than she could support.

Guess what? Now she's in a bind financially and may lose the house. And the mortgage broker who found her the great deal and had a colleague find her the bigger home in town she really didn't want, has his fee and will feel none of the problems she is experiencing.

I deal a lot with incredibly honest, caring and smart mortgage people in the commercial/investment world. From big projects to small ones. It irks me to no end what has happened to people and their homes today. Some of it is "keeping up with the Jones" and overextending on credit, or taking that "interest-only" loan now because they figure they'll be doing even better financially in three years. But more and more it is being shown that a few uncrupulous mortgage brokers put people into homes the broker knew they would never be able to keep. At outrageous fees, at outrageous terms. And our economy is paying the price . . .

Okay, time to take a walk. Headed up a logging road for a long hike today. Maybe that will help me cool off!