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How The IRS Can Be A Minneapolis Duplex Seller’s Best Friend

August 16th, 2010 categories: Selling A Duplex

I’ve recently met with several prospective duplex home sellers who, facing a slower real estate market, were surprised to find the IRS could save the day.

In each case, the property owners had owner-occupied their duplexes at some point in the last five years, ultimately moving out and renting their old unit.

Of course, one of the benefits of owner occupying a duplex is the ability to avoid any capital gains tax on the unit that wasn’t leased; provided the owner lived in the premises two of the last five years.

While I encouraged all of these sellers to consult a qualified tax professional, most reported back by selling now and avoiding capital tax on their half of the duplex, they would be saving thousands of dollars.

This was a bit of a silver lining for them, as it was as if they’d found some of the money they thought they’d lost; in the sofa.

Spoken by Kari Lundin | Discussion: No Comments »

The Best Way To Get Your Duplex Sold Is…

July 26th, 2010 categories: Selling A Duplex

Want to know the number one key to selling your duplex?

It doesn’t matter if you’re selling because you want to move, have a better investment opportunity, or simply have to get out because the mortgage is eating you alive, the method is the same.

And I’m not talking about a fresh coat of paint on the front door; though I’d recommend it and a host of other things to make your investment property more appealing to buyers.

No, you probably won’t hear this one from a home stager or see it featured on HGTV.

This one is more basic and inexpensive.

Give up?

The best way to sell your duplex house is to let people see it.

Duh. That seems obvious.

Doesn’t it?

And yet, out of the five multi-family properties I attempted to show to qualified, motivated buyers today, only two owners made the effort.

In two instances, the buyer and I had ample opportunity to examine the property closely while we were waiting for a listing agent to show up or re-confirm our appointment. Rather than being “wowed” by the inside of the property, my buyer had enough time to discount it because of the outside.

And he won’t circle back.

Sadly, I may not either. And in one case, I have no less than FOUR qualified buyers for the property.

All of our lives are busy. Realtors schedule showings to coincide with a geographic list of properties. We rarely circle back unless the listing was a buyer favorite or unbelievable deal.

But most of the time, those aren’t the duplexes buyers purchase anyway.

They tend to buy the ones that move them on some level- when they walk in.

If you have to offer tenants an incentive to accomodate showings, or you yourself have to go nap in the car so your duplex can be shown, make those arrangements.

I’ve never had a buyer purchase a property either they, or I, haven’t seen.

Spoken by Kari Lundin | Discussion: No Comments »

Why Selling Your Minneapolis Duplex At The Sheriff’s Sale Doesn’t Mean It’s Sold

July 2nd, 2010 categories: Selling A Duplex

The other day I was visiting with a gentleman who owns a Minneapolis duplex and is behind on his mortgage payments.

When I suggested it would be in his best interest to try to market the property as a short sale, he told me the property was already sold.

I was surprised to hear this, so I probed a little further, asking how he’d managed to get it sold and where he found a buyer. His answer?

At the sheriff’s sale.

While we’ve all watched late night infomercials suggesting buying property at a sheriff’s sale at a deep discount, that’s not the case here.

In Minnesota, sheriff’s sales are usually conducted when a lien has been placed against a property in the amount of a judgement. 

When a duplex owner falls behind in mortgage payments, the foreclosure process begins. About the time he is six months or more behind, the mortgage holder will take the matter to a sheriff’s sale. By this time, all of the legal fees the lender incurred while trying to collect the debt in the previous months have been added to the amount due on the loan.

At the sheriff’s sale, the minimum bid amount is most often the total amount owed on the property, plus the accrued legal fees. late fees and penalties.

In today’s real estate market, the total is often more than the property is worth. As a result, there aren’t a lot of Carleton Sheets disciples standing on the court house steps trying to get rich.

In essence, then, the winning bidder is the bank that holds the note on the property.

From the date of the sheriff’s sale, the property owner is given a 6 month ”redemption period” in which he can pay off the total amount of the lien or judgement on the duplex.

This doesn’t happen very often.

More likely, one of two things will. The home owner may choose to let the property go back to the bank through foreclosure or, he may choose to attempt a short sale.

If the rights to the property belong to the bank following the sheriff’s sale, it does not necessarily mean a Realtor can’t help the duplex owner attempt to sell the property for less, then negotiate with the bank for a settlement or short sale.

Bankers know these properties aren’t worth what people either paid or refinanced them for just a few years ago. What’s more, a foreclosure always ultimately costs them more than a short sale.

Not to mention the permanent black mark a foreclosure puts on a former property owner’s credit report.

So remember, if your property has recently sold at a sheriff’s sale, you still own it. However, you won’t for long. The choice between a having a short term credit hit (short sale) vs a long term one (foreclosure), should be easy.

Call a Realtor who’s a Certified Distressed Property Expert (CDPE) to help. There aren’t that many of us, but our numbers are growing. Each and every one of us has been trained to carry many of the burdens of imminent foreclosure for you.

And if you can’t find a CDPE and I’m not in your market, call or email me. I’d be happy to help you find one.

Spoken by Kari Lundin | Discussion: No Comments »

Why Your Option ARM Can Cost You An Arm And A Duplex

June 28th, 2010 categories: Selling A Duplex

Many duplex and single family home owners may be sitting on a ticking bomb and not even be aware of it.

The TNT beneath them is their financing.

An estimated 1.3 million borrowers took out $389 billion in mortgages between 2004 – 2005. Eighty-eight percent of all option ARMs originated between 2004-2007.

What’s an option ARM? It was a type of 30-year mortgage that initially gave borrowers four monthly payment options: a specificed minimum, an interest-only payment, one that was reflected a 15-year amortization or one that was in keeping with a 30-year payment amortization.

Whenever the buyer made the specified minimum payment, it was typically less than the amount of interest that was accruing. The difference between the minimum and the interest was tacked on to the end of the loan, meaning the loan grew in size as a result.

These payment options were typically available only for the first two, three or five years of the mortgage.

According to Credit Suisse, many of these loans are scheduled to reset between now and 2012.

In fact, in a single month in 2011, $18 billion in option arms and $27 billion in subprime mortgages will reset.

Read the rest of this entry »

Spoken by Kari Lundin | Discussion: 1 Comment »

8 Reasons To Sell Your Duplex Short

June 25th, 2010 categories: Selling A Duplex

Let’s face it, there were a lot of duplexes sold during the real estate boom.

Today, most of those properties aren’t worth anywhere near the prices they sold for.

And many of the owner occupants and investors who bought them have fallen behind on their payments, finding themselves facing foreclosure.

Some owners resign themselves to the inevitable, vowing to hang on to the duplex until the bank changes the locks.

Doing so will destroy their credit for years and, in some cases, may even endanger their careers.

And while a short sale can be a drawn out, exhausting process, it doesn’t have nearly the long term ramifications that a foreclosure does.

If you’re behind on your mortgage and haven’t been able to obtain a loan modification from your lender, here are 8 reasons a short sale may be a better decision for you than a foreclosure:

• Credit Score – A foreclosure may reduce your credit score as much as 250  to 300 points for over 3 years. In a short sale, only your late payments on a mortgage will appear on your credit report. Once the property is sold, it will be reported as “paid as agreed” or “settled”. This may impact your credit score as little as 50 points, and appear on your credit report for 18 months or less.
• Credit History- a foreclosure will remain on your credit report for 10 years or more. There isn’t a specific reporting item for “short sale”. In fact, in most cases, the loan is usually reported as “paid in full”.
• Future Primary Residence Loan – If you live in your duplex and lose it to foreclosure, you will not be able to get a Fannie Mae backed mortgage (which is most of them) for 5 years. If you successfully sell via a short sale, that waiting period is shortened to 2 years.
• Future Fannie Mae Loan for An Investment Property – an investor who loses a duplex to foreclosure will not be elligible to obtain a Fannie Mae backed investment mortgage for 7 years. An investor who successfully sells a duplex via a short sale may get a Fannie Mae backed loan after just 2 years.
• Future Loan With Mortgage Company - On any future loan application, a prospective borrower will have to answer “yes” to the question whether he or she has had a property foreclosed upon in the last 7 years. There are no questions on loan applications regarding short sales. If a owner occupant duplex owner is current before executing a short sale, she may apply for an FHA loan immediately. If she’s late with payments, she won’t be eligible for 3 years.
• Security Clearance - A foreclosure may result in security clearance revocation and, ultimately, loss of employment for members of the military, police officers, or any career that requires security clearance. A short sale, on the other hand, does not impact most security clearances, as they are not explicitly reported on a credit report.
• Current Employment - Many employers have the right to regularly check credit. A foreclosure may result in termination or reassignment. As short sales do not appear on a credit report, they do not impact employment in the same way.
• Future Employment – For the same reasons that affect current employment, future job opportunities may be lost as a result of foreclosure.

 

Spoken by Kari Lundin | Discussion: No Comments »

How A Duplex Short Sale Can Force You To Pay Taxes On Your Vacation

June 24th, 2010 categories: Selling A Duplex

Remember when duplexes appreciated with such regularity that you could actually take out a Home Equity Line of Credit (HELOC) or refinance and pull out the extra equity?

For example, if you bought a duplex for $200,000 and it increased in value by $50,000, you could refinance into a loan in the $250,000 range.

For some, it was a great way to pay off credit card debt, buy additional property or finance a vacation.

Times have changed. 

Now, property values have plunged. Many sellers are lucky to have equity at all. Some even discover they owe more on the duplex than it’s worth.

And for those who have to sell, this results in a short sale. The property may now sell for less than the owner even paid for it.

Worse yet, that money that came out of the equity when it was worth more? Taxable. Because it was a gain.

Odds are, the duplex owner didn’t pay taxes on it at the time they used it. So, if the owner took $50,000 out of the equity line in the above scenario, that money represented a gain over the original purchase price. And the seller would owe capital gains tax on it; even if the duplex only sold for $180.000.

See equity and taxable gain don’t have anything in common.

Is there a solution? Possibly.

While many sellers help defer capital gains tax by using a 1031 Exchange, or find relief if she was an owner occupant of the duplex, it would seem there wouldn’t be a solution for an investor.

Enter the Zero Equity 1031 Exchange. Basically, you exchange the gain; even though there’s no cash on hand.

I imagine it would take some talent to find a property to exchange into. However, this does at least give investors a potential tax deferrment.

Spoken by Kari Lundin | Discussion: No Comments »

Underwater Minneapolis Duplex May Be Taxing

June 21st, 2010 categories: Selling A Duplex

A recent study by the research firm CoreLogic found the number of underwater homeowners  (those whose homes are worth less than they owe on the mortgage) now stands at 11.3 million.

That’s about one-fourth of all homeowners with mortgages.

Another 2.3 million have less than 5 percent equity in their properties.

In other words, combine the two and 29 percent of all homeowners with mortgages are underwater.

The report said nothing about duplex and small multi-family property owners.

So what does a single family homeowner, or, for that matter, a duplex owner, do if she absolutely has to sell the property anyway?

A short sale.

For a homeowner, this involves listing the property and getting the mortgage holder(s) to agree to take less than they’re owed.

For example, if the bank is owed $100,000 on the mortage, and proceeds of the sale only net $75,000, they would have to agree to forgive the difference.

Thanks to The Mortage Forgiveness Debt Relief  Act, homeowners who short sell or are foreclosed upon may not be taxed for the amount of indebtedness that was forgiven. If the mortgage was a recourse loan, the lender may come after the owner to collect the difference. If it was a non-recourse loan, which is attached only to the property used as collateral, they may not.

A duplex owner, however, may face different challenges.

If the duplex was not the seller’s principle residence, she will have to pay taxes on the short sale deficiency that was forgiven.

See, the debt relief act doesn’t cover rental or business properties, car loans, vacation homes or credit card debts.

Before you struggle to the surface for air, know that there are exceptions. The sale may not be a taxable event if one of the following is true:

• The duplex was your principal residence.
• Bankruptcy. Debts cancelled during bankruptcy are not considered taxable.
• Insolvency. If your total liabilities are greater than the value of all of your assets, you are considered insolvent. In this case, the debt may or may not be cancelled.

If you are underwater on your duplex, don’t lose hope. There are solutions, and you may find through a conversation with a tax professional and qualified Realtor, that things aren’t as grim as they seem.

And even if you end up owing the IRS money, there’s always the possibility of a  Zero Equity 1031 Exchange, which I’ll talk about on Thursday.

Spoken by Kari Lundin | Discussion: No Comments »

Why Selling A Duplex Is Like Owning A Truck

June 18th, 2010 categories: Selling A Duplex

I have a high mileage Ford F-250 pickup that’s in the shop for the third time this year.  And I have to confess: I have a love/hate relationship with it.

On the one hand, when it’s running well, it helps me move heavy things, haul lumber home from Home Depot or pull lesser cars out of snow banks in the winter.

On the other, due to the 300,000 plus miles on the odometer, it breaks down a lot. Especially as of late.

So I’ve been thinking about selling it. Kelly’s Blue Book says it’s worth about $11-12,000 in it’s present condition. But I was thinking if I advertised it enough, I could get $30,000 for it.

After all, I’ve got at least that much into it.

Are you laughing?

You should be.

Believe it or not, as flawed as my truck logic may be, I hear it all the time from duplex sellers.

They tell me all about the repairs and improvements they’ve made to the property. They tell me about all its wonderful qualities. And then, inevitably, they tell me why they’re selling it.

More often than not, it’s due to a desire to change their lifestyle. That change may involve simplifying or streamlining their lives. Or, it may involve moving up to a bigger property.

No matter their motives, the fact is this: no buyer is going to pay a price for a property that’s based on what the seller “has into it”.

Just like my truck’s value, a buyer and her agent have determined value based on all the other properties they’ve seen on the market and those that have sold recently.

That’s also how the listing agent arrives at a suggested price.

In other words, I could spend a half a million dollars advertising my truck. And at the end of an elaborate ad campaign, a buyer and Kelly’s would still say the truck is worth $11,000. No one would be willing to pay more for it than the truck next door simply because it had its own web site.

True, advertising and marketing help drive buyers to properties.

But at the end of the day, it’s the market that tells you what it’s truly worth.

Just like my truck.

Spoken by Kari Lundin | Discussion: No Comments »

Why Offering A Minneapolis Duplex Tenant A Deal Can Cost You A Lot

June 14th, 2010 categories: Selling A Duplex

When vacancy rates are up, as they have been in the Twin Cities in recent months, it’s sometimes difficult to remember the impact lowering rent in order to stay occuppied can have.

While I have always believed it’s better to have a unit full at a slightly lower rent than it is to hold out for top market value, waiting for months on end for that tenant to appear, I was reminded over the weekend that this practice can be taken to an extreme.

A client was interested in a property just two blocks from Lake Harriet. The duplex had all the vintage charm and curb appeal necessary to rent quickly and easily, even in the most difficult of markets.

And yet, the tenant-occupied unit was leased at a rate nearly 26 percent, or $350 below what the going market rent is for the area, even in a depressed rental market.

What’s the big deal? Well, $350 x 12 months a year = $4200 in lost revenue a year. In a neighborhood where recently sold properties averaged an off market gross rent multiplier that was 12-13 times the amount of rental revenue, this “discount” devalued the seller’s property by more than $50,000.

To my FHA-approved buyers, who can use 75 percent of the rental income to help them qualify to buy the property, it also meant $3100 in lost qualifying income.

I’m sure the sellers were well-intentioned in offering their tenants a terrific deal. And, their building is occupied. In this instance, however, a little bit of kindness may cost them a lot.

Spoken by Kari Lundin | Discussion: 2 Comments »

What A Market Recovery Will Never Reimburse You For

June 11th, 2010 categories: Selling A Duplex

The other day a familiar duplex came on the market.

For the second summer in a row.

It’s a well-maintained property in a sought-after pocket of Minneapolis. As those kinds of properties are somewhat rare, I was happy to see it on the market again; this time at a price that makes more sense.

The irony is, a client of mine wrote an offer on this property last summer; at a number within negotiating distance of the price it’s listed at now.

The trouble is, my buyer bought a different duplex last summer.

And this year, that lovely duplex will likely generate an offer not too different from the one my clients wrote one year ago.

So, what’s the seller out?

A year of property taxes, insurance, maintenance expenses, water bills and the time and effort spent managing the property; all spent during a year they wanted to be done owning a duplex.

A year of lost time and effort to achieve exactly the same result.

I can’t think of a better way to illustrate the importance of pricing a property correctly the first time it hits the market.

After all, no amount of market recovery will ever reimburse you for lost time.

Spoken by Kari Lundin | Discussion: No Comments »

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