The Real Estate Insider talks with Ron Ricard on how to save taxes on your real estate purchases using the 1031 exchange loophole. Many of my clients that buy luxury real estate in Menlo Park, Atherton, Palo Alto and other areas use this rule when handling their real estate portfolio.
Before I get into why you might want to consider a lease option, let me give you a little background on market statistics.The other day, the National Association of Realtors (NAR) released a troubling statistic. In July, home sales across the nation dipped 27% year over year from July 2009. This was due to many buyers purchasing before the home buyer tax credit expired, but it’s still an ugly statistic for home sellers.
Obviously, the tax credit had a major impact on home sales. Everyone who would have bought a home in July or August this year, that qualified for the credit, moved up their purchasing dates to get the credit.
What Is A Lease Option?
As home sales slow moving into the fall selling season, a lease option might be something that could work for you, especially if your home is vacant. What is a lease option you say?
A lease option allows someone to lease your home with the option to purchase it. It’s like a glorified rental, in that the renter of your home has the option to purchase the home at the end of their lease agreement; usually 12 months. Here are some basic principles to a lease option:
The lease option binds the seller to sell and not the buyer to buy. The option gives the buyer discretion to buy or not. This is why lease options usually come with a larger deposit than a months rent. This deposit usually ranges from 2-5% of the home price. Of course this is negotiable between buyer and seller.
How do you determine price? Price can be dealt with in two ways. The buyer and seller can agree to a price when the contract is signed, or they can agree to price by when the date the option is exercised. Either way, it’s usually still based on an appraisal. The monthly payment is determined by buyer and seller, and it can be applied to the cost of the home or not.
It all depends on the terms of the agreement. If the payments are applied to the purchase price of the home, if the buyer decides not to purchase the home, the seller will not have to pay that back. Basically, a lease option is the same as a lease, with the option at a determined time period for the buyer to purchase the property.
Advantages Of A Lease Option For Home Sellers
A lease option opens you up to more buyers. A lease option allows you to sell your home where you otherwise wouldn’t have been able to sell it.
For example, there are many people right now that don’t qualify for financing with the increased regulations in the lending industry.
Many of these potential buyers have been taken out of the market, and a lot of times all they need is more time to qualify. They may need to pay off some debt, raise their credit scores, or save up a larger down payment.
Many of these buyers are very close to purchasing, but can’t quite get over the hump. Especially when you consider Menlo Park, Palo Alto and Atherton real estate and how expensive it is. Coming up with the down payment is not in reach for many home buyers.
For you the seller, this gives you an advantage in an otherwise strong buyers market. The negotiating comes down to telling buyers that they can get price or terms, pick one. Meaning, they can either get a better price with terms that are more strict, or they can pay more and get more lenient terms. As a seller, both will work in your favor. You either get a better price on your home, or you will get some great terms with a nice non-refundable down payment.
If the buyer doesn’t exercise the option to buy your home at the end of the agreement, they forfeit all rent paid, and usually forfeit their down payment. And once this happens, you go into landlord-tenant relations, giving you the right to evict and retain your home. You may also work out another agreement, either way the ball is in your court.
Another advantage is; if you have to move fast or your home is sitting vacant, you get someone to pay your mortgage payment for you. They may also do some upgrades that could add value to the home, and you get people to in your home to maintain it. This is especially true in high priced areas such as Menlo Park, Atherton, Palo Alto and other cities along the peninsula. If renters are paying 5-10k per month, they are probably going to take care of the house.
Short sales are affecting all price ranges these days and not just the first time home buyer or lower end market. Luxury homes are now feeling the pinch of the economy as money is tight for everybody. According to a recent survey, one out of every seven mortgages is in trouble. So, if you are doing ok, look around at the homes on your street and you will find several of your neighbors facing difficulty in paying their mortgage.
With that in mind, the CDPE, or certified distressed property experts as I’ll call it, is out there to help homeowners in all price ranges complete a short sale instead of having to face foreclosure. I am certified in this process, which means I can handle regular listings and sales as well as short sales from both sides (buyer or seller). This means that I have training that a normal agent doesn’t to help increase the chances of getting a short sale through. The standard non trained agent succeeds in a short sale about 15% of the time, while a CDPE certified agent has a 85% success rate. A big difference as short sales are full of emotion and having to deal with the failure of a short sale can be another traumatic event in a sellers life.
So, even if you have a luxury home in Menlo Park or Atherton or Palo Alto, there is a chance you will need my services to help you with a short sale. If you need more information about short sales and to find out if it’s right for you, give me a call or send me an email.
Every week, we have staff meetings to discuss listings, sales etc. and we are seeing a change in the market that I thought would be interesting to pass along to all of you. I know you’ve seen me write for the past couple of months that the published stats will start to support what I am seeing on the market. Here is an example of just one segment of the market as reported in last weeks meeting, and this is only from Alain Pinel.
1. 5 offers received on 2553 Emerson street in Midtown Palo Alto with 3 bedroom, 2 bath, 1784 sf. Listed at $1,398,000 and went pending within a week on the market. Top offers went over $1.5M.
2. 4 offers on 2671 Emerson with 4 bedroom, 2 bath listed at $1,648,000, sold to an all cash buyer. No contingency, as is, quick close clean offer.
3. 6 offers on 3250 Murry way with 3 bedroom, 2.5 bath 1548sf, listed at $1,098,000 sold within a weeks.
4. All cash buyer bought 2340 Dartmouth house for its tear down value and will rebuild it. It was listed at $1,295,000 last year. Sold off the market.
5. Approx. 3 offers on 3715 Whitsell with 3 bedrooms, 1 bath listed at $895,000.
6. One all cash offer was received on 3145 Emerson new construction house. Seller rejected the low ball offer.
7. Multiple interested parties are taking disclosure packages for 601 Matadero. Multiple offers to follow.
The same thing is happening in Menlo Park, Atherton and areas along the Peninsula.
When looking at the statistics for which cities have the highest percentage of turnover in the Bay Area, Menlo Park outpaced Atherton and many other communities for home and condo turnover for the year 2009. The numbers are still lower than you might expect, but interesting to look at for determining which communities have the highest percentage of moving trucks throughout the year.
A couple of key cities and their turnover rates are:
Community # of homes Sales in 2009 Turnover %
Atherton 2,504 71 2.84
Burlingame 7,318 195 2.48
Hillsborough 2,872 106 2.74
Menlo Park 8,915 323 3.62
All numbers are down from 2008, but I guess this shows that, at most, about one out of every 30 of your neighbors will be moving this year or lising their house for sale. I’m sure there are times when we wish that number was higher (loud parties, barking dogs, deferred maintenance) but at least now you know what to expect. So, even though luxury real estate in Menlo Park is highly sought after, the turnover is a bit higher than other areas.
Savvy investors are always the first to jump in a potentially profitable housing market and reports show things heating up.
More than 12 percent of homebuyers today plan to purchase a home as an investment, compared to less than half, only 5.6 percent, just seven months ago, according to a recent real estate survey.
Foreclosure buyers account for 25.3 percent of consumers interested in purchasing a home and 42 percent of potential foreclosure buyers regard their purchases as investments, while 57.6 percent plan to live in the foreclosed home themselves.
This latest Homeownership Survey validates what many had hoped to see in the housing markets — affordable prices and ample inventories are restoring the appeal of real estate to investors while providing opportunities for first time home buyers to enter the market.
Interest rates are below 5 percent for much of the year and … Continue Reading
Are you in the market for a bank owned property? Have you tried in the past to get in on a deal, only to be stuck in an eternal timeline of paperwork and waiting on the bank for answers? Well, mortgage giant Fannie Mae is unhappy about the mounting thousands of REO houses it’s stuck with and is now moving to sell off that inventory faster than it has in the past, potentially opening up some interesting opportunities for home buyers and their agents.
In a new policy announcement, Fannie says it will now accept purchase offers for its REO immediately after listing, without notifying lenders or mortgage servicers whose loan files are under review.
Under its previous policy, Fannie gave lenders and servicers fifteen days to find a better purchase offer for new REO they sent to the company following foreclosure.
That policy affected all repossessions where Fannie demanded the loan file on the house – potentially exposing errors in underwriting or servicing, and requiring reimbursement for losses by the lender.
But that policy also had a negative impact on Fannie’s ability to move its REO ’s out the … Continue Reading
Today’s real estate tip deals with how to still qualify for a loan in the middle of changing jobs or starting new companies. With a lot of people out there changing jobs, losing jobs and starting new careers, I came across an interesting article that addresses what you can do to still buy a house even though a new employer is in the works. Can you still buy a house if you have decide to start your own business?
The answer depends on how the action taken — changing jobs or starting your own business — will impact the way a mortgage underwriter views your income.
Underwriters look at three dimensions of a borrower’s income: the amount, which must bear a reasonable relationship to the borrower’s payment obligations; the documentation for the amount, which is the evidence that the amount is what the borrower says it is; and the stability of the amount, which says that the indicators the amount reported will continue in the future.
Changing Jobs: Changing jobs may affect the underwriter’s judgment about income stability. Ordinarily, an underwriter wants a borrower to be on the job that generates the income used to qualify for two years or more. Other sources of income, such as financial assets and rental property, are subject to their own rules.
A job change does not necessarily imply a reduction in income stability. If you change your job for … Continue Reading
A Realtor is a valuable resource for the issues that invariably come up during a home purchase. Buying a home can be exciting as well as challenging, but with my help it can be a rewarding experience and result in a move-in day filled with happiness. Here are some tips to help with the process:
So, make sure to call me or set up an appointment for any questions, my job is to help you thru a process that will be the largest purchase you ever make.
Here, we’ll show you luxury properties for sale, inside tours of high end homes, tips and advice for selling your home whether it’s luxury real estate or not. Basically, this is the place for your real estate needs.
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The numbers are strong for real estate in Palo Alto with this month’s sales figures. Watch the video to see all key sales numbers for the month of January 2012 compared to January 2011.
The average sales price of a home in Menlo Park fell 7.8% for the month of October 2011 compared to October 2010. The total number of sales for both periods were similar, which is good news, but the home prices were a little lower than expected. The surprise number is that the average price per [...]
A beautiful estate in Atherton has just lowered the asking price of their 7,000 square foot, 6 bedroom, 5 1/2 bath on over one acre property to $6.6 million. That’s a price reduction of $400k! The home also has a pool, large grassy yard, sand volleyball court and located next door to where Joe [...]
The numbers are strong for real estate in Palo Alto with this month’s sales figures. Watch the video to see all key sales numbers for the month of January 2012 compared to January 2011.
Desirable Palo Alto started off the New Year with many home sales exceeding asking price by crazy amounts. The year began with a total of 21 sales in the first 3 weeks of the month compared to 17 total closings in January 2011 and, on top of that, many of the homes were sold significantly [...]
Palo Alto real estate is having a happy 2012!
Yes, I know it’s only been just over two weeks into the new year, but sales in Palo Alto have been very strong compared to the past couple of years. The entire month of January 2011 had a total of 17 closed sales, January 2010 had 23 [...]
The average sales price of a home in Menlo Park fell 7.8% for the month of October 2011 compared to October 2010. The total number of sales for both periods were similar, which is good news, but the home prices were a little lower than expected. The surprise number is that the average price per [...]
A beautiful estate in Atherton has just lowered the asking price of their 7,000 square foot, 6 bedroom, 5 1/2 bath on over one acre property to $6.6 million. That’s a price reduction of $400k! The home also has a pool, large grassy yard, sand volleyball court and located next door to where Joe [...]