Posts tagged: marketing in real estate

Real estate is said to be one of the best investments that an individual can make, but if this is true, why do so many people fail at it? The truth is that an adequate real estate education is needed in order to help you out along the way because the real estate industry can truly turn on you in a real hurry if you are not prepared. Real estate investments are very likely to yield a generous return if the proper steps are taken, but too many people simply do not have the skills to make these deals happen. These are the people who did not take the time to get a real estate investing education and, therefore, will be more likely to fail when things do not go according to plan.

A proper education will prepare these investors for the problems that they will deal with along the way and give these people the skills that they need to work through these problems. In addition, this education teach innovative techniques that many more seasoned investors might not have, which will give these students an advantage in this very competitive industry. During the course, the real estate investor will also be introduced to lenders, builders, attorneys and bankers who can help them close the deals in an efficient manner. Having these connections could be the difference between succeeding and failing, so this is reason in itself to get a real estate education. These courses can even be broken down into specific types of investing, which can cut down on your classroom time and get you into the game even faster.

Even with a real estate investing education, there might be some bumps along the road, but this education will give the investor an idea of how to deal with these bumps without losing too much. There is so much more that goes into real estate investing than simply buying properly, developing it, and selling the finished product and all beginning investors need to know about these nuances before getting involved. Even more seasoned real estate investors are now taking these courses to refresh their memories and possibly even add new techniques to their knowledge base. All successful businesspeople will tell you to never stop learning and this education is one way to stay on top of things.

A real estate education is becoming almost mandatory for those who wish to become real estate investors because so many successful people have already been through these courses. Therefore, taking them can level the playing field somewhat because you will have access to the same techniques as people who have already made a lot of money. This field is not for everyone and it requires a great deal of risk when starting out, so it is extremely important that you are aware of these immense risks. This education will also help you make you aware of what you can lose during this process, which will allow you to make the best decision possible for yourself.

At the present time, in many areas of this country, there are more, licensed, real estate agents, than, houses, currently, listed and available, on the local market. In addition, there are some, who believe (in my opinion, falsely), they don’t need to hire an agent, and proceed, to try, to do it, themselves! For many reasons, it makes little, to no sense, to do this, primarily, because: studies/ surveys, indicate houses sold by real estate professionals, generally, sell, for considerably, more; the degree of expertise, to be prepared, for contingencies; avoiding the hassle, of showing your home, regularly; transaction advice; and, perhaps, most importantly, often, professional negotiating, and knowing/ understanding the market! After over 15 years, as a Real Estate Licensed Salesperson, in the State of New York, I strongly, believe, smart agents, use, at least, these 5 steps, to being a quality, effective, real estate negotiator.

1. Know/ understand/ consider your client’s goals/ perceptions/ priorities: Properly marketing, and getting someone’s house sold, for the best combination of terms, requires, focusing, and emphasizing, taking the time, and making a concerted effort, to know, and understand, your client’s goals, perceptions, and priorities! Effective listening, and paying keen attention, enhances the possibility of proceeding, with, the highest degree of genuine empathy, and understanding! How can you properly represent someone, unless you begin, with this knowledge?

2. Understand other side’s needs: If, you are representing a buyer, you must understand what the seller, is seeking. When, you represent, a homeowner/ seller, you must look at his house, as a potential buyer might, and commit to telling your client, what he, needs to know! When, you make an offer, and/ or, receive one, it’s important, to recognize, and realize, the negotiations, begin!

3. Seek common ground: The best negotiating approach, is normally, not, adversarial, but, rather, proceeding, with a win – win, strategy! Quality negotiations must be based on, seeking common ground, and bringing about, a meeting – of – the – minds!

4. Address pricing, and other key issues: Pricing is, often, the deciding issue, in getting agreement, but, it’s important, to discuss these, as they relate to other terms, financial, emotional, time – related, potential stress, and/ or, risk/ reward considerations!

5. Close the deal: It’s not a professional performance, unless/ until, an agent, brings – about a deal, both sides, are satisfied with! Valuable representation must end – up, effectively, closing the deal!

Will you commit to using these 5 steps, in order to being a better, real estate negotiating professional? Are you committed, and willing, to be better?

As the Great Recessions is slowly but surely fading away with the hopes of eventual recovery showing up on the horizon, foreign buyers and investors starting to pursue opportunities in the US real estate market again. Even though stable recovery of the housing market is still “work in progress”, many foreigners recognize that American real estate is “On Sale”, plus the dollar is historically weak, so many buyers are trying to snatch the bargains in residential and commercial properties here. However, a foreign buyer investing in the US must take extra diligence to plan the acquisitions due to nuances in taxation laws, title holding rules, money transfer rules and many other factors. There are many aspects to consider, I’ll concentrate on some key points:

(1) DOCUMENT EVERYTHING: Before you transfer even a dollar here, make sure you can verify where the money came from. Any transfers over $10,000 into the US, including your all cash real estate buys, will be reported to the federal authorities, and when the Feds come asking questions, you need to make sure that you can prove legal sources of your cash. According to 2001 Patriot Act and the Money Laundering Control Act of 1986, escrow and title companies, brokers, banks must report to the federal authorities any large deposits and money transfers over $10,000. Make sure you have documentation backing up your sources of income, taxes paid overseas, bank account statements, investment account statements, in other words – the paper trail.

(2) FINANCE OR ALL-CASH? If you are planning to buy with all cash, it will give you many advantages as the “all cash” buyers might enjoy deeper discounts from motivated sellers in many areas. All cash buyers can close deals very fast, and some sellers prefer to deal with buyers like this. However, I recommend that you plan the acquisitions with a real estate investment adviser to see if buying with some type of financing will be financially more beneficial for your investment strategy because of leverage-enhanced ROI and distribution of risk among several properties.

If you’re looking to finance your real estate acquisition in the US, be prepared to encounter some tough times. Real Estate Financing is pretty tough for even Americans these days, but for foreigners it’s even tougher. There are only a handful of institutional lenders who will consider loans for foreign nationals, but they will all require a large downpayment (at least 30% or more) and verification of income from your country. If you have a work visa in the US, such as H or L, and have an established credit history in the US, you may be able to qualify for regular financing with as little as 3.5% down even though you are still considered a “foreign national”.

If you have established relationship with your bank in your own country or another foreign bank, you may consider obtaining financing from them and then bringing the loan proceeds into the US as “all cash” purchase, again just make sure to have documentation as to where the money came from.

Alternatively, there a many private lenders who will lend up to 65% of the asset value at 9-12% annually regardless of your immigration status, and if you are looking for a commercial property, you might be able to finance it easier too, because commercial lenders underwrite loans primarily on the merits and income of the property itself, rather than the borrower.

(3) CONTROL YOUR ASSETS: In the US you can hold title to the property in many different ways: as an individual, corporation (either domestic or foreign), Limited Liability Company, partnership, living trust, pension fund, or many other form of entity. Each of these forms has advantages and disadvantages, especially when it comes to taxation of the rental income received from your investment property, transfer of the property to related or unrelated parties, estate planning and many other situations. You need to decide BEFORE you buy a property in the US how you will own the property, spend some time with a knowledgeable international tax advisor to learn about your options.

Investing in real estate is a very hands-on enterprise. You must think through the details before you buy the first property. It’s very hard to operate a rental business when you don’t see what’s happening yourself. I’m working with many investors and have owned many rental properties, and can tell many horror stories about property management companies embezzling money from out of town investors, renting units for cash but reporting them vacant, overinflating repair bills, etc. How are you planning to control your investment physically while living in India or Russia and owning properties in the US?

(4) BEFORE YOU ENTER, PLAN YOUR EXIT. Are you planning to sell for profit? How long before you sell? Did you account for the future capital gain tax? Will you take the money out of the country? If you are planning to sell for profit but re-invest proceeds into another property, you need to become familiar with 1031 tax-deferred exchanges that allow you to trade and consolidate properties for years and decades without paying a dime of taxes until their final disposition. It’s a great tool for smart investors that can make you very rich, but again, you have to plan for this strategy in advance and consult with a knowledgeable person. Besides, when you are selling a property here as a foreign individual, you are subject to all kinds of withholdings regardless if you made any profit or not, including 10% withholding under FIRPTA just because you are a foreigner, 3 1/3% withholding in California because the property is non-owner occupied, etc. But, you can avoid some of these withholdings if you learn the rules and plan your title holding strategy in advance!

(5) VISA CONSIDERATIONS: Important misconception I see among many foreign buyers that I’d like to address here: don’t assume that owning real estate in the US will automatically entitle you to a US visa. You can own $10 million of properties in the US, but still be denied an entry visa. So, make sure to get your visa status cleared first and then come to the US to look at areas of interest and specific properties. DO NOT EVER BUY PROPERTIES SIGHT UNSEEN!!!

(6) WHY REAL ESTATE? Finally, ask yourself honestly: why are you investing in real estate in the US? Because of visa, passive income, future market appreciation, or because you are thinking of making it your future home? If visa and investment potential are your main decision factors, consider some alternatives that can provide you with similar ROI (return on Investment) and visa opportunities, such as EB-5 visas ($1 million dollar minimum), “Regional Centers” ($500,000 minimum), E-2 small investor visas ($200,000 investment), etc. Or you can combine several strategies, depending on your preferences and access to capital.

Bottom line: your investing in real estate here should be a RESULT and the FINAL STEP of some serious planning path. Measure seven times, cut once, as we say in Russian. It’s much easier to avoid costly mistakes before you step into this market than waste time and money undoing mistakes made in the course of a rushed poorly planned real estate venture. Happy Investing!

Now Hong Kong is a Special Administrative Region of China its star is rising as fast as China’s and the entire real estate sector in Hong Kong is benefiting.

The physical geographic restrictions of Hong Kong mean that there is a finite supply of residential and commercial real estate available for sale and rent; and as Hong Kong further strengthens its already robust economic, trade and investment ties with China, the demand for real estate in the region is intensifying.

Competing for space are multinational companies and their massive expatriate employee base, local businesses and local residents, tourists and students. In fact the demand for residential and commercial space in Hong Kong is at its highest today since the glory days pre-1998. Having suffered an acute recession from 1998 until 2003 real estate prices are for sale at deflated costs and are therefore seen as being undervalued which means the real estate market is in a great position right now to grow and expand.

Because demand for real estate in Hong Kong is so intense…

Because Hong Kong’s economy is going from strength to strength…

Because domestic purchasing power is so strong…

And because the real estate market is believed to be currently undervalued – the wealth of opportunity for profit in Hong Kong’s property market right now is intense.

Real estate investors from around the world are buying into the projected period of growth and are committing substantial funds to the Hong Kong market. In terms of any restrictions placed on foreign investors there are none in Hong Kong…in theory anyone is permitted to purchase property. As with all city based real estate economies property in Hong Kong – though currently considered to be undervalued – cannot be regarded as ‘cheap’. However anyone who wishes to get into the market can get mortgages locally in Hong Kong to purchase and can almost guarantee the rental income they will generate if they choose to buy residential or commercial units to let.

The medium term prospects for the real estate market in Hong Kong are good with analysis showing that the number of renovation and new development projects started in recent years is below what is required for the current level of demand. This undersupply will last for at least the next four years according to expert industry analysis. This has resulted in predictions for property price growth of up to 12% annually for at least the next four years, making the real estate market in Hong Kong today a highly attractive prospect.

Although various localities have specific mechanisms, nearly every one has a process to appeal or grieve one’s real estate taxes. In most cases, this can either be done by oneself, or you can hire someone else (or some company) to do so, for you. Why would someone grieve his real estate taxes? One reason might be because most of your neighbors do so, and you will suffer financially, by not doing so. Another is, if you believe your house is being appraised for more than it should be, and thus, you will being paying more taxes than you need to, or should. Regardless of your reasons for doing so, every homeowner should realize he has certain options and rights, and this article will attempt to touch upon 3 of the basic steps in appealing and correcting something which might adversely impact you.

1. Comparative Market Analysis (CMA): Before you can claim you are being charged too much, you must create and present a basis for your belief. In nearly every locality, one must accumulate realistic, relevant, comparable homes, and compare what they are being charged in taxes, to what you are. For example, if you can locate 5 or 6 homes, which are similar in size, location, property, condition, etc, and their assessed values vary significantly with your home’s, you have created the best initial basis, for appeal. If you are capable of doing so, yourself, you will gain the greatest benefit, but if you cannot, or don’t have the time or inclination, contact a reputable company, to handle this for you. In many cases, these companies will charge you up to 50% of your savings, but remember, that’s still far better than what you would otherwise be paying, etc. In addition, you’ll only be charged the fee, if you receive a reduced assessment, and savings!

2. Show what others pay in taxes (or are assessed): Once you’ve identified the relevant other properties, show how much less they may be paying than you are. This is what you submit as your grievance, etc.

3. Fill out the necessary forms/ paperwork: Depending on your location, this process might either be rather simple, or more complex/ complicated! In either case, you must obtain, and properly fill out completely, all the necessary forms and paperwork. This is another reason many people opt to use one of the companies that provides this service.

While it is your responsibility to pay your real estate taxes, it is not, to pay more than you should fairly do so! If you believe you are being unfairly taxed, relative to your neighbors, follow the grievance or appeals process.

Planning to purchase or finance Commercial or Industrial Real Estate? Shopping Center? Office Building? Restaurant/Banquet property? Parking Lot? Storefront? Gas Station? Manufacturing facility? Warehouse? Logistics Terminal? Medical Building? Nursing Home? Hotel/Motel? Pharmacy? Bank facility? Sports and Entertainment Arena? Other?

A KEY to investing in commercial real estate is performing an adequate Due Diligence Investigation to assure you know all material facts to make a wise investment decision and to calculate your expected investment yield.

The following checklists are designed to help you conduct a focused and meaningful Due Diligence Investigation.

Basic Due Diligence Concepts:

Commercial Real Estate transactions are NOT similar to large home purchases.

Caveat Emptor: Let the Buyer beware.

Consumer protection laws applicable to home purchases seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of commercial real estate.

Due Diligence: “Such a measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by, a reasonable and prudent [person] under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the special case.” Black’s Law Dictionary; West Publishing Company.

Contractual representations and warranties are NOT a substitute for Due Diligence.

Breach of representations and warranties = Litigation, time and money.

WHAT DILIGENCE IS DUE?

The scope, intensity and focus of any due diligence investigation of commercial or industrial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon whether the investigation is conducted for the benefit of (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer; or (iv) a Lender.

If you are a Seller, understand that to close the transaction your Buyer (and its Lender) must address all issues material to its objective – some of which require information only you, as Owner, can adequately provide.

GENERAL OBJECTIVES:

(i) A “Strategic Buyer” (or long-term lessee) is acquiring the property for its own use and must verify that the property is suitable for that intended use.

(ii) A “Financial Buyer” is acquiring the property for the expected return on investment generated by the property’s income stream, and must determine the amount, velocity and durability of the revenue stream. A sophisticated Financial Buyer will likely calculate its yield based upon discounted cash-flows rather than the must less precise capitalization rate (“cap rate”), and will need adequate financial information to do so.

(iii) A “Developer” is seeking to add value by changing the character or use of the property – usually with a short-term to intermediate-term exit strategy to dispose of the property; although, a Developer might plan to hold the property long term as Financial Buyer after development or redevelopment. The Developer must focus on whether the planned change is character or use can be accomplished in a cost-effective manner. A developer conducting due diligence will focus on issues involving market demand, access, use and finances.

(iv) A “Lender” is seeking to establish two basic lending criteria:

1. “Ability to Repay” – The ability of the property to generate sufficient revenue to repay the loan on a timely basis; and

2. “Sufficiency of Collateral” – The objective disposal value of the collateral in the event of a loan default, to assure adequate funds to repay the loan, carrying costs and costs of collection in the event forced collection becomes necessary.

The amount of diligent inquiry due to be expended (i.e. “Due Diligence”) to investigate any particular commercial or industrial real estate project is the amount of inquiry required to answer each of the following questions to the extent relevant to the objectives of the party conducting the investigation:

I. THE PROPERTY:

1. Exactly what PROPERTY does Purchaser believe it is acquiring?

(a) Land?

(b) Building?

(c) Fixtures?

(d) Other Improvements?

(e) Other Rights?

(f) The entire fee title interest including all air rights and subterranean rights?

(g) All development rights?

2. What is Purchaser’s planned use of the Property?

3. Does the physical condition of the Property permit use as planned?

(a) Commercially adequate access to public streets and ways?

(b) Sufficient parking?

(c) Structural condition of improvements?

(d) Environmental contamination?

(i) Innocent Purchaser defense vs. exemption from liability

(ii) All Appropriate Inquiry

4. Is there any legal restriction to Purchaser’s use of the Property as planned?

(a) Zoning?

(b) Private land use controls?

(c) Americans with Disabilities Act?

(d) Availability of licenses?

(i) Liquor license?

(ii) Entertainment license?

(iii) Outdoor dining license?

(iv) Drive through windows permitted?

(e) Other impediments?

5. How much does Purchaser expect to pay for the property?

6. Is there any condition on or within the Property that is likely to increase Purchaser’s effective cost to acquire or use the Property?

(a) Property owner’s assessments?

(b) Real estate tax in line with value?

(c) Special Assessment?

(d) Required user fees for necessary amenities?

(i) Drainage?

(ii) Access?

(iii) Parking?

(iv) Other?

7. Any encroachments onto the Property, or from the Property onto other lands?

8. Are there any encumbrances on the Property that will not be cleared at Closing?

(a) Easements?

(b) Covenants Running with the Land?

(c) Liens or other financial servitudes?

(d) Leases?

9. Leases?

(a) Security Deposits?

(b) Options to Extend Term?

(c) Options to Purchase?

(d) Rights of First Refusal?

(e) Rights of First Offer?

(f) Maintenance Obligations?

(g) Duty on Landlord to provide utilities?

(h) Real estate tax or CAM escrows?

(i) Delinquent rent?

(j) Pre-Paid rent?

(k) Tenant mix/use controls?

(l) Tenant exclusives?

(m) Tenant parking requirements?

(n) Automatic subordination of Lease to future mortgages?

(o) Other material Lease terms?

10. New Construction?

(a) Availability of construction permits?

(b) Utilities?

(c) NPDES (National Pollutant Discharge Elimination System) Permit?

(i) Phase 2 effective March 2003 – Permit required if earth is disturbed on one acre or more of land.

(ii) If applicable, Storm Water Pollution Prevention Plan (SWPPP) is required.

II. THE SELLER:

1. Who is the Seller?

(a) Individual?

(b) Trust?

(c) Partnership?

(d) Corporation?

(e) Limited Liability Company?

(f) Other legally existing entity?

2. If other than natural person, does Seller validly exist and is Seller in good standing?

3. Does the Seller own the Property?

4. Does Seller have authority to convey the Property?

(a) Board of Director Approvals?

(b) Shareholder or Member approval?

(c) Other consents?

(d) If foreign individual or entity, are any special requirements applicable?

(i) Qualification to do business in jurisdiction of Property?

(ii) Federal Tax Withholding?

(iii) US Patriot Act compliance?

5. Who has authority to bind Seller?

6. Are sale proceeds sufficient to pay off all liens?

III. THE PURCHASER:

1. Who is the Purchaser?

2. What is the Purchaser/Grantee’s exact legal name?

3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?

(a) Articles or Incorporation – Articles of Organization

(b) Certificate of Good Standing

4. Is Purchaser/Grantee authorized to own and operate the Property and, if applicable, finance acquisition of the Property?

(a) Board of Director Approvals?

(b) Shareholder or Member approval?

(c) If foreign individual or entity, are any special requirements applicable?

(i) Qualification to do business in jurisdiction of the Property?

(ii) US Patriot Act compliance?

(iii) Bank Secrecy Act/Anti-Money Laundering compliance?

5. Who is authorized to bind the Purchaser/Grantee?

IV. PURCHASER FINANCING:

A. BUSINESS TERMS OF THE LOAN:

What loan terms have the Purchaser, as Borrower, and its Lender agreed to?

(a) What is the amount of the loan?

(b) What is the interest rate?

(c) What are the repayment terms?

(d) What is the collateral?

(i) Commercial real estate only?

(ii) Real estate and personal property together?

(e) First lien? A junior lien?

(f) Is it a single advance loan?

(g) A multiple advance loan?

(h) A construction loan?

(i) If it is a multiple advance loan, can the principal be re-borrowed once repaid prior to maturity of the loan; making it, in effect, a revolving line of credit?

(j) Are there reserve requirements?

(i) Interest reserves?

(ii) Repair reserves?

(iii) Real estate tax reserves?

(iv) Insurance reserves?

(v) Environmental remediation reserves?

(vi) Other reserves?

(k) Are there requirements for Borrower to open business operating accounts with the Lender? If so, is the Borrower obligated to maintain minimum compensating balances?

(l) Is the Borrower required to pledge business accounts as additional collateral?

(m) Are there early repayment fees or yield maintenance requirements (each sometimes referred to as “pre-payment penalties”)?

(n) Are there repayment blackout periods during which Borrower is not permitted to repay the loan?

(o) Is there a Loan Commitment fee or “good faith deposit” due upon Borrower’s acceptance of the Loan Commitment?

(p) Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at closing?

(q) What are the Borrower’s expense reimbursement obligations to Lender? When are they due? What is the Borrower’s obligation to pay Lender’s expenses if the loan does not close?

B. DOCUMENTING THE COMMERCIAL REAL ESTATE LOAN

Does Purchaser have all information necessary to comply with the Lender’s loan closing requirements?

Not all loan documentation requirements may be known at the outset of a transaction, although most commercial real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Production of that information to Purchaser for delivery to its lender must be required in the purchase contract.

As guidance to what a commercial real estate lender may require, the following sets forth a typical Closing Checklist for a loan secured by commercial real estate.

Commercial Real Estate Loan Closing Checklist

1. Promissory Note

2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, collection guaranties or a variety of other types of guarantees as may be required by Lender).

3. Loan Agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)

4. Mortgage [sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing]

5. Assignment of Rents and Leases

6. Security Agreement

7. Financing Statement (sometimes referred to as a “UCC-1”, or “Initial Filing”)

8. Evidence of Borrower’s Existence In Good Standing; including

(a) Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of Organization and written Operating Agreement, if Borrower is a limited liability company; Certified copy of trust agreement with all amendments, if Borrower is a land trust or other trust; etc.)

(b) Certificate of Good Standing (if a corporation or LLC) or Certificate of Existence (if a limited partnership) or Certificate of Qualification to Transact Business (if Borrower is an entity doing business in a State other than its State of formation)

9. Evidence of Borrower’s Authority to Borrow; including

(a) a Borrower’s Certificate;

(b) Certified Resolutions

(c) Incumbency Certificate

10. Satisfactory Commitment for Title Insurance (which will typically require, for analysis by the Lender, copies of all documents of record appearing on Schedule B of the title commitment which are to remain after closing), with required commercial title insurance endorsements, often including:

(a) When available, Affirmative Creditors Rights Endorsement (extending coverage over policy exclusion 7 and policy exclusions 3(a) and 3(d) as they relate to creditor’s rights matters)

(b) ALTA 3.1 Zoning Endorsement modified to include parking

(c) ALTA Comprehensive Endorsement 1

(d) Location Endorsement (street address)

(e) Access Endorsement (vehicular access to public streets and ways)

(f) Contiguity Endorsement (the insured land comprises a single parcel with no gaps or gores)

(g) PIN Endorsement (insuring that the identified real estate tax permanent index numbers are the only applicable PIN numbers affecting the collateral and that they relate solely to the real property comprising the collateral)

(h) Usury Endorsement (insuring that the loan does not violate any prohibitions against excessive interest charges)

(i) other title insurance endorsements applicable to protect the intended use and value of the collateral, as may be determined upon review of the Commitment for Title Insurance and Survey or arising from the existence of special issues pertaining to the transaction or the Borrower.

11. Current ALTA Survey (3 sets), [typically prepared in accordance with 2011 Minimum Standard Detail for ALTA/ACSM Land Title Surveys, certified to the lender, Buyer and the title insurer.

12. Current Rent Roll

13. Certified copy of all Leases (3 sets)

14. Lessee Estoppel Certificates

15. Lessee Subordination, Non-Disturbance and Attornment Agreements [sometimes referred to simply as “SNDAs”].

16. UCC, Judgment, Pending Litigation, Bankruptcy and Tax Lien Search Report

17. Appraisal (must comply with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)

18. Environmental Site Assessment Report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Reports)

19. Environmental Indemnity Agreement (signed by Borrower and guarantors)

20. Site Improvements Inspection Report

21. Evidence of Hazard Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an “additional insured” (sometimes listed as simply “Acord 27 and Acord 25, respectively)

22. Legal Opinion of Borrower’s Attorney

23. Credit Underwriting documents, such as signed tax returns, property operating statements, etc. as may be specified by Lender

24. Compliance Agreement (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after closing, errors or omissions in loan documentation.

It is useful to become familiar with the Lender’s loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth with some detail in the lender’s Loan Commitment – which is typically much more detailed than most loan commitments issued in residential transactions.

Conducting the Due Diligence Investigation in a commercial real estate transaction can be time consuming and expensive in all events.

If the loan requirements cannot be satisfied, it is better to make that determination during the contractual “due diligence period” – which typically provides for a so-called “free out” – rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to close may attach.

CONCLUSION

Conducting an effective due diligence investigation in a commercial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical importance.

Unlike owner occupied residential real estate, when a house can nearly always be occupied as the purchaser’s home, commercial real estate acquired for business use or for investment is impacted by numerous factors that may affect its use and value.

The existence of these factors and their affect on a Purchaser’s ability to use the Property for its intended use and on the Purchaser’s projected investment yield can only be discovered through diligent investigation and attention to detail.

The circumstances of each transaction will determine what degree of diligence is required. The level of diligence required under the circumstances is the diligence that is due.

Exercise Due Diligence.

Smaller, investment properties, often, offer, significant financial/ economic benefits, in terms of creating a combination of asset growth, return – on – investment, and some degree of safety! However, this is true, only, if, the purchaser, first, thoroughly, understands, what to seek, and why! Different potential properties, have, varying, potential, for optimal performance, etc! While, everyone, cannot, consistently, take care of, afford, or get involved, in major real estate deals/ purchases, far more, are able to take advantage of smaller properties, etc. These vehicles, often, include, one, to four, family/ unit, houses, and, while some, offer, attractive investments, others, may not, always! With, that in mind, this article will attempt to, briefly, consider, examine, review, and discuss, 4 significant, meaningful, main/ essential considerations, and evaluations.

1. Cash flow: Cash flow, when it comes to these, usually, refers to, the difference, between, the funds/ revenues, received, and the monthly costs. It is important to consider these, in a conservative manner, by, basing evaluations, not, on the highest, potential rent – rolls, but, by market – based rents, and, no more than 75% occupancy (to avoid, a potential, cash – crush, if there are any interruptions, due to a variety of possibilities/ contingencies). In addition, the investor, must, be careful, to ensure, his personal cash flow, doesn’t suffer, by using too high a percentage of his reserves, for up – front costs, as well as creating reserves, etc!

2. Area/ neighborhood/ local market: Before, making – the – leap, thoroughly, consider, and evaluate, local real estate market conditions, and discover, the marketplace, for rentals, in terms of, availability, demand, advantages, and/ or, disadvantages! Thoroughly, know the specific area, and determine, if it offers, the best scenario, for you, and your priorities and purposes!

3. The 6% Rule: Many pay close attention to, what is often, referred to, as the 6% Rule, when it comes, to purchasing, smaller, investment properties. This means, three – quarters, of a realistic rent – roll, must achieve, at least, a six percent profit. Expenses, must include: mortgage – related expenses, including principal, interest, taxes, and escrow; landlord – paid utilities; repairs; renovations; upgrades, and reserves, etc.

4. Property condition: Understand, the existing condition, of the subject property, and, what, will need to be addressed, immediately, on an intermediate – basis, and in the longer – run. Reserve funds, must be used, and prepared, for as many contingencies, as foreseeable, etc! On the other hand, don’t be, overly – influenced, by staging, and overestimating, rent – rolls!

After, over 15 years, as a Real Estate Licensed Salesperson, in the State of New York, I believe, strongly, in the possibilities, and advantages of investing in smaller, investment properties, but, only, when, this is done, carefully, and in a focused manner! The smarter, you proceed, the better – off, you will be!

In, nearly – every financial area, it seems, some people seek to attempt to proceed, with a greater advantage, hoping to time, the specific component, in order to, hopefully, buy – low, and, sell – high! We often witness this behavior, regarding real estate buying and selling, especially, residential transactions! When prices seem to be trending, up, especially, in recent days, when we have seen a record – pace, of price increases, more individuals seem to be getting involved, in what is referred to as, flipping a property, which means, buying a particular house, at a perceived, opportunistic price, and making some, predominantly, cosmetic changes, and selling it, soon, at a profit! After, over 15 years, as a Real Estate Licensed Salesperson, in the State of New York, I have witnessed, this process, being successful, as well as, considerably – less, so! With, that in mind, this article will attempt to, briefly, consider, examine, review, and discuss, 4 reasons, most people shouldn’t try to market – time, real estate.

1. You can’t predict the future, consistently, and/ or, accurately!: If, we had a Crystal Ball, perhaps, we would become, more capable of accurately, and consistently, predicting the future, including, relating to house prices! Since, historically, these prices have tended to be cyclical, it is challenging, to know, when this might, make sense! Obviously, every financial strategy/ action, should be considered, on a risk/ reward basis, and only those, who are ready, willing, and able to handle the uncertainties, stresses, and potential losses, should attempt to flip – a – house!

2. Several (not just – one) factors impact real estate, including pricing: No one factor determines, how prices, will move! Some of the factors, include: interest rates (including mortgage rates and terms, etc); Supply and Demand; seller and buyer perceptions; confidence! We have experienced, a prolonged period, of record – low, interest rates, and corresponding, mortgage terms! When this occurs, more people qualify for a mortgage, thus, increasing, demand. Perhaps, the biggest factor, is Supply and Demand, and, when the supply is lower than the demand, prices go up! One factor is based on emotions, and thus, the perceptions of both, buyers and sellers! Overall consumer confidence influences many people’s mindsets, and, that impacts the overall market!

3. Different factors do not always work, in sync!: When mortgages are easy and cheaper, to get, prices usually go up! When confidence is high, and inventory, low, it, generally, causes an upward trend! However, those factors, which tend to increase, and/ or, decrease house prices, often, may not align, and so, the overall trends, becomes more challenging, to predict!

4. Relationship between home sellers, and qualified, potential home buyers: In general, when demand is great, there are more, qualified, potential buyers, than, houses – for – sale (inventory)! The opposite set, of conditions, usually creates a so – called, Buyers Market. At times, we witness a neutral set of conditions!

For most, trying to market – time, real estate, is speculative, and risky! Like, any, other financial asset, proceed with an open – mind, and, in a well – considered manner!

Real estate commission is the way in which real estate agents are paid for the services they provide. They receive a percentage of the price received for the property. Effectively, the real estate agent requires the seller of a property (the vendor) to sign over to the real estate agent a part of the property being sold.

Another way of looking at it is to say that the real estate agent, through the wording of the listing contract, effectively has his name added to the title deed of the vendor’s property, so that the real estate agent becomes a part-owner of the property. When the property sells, the real estate agent receives a payment that represents his share in the vendor’s property.

Most readers will be aware of the arguments in favour of real estate sale commissions, so I won’t discuss those here. My focus is on the ways in which the sale process can be skewed against all parties involved, when the motivation to win a commission takes precedence over more important considerations.

Commission is a “winner-takes-all, loser gets nothing” situation. This increases the pressure on the real estate agent to secure a sale. Time is also a problem. If the real estate agent cannot secure a sale within a time acceptable to the vendor, the vendor may take the property off the market, or away from the real estate agent’s agency. This will result in a total loss for the real estate agent.

Finally, the vendor becomes an obstacle between the real estate agent and his commission goal. In order to receive payment for his share of the vendor’s property, the real estate agent must receive an offer to purchase within the available time, but the offer must be accepted by the vendor. If the vendor decides that the offer is not acceptable, then the real estate agent loses.

In order to win the gambling game that is real estate sales, the real estate agent may decide to tip the odds in his favour – and there are numerous ways in which this can be done.

At the listing stage the real estate agent may use improper means to win the listing contract. These include over-quoting on valuation, and offering dodgy sales figures.

During the sale process the real estate agent may be tempted to tell potential purchasers things that are untrue. I have seen many sale contracts with clauses designed to protect real estate agents against the consequences of false statements. Known as “porkies clauses”, they invariably state that the purchaser acknowledges that any information provided to the purchaser by the real estate agent is provided on the understanding that the purchaser will not be relying on it for any purpose.

When a purchaser has submitted an offer, and the purchaser cannot be convinced to increase her offer, the real estate agent may be tempted to pressure the vendor into accepting what would otherwise be unacceptable. Observations, such as “the market has softened” or “the market has spoken to us” are used by real estate agents to convince vendors that the real estate agent’s high estimation of value can no longer be relied upon, and that the vendor should now accept what the vendor believes is an unacceptably low offer.

For some years now, I have been arguing that real estate services should be provided on a fee-for-service basis.

I will explore the replacement of real estate sale commissions with a fee-for-service structure further in future articles.

The Alternative Minimum Tax is a very important consideration for taxpayers who own real estate because just about every tax rule applying to real estate is different for the AMT than it is for the Regular Tax. This article on Real Estate and the AMT will address those situations where the individual holds the real estate as an investment, typically as rental property. The differences in tax treatment between the Regular Tax and the AMT can be significant.

Interest expense

Interest paid on the mortgage taken out to acquire the property is fully deductible, both for the Regular Tax and the Alternative Minimum Tax. Unlike itemized deductions that allow a tax benefit for what amounts to personal expenses, the tax law generally allows all deductions a taxpayer has to make in the pursuit of business income. Thus, the limitations discussed in the previous article on home mortgage interest do not apply.

If, however, the equity in the rental property is used as security for an additional loan – a second mortgage, for example – then the taxpayer must look to how the proceeds of that loan are used to determine interest deductibility. If the proceeds are used for a car loan or to finance a child’s education, for example, then the interest is nondeductible personal interest. If the proceeds are used to improve the rental property, the interest is deductible.

Suggestion – it is best that taxpayers keep personal borrowings separate from business borrowings. Mixing the two creates recordkeeping challenges and can result in disputes with the IRS.

Property taxes

Property taxes paid on rental or investment property are allowed in full both for Regular Tax purposes as well as for the Alternative Minimum Tax.

Planning idea – if you have an opportunity to pay your property tax bill either this year or next, pay it in a year when you have enough income from the property so as not to generate a rental loss. This strategy can help avoid triggering the passive activity loss limitations described below.

Example – in Florida property tax bills are mailed in October, and are payable under the following discount schedule: November – 4%, December – 3%, January – 2%, February – 1%. If you have a loss from the property in 2010 but expect to generate income in 2011, do not pay your bill in November or December – forgoing that small discount could help you avoid the loss-limitation rules.

Depreciation

Depreciation is allowed for property held for investment. The portion of the cost allocable to land is not depreciable, but for the building itself and the furniture, appliances, carpeting, etc. a depreciation deduction may be taken.

Real property (this is the legal definition of the house or other building) held for rental/investment may only be depreciated for Regular Tax purposes under the “straight-line” method, over a useful life of 27.5 years. Thus, a property with $275,000 allocated to the building would be depreciated at the rate of $10,000 per year.

Personal property (this is the legal definition of things such as furniture, appliances, carpeting and the like) may be depreciated for Regular Tax purposes under an “accelerated” method over a useful life of five years. An accelerated method allows a larger depreciation deduction in the early years, in recognition of an obsolescence or decline-in-value factor that you see in new property (cars are a good example).

For purposes of the AMT, however, personal property may be depreciated only by using a straight-line method. Thus, an AMT item will be generated in the early years if the accelerated method is used.

Planning idea – for personal property consider electing the straight-line method for Regular Tax purposes. While giving up a little tax benefit from the greater depreciation in the early years, it could mean avoiding paying the AMT.

Active/passive investment rules and the “at-risk” rules

A taxpayer who is not “active” in managing investment property may not use losses from rental property to offset other income such as salaries and wages, dividends, interest, capital gains, etc. Instead, these losses are deferred until the taxpayer either sells the property or generates passive income from this or other passive investment sources.

The at-risk rules similarly deny using these types of losses to the extent the taxpayer has acquired the investment with borrowed money and does not have personal liability on the debt.

Planning idea

If these loss limitations apply, consider the planning ideas mentioned above to minimize the losses being generated each year. They are not doing you any good anyway.

Sale of the property

Several different AMT issues can arise on the sale of rental/investment property. One is that your gain or loss may be different for the AMT than it is for Regular Tax purposes. This would be caused if different depreciation methods were used. For example, if the personal property was depreciated using an accelerated method for Regular Tax purposes, then the basis in that property when calculating gain or loss on sale would be different because the straight-line method had to be used for Alternative Minimum Tax purposes.

Gain on the sale of investment property generally is capital gain, although a portion may be treated as ordinary income depending on the accelerated depreciation method was used. Capital gains in and of themselves are not an AMT item, but nonetheless they can result in AMT being paid. This is because the AMT exemption amount is phased out for taxpayers at certain income levels, so this additional income can have the result of reducing the exemption which in turn increases taxable income for purposes of the Alternative Minimum Tax.