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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.

If you are looking for a great way of building your net worth, investing in real estate is a great idea. You can make a lot of money if you do it the right way. However, if you don’t follow the right techniques, this venture can cost you a lot of money. Therefore, we have shared a few tips with you that can help you achieve success as a real estate investor.

Opt for a Good Location

Location is the first thing that people consider when they need to buy a residential, vocational or commercial properly. Ideally, the property you are going to buy should be near a workplace and school. Similarly, if it’s close to the marketplace, people can go there without burning a lot of gas or killing a lot of time. Therefore, it’s much better to choose a better location.

Upgrade or Renovate Your Property

It’s better that you upgrade your property features to make it more appealing. For instance, you may add home automation, such as automated lighting. The same is true about commercial real estate as well.

If you offer wheelchair lifts, for instance, it can make your property more useful for people with disabilities. This will attract many more buyers. Actually, it all depends upon how convenient your property is. If your property offers features that can help people make their lives easier, more people will show their interest in what you offer.

Improve Property Conditions

More buyers will contact you if your house or apartment is well maintained. However, make sure you don’t go beyond the limits. In other words, you may not want to spend an arm and a leg just to make your property more beautiful. It won’t increase the value of your property exponentially. Although it may be worth it in certain situations, spending too much is not a good idea.

Let’s take a look at a few tips that can help you make your property well-maintained.

Kitchen: if you do it right, your kitchen can increase the value of your property by up to 80%. Therefore, if you renovate your kitchen by spending $15,000, you can sell your house at 80% higher price.

Plumbing: we all need clean running water. Keep in mind that rusty pipes pose a health hazard in addition to reducing the beauty of your house.

Landscaping: If you maintain your landscape properly, it can add ambience to your house or apartment. In addition, landscaping helps reduce your energy bills.

Do Your Research

Make sure you consider the type of people that you think will be suitable if you want to sell or rent your house. If you want to get the highest return on your investment, make sure you contact the right people. Otherwise, you won’t be able to earn a lot of profit or find good buyers. Opting for the right clients can help you find a great deal.

Conclusion

So, these are a few tips that you can follow if you want to get the most out of your investment. Hopefully, you will find these tips pretty helpful.

Even if your real estate contract has been written on toilet paper, it’s valid.

Content of your real estate investing contract is what’s important.

Your financial destiny in real estate investing is sealed BEFORE you walk into a real estate closing as a buyer. You have set in

concrete your profit (or loss) before you turn the door knob to enter the office of your attorney or title company at closing. The payoff of the transaction under anticipation is predetermined when the contract is signed between you as the buyer and the other party who is the seller.

The interpretation of these cold, hard words is that you must recognize the importance of the real estate contract that ties together the property transaction. Your contract contains implications for determining profits in advance.

When we strike a deal in real estate investing, we usually just reach for some pre-printed contract form that came from a real estate office or stationary store. We usually forfeit many of our closing rights to some stranger who put together traditional jargon and processes without recognizing that we ourselves have the right to charter this course. Subjecting ourselves to legalese of an attorney who may not even be a real estate investor nor own more than his own home is the pattern followed by most who purchase and sell real estate.

The first order of business in writing contracts is understanding that any sale or purchase of property is negotiable. While the payment of certain closing costs may be customary or traditional for the buyer and the seller, we are not bound by this protocol. Without differing specification in your contract to dictate your personal direction, the closing agent simply resorts to customary convention.

But by understanding your rights as buyer or seller of real estate property, you can actually INCREASE your profits on a transaction by the wording of your contract. However, these settlement terms must be in writing on your contract in advance of the closing. Otherwise, potential profits fly out the window.

One of the most euphoric feelings I have ever experienced in this business of real estate investing was walking out of a closing with a check payable to me for $75,000 on a package of a few cheap real estate properties! As with anyone, I had a use for that cash! But those profits were dictated on my special personal contract in advance of closing.

Much more cash at closing is available to real estate investors who take control of the options available by independently choosing wording in the content of their own purchase contract and sales contract. This choice is readily available to the real estate investing professional who understands these rights and applies them in the construction of a personal contract.

The suggestion in this article is not legal advice but encouragement to take advantage of an opportunity available in real estate investing. This suggestion is not encouragement to become greedy with legal rights but to give notification that negotiation is available over the dictates of closing costs. Sometimes transactions are profitable only when these considerations are understood.

A foreclosed home is one in which the home owner was unable to pay his home loan so that the lender took over home ownership through the foreclosure process. These bank owned properties are also known as REOs (real estate owned).

The process in Arizona is similar to that in other states and will be the basis for this article. When you work with a real estate agent he will write up your purchase offer with you on a standardized contract which was developed by the Arizona Association of Realtors. The contract allows the agent to customize the contract for your particular purchase and has many built in protections for both the buyer and the seller.

When you make an offer for a foreclosed property, you can expect to receive back from the seller (the bank currently owning the property) an addendum to the contract. These addendums are in essence a counter offer that the buyer must accept if he wants to purchase the property. In some cases the seller will negotiate with the buyer over these terms but most sellers expect the buyer to agree to their terms. We have seen a wide variety of addendums in the past year as we have worked with buyers. In all of them, many of the protections for the buyer in the standard contract are eliminated or modified. Here are some of the things we are seeing.

Inspection Period

In the standard contract, the inspection period lasts ten days from the date the contract has been signed by both parties. We have seen addendums that change that to be ten days from verbal acceptance of the contract and have even seen a five day inspection period that must be completed before the buyer signs and accepts the addendums.

Title/Escrow Company

The seller will typically require the buyer to utilize the escrow company of the seller’s choice. Usually using this company helps facilitate the timeliness of the transaction because the escrow company is familiar with the seller’s requirements.

AS/IS & Disclosures

When you purchase an owner occupied property, you will usually get a Seller’s Disclosure Statement. This will provide information about the property and a history of repairs done. When you buy a foreclosure property, the seller has not occupied the property and typically will not provide any disclosure statements. Additionally, the buyer is generally required to purchase the property in its current condition “as is” and the seller will not make any repairs. If something is missing such as a kitchen appliance or garage door openers the seller will not provide it. What you see is what you get. Read the addendum carefully to understand what the seller will be responsible for if the property is damaged during the escrow period. The escrow period spans the time from when the contract is agreed upon by both parties until the sale records (close of escrow).

Cost for Extension of Close of Escrow

Most of these addenda have a per diem charge if you need to extend the close of escrow beyond the date in the original contract. The most common reason buyers need to ask for an extension of the closing date is that the lender has not completed loan processing and delivered loan documents to title several days prior to closing to allow time for both the seller and the buyer to sign. We have seen costs ranging from $40 to $100 per day.

Loan Approval

The Arizona contract allows for a return of earnest money deposited by the buyer if after a good faith attempt to obtain a loan at prevailing market rates to purchase the property the buyer is unable to do so. Some addendums are limiting the buyer’s time to obtain loan approval to a set number of days from contract acceptance, for example 25 days. If the buyer does not notify the seller of his inability to obtain a loan within that time frame, he will forfeit his earnest money to the seller. This holds true even if the inability to obtain the loan had nothing to do with the buyer’s financial qualifications. We have seen loans turned down in the past few months for condo purchases because the community had too low a percentage of owner occupied units or the HOA was not financially solid or some cases for both of these reasons.

Tenants or Other Occupants

Most of these properties will be vacant; however, if you see evidence that someone is living in the property when you are viewing it and prior to writing an offer, you need to ask questions. Who is living in the property? If the property has been rented, what are the terms of the lease? We’ve seen addenda that indicate that the seller will not evict any occupants of the property and that it will be the responsibility or the buyer once he has purchased the property. You should also be aware that tenants have rights too. Be very cautious about writing an offer for a foreclosure property that is occupied.

What Does the Buyer Need to Do?

It is very important for the buyer to read the entire addendum provided by the seller prior to signing. If he has questions about the addendum he should ask his real estate agent for clarification. He should also verify that his real estate agent has read the entire addendum and made note of key dates.

These laws legally force the seller of a home to disclose to the potential buyer any serious defects of the property. The laws were created to help protect the buyer from any defects that were not noticed until they closed on the house and become the owners. Many times it is hard to enforce real estate disclose laws because what is considered serious defects may be open to interpretation. Because of this, the laws are constantly changing resulting in many states not having effective disclosure laws. If the state does not have mandatory real estate disclosure laws, they will usually have a voluntary disclosure.

These laws can cover many different subjects so you should consult with a qualified lawyer or real estate agent to find out the specifics of what they cover. In regards to real estate disclosure there are both state and federal laws regarding these laws. Some brokerages have additional regulations for listings they accept. In the United States, Federal law requires disclosure in regards to using lead paint in homes constructed before 1978. The disclosure laws generally cover toxic or hazardous materials and the presence of asbestos and radon gas.

These laws are designed to help protect a potential buyer from buying a home that has known defects or issues. For example, if the home you are considering buying has suffered from earthquake or flood damage these laws will typically require the seller to provide you with this information. In addition to real estate disclosure law protection the buyer should also have a home inspection done by a professional. This inspection can possibly find other potential issues. Sometimes, the lender will require that a home inspection be done before they approve the loan.

In some states, there are long questionnaires that the property owner has to fill out before they can sell the property. This questionnaire does ask about any potential issues or defects with the property. These questionnaires typically cover everything from issues with the land to the wiring and plumbing inside the home. Some of the things that the seller has to disclose include, but not limited to, are:

• Water damage caused by a leaking roof
• Presence of wetlands on a part of the property
• Recent deaths on the premises

Generally, these laws only require that the sell reveal issues that they are aware of. This means that they cannot be held responsible for any problems they were unaware of before putting their home on the market but not every state provides this protection. There have been some cases that the seller can be sued by the buyer after they buyer becomes the homeowner. This is why you need to have expert advice about real estate disclosure laws in your state.