BradyLoan.com

Mortgage Loans to IRAs Available For Real Estate Investors

Investors with money stuck in an IRA,or old employer's 401-k account, have traditionally shunned real estate as an investment.  Custodial fees were high and there was no way to leverage the property through an IRA.  There may be a solution.

Consider a non-recourse, loan to the IRA.  Real estate investors can get a commercial loan, directly to their Individual Retirement Account, through our IRA mortgage program.  A brief rundown:

• the mortgage is non-recourse
• down payment of 35% required (50% down payment in certain states)
• ARM products and fixed rate loans available
• rates are typically higher than conforming mortgage rates
• 25 year amortization only

Not all IRA custodians will be able to administer real property holdings.  A short list of custodians for real estate investments includes:

Lincoln Trust Company 
Trust Administration Services Corporation
PENSCO Trust Company
Sterling Trust Company
Equity Trust Company
Sunwest Trust Company
Self-Directed IRA Services, Inc.
Provident Group

Home Buyer Tax Credit Q&A: TurboTax VP Bob Meighan, CPA

I participated in a live chat with Turbo Tax VP, and Certified Public Accountant Bob Meighan today.  I had two pointed questions for him:

 BRADY:. What if a buyer's federal tax obligation is less than the tax credit? Does the buyer receive the full amount or just an amount up to his/her federal tax obligation?

MEIGHAN. The homebuyer credit is a "refundable" credit, which means that you get the full credit regardless of your tax liability. In other words, the IRS will send you a check if your credit is more than the tax liability/withholding.

BRADY. If the transaction closes on or after Jan 2, 2010, can the home buyer still claim the tax credit on their 2009 tax return? If the transaction closes after April 15, 2010 (but before June 30, 2010), would they file an amended return for 2009?

MEIGHAN. The beauty of the homebuyer credit is that you can get the credit dollars pretty fast. So, if you purchase in 2010, you have the option to claim the credit on your 2009 return (either the originally filed one or even an amended return). By doing so, you get your credit dollars now (or relatively soon) versus having to wait to claim the credit on your 2010 tax return (which would be filed in 2011).

Other questions asked in the chat about the Homebuyer Tax Credit:

Q. What will be the earliest day I will be able to file online this year?

MEIGHAN. TurboTax Online is up and running now. While not all IRS forms are final yet, most should be final by January 1, 2010. So get ready and get going. By the way, if you'll be claiming one of the homebuyer credits, you may have to wait a few weeks because the credit form for this won't be final from the IRS until sometime in January.

Q. Can you tell folks the top 3 things EVERYONE should know about this credit....at a very high level?

MEIGHAN:  Three things you need to know about the homebuyer credit:

1. The credit is available to first time AND existing homebuyers. The credit amounts are $8000 and $6500 respectively. And pay attention to the rules. For example, a first time buyer simply means you have not owned a principal residence in the last three years.

2. The purchase date has been extended to June 30, 2010, but you have to have a signed contract in place by April 30, 2010.... See More

3. Those claiming a homebuyer credit on their 2009 return will have to paper file the return. The IRS will NOT accept the return electronically because they need a copy of your settlement statement to substantiate your purchase. Having to file a paper copy of your return is big disappointment because it will delay your refund from days to weeks.

Q. Would a current homeowner be eligible for the extended Homebuyer Credit if they purchased a second home in another state this year? They did not sell their current home, but were told by their Realtor that they can claim the credit.

MEIGHAN. As long as you owned and lived in the existing home for at least five consecutive years of the eight years prior to the purchase date of your new home, you may qualify. There are other requirements like income and purchase price, but otherwise you should qualify. By the way, there is no requirement that you sell your existing home.

Q. Can a home buyer file with TurboTax.com with the home buyers credit?

A. You can use any version of TurboTax to claim the first time homebuyer credit. However, you won't be able to file until sometime in January when the IRS releases the final form for claiming this credit. Also, those claiming the credit will have to paper file their return because of the IRS requirement to attach your closing statement. This paper filing requirement is true for ALL filers, regardless of whether you use tax software or go to a pro.

For more information, read the December 17, 2009 TurboTax Blog post about the home buyer tax credit.

To purchase Turbo Tax for 2009, click here

How To Get An Offer Accepted with an FHA or VA Mortgage

Debbie Rumsey, a REALTOR in Encinitas, CA commented that buyers with VA home loans face increased scrutiny from sellers and their agents, on an article I wrote about VA condo complex approvals:

Thanks Brian!  I have bookmarked this for a place to refer back to when using VA loans.  The hardest part so far seems to be able to get sellers to accept them!  Glad to hear it is easy once you have received acceptance!

Debbie, I think we have to get really proactive when you present an offer for a buyer using VA or FHA financing.  There are three reasons sellers discriminate against buyers using government- assisted financing:

• The low down payment requirement means less skin in the game
• The (misguided) perception that the seller must pay for some or all of the buyer's closing costs
• The (false) belief that VA and FHA appraisers are (a) less generous in their valuations and (b) more restrictive in the remarks about property condition.

Debbie, I'll share with you how I've been helping agents debunk those three myths and get offers accepted (and eventually closed).

The low down payment requirement means less skin in the game

We can't debunk this because it's factual.  What we can do is show the seller that the borrower has an automated underwriting approval and furnish income and asset documentation to support that approval.  What this does is assuage  the fears a seller might have about a buyer (and that buyer's lender) performing within a prescribed time period.

The (misguided) perception that the seller must pay for some or all of the buyer's closing costs

The seller is not required to pay ANY costs for the buyer but is permitted to pay up to 6% for FHA loans and up to 4% for VA loans.  There are certain "non-allowable" costs for which the buyer is forbidden to pay.  Either the real estate agents or the lender can pay those costs.  All you (or any other agent) needs to request is a "no junk fee" good-faith-estimate to be furnished to the buyer.  It is further advised that the following language be inserted in to the CAR purchase and sale agreement:

Seller not responsible for any buyer closing costs, regardless of the selected loan program.  All agency-related "non-allowable" costs to be borne by lender.

The (false) belief that VA and FHA appraisers are (a) less generous in their valuations and (b) more restrictive in the remarks about property condition than conventional appraisers.

This is a common misperception.  In the 1990s, it was widely believed that FHA and VA appraisers would intentionally "low ball" appraisals and "condition" for repairs on the property in order to "cover themselves" with the agency.  The agencies did require the appraisers to warrant the condition of the property, much like a property inspector, in the late 1990s.  The agencies relieved the appraisers of the (unfair) responsibility in the early part of this decade.  Still, agents have a bad taste in their mouths from that time period.

Agency-approved appraisers are required to comment on the condition of the property inasmuch as it relates to livability, just like conventional appraisers.    Real estate agents also relied on the "clubby nature" conventional lenders had with their appraisers; those close relationships were removed with the implementation of the Home Valuation Code of Conduct.

In summary Debbie, what we need to do is to be really proactive with the offer.  Lenders (like me) need to give REALTORS (like you) a better pre-approval package so as to relieve the seller of any doubts that the loan can close.  REALTORs need to address seller-paid closing costs in the offer, and we both probably need to attach a copy of this article to better educate listing agents (and their clients) about how HVCC has made all appraisals equal.

Show Me A Good Real Estate Deal..in Vegas

Renee Burrows of Nevada Realty Solutions presents a 4-plex in the City of Las Vegas.  It is offered for sale at $455,000.  It is located near the Strip and UNLV so it is convenient for both casino workers and students.

Annual Income Analysis:  3 two bedroom units, rented at $625/mo. and 1 three bedroom unit, rented at $725/month.  The property makes $800 annually in other income (laundromat?).  They assume a vacancy factor of 5%.  Total annual income= c. $30,000

Annual Expense Breakdown:  Taxes at $1,648, Insurance of $900, Maintenance at $400, Utilities of $1,500, and Trash of $144.  Total Annual Expenses = c. $4,600

Net Annual Operating Income= $25, 400

Okay, what's a good price to pay for this property?

1- Zillow says it's worth $438,000...whatever.

2- It was bought about 18 months ago for $417,000, Ouch!  Listed at $455,000, it's priced at 9% higher than list price.  That sounds like the owner is just trying to get out of the deal without a loss.  Selling that quickly for no profit leads me to believe that there may be a problem.  Maybe not.  The owner could have personal reasons to sell but the quick sale seems mighty suspicious.  The prior sale was for $180,000 in 1998.  Whew!  That makes us feel a bit better.  That ten year appreciation is in line with Vegas real estate.  The owner has equity in the property so there won't be a short sale consideration if we lower the price.

3- Oh!  It was built in 1963.  Perhaps there is some deferred maintenance?  Lets assume $10K per unit and $10K for the building (an inspection will reveal more but we have to set a price before inspection).  We're GUESSING at $50,000 in expected maintenance for the next five years.

4- Let's use a ten-year, interest only loan at 7.25% (7.45% apr).  That would be $6.02 per thousand for the monthly payment.  We have NAOI of $25,400 or monthly NOI of $2,116.  Okay, divide $2116 by 6.02 and we have a max loan amount of $351,500.   Divide that loan amount by.8 (to reflect a 20% down payment) and we get a max price of  $439,375.

5- My guess is that a good price to pay is between $390,000 (to reflect my GUESSED deferred maintenance) and $440,000.  Renee reports that the Vegas rentals market is tight.  If she feels that rents can increase some 10% from these figures in the next year, the deferred maintenance issue may be null and void.

Point of interest.  I did not figure the tax benefits of depreciation into this equation.  This can add more to the value.  I'm guessing that an investor, offering as high as $440,000, with about $95,000 for down payment and closing costs will have positive cash flow.  That means he can weather any downside Vegas may have left while still "getting into the game" of a growing economy.  Again, Renee reports that rentals are tight in Vegas; the time may be correct today and the upper end of $40,000 may be justified.

So I want a 15% annual pre-tax return.  This means I want to clear $400,000 in ten years.  Assuming a 10% cost of sale, I need to sell for $925,000 by 2017.  That's a little more than a double in price.  Since price is a function of rents, can those rents double by 2016, Renee?

Disclaimer:  This is an exercise.  I am not a licensed real estate broker nor an real estate investments specialist.  I'm a mortgage originator with a history of securities brokerage and real estate investments owner.  I have a BS in Finance.  This exercise is offered as a forum for discussion.  I have no doubt that there will be many opinions, analysis, and discussion in the comments section.  Please remember to critique the ideas and the investment analysis.  There will be no ad hominem attacks allowed in the comments section.   This is not an offer to sell real estate.

Show Me A Good Real Estate Deal

Denny Oh impressed me with this analysis of the downtown San Diego condo market. Jeff Brown continually astounds me with his ability to identify growth investments in residential real estate, across the country.  Greg Swann is picking off pricing disparities in Phoenix.

There is an old question I used to get when I traded securities.  "Is this the year of the market timer or stock picker ?"  That question was posed to me every year by various clients.  This year, the question is no different except it's geared towards residential real estate.

You always make money when you BUY the investment, not when you sell it.

I'm starting a new category on America's Mortgage Broker; Show Me A Good Deal. This category is reserved for real estate agents who want to highlight what, they believe, will be a great investment.  Here are the rules:

1- Explain your premise (eg- Boise is San Diego 25 years ago).
2- Address the use of leverage and how it enhances the "deal" (I can help you with that)
3- Give a compelling reason for THIS property (eg- Buy it for $200K below market, spend $50K t0 improve it to market condition)
4- Address the holding time period.
5- Identify the potential sales price and explain why
6- Compute the IRR (I can help you here).

Your prize?  When the article is posted, you may duplicate it on your home weblog.   I'll also feature it in my newsletter to  past clients (over 700 in the database).  I don't have a ribbon to award you  nor do I have a button for your weblog but you will display your prowess to some 250-300 readers daily.

First Up?  Renee Burrows of Las Vegas with a 4-plex in the UNLV area.  Check back tomorrow.