INFO THAT HITS US WHERE WE LIVE... Our leaders in Washington aren't telling if they've truly resolved to put our fiscal house in order, but at least last week's deal to avert the fiscal cliff left housing a winner on most issues. First, they extended mortgage forgiveness debt relief through 2013. If they hadn't done this, principal balances written off by lenders to help homeowners with underwater mortgages would have been treated as ordinary taxable income. The bill also re-established the deduction for mortgage insurance premiums for 2012 and 2013 for people with adjusted gross income below $110,000.
In addition, the compromise offers tax credits to homeowners making energy-efficient home improvements in 2012 and 2013. Builders get a tax credit on new homes constructed in 2012 and 2013 that meet federal energy standards. U.S. manufacturers of energy efficient appliances also earn tax credits. Best of all, tax deductions for mortgage interest and property taxes were left untouched, but that battle isn't over, since the politicians will soon be reforming the tax code. Always consult a tax professional for definitive answers on all these issues.
BUSINESS TIP OF THE WEEK... People buy from people. Rather than talking business or current events with prospects, bring up family, hobbies, whatever interests you. Take the time to build a personal connection first.
>> Review of Last WeekWHAT A RELIEF... Last Tuesday, with the country poised to go over a fiscal cliff of major tax hikes and spending cuts, Congress averted it by passing budget legislation the President agreed to sign. They raised taxes on a small portion of wealthy Americans and extended unemployment benefits, and the fact they came to any agreement set off a humongous relief rally on Wall Street. The S&P 500 index closed Friday at a five-year high, enjoying its largest weekly percent gain in more than a year. But spending cuts weren't addressed, so there'll be more political wrangling on that and the $16.4 trillion debt ceiling limit we'll soon reach.
All was not upbeat as stocks fell Thursday after the minutes from the Fed's December meeting revealed some officials want to see an end to the central bank's bond-buying economic stimulus program later this year. Economic data continued mixed, with ISM Manufacturing and initial and continuing jobless claims missing estimates. But ISM Services topped forecasts and showed growth for that sector, while Friday's December Employment Report added a modest 155,000 jobs, although the unemployment rate remained at 7.8%.
For the week, the Dow ended up 3.8%, to 13435; the S&P 500 was up 4.6%, to 1466; and the Nasdaq was up 4.8%, to 3102.
Bonds got slammed as stocks soared on the cliff deal and investors worried the Fed might slow its bond purchases. The FNMA 3.5% bond we watch ended the week down .14, at $106.05. National average mortgage rates held near record lows last week in Freddie Mac's Primary Mortgage Market Survey. In the Mortgage Bankers Association weekly survey, applications for purchase loans were finally down, after increasing five weeks in a row.
DID YOU KNOW?... At the New Year, a resolution is an expression of intent to do something. But in the corporate world, a resolution is an official document representing an action on the part of the Board of Directors.
>> This Week’s Forecast QUIET START... After last week's melodramatics, we have a very quiet period of economic reporting. Thursday, Initial Weekly Unemployment Claims are expected to remain above 350,000 while Continuing Unemployment Claims stay at the 3.2 million level.
Friday, the November Trade Balance should shrink a bit, showing a little more strength in our exports. This will be followed in the afternoon by the December Federal Deficit, forecast still way too high, above $80 billion. Please note, that's for the month!
>> The Week’s Economic Indicator CalendarWeaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.
Info from Craig Piland
Over the years clients would discuss
their property, their portfolio and what they would like to accomplish
or could envision n the future. Our clients looked for advice and
although they could find real estate agents growing on trees and
financial advisors for stocks and bonds can be found the investor with a
house, condominium or one apartment building to a small portfolio has
real difficulty in finding an advisor conversant in all facets of real
estate and that can listen to a clients full strategy and help them
develop a long term real estate strategy including one of simply holding
for the long term.
To demonstrate o capabilities in this area please review the
following five examples: a doctor, "Ready to Retire", a retired
gentleman, an entrepeneur, and a small business owner.
Dr. X, in 2003, had read our annual newsletter and came into our
office. He had three properties in Pacific Beach and had the same
manager for about twelve years. Management had operated under the "keep
rents at the same level and keep the same tenants for years and do as
little maintenance as possible" philosophy. It works for a while.
When Dr. X came into our office he said he wanted to take a
comprehensive look at his properties and possibly take a new direction.
Dr. X and agent performed a walkthrough inspection of all three
of his properties. Property A was a well- located 8 unit near the bay in
very poor condition and very low rents. Property B was a well-located 9
unit with very large units and lots of parking within eight blocks of
the ocean in extremely poor condition and extremely low rents. Property C
was in tear down condition and extremely low rents. The portfolio
represented a lot of potential, but the properties potential was not
Dr. X asked for my recommendation, which was as follows: Property A
had to be rehabilitated immediately and I offered two different
scenarios a light rehabilitation and a full rehabilitation. Property B
we should do a minimal rehab and raise the rents to market and take a
look at the property again in five years. Property C was a tear down.
The units were too small to rehab and I recommended three scenarios the
owner could contract with a design/builder(long term contact), complete a
joint venture with a design/builder or sell to a developer and complete
a 1031 exchange into a newer property.
Dr. X looked at the options and concluded on the following strategy:
Major rehab on Property A, a light rehab with maximum rent increases
for Property B and to sell property C and complete a 1031 tax deferred
exchange. The result of these moves was on property A: An increase in
net income from $12,000 per year to $42,000 per year and a completely
rehabilitated building. Property B: An increase from net income of
$16,000 per year to $32,000 per year and decreased liability through a
well-maintained building. Property C: An increase in net income from
$5,000 per year to $10,000 per year and purchased two high quality well
located buildings to replace a building that was falling down.
Ms P has three properties with 4 units each in Pacific Beach that
she had purchased through Cal-Prop in 1991. There were tremendous
locations. She had weathered the storms of the mid-nineties market and
she was about to retire and she had significant equity. She further
needed some cash to pay into an old retirement plan, which would
increase her retirement stream. The year was 2004 and interests rates
were very low and her variable loans had a 7% floor. We reviewed all of
the options including selling and paying taxes, selling and carrying
paper, converting to condominiums, only doing a refinance and finally
doing a re-finance and re-position the property as luxury apartments. In
the end Ms P chose the last option. We refinanced, pulled enough equity
to pay down her retirement plan, completed a full remodel of the units
for $350,000 and her net cash flow on the units went from $25,000 per
year to $60,000 per year.
Mr. D has owned his apartments for over 20 years. They are in an
extremely good Beach location, but are aging rapidly. Based on the value
in today's market despite the fact that Mr. D has a very attractive
Prop 13 property tax payment and the properties are free and clear the
return based on current equity is 3.25%. Mr. D is retired and wants to
cut down his involvement in oversight and management. CP assisted Mr. D in selling his buildings to a condominium converter
for an extremely attractive price and completed an IRS 1031 Tax Deferred
Exchange in a Tenant-in-common (TIC) property. The TIC yields him a
management free 8% return on his money. TICs can be found with 7 to 10%
return in California and across the country.
R Thorton CP Management9 previous employment property management PB
Foreclosure Starts Down Dramatically
August 2012 California Notice of Defaults were down 23.6 percent from the prior month, and down 49.1 percent compared to last year. In Arizona, Notice of Sales were down 16.1 percent from the prior month, and down 42.2 percent compared to last year. The decline in Foreclosure Starts is even more significant on an average daily basis, down 30.2 percent from the prior month in California with 23 business days in August vs. 21 business days in July.
Foreclosure Sales were up 23.7 percent in California on a month over month basis. On an average daily basis, the increase was up 12.9 percent from the prior month.
In Oregon, non judicial foreclosure activity almost came to a halt, with Foreclosure Starts down 80.6 percent from the prior month and down 93.9 percent compared to last year, most likely indicating a move to judicial foreclosures as discussed last month.
"We continue to see reports that there will be a wave of foreclosure sales after the election or at the start of the year,” stated Sean O'Toole, Founder & CEO of ForeclosureRadar. “The lack of Foreclosure Starts this month puts a nail in the coffin of this theory. There will be no wave of foreclosures for at least five months. The good news for investors and first-time buyers is that Foreclosure Sales have at least remained flat or slightly up, continuing to provide some opportunities in the meantime."
From Foreclosure Radar
Many homeowners have been caught up in the “bad timing” of the mortgage crisis and eventual loss of property values. As the dust has settled and the economy is showing signs of improvement, the average San Diego Homeowner owns a home that is approximately worth 23% less than it was in 2008.
Regardless of how far underwater your current property is, if you have the income to support the payments of your current property and the payment of the house you are buying, you can qualify for the purchase of a new home. Or you can buy the new property as an Investment Home (non-owner – minimum 20% down payment) and use the rents to offset the mortgage payment.
If you want to use future rents from your departing residence to offset the mortgage payment, see the below guidelines for VA, FHA, and Conventional.
VA Purchase Financing is only loan program that will allow you to use market rents from your departing residence regardless of the equity position of the property.
FHA Purchase Financing will require evidence of a minimum of 25% equity in your departing property to use any rental income to qualify for your new home. If you’re current house is upside down and you need rents to qualify for your new home an FHA loan will not work for you.
Conventional Purchase Financing will require evidence of a minimum of 30% equity in your departing property to use any rental income to qualify for your new home. If you’re current house is upside down and you need rents to qualify for your new home an FHA loan will not work for you.
Give me a call anytime if you have questions or if I may be of help to you and your business. Have a great week!
Info from loan officer Craig Piland