Is This Really A Good Time For You To Sell?

 

Real estate appears to be in the middle of a crazy sellers market. Inventory is low and most anything that is placed on the market is snapped up almost immediately by desperate buyers – sometimes sight unseen.

Much of this comes as many buyers migrate from colder, more expensive and restrictive northern and western states to warmer, less costly locations in the south. However, this is not the whole story as the pandemic induced practice of working from home reduces the need for proximity to urban environs. Then there are the usual reasons for moving like new job, downsizing and retirement. Whatever the individual reasons, buyers significantly outnumber sellers with the predictable upward pressure on the prices.

For instance, a simple cape cod – nice, but nothing for HGTV – that was located across the street from my son's home, was listed at a substantial increase in price over comparable sales. He says the street was lined with cars when the house hit the market. The eventual buyer, after just a few days paid twenty thousand over the asking price. Then, when the inspection revealed mold in the basement, they just took the house as-is and paid for the remediation without going back to renegotiate with the seller.

An associate of mine had a nice two bedroom condo they wanted to sell, but were not in a hurry. They priced it high to give them time to get ready to move, etc. It was gone in three days.

Is it time for YOU to sell?

Given that it would probably not be difficult for you to sell your property, unless something is dreadfully wrong with it like being adjacent to a landfill or politicians office, is selling now the best decision for you? It depends on your circumstances and what you plan to do with the windfall.

If you've been in the place for a while and have some equity AND are heading to a less costly location, this choice could be a winner for you. That is moving from the city to the suburbs or from the high tax north to a more southern location, could go well for you. If you are looking at going the other way, from the suburbs to the city – unless it is somewhere like New York City where some prices have taken a beating as many people have fled the area – it may not go as well.

If you've had your eye on the five bedroom center hall colonial or the nearby waterfront home a few miles down the road and you see your house has increased significantly in value, don't get too excited since, although your house is now worth what those homes were selling for – they have gone up as well. So, when you sell your house for a pile of money, that pile of money will buy you pretty much what you had if it is in the same market.

On the other hand, if you are not needing the money to buy another home or it is an investment property, that is an entirely different situation. It may be time to take the money while prices are high and run – just consider carefully what you would do with the cash.

If you are looking a selling investment properties, there are a few factors to consider. Will the cash from selling a property that is producing a steady income replace that income? This may not be a factor if you are cashing out and retiring to a tropical island, or even a nice Florida beach.

If you have significant equity, the cash from one property may provide the down payment for several more properties and increase your cash flow... or it may provide the capital to take advantage of the outrageous retail prices and allow you to rehab and flip some currently undesirable homes.

There is a lot to consider beyond just the inflated selling prices. If you don't think prices will remain this high, just like many stock market investors do, moving into a good cash position may well permit to buy more with your money as a potential bubble bursts and prices fall. This whole process would be so much simpler if only we had a crystal ball to see the future.

The Taxman Cometh

No discussion of the potential for greater profits would be complete without recognizing that your greedy uncle in Washington is looking at more and better ways of increasing his share of your income. Books have been written on the subject so what we have here is, at best, a brief overview of some of the things to keep in mind. Whatever is written here could change tomorrow, so it would be well to pay attention to events in DC and keep in touch with your accountant and tax advisor.

If this is your personal residence, you get somewhat of a break. As a single tax payer, $250,000 of the profit is sheltered from the taxman. That is profit, not selling price. As a married taxpayer, each of you is eligible for that amount, or $500,000 profit is yours before they look for tax payments. Unless you are in the realm of point houses (as in 2.4 million), you should have little problem here.

Investment properties are another story entirely. Currently long term capital gains are taxed at a lower rate than regular income. Word out of Washington is that some are salivating over the potential windfall they would get from more than doubling their share of your profit. All this in view of the fact that a considerable portion of the price increase is because of inflation and not increase in intrinsic value.

Is There A Defense?

There are some things you can do to soften the bite of the taxman. Here is where a good tax advisor or account can be a valuable addition to your team. Just be sure that he or she is on the up and up and stays on the straight and narrow as the IRS can do nasty things to you if they think you are chiselling rather than filing.

While books have been written on tax strategies, we will look at a few. First thing that comes to mind is that you receive payments over several years as this will show a lower profit each year than if you recognized the whole amount in one year. This generally lowers your tax bill as it can keep you in a lower bracket.

If you hang around real estate investors for long, you will become aware of a number of creative ways to purchase property... and they are legal as I don't know any of these people that would look good in an orange jump suit. We don't have room to go into detail here, but options can be useful in spreading income over a few years. Partial ownership and lease options are other paths to explore. You can work with 1031 exchanges. Although both properties would be valued at the inflated prices you would still get the tax saving benefits of the arrangement.

As the saying goes: It's not what you make, it's what you get to keep that matters. If it is right for you, sell and take your profit, but be careful so you get to keep as much as possible.

 

Who Owns Your Property?

Some will jokingly tell you that the bank really owns their property, just like it does the new car you just bought with the seven year payment book. Even though your name is on the title, is it really yours?

That's not exactly what I am talking about today. Stick around, you may or may not have heard some of this before. Before I go any further, I need to point out that I am not a lawyer and I've never played one on TV. I confess to spending some time watching Matlock and Perry Mason, but that didn't do me much good. However I have learned a thing or two over the years and hope to help you ask a few more of the right questions of the esquires in your life.

Is That Your Name on the Title?

When you get a property or two, it feels good to see your name on the deed and get the feeling of owning something solid like real estate – even if you are in debt up to your neck with the lender. In time, you gain another property, then another. You are on the road to becoming a major property owner in your community.

You are also on the road to becoming a major target should anything go wrong that an ambulance chasing attorney believes he can turn into a big pay day for himself, maybe even, his client. These guys love to go after the “evil rich”, who they define as anyone who as enough assets to justify suing.

By holding five, ten, twenty or more properties, you are in his cross hairs and he is just waiting for something bad to happen. You are ripe for the picking. When you don't have anything (at least in your own name), there are no big pay days for the shyster lawyers and they are hesitant to work of nothing, which they will do if they sue some poor schlub who has nothing to take.

You can stay safe if you don't accumulate many assets and some have chosen that route...but that is not the route to financial success.

Don't Put Them In Your Name

Some folks will tell you to form an LLC to hold the properties. There is some wisdom in this, but it is not fool proof. While there is some liability protection with an LLC, holding a dozen properties in an LLC makes it the same kind of target as an individual holding as many properties.

Some have recommended a separate LLC for each property, or at least for every two. However this can be an administrative and tax reporting nightmare. Rules are different in each state, but here in Florida there is an annual report with a hundred dollar plus filing fee for each one and much higher penalties if you should not get the reports in on time.

This is not to say that LLCs are bad, just that this isn't the best use of them. I have one and it functions well, but it does nothing to conceal the ownership of the properties since all anyone had to do is go to sunbiz.org and see the names on the registration. It is probably just as easy in other states to find the true ownership of a company.

What Do You Do?

You want to accumulate real estate without advertising you wealth – that is the best way to keep it. Here in Florida, this is easily done by holding the property in a trust. It sounds complicated, but it is not, once you actually do it. This is not an instruction on how to create a trust – like I said, I am not an attorney and I have never played one on TV. It is, however, meant to encourage the reader to look into it and explain some of the benefits. We'll discuss how to get this information shortly.

Generally one property in one trust will serve your interests nicely. If anything really bad happened and a court order penetrated the protection of a trust, there will be no way to link it to other trusts you happen to control.

As an example of how this works, I was rehabbing a house a few years ago and needed a fairly large window replaced. I got a couple of estimates, but the interesting thing was one salesman told me that they like to check out who they may be dealing with and all they saw was the trust name on the property and they had no idea who actually owned the house. I smiled and told him that is exactly how it is supposed to work.

Some Things to Think About

Here in Florida, the trust has a trustee. The trustee legally has complete control of the property. Even if he (or she) receives a subpoena, there are somethings they generally are not able to do... but they can sell the property, rent it or do anything an owner would do. So the first thing you need in a trustee is someone you can trust – someone who actually believes in integrity.

Then you need a trust agreement. I will not begin to outline this agreement, but they are not complex. If you are in the Sunshine State, I would recommend looking up the Land Trust Service Corporation. It is operated by an attorney who can create these documents for a reasonable fee and can even serve as trustee. I understand the readers reservations, but Mark Warda is a good guy and his business would not last long if he were not a straight shooter.

In other states most real estate attorneys can put together an trust agreement, but you really want one that deals with and understands investors. They can often be located through REIA groups or title companies that work with investors. The point is that it is not very expensive and it is not worth doing wrong.

So, go out and buy some properties and do it in a way that you can keep them,

Robber Barons Return

Robber barons flourished in the late 1800s and acquired the label because of practices that mimicked those of organized crime – such as corruption, intimidation, conspiracies and, on occasion, violence. They amassed great wealth though monopolies and manipulation.

Many think of today's hedge funds in the same terms. It appears that nobody really likes them, except those reaping the profits of their activities. We have witnessed this week something we hardly ever see in America: an almost universal condemnation of efforts by stock market elites to protect the hedge funds that held short positions in Game Stop. I was dumbstruck to see AOC, Elizabeth Warren and Ted Cruz singing off the same page.

This whole dust up has little to do with the intrinsic value of the stock or the corporation itself. As with much of the market, it is more driven by the perception of the investors. Logically, the funds were right in expecting the stock price to fall as the Game Stop stores are facing increased pressure from online competition.

A Brief Explanation

Photo by BP Miller on Unsplash

For those not familiar with the process, I will give a very brief outline. To sell a stock short, means that you borrow shares from someone who doesn't share your belief or who, at least, takes your “rental fee” as a hedge against falling prices. To maintain this position in the presence of rising prices means being certain the brokerage has sufficient funds to buy the shares to cover the ones you borrowed. Because of this the fund managers were meeting calls for more and more cash.

This is the reason for the panic on Wall St. when the short sellers were faced with calls for funds to cover stocks they thought were going to $4 a share when they went to $300 and $400. It cost them billions. Some sold other stocks to cover themselves. Nobody really felt that sorry for them except some brokerage houses halted trading in Game Stop and a few other stocks. Prices began to fall, but public and public official pressure made them open trading again.

Many public figures proclaimed, this halt in trading was proof that the system was rigged in favor of the major investors and when the “little guys” figured out a way to win and beat the hedge fund operators at their own game, they had to be stopped.

Application For Real Estate

Hedge funds, Zillow and others have been moving in on our territory for years. Hmmmm... even that terminology smacks of organized crime. I understand that many of us who have been at this for a while have made connections with private investors, etc. that we have access to funds for our deals. However, often it takes more than just purchase and rehab money.

There will always be people who would rather deal with an individual or small business man or woman than a corporate entity. However, the economics of the corporate buyers are different than individual investors. The kung flu has already created a shake up in the real estate business, and these new players have added to it. Many who don't adapt will be gone.

The Defense

Personalized service is an advantage we have over the formula driven competition. We can listen and adapt our approach more easily than corporate types even though most of out pockets aren't quite as deep as theirs. Will that be enough? I don't know. Big money almost always finds a way to squeeze out the “little guy”. That's the way the robber barons of the past have done.

The events of the past week should give us hope. I am not proposing a particular strategy for two reasons. First, until it is ready to be implemented it is best to keep it under wraps and, second, I really don't have one at this point.

I am suggesting that we begin to look for one that, similar to the Game Stop crowd, uses their massive resources against them as martial arts practitioners often do. We need to keep a watchful eye on their activities – and keep thinking. There are flaws in their systems and we need to find them, just as the gang on Reddit used the public knowledge of the short position to burn the hedge funds.

 

What's Up for 2021?

There are a lot of articles telling us what we will be living with in the coming year. Everyone seems to have an opinion, and that is a good thing – that we are all free to see things through our own lenses. So, I thought I would put in my two cents, although due to inflation, it may be up to a nickel or even a dime.

Some are predicting a real estate boom, although I am not sure what the see as driving it, but that is what they see. Others see doom and gloom on the horizon. I find more evidence for that, but I really don't believe there will be a universal collapse.

The Great Migration

One of the factors we have to consider is the exodus from states like New York, California, Illinois and, to a lesser degree, other similar places that have not handled the Chinese flu or fiscal policies well. But it cannot be blamed soley on the actions of the communist regime – the one in China that is. Restrictive regulations, high taxes and general lack of concern for middle class Americans who make the country function has pushed many who can afford it to pack up and leave for friendlier places.

It is not just the worker bees leaving, but corporations are leading the pack in some cases as they look for a more favorable environment for themselves and their employees. Two notable examples are Elon Musk bringing his operation to Texas, as is Oracle as they desert the silicon valley environment. The NRA is reconstituting in the Lone Star State as well.

These actions do not bode well for the economies of the donor states, but what does it mean for their states with expanding populations? The influx of affluent residents would indicate that even if it doesn't result in an actual real estate boom, the market will have more support than areas with collapsing populations.

All this movement is on top of the normal movement of those of us who have had enough ice and snow to last a lifetime and headed to warmer climates.

The Caveat

This may not necessarily be good news for those of us who see fleets of moving trucks in our neighborhoods. If our new neighbors have not learned from their experience and want to create a world something like they left, it could be bad news for all of us, only we would be more comfortable when we are all out of work and can't afford to pay for heat.

The Opportunity

Obviously an expanding population puts sellers in a better position, whether they are regular homeowners, real estate agents or investors. It is possible this prosperity could be just an illusion. Homeowners who jump at the chance to sell their property for a price they never dreamed of will benefit them little if they are looking for another place to live in a similar area, as the house they are looking to buy will be selling at a premium as well... unless they want to move up north to retire. Who in their right mind does that?

However, agents will be cashing larger checks. Investors, if they watch their pennies, can turn larger profits. Businesses that cater to consumers will have more people to serve – if they are not in a business that has much online competition.

For those with deep pockets and the intestinal fortitude for long term plays may actually be able to make a profit from falling prices in the areas losing population – if they believe it will come back in the foreseeable future. Even in bad times there are always people who find a way to prosper. Fortunes were made even during the great depression. One good thing about looking for the golden ticket in these places is that you probably won't have a lot of competition.

One Certainty

There are always opportunities. Sometimes they are disguised as work. While occasionally they will come knocking on your door, most of the time you have to chase them down and catch them – but you can't even do that if you aren't looking.