The Tax Advantages of Owning a Vacation Home

Whether your vacation home is an oceanfront manor or a small cabin in the woods, it can provide significant tax advantages. How often you use the home and how much you rent it are the primary determinants of your vacation home's tax treatment. The California Society of CPAs (www.calcpa.org) explains what you need to know to gain maximum tax advantage from your vacation property. Minimal Rental Brings Tax-Free Income If you rent your vacation home for less than 15 days during the year, any rental income you earn is tax-free. You don't even have to show it on your tax return. In terms of mortgage interest and property taxes, a vacation home used mainly for personal purposes receives the same tax treatment as your primary residence. You may fully deduct mortgage interest on up to $1 million of acquisition mortgage debt on your first and second home. Property taxes are also deductible, but you cannot write off any rental related expenses. Renting More Than 14 Days If you rent your vacation home for more than 14 days per year and your personal use of the place exceeds 14 days per year or 10 percent of the number of days it is rented, whichever is greater, all rental payments are included in income and limited rental expenses may be deducted. You may be able to write off certain rental-related expenses, but only up to the amount of your rental income. Expenses that relate only to renting, such as advertising and commissions

and personal usage. Finally, all other expenses, such as insurance, maintenance and repairs that apply to the property itself must be allocated between rental and personal use. Expenses that cannot be currently deducted may be carried forward to future years. Personal Use May Be More Than Meets the Eye Be aware that when you allow family members to stay in your vacation home, you must count any part of the day the home is used by parents, siblings, children, grandparents and grandchildren as personal time, regardless of how much they pay for the privilege. If a friend rents your home for less than the fair market rate, that also counts as personal use. On the other hand, days spent at your vacation home to make repairs do not count as personal use. This is true even if other family members use the home during the same time for recreational purposes. Limited Personal Use Leads To Greater Tax Benefits If you do not use your vacation home for personal purposes for the greater of more than 14 days during the year or more than 10 percent of the number of days the home is rented, the limitation rules do not apply. However, restriction of expenses may still apply if the rental of the residence is not engaged in for profit. If the status of your property qualifies as rental property, it is possible for you to write off more expenses-up to $25,000 in excess of your rental income, if you actually manage the property. This amount is phased out to zero if your adjusted gross income is between $100,000 and $150,000.

 

Use Your IRA to Invest in Real Estate
April 20th 2004

By: Tom Lunndstedt, CCIM - www.tomlundstedt.com

A short, middle-aged woman wearing red glasses came up to me after one of my real estate seminars. She seemed shy and hesitant, but she’d listened intently and taken lots of notes during the class. She told me her name was Norma and proceeded to ask me several good questions about real estate investing. She happened to mention she had $200,000 in her retirement account. When I congratulated her she said, “Don’t be impressed. I had $300,000 a few years ago!”

Her retirement account, like many others, has suffered as a result of investment choices. Norma went on to tell me she wished she had bought real estate instead of “investing in an IRA.” She was amazed when I told her she could have her cake and eat it too - or rather, have her IRA and real estate too! Let me explain.

First and foremost: A retirement account (traditional IRA, Roth IRA, SIMPLE IRA, SEP Keog 401k etc.) is not an investment! It’s simply a special account that holds your investment. It holds many types of investments, such as mutual funds, stocks, bonds, and …. drum roll please, real estate.

Picture a truck with the words “MY RETIREMENT ACCOUNT” painted on the doors. In the back of the truck, you load whichever allowable investments you choose. As you picture this ask yourself, “Is my retirement truck on the way to becoming a big, heavy-duty monster truck or will I end up with a little, wimpy mini pickup?”

When I told Norma her retirement account could own real estate she said, “But I asked the company that administers my account if my IRA could own real estate, and they said “no”.

Whoa! Instead of merely saying “no” the person she talked with should have added three important words: “not with us.”

The problem is that most companies that hold retirement accounts aren’t geared up to handle real estate. Therefore, have no incentive to inform their customers that real estate is an alternative investment choice. That’s the main reason for the misconception that real estate can’t be held in a retirement account.

Let’s get this straight: retirement accounts can own real estate.

In a minute, we’ll get to the basic ins and outs of real estate IRAs. But, first some advice: The article is designed to be a launching pad for readers to being their exploration of real estate IRAs. It’s a complicated subject and everyone’s situation is unique, so be sure to talk with your competent advisors before you take any action. OK, here we go.

First, establish a self-0directed retirement account with a company/custodian that specializes in real estate IRAs. This is a relatively easy process and can be done by either establishing a new account or rolling over the assets of an existing account. (Be sure there are no surrender charges for rolling over and existing account.)

Once you’re the proud owner of a self-directed IRA with a custodian that can handle real estate, what’s next? There are specific rules as to what you can and cannot do with your real estate IRA.

Some Things You Can Do:

• Your real estate IRA can buy and sell many types of real estate, including raw land, rental properties, condos, fixer-uppers, commercial properties, lakeshores, etc.
  
  Keep in mind it’s the self-directed real estate IRA that buys, owns and sells the property. Not you personally. You don’t withdraw the money from the IRA to buy the property - the custodian buys the property in the name of your self-directed real estate IRA.
• The property can be rented but the rental income is paid into your IRA, not to you.
• All the expenses of renting and operating the property must flow in and out of your self-directed real estate IRA.
  
  Be sure your self-directed real estate IRA has enough liquid reserve funds to cover operating expenses, improvements etc.
• It is possible to finance a property that is owned by your IRA. But the financing must be “no recourse.” That means the property, not the IRA account, is the sole security for the loan. More traditional lenders won’t provide non-recourse financing. However, seller financing or private loads are possibilities. Let me emphasize again: get good professional advice before taking action.
• Your real estate IRA can buy a partial interest in a property. This is useful if your IRA does have enough money to buy 100 percent of the property. It could be a partner and own a fractional interest.

Some Things You Can Not Do:

• Your real estate IRA cannot buy a property that you, your spouse, or certain family members already own. Likewise, your real estate IRA cannot sell a property it owns to you, your spouse or certain family members.
• You, your spouse or certain family members cannot have any personal use of the property owned by your real estate IRA.
• Your IRA cannot lease the property to your business. Your business cannot use or occupy any part of the property.

Is a Real Estate IRA Right for You?

So, now you know you can use your retirement account to buy real estate. But the bigger issue is should you use your retirement account to buy real estate? The answer is, it depends on the type of real estate and your unique situation.

You already know your real estate IRA cannot own property that is used by you, certain family members or your business. Therefore, primary residences, second homes and vacation homes are not candidates.

In addition, a rental property that produces tax shelter from depreciation deductions would probably not be a good fit because the tax shelter would go to waste in your retirement account.

Other types of real estate, such as raw land, fixer-uppers, and non-leveraged rental properties are perfect candidates. The profit from these investments would be taxes if you owned the property personally. However, if your real estate IRA buys, owns and sells the property, the profit would compound in your IRA tax-deferred (or tax-free if it’s a Roth IRA)!

There is a limit on how much you can contribute each year to your retirement account. But there’s no limit on how much the account can earn! Hubba hubba!

Last But Not Least

• Before your IRA buys any property, you’ve got to understand how real estate works. There is a lot to it. Make a commitment to learn how to analyze a property before you buy it, including operating expenses and management considerations. Study the financial benefits such as cash flow, depreciation and appreciation. Learn how to determine cap rates, cash on cash and other rates of return. And so on. The more you know, the better your chance of success.
• Remember that real estate IRAs are specialty and note very retirement account administrator/custodian is geared up to handle them. In the “Resources” section below, I’ve included several real estate IRA custodians (as well as some other resources) to get you started. Bear in mind, there are other custodians and you need to find one that’s right for you. Check out their web sites or call them.
• If you’re in the real estate profession, I hope you can see the huge potential of real estate IRAs. Think of the millions of dollars that are sitting in the retirement accounts of your potential clients. Get out there and help them take advantage of a great opportunity!
  
  And finally, if the choices you’ve made so far for your retirement account aren’t taking you where you want to go, find a new vehicle. Real estate opportunities are everywhere for those savvy enough to recognize them and motivated enough to take action.

Whatever Happened to Norma?

Sometimes I wonder if anyone ever acts on the information they receive in my seminars. I can only hope. But if I let my imagination run wild… It’s 20 years from now and I’m driving down the interstate when a huge, shining, beautiful 18-wheeler semi truck pulls along side me. The driver gives a friendly toot on the air horn, waves and smiles. I can’t believe my eyes - it’s a little old lady wearing bright red glasses, and as the truck passes I see huge lettering running from the front to back: “NORMA’S REAL ESTATE IRA!”

What a country!

Resources

• Entrust (1-800-392-9653)
• Lincoln Trust (1-800-825-2501)
• Sterling Trust (1-800-955-3434)
• On the internet, enter “real estate IRA” on the search engines such as Google.

Another good resource is the book, IRA Wealth, by Patrick W. Rice with Jennifer Dirks.

 

Real Estate Market feels like year 2000 all over again
Mar 10th 2004
By: Avram Goldman

Listings are beginning to sprout. Listings taken are increasing, however they are being sold at a rapid pace. Several offices reported all offers presented were in multiple offer presentations. Not uncommon to have multiples in double digits. SF Noriega office participated in a 30 offer presentation. Inventories in a number of markets are less than one month. Even high end markets are seeing less than 2 month inventories. Some feel that it is 2000 all over again. That is not too far from the truth. Current inventories are the lowest since 2000. The Pleasanton office had 22 sales in the first 3 days of March. The market is sizzling. Again best time since 2000 to list. As long as interest rates hold, this market will be at high velocity. The demand is extremely strong given the numbers through our open houses. Many had 70-100 people through them.

Have a great week.

Avram Goldman
Coldwell Banker
San Francisco Bay Area
President and COO
12657 Alcosta Blvd. Suite 500
San Ramon, California 94583
Office 925.275.3008
Cell 925.323.8881
agoldman@camoves.com

 

The market is picking up steam
Jan 18th 2004,
By: Avram Goldman

Listings are still in short supply. They are selling as fast as they hit the market. In fact, listing inventories are still declining. In Santa Clara county they are the lowest since 2000. The second lowest since 1999. In a number of markets we have less than a one month supply. Many double digit multiple offers are occurring. Here is a sampling: 12 offers on a home in Oakland, 14 on one in San Ramon just under $500,000, 24 offers on a home in Pleasanton at $549,000, 12 offers on a home in SF priced at $899,000 which went for over a million and another priced at $850,000 with 19 offers sold at over a million. It is feverish under $850,000. Open houses are crowded, several had over 100 buyers and one had over 200. Offers have to be crafted to have a fighting chance. It is more important than ever to make the extra effort to woo the listing agent and build a relationship. Buyers have to be qualified at the most they can afford to have a chance to be the winning offer. Sales are picking up quickly. As of the 29th the Fremont office had 101 sales, Santa Rosa 81, SF Lakeside 72, and Walnut Creek 50. This is the best opportunity sellers have had since the red hot market of 2000. If they are thinking of selling in the Spring or Summer they should move up the date to catch this wave. Timing is everything. Here are this months results: 15 office reported Increasing Inventories (but selling quickly--more listings coming on the market), 7 Steady and 5 Declining----14 offices reported Increasing sales 11 Steady and only 2 Declining.
Have a great week.

Avram Goldman
President and COO
Coldwell Banker San Francisco/Bay Area
12657 Alcosta Blvd. Suite 500
San Ramon, California
925.275.3008 office
925.323.8881 cell
agoldman@cbnorcal.com

 

Influx of Immigrants Will Be Major Stimulus to Future Housing Demand, NAHB Economist Says
Nov 7th 2003, 2003
By: Beth Bresnahan

RISMEDIA, Nov. 7-The substantial influx of immigrants to this country during the next 10 years will be a major support for housing demand in both the rental and for-sale markets, according to National Association of Home Builders (NAHB) Economist Michael Carliner.

Speaking at NAHB’s recent Construction Forecast Conference in Washington, D.C., Carliner said, "Immigrants typically provide an initial stimulus to rental markets for their first few years in the U.S. After becoming established in the U.S, they become a major factor in the for-sale marketplace," he explained. "Since the 2000 Census, it appears that immigration has accelerated, with a net of about 1.5 million new immigrants coming to this country annually since the beginning of this decade."

Looking forward, NAHB forecasts of populations and household formations project a net flow up to 1.7 million foreign-born people coming to this country every year between 2002 and 2012, with labor demands created by the retirement of baby boomers likely to provide economic and political influences supporting immigration. Because of the demographic changes projected for the next decade, the long-term outlook for single-family home construction is expected to be more favorable than the past decade.

Analysts at the conference were also in agreement that an imminent bust in the nation’s housing prices remains essentially out of the question. Not only have prices never declined on a national basis over the past 30 years, said Fannie Mae Director of Economic and Policy Research Michael Fratantoni, but inventories of unsold homes have been on a steady decline that’s expected to continue in the near future. Part of the blame for this goes to restrictive land use policies, particularly on the East and West Coasts, he said. Fannie Mae is currently forecasting that, at the national level, prices on single-family homes will grow annually at a 5 percent pace between 2003 and 2013.

Speaking to the condition of housing finance markets, Freddie Mac Chief Economist Frank Nothaft indicated that the nation’s secondary mortgage market and its access to global capital markets will become increasingly important over the next 10 years in order to meet the growing financing needs of U.S. home buyers and owners. "Over the next decade, we expect approximately $22 trillion in mortgage originations," he said. That amount, which includes refinancing, will finance about 115 million homes and 65 million home purchases.

Nothaft predicted that residential mortgage debt outstanding will grow at an average annual rate of 8 percent through 2013, when it will total about $17 trillion - more than double its current $7 trillion. The most significant factor behind the growing need for housing finance will be average annual price appreciation, which Freddie Mac is anticipating at about 4.7 percent. Nothaft also predicted that the nation’s homeownership rate would grow by 0.5 percent per year, reaching 72 percent by 2010 as baby boomers enter the peak home buying years and as minority households gradually narrow the homeownership gap between them and white households. Some of the credit for the latter trend belongs to automated underwriting systems, which are lowering costs and expanding the borrower pool, Nothaft noted.

Regionally, most states are likely to experience some decline in single-family starts in 2004, with relatively large declines concentrated in the Midwest and Northeast regions, noted forecasting consultant Stanley Duobinis, formerly of NAHB. "In particular, production of multifamily units will fall back in 40 states, largely across the northwest and mountain states," he said. "States with the greatest ‘housing intensity’ (total starts per 1,000 population) will be in the southeastern and mountain regions, while states with the lowest intensity will be in the Northeast.

 

Economy: California's Economic Structure Ensures Spectacular Declines, But Also Spectacular Recoveries
Sept 1, 2003
By: Dr. Scott Anderson

The majority of national economic indicators suggest a reinvigorated recovery beginning in the third quarter. What does this mean for California's vast economy? The linkages between the U.S. economy's fortunes and California's are strong. California's economy contributes approximately 13.0 percent of U.S. GDP. Still, there are important structural differences that often lead to vastly different economic performances. California tends to have a much more volatile economy than many other states, with outsized swings in employment and Gross State Product (GSP). California's employment volatility is nearly twice the U.S. average with about 46 percent of the volatility due to the U.S. and 54 percent due to other factors specific to California. California's economy significantly outperformed the U.S. in the late 1980's, significantly underperformed in the early 1990's as defense and aerospace spending fell, and then again outperformed in the late 1990's as the Internet boom engulfed the state.

What accounts for this outsized volatility? The structural differences in California's economy are the primary reason. California's economy is concentrated in pro-cyclical and volatile industries. California's economy is largely driven by tourism, international trade and transportation, and high-tech information services and manufacturing. Media is another important industry, as California has more than 3.3 times the concentration than the national average in motion picture production, Internet publishing and broadcasting. Finally, California has a high (though under publicized) concentration of low-tech manufacturing as well. Apparel manufacturing is an excellent example, where California has more than 2 times the concentration than the national average.

The economic forces at play in recent years have disproportionately struck California's major industries. The global economic recession has reduced international trade and tourism. Tourism has also been hurt by 9-11, the war in Iraq, and SARS. High-tech manufacturing has been hit by the nearly 12 percent decline in business investment over the past three years. The collapse of the Internet bubble hit California venture capital, advertising, media, and information service companies. The strong dollar and intense competition from South-East Asian apparel manufacturers have ravaged California's ability to compete in the apparel market. California's above-average population growth is one of the only factors supporting the state's economy right now, helping to boost retail trade, personal services and the residential construction market. But even California population growth has slowly been eroding in recent years.

Looking ahead, California's economic structure should be a winner, with California once again outperforming the national average. A rebounding U.S. and global economy will bolster international trade. Moreover, California's close proximity to Asia compared to the rest of the country will mean that California will benefit the most from a wealthier and faster growing Asia. Leisure travel has largely returned since the Iraq war ended. More affluent and confident American consumers will again be taking to the skies, and business travel should not be too far behind. Finally, the technology industry is again showing signs of life. Demand for computers, semiconductors, DVDs, digital camera's, DSL and cable modem devices are seeing robust increases. This should begin breathing new life into Silicon Valley and California's technology based industries. The Internet survivors are now showing profits and Internet advertising is rebounding. The global adoption of broad band technology will offer a new medium and opportunities for California's media companies, even though digital piracy will remain a threat. So despite recent obstacles including one of the worst state budget problems in the country, it would be a mistake to call California's economy dead in the water. There is perhaps no other state economy in the country better structurally positioned to take advantage of the global economic activity that will occur over the next decade.

INFORMATION IN THIS REPORT IS THE PERSONAL VIEW OF THE WRITER, NOT NECESSARILY REFLECTING WELLS FARGO & CO. IT IS FOR YOUR PERSONAL USE. THE WRITER DOES NOT REPRESENT THAT IT IS ACCURATE OR COMPLETE. NOTHING IS GUARANTEED.

 

Housing Boom to Outlast Another Decade
July 1, 2003
By Kermit Baker

Housing is well-positioned for another solid decade when the economy regains momentum and the lingering effects of the recession subside. Average incomes and wealth for all age groups are higher today than they were 10 years ago. These gains, together with continued strong immigration, should put household growth and housing investment above 1990s levels. At the same time though, escalating costs will make it even more difficult for low- and moderate-income households, whose incomes grow more slowly, to find affordable homes.

By most measures 2002 was the strongest year for housing on record, despite the 2001 recession and weak ensuing recovery. Residential investment, home sales, homeownership rates and home prices all improved last year. But anemic overall economic growth has nevertheless taken its toll, sending mortgage delinquency rates up while pushing down rents in some areas.

Rising home values and falling interest rates gave housing a sturdy boost in 2002. Homeownership rates, investment in new construction, home sales, remodeling expenditures, home equity and mortgage refinance volumes all hit new highs, even in the face of widespread job losses.

With rates at 40-year lows, record numbers of homeowners rushed to refinance their mortgages and cash out some of their newfound housing wealth in the process. All told, refinancing pumped an estimated $110 billion in home equity back into the economy with another $70 billion going to pay off higher-cost second mortgages. Low interest rates also encouraged homeowners to replace higher-cost consumer credit with equity loans or lines of credit, expanding net second mortgage debt by about $130 billion.

The number of new single-family homes built in 2002 reached the highest level since 1978, as multifamily production increased slightly. The only weak spot in production was manufactured housing, which still struggled to work off excess inventories. Home building has kept pace with long-run demand, although residential construction was unusually strong for a period of such paltry economic growth. Barring a slide back into recession, residential construction should remain strong in the years ahead. With little pent-up demand in evidence though, housing is unlikely to lead the economy into more vigorous growth.

Surging home prices have sparked fears of a housing market collapse; however, widespread price declines are unlikely because home prices in most areas have increased in line with income growth. History demonstrates that few areas experience the kind of concentrated job losses that precipitate severe home price deflation.

Over the past 15 years, 53 of the 100 largest metropolitan areas have not experienced a single year of declining nominal home prices. Most areas, in contrast, have experienced slow deflation in real (i.e., inflation-adjusted) home prices after prolonged run-ups. In fact, real prices in 58 of the largest metros have fallen at least 10 percent at least once since 1987. In about a third of these locations, however, the real home values of owners who bought at least two years before the peak exceeded their purchase prices even at the bottom of the inflation-adjusted declines.

Despite this remarkable buoyancy, housing market risks have intensified over the past few years. Job losses have forced more mortgage holders into foreclosure, increased the number of homeowners spending half or more of their income on housing and softened some rental markets. Expansion of mortgage credit to borrowers with past payment problems has elevated foreclosure risks. Increased mortgage-debt levels and growing shares of home buyers with high loan-to-value ratios have raised concerns about the amount of debt carried.

Though heightened, several of these risks remain relatively well contained. The increase in mortgage debt has yet to create serious problems. Thanks to lower interest rates, owners have been able to increase their debt loads without necessarily adding to their monthly payments. Strong home-price appreciation has increased home values, providing 88 percent of mortgage borrowers with equity of 20 percent or more in 2001. Only about 4 percent of mortgage borrowers had equity of less than 5 percent in that year.

Although economic and geopolitical uncertainties cloud the near-term outlook, the underpinnings are in place to support another strong decade for housing. Household growth, the primary driver of housing demand, may well exceed 12 million between 2000 and 2010. Immigrants are expected to contribute more than one-quarter of this increase and minorities fully two-thirds. The growing influence of minorities on housing markets was evident in 2001, when minorities accounted for 32 percent of recent first-time buyers and 42 percent of all renters.

Shifts in the age distribution of the population will favor higher spending on both remodeling of existing homes and purchasing of new homes in the coming years. By 2010, older baby boomers will be in their peak wealth years, and younger boomers will be in the peak-earning ages of 45 to 54. The boomers will still be an important force in home-buying markets because of their sheer numbers and economic clout, even though fewer of them will move during the next 10 years.

The younger, more mobile baby-bust generation also will be important to housing markets as they continue to form new households. The echo boomers will be starting to reach young adulthood and living on their own, boosting demand for apartments and starter homes.

Household growth is likely to remain concentrated in Western and Southern states, but most of the large metropolitan areas across the country will see strong housing production at the fringes. Just as white households continue to move to these outlying areas, minorities are now moving out of the traditional city cores to the inner suburbs. Over the next decade, immigrants are expected to fan out from the handful of metro areas that are traditional gateways for foreign-born households.

And yet affordability pressures have intensified. Even households with incomes well above the full-time equivalent of the minimum wage are struggling to find housing that meets their needs at costs they can afford. Between 1997 and 2001, the number of lower-middle and middle-income households spending more than half their incomes on housing surged by more than 700,000.

For households with the lowest incomes, the only answer is subsidies that defray their housing costs while still providing enough funds for adequate property upkeep. As it is, many of the nation's 21.4 million neediest households can barely afford to cover the cost of utilities, property taxes and maintenance on even modest units in less desirable communities. Today only 32 percent of these neediest renters receive assistance, and with government deficits ballooning, the prospects for expanding this share are grim.

The already scarce supply of smaller, less costly housing is shrinking, with especially sharp losses among two- to four-unit apartment buildings. Regulatory and natural constraints on land are driving up land costs in and around many of the nation's metropolitan areas, restricting development of affordable housing. The hope remains though that communities will begin to find ways to balance the need for a mix of housing types suitable for a range of incomes with community interests in improving environmental and housing quality.

Kermit Baker is chief economist of the American Institute of Architects and a senior research fellow at the Harvard University Joint Center for Housing Studies.

 

Buyers Act Now! Rates still at record lows; 15-year fixed is 5.01%
March 11, 2003
By the Associated Press

WASHINGTON – Mortgage rates dropped to a new low last week, providing good news for people thinking about buying or refinancing a home.

The average interest rate on 30-year fixed rate mortgages fell to 5.67 percent for the week ending Friday, according to Freddie Mac, the mortgage company.

That surpassed the previous record low of 5.79 percent the previous week and marked the fourth time this year that 30-year rates dipped to a new weekly low.

Last week’s rate was the lowest since Freddie Mac began tracking 30-year rates in 1971. Records that reach back earlier show the rate is the lowest since the early ‘60s.

Fifteen-year fixed rates plunged to 5.01 percent from 5.14, the lowest since Freddie Mac began tracking them in 1971.

Recent mortgage rate declines have been spurred by falling Treasury bond rates, which are influenced by concerns about a war with Iraq, economists said.

“The political and economic uncertainty of a war with Iraq is wearing on the confidence of consumers and restraining business expansion, said Frank Nothaft, Freddie Mac’s chief economist. “That, in turn, translates into a weaker economy, which places downward pressure on interest and mortgage rates.”

Rates for one-year adjustable rate mortgages fell to 3.76 percent from 3.83.

Low mortgage rates propelled home sales and home-mortgage refinancing activity to record levels last year.

As consumers swap higher-interest rate home loans for lower-interest rate ones, the extra cash has helped to support consumer spending.

A year ago, 30-year rates averaged 6.87 percent, 15-year 6.37 and one-year ARMs 5.07.

 

Facts about the future of real estate
February 2003
By Avram Goldman
President / Chief Operating Officer of Coldwell Banker San Francisco Bay Area

With a sluggish economy and layoffs in the high-tech industry mounting, many wonder whether the Bay Area housing market might be the next sector to be affected. Are prices “too high” in the Bay Area and could “the bubble” burst like it did in the stock market two years ago?

While no one can predict the future of the economy, a number of experts have indicated that the bubble is not likely to burst. There are a number of economic factors that keep Bay Area prices higher than elsewhere in the nation, and that many believe will continue to do so for many years to come. Following is a look at Bay Area real estate and the economics of why experts agree, the bubble is not likely to burst.

According to the January, 2003 issue of Kiplinger’s Personal Finance, investors agree that the market is going up. “Stocks are cheap and America is on the mend.” Additionally, the financial publication reports, “Home prices played hero last year, defying a struggling economy to sail to record-breaking highs…Continued low mortgage rates, consistent demand and a slight decline in home building will prop up prices. With those factors constant, and with the sluggish economy taking the edge off what had been voracious demand in certain markets, the price outlook nationwide looks remarkably uniform.”

James Diffley of Global Insight, a company which provides housing-forecast figures, says: “We don’t think home markets virtually anywhere can be characterized as a bubble about to burst…We’ll see more normal, sustainable increases in home values in 2003.”

The California Association of Realtors reports, historically, the changes in Bay Area prices are more pronounced than elsewhere in the country, but the long-term direction has always been up.

A look at historical data provides an interesting glimpse at the stability of California real estate. According to the California Association of Realtors, over the last 37 years the median sales price of homes in California has only decreased seven times – six times under 4% and only once at 6%.

The supply of housing continues to fall short of the demand; according to the California Building Industry Association, California typically adds about 250,000 new households each year, yet only builds about 150,000 new housing units.

The shortage is particularly acute in the Bay Area where the population will grow by 450,000 between 2001 and 2005 according to the Association of Bay Area Governments. Interest rates also are making housing more affordable. Mortgage rates are at their lowest levels since President Kennedy was in the White House.

In the future we’re likely to see even more investment in housing due to what two Cornell University economists, Robery Avery and Michael Randall, have dubbed “the wealth tsunami.” Baby-boomers nationwide will be the beneficiary of as much as $10.4 trillion in inheritance between now and the year 2040, much of which will go into real estate.

An Ohio State Professor, Lisa Keister, found that the only baby-boomers who haven’t done as well as their parents have been those who haven’t bought a home.

 

Grounding your IRA: Roll retirement into real estate
Sunday, January 26, 2003
By Corrie M. Anders
San Francisco Chronicle

It’s a little known strategy but the stock market-wary can roll retirement into real estate

If you’re squeamish about parking your IRA nest egg in the wobbly stock market, there’s an alternative investment that few people know about. It’s real estate.

Individual Retirement Accounts that invest in real estate have been around for more than 25 years. But they have only started to gain public attention during the past two years as huge chunks of wealth have evaporated in the stock market.

While these “real estate IRAs” have their own, sometimes complicated rules of the game, there’s virtually no limit to the type of residential or commercial transactions allowed. Single-family houses, apartment buildings, farms, shopping centers, office buildings, hotels, trust deeds, tax lien certificates and raw land all qualify.

Separate IRA accounts also can be pooled to form limited partnerships or limited liability corporations to increase buying power. The partnerships range from spouses who merge their separate IRAs to people with fairly new IRAs that haven’t yet accumulated substantial savings.

“You name it and you can invest in it,” said Patrick Rice, president of IRA Resource Associates, a Camas, Wash., firm that facilitates such deals. The IRS code “doesn’t tell you what you can invest in. It tells you what you can’t invest in.”

Out, for example, are collectible coins or rare liquors. Neither can your IRA invest in a Chagall masterpiece, antique cars or life insurance.

Business is up – way up

Some 35 million households own approximately $3 trillion worth of IRAs, mostly invested in stocks and bonds sold by brokerage houses, banks, mutual funds and insurance companies. Less than 1 percent of the retirement money involves real estate or other nontraditional investments, according to Rice.

That’s changing, as more people become aware of the real estate option. Rice noted that the amount of money flowing into his company for real estate IRAs has quintupled over the past two years.

Traditional IRAs – in which individuals this year can contribute a maximum $3,000 annually, or $3,500 if you’re age 50 or over – have been allowed to hold real estate since the program’s inception in 1974. Still that option comes as a surprise to most ordinary IRA savers – and to many professionals as well.

“I spoke to 40 Alameda County real estate attorneys recently, and most didn’t know you can do this,” said Tom Anderson, CEO of PENSCO, a bank based in San Francisco that specializes in the administration of IRAs that invest in real estate.

No profit for stockbrokers

The reason you haven’t heard about them is that there is little profit incentive for financial institutions, which primarily sell stocks and bonds to IRA accounts. “Why would they tell you about real estate?” said Rice. “That would mean the money would go out of their pots and they couldn’t make money on it anymore.”

Real estate IRAs might be tempting for anyone who’s watched the value of Bay Area real estate skyrocket during the past few years. People with Keoghs, SEPs, Roth IRAs – or those who have rolled their 401(k)s into an IRA after retiring or changing employers – also are eligible.

In addition to potential appreciation, the capital gains tax on an IRA-sold property can be deferred – or eliminated in some cases. Another bonus is that any rental income goes directly into the IRA account.

Pitfalls and penalties

Keep in mind, however, that real estate goes through its own boom-bust cycle. Values could be stagnant or in decline when it’s time to sell your holdings. And real estate IRAs have potential pitfalls with harsh financial penalties for transgressions.

Most savers will want to work with experts to help convert a traditional IRA into a self-directed IRA – one that you control – and to help you stay within the rules. They include IDA custodians, who act as trustees for the account; IRA advisers, who locate real estate investments; and IRA administrators, who handle record-keeping chores, including collecting rents and paying bills.

“We don’t recommend this for people who are not sophisticated investors or not working with advisers,” said Anderson.

One sticky area for IRAs holding real estate is self-dealing, which is a no-no. a beautiful house at the beach and a gorgeous weekend may seem awfully alluring. But neither you and your spouse, nor your parents, nor your children can own or use the property as a personal residence. (Strangely, your sister or brother can). Likewise, you cannot use your IRA’s commercial space for your own business.

Break the rule and you could lose, including penalties, anywhere from 15 percent to 155 percent of your IRA’s value.

Another potential quagmire: Once an IRA purchases a property, the account must contain enough cash in reserve, or have enough rental income, to cover operating expenses. You also need funds for emergencies “in case a water heater breaks, or you lose a tenant for a couple of months” said Debra Greenstein, president of Entrust Administration of Oakland.

If the account has inadequate funds, you can put in new cash to cover the shortage. But the IRS will slap you with a 6 percent penalty on any additional contribution beyond the maximum annual limit. The penalty doesn’t stop until the excess contribution is removed from the account.

Mandatory distribution

Property management can post a considerable expense – from 6 to 10 percent of monthly rents – and it may not be cost-effective for individual houses and small apartment buildings. Some IRA facilitators will let you collect the rent check and send it to them uncashed – or let you arrange for a plumber to make repairs, but have the facilitator pay the bill from the IRA account.

IRA holders must also be cautions about mandatory distribution. The IRS requires that you must start to take mandatory distributions from your retirement account once you reach 70 1/2. So the IRA must generate enough income to provide for the distributions. Otherwise, the IRS will assess another onerous penalty – a hefty 50 percent on the amount of the minimum distribution you should be receiving.

There are several ways to raise funds if your IRA needs cash for emergencies or mandatory distributions. Funds can be merged in from another IRA, the real estate can be refinanced, or it can be sold.

Real estate IRAs with mortgages can also run afoul of the Unregulated Business Income Tax (UBIT). It goes into effect when the leveraged real estate produces profits of $1,000 or more in any one year. The hit is up to 39.6 percent of the capital gains beyond $1,000.

For many smaller properties, expenses offset any income. Still, applying the excess gain to the loan principal can mitigate the UBIT situation. And the tax burden disappears once the loan is paid off.

“You can pay off the principal and wait one year,” said Anderson. “Than at the time of sale, the capital gains will go direct into the IRA tax-deferred. And if it’s a Roth IRA, it’s tax-free.”

 

 

Owner Move-In Evictions - The Basics from A to Z
January 2003
By Jeffery P. Woo
SF Apartment Magazine

The ability of an owner to move into her own property is regarded as a basic American right. The San Francisco Rent Stabilization and Arbitration Ordinance even permits evictions when the owner seeks to move in to her own property. Although the right of a landlord to live in her own property seems simple enough, there are a number of conditions imposed by the Rent Ordinance that often makes this type of eviction expensive and time consuming.

The Basic Requirements
According to Section 37.9(a)(8) of the Rent Ordinance, an owner may evict a tenant provided the landlord:
* Owns at least 25 percent of the property (married couples or domestic partners may combine their ownership interest to equal the 25 percent) if the property was purchased after February 1, 1991, or if purchased before that date, the landlord must own at least 10 percent;
* Intends to occupy the premises as her principal place of residence for at least three years;
Seeks to evict with honest intent, in good faith, and without ulterior motive;
* Provides at least a 60-day notice, effective January 1, 2003 (formerly a 30-day notice);
Must take another residential unit if it becomes vacant, prior to the actual eviction, if it is comparable to the original unit that she wanted. If the vacant unit is not comparable, the landlord must offer the vacant one to the tenant of the unit she wants at a commensurate rent to what the tenant is currently paying; and
* Must pay the tenant who will be evicted a relocation fee of $1,000, provided he or she has lived in the premises for at least one year. Half of the fee must be paid at the time the notice is served. The balance is due when the tenant moves out. This requirement does not apply to single-family homes or condominium units.
* At first glance, these requirements appear relatively easy to meet. However, the landlord’s burden to prove she meets the requirements is not always easy in particular circumstances.

Landlord’s Intent to Occupy
As a landlord, your intent to occupy the premises for three years as your principal place of residence does not simply mean that you have to live there for three years. It means that you must prove to a jury that as of the date of the notice of eviction (known as the Owner Move-In [OMI] Notice), you have the requisite intent. Proving that intent will depend on your personal situation. For instance, if you own no other property and bought this property for the sole purpose of using it as your home, you will likely succeed in proving the “principal place of residence” component of the Rent Ordinance. If, however, you currently live in Hillsborough in a five-bedroom house with a spouse and three kids, you may not be able to prove the “principal place of residence” component if the premise you seek to evict is a two-bedroom house in the outer Mission district.

Likewise proving the three-year component of the Rent Ordinance will depend again on your circumstances. A common situation involves parents gifting or selling a 25 percent interest of a property to their adult children, which allows them to move in via an OMI eviction. Often these children will be in their mid to late 20s, recent college graduates, single, and starting their first professional, full-time jobs. For example, in determining sufficient proof for the requisite intent to stay for three years, we would look at the likelihood of whether this young person might change jobs and move to another city, decide to attend an out-of-town graduate school, or marry someone currently living in another city. The landlord clearly has the burden of proving her intent, and so this process may require fully considering the totality of her life.

Honest Intent, Good Faith, No Ulterior Motive
This element again requires the landlord to prove her state of mind. Two factors must be considered: (1) the relationship between the landlord and the tenant and (2) the landlord’s financial benefit in removing the tenant.

The relationship between a landlord and tenant is particularly relevant if there has been a history of conflict between them. This can range from tenant demands for repairs to tenant reports about illegal conditions to the building inspectors. If there is a history of conflict, a tenant will certainly claim that the OMI eviction is motivated by retaliation for the tenant’s assertion of his rights. Retaliation, however, is not a viable defense when the property has just been purchased, because the landlord has not had any pre-existing relations with the tenant.

In situations where the rent is substantially under market, a tenant being evicted will always claim that the OMI eviction is motivated by the landlord’s goal to clear the building of low-paying tenants. If your property is a multi-unit building in which there are a number of similarly sized units, you may avoid this defense by selecting a unit with a rent higher than your lowest priced one. Frequently, the laws of nature make this impossible for one reason or another. If this is the case, you must clearly justify the reasons you have chosen this specific unit. For instance, in spite of the fact that the unit you want may have the lowest rent, you may find it particularly desirable because it is on the top floor and has the best view, or it includes a garage. While the low rent paid by the tenant may be part of the reason you want a particular unit, you must demonstrate that it is not your dominant motive.

The other common claim of bad faith arises when the tenant is over the age of 60 or disabled and is approaching the tenth anniversary of his or her tenancy. A tenant will allege that the eviction is motivated primarily by the landlord’s wish to get rid of a tenant who will become a protected tenant shortly. (Further information follows under the section below entitled “Restrictions Against OMIs.”)

Thirty/Sixty Day Notice
Effective this month, the Rent Ordinance now requires a 60-day notice (formerly a 30-day notice). As soon as you know your intent, give your tenant as much notice as possible. One of the biggest barriers to a tenant’s compliance with a notice of termination is his or her failure to find alternate housing by the expiration date.

In certain circumstances, if you buy a property with the intent of occupying one of the units, you may evenchoose to meet with the tenant to inform him or her of your intentions once escrow closes.

Restrictions Against OMIs
Even if you meet the requirements for an OMI, you may not evict the tenant if he is:
* Over the age of 60 and has resided in the premises for at least 10 years;
* Disabled within the meaning of federal Supplemental Security Income (SSI) and is determined by SSI to qualify for the SSI program or satisfies such requirements through any other method of determination as approved by the Rent Board, and who has resided in the premises for more than 10 years; or
* Catastrophically ill (Defined as disabled and having a life threatening illness and who has resided in the premises for more than five years.

These restrictions do not apply to OMI evictions of single-family homes or condominium units.

New Requirements Under the Daly Amendment
Effective June 2, 2002, Supervisor Chris Daly’s legislation adds new requirements when an OMI eviction is initiated. Following are some of the major requirements:
* The OMI Notice, which must be served upon the Rent Board, must be recorded on the title of the property by the Rent Board;
* In order to be valid for a tenant’s waiver of any rights under the Rent Ordinance in a settlement, the tenant must be represented by independent counsel and the settlement agreement must be approved by a sitting Superior Court Judge or retired judge;
* Regardless of the agreement made by the landlord and the tenant in a settlement—even if approved by a Superior Court Judge—if the tenant moves out after an OMI Notice has been served, the landlord must move in and live in the premises for three years or, if she does not, then she must re-offer the unit to the evicted tenant.

The effect of these changes now makes it extremely cumbersome to negotiate with a tenant to move out in order to avoid the expense of a trial.

Requirements After You Evict the Tenant
Once you have served the OMI Notice and the tenant has moved, either by agreement or as a result of a trial and judgment, there are yet more requirements that deserve your attention. First, you must occupy the premises within three months of the tenant’s departure from the unit. If you fail to do so, it will be rebuttably presumed that you have not acted in good faith.

Second, you must use the premises as your principal place of residence. Under the Rent Ordinance, you can have only one principal place of residence. In order to determine your principal place of residence the following factors are examined:
* Subject premises are listed as the owner’s place of residence on any motor vehicle registration, driver’s license, or with any other public agency, including state and local taxing authorities;
* Utilities are installed under the owner’s name at the subject premises;
* All the owner’s personal possessions have been moved into the subject premises;
* Documentation of a homeowner’s tax exemption, voter registration, and U.S. Postal Change of Address form;
Subject premises are the place the owner normally returns to as his/her home, exclusive of military service, hospitalization, vacation, or travel necessitated by employment;
* Notice to move from another dwelling unit was given in order to move into the subject premises; and
* Owner sold or placed on the market the home she occupied prior to occupying the subject premises.

Third, you must reside in the premises for three years. If you fail to do so, it is rebuttably presumed that you have acted in bad faith. If you vacate the premises before the three years have passed, you are required to offer the unit back to the evicted tenant at the same rent that was charged at the time of his or her eviction, plus any lawful rent increases that could have been taken. In the event that the original tenant does not wish to reoccupy the unit, and you offer the unit for rent to another party, you must charge the same rent that was charged at the time of the eviction, plus any lawful rent increases that could have been taken. After three years, the landlord may vacate without offering the unit back to the tenant or restricting the initial rent she charges to new tenants. Last, by doing an OMI eviction, you have designated that unit as the owner’s unit. In the future, this is the only unit in which any other owner of the property may ever seek to evict tenants for OMI.

Risk of Wrongful Eviction Claims
The subject of wrongful eviction is beyond the scope of this article, but it does bear a few words. Probably more wrongful evictions claims arise out of OMI evictions than any other type. This is because the cause of action can arise if bad faith can be proven during the initial eviction or after the eviction is complete. Don’t be fooled by the Rent Board’s rules regarding your obligation to offer back the unit if you don’t live there for three years. Those rights are in addition to any rights the tenant may have to sue for wrongful eviction. Because the Rent Ordinance creates rebuttable presumptions, the landlord who must bear the burden of proof that she acted in good faith.

Before any action is taken to commence an OMI eviction, including the service of an OMI Notice, confirm that your liability insurance policy covers you for wrongful evictions.

Conclusion
Your fundamental right to live in your own property is greatly affected by the requirements of the Rent Ordinance. Whether you currently own property with a unit you want to occupy, or you are buying property with the intent to move into a unit, the presence of a tenant there will force you to carefully evaluate the time and expense that recovery of the unit will require. The advice of an experienced attorney is critical to this evaluation.

 

Exemption rules for home sellers
Friday, January 3, 2003
By Kenneth Harney
Nation’s Housing

WASHINGTON- Call it a holiday gift for America’s home sellers: The IRS has just answered many of the long-pending questions about tax-free capital gains on home sale profits.

Tops on the list: What happens if you have to sell a house before the minimum two-year threshold for taking the maximum $250,000 or $500,000 tax-free exclusions? The standard rule allows married, joint-filing home sellers who own and use a property as a principal residence for an aggregate two years out of the five years preceding the sale to exclude up to $500,000 in profits, tax-free. Single-filing sellers can shelter up to $250,000 of gain.

But what about people who have to sell before the two-year minimum? For them, Congress created a partial exclusion safety net, but limited it to situations where the early sale was caused by a change in employment, health or “unforeseen circumstances.”

The partial exclusion is critically important because it is often worth as much as the full exclusion. For example, a single home seller whose employment change forces an early sale after just one year of ownership could qualify for 50 percent of the maximum $250,000 exclusion - $125,000. The odds are that’s more than enough to make the sale totally tax free.

How to qualify for such largesse? The IRS has now mapped the way with temporary rules to guide early sellers. To qualify for an employment-related partial exclusion, the home seller’s new place of work must be at least 50 miles farther from the old (sold) home than the former workplace was from that home.

To qualify for health reasons, early sellers need to show that the sale was related to a disease, an illness or injury of an owner or co-owner of the property. If a physician recommends a change in residence for health reasons, that will qualify. Sales related to an owner’s need to provide health care for sick family members will also generally qualify, but sales intended to be “merely beneficial to the general health” of the seller will not.

As to “unforeseen circumstances,” the rules identify seven major categories, but open the door to others that the taxpayer can demonstrate fit the letter and spirit of the law. The big seven:
* Death of a taxpayer, spouse, co-owner or family member.
* Divorce or legal separation of an owner or co-owner.
* A job loss that makes an owner or co-owner eligible for unemployment compensation.
* A change in employment that leaves an owner or co-owner unable to pay the mortgage or basic living expenses.
* Multiple births resulting from the same pregnancy. (Yes, quadruplets can save you taxes).
* Damage to the residence caused by a natural or man-made disaster, or by an act of terrorism or war.
Condemnation of the property by a public entity.

In the absence of rules like these during recent years, the IRS had urged home sellers not to use the “unforeseen circumstances” rationale for their early sales. Now, the IRS recommends that anyone who could have qualified for tax relief in a prior year under the newly issued guidelines should claim a refund. Just file a Form 1040X amendment to whichever year’s tax return you reported the home sale gain.

 

Lapse in flood insurance program may cause havoc
San Francisco Chronicle
December 18, 2002
By Kenneth Harney

WASHINGTON – An estimated 400,000 homeowners, sellers, buyers and mortgage refinancers around the country could be in for a financial shock at the stroke of midnight Dec. 31.

That’s when the national flood insurance program grinds to a halt – at least temporarily – thanks to Congress’ failure to reauthorize it before leaving Capitol Hill for the holidays.

As of Jan. 1:
New home sales transactions in the approximately 20,000 communities that are covered by the national flood hazard law will be subject to indefinite delays or even cancellation because of the lack of insurance policies.

The most directly affected areas include huge sections of the East and Gulf Coast states, extensive portions of the West Coast, plus thousands of inland areas adjacent to rivers, lakes and streams. Resort and second-home communities will be especially hard hit.

New mortgages and refinancings may be difficult or impossible to close in designated flood hazard areas. That’s because under federal law, mortgage lenders and investors – including giants like Fannie Mae and Freddie Mac – are prohibited from making or purchasing loans on properties within flood hazard zones unless valid insurance policies are in force.

Realtors are likely to find closings delayed, opening the door to higher numbers of contract kick-outs, or cancellations, as the result of expiring rate locks and loan commitments.

Owners of condominiums and single-family homes whose flood insurance policies expire in January and February could find themselves with no coverage for a period of time – and vulnerable to heavy losses in the event of a flood.

How could this happen? How could a program that protects 4.4 million property owners with $623 billion in total insurance coverage be allowed to lapse into legal limbo?

More practically, how can property owners and buyers in flood hazard areas deal with the situation?

Congress’ failure to reauthorize the flood insurance program is directly connected to its partisan gridlock on virtually the entire federal budget this year.

To fund the government into 2003, Congress passed a continuing resolution authorizing operations at the major federal departments. But in an effort to keep the resolution streamlined, congressional leaders eliminated a variety of federal activities requiring reauthorizations before Dec. 31 to continue functioning.

One of those was the National Flood Insurance Program, which has been in existence since 1968. The program supplies an estimated 90 to 95 percent of all flood insurance written on American properties and is combined with flood plain management responsibilities for participating communities. In some coastal and resort areas, flood insurance is required on virtually all structures to obtain financing.

With the Dec. 31 deadline approaching, Anthony S. Lowe, federal insurance and mitigation administrator, sent out guidance to program participants.

As of Jan. 1, said Lowe, no new contracts for flood insurance will be available until Congress and the president reauthorize the program. Requests for new coverage received – not simply post-marked – before that cutoff date will be accepted and the insurance issued.

In a recent interview, Lowe emphasized that the flood insurance program will be in hiatus for new policies, but “we do have authorization to pay claims” on existing policies.

In other words, for most homeowners whose policies are not expiring in the near future, there should be no change in coverage or risk.

However, Lowe estimated that about 400,000 new or expiring policies could be affected by the authorization lapse during January, and it is inevitable that some mortgage and real estate transactions will be disrupted.

Lowe noted that his agency, along with a broad coalition of real estate, home building, insurance and financial trade groups, is working to persuade Congress to restore the program as quickly as possible after it returns next month. Though prospects for reauthorization appear good, there is no assurance of a specific timetable.

One of the groups in the coalition, the National Association of Professional Insurance Agents, worries about the potential for financial disaster during the period when no new policies are issued.

Pat Borowski, senior vice president for the association, asked, “What if we have a major flooding event Jan. 3? Who is going to help people who are knee deep in water, with water seeping up the wallboards?”

What should homeowners and others in flood zones do to protect themselves?

First and foremost, renew your policy early – well before Dec. 31 if possible – even if the coverage isn’t set to expire until January or February.

Second, if you’re planning to close a sale or purchase in the upcoming two months, do everything possible to get the flood insurance coverage nailed down before Dec. 31. line passes, it’s anybody’s guess when the program will be back in action.

 

Existing-home sales hit near-record rate in October
Tuesday, November 26, 2002
By Jeannine Aversa
Associated Press

WASHINGTON – Sales of previously owned homes registered their third-best month on record in October and are on track for an all-time high this year, as the beacon of low mortgage rates turns house hunters into home buyers.

The National Association of Realtors said Monday that existing-home sales climbed to a seasonally adjusted annual rate of 5.77 million in October, representing a 6.1 percent jump from the previous month.

October’s performance, which followed a 2.6 percent advance in sales in September, exceeded analysts’ expectations. They were forecasting a small dip in last month’s sales.
Housing has been a pillar supporting the economy this year as it struggled to get back to full health after being knocked down by last year’s recession.

“With mortgage rates dropping to more than 30-year lows, people are viewing this as a home-buying bonanza,” said Stuart Hoffman, chief economist at PNC Financial Services Group. “This makes the housing market one of the brightest spots in an otherwise dull economy.”

The uneven economic recovery is a source of apprehension for the Federal Reserve and President Bush, whose economics team is pondering what more can be done to help the economy.

“The economy is growing in fits and spurts, not as fast as the president would like it to,” said White House spokesman Ari Fleischer. “I won’t preface or guess what the president is going to propose, if he might propose anything on this.”

The president, Fleischer said, remains concerned about anemic job growth.

Wanting to energize the economy, the Fed cut a key interest rate this month by a bold half a percentage point, the first rate reduction this year.

Although many analysts believe the economy has lost momentum in the current October-December quarter, they said Monday’s report reinforced their belief that the country will avoid a return to recession.

October’s brisk 5.77 million sales pace tied with April’s as the third-highest monthly level on record. Existing-home sales for all of 2002 are expected to shatter the record set last year, the association said.

Home sales are being stoked by low mortgage rates.

The average rate on a fixed-rate 30-year mortgage was 6.11 percent in October, up slightly from a record low rate of 6.09 percent in September, but well below the 6.62 percent average rate seen in October 2001.

The small rise in mortgage rates in October probably prompted some people, worried that mortgage rates might continue upward, to jump off the fence and lock in a deal, said David Lereah, chief economist for the National Association of Realtors.

Last week, rates on 30-year mortgages stood at 6.03 percent, up slightly from the previous week’s 5.94 percent, which marked the seventh new weekly low this year for the benchmark mortgage.
Low mortgage rates have been feeding a refinancing boom. The extra monthly cash that home-owners are saving by refinancing mortgages at lower interest rates is helping to support consumer spending, which has been the main force keeping the economy going this year.

These positive factors are helping to offset some negative ones, including a turbulent stock market, a lackluster job market and economic uncertainties that include possible war with Iraq.

Rising home values also are helping to support consumer spending, economists said.

The national median price of an existing home rose to $159,600 in October, a 9.8 percent increase from October 2001. That marked the largest increase since July 1987. The median price is that at which half of all houses sold sell for more and half sell for less.

 

Contracting is a hat hard to wear - Doing it yourself is dose of reality
Sunday, November 3, 2002
By Joanne Kaufman
New York Times

So what could be so tough about being her own contractor, Jody Cukier Siegler thought. Didn't she have two degrees from Harvard? Wouldn't she be supervising just a minor renovation of her weekend home, Botox as opposed to a face-lift?

"I felt that the scope of work was manageable enough," said Siegler, 45, a former film marketing executive whose checklist for remodeling her home in Malibu Beach a few years ago included updating the countertops and light fixtures, painting, replacing the deck and deck framing, and a little interior and exterior decoration.

Lesson No. 1 for Siegler: Do not go to gravel yards in your Manolo Blahniks. Lesson No. 2: When you pick out a carpet, the carpenter really needs to know how thick it is. "Somebody had to take all the doors off and shave them down because they wouldn't close," she said recently. "How did I not know that?"

How problems multiply
How did she not realize the implication of her decision to keep the original bathroom countertop, then add a moisture barrier and a layer of new tile? It was much thicker, which meant that the stems for connecting the plumbing fixtures wouldn't fit. And so on and so on.

Acting as your own contractor - hiring the workers, setting a schedule and a budget, buying the materials and approving the work appeals to some second-home owners. And there is a certain logic to it. After all, these weekend warriors are unlikely to feel the same sense of urgency they would toward a primary residence, so they can afford to take their time and handle building projects in bite-size pieces.

Skeptics, however, say the do-it-yourself contractor is like the lawyer who represents himself in court: He has a fool for a client.

"People think they will save a lot of money," said Ed Del Grande, himself a general contractor and the host of Warehouse Warriors on the Do It Yourself cable television network. "It can end up costing them a lot of money. If there are mistakes, there's no one else to blame. You have to keep in mind that the buck stops with you."

The foolish dreams of would-be contractors extend beyond the notion of extra dollars in the bank. "I think it's not uncommon for people to underestimate the effort involved," said Eric Linthicum, an owner of Linthicum Custom Builders in Scottsdale, Ariz. "But I think that people need to be aware of all the complexities." Not the least of which is corralling the subcontractors in the first place.

Siegler has been there. "They know they have no future with you as they do with a full-time general contractor, so it's difficult to get their attention," she said. "It's not that they'll do bad work, but they might not show up for the job."

Del Grande agreed. "You can sometimes end up just going through the phone book," he said. "If they're available it may be because theyíre not so good."

And would you know from good? What do you want to see from your drywall man? What's the difference between skim coat and prep coat? If a subcontractor says, Don't worry, we can fix that with a little caulking, should you worry?

Scheduling nightmares
To your worry list, add scheduling, as in figuring how much time the carpenters need to do the framing before the electricians and plumbers arrive (or do the plumbers come first?).

Since it's a weekend home, and therefore probably some distance out of town, would-be contractors need extra time to travel and supervise. And they need to make sure that they're adequately covered for liability, theft and damage claims, and that their subcontractors are licensed and insured.

There is also, as Siegler has found, an irrefutable law of construction physics to contend with: For every action there is an equal and opposite and expensive reaction.

Deeper and deeper
Just ask Marty Hollander, the vice president for marketing at MeetingPlace, a voice and Web conferencing center based in Santa Clara. He had a simple project on the table: replacing 14 windows and five glass sliding doors at his weekend home in Santa Cruz.

He hired workers to help him, and soon the problems started. "In doing the replacements I found that the people who did the work originally hadn't done any waterproofing," he recalled. "So we had to take out beams and parts of walls. Then it turned out that the beams supporting a second-floor patio were rotting." Suddenly, Hollander, 49, was supervising carpenters and stucco and tile subcontractors.

Stephen Wald, 45, a Manhattan real estate broker who is building a 3,600-square-foot Mediterranean stucco house in Long Island, N.Y., hedged his bets a bit by deputizing his builder as foreman. Still, he said, he has "nine toes in the water as contractor," hiring all the subcontractors, dickering fiercely with them and subsequently nipping 5 percent to 10 percent off each bid.

He's also on the site once a week, and bought all the materials for the house, from flooring to faucets, not necessarily a wise move, according to Del Grande.

"You should always have your subcontractors buy the material, because then they'll warranty it," Del Grande said. "If you buy it, you're responsible for any problems or repairs."

According to Del Grande, amateur contractors tend to be well organized and enjoy being in a position of authority, and would rather play a baseball game than watch one. "These are very good qualities, " Del Grande said, "but if you don't have the horsepower to back it up you're going to make a mess."

Susan Yungbluth, 60, an antiques dealer with homes in Vienna, Austria, and on Long Island, said she was perfectly at home taking her cottage in Easthampton, N.Y., down to the studs because of her background as a dress designer, her experience in art restoration and her knowledge of architecture.

"I stood right out in the mud with the crew," Yungbluth said. "I watched every screw go in, every piece of molding. I think I got better work being my own contractor."

Siegler is ready to get back on the ladder again, and not only because being her own contractor halved her renovation cost. "I'm eager to prove I wouldn't make the same mistakes again," she said. "It's kind of me against the toolbox. I'm not going to let a little spackle get the best of me."

 

Leveraged buying - high profit at high risk
Chronicle Sacramento Bureau
Sunday, September 29, 2002
Dian Hymer House Hunting

Dian Hymer is author of “House Hunting: the Take Along Workbook for Home Buyers,” and “Start Out:
The Complete Home Buyer’s Guide” (Chronicle Books)

Many financial advisers, even conservative ones, recommend borrowing as much as you can at today’s low interest rates. Today, lenders make it easier than ever to do just that. Not long ago, lenders limited the amount borrowers could pay for their monthly housing expense (principal, interest, taxes and insurance) to 28 to 32 percent of their monthly income. Now, many lenders permit high-income earners to apply as much as 50 percent of their income to their housing expense. This makes it easier for borrowers to qualify for larger mortgages and buy more-expensive houses.

Lenders also have eased up on the amount of cash they require a borrower to contribute to a home purchase. First-time buyers in high-priced markets like San Francisco, Boston, and New York City, are often making cash down payments equal to 5 percent of the purchase price, or less. A couple of decades ago, the norm was 20 percent.

House-hunting tip: An advantage of borrowing as much as you can is that you can take advantage of leverage. Leverage is using someone else’s money to buy an investment. The less of your own money you use to buy an investment, the more highly leveraged you are. For example, if you put 5 percent cash down and borrow 95 percent of the purchase price, you’ll be more highly leveraged than you would be if you borrowed 80 percent and put down 20 percent down.

One reason to consider a highly leveraged purchase is that the profit potential is greater than it would be with less leveraged purchase. Suppose you buy a home for $350,000 and put down 20 percent, or $70,000, down. If the property appreciates 10 percent, it will be worth $385,000. You will have earned $35,000, a 50 percent return on your investment of $70,000. With a 10 percent down payment of $35,000, you earn 100 percent on your investment. The lower down payment yields a higher return. But, if you were to pay all cash, you would earn only 10 percent on your investment.
Keep in mind that where there’s a high profit, potential, there’s also high risk. Leverage works wonders as long as property values are going up. But, when values reverse direction and decline, a highly leveraged investor can end up owing more than the property is worth.

During the early 1900s -an other time when lenders made it easy for home buyers to qualify for mortgages – many first-time buyers got themselves into trouble with highly leveraged financing. One young couple, with two small children, bought their first home with 10 percent down. The real estate market softened soon after they purchased. About a year later, they were transferred. They kept the property because they would be returning to the area, and they didn’t want to sell in a bad market.
After a few years, they realized they wouldn’t be transferred back and decided to sell. Property values had dropped about 20 percent. So, when they sold, their mortgage amount far exceeded the sale price. They had to use savings in order to make up the difference to complete the sale. When home prices are rising steadily, as they have been for several years in this country, buyers usually feel compelled to buy before prices rise further. As prices rise, buyers often find themselves taking out larger mortgages to make their home purchases possible. As buyers with limited cash resources chase the market higher, they inevitably find themselves in a more highly leveraged purchase. The closing: You can reduce the risk factor by buying for the long term so that you’re not caught having to sell in a down market.

 

IRS issues tax guidelines for unplanned house sales
San Francisco Chronicle
Sunday, September 1, 2002
Kenneth Harney

Washington - The federal government has just provided a partial answer to one of the longest-pending tax issues affecting American home sellers: how to figure capital gains tax write-offs when you don’t qualify in terms of minimum number of years of ownership.

How much profit can you shield for the federal tax bite when an unforeseen circumstance forces you to sell your house sooner than planned?

The IRS and the Treasury simultaneously released policy guidance on the far-ranging aftershock of the Sep. 11 terrorist attacks The guidance also gave hints of other, forthcoming clarifications of the capital gains rules for homeowners seeking to save on taxes because of more common types of unforeseen circumstances from death to divorce.
Here’s what the announcements covered. Under tax reform legislation enacted in 1997 and 1998, you as a home seller can exclude from federal taxation up to $250,000 (as a single filer) or up to $500,000 if married filings jointly) of profit on the sale of your property, provided you have owned it and used it as principal residence for a total of at least two of the five years preceding the sale.

Under the law, taxpayers who sell before the minimum two-year period because of a change in place of employment, health, or unforeseen circumstances may be eligible for reduced tax-fee exclusion.
For instance, a new homeowner who suffers a serous health problem requiring long-term hospitalization could qualify for a fraction of the maximum tax-free exclusion. If he or she had owned the property for a year before the sale, the taxpayer could qualify for one-half of the maximum $250,000 tax-fee exclusion because eligible ownership and use totaled half of the two-year requirement. An 18-month ownership period would qualify for there-fourths of the maximum $250,000 exclusion.

Health and employment changes that affect the timing of sale are relatively straightforward under the law, but what did Congress mean by unforeseen circumstances? Should this vague wording allow anyone who sells before two ears to conjure up an “unforeseen” compelling reason to claim a piece of the $250,000/$500,000 tax-free write-off?

This is an especially relevant question today, when million of Americans homeowners fin themselves sitting on potentially large gains in hi-inflation housing markets.

Since early 2001, Treasury and the IRS have been working on regulation to resolve the issue. Their recent announcements made clear that taxpayers whose home-sales timing was affected by the events of Sep. 11 may able to claim a partial capital gains exclusion on their profit.

The government said, in effect, that Sep. 11 qualifies as an unforeseen circumstance for tax payers who sols their homes earlier than the two-year minimum holding periods as a direct result of the attacks.

Home sellers are considered affected by the rule if any of he following conditions apply: a spouse, co-owner or person living with the home seller was killed in the attacks; the taxpayer’s principal residence was damaged; the home seller, co-owner or co-resident lost his or her job as a result of the attacks; or the home seller has an employment change that made him or her unable to pay reasonable basic living expenses for the household.

For example, say your spouse or a co-owner of your property perished in one of the attacks, leaving you with a house you had jointly purchased one year earlier. In the month’s following Sept. 11, you found that the house no longer fit your needs or economic situation. You then sold it in March.

Fortunately for your, the market had appreciated sharply, so you netted a $100,000 profit on the sale.

What taxes do you owe, given that you owned the home for 18 months- six months shy of the 24-month minimum? Based on the new guidance, the answer is zero.

You are allowed to claim three fourths of the maximum allowable exclusion for joint filers – that is, three-fourths of $500,000. Because that is far in excess of your gain, all $100,000 of it is tax-free.
The advisories referred to broader categories of unforeseen circumstances that are likely to appear in the final home-sale rules that are expected soon.

Tops on the list: the death of a spouse. Next: man-made disasters. Finally, acts of war. All of these will qualify home sellers to claim a partial capital gains exclusion if the home is sold after less than two years.

But what about another circumstance that triggers huge numbers of early home sales: divorce? The IRS declined to touch that hot potato for the record, but many tax professionals have urged that divorce be added to the growing list of circumstances officially deemed unforeseen.

 

Davis Signs Law Giving Renters New Protections
Bill requires 60-day eviction notices, toughens rent control
Chronicle Sacramento Bureau
Sunday, September 8, 2002
Robert Salladay

Sacramento – Governor Gray Davis has signed legislation requiring landlords to give at least a 60-day notice before evicting a tenant and a formal written notice before entering their property.
The new law, which goes into effect Jan. 1, also makes it harder for landlords to bypass rent-control laws by evicting tenants, temporarily pulling a property off the market and then inflating the rent for new tenants.

The bill is the first of two major landlord-tenant reforms passed by the Legislature this year, aided by the case of a Tokyo investor who evicted families from 559 rental homes in Sacramento and Santa Rosa with a month’s notice.

Only after an intense public outcry and intervention by various politicians, including Davis, did landlord Genshiro Kawamoto agree to let the tenants stay several more months.

“It is unfair to expect families to uproot and relocate in such a short time,” Davis said in his signing message on the bill, SB1403. “This bill gives all tenants more time to search for a new home in the neighborhood they prefer.”

The 60-day eviction notice already is required by state law in Santa Monica, Los Angeles and West Hollywood, but it now gets expanded statewide. The new 60-day notice only applies to people who have rented the same property for more than a year.

The state reverts back to a 30-day notice in 2006 unless the Legislature decides to extend the law.
Written by Assemblywoman Sheila Kuehl, D-Santa Monica, the new law also requires landlords to either hand-deliver or mail a notice that they need to enter a property. The notice must arrive at least 24 hours in advance, but an exception is made for emergencies.

The law also makes a significant change to the state’s Ellis Act, which allows a landlord to evict rent-controlled tenants with a 30-day notice so that the owner can live in the property themselves.
Some landlords have been “flipping” properties by evicting tenants, moving in, then renting it out later at inflated prices. Current law requires landlords to wait at least two years before they can rent the property at prices higher than the old rent-controlled rate.

The new law makes landlords wait at least five years.

Another measure Davis is considering would make it harder for landlords to siphon off security deposits for unneeded or overly expensive repairs. Davis has yet to act on the Bill, AB2330 by Assemblywoman Carole Migden, D-San Francisco.

The Migden measure would require landlords to inspect a property before the move-out date and then give their tenants a detailed, itemized explanation for any reduction in their deposit.

The Migden measure also allows a tenant to request an early inspection so they can arrange to make repairs themselves. However, if a tenant hides problems from the landlord during an inspection, money can still be deducted from the security deposit.

Davis has a month to act on this and hundreds of other bills sent to him by the Legislature in the final weeks of the 2002 session, which ended early Sunday.

This is not an offer to sell, but is intended for information only.
The developer reserves the right to make modifications in
materials, specifications, plans, designs, scheduling
and delivery of the homes without prior notice.