With real estate being so competitive, may investors are
investigating real estate mortgages.
This short video explains the variables.. WATCH HERE
Real Estate Note Buyers and Seller Carry Consultants
With real estate being so competitive, may investors are
investigating real estate mortgages.
This short video explains the variables.. WATCH HERE
Pending home sales rose in December for the third straight month, providing further evidence that 2017 was a positive year for housing, but the National Association of Realtors doesn’t expect the good times to keep rolling.
Recent data from NAR, the Census Bureau and the Department of Housing and Urban Development showed that 2017 was the best year for new home sales and existing home sales in a decade.
Now, new data from NAR shows that pending home sales rose in December to the highest level since March 2017, but NAR is concerned that Republican-led tax reform will dent home sales in 2018.
According to a new report from NAR, which was released Wednesday, the Pending Home Sales Index, a forward-looking indicator based on contract signings, increased 0.5% to 110.1 in December from an upwardly revised 109.6 in November.
That marks the third straight month that the index has increased.
But combine continually low housing inventory and the Republican tax plan, which President Donald Trump signed into law late last year, and you have a recipe for a slowdown, according to NAR Chief Economist Lawrence Yun.
“Another month of modest increases in contract activity is evidence that the housing market has a small trace of momentum at the start of 2018. Jobs are plentiful, wages are finally climbing and the prospect of higher mortgage rates are perhaps encouraging more aspiring buyers to begin their search now,” Yun said.
“Sadly, these positive indicators may not lead to a stronger sales pace,” Yun added. “Buyers throughout the country continue to be hamstrung by record low supply levels that are pushing up prices – especially at the lower end of the market.”
According to NAR, there’s an “imbalance” of supply and demand, which has led to price increases of 5% or more for each of the last six years, but Yun expects that to slow this year.
Yun said that while tight inventories are still expected to put upward pressure on prices in most areas this year, he expects overall price growth to shrink, with some states even experiencing a decline, due to the negative effect the changes to the mortgage interest deduction and state and local deductions under the new tax law.
“In the short term, the larger paychecks most households will see from the tax cuts may give prospective buyers the ability to save for a larger down payment this year, and the healthy labor economy and job market will continue to boost demand,” Yun said. “However, there’s no doubt the nation’s most expensive markets with high property taxes are going to be adversely impacted by the tax law.”
Three of the states where the tax bill’s changes to property tax deductions are expected to have a significant impact are already threatening to sue the government over the tax bill.
Last week, the governors of New York, New Jersey, and Connecticut said they plan to sue the government due to the Tax Cuts and Jobs Act’s elimination of certain state and local tax deductions.
The tax bill installs a cap of $10,000 on state and local tax deductions, but several states (including New York, New Jersey, and Connecticut) have state and local tax burdens that far exceed $10,000.
Yun said that he anticipates the changes to the SALT deduction rules to disproportionally impact certain segments of the housing market.
“Just how severe is still uncertain, but with homeownership now less incentivized in the tax code, sellers in the upper end of the market may have to adjust their price expectations if they want to trade down or move to less expensive areas,” Yun said. “This could in turn lead to both a decrease in sales and home values.”
Topic
INVESTMENT GOALS & EXPECTATIONS
Our February Note Investors Forum Meeting will followup
on Stan Harley’s presentation– Taking what he shared and incorporating that with with YOUR individual goals. What is most important to you? Cash Flow or Capital Accumulation.
Or……………And more specifically how does risk tolerance fit into your needs and expectations.
We’ll consider Performing and Non-Performing notes
How note due diligence can expand your expectations.
Case studies with 2 special out of state note investors
Click Here for more information
February 6th
Dobson Ranch Inn Fiesta Bar & Grill
1644 S. Dobson Rd
Mesa, AZ
SW Corner of Dobson & RT 60 – Superstition Freeway
The new federal tax law took away some benefits of homeownership but
gave real estate investors a gift they might not be aware of yet.
Owners of investment property — from mom and pop landlords to big-time real estate moguls — could get a federal tax deduction of up to 20 percent of their net rental income for tax years 2018 through 2025. Most people who own shares in real estate investment trusts can also
deduct up to 20 percent of their ordinary REIT dividends.
This tax break has been overshadowed by all the wailing over the law’s treatment of homeowners. It will reduce the mortgage interest and property tax deductions for some homeowners, but these new limits do not apply to interest and property taxes on income property.
More importantly, real estate investors get a potentially large tax break they didn’t have before.
It comes under the section of HR1 titled “Deduction for qualified bus
iness income of pass-thru entities.” Congress “used the Facebook spelling” of “through,” quipped Paul Bleeg, a partner with accounting firm EisnerAmper.
Bleeg said the new deduction could increase investor demand for real estate, offsetting any potential drop in demand from homeowners.
The pass-through provision is insanely complex, but it essentially
lets owners of pass-through entities deduct up to 20 percent of their business income on their personal tax return, subject to certain limits.
Pass-through entities pay no business tax. Instead, their income passes through to their owners and is taxed at their personal tax rates. They include sole proprietorships, partnerships, limited liability companies and S corporations.
In the past, 100 percent of this income was taxed at the owner’s ordinary income tax rate. In the future, some owners can deduct up to 20 percent of it on their federal ret
urn (but not their California return unless the state conforms to this provision). Taxpayers won’t have to itemize to claim the new deduction, which will show up on a new line after adjusted gross income, said Mark Luscombe, principal tax and accounting analyst with Wolters Kluwer.
Congress put several limits on the new deduction, which differ depending on the type of business and the owner’s taxable income.
The first limit applies to everyone claiming the 20 percent pass-through deduction. It says your deduction generally cannot be more than 20 percent of your taxabl
e income, excluding capital gains and the pass-through deduction itself. (Taxable income is your household income from all sources minus your deductions.)
If your taxable income is less than $157,500 (single) or $315,000 (married filing jointly), that is the only limit that applies. If your taxable income is above those amounts, then other limits apply, depending on the type of business.
If you are in a “specified service trade or business,” your deduction w
ill be phased out between $157,500 and $207,500 in income (single) or between $315,000 and $415,000 (married filing jointly) according to a fairly simple formula. If your income exceeds the top of the phaseout range, you get no deduction.
Specified service professions include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial and brokerage services or any business where the principal asset “is the reputation or skill” of one or more employees. (Curiously, architects and engineers were excluded from the list.)
This income limit would apply to real estate agents but would not apply to real estate investors because their principal asset is their property, not their skill, said Kenneth Weissenberg, chair of real estate services at EisnerAmper.
If you are not a service professional and your taxable income exceeds $157,500/$315,000, then your pass-through deduction may be limited by a convoluted computation. It says: Yo
ur pass-through deduction can’t exceed the greater of either 50 percent of W-2 wages or 25 percent of W-2 wages plus 2.5 percent of the “unadjusted basis” of depreciable assets, which generally means what the owner paid for the assets, excluding land. Real estate investors would be subject to this nutty math if their income exceeds the limit.
To get the deduction, real estate investors must have net income from a property. Many real estate investors have net losses thanks to depreciation, interest, repairs and other expenses.
Suppose Donna is single, earns $100,000 a year working for a tech company, and owns a duplex that generates $20,000 a year in net income. Her taxable income, we’ll assume, is $10
8,000.
Under the new law, her pass-through deduction would be 20 percent of $20,000 or $4,000. It is not reduced because $4,000 is less than than 20 percent of her taxable income..
Now suppose she makes $200,000 at her tech job and her taxable income including the rental is $208,000. In this case she would have to do the complex computation.
We’ll assume she bought the duplex for $600,000 but $100,000 of that was land value. Her unadjusted basis is $500,000, and 2.5 percent of that is $12,500. She doesn’t pay anyone a salary, so her W-2 wages are zero. Her deduction still is not reduced because $4,000 is less than $12,500.
“The wages and depreciable property limits won’t impact most real investors,” said Stephen L. Nelson, a CPA in Redmond, Wash., who wrote a monograph on the new deduction.
One gray area is whether people who own real estate in their own names and file their rental income on Schedule E would qualify for the pass-through deduction.
“It’s not 100 percent clear,” said Jeff Levine, director of financial planning with Blueprint Wealth Alliance. To get the percent deduction, “it has to be a qualified trade or business.” The new law does not clearly define trade or business, and the term is defined differently in different parts of the tax code. “Depending on IRS interpretation, a taxpayer’s involvement in the rental property could be a factor” in whether he or she qualifies.
Luscombe said he believes Congress intended real estate investors who use Schedule E to qualify for the deduction, and a congressional committee report supports that idea.
Weissenberg said they clearly would qualify for the deduction.
Nelson also said they should qualify, “but we’ll have to see what the IRS says” when it issues regulations.
Real estate investors do not need to form a limited liability company to take this deduction, Nelson added. They can put property into an LLC (many do for liability reasons) as long as it’s not taxed as a corporation.
The law does state that people who own shares in a real estate investment trust can deduct 20 percent of their ordinary dividends (but not capital gains dividends) starting in 2018. This deduction cannot exceed 20 percent of their taxable income, but other limits do not apply.
“Real estate is a big-time winner” in the tax law, Weissenberg said, thanks to this and other provisions.
Danielle Baker wanted a $324,000 loan last year to expand the peanut-processing business she ran from the family farm. She had a longstanding relationship with the Roxobel branch of Southern Bank, and she thought Southern would help fund the peanut operation she had spun off, too.
But that branch—the town’s only bank—closed in 2014. A Southern banker based in Ahoskie, 19 miles away, said Bakers’ Southern Traditions Peanuts Inc. was too small and specialized, she says. A PNC bank branch also turned her down.. Click below for more
Today an IRA administrator questioned -requested an explanation on the sale of a partial. He said he had never seen this type of transaction before. Neither had his compliance officer.
They were confused and requested a simple explanation which follows.
All of the following statements are true:
“Bob” is buying 3 partials–funding the last purchase of 125 payments(blue) for $18,900.
My entity is keeping the remaining payments –gold(the tail).My entity is assigning all the payments to him as evidenced by an allonge which keeps this transaction SEC compliant.
This is a great deal for Bob, because I will always be in the deal protecting the remaining payments(gold).
After Bob receives his payments, the remaining payments will be reconveyed to my entity as evidenced by a Reconveyance of Agreement for Deed which references the Purchase and Sale Agreement.
In the event of an early payoff, default or if Bob opts to exercise the 60 month buy back provision the following chart –the Entitlement Schedule –Schedule B illustrates how that scenario will be administered.
The IRA Administrator has executed the following docs:
Bob will record the Assignment of Contract for Deed to protect himself and will have the original note and the allonge(transfers the note) which will be archived by the Servicier and distribute the 125 payments to Bob. In the event of an early payoff or if the purchaser wants to exercise his 60 month option for an early buyback, his administrator as a road map for future reference.
The IRA company rep understood this transaction when explained in plain English. Additionally he received the following Partial from our NoteHolder’s Handbook–Note Holders Handbook_Partials.
A partial is one of the safest ways to invest in notes.
The IRA Administrator thanked me for providing a “Great explanation!”
OIG report notes that Ginnie Mae made progress on oversight, but issues remain.
As readers of HousingWire are likely well aware, over the last few years, there’s been a shift in the mortgage business, with nonbanks significantly increasing their share of mortgage originations as the big banks dialed back in the wake of the financial crisis.
This shift was noted in a recent report from the Urban Institute, which showed that the nonbank origination share rose from 30% in 2013 to 60% in July 2017.
Over that same time period, Ginnie Mae experienced the largest shift, with its share of nonbank originations rising from 37% in 2013 to 75% this year. In 2011, nonbanks made up only 11% of Ginnie Mae’s originations. Ginnie Mae is the arm of the federal government that securitizes federally insured mortgages.
And, according to a new report from a government watchdog, Ginnie Mae was not prepared for the rise of nonbank mortgage lending and “did not adequately respond” to the changes in its lender base.
The report, published late last week by the Department of Housing and Urban Development Office of the Inspector General, states that over the last few years, Ginnie Mae “did not implement policies and procedures in a timely manner for its account executives to follow in managing issuers, did not develop a written default strategy, and did not assess and address the risks posed by nonbanks in a timely manner.”
The report notes that since the financial crisis, both the size and scope of Ginnie Mae’s business changed considerably.
As the chart below shows, the remaining principal balance of Ginnie Mae mortgage-backed securities has increased from $427.6 billion in 2007 to $1.7 trillion in 2016, an increase of 300%.
(Click to enlarge. Image courtesy of HUD-OIG)
While Ginnie Mae’s portfolio has tripled, the makeup of its business changed as well.
As the chart below shows, Ginnie Mae’s issuer base shifted dramatically over the last several years towards nonbanks.
(Click to enlarge. Image courtesy of HUD-OIG)
As the report notes, as of September 2016, six of Ginnie Mae’s top 10 issuers in its single-family MBS program were nonbanks. In 2011, only one of Ginnie Mae’s top 10 issuers was a nonbank.
In fact, Ginnie Mae never had nonbank issuers of this size, nor have nonbanks ever made up such a large portion of its issuer base.
The HUD-OIG report states that Ginnie Mae was not prepared for this shift and was forced to be reactive, rather than proactive, towards the shift in its business.
“This condition occurred because Ginnie Mae was not prepared for the rapid growth and shift in issuer base and its staff lacked the skills necessary to immediately respond to increased risks posed by these changes,” the HUD-OIG report states.
“As a result, Ginnie Mae may not identify problems with issuers in time to prevent default,” the report continues. “Additionally, it may not be able to properly service loans absorbed in a default and may require additional funds from the United States Treasury to pay investors in the event of a large issuer default.”
The OIG report states that in 2011, Ginnie Mae began reviewing its internal procedures but did not enact official changes until July of this year.
From the report:
In 2011, Ginnie Mae determined that its desk manual, which included its operating procedures, no longer reflected its current operation and stopped requiring its use. In late 2014, Ginnie Mae hired a contractor to review its current state. The contractor completed the review in 2015, and began working with Ginnie Mae to develop policies and procedures to replace the desk manual. Ginnie Mae began implementing the policies and procedures that resulted from this review in July 2017. Several account executives told us they did not have adequate policies and procedures to manage issuers. They said they learned how to perform tasks from one another.
The report also states that Ginnie Mae did not address the potential for defaults concentrated among several large originators that may rely on credit lines for funding, as opposed to depositories, which would theoretically have capital on hand to cover defaults if needed.
From the report:
Ginnie Mae did not develop a written default strategy, which included identifying, analyzing, and planning for all default scenarios and determining whether its staff and master subservicers had the capacity to default and absorb large issuers (issuer with more than 100,000 loans). Ginnie Mae operates with a small staff and relies heavily on contractors to perform its core responsibilities, including servicing loans absorbed from defaulted issuers. Ginnie Mae officials told us that they recognized the challenges Ginnie Mae faced and had ideas on how they would execute large or multiple-issuer defaults, but Ginnie Mae did not begin to implement a written strategy to address large issuers or all default scenarios until July 2017.
The OIG report lays out a series of recommendations for Ginnie Mae to enact to ensure the agency is properly overseeing nonbank originators, including:
It should be noted that Ginnie Mae’s Michael Drayne, senior vice president in the office of issuer and portfolio management, provided a response to the OIG’s report, as part of the published report itself.
In Drayne’s response, he states that Ginnie Mae responded appropriately and within its means to the changes in its business.
“The report asserts repeatedly that Ginnie Mae’s overall organizational response to the changing environment was not sufficiently timely, but nowhere is it explained how Ginnie Mae could reasonably have been expected to make substantial organizational changes more rapidly than it has been able to do, given the need to develop skills and procedures during the time merely to cope with day-to-day program management needs that did not previously exist,” Drayne writes in response.
“Our view, in fact, is that Ginnie Mae and OIPM staff in particular have displayed an unusual degree of vision, persistence and skill in re-organizing in the face of extraordinary change over a five-year period, without the occurrence of any significant lapses in the management of the MBS program,” Drayne add
If a person wants to become a homeowner but lacks the qualifications to qualify for a traditional mortgage, signing a land contract is another option for purchasing property.
A land contract is a written agreement between the seller of the property and a potential buyer. Instead of taking out a mortgage and making payments to a bank, the buyer makes payments to the seller. But the seller retains ownership of the property until the buyer pays the entire purchase price. The land contract is essentially a type of rent-to-own agreement.
People can use land contracts to buy or sell any type of property, including personal residences, commercial buildings and land. There are several common situations where a buyer and a seller might use a land contract instead of going through the conventional mortgage process:
A land contract provides quite a bit of leeway when it comes to the conditions of the sale. Some of the items that the buyer and seller have to agree on include:
Sellers may allow buyers to make regular payments on property over a certain period of time, or they can demand a balloon payment after a specified amount of time. For example, the contract might state that the buyer has to pay off the entire sale price within five years. During the five years, the buyer could take steps to improve his credit and secure approval for a conventional mortgage.
On average, it takes 65 days for a home to sell. If the seller doesn’t want to wait this long or fears that a bank may turn down a mortgage for the property, the seller can opt to sell it with a land contract. Lenders may not agree to a mortgage for a property that requires extensive repairs or doesn’t meet other criteria. The seller has the option of selling it through a land contract instead of making the improvements or repairs.
Real estate markets constantly fluctuate; in a down market, the seller can often get more money for the property by offering a land contract. Buyers are typically willing to pay a higher overall price in exchange for seller financing.
A land contract has disadvantages for both the buyer and the seller.
A buyer who purchases a home with a traditional mortgage accumulates equity as he makes payments. He also gets to take advantage of gains in the housing market that raise the value of the house. Should the buyer decide to sell the property before the mortgage is paid off, the buyer still gets to realize the equity in the home.
However, if the buyer uses a land contract and decides he doesn’t want to remain in the home, he has no equity, even though he has made payments, a down payment and the home has risen in value.
It’s important to note that the courts consider the buyer an equitable titleholder to the property. This means that the buyer has an interest in the property, which prevents the seller from completing any actions that disrupt the buyer’s potential claim to the property.
A seller in a land contract has to assume the risk of a mortgage lender. There’s always the possibility that the buyer may not make the agreed-upon monthly payments. This is one reason that buyers usually pay more for property bought with a land contract.
The seller can file a land contract forfeiture in court that basically evicts the buyer and terminates the buyer’s interest in the property, but this option takes time. However, the seller gets to keep all payments made by the buyer and retains ownership of the property.
Proper and detailed due diligence is a must in purchasing a quality note. The note overview provided for each note in the note vault is a summary of what our underwriting has determined to be important points to consider when purchasing note. Let’s look at them line by line.
TYPE–means the type of security. It could be a land contract, mortgage or deed of trust
CFD — means Land Contract, Contract for Deed or Agreement for Deed all of which are synonymous.
VALUE–is the value we have determined usually by a BPO(broker price opinion), sometimes referred to as a CMA(Competitive Market Analysis)
CURRENT BALANCE–is the current loan balance some times referred to as UPB–unpaid principle balance
ORIGINAL BALANCE–is the original when the loan was originated
P & I–meant the amount of the monthly principle and interest payment
ORIGINAL TERM–reflects the # of months of amortization when the loan was originated.
REMAINING TERM–reflects the # of remaining months of amortization.
PAYMENTS FOR SALE–reflects if we are selling all of the note or a piece of the note, meaning a Partial which is further described in this article and in paragraph 4 HERE.
INVESTMENT TO VALUE–reflects the amount of money invested divided by the property value or BPO amount. We consider a good range to not exceed 65%.
LOAN TO VALUE–reflects the amount of the existing loan balance(UPB) divided by the property value or BPO amount. We feel the lower the better, definitely less than 60-65%. The lower the better. The lower the better the equity position in the event something goes wrong with the payments.
INTEREST RATE-is the amount of interest the payor(borrower) is paying.
EFFECTIVE YIELD-is what is your rate of return based upon how much one is paying for the loan compared to the actual remaining loan balance.
SEASONING-reflects how many months the borrower has been paying since the loan was originated.
PAYMENT HISTORY-is a record–a spreadsheet of the payments which include due date, paid date, late fees, taxes and insurance payments and multiple other items. As long as the borrower is current 11 out of 12 months, it is considered to be a good history. As long as the borrower pays within 30 days of the due date even though there may be a late fee charged, we consider that to be on time payments.
ACH-means the payments are automatic bank drafts from the borrowers account. As lenders we really like that typo of borrower.
PAYOR—another word for borrower
DODD-FRANK FRIENDLY–refers to the Dodd-Frank Act which was effective January 10, 2014. Any loans originated after that date require underwriting by a loan originator.
PROJECTED RENT–reflects what that typo home rents for in the area. We use that as a benchmark for the payor–meaning we like to see their total payments to be less than a typical area rental. They have to live somewhere. If rents in the area are much more than their monthly PITI, it is less likely the payor will default.
For additional information on due diligence go to this posting.
Go to our NOTE VAULT for our current performing note inventory.
In todays’ world, many investors are in sort of a “conundrum”. Many are sitting on a pile of cash.
They continually ask themselves, what can I do?
Where can I invest?
What is safe and secure with a respectable/acceptable return?
You may fit one of these scenarios. What are you going to do?
Maybe it’s time for a mindset reset.
We play in an inefficient market.
Cash is no longer king.
Deals are KING!!
Think of a parked car in your yard. Is it getting rusty? Are the tires are going flat? Most likely the hoses and belts are rotting and the interior is mice infested?
Dry cash is the same thing. Inflation is devaluing what you have worked hard to acquire.
It may be helpful to do a short review of your needs and wants.
Consider this illustration.
Think about what is important to you.
Number them in the order of importance
that meets your needs.
There are other options!!
Consider Performing Real Estate Notes.
A properly vetted Performing note provides a quantifiable predictable rate of return on an investment backed by real estate. Passive mail box money.
They can be a perfect match for your ROTH IRA or HSA.
Performing notes can provide a
“SET IT AND FORGET STRATEGY”
Every investor needs passive income in their portfolio.
Check out our NOTE VAULT for some options…
https://capstonecapitalusa.com/notes-for-sale/